Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-04-00098/USCOURTS-ca10-04-00098-0/pdf.json

Nature of Suit Code: 0
Nature of Suit: other
Cause of Action: 

---

* This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. 10th Cir. BAP

L.R. 8018-6(a).

FILED

U.S. Bankruptcy Appellate Panel

of the Tenth Circuit

May 12, 2005

Barbara A. Schermerhorn

Clerk NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE TENTH CIRCUIT

IN RE AC RENTALS, INC.,

An Oklahoma Corporation,

Debtor.

BAP No. WO-04-098

AC RENTALS, INC.,

Appellant,

Bankr. No. 02-10540-WV

 Chapter 11

v. ORDER AND JUDGMENT*

UNITED STATES TRUSTEE,

ASHLEY H. HOUGH, STEVE

POWELL, and JOLENE POWELL,

Appellees.

Appeal from the United States Bankruptcy Court for the Western District of Oklahoma

Before CLARK, BROWN, and McNIFF, Bankruptcy Judges.

PER CURIAM

The parties did not request oral argument, and after examining the briefs

and appellate record, the Court has determined unanimously that oral argument

would not materially assist in the determination of this appeal. Fed. R. Bankr. P.

8012. The case is therefore ordered submitted without oral argument.

The debtor appeals an Order of the United States Bankruptcy Court for the

Western District of Oklahoma dismissing its Chapter 11 case. For the reasons

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 1 of 11
1 In re Hough, BAP No. WO-01-059, 2002 WL 518687 (10th Cir. BAP Jan. 8, 2002).

2 In re AC Rentals, Inc., BAP No. WO-03-096, 2004 WL 1182254 (10th Cir. BAP May 28, 2004).

-2-

stated herein, the bankruptcy court’s Order is AFFIRMED. 

I. Background

The debtor corporation is owned by Charles Hough (Hough). The

bankruptcy court’s Order dismissing the debtor’s Chapter 11 case is based on

facts, which have not been disputed, related to Hough’s divorce from Ashley

Hough (Ashley), and the debtor’s acts and omissions as a debtor in possession. 

These undisputed facts, as well as the procedural history giving rise to the

bankruptcy court’s Order dismissing the debtor’s case, are summarized below.

1. The Divorce Lien

Hough and Ashley divorced in 2000. Pursuant to a settlement, Ashley was

granted a lien against the debtor’s real property in the divorce (Divorce Lien). 

However, before the Divorce Lien was finalized and recorded, Hough filed a

Chapter 13 petition. Ashley was granted relief from the automatic stay in

Hough’s Chapter 13 case to finalize and perfect her Divorce Lien (Relief Order). 

Hough appealed the Relief Order, and this Court affirmed that Order. In January,

2002, several weeks after this Court issued its Order and Judgment,1

 the debtor

filed its Chapter 11 petition.

The debtor commenced an adversary proceeding against Ashley, seeking to

avoid the Divorce Lien pursuant to 11 U.S.C. § 544. The bankruptcy court

entered judgment in favor of the debtor, avoiding the Divorce Lien. This Court

affirmed the bankruptcy court’s judgment,2

 and Ashley’s appeal of our Order and

Judgment is currently pending before the Court of Appeals.

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 2 of 11
3 Objection to UST’s Third Motion to Dismiss Case and Brief in Support, in Appellant’s Appendix at 56; Appellant’s Brief at 7.

-3-

2. Acts and Omissions of the Debtor in Possession

The debtor does business as “Outer Limits” (OL), a bar located in

Oklahoma. OL, although possibly conceived by Hough prior to the filing of the

debtor’s Chapter 11 petition, commenced operation postpetition without obtaining

bankruptcy court authorization. Neither OL nor its liquor licence is listed as an

asset in the debtor’s Schedules. OL maintains a non-debtor-in-possession

checking account, and income and expenses in the account are not reported in the

debtor’s monthly operating accounts. Hough and Paula Edens (Edens), another

former spouse of Hough, are the authorized signatories on OL’s bank account. 

The debtor pays OL’s labor expenses, including payments to Edens, but it does

not keep records of time worked or cash paid.

From January, 2002, when the debtor’s petition was filed, until at least June

2003, the debtor in possession made monthly payments averaging $4,000 in

amount to “AC Air” (Air), a sole proprietorship owned by Hough, for “contract

labor.” The debtor in possession does not pay Hough a salary, but Hough has

paid the trustee in his Chapter 13 case over $60,000. The debtor borrowed money

from Air, but no records were maintained of inter-company transactions and

bankruptcy court authorization was not obtained. 

The debtor in possession failed to file tax returns, and was habitually late in

filing its Monthly Operating Reports. Many checks issued by the debtor in

possession were returned for insufficient funds, and insurance on some of its

assets lapsed during the postpetition period. Although the debtor in possession

proposed a Chapter 11 plan, numerous objections to its confirmation were filed,

and the debtor has admitted that it cannot obtain confirmation of the plan.3

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 3 of 11
4 A motion filed by Powell indicates that he and his spouse are the owners of the real property on which OL does business. Motion to Convert Case to Chapter

7 at 1, in Appellant’s Appendix at 58; see also Transcript at 3, in Appellant’s Appendix at 3. The bankruptcy court found, and it is undisputed, that the debtor

and Powell are either partners, or have a joint venture related to OL. See

Appellee’s Appendix at 59. The debtor in possession commenced an adversary

proceeding against Powell seeking injunctive relief. Id. at 9/10/03, in Appellee’s Appendix at 11.

-4-

3. Procedural History Related to Dismissal of the Debtor’s Case

In July, 2002, seven months after the debtor filed its petition, the United

States trustee (UST) sought to convert the debtor’s Chapter 11 case to Chapter 7,

or to dismiss the case (First Motion). The debtor objected to the First Motion,

and shortly thereafter filed Monthly Operating Reports for the months of January

through July, 2002. The bankruptcy court denied the First Motion. 

Several months later, in May, 2003, the UST again moved to convert the

debtor’s Chapter 11 case to Chapter 7, or dismiss the case (Second Motion). The

Internal Revenue Service (IRS) also moved to convert or dismiss the debtor’s case

at this time (IRS Motion). After these Motions were filed, the debtor filed

Monthly Operating Reports for October, 2002 through July, 2003. The

bankruptcy court subsequently entered an Order denying the Second Motion and

the IRS Motion.

A third motion to convert the debtor’s Chapter 11 case to Chapter 7 or to 

dismiss it was filed by the UST in March, 2004 (Third Motion). The debtor

objected to the Third Motion, and filed Monthly Operating Reports for December,

2003 through February, 2004, whereupon the Third Motion was withdrawn by the

UST.

Steve Powell, as an “interested party” (Powell), filed a motion to convert

the debtor’s Chapter 11 case to Chapter 7 in April, 2004 (Powell Motion).4

 The

debtor and Hough objected to the Powell Motion. The Powell Motion was never

noticed for hearing, and no order was entered disposing of it.

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 4 of 11
5 Transcript at 18, in Appellant’s Appendix at 18.

-5-

In September, 2004, the UST moved to dismiss the debtor’s Chapter 11

case pursuant to 11 U.S.C. § 1112(b) (Motion to Dismiss). Ashley filed a

statement supporting the UST’s Motion to Dismiss. The debtor objected to the

Motion to Dismiss, stating that although it could not confirm a plan, it would be

in the best interests of creditors to convert its Chapter 11 case to Chapter 7. At

that time, the debtor also filed Monthly Operating Reports for March, 2004,

through August, 2004. None of the debtor’s creditors opposed the Motion to

Dismiss, or filed papers in support of the debtor’s request to convert. Powell and

his spouse, as “interested parties,” moved to convert the debtor’s case to Chapter

7 while the Motion to Dismiss was pending, but their motion was never noticed

for hearing.

The bankruptcy court held a hearing on the UST’s Motion to Dismiss in

November, 2004. None of the debtor’s creditors appeared to oppose the Motion

to Dismiss, or to support the debtor’s request for conversion. Of the parties who

appeared (the debtor, the UST, Powell and Ashley), none argued that the Chapter

11 case should continue. Rather, the dispute centered on whether the Chapter 11

case should be converted to Chapter 7, as requested by the debtor, or whether it

should be dismissed for the reasons stated in the Motion to Dismiss. Although

the UST requested that the debtor’s Chapter 11 case be dismissed in its Motion to

Dismiss, it refused to take a position at the hearing as to whether it should instead

be converted; but pointed out that if the case were converted, most of the debtor’s

assets would be used to pay administrative claimants, and unsecured creditors

would receive little, if any, distribution. The debtor agreed with the UST that

unsecured creditors would not receive a meaningful distribution if its case were

converted to Chapter 7.5

 Notwithstanding, the debtor argued that conversion was

more appropriate than dismissal because Ashley’s Divorce Lien would be

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 5 of 11
6 See 11 U.S.C. § 349(b).

7 28 U.S.C. § 158(a)(1); Fed. R. Bankr. P. 8002(a).

8 28 U.S.C. § 158(b)-(c); Fed. R. Bankr. P. 8001(e).

-6-

reinstated if the case were dismissed.6 Powell supported conversion because he

wanted a trustee to administer the debtor’s assets. At the close of the hearing, the

bankruptcy court took the matter under advisement.

In December, 2004, the bankruptcy court reconvened the hearing on the

Motion to Dismiss, and granted the Motion, issuing its findings of fact and

conclusions of law on the record. Subsequently, the bankruptcy court entered a

separate Order granting the Motion to Dismiss, incorporating by reference its

findings of fact and conclusions of law made on the record (Dismissal Order). 

The debtor timely appealed the bankruptcy court’s final Dismissal Order.7

The parties have consented to this Court’s jurisdiction because they have not

elected to have this appeal heard by the United States District Court for the

Western District of Oklahoma.8

II. Discussion

The bankruptcy court dismissed the debtor’s Chapter 11 case pursuant to 11

U.S.C. § 1112(b), which states:

[O]n request of a party in interest or the United States trustee or

bankruptcy administrator, and after notice and a hearing, the court

may convert a case under this chapter to a case under chapter 7 of

this title or may dismiss a case under this chapter, whichever is in the

best interest of creditors and the estate, for cause, including–

(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation;

(2) inability to effectuate a plan; 

(3) unreasonable delay by the debtor that is prejudicial to creditors;

. . . .

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 6 of 11
9 11 U.S.C. § 1112(b)(1)-(3), (10).

10 Hall v. Vance, 887 F.2d 1041, 1044 (10th Cir. 1989) (“The bankruptcy court has broad discretion under § 1112(b)” to dismiss or convert a case) (citing

S. Rep. No. 95-989, at 117, (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5903);

H. R. Rep. No. 95-595, at 405 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6361

(§ 1112(b) “gives wide discretion to the court to make an appropriate disposition

of the case when a party in interest requests. . . . The court will be able to

consider other factors as they arise, and to use its equitable powers to reach an

appropriate result in individual cases.”); accord In re Preferred Door Co., 990

F.2d 547, 549 (10th Cir. 1993) (“Under section 1112(b) . . . a bankruptcy court

has broad discretion to convert a Chapter 11 case to a Chapter 7 proceeding or to

dismiss a case for several causes, including the debtor’s inability to effectuate a

plan.”); Frieouf v. United States (In re Frieouf), 938 F.2d 1099, 1102 (10th Cir. 1991) (“Section 1112(b) provides a nonexhaustive list of grounds upon which a

bankruptcy court may dismiss a Chapter 11 case for ‘cause.’”).

11 Hall, 887 F.2d at 1044-45 (in response to the argument that the bankruptcy court abused its discretion in choosing to dismiss a Chapter 11 case, as opposed to

appointing a Chapter 11 trustee, the Court of Appeals stated: “[A]ll creditors had

notice of the motions to dismiss, yet during the three months between the filing of

those motions and the hearing on them, none filed objections or moved to convert. 

If conversion were in the best interest of the creditors, they would have so moved

prior to the . . . hearing.”)

12 Id. at 1045. 

-7-

(10) nonpayment of any fees or charges required under chapter 123 of title 28.9

Under this section, when “cause” exists, a bankruptcy court has broad discretion

to either convert a Chapter 11 case to Chapter 7, or to dismiss the case, depending

on the best interest of creditors and the estate.10 It is appropriate for a bankruptcy

court, in determining whether conversion or dismissal is in the best interest of

creditors and the estate, to take into account the fact that no creditors have

opposed a motion to dismiss or independently moved to convert the case.11

All parties below agreed that the debtor’s Chapter 11 case should be

dismissed or converted to Chapter 7. Thus, there is no question that “cause”

exists under § 1112(b). The question herein is whether the bankruptcy court erred

in choosing to dismiss the case, as opposed to converting it to Chapter 7. We

review this decision for abuse of discretion.12

The bankruptcy court made the following findings of fact and conclusions

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 7 of 11
13 Transcript at 9-11, in Appellant’s Appendix at 31-33.

-8-

of law related to its decision to dismiss the debtor’s case, as opposed to

converting it to Chapter 7:

[U]nder section 1112(b), the Court has the discretion to either

convert the case . . . to one under Chapter 7 or to dismiss the case. 

And in the words of the statute, quote, “whichever is in the best

interest of creditors and the estate.”

According to Collier on Bankruptcy, . . . if all the parties agree, the Court should grant their desire. The parties in interest

here would be the creditors. Here, Ashley . . . while she’s listed as a

creditor in the schedule, is not actually a creditor of the estate but is

a lien holder pursuant to the divorce decree I mentioned earlier. 

Ashley . . . , although not a creditor, favors dismissal. Steve Powell

favors conversion to Chapter 7, but he’s not a creditor either, but

rather a partner or joint venturer in the [OL] investment. The [UST]

does not take a position with respect to conversion or dismissal, and

the debtor favors conversion.

The only unsecured creditors listed in the schedules are three in number if Ashley . . . is excluded, as she should be, and also Kent

Klingenberg should be excluded because he also is not a creditor of

this estate. So, if you eliminate those, the three unsecured creditors,

the total debt of those unsecured creditors is roughly $13,000. None

of the unsecured creditors have appeared in support of or in

opposition to the [UST’s] motion. Washita State Bank is a secured

creditor, who in the schedules is shown as having a partial unsecured

claim, but the bank’s not taken a position either. 

The debtor’s statement of financial affairs indicates that there

was no pending litigation or collection activity when bankruptcy was

filed. The statement of financial affairs does not indicate any

preferential payments. So, if that’s correct, there would be nothing

to pursue if the case were converted. 

If the case were dismissed, there would not be any continuing additional administrative expenses to be paid. If the case were

dismissed, the secured creditors could pursue foreclosure or

collection activity. There are a small amount of unsecured claims,

and unsecured creditors again have not indicated, have not initiated

any collection activity.

Dismissal of the estate rather than conversion would maximize

the estate’s value; thus, it seems that the case should be dismissed.13

The bankruptcy court did not abuse its discretion under § 1112(b) because from

these findings of fact and conclusions of law we do not have “a definite and firm

conviction that [it] made a clear error of judgment or exceeded the bounds of

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 8 of 11
14 Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir. 1994) (citation omitted).

15 See, e.g., United States v. Kras, 409 U.S. 434, 446-477 (1973); In re

Stewart, 175 F.3d 796, 811 (10th Cir. 1999).

16 Appellant’s Brief at 4.

-9-

permissible choice in the circumstances.”14 Accordingly, we affirm the Dismissal

Order.

In addition to the findings and conclusions supporting its decision to

dismiss, as opposed to convert, the debtor’s Chapter 11 case, the bankruptcy court

stated that dismissal was warranted under § 1112(b) because the case was filed in

bad faith. The debtor attacks this conclusion, stating that the bankruptcy court

improperly imputed Hough’s acts to the debtor-corporation. This argument fails

because even if we disregarded the bad faith conclusion, the undisputed findings

of fact set out above support the Dismissal Order. 

The debtor contends that dismissal of its Chapter 11 case denied it its

constitutional right to bankruptcy protection. This argument is without merit as a

matter of law, as it is well-established that there is no constitutional right to a 

bankruptcy discharge.15

The debtor also argues that it was denied due process because the

bankruptcy court “employed several fact findings that the debtor was not given an

opportunity to attempt rebuttal.”16 This argument is without merit. Not only has

the debtor failed to set forth with any specificity the fact findings that it would

rebut, but it misunderstands the process. The debtor had notice of the Motion to

Dismiss, and it opposed that Motion, arguing that its Chapter 11 case should be

converted to Chapter 7 instead of being dismissed. As the proponent of

conversion, it had the burden to show that conversion, rather than dismissal, was

in the best interest of creditors and the estate at the noticed hearing on the Motion

to Dismiss. The debtor failed to present any evidence at that hearing. 

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 9 of 11
17 Appellant’s Brief at 7.

-10-

Significantly, the debtor admitted at the hearing that unsecured creditors would

not likely receive a distribution if its case were converted to Chapter 7. It was

this admission, together with representations made by the debtor in papers filed in

its case, including admissions made in a fact stipulation filed with the UST in

conjunction with the Third Motion (summarized above), that formed the basis of

the bankruptcy court’s decision to dismiss, as opposed to convert, the case. This

being so, the debtor cannot complain that it did not have an opportunity to rebut

facts. 

Finally, the debtor makes two arguments related to Ashley and the Divorce

Lien, both of which are without merit. The debtor first maintains that dismissal

of its case “is tantamount to circumventing the appeals process, by effectually

undoing the Bankruptcy Court’s summery judgement [sic] granted [the debtor]

regarding Ashley Hough’s liens.”17 The appeal process is not circumvented by

dismissal of the debtor’s case, but rather is rendered moot because Ashley’s

Divorce Lien is reinstated by the Dismissal Order as a matter of law pursuant to

11 U.S.C. § 349(b). There being ample grounds to dismiss the case resulting from

the debtor in possession’s admitted acts and omissions, it cannot complain about

the effect of § 349(b) as only debtors who comply with the Bankruptcy Code are

entitled to its benefits. 

The debtor also argues that the bankruptcy court erred in dismissing its

case because Ashley was the only party who requested dismissal and she lacked

standing to do so. This argument lacks merit for numerous reasons, the most

important of which is that the bankruptcy court did not dismiss the debtor’s case

on Ashley’s motion, and in fact, discounted Ashley’s role, holding that she was

not a “creditor” to which the § 1112(b) “best interest” test applied. The Motion

to Dismiss was made by the UST, and it has not been nor can it be disputed that

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 10 of 11
18 11 U.S.C. § 1112(b).

-11-

the UST may request dismissal.18 Although the UST refused to take a position at

the hearing on its Motion as to whether dismissal or conversion was appropriate,

it did not withdraw its Motion to Dismiss, and its argument favored dismissal. 

Indeed, it was the UST’s argument that conversion would result in increased

administrative expenses and little or no distribution to unsecured creditors that

compelled the bankruptcy court to dismiss the case. 

III. Conclusion

The bankruptcy court’s Dismissal Order is AFFIRMED.

BAP Appeal No. 04-98 Docket No. 37 Filed: 05/12/2005 Page: 11 of 11