Hoover, III v. Harrington , 828 F.3d 5 ( 2016 )

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.
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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,
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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.
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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"?
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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
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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
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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.
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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
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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.
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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.
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