Court Opinion

ID: 3285768
Source: CourtListenerOpinion
Date Created: 2016-07-05 17:00:34.830441+00
Date Added: 2024-06-11T12:17:57.685393
License: Public Domain

United States Court of Appeals
                      For the First Circuit

No. 15-2383

                   IN RE: JOHN E. HOOVER, III,

                             Debtor,

                       JOHN E. HOOVER, III,

                            Appellant,

                                v.

   WILLIAM K. HARRINGTON, United States Trustee for Region 1,

                            Appellee,

    RICHARD KING; JOHNATHAN R. GOLDSMITH, Chapter 7 Trustee,

                       Interested Parties.

          APPEAL FROM THE UNITED STATES DISTRICT COURT
                FOR THE DISTRICT OF MASSACHUSETTS

         [Hon. Timothy S. Hillman, U.S. District Judge]

                              Before

                  Thompson, Selya, and Kayatta,
                         Circuit Judges.

     David G. Baker and Law Offices of David G. Baker on brief for
appellant.
     Robert J. Schneider, Jr., Trial Attorney, Executive Office
for U.S. Trustees, Department of Justice, Ramona D. Elliott, Deputy
Director/General Counsel, Executive Office for U.S. Trustees,
Department of Justice, P. Matthew Sutko, Associate General
Counsel, Executive Office for U.S. Trustees, Department of
Justice, Wendy L. Cox, Trial Attorney, Executive Office for U.S.
Trustees, Department of Justice, William K. Harrington, United
States Trustee for Region 1, Richard T. King, Assistant United
States Trustee, Eric K. Bradford, Trial Attorney, Office of the
United States Trustee, Department of Justice, and Lisa D. Tingue,
Trial Attorney, Office of the United States Trustee, Department of
Justice, on brief for appellee.

                          July 5, 2016
          KAYATTA, Circuit Judge.      John E. Hoover, III, ("Hoover")

appeals an order of the United States District Court for the

District of Massachusetts affirming the United States Bankruptcy

Court's conversion of Hoover's Chapter 11 bankruptcy case to a

case under Chapter 7.       Hoover v. Harrington, No. 14-40126-TSH,

2015 WL 5074479 (D. Mass. Aug. 27, 2015).             For the reasons

expressed below, we reject this appeal, which probably should not

have been brought.1

                             I. Background

          As   an   individual   and   doing   business   as   "Halloween

Costume World," Hoover filed a voluntary petition for bankruptcy

under Chapter 11 of the United States Bankruptcy Code.         The United

States Trustee ("the Trustee") filed a motion pursuant to 11 U.S.C.

§ 1112(b) ("section 1112") to dismiss or convert the case to a

liquidation proceeding under Chapter 7 of the Bankruptcy Code.

          Hoover was the sole witness at the July 30, 2014,

evidentiary hearing.   After direct and cross-examination about his

business, his finances, and the prospects for rehabilitation and

reorganization, the bankruptcy court granted the Trustee's motion,

finding that cause existed to convert the case to Chapter 7 under

     1 Because there is a   question of whether the Chapter 7 trustee
still has approximately      $200,000 on hand that he has not yet
liquidated, with which      Hoover claims he could resurrect his
business, we decide this    appeal on the merits rather than accept
the Trustee's claim that    this appeal should be dismissed as moot.

                                 - 3 -
three separate provisions of section 1112(b)(4): "substantial or

continuing loss to or diminution of the estate and the absence of

a   reasonable   likelihood    of    rehabilitation"    under   (b)(4)(A);

"unauthorized use of cash collateral substantially harmful to 1 or

more creditors" under (b)(4)(D); and "unexcused failure to satisfy

timely any [pertinent] filing or reporting requirement" under

(b)(4)(F).    The district court affirmed, concluding that cause to

convert    existed   under   (b)(4)(A)      and   without   discussing   the

alternative grounds for cause found by the bankruptcy court under

(b)(4)(D) and (b)(4)(F).      Hoover, 2015 WL 5074479, at 3 & n.2.

                        II. Standard of Review

             We review the bankruptcy court's legal conclusions de

novo, its findings of fact for clear error, and its discretionary

rulings for abuse of discretion.       In re Gonic Realty Tr., 909 F.2d

624, 626 (1st Cir. 1990).           We may also affirm "on any ground

supported by the record even if the issue was not pleaded, tried,

or otherwise referred to in the proceedings below."           Doe v. Anrig,

728 F.2d 30, 32 (1st Cir. 1984) (quoting Brown v. St. Louis Police

Dep't, 691 F.2d 393, 396 (8th Cir. 1982)).

                              III. Discussion

             When an interested party files a motion to convert or

dismiss a Chapter 11 case, the bankruptcy court inquires as

follows:   Does "cause" exist to convert or dismiss the case; and,

                                    - 4 -
if   so,   is    conversion    or    dismissal       in   the   best   interests   of

creditors and the estate?           See 11 U.S.C. § 1112(b)(1).2

              Hoover argues that the bankruptcy court erred both in

finding that "cause" to convert existed and in finding that

conversion was in the best interests of the creditors.                   We address

each argument in turn.

A.    Cause

              As noted above, the bankruptcy court found at least three

separate causes for conversion.                 We begin and, because one cause

is enough, see Anrig, 728 F.2d at 32, we end by explaining why the

bankruptcy       court   did        not        err   in   finding      cause   under

section 1112(b)(4)(A).

              Cause exists under section 1112(b)(4)(A) if there has

been a "substantial or continuing loss to or diminution of the

estate     and     the   absence          of     a   reasonable     likelihood     of

      211 U.S.C. § 1112(b)(1), residing within Chapter 11 of the
Bankruptcy Code, provides:

              [O]n 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 unless the
              court determines that the appointment . . . of
              a trustee or an examiner is in the best
              interests of creditors and the estate.

                                          - 5 -
rehabilitation."      11 U.S.C. § 1112(b)(4)(A).             The bankruptcy

court's   finding   of   diminution    in    this    case   was   simple   and

straightforward:     Hoover conceded that he was selling inventory

without replacing it, and his monthly operating reports ("MORs")

showed insufficient profit to account for (or replace) the sold

inventory.     In short, the estate was diminishing.              As for the

likelihood of rehabilitation, the court again pointed to the MORs,

showing insufficient cash flow to pay costs and debts.             The court

concluded:    "This debtor barely makes it.         That's what the numbers

tell me and barely makes it only by not paying people . . . and

that's no recipe for a reorganization."

             Hoover's first response to the foregoing is procedural.

He argues that he had no adequate notice that the trustee would

rely on section 1112(b)(4)(A).        His premise that he was entitled

to reasonable notice is correct.            In contested matters such as

motions to dismiss or convert a case under section 1112(b), Federal

Rule of Bankruptcy Procedure 9014 applies.             See Fed. R. Bankr.

P. 9014(a) ("[R]elief shall be requested by motion, and reasonable

notice and opportunity for hearing shall be afforded the party

against whom relief is sought."); see also id. 1017(f)(1) ("Rule

9014 governs a proceeding to dismiss or suspend a case, or to

convert a case to another chapter, except under [certain provisions

not relevant here].").      So the question is, did Hoover receive

"reasonable notice and opportunity for [a] hearing"?

                                 - 6 -
            Clearly, he did.     The Trustee's motion expressly stated

that the Trustee sought conversion based on a showing of cause

under section 1112(b)(4)(A).           When it then became clear at the

hearing begun on May 22, 2014, that the Trustee relied in great

part on the MORs, the court continued the hearing to July 8, 2014,

so as to allow Hoover and his counsel to present evidence and

prepare to address the MORs, which were central to determining

whether Hoover's estate was being diminished and whether there was

a reasonable likelihood of rehabilitation.            Cf. In re Peña, No.

14–09799, 2016 WL 1043736, at *6 (Bankr. D.P.R. Mar. 15, 2016)

(MORs demonstrated that a plan of reorganization was "simply not

feasible for the [d]ebtors").          In so doing, the court explicitly

stated that "we're talking about a likelihood-of-reorganization

question and the Bank is pointing out that on the debtor's own

cash, monthly operating reports it's losing money."                 The court

later granted Hoover's motion to continue the hearing until July

30, 2014.   The court also ordered the parties to file any MORs and

legal   memoranda     relevant   to    the    Trustee's   motion,   including

materials relevant to Hoover's ability to propose a feasible

Chapter 11 plan.      All of this was more than reasonable under the

circumstances    to     inform    Hoover       that   the    likelihood    of

rehabilitation was at issue and to provide him with a meaningful

opportunity to prepare and be heard on the issue.            See Mullane v.

Cent. Hanover Bank & Tr. Co., 339 U.S. 306, 314 (1950) (due process

                                      - 7 -
requires that notice be "reasonably calculated, under all the

circumstances, to apprise interested parties of the pendency of

the   action   and    afford     them   an   opportunity       to   present      their

objections").

           Moving from the question of notice to the merits of the

cause determination, Hoover baldly asserts that there was no

evidence of diminution "other than possibly the fact that Hoover

was continuing to conduct business."                But as Hoover's own records

unmistakably    reveal,     he    was   "conducting         business"    by    selling

inventory without replacing it with new inventory or retaining

cash sufficient to offset the diminution.

           Hoover      next      argues      that     his     proposed        plan    of

reorganization was not "patently unconfirmable," that the state

tax authorities would "hopefully" write off much of his debt, and

that it was "too early" to tell whether a zero dividend was

"ineluctable."        The issue before us, though, is whether the

bankruptcy court abused its discretion in determining that there

did not exist "a reasonable likelihood of rehabilitation."                           11

U.S.C. § 1112(b)(4)(A).

           We see no such abuse.              The Profit and Loss Statement

revealed that in 2013, Hoover's business lost over $135,000, and

the MORs showed that, since filing for bankruptcy, the business

had   generated      only   minimal     profits      despite    selling       off    its

                                        - 8 -
inventory and not paying anything to secured creditors.3   The court

described, in detail, its view of the evidence regarding whether

there was a reasonable likelihood of rehabilitation, noting a lack

of sufficient funds and income to pay monthly expenses under a

Chapter 11 plan.   The court, in its broad discretion, supportably

declined to credit Hoover's testimony that he had plans for

generating more income, finding those plans both speculative and

optimistic.4   See Palmacci v. Umpierrez, 121 F.3d 781, 785 (1st

Cir. 1997) ("[p]articular deference" is due to bankruptcy court's

findings that depend on witness credibility); see also In Re Carp,

340 F.3d 15, 19 (1st Cir. 2003) (appellate courts "are not free

     3 Hoover claims that as a retail business, there is nothing
"unreasonable" or "wrong about not replenishing inventory in the
slowest season of the year[.]" But selling off inventory while
simultaneously not retaining the proceeds with which to buy new
inventory and pay expenses is not a sign of an improving business.
     4 Hoover testified that he planned to start a flea market,

but there was no written agreement for the market, there was little
foundation for Hoover's claim that the market would result in "very
significant weekly income," and there was no evidence to support
the notion that the market would have the same or similar success
as it had when it operated in a different location. Hoover also
claimed that his profits would increase because a competitor,
Spirit Stores, had left town. The only basis for this speculation
was Hoover's internet search and the fact that the space was being
rented by another business.     He could not confirm whether the
competitor was moving to another space in the area and could not
provide an accurate accounting of how much his business had dropped
in the three years that Spirit competed with his business, only
"guessing" that it took "fifty to a hundred thousand dollars of
business away from [him]." The court, in its discretion, declined
to credit this speculative testimony.

                               - 9 -
to . . . make independent judgments about the credibility of

witnesses").

          Although      the   question   of   rehabilitation   under

section 1112(b)(4)(A) is not synonymous with reorganization (i.e.,

the debtor need not have a confirmed reorganization plan in place

to avoid conversion), the debtor still must have "sufficient

business prospects," In [re] Landmark Atl. Hess Farm, LLC, 448

B.R. 707, 714–15 (Bankr. D. Md. 2011), to "justify continuance of

[a] reorganization effort," In re LG Motors, Inc., 422 B.R. 110,

116 (Bankr. N.D. Ill. 2009) (quoting In re Rey, Nos. 04-B-35040,

04-B-22548, 06-B-4487, 2006 WL 2457435, at *6 (Bankr. N.D. Ill.

Aug. 21, 2006)).     Upon review of the evidence and the bankruptcy

court's detailed reasoning, we, like the district court, are "not

left with a 'definite and firm conviction that a mistake has been

committed.'"   Hoover, 2015 WL 5074479 at *2 (quoting In re Watman,

301 F.3d 3, 8 (1st Cir. 2002)).

          Given this conclusion, we have no need to consider

Hoover's challenges to the other "causes" for conversion found by

the bankruptcy court.    As the Trustee points out, and Hoover does

not contest, one cause is enough.

B.   Best Interests of Creditors

          Once the bankruptcy court determined that there was

cause to convert the case, it had broad discretion to do so if it

concluded that conversion was in the best interests of creditors

                                - 10 -
and the estate.        11 U.S.C. § 1112(b)(1).         Given the court's

findings on diminution and rehabilitation, its conclusion that

conversion was in the interest of creditors and the estate was

hardly surprising.

             Hoover argues to us, nevertheless, that the creditors

will   mostly    get    nothing    on    liquidation    after    both   the

administrative fees and his Massachusetts tax obligation (in part)

are paid.    Therefore, he reasons, even a long shot at making a go

of it under Chapter 11 is worth it for the creditors.              Hoover,

though, did not make this argument to the bankruptcy court;

therefore, we can consider the argument waived.             See In Re Net-

Velázquez, 625 F.3d 34, 40 (1st Cir. 2010) ("[A]bsent the most

extraordinary circumstances, legal theories not raised squarely in

the lower court cannot be broached for the first time on appeal."

(quoting Teamsters, Chauffeurs, Warehousemen & Helpers Union,

Local No. 59 v. Superline Transp. Co., 953 F.2d 17, 21 (1st Cir.

1992)).     Even if not waived, this argument would fail. Confronted

with two likely bleak alternative outcomes, the district court had

ample discretion to conclude that a prompt conversion rather than

further   diminution    was   in   the   best   interests   of   creditors,

especially where no creditor opposed conversion as hostile to its

interests.

                                   - 11 -
            We therefore find no error of law or abuse of discretion

by   the   bankruptcy   court   in    converting   Hoover's   Chapter   11

bankruptcy case to Chapter 7.

                            IV.      Conclusion

            The judgment of the district court, affirming the order

of the bankruptcy court, is affirmed.5

      5 We observe that Hoover's brief also criticizes the
bankruptcy court's refusal to stay its order. That criticism is
rendered moot by our disposition of this appeal.

                                  - 12 -