Dismissal / Conversion of Chapter 11 Cases -

      Sometimes during the Chapter 11 process, it may become apparent that a Chapter 11 plan is not going to be possible. This could be due to the loss of a property at foreclosure sale by a creditor who obtained relief from the automatic stay, continued business losses, or other event. At this stage, it might make the most economic sense for the case to be either dismissed outright, or converted to liquidation proceedings under Chapter 7. Normally, if there are only nominal assets remaining in the Chapter 11, it might not make any sense to have the case converted, and a dismissal would be a better course.

Debtor Can Convert to Chapter 7

      Under Section 1112(a) of the Bankruptcy Code, a debtor has an absolute right to convert his Chapter 11 case to Chapter 7, unless: he is not debtor in possession; the case was commenced as an involuntary case under Chapter 11; or the case was converted to Chapter 11 on the request of someone other than the debtor.

Debtor May Dismiss Case

      A debtor does not have the absolute right to dismiss his case, however. This can only be done on noticed motion, and the court has to find that dismissal would be in the best interests of creditor and the estate. In many courts, the preferred route for a failed Chapter 11 is conversion to 7. This allows a Chapter 7 to in effect double-check the facts of the case, and make sure that no valuable assets or legal rights were missed.

Creditor can Ask for Dismissal / Conversion

      Under Bankruptcy Code Section 1112(b), a creditor or the U.S. Trustee can also file a motion to dismiss the case or convert it to Chapter 7, for cause shown, including but not limited to certain enumerated grounds set forth in paragraph (4) of that section. These include:

- Continued loss of diminution of the estate and lack of likelihood of a successful reorganization - Gross mismanagement of the debtor's affair - Unauthorized use of a secured creditor's cash collateral - Failure to maintain public liability or fire insurance - Failure to comply with court orders for the filing of reports and documents - Failure to attend the meeting of creditors or a duly-set Rule 2004 examination; failure to cooperate with the U.S. Trustee's Office in furnishing requested documents and information - Failure to file required post-bankruptcy tax returns or pay the taxes - Failure to meet Code-imposed or court-imposed deadlines for filing and/or confirmation of a plan and disclosure statement - Failure to effectuate a plan - Denial or revocation of confirmation of a plan - Inability to consummate the terms of a confirmed plan - The failure to meet post-bankruptcy domestic support obligations.

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Written by Henry Rendler