United States' Motion to Convert Chapter 11 to Chapter 7

MIKE K. NAKAGAWA, Bankruptcy Judge.

The United States of America, on behalf of its agency, the Internal Revenue Service ("IRS"), which is a creditor and party in interest in this action, hereby moves to convert this case to chapter 7 pursuant to 11 U.S.C. § 1112(b), Fed. R. Bankr. P. 1017(f), and Fed. R. Bankr. P. 9014 for (1) the debtor's failure to file a tax return due after commencement of the case, and (2) the debtor's failure to propose or confirm a chapter 11 plan.

This case commended on March 21, 2017, see ECF No. 1, and the IRS is a creditor and party in interest having filed a proof of claim asserting income tax liabilities in the total amount of $215,941.08. For purposes of conversion to chapter 7, section 1112(b)(1) of the Bankruptcy Code provides, in pertinent part as follows:

11 U.S.C. § 112(b)(1). Section 1112(b)(4) includes a non-exclusive list of what constitutes "cause". The Court, however, has broad discretion to determine what constitutes "cause" and may "consider other factors as they arise, and [ ] use its equitable power to reach the appropriate result in individual cases." Pioneer Liquidating Corp. v. United States Trustee (In re Consolidated Pioneer Mortgage Entities), 248 B.R. 368, 375 (B.A.P. 9th Cir. 2000) aff'd, 264 F.3d 803 (9th Cir. 2001). The movant bears the initial burden to establish cause by a preponderance of the evidence. Sullivan v. Harnisch (In re Sullivan), 522 B.R. 604, 614 (B.A.P. 9th Cir. 2014) (citation omitted). Once a determination of "cause" has been made, a choice must be made between conversion and dismissal based upon the best interests of the creditors and the estate. E.g., In re Moore, 583 B.R. 507, 511-12 (C.D. Cal. 2018) (citations omitted).

A. The Debtor has failed to file post-petition tax returns.

The failure to file a tax return that comes due after commencement of a case is cause to convert from a case under chapter 11 to a case under chapter 7. 11 U.S.C. § 1112(b)(4)(I). Here, the Debtor has not filed his income tax return for 2017, which was due, after extension, on October 15, 2018.

B. The Debtor has failed to propose or confirm a plan.

This case has been pending for two years without a plan even being filed, let alone set for confirmation, and the failure to file or confirm a plan is cause for conversion. 11 U.S.C. § 1112(b)(4)(J); see also In re Brooks, 488 B.R. 483 (Bankr. N.D. Ga. 2013). The debtor should not be permitted to "wallow" in chapter 11 at the expense of creditors. See In re Babayoff, 445 B.R. at 79 (holding that because "[a] debtor's failure to make meaningful and substantive progress toward the confirmation of a plan . . . is nearly always prejudicial to creditors[,] . . . a debtor cannot wallow in chapter 11.") (quotations and citations omitted); see also In re Milford Conn. Assocs. L.P., 389 B.R. 303, 309 (Bankr. D. Conn. 2008) ("Chapter 11 debtors cannot `have their cake and eat it too'; the extraordinary relief provided by the bankruptcy laws comes with a price . . . includ[ing] the responsibility to pursue an open and expeditious reorganization."); In re Van Brunt, 46 B.R. 29, 30 (Bankr. W.D. Wis. 1984) ("The Chapter 11 debtor is a fiduciary of his creditors . . . and is obligated to prosecute his bankruptcy proceeding in an expeditious manner.") (citations omitted).

Further, as each month passes without a confirmed plan, the window for payment of priority tax claims gets smaller and the required payment under a chapter 11 plan gets larger. Because the window for deferred payment of priority tax claims under a chapter 11 plan is five years from the petition date, see 11 U.S.C. § 1129(a)(9)(C), the need to move to confirmation is crucial. At this point, almost two years into this case, any chapter 11 plan would have to provide for payment of priority tax claims over a period of three years or less. And, based on review of the schedule of assets and monthly operating reports, the debtor does not have the ability to fund such a plan. Accordingly, there is cause for conversion.

C. There are no "unusual circumstances" precluding relief under section 1112(b)(1).

Having established cause, the burden shifts to the debtor under section 1112(b)(2) to specifically identify unusual circumstances precluding relief under section 1112(b)(1). For the exception to apply the debtor must prove and the bankruptcy court must "find and specifically identify" that "unusual circumstances" exist to show that conversion or dismissal is not in the best interest of creditors and the estate. See In re Warren, 2015 WL 3407244, at *4 (B.A.P. 9th Cir. May 28, 2015). The debtor must also prove that the cause for conversion or dismissal was reasonably justified, and that basis for dismissal or conversion can be "cured" within a reasonable time. Id. The debtor must prove both statutory elements to avoid conversion or dismissal. E.g., In re Om Shivai, Inc., 447 B.R. 459, 465 (Bankr. D.S.C. 2011) ("The construction of the statute makes it clear that all of the elements set forth in the statute must be satisfied to protect the debtor from conversion or dismissal.") (citation omitted). The record does not disclose any unusual circumstances that would establish justification against granting relief under section 1112(b)(1).

D. It is in the best interest of the creditors of the estate to convert to chapter 7.

Consistent with section 1112(b)(1), it is the IRS' position that conversion to chapter 7 rather than dismissal is in the best interest of all creditors and the estate.

E. Conclusion

Based on the foregoing and for cause established pursuant to 11 U.S.C. § 1112(b)(1), the IRS respectfully requests that this case be converted to a chapter 7 bankruptcy with appointment of a chapter 7 Trustee.