BANKRUPTCY BULLETIN
In In re Duling Sons, Inc., 2023 WL 3317996 (Bankr. D.S.D. Apr. 10, 2023), Judge Kesha Tanabe found cause to remove the debtor as debtor-in-possession (“DIP”) and to expand the role of the subchapter V trustee.
The debtor filed a voluntary petition for Chapter 11 relief and elected to proceed under Subchapter V. In the case, several motions were filed to convert from Chapter 11 to Chapter 7 pursuant to 11 U.S.C. § 1112, or alternatively, to remove the DIP pursuant to 11 U.S.C. § 1185. By the conclusion of the final hearing on the motions, the major stakeholders supported removing the DIP and expanding the role of the subchapter V trustee.
A Chapter 11 case can be converted to Chapter 7 for “cause” under § 1112(b)(4)(A) for substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation. In the case, the court found cause under § 1112(b)(4)(A) because the case had been pending for 16 months, there was a threat to the administrative solvency of the case, and the DIP had shown little progress in securing support of creditors for a plan of reorganization.
The court also noted that “cause” to convert under § 1112(b)(1) or “cause” to remove the DIP under § 1185(a) can include where the DIP has a conflict of interest in properly investigating and pursuing potential fraudulent transfers and other claims of the estate, such as where a principal of a debtor would have to sue himself or herself. In finding a non-curable conflict of interest, the court noted that the shareholder in control of the debtor appeared to have engaged in gross mismanagement of the debtor’s business, likely committed fraud, and engaged in self-dealing against the debtor. As such, he would have to sue himself to fulfill his fiduciary obligations to the estate. Thus, the court found “cause” under the applicable statutes to dismiss, convert, or remove the debtor as DIP.
The court decided to remove the DIP pursuant to § 1185(a) and to expand the role of the subchapter V trustee pursuant to 11 U.S.C. § 1183(b)(2) and (5). In doing so, the court noted the general advantages of Subchapter V including cost-effectiveness, elimination of the absolute priority rule, and the impaired accepting claim requirements for the confirmation standard.
Section 1189(a) of the Bankruptcy Code provides that only the debtor can file a plan. In the case, the court ordered that the debtor has 90 days from the date of the order to file a joint plan with the subchapter V trustee, or else, the case would be converted to Chapter 7.
Editors-in-Chief:
C.J. Harayda, Stinson LLP
David M. Tanabe, Winthrop & Weinstine, P.A.