ROBERT H. JACOBVITZ, United States Bankruptcy Judge.
Before the Court is the United States Trustee's ("UST") Amended Motion to Convert Chapter 11 Case to Chapter 7, or in the Alternative, Motion to Dismiss (Docket No. 308) (the "Motion"). The Debtor filed its Concurrence with and Response in Support of the Motion (Docket No. 318) ("Concurrence"). Creditors, Lawrence Castleman and Harminder Sian, filed Notices of Creditor's Preference for Dismissal Regarding Motion to Convert or Dismiss (Docket Nos. 319 and 320). Creditor, NCG, LLC ("NCG") filed its Opposition to the Motion (Docket No. 321) ("Objection"). The Court held a final, evidentiary hearing on the Motion and took the matter under advisement. In its closing argument, the UST stated that based on the amendments to NCG's offer to purchase assets of the estate, the UST does not object to the case being converted to a chapter 7 case.
Having considered the evidence in light of the applicable Bankruptcy Code sections and relevant case law, the Court concludes that the Motion should be granted and that this chapter 11 case should be converted to a case under chapter 7 of the Bankruptcy Code.
This is the second chapter 11 bankruptcy case the Debtor, Sandia Resorts, Inc., has filed. Debtor commenced this voluntary chapter 11 bankruptcy case on June 9, 2016. This has been a heavily litigated chapter 11 case. Debtor and NCG filed competing plans. Despite numerous amendments and vigorous litigation, neither plan proponent was able satisfy § 1129(a)(10)'s
The Debtor owns and operates a hotel (the "Hotel") branded and doing business as America's Best Value Inn on its real property located at 5601 Alameda Blvd., N.E. near Alameda Blvd. and I-25 in Albuquerque, New Mexico (the "Real Property"). The term Real Property as used in this opinion includes the building where the Hotel is operated and all fixtures. The Hotel is Debtor's primary asset. NCG holds a note and mortgage secured by the Real Property, which it purchased from First National Bank of Santa Fe.
NCG made an offer set forth in its Objection. The offer is made to any chapter 7 trustee appointed in the converted case if this Court converts this chapter 11 case to chapter 7. NCG amended the offer in open court. These are the terms and conditions of NCG's offer, as amended (the "Offer"):
There is a good prospect that NCG will have the ability to borrow $500,000 from Main Bank to fund $500,000 of the Purchase Price at closing and to close if the Chapter 7 Trustee accepts the offer and the Court approves the sale. NCG obtained a loan commitment from Main Bank in the amount of $500,000. The Chief Executive Officer of Main Bank signed the loan commitment on behalf of the bank and testified at the hearing. Main Bank regards the appraisal contingency in the loan commitment as having been satisfied. The other contingencies in the loan commitment are the typical type of contingencies contained in loan commitments for commercial loans.
Debtor scheduled the Real Property as having a value of $1.2 million. See Schedules, filed October 10, 2016; Docket No. 291. Debtor estimated the liquidation value of its furniture, fixtures, equipment and furnishings at $72,000, net of costs of sale. See the Liquidation Analysis attached to Debtor's Corrected Second Amended Disclosure Statement, filed August, 2, 2016. Docket No. 164. Debtor scheduled claims against Don Harris and/or Albuquerque Business Law P.C. for legal malpractice; and against NCG, First National Bank of Santa Fe, Peak Hospitality LLC, C. Randel Lewis and Western Receiver, Trustee & Consulting Services, Ltd. and/or their respective agents, affiliates and representatives, all in amounts listed as unknown. Id. Debtor asserts it has claims against NCG that relate to NCG secretly purchasing First National Bank of Santa Fe's loan to Debtor contrary to an agreement between Debtor and NCG that NCG would help Debtor refinance its debt owed to the bank. Debtor is likely to pursue the scheduled claim against NCG if the case is dismissed because Debtor's principal believes NCG double crossed him, and he would be more motivated to pursue the claim than a chapter 7 trustee.
NCG filed a proof of claim asserting a secured claim against the estate in the
Unpaid administrative claims in this chapter 11 case, subject to allowance of such claims, appear to be approximately $95,000 to 100,000, which includes approximately $75,000 of unpaid professional fees, plus operating expenses incurred in November and December 2017 not yet paid in the ordinary course of business. There are sufficient funds in Debtor's operating account to pay those operating expenses.
Unpaid real and personal property taxes appear to be approximately $260,000,
The Internal Revenue Service filed a proof of claim in the amount of $8,211.38 as a secured claim, collateralized by all of Debtor's assets and a $981.46 priority unsecured claim. See Proof of Claim No. 1 filed June 15, 1015. The New Mexico Department of Taxation and Revenue filed a claim in the amount of $23,737.97 as a secured claim collateralized by all of Debtor's assets and an unsecured claim in the amount of $4,774.76.
Based on proofs of claim on file, and the Debtor's schedules, there appear to be approximately $365,000 to $400,000 of nonpriority, unsecured claims.
If a chapter 7 trustee accepts the Offer, this Court approves the sale, and the sale closes, it is likely the sale proceeds would be sufficient to pay all real and personal property taxes, all Lodger's taxes, all secured and priority unsecured claims held by the Internal Revues Service and New Mexico Department of Taxation and Revenue, all chapter 7 administrative expenses, all unpaid chapter 11 administrative expenses, and at least a 20% dividend on nonpriority unsecured claims. In a chapter 7 liquidation, without a sale on the terms set forth in the Offer, chapter 11 administrative claims would not be paid in full and no distribution would be made on account of priority and nonpriority unsecured claims, unless the chapter 7 trustee were to recover sufficient amounts on claims against third parties that are property of the estate to make such distributions. If this chapter 7 case is dismissed, administrative and priority claimants would lose their priorities and would bear a significant risk of not being paid anything on their claims. Likewise, if this chapter 7 case is dismissed, holders of nonpriority unsecured claims would bear a significant risk of not being paid anything on their claims.
There is no realistic prospect of confirmation of a plan under chapter 11 in this bankruptcy case. Cause exists to either dismiss or convert this chapter 11 case under 11 U.S.C. § 1112(b).
Conversion or dismissal of a chapter 11 case is governed by 11 U.S.C. § 1112(b)(1), which provides that "the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause...." Section 1112(b) establishes a two-step process for considering the question of conversion or dismissal. The Court "first determines whether there is `cause' to convert or dismiss," and if cause is found, the Court considers whether "conversion or dismissal ... [is in the]
The only criteria in the Bankruptcy Code for choosing between dismissal or conversion of a chapter 11 case upon a finding of cause, is whether conversion or dismissal in the "best interest of creditors and the estate." See Lakefront Investors LLC v. Clarkson, 484 B.R. 72, 82 (D. Md. 2012) (noting that "the Bankruptcy Code does not identify factors ... to consider when determining the remedy in the `best interests of creditors and the estate'"). Case law provides guidance on this decision. The decision between conversion or dismissal falls within the sound discretion of the court. See Loop Corp. v. U.S. Trustee, 379 F.3d 511, 515 (8th Cir. 2004) ("The bankruptcy court has broad discretion in deciding whether to dismiss or convert a Chapter 11 case."). This Court has previously held, "[i]n evaluating the best interests of creditors and the estate, the Court consider[s] the practical impact of conversion on all parties involved." In re Pettingill Enterprises, Inc., No. 11-12-10515 JA, 2013 WL 5350789, at *7 (Bankr. D.N.M. Sept. 23, 2013). Numerous courts have developed a non-exhaustive list of the factors courts may consider when deciding whether dismissal or conversion is in the best interest of creditors and the estate, which include:
Pettingill, 2013 WL 5350789, at *5 (quoting In re Helmers, 361 B.R. 190, 196-97 (Bankr. D. Kan. 2007)). See also In re Veltmann, 2007 WL 4191736 (Bankr. D.N.M. 2007) (applying the same factors); In re BH S & B Holdings, LLC, 439 B.R. 342, 346 (Bankr. S.D.N.Y. 2010) (applying the same factors). The Court adds three additional factors that are not expressly contained in the first ten:
(11) The prospect of payment of any unpaid secured claims, chapter 11 administrative claims, priority claims and nonpriority unsecured claims in a converted chapter 7 case or after dismissal;
(12) Whether conversion to chapter 7 would result in bankruptcy powers and procedures being used to benefit secured creditors without providing a material benefit to other creditors; and
(13) Any other prejudice to parties in interest resulting from conversion or dismissal.
The Court may also consider the preferences expressed by the parties in interest, especially neutral third-parties such as the United States Trustee. See In re Ferri, 2010 WL 1418147, *4 (Bankr. D.N.M. 2010); In re Gollaher, 2011 WL 6176074, *4 (10th Cir. BAP 2011) ("Courts... consider the preferences expressed by creditors for either dismissal or conversion as they are the best judge of their own best interests."); In re Mazzocone, 183 B.R. 402, 411-12 (Bankr. E.D. Pa. 1995), aff'd, 200 B.R. 568 (E.D. Pa. 1996) ("[W]here an interested party other than the debtor, particularly a completely neutral, "watchdog" party such as the USTE, feels strongly enough about the proper disposition of a bankruptcy case to move for its dismissal, we are even more strongly inclined to dismiss a case than if only the debtor is pressing for this result."). No factor is necessarily determinative, and the court need not give the same weight to each factor.
Having considered the interests of all parties in interest as a whole, the Court has determined that conversion of this chapter 11 case to a case under chapter 7 is in the best interest of the estate and its creditors. The preferences expressed by the parties in interest were mixed. The Court considered the thirteen factors identified above and has concluded that the first, third, fourth, fifth, seventh, eighth, ninth, and tenth factor are neutral. As to the first factor, there no evidence conversion or dismissal will alter the equality of distribution. As to the third factor, there is no strong evidence that the Debtor intends to file another bankruptcy case. As to the fourth factor, there is no reason to believe that there are assets of the estate that a chapter 7 trustee could assist in reaching. As to the fifth factor, neither conversion nor dismissal is likely to impact the estate's value as an economic enterprise. As to the seventh factor, the estate is not a "single asset." As to the eighth factor, while creditors have alleged misconduct by the debtor, there is no convincing evidence before the Court of any significant misconduct. As to the ninth factor, no plan has been confirmed. As to the tenth factor, there are no environmental or safety concerns of which the Court is aware.
The second and eleventh factors weigh significantly in favor of conversion. As to the second factor, there is a substantial amount of unpaid chapter 11 administrative
The twelfth factor weights in favor of conversion. In exchange for a chapter 7 sale that would significantly aid NCG in realizing upon its collateral, NCG has offered to provide significant value to a chapter 7 trustee.
The sixth and thirteenth factors are mixed. Debtor asserts that its claims against NCG and others would be better resolved in a state court foreclosure proceeding after dismissal. Debtor argues that dismissal is in the best interest of the estate and its creditors because it, rather than a chapter 7 trustee, has the greatest motivation to pursue those claims for the benefit of the Debtor and its creditors, especially the claim against NCG. Debtor scheduled each of the claims as having an unknown value and has provided the Court no evidence on their value. If the claims are valuable, a chapter 7 trustee can assess their value and use that information when considering NCG's Offer and other options. The estate and its creditors will likely benefit from having a neutral third party evaluate the claims and pursue or sell them based on the best interest of the estate and creditors. Conversion would guard against the possibility of Debtor wasting its assets to pursue claims to avenge a perceived wrong irrespective of the impact on creditors.
NCG's Offer weighs heavily in the Court's evaluation of whether conversion or dismissal is in the best interest of the estate and creditors. The Offer gives a Chapter 7 Trustee an option (not available after dismissal) that could make this case administratively solvent, pay all tax claims, secured claims (excluding NCG's claim), and priority unsecured claims in full, and leave funds to make a distribution of 20% or more on nonpriority unsecured claims. Dismissal provides no safety net.
Based on the foregoing, the Court will enter an order converting this chapter 11 case to chapter 7.
