In an individual Chapter 11 Subchapter V case, a group of creditors (“Creditors”) filed a motion to convert the case to Chapter 7. Finding cause for conversion under 11 U.S.C. § 1112(b) because Debtor filed the case in bad faith, the Court converted the case to Chapter 7.
Debtor filed his bankruptcy petition while he was incarcerated for civil contempt of the state trial court. The state court had adjudicated Debtor as having breached his fiduciary duties through a fraudulent scheme by which he took Mexican beachfront property from a Colorado LLC (of which he was a member and manager) for himself. During the state court litigation, Debtor lied under oath, hid his assets, and disobeyed orders of the court. His actions prompted the state court to sanction him on multiple occasions, including by granting Creditors a writ of attachment on Debtor’s assets. Debtor filed his bankruptcy petition on the eve of a state court damages hearing that had been continued twice. Debtor’s bankruptcy petition secured his release from jail without purging his contempt and further delayed the damages hearing against him for several months.
Postpetition, after the Court granted relief from stay, the state court held the damages hearing and liquidated over $21 million in damages against Debtor and in favor of Creditors. Due to the comparatively small amounts of his other debts (which were largely legal fees incurred from state court litigation), Debtor’s bankruptcy case was essentially a two-party case between himself and Creditors. Despite his dishonest prepetition conduct, Debtor filed a proposed Subchapter V plan that relied on him reinvesting funds and making $2 million in payments over five years, followed by a $22 million balloon payment at the conclusion of the plan. The Court questioned whether the proposed plan was feasible and proposed by means not forbidden by law.
Significantly, throughout the pendency of his Subchapter V case, Debtor knowingly held investments in cannabis companies. Because of these investments, Debtor argued that the Court must dismiss his case rather than have a Chapter 7 trustee administer illegal cannabis assets. The Court disagreed with Debtor, finding that based on the scant facts in the record—and because United States Trustee took no position on whether the case must be dismissed—Debtor’s seemingly attenuated connections to cannabis did not require dismissal instead of conversion.