ROBERT H. JACOBVITZ, Bankruptcy Judge
THIS MATTER is before the Court on the Motion to Convert Case to a Chapter 7 ("Motion to Convert") filed by Julius Wollen, as Trustee of the Julius M. and Diane Wollen Revocable Trust, dated October 20, 1993 ("Wollen"). See Docket No. 1018. Judith Wagner, Chapter 11 Trustee of the bankruptcy estate of the Vaughan Company Realtors (Ms. Wagner, or the "Trustee") and the United States Trustee ("UST") filed a response and supplemental response in opposition to the Motion to Convert.
After consideration of the Motion to Dismiss, the responses thereto, the evidence presented at the final hearing, and the written closing arguments, and being otherwise sufficiently informed, the Court finds that cause does not exist under 11 U.S.C. § 1112(b)(1) to convert the Chapter 11 case to Chapter 7. The Motion to Convert will therefore be denied.
The Vaughan Company Realtors ("VCR" or "Debtor") was a real estate brokerage company operating in New Mexico. The Trustee claims that VCR's principal, Douglas Vaughan, caused VCR to operate a Ponzi scheme. VCR issued promissory notes to hundreds of different investors; many of the notes were secured by the same real property. After VCR commenced this bankruptcy case, Douglas Vaughan went to prison and the Securities Exchange Commission ("SEC") filed an action against VCR.
On February 22, 2010, VCR filed a voluntary petition under Chapter 11 of the Bankruptcy Code, thereby commencing its bankruptcy case. The Schedules filed in VCR's bankruptcy case reflected assets totaling $643,363.18, including accounts receivable in the amount of $539,179.43. See Docket No. 82. Roughly two months later, the UST asked the Court to approve the appointment of a Chapter 11 Trustee of the VCR bankruptcy estate. See Docket No. 163. The Honorable James Starzynski appointed Judith A. Wagner as the Chapter 11 Trustee of the VCR estate on April 29, 2010.
When Ms. Wagner was appointed Chapter 11 Trustee, VCR was operating as a real estate company. After consulting with the VCR management team, Ms. Wagner determined that VCR had a number of pending real estate transactions and outstanding commissions. Ms. Wagner employed a qualifying broker to close real estate contracts entered into prior to her appointment and to collect commissions due to VCR. Ms. Wagner collected over $300,000 from those contracts. Except for closing pending real estate transactions, Ms. Wagner did not operate VCR as an ongoing business. She has no intention of resuming the business operations of VCR.
On June 25, 2010, Ms. Wagner filed a motion to convert the bankruptcy case from Chapter 11 to Chapter 7 ("VCR's Motion to Convert"). See Docket No. 269. At the time, Ms. Wagner believed the bankruptcy estate would incur less administrative expense if the case converted from Chapter 11 to Chapter 7. Ms. Wagner was also unsure whether, and to what extent, VCR would be able to fund a Chapter 11 plan. The Committee filed an objection to VCR's Motion to Convert, contending that the monthly operating reports (individually "MOR") Ms. Wagner would be required to file under Chapter 11 of the Bankruptcy Code would benefit the creditor body. The Securities Exchange Commission ("SEC"), with whom Ms. Wagner was negotiating a settlement, also wanted Ms. Wagner as Chapter 11 Trustee to continue to provide MORs for VCR.
After filing VCR's Motion to Convert, Ms. Wagner compared the administrative costs associated with a Chapter 11 case, which include quarterly fees paid to the UST and the cost of preparing the MORs, with the administrative costs associated with a Chapter 7 case, which include bank charges for use of specialized Chapter 7 trustee software. During her discussions with the SEC, she also determined that she needed to explore different avenues of recovery, including collecting money from VCR's insurance policy. Ms. Wagner believed it would be easier to pay VCR's insurance premiums in the Chapter 11 case. Because Ms. Wagner was successful at collecting commissions from outstanding real estate contracts during the summer and fall of 2010, she also determined that it may be possible to fund a Chapter 11 plan. On September 17, 2010, Ms. Wagner withdrew VCR's Motion to Convert.
Shortly after her appointment as Trustee, Ms. Wagner took possession of VCR's computers and files in an attempt to reconstruct VCR's records. The task of reconstructing VCR's records was particularly arduous because Douglas Vaughan maintained separate, "off book" ledgers documenting the transactions made in furtherance of the alleged Ponzi scheme. The Federal Bureau of Investigation ("FBI") seized VCR's records, digitized the records, and provided Ms. Wagner with some of the records in the fall of 2010. Reconstruction of the records required specific forensic expertise.
Ms. Wagner filed VCR's outstanding tax returns. She performed a detailed accounting to determine how much money each individual investor in VCR's promissory note program received from VCR in connection with the alleged Ponzi scheme. Between June, 2011 and February, 2012, Ms. Wagner started pursuing fraudulent and preferential transfer actions against investors in VCR's promissory note program who received some or all of the return on their investment.
In connection with her administration of the Debtor's Chapter 11 estate the Trustee has employed the following professionals for the following purposes: 1) Askew & Mazel, LLC and Arland & Associates, LLC (general counsel for the Trustee)(Docket Nos. 273 and 1256);
Counsel for Ms. Wagner estimated that, as of November 2012, the total remaining litigation budget would be roughly $600,000.00.
roughly $2.16 million on the administration of VCR's estate, including legal and other professional fees and costs associated with investigating fraud claims, reviewing claims, performing detailed accountings, examining tax matters, and performing other tasks. Most of the accounting work and investigation costs associated with tracing funds from VCR to the investors in VCR's promissory note program has been completed. Ms. Wagner began mediating with a substantial number of VCR investors and insiders in late 2012 and early 2013. It is unclear from the evidence before the Court how much money VCR's estate spent in an attempt to settle the claims.
In September 2010, before Ms. Wagner began settling claims with insiders and investors, VCR had $174,614.53 in liquid assets. As of February 28, 2013, the estate had collected a total of over $3.7 million, and expended approximately $2.6 million. Ms. Wagner has settled claims of the estate for the total amount of approximately $3.2 million, and has obtained a reduction of over $7 million in creditor claims against the estate. As of February 28, 2013, VCR had over $1.1 million in liquid assets, with accounts payable of approximately $288,000, mostly attributable to outstanding professional fees. Since the hearing on the Motion to Convert, the Trustee has filed motions for approval of settlements reached in connection with fraudulent transfer and preference actions in the amount of over $725,000.
Ms. Wagner has begun to evaluate whether, and to what extent, VCR's creditors could be paid. Several factors have affected her decision regarding when VCR should begin formulating its Chapter 11 plan. Ms. Wagner waited until judgment was entered against Douglas Vaughan in his criminal case in September of 2012. She believed that his conviction affected whether she would have to prove that VCR operated a Ponzi scheme in the fraudulent transfer actions. There has also been a dispute throughout the case regarding the amount and validity of the Internal Revenue Service's ("IRS") claim against VCR. The IRS filed a claim in the amount of $972,597.36, of which it seeks priority status for $708.353.57. See Claim No. 200. Ms. Wagner is attempting to resolve that issue with the IRS. Finally, VCR had several dispositive motions pending in the Bankruptcy Court that could affect how much money VCR will be able to recover from the investors in VCR's promissory note program. Brian Rowe, an accounting expert called by Wollen, testified that VCR could have filed a Chapter 11 plan in November, 2012.
In late 2012 or early 2013, Ms. Wagner began drafting what is sometimes known as a "rising tide" plan. A "rising tide" plan seeks to ensure that all investors receive an equal percentage distribution on their lost investments, considering both the prior payments from VCR and the distributions from the bankruptcy estate. Under this type of plan, more money will be distributed to investors who did not receive distributions from VCR than the investors who did
receive distributions. On December 7, 2013, Ms. Wagner filed a report pursuant to 11 U.S.C. § 1106(a)(5) (the "1106 Report") explaining why she had not yet filed a plan and stating her intention to file a plan and disclosure statement by the end of 2012. Ms. Wagner amended the 1106 Report on February 13, 2013, stating that, due to pending motions to dismiss that raised various defenses to the fraudulent and preferential transfer actions, and her ongoing investigation into the claim of the IRS, she now anticipates filing a plan and disclosure statement in late spring of 2013.
A chapter 11 case may not be converted or dismissed under 11 U.S.C. § 1112(b) except for "cause." 11 U.S.C. § 1112(b)(1). Thus, the threshold issue under 11 U.S.C. § 1112(b) is "cause." See In re Melendez Concrete, Inc., 2009 WL 2997920, *3 (Bankr.D.N.M. Sept. 15, 2009).
(A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation;
(F) unexcused failure to satisfy timely any filing or reporting requirement established by this title or by any rule applicable to a case under this chapter; and
(J) failure to file a disclosure statement, or to file or confirm a plan, within the time fixed by this title or by order of the court.
11 U.S.C. § 1112(b)(4).
With respect to the unexcused failure to timely satisfy a reporting or filing requirement, Wollen asserts that the Trustee has failed to satisfy the reporting requirements under 11 U.S.C. § 1106(a)(3) and (4) and has failed to file a plan as required under 11 U.S.C. § 1106(a)(5). The Court will address each ground in turn.
"Cause" under 11 U.S.C. §1112(b)(4)(A) requires both a substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation. Hyatt, 479 B.R. at 887 (citing In re Fall, 405 B.R. 863, 867 (Bankr.N.D.Ohio 2008), aff'd, 2009 WL 974538 (N.D.Ohio 2009)(remaining citation omitted).
In evaluating whether the Debtor has suffered continuing losses or diminution of the estate under 11 U.S.C. §1112(b), the Court considers all relevant information, including the bankruptcy estate's financial history and financial prospects and the financial records on file in the case. See In re Gateway Access Solutions, Inc., 374 B.R. 556, 564 (Bankr.M.D.Pa. 2007)("the Court looks to both the financial prospects of the Debtor and the financial records filed with the Court" to determine whether there has been a continuing loss or diminution to the estate). See also, In re The AdBrite Corp., 290 B.R. 209, 215 (Bankr.S.D.N.Y. 2003)(stating that "a court must make a full evaluation of the present condition of the estate, not merely look at the debtor's financial statements.")(citation omitted). Under certain circumstances, negative cash flow alone can establish a continuing loss to or diminution of the estate for purposes of establishing the first element of 11 U.S.C. § 1112(b)(1). See Loop Corp. v. United States Trustee, 379 F.3d 511, 516 (8
Here, the Trustee has already liquidated the Debtor's tangible estate assets; the only remaining estate assets consist of the Debtor's litigation claims against third parties, including the potential recovery of assets for the benefit of the estate represented by the Trustee's fraudulent and preferential transfer actions filed against investors in VCR's promissory note program. Wollen asserts that there has been a continuing loss to or diminution of the estate, particularly as a result of ongoing litigation costs associated with these fraudulent and preferential transfer actions. This Court disagrees.
As is true with all litigation that seeks a money judgment, litigation costs are incurred before the plaintiff actually recovers any money. The Trustee has filed over 150 suits in an effort to recover funds for the benefit of the estate. Approximately sixty-seven were transferred to the United States District Court following the withdrawal of the reference. A portion of those proceedings have settled. Approximately forty-four suits remain pending as adversary proceedings before this Court. The total amount of the claims the Trustee asserted in her fraudulent and preferential transfer actions is approximately $37 million. See Exhibit B-K. The Trustee has successfully withstood motions to dismiss filed in several of these adversary proceedings on a wide variety of grounds. See, e.g., Wagner v. Pruett, Adversary No. 11-1185 (Docket No. 20); Wagner v. Cunningham, Adversary No. 11-1227 J (Docket No. 19); Wagner v. Wilson, Adversary No. 12-1142 (Docket No. 27); Wagner v. Levann, United States District Court Case No. CV-12-817 (Docket Nos. 254 and 236). She has also settled some of these adversary proceedings. Including the funds the Trustee has realized from the sale of the Debtor's tangible assets, from the recovery of accounts receivable, and from the settlements of the fraudulent and preferential transfer actions, the Trustee has so far recovered over $3.5 million. See Monthly Operating Report — February 2013 (Docket No. 1290).
Wollen argues that the adversary proceedings the Trustee has settled so far represent the "low-hanging fruit," that the Trustee cannot expect to fare as well with the remaining adversary proceedings, and the ongoing litigation costs are unreasonably high relative to the Trustee's prospects of recovery in the remaining fraudulent and preferential transfer actions. No evidence was presented to substantiate these assertions. The Trustee may or may not realize a similar percentage of recovery from the remaining adversary proceedings. But many of the fraudulent and preferential transfer actions are similarly situated such that a significant portion of the litigation costs will be the same regardless of the total number of adversary proceedings that remain. The Court granted the Trustee's motion for case management procedures which provides for a consolidated trial on issues common to all of the fraudulent and preferential actions pending in this Court. See Order Authorizing and Approving Case Management Procedures Governing Multiple Adversary Proceedings Arising under 11 U.S.C. §§ 544, 547, 548 and 550, Misc. Case No. 12-00006 (Docket No. 5). Consolidating common issues for trial will minimize litigation costs. Further, the Trustee already has incurred a substantial portion of the total cost of litigating the adversary proceedings.
Wollen also points out that the Trustee's professional fees, including the fees of the Trustee's accounting firm, will be paid as administrative expenses that will deplete the estate. Where a debtor has stopped operating its business, a continuing diminution can occur based on the accumulation of administrative expenses without a reasonable prospect of payment. See Loop Corp., 379 F.3d at 515 (where a liquidating Chapter 11 debtor who has ceased business operations but continues to incur administrative expenses, the debtor suffers from a negative cash flow which can constitute a "continuing loss to or diminution of the estate" for purposes of 11 U.S.C. § 1112(b)); Citi-Toledo Partners, 170 B.R. 602, 606 (Bankr.N.D.Ohio. 1994)(continuing administrative expenses coupled with the fact that the debtor's project remained idle demonstrated a diminution to the estate).
The Debtor's monthly operating report for the period from February 1 to February 28, 2013 shows that the total cumulative amount of professional fees for legal and accounting and other services incurred is over $2 million, of which $287,915.31 remains unpaid. See February 2013 Monthly Operating Report — Docket No. 1290. The Trustee incurred these fees not only in connection with fraudulent and preferential transfer litigation, but also to discharge her duties to investigate fraud, prepare tax returns, deal with the Securities and Exchange Commission, and administer the bankruptcy case. The report also reflects a cumulative amount of collected funds in the amount of $3,777,980.80, of which $1,145,614.75 remains available to the estate. Id. The Trustee has sufficient cash on hand to pay all Chapter 11 administrative expenses. Compared to the assets on hand as of the date the case was filed, the total value of the assets recovered by the Trustee that are still property of the bankruptcy estate thus far has increased.
The Court concludes that Wollen has failed to demonstrate a continuing loss to or diminution of the bankruptcy estate sufficient to establish cause to convert this Chapter 11 case to Chapter 7. The Court bases this conclusion on the following: 1) the amount of liquid assets in the estate, net of estate payables, has increased since commencement of this Chapter 11 case; 2) the amount of funds received by the estate has exceeded the sum of total estate disbursements and unpaid estate payables; 3) the unpaid administrative expenses do not exceed the cumulative funds available in the estate to pay those expenses; 4) the Trustee has already realized more than $3 million from her settlements of various adversary proceedings, is continuing to settle claims, and substantial claims remain; 5) the Trustee has made a substantial investment in her pending claims and has already incurred a substantial portion of the cost to litigate those claims; and 6) the Trustee has taken reasonable and appropriate steps to minimize the litigation costs associated with her prosecution of her remaining claims.
Unless the court orders otherwise, a Chapter 11 trustee is charged with investigating the "acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor's business . . . and any other matter relevant to the case or tot eh formulation of a plan." 11 U.S.C. § 1106(a)(3). A Chapter 11 trustee must also file a report explaining the results of the investigation. See 11 U.S.C. § 1106(a)(4).
The Trustee filed her 1106 Report on December 7, 2012. It consists of a fifty-four page report and an attached Litigation Information Summary Spreadsheet. The 1106 Report includes an explanation of the Debtor's background, its note investment program, the criminal actions involving the Debtor's principal, Douglas Vaughan and Martha Runkle, and the action filed against the Debtor by the Securities and Exchange Commission. The 1106 Report also describes the Trustee's efforts in investigating and reconstructing the Debtor's books and records, identifying potential claims against the Debtor's related entities and officers and key employees of the Debtor, and potential fraudulent and preferential transfer claims.
Wollen argues that the Trustee herself felt she could have filed the 1106 Report as early as June 2010, and complains that the Trustee did not file the 1106 Report until after Wollen filed the Motion to Convert. Wollen's argument that the Trustee could have filed the 1106 Report in June 2010 is based on the fact that the Trustee filed a motion to convert in June of 2010, shortly after her appointment. But the Trustee had not completed her investigation of the Debtor's business transactions, and had not completed her analysis of the Debtor's alleged Ponzi scheme and the potential fraudulent and preferential transfer claims as of June of 2010. The Securities and Exchange Action was stayed because the pending criminal action against the Debtor's principal, and, as a result, the civil action involving the Securities and Exchange Commission was not fully resolved until December 2012. The criminal action involving the Debtor's principal was ongoing through September 2012 when the United States District Court entered a judgment against him and sentenced him to prison. She filed her 1106 Report on December 7, 2012. On February 15, 2013, the Trustee filed a supplement to her 1106 Report. See Chapter 11 Trustee's First Supplement to her Report Pursuant to 11 U.S.C. § 1106(a)(3) and (a)(4) ("Supplemental Report")(Docket No. 1264). The Supplemental Report describes the status of the fraudulent and preferential transfer actions pending in this Court and in the United States District Court, reports that the Internal Revenue Service has filed a sizeable claim but that the Trustee is in discussions with the IRS to investigate the possibility of the IRS agreeing to subordinate its claims to investors in VCR's promissory note program, and states that the Trustee intends to file a "Rising Tide" plan and disclosure statement in late spring of 2013. Id.
Wollen complains that the Trustee's 1106 Report contains only "bulk estimates" of total litigation costs, but no case-by-case analysis, fails to include a detailed analysis of potential recovery, and offers no cost benefit analysis for pursuing the fraudulent transfer claims. The investigative reporting requirements under 11 U.S.C. § 1106(a)(3) do not require such case-by-case projections of costs associated with anticipated potential litigation, but only direct the trustee to report on "the acts, conduct, assets, liabilities and financial condition of the debtor," including any facts relating to fraud or misconduct by the Debtor in managing its business affairs. 11 U.S.C. § 1106(a)(3) and (4)(A). The Trustee must also report on "any other matter relevant to the case or a formulation of a plan," which could include projections regarding the potential litigation. The Trustee's Litigation Information Spreadsheet (Exhibit B-K) attached to the Trustee's 1106 Report adequately accomplishes the task of reporting on specific fraudulent and preferential transfer actions. Further, as determined above, the Trustee's pursuit of the fraudulent and preferential transfer actions and other litigation has resulted in a significant recovery of funds for the benefit of the estate notwithstanding the litigation costs associated with such lawsuits. Finally, the Trustee testified that she weighed the potential for recovery against the costs of litigation in determining which preferential and fraudulent transfer actions she would pursue. The Trustee has also timely filed detailed MORs throughout the period she has served as Trustee.
Based on the foregoing, the Court finds that Wollen has not demonstrated "cause" based on the Trustee's alleged failure to comply with the requirements of 11 U.S.C. §§ 1106(a)(3) and (4). The 1106 Report and supplement adequately describes the investigations the Trustee undertook to assess the Debtor's business dealings and financial situation, uncover the alleged Ponzi scheme, and determine what course of action to take to administer the bankruptcy estate, including the pursuit of fraudulent and preferential transfer actions. The Trustee diligently conducted her investigation of the Debtor as required under 11 U.S.C. § 1104(a)(3) and filed her 1106 Report as soon as practicable after she completed her investigation.
Under 11 U.S.C. § 1106(a)(5) the Trustee is required to take one of three alternative actions. That section provides:
11 U.S.C. § 1106(a)(5).
The Trustee must act under this section "as soon as practicable." Id. Approximately two months after her appointment as Trustee, the Trustee filed a motion to convert this case to Chapter 7. She withdrew the motion to convert on September 7, 2010. Wollen complains of the Trustee's decision to withdraw the motion to convert. The Trustee testified that she withdrew the motion to convert for the following reasons: 1) to collect outstanding broker commissions; 2) to pursue insurance coverage litigation; and 3) because the SEC and the creditor's committee wanted the monthly reporting information that would be covered in the MORs. These reasons adequately explain why the Trustee chose to withdraw the motion to convert. In addition, given that over two years have passed since the Trustee withdrew the motion to convert, it is simply too late for Wollen to complain that the Trustee's withdrawal of the motion to convert evidences a failure to comply with the requirements of 11 U.S.C. § 1106(a) or constitutes cause for conversion.
Wollen also contends that the Trustee has failed to comply with 11 U.S.C. § 1106(a)(5) because she has not filed a plan. To date, the Trustee has not filed a plan. Nor does the Chapter 11 Trustee's Report Pursuant to 11 U.S.C. § 1106(a)(3) and (a)(4), filed December 7, 2012, include a section regarding the Trustee's intentions with respect to a Chapter 11 plan, though the Supplemental Report indicates that the Trustee intends to file a plan and disclosure statement sometime in late spring of 2013. Wollen's expert, Brian Rowe, stated that the earliest the Trustee could have formulated and filed a plan and disclosure statement would have been in November of 2012. The Trustee also testified that she intends to file a plan.
In order to evaluate whether a Chapter 11 trustee has satisfied the requirements of 11 U.S.C. § 1106(a)(5) it is appropriate to note what is generally appropriate for Chapter 11 debtors in possession who are also bound to comply with that section. See In re Marshall, 2010 WL 3959612, *39 (Bankr.E.D.Va. Oct. 11, 2010)(citing In re Gusam Restaurant Corp., 737 F.2d 274, 275-76 (2
Based on the particular circumstances of the Debtor's bankruptcy case, including the pending criminal action against the Debtor's principal, the volume of records the Trustee reviewed and her limited access to records while the criminal action was pending, the investigation of the Debtor's business by the Securities and Exchange Commission, and the substantial time and resources the Trustee has devoted to the fraudulent and preferential transfer actions, the Court finds that it has not yet been practicable for the Trustee to file a plan. "As soon as practicable" must be applied within the context of the facts and circumstances particular to each case, and not as a fixed deadline. Marshall, 2010 WL 3959612 at *39 (citing In re New Life Fellowship, Inc., 198 B.R. 813 (Bankr.W.D.Okla. 1996)). The Court, therefore, finds that the Trustee has not failed to satisfy the requirements of 11 U.S.C. § 1106(a)(5). Consequently, Wollen has not demonstrated "cause" for dismissal under 11 U.S.C. §1112(b)(4)(F).
Under 11 U.S.C. §1112(b)(4)(J), "cause" exists if the Debtor has failed, within the applicable time periods fixed under the Bankruptcy Code in Chapter 11 cases or by order of the court, to: 1) file a disclosure statement; 2) file a plan; or 3) confirm a plan. 11 U.S.C. §1112(b)(4)(J). Only small business debtors are constrained by deadlines fixed under the Bankruptcy Code for filing a disclosure statement, filing a plan, and confirming a plan in a Chapter 11 case. See 11 U.S.C. §1121(e)(2) and (3)(requiring a small business debtor to file a plan and disclosure statement no later than 300 days after the date of the order for relief, unless the debtor obtains an extension of the time before the expiration of the deadline); 11 U.S.C. 1129(e)(requiring a small business debtor to obtain confirmation no later than 45 days after the plan is filed, unless the debtor obtains an extension of time). The Debtor is not a small business debtor, and the Court has not entered an order fixing a deadline for the Debtor to file a disclosure statement or plan. Consequently Wollen has failed to establish "cause" under 11 U.S.C. § 1112(b)(4)(J).
By focusing on the significant amount of administrative expenses incurred by the Trustee, Wollen reasons that conversion to Chapter 7 with would result in a cost savings for the estate. The Court finds that the relative cost of proceeding under Chapter 7 versus Chapter 11 is relatively inconsequential in the context of this bankruptcy case if a Chapter 7 trustee were to continue to vigorously prosecute the fraudulent and preferential transfer actions. The real risk to the estate is the prospect of changing trustees if the case were converted to Chapter 7. Both parties point out that the existing Trustee could be appointed as Chapter 7 trustee if the case were converted. But there is no guaranty that the Trustee would serve as Chapter 7 trustee upon conversion, particularly since the defendants in the fraudulent and preferential transfer actions may well have the votes to control the election of a Chapter 7 trustee. See Schedules and Claims Register; 11 U.S.C. § 702 (providing that creditors may elect a person to serve as chapter 7 trustee). Because the Trustee has invested so much in pursuing the fraudulent and preferential transfer actions, the comparative potential cost savings to the estate of proceeding in Chapter 7 does not outweigh the risk to the estate of changing trustees at this stage in the bankruptcy case.
Wollen also argues that "cause" for conversion exists when there is no reasonable prospect for confirmation of a Chapter 11 plan, relying, in part, on In re FRGR Managing Member LLC, 419 B.R. 576 (Bankr.S.D.N.Y. 2009). In FRGR, the Court granted the United States Trustee's motion to convert based on the debtor's apparent inability to fund and timely confirm a plan, reasoning that the debtor was not engaged in an ongoing business and its only source of funding for a Chapter 11 plan was the debtor's potential litigation claims. FRGR, 419 B.R. at 584. See also In re Rey, 2006 WL 2457435, *7-8 (Bankr.N.D.Ill. Aug. 21, 2006)(converting a chapter 11 case based on an inability to fund a chapter 11 plan, where the debtor had few assets other than potential litigation claims).
Here, the Trustee testified that she intends to file a liquidating plan that will be funded in large part from the recoveries from the fraudulent and preferential transfer actions that the Trustee has filed against investors in the Debtor's alleged Ponzi scheme. A liquidation plan is an acceptable form of reorganization under Chapter 11. See, In re Deer Park, Inc., 136 B.R. 815, 818 (9
Based on the evidence now before the Court, the Court concludes that Wollen has failed to demonstrate "cause" to convert this Chapter 11 case to Chapter 7. Moreover, even if "cause" had been established, 11 U.S.C. § 1112(b) provides that one option available to the Court is to appoint a Chapter 11 Trustee in lieu of conversion where such appointment is in the best interest of creditors and the estate. 11 U.S.C. §1112(b). The appointment of a Chapter 11 Trustee has already occurred. The Trustee was appointed shortly after this bankruptcy case was filed and has carried out her duties under 11 U.S.C. § 1106, including her pursuit of fraudulent and preferential transfer actions in an effort to recover funds for the benefit of the bankruptcy estate. She has, in fact, successfully recovered a significant sum. It is in the best interests of creditors as a whole, and the estate, for the Trustee to continue to serve in this Chapter 11 case rather than to convert this case to a case under Chapter 7. At this stage in the case, and where the preponderance of the evidence fails to demonstrate a continuing loss or diminution to the estate, the Court will not convert the case. The Court will enter a separate order denying Wollen's Motion to Convert.
11 U.S.C. § 1112(b)(4).
11 U.S.C. § 1106(a)(4)
