Mountain Highlands, LLC

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
Mountain Highlands, LLC,
Debtor. 	No. 11 - 06-10011 - SA
MEMORANDUM OPINION ON DEBTOR’S
MOTION TO DISMISS BANKRUPTCY CASE AND
DEBTOR’S MOTION FOR LEAVE TO PAY UNDISPUTED CLAIMS
This matter is before the Court on the Debtor’s Motion to
Dismiss Bankruptcy Case (doc 146)(“Dismissal Motion”) and
Magnolia Mountain Limited Partnership’s (“MMLP”) Objection
thereto (doc 155) and MMLP’s Motion to convert [Case] to Chapter
7 (doc 173). 	Also before the Court are Debtor’s Motion for Leave
to Pay Undisputed Claims (doc 147)(“Payment Motion”) and MMLP’s
Objection thereto (doc 156). 	Signature Capital Funding, Inc.
(“Signature”) also filed a Limited Objection to the Motion To
Dismiss (doc 157) which it later withdrew (doc 164). 	The Court
has reviewed the pleadings and the file, and consulted its notes
from the confirmation hearing (conducted February 28 and March
22, 2007) and applicable authorities and finds that Debtor’s
Motions are well taken and should be granted. 	This is a core
proceeding. 	28 U.S.C. § 157(b)(2)(A).
FACTS
1. 	Debtor filed a voluntary petition under Chapter 11 on
January 5, 2006 and remains a debtor-in-possession.
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1This claim is listed as totally unsecured based on the
existence of prior liens.
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2. 	After obtaining an extension, Debtor filed its Summary of
Schedules, Statistical Summary, Schedules A-J, and Statement
of Financial Affairs on January 25, 2006 (doc 10).
3. 	Schedule A lists approximately $12 million in real property,
and discloses that Signature claims a lien against all
Schedule A property except water rights and “Silvertree.”
Schedule D lists Signature as a secured creditor with a
claim of $1.5 million.
4. 	Schedule D also lists David Hendricks, d/b/a Magnolia
Mountain, Ltd. as a secured creditor on two parcels of land:
a claim of $450,000 against Silvertree and a claim of
$500,000 1 as a second mortgage against 3 other parcels.
5. 	The only other secured creditor is Taos County holding a
claim of $83,000 for taxes.
6. 	Debtor listed no priority claims on Schedule E.
7. 	Debtor lists seven unsecured creditors holding an
approximate total of $220,000 of claims.
8. 	On April 4, 2006, Debtor filed its Plan and Disclosure
Statement (docs 21 and 22).
9. 	Over the next few months Debtor filed a first modification
to plan (doc 44), a second modification to plan (doc 48), a
supplement to the disclosure statement (doc 49), a third
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modification to plan (doc 62), an Amended Chapter 11 Plan
(doc 63) and Amended Disclosure Statement (doc 64). 	On
December 19, 2006 the Court entered its Order Approving
Disclosure Statement and Setting Hearing on Confirmation of
Plan. 	(Doc 69).
10. 	Debtor filed a motion to sell substantially all of its real
and personal property under Section 363(b) on November 9,
2007 (doc 106). 	MMLP and Signature objected to the sale
(docs 125 and 126).
11. 	The Court denied confirmation of the Chapter 11 Plan on
December 14, 2007 and set a status conference for January
2008 (doc 132). 	The Memorandum Opinion entered with the
Order denying confirmation contains a detailed history of
this case, analysis of the Plan, and reasons supporting the
denial of confirmation (doc 131).
12. 	Debtor, MMLP and Signature resolved their differences
regarding, among other things, the Section 363 sale and
submitted a Stipulated Interim Order authorizing the Section
363 sale (“Order”) on December 17, 2007 (doc 137). 	The
Order authorizes the Debtor to consummate the sale, directs
the title company to pay closing costs, all prior and
current prorated real property taxes, Signature’s claim in
the amount of $2,238,965.54 plus per diem interest,
$1,577,000 to Debtor’s counsel to be held in trust pending
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2A later order authorized and directed Debtor’s counsel to
deposit this $1,577,000 into the Court Registry (doc 139).
3And, that some of the funds are proceeds of the sale that
are not estate property and to which MMLP and Hendricks make
claim.
4This was an oral order at the January 2008 status
(continued...)
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further order on MMPL’s claims 2, a mortgage against a
related entity’s property, and the balance to Debtor.
Signature in turn agreed to remit $90,000.00 of its proceeds
to the court registry pending resolution of Signature’s
claim for attorneys fees. 	MMLP and/or David Hendricks in
turn agreed to include some of its/his real property as part
of the sale and the Order sets out different scenarios for
escrowing documents and destroying documents at appropriate
times.
13. 	On January 24, 2008 Debtor filed the Dismissal Motion (doc
146) and the Payment Motion (doc 147). 	The Dismissal Motion
alleges that the sale of virtually all assets was completed
at a net price sufficient to pay all claims in the
bankruptcy case, that Debtor is filing a motion to pay said
claims, that Debtor has already paid the secured claim of
Signature, and that Debtor has placed funds 3 in the registry
to protect the claims of MMLP and Hendricks. 	The Motion
also alleges that the Court has fixed a deadline of April 7,
2007 to file a new plan 4, but that Debtor will not file such
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4(...continued)
conference. 	See Minutes, doc 145.
5The seven creditors are not identical to those on Schedule
F; it appears that insider creditors were removed from the list
and others added. 	The insiders removed were Desert Highlands,
LLC, Masaren, LLC, Pepper Highlands, LLC, and The Shepard’s
Group, Inc. 	The Debtor’s designated representative Robert Janes
is an officer for each of the insiders, and in any event, none of
the insiders has objected to the amended Payment Motion.
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a plan, and that conversion of the case would not be in the
best interests of creditors because it would cause a
substantial increase in administrative expenses and a
substantial delay in distribution of payments to creditors.
The Dismissal Motion also invites the Court to fashion any
conditions precedent to dismissal, such as escrowing the
$1.577 million with the United States District Court and/or
paying all undisputed unsecured creditors in full. 	The
Payment Motion recites that Debtor has sold its assets and
provided for payment of secured claims, and requests
permission to pay seven 5 unsecured creditors their claims
(totaling $21,301), plus 6% simple interest from the filing
date. 	Debtor amended the Payment Motion on January 28, 2008
(doc 152) to correct the amounts to be paid to $40,207.
14. 	MMLP objected to both the Dismissal Motion(doc 155) and the
Payment Motion (doc 156). 	Signature filed a limited
objection to the Dismissal Motion (doc 157) which it later
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6Movants assume they are secured, a conclusion with which
this Court does not necessarily agree. 	In any event, Movants
have taken no steps to have this Court recognize a security
interest.
7“Ordinarily, liens and other secured interests survive
bankruptcy.” 	Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991).
Movants do not explain how dismissal would destroy their secured
claim.
8Debtor would not receive a discharge upon dismissal and
would therefore continue to owe Movants.
9Every other creditor remaining would be paid before
dismissal. 	The amount of the other creditors’ claims are de
minimus, compared to the $1.577 million on deposit and the claims
now being asserted by MMLP and Hendricks of close to another $1.0
million.
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withdrew (doc 164). 	No other creditor, party in interest or
the United States Trustee objected to either motion.
15. 	MMLP and Hendricks filed a Motion to Convert this case to
Chapter 7. 	Doc 173. 	Most of that motion argues that there
is cause to convert or dismiss the case, with which the
Court agrees. 	Part IV of the Motion states only one reason
why MMLP and Hendricks would prefer conversion over
dismissal:
Magnolia and Hendricks have secured claims 6 to the
proceeds of the sale of Ski Rio, which is Debtor’s
only remaining asset. 	Magnolia and Hendricks will
lose their security upon dismissal 7. 	Thus Debtor
will have effectively used the Bankruptcy Court to
complete a sale of its own property, and property
of Magnolia and Hendricks, take these proceeds,
and deprive Magnolia and Hendricks of any amounts
due 8. 	It is in Magnolia’s and Hendricks’
interest, and possibly the interest of every
unsecured creditor remaining 9, for this case to be
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converted so that all creditors have some chance
of being paid.
CONCLUSIONS OF LAW
1. 	Bankruptcy Code section 1112 provides, in part:
(b)(1) ... [O]n request of a party in interest,
and after notice and a hearing, absent unusual
circumstances specifically identified by the court
that establish that the requested conversion or
dismissal is not in the best interests of
creditors and the estate, 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, if the movant establishes cause.
...
(4) For purposes of this subsection, the term
‘cause’ includes--
(A) substantial or continuing loss to or
diminution of the estate and the absence of a
reasonable likelihood of rehabilitation;
...
(J) failure to file a disclosure statement, or to
file or confirm a plan, within the time fixed by
this title or by order of the court[.]
2. 	The Court finds that there is little likelihood of
rehabilitation in this case because the assets are
substantially gone and Debtor is no longer operating its
business. 	Debtor also failed to file a new plan by April 7,
2008 and has affirmatively stated that it will not file
another plan. 	Therefore, cause exists to convert or
dismiss.
3. 	In re Mazzocone, 183 B.R. 402, 414-16 (Bankr. E.D. Pa.
1995), aff’d. 200 B.R. 568 (E.D. Pa. 1996) lists ten factors
that suggest dismissal of a chapter 11 case is more
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10 Although “forum shopping” is commonly reviled, any counsel
would be remiss in not at least considering the tactical
advantage it might provide to the client. 	The Court considers
that factor here because it is part of the Mazzocone dismissal
test.
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appropriate than conversion as follows: (1) the debtor and
the United States trustee both favor dismissal; (2) state
law proceedings are poised to go forward; (3) the debtor no
longer wishes to utilize the bankruptcy process for any of
its intended purposes; (4) pending disputes are in the
nature of a two-party dispute involving state law issues;
(5) protection against unlawful dissipation of assets sought
by a creditor is also clearly available under state law; (6)
a creditor's preference for conversion is partially in the
nature of forum shopping; 10 (7) the ability or interest of a
chapter 7 trustee to assist a creditor regarding the alleged
dissipation of assets and the pursuit of the creditor's
claim is unclear or non-existent; (8) conversion entails
added administrative expenses; (9) no allegations exist that
preference recoveries or other bankruptcy causes of action
will be lost if the case is dismissed; and (10) dismissal
preserves the time and resources of the bankruptcy court
from onerous and time consuming non-bankruptcy related
issues. 	The Court finds all of those factors present in
this case. 	Specifically, 1) Debtor has sought to dismiss
and the United States Trustee has not objected; 2) there is
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a pending case between the remaining parties, originally
filed in state court but then removed to federal court, that
can be immediately pursued (see Conclusion of Law no. 4
below); 3) the Debtor no longer wishes to utilize the
Bankruptcy Court for any of its intended purposes, such as
protecting itself from creditors or reorganizing its debts;
4) the only remaining issues are in the nature of a two-
party dispute involving state law issues; 5) $1.577 million
is in the custody of the Bankruptcy Court and steps will be
taken to transfer this to the United States District Court;
if MMLP or Hendricks fear a further dissipation of assets
they can apply for protection in the United States District
Court; 6) MMLP’s and Hendricks’ motion to convert would
serve the purpose of retaining jurisdiction in the
bankruptcy court and could be viewed as a type of forum
shopping; 7) if the case were converted the Chapter 7
Trustee would surely not assist MMLP or Hendricks in
perfecting any claim they had to any remaining assets;
rather, the Trustee would examine their claims and either
abandon the $1.577 million or attempt to defeat their
entitlement to it; 8) conversion would entail added
administrative expenses for the Trustee and his or her
professionals, with the potential likelihood that there
would be no funds with which to pay them; 9) no one has
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alleged that there are any preference recoveries or other
bankruptcy causes of action that would be lost if the case
is dismissed; and 10) dismissal would preserve bankruptcy
court resources by not having this court devote time and
energy to two-party non-bankruptcy state law issues.
4. 	MMLP and Hendricks objected to the Dismissal Motion for
several reasons. 	They allege that to assist the Section 363
sale to close, MMLP and/or Hendricks contributed property
worth $972,810 to the sale, which is not covered by the
$1.577 million that was escrowed as part of the sale. 	While
this may be true, this is not justification to keep Debtor’s
bankruptcy case alive. 	Debtor is not seeking a discharge,
and any amounts owing MMLP and/or Hendricks will continue to
be owed upon dismissal. 	MMLP and/or Hendricks may have a
lien on some or all of the $1.577 million in escrow as
proceeds from the sale of the collateral on which they had a
lien. 	Nothing in the sale order, however, granted liens on
any proceeds in excess of this $1.577 million. 	MMLP and
Hendricks also allege that the additional amounts due them
have not been determined and there is no alternative forum
with jurisdiction; this is not true, as Debtor filed a case
in the Second Judicial District Court against MMLP and
Hendricks regarding these very issues (Case D-202-200801559,
filed February 14, 2008), which MMLP and Hendricks removed
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to the United States District Court for the District of New
Mexico on March 7, 2008 (Case 08-cv-00239-JB-ACT). 	That
case is still pending. 	The objection also asks the Court to
order the Debtor to place an additional $800,000 in escrow
to secure the claims of MMLP and/or Hendricks. 	The Court
cannot do this for three reasons: 1) the objectors have not
explained how their claims can become secured at this point,
now that there is no collateral left with which to secure
the claims, see 11 U.S.C. §506(a)(1) (An allowed claim is
secured only to the extent of the value of the creditor’s
interest in the estate’s interest in the collateral.); 2)
any agreement to collateralize the claims with estate
property should have been part of the sale motion and order
and notice of the agreement should have been given to all
creditors and parties in interest, see Fed.R.Bankr.P.
4001(d); and 3) objectors would need an adversary proceeding
to obtain a lien on estate assets, see Fed.R.Bankr.P.
7001(2) (A proceeding to determine the validity, priority,
or extent of a lien or other interest in property requires
an adversary proceeding), which MMLP and Hendricks have not
filed.
5. 	MMLP and Hendricks objected to the Payment Motion for the
same reasons that they objected to the Dismissal Motion,
with one additional claim: that their claims for the
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property contributed to assist completion of the Section 363
sale should be afforded priority over any other claims in
this proceeding. 	See doc 156 ¶ 9. 	The objectors have not
explained, however, how they would be entitled to priority
and they have taken no steps to establish this priority in
the bankruptcy case.
6. 	In conclusion, the Court finds that dismissal of this case
is appropriate. 	A separate Order will enter on the
Dismissal Motion. 	The Court will also deny the Motion to
Convert. 	The Court also finds that it should grant the
Payment Motion as a condition precedent to dismissal. 	A
separate Order will enter on the Payment Motion.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	August 14, 2008
copies to:
Arin Elizabeth Berkson
Moore, Berkson & Gandarilla, P.C.
PO Box 216
Albuquerque, NM 87103-0216
George M Moore
Moore, Berkson & Gandarilla
PO Box 216
Albuquerque, NM 87103-0216
United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
Donald A Walcott
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PO Drawer 9570
Santa Fe, NM 87504-9570
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