The Debtors, Happy Beavers, LLC; Armed Beavers, LLC; and Gunsmoke, LLC operate a business known as Front Range Gun Club. Happy Beavers, LLC holds title to the real property where the business is located. Gunsmoke, LLC operates the business, is a wholly owned subsidiary of Armed Beavers, LLC, and leases the business premises from Happy Beavers, LLC. All the business income is generated through Gunsmoke, LLC. Each of the Debtors filed Subchapter V Chapter 11 cases in July, 2020. The original 90-day deadline to file plans of reorganization under 11 U.S.C. § 1189 was extended and plans were timely filed. Objections to the plans were filed by the principal creditors in the cases. The parties entered into a standstill agreement to facilitate efforts to reach a global settlement. When those negotiations fell through, the Court required the filing of amended plans. The Debtors sought two additional extensions of time to file the amended plans through January 11, 2022.
On January 11, 2022, the Debtors and Great Western Bank filed motions to approve the sale of estate assets free and clear of liens but did not file amended Chapter 11 plans. The Court issued Orders to Show Cause why the cases should not be dismissed or converted for the failure to file amended plans. At the show cause hearing, the Debtors argued they acted in good faith throughout the Chapter 11 proceedings, and, after extensive negotiations with the Bank, determined the best interest of creditors of the estate would be served through a public auction sale of the ongoing business free and clear of liens, claims, interests, and encumbrances pursuant to 11 U.S.C. § 363(f). The Debtors did not directly reference circumstances for which they should not justly be held accountable for the failure to timely file plans of reorganization or liquidation. The Debtors argued the proposed sale was a prerequisite to the filing of amended plans.
The Court found the failure to file amended plans constituted cause for conversion or dismissal under 11 U.S.C. §§ 1112(b)(1) and (b)(4)(J). The Court found that conversion of the cases to Chapter 7 was in the best interest of creditors of the estate as the Debtors had accumulated cash during the Chapter 11 proceedings and conversion would allow a Chapter 7 Trustee to independently evaluate pending litigation and whether continued pursuit of the same was warranted.