Yehud-Monosson Usa, Inc. v. Habbo Fokkena

Citation: Not availableDocket: 11-6040

Court: Court of Appeals for the Eighth Circuit; October 5, 2011; Federal Appellate Court

Original Court Document: View Document

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

Yehud-Monosson USA, Inc. appeals the conversion of its Chapter 11 bankruptcy case to Chapter 7 by the bankruptcy court, which is a final order subject to appellate jurisdiction. The standard of review for such conversions is abuse of discretion, evaluated based on whether the proper legal standards were applied and if findings of fact were clearly erroneous.

The background reveals that this is the fifth bankruptcy filing by the Debtor's shareholders in two years, involving similar assets and liabilities across multiple entities. The initial case was filed by Midwest Oil of Minnesota, LLC, in March 2009 in Delaware, dismissed for abuse of the bankruptcy process. Subsequent appeals and filings, including a 2010 case in Minnesota dismissed for bad faith, illustrate a pattern of manipulation of the bankruptcy system. Notably, a Delaware court barred further filings until proper counsel was retained after dismissing a third case for lack of good faith.

The bankruptcy court found that the Debtor's repeated filings amidst pending foreclosures indicated bad faith, leading to a continuing loss of the estate and a lack of reasonable likelihood for rehabilitation. Additionally, the Debtor’s refusal to appear at the creditors' meeting further demonstrated its bad faith, contradicting its complaints about the expedited hearing process initiated by the U.S. Trustee.

The debtor, identified as Yehud-Monosson USA, Inc., failed to engage in the initial debtor interview scheduled by the United States Trustee and declined to participate in other opportunities, prompting the Trustee to request that if the case is dismissed, Yehud should be barred from filing another bankruptcy case for at least one year. This request is justified to prevent the debtor from abusing the bankruptcy system through serial filings, which have frustrated creditors' rights. Yehud, incorporated in New York, was listed as the lessee of property owned by Midwest Oil and allegedly merged with Midwest Oil after its bankruptcy case was dismissed on March 9, 2011. Yehud filed for Chapter 11 bankruptcy on March 23, 2011, just before a scheduled sheriff's sale of Midwest Oil property. The United States Trustee argued that the case should be transferred to Minnesota, which the New York bankruptcy court agreed to, although Yehud appealed the transfer, leading to a denial of a stay and a voluntary dismissal of the appeal.

In Minnesota, the United States Trustee sought to convert Yehud’s case to Chapter 7, citing bad faith and ongoing losses to the estate, as well as Yehud's failure to meet its obligations under the Bankruptcy Code. Yehud's largest secured creditors supported this conversion, while Yehud contended its case was legitimate, asserting that it could not be involuntarily converted due to its not-for-profit status and requested an evidentiary hearing. On June 15, 2011, following hearings, the bankruptcy court ordered the conversion to Chapter 7, exercising its discretion based on findings that Yehud had previously had multiple opportunities in court, constituting an abuse of judicial process. The court's conclusion that Yehud is substantially the same entity as Midwest Oil, previously barred from filing in bankruptcy court, was not found to be clearly erroneous.

A comparison of financial documents from the previous Midwest Oil case and the current Yehud-Monosson bankruptcy case reveals significant similarities, leading the bankruptcy court to conclude that Yehud has previously had multiple opportunities to litigate its case. Notable parallels include identical principals (Isaacson and SIST), shared ownership of real property, comparable secured debts, and matching unsecured priority claims. Yehud contends it possesses more assets and income than Midwest Oil, but fails to substantiate this claim, with its financial statements indicating no income prior to bankruptcy, in contrast to Midwest Oil’s reported income of over $322,000. The court determined that substantial similarities justified its finding that Yehud had its "day in court" multiple times, rendering the current case an abuse of process, supported by prior rulings from other courts deeming previous filings by Yehud's predecessor as abusive.

Regarding the conversion of Yehud’s case to Chapter 7 under 11 U.S.C. 1112(c), the bankruptcy court ruled this permissible, despite Yehud’s assertion that it does not qualify as a "moneyed, business, or commercial corporation." In the Eighth Circuit, this classification is based on state classification, powers conferred, and the nature of the corporation's activities. Yehud's own statements, including its president's affidavit confirming that it operates convenience stores, combined with its unrestricted New York State Certificate of Incorporation, support the court's conclusion that Yehud is indeed a moneyed corporation. The separate status of Yehud’s parent corporation does not exempt it from conversion under 1112(c), as the entities were intentionally operated separately.

Yehud contends that its engagement in for-profit activities does not classify it as a moneyed or commercial corporation, arguing that such activities are secondary to its nonprofit efforts. However, it acknowledges that operating convenience stores is its primary function. Consequently, the bankruptcy court correctly concluded that Yehud is a commercial entity. Yehud also claimed it was entitled to an evidentiary hearing, asserting it would prevail if allowed one. Section 1112 stipulates dismissal for cause after notice and a hearing, with Section 102(1)(A) defining 'hearing' based on the circumstances. In this case, the circumstances did not necessitate an evidentiary hearing. Yehud had sufficient notice regarding the UST’s motion but failed to specify what evidence it would present. Instead, it provided vague statements about having more assets than Midwest Oil and submitted extensive pleadings that were only marginally relevant to the conversion issue. Despite considering Yehud's claims about its reporting and operational compliance, the bankruptcy court found no evidence supporting Yehud's assertion that it was distinct from Midwest Oil, which had faced similar dismissal motions in previous cases. The bankruptcy court's determination that Yehud was effectively the same entity as Midwest Oil, justifying conversion under Section 1112(c), was based on factual evidence rather than prejudice. The conclusion affirms the bankruptcy court's decision to convert Yehud's Chapter 11 case to Chapter 7.