Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Nov. 20 — A bankruptcy court properly considered the best interest of the creditors and the bankruptcy estate when it dismissed a debtor's Chapter 11 reorganization rather than converting the case to a Chapter 7 liquidation, a district court in Illinois held Nov. 13.
Judge Elaine E. Bucklo of the U.S. District Court for the Northern District of Illinois concluded that the bankruptcy court didn't abuse its discretion in dismissing debtor BlackAMG's Chapter 11 case.
Creditor Northbrook Loans, LLC argued that it was in the best interest of creditors and “more economical” for the debtor to remain in bankruptcy and convert to Chapter 7 than to dismiss the case and return to state court.
Under Bankruptcy Code Section 1112(b), a debtor may convert a case under Chapter 11 to a case under Chapter 7. A bankruptcy court “has broad discretion to dismiss or convert a Chapter 11 case for cause, and its decision is reviewed for an abuse of discretion,” the court said.
Northbrook holds a mortgage on the debtor's property in Chicago worth $2.6 million. In 2011, Northbrook pursued a foreclosure on the property in state court and obtained a judgment.
While the foreclosure action was pending, Northbrook agreed to resell the property to a third party, Wells Street Companies, provided it obtained the property at a judicial sale. A receiver was appointed and is in possession of the property.
Nearly two years after the foreclosure judgment, the debtor filed for Chapter 11 protection. Prior to the filing, the debtor entered into an agreement to sell the property, subject to all encumbrances except Northbrook's mortgage, to OUT Chicago, LLC. The debtor filed its petition with the understanding that OUT Chicago would fund its restructuring plan.
When the sale to OUT Chicago fizzled with the debtor, BlackAMG determined that the reorganization wasn't a viable solution and asked the bankruptcy court to dismiss the petition.
All of the debtor's other creditors supported the debtor's motion to dismiss except Northbrook.
After a hearing, the bankruptcy court granted the debtor's motion to dismiss the case.
Northbrook appealed to the district court, arguing that the bankruptcy court's analysis was flawed because it ignored the creditors' interest and instead focused on Northbrook's conduct during the proceedings.
The district court found it significant that Northbrook took an unusual position in the case in that it already had a state foreclosure judgment. In view of Northbrook's “highly unusual position,” the bankruptcy court was “well within its discretion to consider the facts surrounding BlackAMG's Chapter 11 petition,” the court said.
The other creditors argued that Northbrook wanted the sale to occur in bankruptcy rather than in foreclosure for reasons that have nothing to do with the property's potential sale price or a comparison of creditors' likely recovery, but more with the fact that Northbrook hopes to avoid its obligation under the agreement with Wells Street to resell the property.
Northbrook disputed the characterization of its conduct as “an abuse of process.”
The court noted that the bankruptcy court expressed “skepticism as to the economy of conversion.” According to the court, a Chapter 7 trustee imposes additional costs, which the court found were unwarranted in this case.
The bankruptcy court judge observed that Northbrook's opposition to dismissal “ran counter to ‘everything that [Northbrook] actually had happen in this case'” and rejected its “eleventh-hour” argument that keeping the case in bankruptcy was in the best interest of all of the creditors.
The court noted that “there is no ‘bright-line' test to determine [whether] conversion or dismissal is in the best interests of creditors and the estate.”
Northbrook relied heavily on Collier on Bankruptcy's listing of factors, especially “equality of distribution.”
The court rejected this argument, saying that it relied on Northbrook's own predictions about how the junior lienholders' claims would be resolved in the foreclosure proceedings, which may or may not be the case. It also ignores the fact that every creditor who expressed a view on the issue favored dismissal, the court said.
Raymond John Ostler, Michael McAleer Nutt, Gomberg, Shafman, Gold & Ostler, P.C., Chicago, represented appellant Northbrook Loans, LLC; Brian Michael Graham, Frankfort, Ill., represented appellee/debtor BlackAMG, L.L.C.; George J. Spathis, Horwood Marcus & Berk Chtd., Chicago, represented appellee Out Chicago LLC; Denise Ann Delaurent, Department of Justice, United States Trustee, Chicago, represented Trustee Patrick S. Layng.
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