The debtor filed for Chapter 11 bankruptcy. In the bankruptcy petition, the debtor reported owning and living in a residential property in New York. The bank held the mortgage on the debtor’s property and filed a claim in the bankruptcy case for the remaining balance. The debtor submitted a reorganization plan to the court to pay off the debt to the bank. The debtor claimed that he could pay off the debt by making small payments for 20-22 months, and the remaining balance would be covered by either a sale of some or all the property to a neighboring religious organization or through his spouse’s inheritance. The bank objected to the proposal, arguing that the debtor had failed to file a disclosure statement, thereby violating 11 U.S.C. § 1125 and Rule 3016(b). In addition, the bank argued that the plan was “speculative” and would alter the bank’s lien on the property, violating 11 U.S.C. § 1123(b). The court permitted the parties to negotiate and explore loss mitigation options, but they failed to reach a settlement. The trustee then filed to convert the case to Chapter 7 case or to dismiss the case under 11 U.S.C. § 1112(b). The trustee concluded that a successful reorganization was unlikely because the debtor was not earning income, couldn’t pay his debts, and did not qualify for mortgage assistance. Further, the trustee argued that dismissal was appropriate because the reorganization plan was speculative, “impermissibly modified a mortgage on residential property,” and the bank would not agree to the plan. The bank then sought relief from the automatic stay to foreclose on the property. 11 U.S.C. § 362(d)(2). The debtor opposed the trustee’s motions, asserting that his monthly operating reports did not change unexpectedly and that he had been negotiating with the bank and needed more time. He further claimed that the value of the property had not diminished and that continuing the Chapter 11 bankruptcy case was in the best interest of all parties. The bankruptcy court found that the debtor could not generate income to pay his debts and that the bank (the only impaired creditor) could reject the plan and prevent confirmation under 11 U.S.C. § 1129(a). Additionally, the court noted that the exceptions to dismissal under § 1112(b) were inapplicable because there was no evidence that the creditor’s best interest would not be served by dismissal, and the bank sought dismissal rather than conversion. Therefore, the bankruptcy court dismissed the case for cause under § 1112(b), and the debtor appealed.
In Plasterer v. US Bank Trust N.A., Case No. 2:23-cv-6151 (NJC), 2025 WL 101612, 2025 U.S. Dist. LEXIS 7282 (E.D.N.Y. Jan. 14, 2025) (opinion not yet released for publication), the court affirmed the bankruptcy court’s dismissal of the debtor’s Chapter 11 case for cause. The court reiterated that a court must dismiss or convert a Chapter 11 case if it “is in the best interest of creditors and the estate” and the court finds “cause.” § 1112(b). First, the court found that the bankruptcy court had sufficient evidence to find cause. 11 U.S.C. § 1112(b)(4)(A) states that a “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation” constitutes cause for dismissal. The bankruptcy court found “that there was a continuing loss to or diminution of the estate” because the debtor had negative cash flow, could not pay current expenses, and the post-petition arrears had grown because the debtor failed to make post-petition mortgage payments. The court also found that the debtor had no chance of rehabilitation because he did not have income, the reorganization plan was speculative and unfeasible, and he had provided no evidence of his “vague claims” to sources of money that could pay off his debts. The debtor argued that the bankruptcy court should have considered several other factors, such as his ongoing negotiations and good faith efforts to pay his debts. However, the debtor failed to dispute the bankruptcy court’s findings of fact. Further, the debtor did not argue that an exception to § 1112(b) applied or that the case should have been converted to Chapter 7. Therefore, the debtor had failed to set forth an argument that would “compel a different outcome.” Next, the debtor argued that the bankruptcy court erred in not allowing an extension for him to file his reorganization plan. However, the debtor filed his request for an extension beyond the 120-day time period under § 1121(b), and the issue was moot because § 1121(a) permitted a Chapter 11 debtor to “file a plan at any time during the case.” Finally, the debtor argued that the bankruptcy court should have heard his argument regarding “the authenticity of the chain of custody of the mortgage.” The court rejected his argument because the debtor failed to file the objection “at least 30 days before the hearing” as required by Bankruptcy Rule 3007(a). Therefore, the court affirmed the bankruptcy court’s dismissal of the debtor’s Chapter 11 case.
By Nura Elhentaty: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]