The following is a case update written by Robert G. Harris (email@example.com), a partner in the Silicon Valley bankruptcy boutique, Binder & Malter, LLP, analyzing a recent decision of interest:
The Bankruptcy Court for the Western District of New York (the “Court”) recently denied confirmation of a Subchapter V plan and dismissed three consolidated Subchapter V cases for cause on motions by the Office for the U.S. Trustee (“UST”), exercising discretion not to convert to Chapter 7. In re MCM Natural Stone, 2022 WL 1074065, 2022 Bankr. LEXIS 987 (Bankr. W.D.N.Y. April 8, 2022)
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On January 7, 2022, MCM Natural Stone (“MCM”) filed a Chapter 11 bankruptcy petition. CM&M Products (“CMM”) filed a Chapter 11 petition that same day and then filed a second, identical petition. One or both of the CMM cases were filed for a shell entity. MCM and CMM are collectively referred to herein as the “Debtors.” Within days, the Debtors amended their petitions to seek relief under Subchapter V, but they neglected to attach the small business documents required by Bankruptcy Code section 1116.
The Court and UST Trustee repeatedly attempted to contact Debtors’ counsel to inquire about CMM’s duplicative filing. No phone calls were returned. The Debtors never communicated with or provided any information about their cases to their Subchapter V Trustee. The Debtors used cash collateral without authorization, and no motion for approval was ever filed. The Debtors did not close their pre-petition bank accounts and waited a month to bring a defective motion to maintain their pre-petition accounts. The Debtors filed no monthly operating reports. Counsel for the Debtors was never appointed by the Court. At the conclusion of their Subchapter V status conference, after counsel admitted the foregoing deficiencies, the Debtors finally filed a motion to dismiss the first CMM case, but the motion listed (1) an incorrect address for the United States Courthouse, (2) a hearing date of April 7, 2014, and (3) the number of an entirely unrelated case.
The UST filed a motion to dismiss each of the Debtors’ cases under 11 U.S.C. §§ 1112(b)(1), (b)(4)(H) and (b)(4)(F). Secured creditor Evans Bank, the holder of a lien covering the entire value of the Debtors’ combined assets, filed a motion to convert under § 1112(b)(4)(D). The Debtors filed objections to the motions to dismiss and convert. The Debtors filed Subchapter V plans containing a myriad of internal inconsistencies on the eve of the April 7, 2022 hearing on the motions. The Court denied the Evans Bank motion to convert and granted the UST’s motions to dismiss.
The Court first recited the intended speed and efficiency of cases under the Small Business Reorganization Act: “Subchapter V of the Code is intended to eliminate many of the obstacles small business debtors face while reorganizing in Chapter 11. [citation omitted] … While eliminating many of Chapter 11’s administrative costs, it also streamlines the process by requiring the debtor to file a plan ‘not later than 90 days after the order for relief.’ [citation omitted] …. By its very nature, a Subchapter V case is expected to move quickly and efficiently. [citation omitted].”
The Court however saw “[t]his trio of cases [as] the very antithesis of the characteristics of a Subchapter V case” more closely “…resemble[ing] the ‘Cheese Shop’ sketch, in which John Cleese found the shop frustratingly uncontaminated by any cheese. These cases have been frustratingly uncontaminated by the Debtors’ compliance with the Code, Rules and UST reporting requirements.”
The Court found that the UST had demonstrated cause exists to convert or dismiss the Debtors’ cases by a preponderance of the evidence. The Court then had to decide whether to grant the UST’s motions to dismiss or Evans Bank’s motions to convert. Evans Bank had moved to convert under 11 U.S.C. §1112(b)(4)(D) which requires a showing of both the unauthorized use of cash collateral and a showing of substantial harm. Evans Bank failed to meet its burden to show substantial harm. The Court concluded that conversion would leave no likelihood of any distribution to unsecured creditors and, thus, no bankruptcy purpose would be served in conversion to Chapter 7. The Court ordered the cases dismissed so Evans Bank could pursue its remedies in state court.
Judge Warren’s reference to this classic Monty Python sketch conveyed so much more than just his quote. The proprietor of the National Cheese Emporium, Henry Wenslydale, admitted at the end to Mr. Mousebender that he had been deliberately wasting his time. Fortunately for all involved, non-compliant cases such as these can only be dismissed and not shot.
This review was written by Robert G. Harris (firstname.lastname@example.org), a partner in the Silicon Valley bankruptcy boutique, Binder & Malter, LLP, and a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.