While you can probably think of other contenders, if any case “resembles the walking dead,” it is the recent case of In re Commonwealth Renewable Energy, Inc. In Commonwealth, the court was faced with a motion to dismiss the debtor’s chapter 11 case pursuant to section 1112(b) of the Bankruptcy Code. Finding in favor of the movants and dismissing the case, the court held that allowing the case to continue in chapter 11 without any reasonable likelihood of reorganization in the foreseeable future was sufficient ammunition to find “cause” to dismiss or convert the case under section 1112(b) of the Bankruptcy Code. But, as discussed below, the nail on the coffin of this debtor’s bankruptcy case was the court’s finding that the parties in interest in this case could adequately pursue their interests in state court (and were doing so) and, thus, dismissal would not prejudice the parties. Accordingly, the court decided to lay In re Commonwealth to rest and dismiss the case rather than convert it to chapter 7.
Debtor Commonwealth Renewable Energy, Inc. was formed to develop an ethanol production facility in New Staton, Pennsylvania on a 133 acre tract of land (the “Property”). The project was unsuccessful and the Property was unoccupied, but for a portion leased by an entity controlled by two of the debtor’s principals (Stephen Frobouck and Steven Savor). Following its inception, the equity interests in the debtor were controlled by Frobouck, Savor, and either William E. Anderson or his estate, in equal 1/3 shares.
In 2006, William and Ruth Anderson advanced approximately $7 million to the debtor, secured by a lien upon, among other things, the Property. After William Anderson’s untimely passing in 2008, his estate became involved in litigations across several forums with the debtor, Frobouck, and Savor due to, among other things, a difference with respect to the proper characterization of the Andersons’ cash advance as either a loan secured by all of the debtor’s assets (Andersons’ position) or an equity contribution (the debtor’s, Frobouck’s, and Savor’s position).
Commonwealth commenced its chapter 11 case in 2014 to sell the Property and distribute the proceeds to its creditors. A few months later, Commonwealth filed its liquidating plan. After a series of hearings, the court found that the Andersons held a valid secured claim against the Property and granted the Andersons relief from the automatic stay to resume their mortgage foreclosure action in state court. The debtor, Frobouck, and Savor appealed this decision. In light of this finding, the debtor’s plan was rendered unconfirmable and it was withdrawn at the debtor’s request. At such time, the exclusivity period had expired, but no other plan had been proposed.
Thereafter, the Andersons filed a motion to dismiss the chapter 11 case pursuant to section 1112(b) of the Bankruptcy Code.
“Cause” Exists under Section 1112(b)
Section 1112(b) of the Bankruptcy Code provides that, with certain exceptions, “on request of a party in interest, and after notice and a hearing, 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)(4) provides a non-exhaustive list of factors which may constitute “cause” for dismissal or conversion. As the court explained,
The Third Circuit has determined that cause exists when there is not a reasonable possibility of a successful reorganization within a reasonable period of time. If the debtor has no viable prospect of confirming a plan, then there is no point in expending estate assets on administrative expenses, or delaying creditors in the exercise of their nonbankruptcy legal rights. . . . [A] bankruptcy court is not bound to clog its docket with visionary or impracticable schemes for resuscitation.
Id. at 6 (internal quotation marks omitted). Applying the above standard, the court found that cause existed to dismiss or convert the case under section 1112(b) because, among other things, the debtor had no reasonable possibility of a successful reorganization or liquidation within a reasonable time. In support, the court cited that (i) the debtor is a non-operating entity with zero employees; (ii) the debtor’s only material assets consist of the Property, the lease, and the cash from the lease revenues; (iii) the debtor’s original plan was unconfirmable and was withdrawn; (iv) since such time the debtor has been unable to provide an alternative plan to move the case forward; (v) any viable plan would require a significant equity infusion from Frobouck and Savor—both of whom were unwilling to contribute such funding until their related appeals were exhausted; and (vi) no other party was willing to put forth a plan.
The court had not been presented with credible evidence to suggest that a sale of the Property would occur in the near future to address the pending issues in the case. Although a broker had been marketing the Property for over two years, the broker had not made any significant progress towards the consummation of a sale. Accordingly, the court found that the bankruptcy case had not “maximized the value of the estate in any measurable way.” Instead, the estate was incurring substantial administrative expenses without a corresponding benefit. Based on the foregoing, the court found that it was unlikely that a confirmable plan could be offered within a reasonable time.
Dismissal, Rather Than Conversion, Was Appropriate under Section 1112(b)
In determining whether to convert the chapter 11 case to chapter 7 or dismiss the bankruptcy case entirely, the court concluded that the interests of third parties would neither be impaired by dismissal of the case nor benefitted by its continuation and that conversion to chapter 7 would only delay the case and generate unnecessary fees. No other creditors made an appearance during the two years the case was pending. Only one proof of claim was filed by a secured tax creditor (whose claim would remain protected whether the case was dismissed or converted). Accordingly, the court held that all interests were already protected by the litigants in the various pending state court proceedings. Moreover, if the case were converted the court would need to decide whether the Andersons have rights to the rents stemming from the Property. Based on its prior rulings, the court stated that it “would have no conceivable basis to deny” the Andersons the relief sought and, thus, a chapter 7 trustee would have no significant assets to administer and no funds to pay expenses. Finding no conceivable advantage to converting the case to chapter 7, the court granted the Andersons’ motion to dismiss.
Preserving going concerns and maximizing the property available to satisfy creditors is the sine qua non of bankruptcy—and everything Commonwealth was lacking. Commonwealth reminds us of what practicing bankruptcy law is all about. Bottom line: if your client’s case is not serving either of these fundamental purposes, it might as well be a walker opposite Rick Grimes. CASE DISMISSED!
Andriana Georgallas is an Associate at Weil Gotshal & Manges, LLP in New York.