In re Sunnyland Farms, Inc.

Citations: 517 B.R. 263; 2014 Bankr. LEXIS 3840; 2014 WL 4443491Docket: No. 14-10231 TA

Court: United States Bankruptcy Court, D. New Mexico; September 9, 2014; Us Bankruptcy; United States Bankruptcy Court

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Petitioning Creditors filed a Motion to convert the Debtor’s Chapter 11 case to Chapter 7, which the Court denied after a final hearing on August 21, 2014. The case began with an involuntary Chapter 7 petition on January 30, 2014, but the Debtor converted it to a voluntary Chapter 11 case on April 20, 2014, with the conversion order granted on May 8, 2014. Sunnyland Farms Incorporated, a New Mexico corporation, operates a hydroponic greenhouse in Grants, New Mexico, which has fallen into disrepair, valued at $365,006.71 due to vandalism and lack of maintenance. The Debtor's total assets are estimated at $5,815,006.71 against liabilities of $41,890,322.38, including substantial secured debts, primarily to the largest creditor, 1670083 Ontario Inc., securing approximately $7.9 million. The Debtor also owes significant federal and state taxes, totaling about $1.7 million, with no current insurance on the Greenhouse since 2010.

The Debtor has submitted monthly operating reports and is current on post-petition taxes, with upcoming property taxes due in November 2014. The exclusivity period for filing a reorganization plan expired on September 5, 2014, when the Debtor filed a plan and disclosure statement. The Court noted that if converted to Chapter 7, no funds would be available for junior secured, priority, or general unsecured creditors unless Ontario’s lien is subordinated or set aside. Petitioning Creditors suggested potential equitable subordination of Ontario’s claim due to Debtor's principal, John Stockwell, having previously sought a nominal purchase option for the claim, which he later abandoned on legal advice.

No evidence suggests that Ontario would have accepted a conversion option or that any creditors other than Ontario would have been adversely affected by such a conversion. Various creditors have expressed preferences for the case's conversion, with some preferring an immediate shift to Chapter 7. The conversion of a Chapter 11 case is governed by 11 U.S.C. § 1112(b), which requires a finding of "cause" to either dismiss or convert the case. The statute outlines nonexclusive causes for conversion, and the burden of proof falls on the party requesting conversion to establish cause by a preponderance of the evidence.

Petitioning Creditors argue there are grounds for conversion based on continuing loss to the estate, mismanagement, failure to maintain insurance, and failure to pay taxes. Specifically, under § 1112(b)(4)(A), they claim there is a substantial loss to the estate and no reasonable likelihood of rehabilitation. However, the evidence presented does not support their claim; the debtor has not been conducting business for four months and has no post-petition income. Although the petitioning creditors raised concerns about a lack of insurance, which is valid, the absence of equity in the estate means that any damage would primarily affect Ontario, who is not seeking conversion. The court concludes that, at this point, no cause exists for conversion under § 1112(b)(4)(A).

Petitioning Creditors allege that the Debtor's post-petition gross mismanagement justifies conversion of the case under 1112(b)(4)(B). However, the Court finds no evidence of such mismanagement; the Debtor has timely filed monthly operating reports and a plan of reorganization. Financial constraints prevent the Debtor from purchasing insurance, but the lack of insurance does not pose a material risk to the estate or public, as the Greenhouse's value is minimal and any potential risk lies with trespassers. Consequently, there is no cause for conversion under 1112(b)(4)(C).

Regarding taxes, while the Debtor owes significant pre-petition taxes to the IRS and NMTRD, there is no evidence of unpaid post-petition taxes, which would primarily be real property taxes due biannually. The Court concludes that the Debtor's reorganization plan addresses tax payments, thus no cause exists under 1112(b)(4)(I).

Lastly, considering the best interests of creditors, the Court determines that converting or dismissing the case would not benefit unsecured creditors. The Debtor has over $41.89 million in liabilities against $5.8 million in assets, with a secured creditor, Ontario, holding a claim of $7.9 million. Liquidation under Chapter 7 would leave no funds for unsecured claims, making the continuation of the reorganization process preferable for potential creditor recovery.

Petitioning Creditors propose that Ontario’s secured claim should be equitably subordinated to benefit general creditors; however, the evidence does not support this argument. There are insufficient grounds in the current record for equitable subordination. Stockwell's potential breach of duty concerning Ontario’s secured claim does not inherently threaten that claim's validity. While the Petitioning Creditors could independently pursue equitable subordination claims, the court notes that individual creditors have standing under 11 U.S.C. § 510(c) to bring such claims. The court acknowledges that the Debtor faces challenges in securing funding for reorganization and necessary operations, particularly due to the absence of liability insurance. Therefore, while the court will allow the Debtor to continue its Chapter 11 proceedings and work towards plan confirmation, it emphasizes the need for expediency in light of the lack of insurance. If the Debtor can raise funds to acquire insurance, the timeline for reorganization may be adjusted. The court has judicially noticed its docket and acknowledges that the record of claims presented does not definitively establish the existence or extent of any creditor's allowed claim. Lastly, the court retains the authority to convert or dismiss the case if warranted by the interests of the creditors and the estate.