Picacho Hills Utility Company, Inc.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
PICACHO HILLS UTILITY COMPANY, INC.,
Case No. 11-13-10742 TL
Debtor.
MEMORANDUM OPINION
The debtor Picacho Hills Utility Company, Inc. is a small water and sewer utility serving
about a thousand homes in a residential development near Las Cruces, New Mexico. Debtor and
its owner ran afoul of two New Mexico regulatory agencies, the New Mexico Public Regulation
Commission (“PRC”) and New Mexico Environment Department (“NMED”), resulting in
substantial penalties and the appointment of a state court receiver. 	Shortly before a hearing on
the receiver’s motions to sell Debtor’s assets and set aside two questionable purported transfers,
Debtor filed this Chapter 11 case.
The state court receiver (“Receiver”) filed a Motion to Dismiss for Bad Faith Filing (the
“Motion to Dismiss”); a Motion to Abstain Pursuant to § 305 (the “Motion to Abstain”); and a
Motion to Excuse Compliance with § 543(a) (the “Motion to Excuse Turnover”) (together, the
“Motions”). 	PRC, NMED, Bank of the Rio Grande (“BRG”), and Blanco Development, LLC
(“BDLLC”) joined in the Motions and participated in the final hearing.1 Debtor opposes the
Motions.
The Court tried the contested matters on April 12, 15, 18, and 19, 2013. For the reasons
set forth below, the Court finds that the Receiver should be excused from turnover and that this
case should be suspended until the Receiver has sold Debtor’s assets. 	Because of the relief
1 Two other creditors, Brightview Land Company and Peter Gould, also indicated their support for the
Motions.
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granted to the Receiver, the Court finds that the case should not be dismissed, so Debtor can be
allowed, post-sale, to liquidate and distribute its estate.
I. 	FACTS
The Debtor
1. 	Debtor, a New Mexico corporation, is a public utility as defined by N.M.S.A. §
62-3-3(G). 	Debtor provides water and sewer service to approximately one thousand residences
in and around the Picacho Hills development near Las Cruces, New Mexico. Debtor is regulated
by PRC and NMED.
2. 	Debtor is wholly owned by Stephen C. Blanco (“Blanco”), Debtor’s president.
3. 	Debtor owns 2260 acre-feet-per-year (“AFY”) of “permitted” water rights, set
forth in permits issued by the New Mexico Office of the State Engineer (“OSE”). 	Of these,
about 384 AFY have been put to beneficial use, and will be considered “perfected,” while the
balance will be considered “inchoate.”
4. 	NMED has issued Debtor a number of sewage wastewater discharge permits over
the years, without which Debtor could not have operated the sewer utility.
5. 	Discharge permits must be renewed every five years. 	Debtor’s 2007 discharge
permit required Debtor to construct an effluent discharge pipeline to the Rio Grande as an
alternative disposal method (the “Discharge Pipeline”).2 NMED imposed a July 24, 2008
deadline to complete the Discharge Pipeline.
6. 	NMED extended the deadline several times, in part due to Debtor’s need to seek
approval from PRC to borrow funds to construct the Discharge Pipeline.
7. 	On May 8, 2009, after Debtor had missed the extended deadlines to complete the
2 Currently, the only way Debtor can dispose of sewage wastewater is to treat it and pump the treated
water to the Picacho Hills Country Club, where it is used to irrigate the golf course.
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Discharge Pipeline several times, NMED issued a Notice of Violation that required, among other
things, the Discharge Pipeline to be constructed no later than August 6, 2009.
8. 	Debtor has not built the Discharge Pipeline and has no funds with which to do so.
Debtor will soon be five years late in building the pipeline.
Administrative Proceeding
9. 	On or about October 23, 2008, PRC commenced Case No. 08-00315-UT (the
“Administrative Proceeding”) to investigate Debtor’s compliance with PRC rules and orders.
10. 	The Administrative Proceeding afforded Debtor a full and fair opportunity to
litigate the matters at issue. 	The final hearing, conducted over four days in February, 2010,
included seven witnesses and 34 exhibits. 	Pre-hearing procedure, discovery, and preparation
were comprehensive and took place over 15 months.
11. 	On May 26, 2010, the hearing examiner Carolyn R. Glick completed her Final
Recommended Decision (“FRD”).3 The FRD is 88 pages long.
12. 	The FRD is very critical of Debtor’s and Blanco’s actions. The FRD finds, inter
alia, that Debtor violated PRC rules or orders 42 times; and that Blanco gave false testimony,
attempted to intimidate potential witnesses, and converted substantial Debtor funds.
13. 	On August 12, 2010, PRC issued its Final Order in the Administrative Proceeding
(the “Final Order”), adopting the hearing examiner’s FRD with few exceptions.
14. 	Among PRC’s separate findings are: 	Debtor engaged in multiple unauthorized
financial transactions; Debtor failed to build the Discharge Pipeline despite repeated PRC orders;
Blanco made false statements under oath; Blanco converted utility funds for personal and other
uses; and Blanco engaged in acts of witness intimidation.
15. 	PRC also independently found and/or concluded that Debtor is unwilling or
3 Debtor sought to disqualify Ms. Glick based on alleged bias, but the effort failed. FRD, p. 7.
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unable to adequately service its customers and consistently violated PRC’s rules or orders.4
16. 	In the Final Order, PRC determined to commence an action in state court seeking
the appointment of a receiver for Debtor’s assets.5
17. 	PRC also stated in the Final Order that Blanco’s false statements under oath,
conversion of Debtor funds, and acts of witness intimidation would be referred to the New
Mexico Attorney General.
18. 	Debtor appealed the Final Order to the New Mexico Supreme Court. 	On
September 7, 2011, the New Mexico Supreme Court affirmed the Final Order.
19. 	In a Supplemental Order Imposing Additional Penalties, issued August 24, 2010
(the “Supplemental Order”), PRC assessed a $950,000 penalty against Blanco and a $15,000
penalty against Debtor.
The Receiver Action
20. 	On September 2, 2010, BRG filed an action in the Third Judicial District Court,
Dona Ana County, New Mexico, entitled Bank of Rio Grande v. Picacho Hills Utility Company,
Inc., et al., Case No. D-307-CV-201002416 (the “Receiver Action”). 	In the Receiver Action
BRG seeks to collect a loan secured by a mortgage on Debtor’s assets. The case was assigned to
4 The PRC findings are binding upon this Court, under principles of collateral estoppel/issue preclusion.
Collateral estoppel applies in adversary proceedings, see e.g. Grogan v. Garner, 498 U.S. 279, 284 n. 11
(1991), and contested matters. See e.g., In re Thomas, 2007 WL 1655669, at *5 (Bankr. S.D.N.Y. 2007);
In re Flury, 310 B.R. 659 (Bankr. M.D. Fla. 2004). When applying principles of collateral estoppel based
on state court judgments, the bankruptcy court looks to the applicable requirements of the state in which
the judgment was entered. See Gonzales v. Hernandez, 175 F.3d 1202, 1204 (10th Cir. 1999) (“A federal
court is required to give a state court judgment the same preclusive effect it would be given under the
laws of the state in which it was rendered.”) (citations omitted). Under New Mexico law, administrative
adjudications can form the basis for collateral estoppel. See Shovelin v. Cent. New Mexico Elec. Co-op,
Inc., 115 N.M. 293, 298, 850 P.2d 996, 1001 (1993) (“administrative adjudicative determinations may be
given preclusive effect if rendered under conditions in which the parties have the opportunity to ‘fully and
fairly litigate the issue at the administrative hearing’”). The Court finds that Debtor was given a full and
fair opportunity to litigate before the Hearing Officer and the PRC, and that the Final Order can fairly be
the basis for issue preclusion. This finding is bolstered by the fact that Debtor appealed the Final Order to
the New Mexico Supreme Court, which affirmed PRC’s decision in all respects.
5 For PRC’s authority to do so, see N.M.S.A. § 63-13-15.
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Hon. James T. Martin. On September 7, 2010, BRG filed an application to appoint a receiver.
21. 	PRC intervened in the Receiver Action and joined BRG’s receiver application.
22. 	On or about October 14, 2011, Blanco signed a letter of intent to pursue the sale
of Debtor’s assets to a certain David L. Hamilton for $1,300,000.
23. 	On November 14, 2011, Judge Martin entered an Order Appointing Receiver (the
“Receiver Order”).
24. 	The Receiver Order appointed Robert Martin (no relation to Judge Martin) the
receiver and granted him the sole right to lease, market, and/or sell Debtor’s assets.
25. 	On July 16, 2012, after a lengthy mediation, Blanco, Debtor, BRG, and PRC
signed a Settlement Agreement. 	As part of the Settlement Agreement, 	Blanco and Debtor
“agree[d] to the sale of the Picacho Hills Utility Co (PHUC) assets by the receiver.”
26. 	On August 31, 2012, Judge Martin entered a Stipulated Partial Judgment that
contained the following finding: “PHUC and Blanco agree to the sale of PHUC assets by the
Court appointed Receiver, Robert Martin and/or his successors or assigns.” 6
The Proposed Sale
27. 	At about the time the Settlement Agreement was signed, the Receiver asked
Debtor’s counsel (Alex Chisholm) whether Debtor would look favorably on a sale of Debtor’s
assets for $2,000,000. Mr. Chisholm stated Debtor would be delighted with such a price.
28. 	The Receiver found a potential buyer, the Dona Ana Mutual Domestic Water
Consumers Association (the “MDWCA”).
6 Consent judgments are res judicata in New Mexico. See Myers v. Olson, 100 N.M. 745, 748, 676 P.2d
822, 825 (1984); Johnson v. Aztec Well Servicing Co., 117 N.M. 697, 700, 875 P.2d 1128, 1131 (Ct. App.
1994). However, such judgments generally are not entitled to collateral estoppel effect where the issues
involved are not actually adjudicated, and trial judge’s role in signing the judgment is only ministerial.
See Pope v. Gap, Inc., 125 N.M. 376, 383, 961 P.2d 1283, 1290 (Ct. App. 1998). Here, the Stipulated
Partial Judgment is not a final judgment, so it is not res judicata and has no preclusive effect. See e.g.
Bounds v. Hamlett, 150 N.M. 389, 258 P.3d 1181 (Ct. App. 2011) (only final judgment are res judicata).
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29. 	On September 4, 2012, the Receiver filed a “Motion for Approval of Agreement
of Purchase and Sale of Assets and for Approval of Receiver’s Fees and Costs” (the “Sale
Motion”), seeking state court approval of the proposed sale to MDWCA.
30. 	The proposed sales price is $2,250,000.
31. 	Debtor and Blanco objected to the Sale Motion on September 21, 2012, arguing
that the price was inadequate.
The Challenged Conveyances
32. 	On August 31, 2012, unbeknownst to the Receiver, Blanco caused Debtor to
purport to convey 1,876 AFY of Debtor’s permitted water rights to an entity denoted Rio Grande
Investments, LLC. 7 On September 19, 2012, Blanco caused Rio Grande Investments, LLC to
purport to convey the same water rights to Resurrection Mining, LLC (“Resurrection Mining”)
(together, the two purported transfers are referred to as the “Challenged Conveyances”). 8
33. 	On or about October 9, 2012, after learning of the Challenged Conveyances, the
Receiver 	filed 	a 	“non-opening” 	complaint 	in 	the 	Receiver 	Action, 	naming, 	inter 	alia,
Resurrection 	Mining 	as 	an 	additional 	defendant 	and 	seeking 	to 	void 	the 	Challenged
Conveyances.
34. 	In addition, on November 27, 2012, the Receiver also filed a Motion For Order to
Show Cause Why Parties Should Not be Held in Contempt and to Void Transfers of
Receivership Assets (the “Contempt Motion”).
35. 	Resurrection Mining attempted to disqualify Judge Martin from hearing the
complaint against it, but Judge Martin declined to remove himself. 	Resurrection Mining
7 Apparently no such entity has been formed, at least in New Mexico.
8 The purported conveyances were via two quitclaim deeds and two Change of Ownership forms prepared
at Blanco’s instruction and signed by Blanco. The documents were recorded in Dona Ana County, but
the OSE refused to accept them for filing. Resurrection Mining apparently is 22% owned by Blanco.
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petitioned 	the 	New 	Mexico 	Supreme 	Court 	for 	a 	writ 	of 	mandamus 	enforcing 	the
disqualification. The Supreme Court denied the petition.
36. 	Hearings on the Sale Motion and the Contempt Motion were originally set for
hearing on January 8, 2013, but were continued to March 11, 2013.
37. 	On March 8, 2013, Debtor filed this bankruptcy case.
38. 	Debtor admits it filed the case primarily “to stop a sale of the assets of Debtor for
less than adequate consideration.”
Witness testimony
Alysia Leavett
39. 	Alysia Leavett, an NMED employee, works in the Construction Loans Bureau
and manages NMED’s Rural Infrastructure Loan program. Her testimony was very credible.
40. 	Ms. Leavett testified that MDWCA applied to NMED for a $2 million loan to
finance the purchase of Debtor’s assets. NMED approved the loan request.
41. 	Ms. Leavett also testified that, in addition to the purchase loan, MDWCA is
qualified to borrow up to an additional $2 million from NMED to make capital improvements to
Debtor.
42. 	Ms. Leavett testified that for both loans to be available to MDWCA in 2013, the
purchase loan must close no later than June 30, 2013, because NMED is statutorily limited to
lending $2 million dollars per fiscal year to any one borrower.9 If MDWCA closes on the
purchase loan after June 30, 2013, NMED could not loan MDWCA more money before July 1,
2014.
Robert Martin
43. 	The Receiver testified in support of the Motions. 	His testimony was very
9 N.M.S.A. § 75-1-4(D).
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credible.
44. 	The Receiver testified that since his appointment he has diligently operated the
water and sewage utilities, given the lack of capital.
45. 	The Receiver testified that when he took over Debtor’s operations, there was
about $1,000 in Debtor’s bank accounts. 	The Receiver opined that Debtor’s prior management
depleted Debtor’s bank accounts in advance of Receiver’s appointment.
46. 	The Receiver further testified that Debtor’s only water storage tank has a leak and
can only be filled about halfway. 	The Receiver’s opinion is that to fix the leak, Debtor would
have to build a second, smaller tank, drain the leaking tank, and repair the leaking tank when it is
empty and dry.
47. 	Finally, 	the 	Receiver 	testified 	that 	Debtor 	is 	able 	to 	cash 	flow, 	but 	is
undercapitalized and needs to spend substantial amounts to build the Discharge Pipeline, fix its
water tank, and modernize its water tank, pumps, and sewage treatment system. 	The Receiver
characterized Debtor as able to operate day to day, but vulnerable to any significant capital
demands and unable to spend the money needed to treat its sewage water as well as it should be
treated.
Dr. Barrett
48. 	Dr. Vince Barrett, Receiver’s expert witness, opined that Debtor’s assets are
worth about $1,198,000 if sold to a buyer that would be subject to PRC regulation, and about
$2,952,000 if sold to a buyer that would not be subject to PRC regulation.
49. 	Dr. Barrett opined that Debtor’s assets could be worth less (by an unspecified
amount) if the buyer were required to build the Discharge Pipeline immediately or incur other
substantial capital expenses.
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50. 	Dr. Barrett’s opinion is that Debtor’s 384 AFY of “perfected” water rights are
worth about $2,000 per AFY, while Debtor’s inchoate water rights have no substantial value.
51. 	The Court finds that Dr. Barrett’s opinions are thoughtful and credible, and gives
them substantial weight.
David Esparza
52. 	Mr. David Esparza, Debtor’s expert witness, testified that Debtor has about 1867
AFY of water rights it could lease or sell, and stated or implied that the per AFY value of those
water rights was about the same as the 384 AFY Debtor has put to beneficial use.10 If true, using
Dr. Barrett’s estimate of $2,000 per acre foot, the inchoate water rights could be worth about
$3,750,000.
53. 	The Court does not give Mr. Esparza’s opinion substantial weight, for the
following reasons:
a. 	Mr. Esparza is not disinterested, since he has worked for Debtor and
Blanco for years, is a defendant in the Receiver Action, and may have an interest in Rio Grande
Investments (the first of the Challenged Conveyances grantees);11
b. 	Mr. Esparza admitted he is not aware of any sales or leases of inchoate
water rights in the lower Rio Grande basin;
c. 	Mr. Esparza did not address the difficulty presented by the requirement
that PRC approve any water rights transfers;
d. 	Mr. 	Esparza’s 	role 	in 	recommending, 	drafting, 	and 	submitting 	the
Challenged Conveyances raises questions about Mr. Esparza’s judgment and/or independence;
e. 	Mr. Esparza is owed about $80,000 from Debtor;
10 Mr. Esparza was not qualified as an expert witness on the value of water rights, so his opinion about
the value of Debtor’s inchoate water rights is given little weight.
11 Mr. Esparza is described in the paperwork as the manager of Rio Grande Investments.
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f. 	Mr. Esparza’s fee for work in these contested matters is being paid by Mr.
Chisholm, Debtor’s former counsel and an apparent owner of Resurrection Mining; and
g. 	Mr. Esparza’s knowledge about New Mexico water law does not seem
particularly extensive or detailed. 	For example, Mr. Esparza did not appear to be aware of the
Hanson v. Turner decision discussed below.
Kelly Cassels
54. 	Kelly M. Cassels, a New Mexico attorney, testified as an expert in water law.
The Court finds that Mr. Cassels is very knowledgeable and credible. Mr. Cassels testified that
in his opinion Debtor’s inchoate water rights were of little or no value because of, inter alia, the
decision in Hanson v. Turney, 136 N.M. 1, 94 P.3d 1 (Ct. App. 2004). 	Hanson affirmed the
OSE’s decision not to allow a requested change of use of inchoate water rights, ruling that an
inchoate water right is not really a water right at all, but only a “necessary first step” in obtaining
a water right. 136 N.M. at 3. Based on Hanson, Mr. Cassels was of the opinion that a third party
buyer of Debtor’s inchoate water rights would not be allowed to change the point of diversion,
place of use, or purpose of use, rendering them essentially worthless. 	In Mr. Cassels’ opinion,
Debtor’s inchoate water rights will never have value unless they are put to beneficial use first
and become “perfected” rights.
55. 	Mr. Cassels cited three other reasons why he questioned the value of Debtor’s
inchoate water rights: 	(i) Debtor will be required in the near (albeit indefinite) future to file a
Proof of Application of Water to Beneficial Use, the result of which likely would be that any
unused inchoate water rights would be lost; (ii) the lower Rio Grande basin is the subject of a
pending adjudication, and when Debtor’s water rights are adjudicated (again, the date is
unknown; it could be any day, or years from now), inchoate water rights would be lost; and (iii)
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the pending litigation between Texas and New Mexico over Rio Grande water rights puts
additional pressure on all water rights claims in the lower Rio Grande basin.
56. 	In a related matter, Mr. Cassels pointed out that the Guidelines adopted by the
Mesilla Valley Administrative Area (the OSE division in charge of water rights in Debtor’s area)
require proof that beneficial use of water rights has been “continuous” before the OSE can
declare that claimed water rights have been properly perfected.12 Because of the continuity
requirement, Mr. Cassels did not think Debtor’s apparent “outlier” diversion of 1317.03 AFY in
2007 could be used to obtain perfected water rights in that amount.
Stephen C. Blanco
57. 	Mr. Blanco testified about the history of Debtor and the Picacho Hills subdivision,
Debtor’s difficulties with PRC and NMED, Debtor’s relationship with its customers, Debtor’s
water and sewage quality issues, the Challenged Conveyances, and his plans for Debtor.
58. 	The Court finds that Mr. Blanco’s testimony about the history of the Picacho Hills
development, and the Debtor, was credible and helpful. It is clear that Blanco cares a lot about
the Picacho Hills subdivision and Debtor, and has spent many years operating Debtor and
developing the subdivision.
59. 	Mr. Blanco’s testimony about his and Debtor’s relationship with NMED and PRC
was helpful to the Court in understanding how the relationship evolved over time and came to be
so adversarial. Mr. Blanco gave only his “side of the story,” but was generally credible from that
perspective.
60. 	On the other hand, the Court finds that Mr. Blanco’s testimony about the
Challenged 	Conveyances 	was 	not 	credible. 	Mr. 	Blanco 	testified 	that 	he 	signed 	and/or
12 Mesilla Valley Administrative Area Guidelines for Review of Water Rights Applications, p. 13
(January, 1999).
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acknowledged the Challenged Conveyances based on the advice of Messrs. Chisholm and
Esparza, with no agreement or understanding of what he or Debtor would receive in exchange.
This testimony strains the credulity of the Court. 	Mr. Blanco is a reasonably sophisticated
businessman. To the extent he believed the (purportedly) transferred water rights had any value
(which 	he 	now 	asserts), 	Mr. 	Blanco 	would 	have 	insisted 	on 	reasonable, 	agreed-upon
consideration. Businesspeople to not transfer assets they think are worth $3,700,000 to unknown
third parties without getting paid and agreeing on specific terms of exchange. 	The Court
believes it much more likely that Mr. Blanco completed the Challenged Conveyances in an effort
to delay the Receiver’s proposed sale to MDWCA, rather than a bona fide effort to sell inchoate
water rights for fair value. Further, it is clear Mr. Blanco knew he should not purport to convey
the Receiver’s assets, but he did so anyway.
61. 	To 	Mr. 	Blanco’s 	credit, 	he 	admitted 	that, 	given 	the 	current 	regulatory
environment and financial situation, a reorganization of Debtor is not realistically possible, and
that Debtor’s assets must be sold.
Other Findings
62. 	Given the Court’s rulings on the Motion, the Court does not believe it appropriate
to make a finding whether the proposed sale to MDWCA is fair and reasonable. 	However, the
Court finds that the evidence supporting Receiver’s position on the sale clearly is sufficient to
submit the matter to the state court for a hearing and ruling.
63. 	A substantial delay could jeopardize the sale to MDWCA. 	The risk that
MDWCA would terminate the pending purchase agreement is unknown, but the Court finds that
if the sale does not close by June 30, 2013, there is a risk the acquisition would less attractive to
MDWCA and/or NMED, because there would be a one-year delay in building the Discharge
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Pipeline, and/or a substantial increase in the cost of borrowed funds.
64. 	There is a risk to public health caused by Debtor’s current operations, which
would be alleviated if Debtor’s assets were promptly sold to MDWCA and MDWCA completed
the Discharge Pipeline. 	The size of the risk is unknown, and probably is not too significant,
given that NMED has taken no action and the risk has been present since Debtor began
operating. 	Nevertheless, the Court finds that the sooner Debtor’s assets are sold to a well-
capitalized buyer that can and will build the Discharge Pipeline, the better for public health.
65. 	It appears Debtor’s assets may bring enough at sale to pay creditors in full, so the
interests of equity should be taken into account.
II. 	MOTION TO EXCUSE TURNOVER
A. 	Law on § 543(d).
In determining whether a custodian13 of property of the debtor should be excused from
turnover, courts have reviewed the following:
(1) 	The likelihood of reorganization, and whether funds held by the
receiver are required for reorganization;14
(2) 	Whether the debtor mismanaged the property;
(3) 	Whether turnover would injure the creditors;
(4) 	Whether the debtor would use the property for the creditors’
benefit;
(5) 	Whether there are avoidance issues raised with respect to property
retained by a receiver, because a receiver does not possess avoiding powers for
the benefit of the estate; and
(6) 	The fact that the automatic stay has deactivated the state court
Receiver Action.15
The party requesting excusal from turnover must show by a preponderance of evidence
13 A receiver appointed by a state court is a “custodian” subject to § 543(b). See 11 U.S.C. § 101(11); In
re Franklin, 476 B.R. 545, 551 (Bankr. N.D. Ill. 2012).
14 An alternative statement of this factor is “the likelihood of a reorganization, and the probability that
funds required for reorganization will be available.” In re Northgate Terrace Apts., Ltd., 117 B.R. 328,
332 (Bankr. S.D. Ohio 1990).
15 See In re Attack Properties, LLC, 478 B.R. 337 (N.D. Ill. 2012), citing In re Franklin, 476 B.R. 545,
551 (Bankr. N.D. Ill. 2012); Dill v. Dime Bank (In re Dill), 163 B.R. 221, 225 (E.D.N.Y. 1994).
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that the best interests of the creditors are served by permitting a custodian to retain control of the
estate. 	Franklin, 476 B.R. at 551, citing In re Falconridge, LLC, 2007 WL 3332769 at *6–7
(Bankr. N.D. Ill. 2007). If such a showing is made, the burden shifts to the debtor to show why
turnover is appropriate. In re Plihal, 97 B.R. 561, 564 (Bankr. D. Neb. 1989).
The “paramount and sole concern is the interests of all creditors.” 	Falconridge, 2007
WL 3332769, at *7, citing In re KCC-Fund V, Ltd., 96 B.R. 237, 239 (Bankr. W.D. Mo. 1989)
(emphasis in original). The interests of the debtor are not to be considered. Falconridge, at *7,
citing Dill, 163 B.R. at 225; Foundry of Barrington P'ship v. Barrett (In re Foundry of
Barrington P'ship), 129 B.R. 550, 557 (Bankr. N.D. Ill. 1991).16
Whether the Court decides to apply § 543(d)(1) is based on the exercise of its discretion.
See In re R&G Properties, Inc., 2008 WL 4966774, at *4 (Bankr. D. Vt. 2008), citing Dill, 163
B.R. at 225; Northgate Terrace Apts., 117 B.R. at 332.
B. 	Discussion.
The Court weighs the Attack Properties factors as follows:
Factor 	Discussion/ Findings
1. Likelihood of reorganization; 	Reorganization is very unlikely, given the strained
relationship between Debtor and its regulators, and
Debtor’s lack of capital. Mr. Blanco admits that in all
likelihood Debtor will have to sell rather than reorganize.
Thus, the funds held and/or generated by the Receiver
are not required for reorganization;
2. Whether the debtor
mismanaged the property;
Per the PRC’s Final Order, which binds Debtor and the
Court, the Court finds that Debtor mismanaged its
property and business before Receiver’s appointment;
3. Whether turnover would injure
the creditors;
Ordering turnover would prevent the Receiver from
completing the pending sale, and it does not appear
Debtor would pursue the sale. If the sales price is
favorable, turnover would injure the creditors;
16 However, if the debtor is solvent, the interests of equity must be considered. 11 U.S.C. § 543(d)(1).
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4. Whether the debtor would use
the property for the creditors’
benefit;
The Court has no reason to believe Debtor would use its
property in a manner inconsistent with the rights of
creditors, but Debtor may have unrealistic ideas about the
value of its property (e.g. $3,752,000 for inchoate water
rights), which would at a minimum result in delay, and
could prejudice, creditors;
5. Whether there are avoidance
issues raised with respect to
property retained by a receiver,
because a receiver does not possess
avoiding powers for the benefit of
the estate;
There are no avoidance issues related to property held by
Receiver that cannot, apparently, be dealt with by the
state court.17 Post-sale, Debtor can pursue any remaining
avoidance actions in this Court;
6. The fact that the automatic stay
has deactivated the state court
Receiver Action.
The automatic stay will be modified by the relief granted
on the Motions, and therefore will not interfere with the
Receiver Action.
The Court finds that excusing turnover clearly is in the best interests of creditors. Since
the estate may be solvent, the Court should consider the interests of equity also. 	11 U.S.C. §
543(d)(1). 	Based on a preponderance of evidence, the Court finds that equity security holders
(i.e. Mr. Blanco) would be better served by permitting the Receiver to remain in possession,
custody, and control of Debtor’s assets. The Motion to Excuse should be granted.
III. 	MOTION TO ABSTAIN
A. 	Law on § 305(a)(1).
Abstention from hearing a bankruptcy case is authorized by § 305(a)(1), which provides:
The court, after notice and a hearing, may dismiss a case under this title, or may
suspend all proceedings in a case under this title, at any time if--
(1) the interests of creditors and the debtor would be better served by such
dismissal or suspension . . . .
Abstention or suspension under § 305(a)(1) is an unusual remedy. 	In re StatePark
Building Group, Ltd., 316 B.R. 466, 476 (Bankr. N.D. Tex. 2004). 	See also In re Starlite
Houseboats, Inc., 426 B.R. 375, 388 (Bankr. D. Kan. 2010) (abstention appropriate in rare
17 The Receiver testified he is confident he can set aside the Challenged Conveyances in state court.
Doing so likely is a condition to closing the proposed sale to MDWCA. 	If the Receiver changes his
position on this matter, he should notify the Court.
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circumstances). The burden of proof for a motion to abstain is on the party seeking abstention.
In re Forest Hill Funeral Home & Memorial Park-East, LLC, 364 B.R. 808, 819 (Bankr. E.D.
Okla. 2007), citing In re Taylor Agency, Inc., 281 B.R. 354, 359 (Bankr. S.D. Ala. 2001).
There is no agreement on what “interests of creditors and the debtor” should be
considered. In In re Eastman, 188 B.R. 621 (9th Cir. BAP 1995), the 9th Circuit BAP stated:
As the statutory language and legislative history demonstrate, the test under §
305(a) is not whether dismissal would give rise to a substantial prejudice to the
debtor. Nor is the test whether a balancing process favors dismissal. Rather, the
test is whether both the debtor and the creditors would be “better served” by a
dismissal.
188 B.R. at 625. The discussion in In re Spade, 258 B.R. 221, 225 (Bankr. D. Colo.), aff’d., 269
B.R. 225 (D. Colo. 2001), is helpful:
The language enacted by Congress in § 305 is rather simple . . . . It is true that
certain elements of this provision are not specifically defined. For example, the
provision offers no guidance as to what “interests of the creditors and the debtor”
might include, nor does it specify the situations in which these interests would be
“better served” by dismissal or suspension. 	Nevertheless, the rules of statutory
construction prohibit a court from abandoning the plain language of § 305 unless
it makes a determination that the statute is ambiguous. See id. Words or phrases
that are not specifically defined in a statute are not ambiguous per se. Congress
routinely drafts provisions with broad language as a means of delegating
discretion to those obligated to act under the provision.
Id. at 225.
Courts have come up with various lists of factors to consider when ruling on a §
305(a)(1) motion. A recent decision used the following list:
(1) 	Economy and efficiency of administration;
(2) 	Whether another forum is available to protect the interests of both
parties or there is already a pending proceeding in state court;
(3) 	Whether federal proceedings are necessary to reach a just and
equitable solution;
(4) 	Whether there is an alternative means of achieving an equitable
distribution of assets;
(5) 	Whether the debtor and the creditors are able to work out a less
expensive out-of-court arrangement which better serves all interests in the case;
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(6) 	Whether a non-federal insolvency has proceeded so far in those
proceedings that it would be costly and time consuming to start afresh with the
federal bankruptcy process; and
(7) 	The purpose for which bankruptcy jurisdiction is sought.
In re Birchall, 381 B.R. 13, 18 (Bankr. D. Mass. 2008), citing In re Mountain Dairies, Inc., 372
B.R. 623 (Bankr. S.D.N.Y. 2007) and In re Fax Station, Inc., 118 B.R. 176 (Bankr. D.R.I.
1990). 18
Courts agree, however, that each case must be decided by its own facts. See In re Iowa
Trust, 135 B.R. 615, 622-23 (Bankr. N.D. Iowa 1992) (“although [various] tests are useful in
determining whether dismissal under § 305(a) is appropriate, courts must look to the factors of
the individual cases”), quoting In re Trina Assoc., 128 B.R. 858, 867 (Bankr. E.D.N.Y. 1991).
Case law on abstention through suspension (rather than dismissal) is sparse. 	The most
instructive case is In re Mazzocone, 183 B.R. 402 (Bankr. E.D. Pa. 1995), aff’d, 200 B.R. 568
(E.D. Pa. 1996), where Chief Judge Scholl suspended a voluntary Chapter 11 case for six months
to allow the parties to litigate their numerous disputes in a pending state court action. In doing
so the court stated: 	“Pursuant to 11 U.S.C. § 305(a) . . . we may exercise our discretion to
temporarily relinquish jurisdiction over a case.” 	183 B.R. at 420. 	The court suspended all
proceedings and ordered the parties to provide a written status report in six months, after which
time the court would determine whether to dismiss the case, convert the case, or continue the
suspension. Id. at 422. See also In re Rookery Bay, Ltd., 190 B.R. 949, 951 (Bankr. M.D. Fla.
18 See also 2006 Norton’s Annual Survey of Bankruptcy Law: Abstention: Recent Developments, text
accompanying note 16 (citing the same factors). Other cases identify different factors to consider. See,
e.g., In re ABQ-MCB Joint Venture, 153 B.R. 338 (Bankr. D.N.M. 1993) (listing 12 factors); In re
Colonial Ford, 24 B.R. 1014, 1023 (Bankr. D. Utah 1982) (existence of comprehensive pre-bankruptcy
workout agreement crucial factor in court’s decision to abstain, so debtor does not get a chance to
“reorganize” twice); In re Wilson, 85 B.R. 722, 727 (Bankr. E. D. Pa. 1988) (abstention may be warranted
to permit a dispute to be heard by a specialized forum); Forest Hill Funeral Home, 364 B.R. at 824
(abstention may be appropriate when a state needs to enforce its police powers); In re Iowa Trust, 135
B.R. 615, 623 (Bankr. N.D. Iowa 1992) (degree of creditor support).
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1995) (Chief Judge Paskay suspended “any further proceedings” an involuntary chapter 7 case
until a pending state court appeal could be decided); Colonial Ford, 24 B.R. at 1023 (§305(a)(1)
permits suspension as well as dismissal of a case).
B. 	Discussion.
The Court weighs the following factors as follows:
Factor 	Discussion/Findings
1. Economy and efficiency of
administration;
Economy and efficiency would be better served by
suspension, given the status of the Receiver Action;
2. Whether another forum is
available to protect the interests
of both parties or there is
already a pending proceeding in
state court;
The Receiver Action is pending, and the interests of the
parties, including Debtor, can be protected there, at least
until after the sale;
3. Whether federal proceedings
are necessary to reach a just and
equitable solution;
Federal proceedings are not needed to allow Receiver to
sell the receivership assets. It is less clear to the Court that
Debtor’s estate can be properly liquidated and distributed,
post-sale, without use of the Bankruptcy Code, and in any
event Debtor is entitled to the benefit of the Bankruptcy
Code if desired;
4. Whether there is an
alternative means of achieving
an equitable distribution of
assets;
This Court is, on balance, a better place to liquidate and
distribute Debtor’s assets, post-sale. Pre-sale, the Receiver
Action is a perfectly acceptable alternative forum to
supervise the sale of Debtor’s assets;
5. Whether the debtor and the
creditors are able to work out a
less expensive out-of-court
arrangement which better serves
all interests in the case;
Per the Settlement Agreement and Stipulated Partial
Judgment, the parties agreed to an out-of-(bankruptcy)
court) arrangement, and the arrangement should be
honored. A key provision of the agreement was that the
Receiver would be allowed to sell Debtor’s assets, subject
to state court approval. Allowing the Receiver to pursue
the sale of Debtor’s assets would be less expensive and
serve the interests of the parties better;
6. Whether a non-federal
insolvency has proceeded so far
in those proceedings that it
would be costly and time
consuming to start afresh with
the federal bankruptcy process;
Following through with the Settlement Agreement and
Stipulated Partial Judgment, the state court can promptly
rule on the Receiver’s pending motion to approve the sale.
It would be improper for this Court to shift the sale venue
from the Receiver Action, given all of the facts of the case;
7. The purpose for which
bankruptcy jurisdiction is
sought;
Debtor’s motives are mixed. Debtor wants to take control
of the sales process, which the Court finds would not be in
the best interests of any party, and contrary to the
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Settlement Agreement and Stipulated Partial Judgment. On
the other hand, Debtor also wants bankruptcy court law and
procedure in the final liquidation of its estate, post-sale,
which the Court finds is fair and reasonable, and consistent
with the Settlement Agreement;
8. Whether § 305(a)(1) relief
has the substantial support of
creditors;
All creditors that have taken a position in this matter
support Receiver’s request for § 305(a)(1) relief. The only
opposition is from Debtor;
9. Whether § 305(a)(1) relief is
appropriate to allow a state to
enforce police powers.
It is unclear whether the automatic stay prevents PRC from
pursuing the Receiver Action.19 Nevertheless, the relief
granted by the Court will allow the Receiver to pursue his
proposed sale in state court, which is consistent with PRC’s
and NMED’s police powers.
Considering all of the facts of the matter, the Court concludes that the interests of
creditors and Debtor would be better served by suspending this case until after the Receiver has
completed the sale of Debtor’s assets. 	Among other reasons, suspension follows the logic of
Colonial 	Ford 	and 	requires 	the 	parties 	to 	complete 	the 	arrangement 	worked 	out 	and
memorialized in the Settlement Agreement and Stipulated Partial Judgment. The Court does not
believe it would be right for Debtor to use bankruptcy court jurisdiction to renege on the
Settlement Agreement, especially since allowing the Receiver to sell assets in the Receiver
Action has unanimous creditor support.20 Furthermore, since Debtor acknowledges that its assets
19 Compare In re Yellow Cab Co-op. v. Metro Taxi, Inc., 132 F.3d 591 (10th Cir. 1997) (using the
“pecuniary purpose” and the “public policy” tests to determine whether the stay applies), with In re Cash
Currency Exchange, Inc., 762 F.2d 542, 555 (7th Cir. 1985) (quoting State of Missouri v. United States
Bankruptcy Court, 647 F.2d 768, 776 (8 th Cir. 1981), cert. denied, 454 U.S. 1162 (1982), the Seventh
Circuit held that the police powers exception set forth in 11 U.S.C. § 362(b)(4) has been narrowly
construed to apply to the enforcement of state laws affecting health, welfare, morals and safety, but not to
“regulatory laws that directly conflict with the control of the res or property by the bankruptcy court”).
The Court finds that PRC’s desire for a receiver to operate and sell Debtor’s assets is not motivated by
pecuniary interest, but by public policy concerns. On the other hand, allowing PRC to pursue its state law
receiver rights would directly conflict with the Court’s control of all estate property. The Tenth Circuit
might find this regulatory reach too much to allow under § 362(b)(4), even if the “public policy” test is
satisfied. Given the Court’s ruling on the Motions, however, the Court does not have to decide the issue.
20 See also In re Club Tower, L.P., 138 B.R. 307 (Bankr. N.D. Ga. 1991) (pre-petition forbearance
agreements that give a creditor relief from the automatic stay if the debtor subsequently files bankruptcy
are enforceable), citing In re Citadel Properties, Inc., 86 B.R. 275 (Bankr. M.D. Fla. 1988); In re Orange
Park South P’ship, 79 B.R. 79 (Bankr. M.D. Fla. 1987); In re Deb-Lyn, Inc., 2004 WL 452560, at *1
(N.D. Fla. 2004) (same); In re Hudson Manor Partners, Ltd., 1991 WL 472592, at *1 (Bankr. N.D. Ga.
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must be sold, there is no reason why this Court, rather than the state court, should supervise the
sale. 	If as Debtor contends the sales price is inadequate, that showing can be made to the state
court, which has to rule on the reasonableness of the sales price and other terms.
After completion of the Receiver’s sale of assets, the Court finds that allowing Debtor to
complete the liquidation of its estate in this case would not deprive BRG or PRC of any
bargained-for benefits, and would allow Debtor to exercise its right to use the federal bankruptcy
process.
Suspension under § 305(a)(1) divests the Court of jurisdiction over the case for the
suspension period. 	In re Mazzocone, 183 B.R. at 420. 	Because of that, the Bankruptcy Code
and Rules will not apply during the suspension period. To the extent there is any doubt about the
matter,21 however, the Court will exercise its powers under § 105(a) and grant relief, during the
suspension period, from all Code sections and Rules, so the parties may have unfettered freedom
to pursue (or object to, as the case may be) any assets sales proposed by the Receiver.
IV. 	THE MOTION TO DISMISS
A. 	Law on § 1112(b) Motions to Dismiss for Bad Faith Filing.
Dismissal of a Chapter 11 bankruptcy case is governed by 11 U.S.C. § 1112(b).22 The
Court generally is required to dismiss or convert a case under this section upon a finding of
“cause.”
1991) (same).
21 See e.g. In re Compania de Alimentos Fargo, 376 B.R. 427, 440 (Bankr. S.D.N.Y. 2007) (in dicta,
Judge Bernstein implied that § 305(a) suspension may not terminate the automatic stay); In re Duratech
Indus., Inc., 241 B.R. 291 (Bankr. E.D.N.Y. 1999) (court apparently believed U.S. Trustee guidelines
applied during the suspension period).
22 See 11 U.S .C. § 1112(b)(1) (“on 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 ...”).
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Section 1112(b)(4) contains a nonexclusive list of “causes.”23 Whether “cause” exists to
dismiss or convert a Chapter 11 case is a threshold issue. 	In re Melendez Concrete Inc., 2009
WL 2997920, at *3 (Bankr. D.N.M. 2009).
A debtor's bad faith in filing a petition can constitute “cause” for dismissal under 11
U.S.C. § 1112(b). See In re First Assured Warranty Corp., 383 B.R. 502, 543 (Bankr. D. Colo.
2008) (citing In re Frieouf, 938 F.2d 1099, 1105 (10 th Cir. 1991), the court stated that
“[a]lthough a debtor's bad faith in filing a petition is not an enumerated ground for dismissal
under § 1112(b), courts have overwhelmingly held that proof of such an allegation may be
‘cause’ for dismissal.”).24
In determining whether a Chapter 11 petition was filed in bad faith, courts have identified
the following non-exclusive factors to consider:
(1) 	whether the petition serves a valid bankruptcy purpose such as
preserving a going concern or maximizing the value of the debtor's estate;
(2) 	whether the petition is filed merely to obtain a tactical litigation
advantage;
(3) 	whether 	the 	debtor's 	financial 	problems 	involve 	essentially 	a
dispute between the debtor and secured creditors that can be resolved in the
pending state court litigation;
(4) 	whether it is a single asset case,
(5) 	whether there are one or a very few unsecured creditors,
(6) 	whether there is no ongoing business or employees;
(7) 	whether the pre-petition conduct of the debtor was improper; and
(8) 	whether the case is filed to evade one or more court orders.25
23 AmeriCERT, Inc. v. Straight Through Processing, Inc. (In re AmeriCERT, Inc.), 360 B.R. 398, 401
(Bankr. D.N.H. 2007) (the § 1112(b)(4) list is not exhaustive); In re Whetten, 473 B.R. 380, 382 (Bankr.
D. Colo. 2012) (same).
24 See also In re Lee, 467 B.R. 906, 917 (6th Cir. BAP 2012) (well-settled in Sixth Circuit that a debtor's
bad faith in filing a chapter 11 may be cause for § 1112(b)(1) dismissal); AmeriCERT, 360 B.R. at 401 (“a
case may be dismissed for other causes, such as bad faith”); In re Pacific Rim Investments, LLP, 243 B.R.
768, 771 (D. Colo. 2000) (citing Udall v. FDIC (In re Nursery Land Dev. Inc.), 91 F.3d 1414 (10th Cir.
1996), the court held that a “Chapter 11 petition must be filed in good faith, and if not, dismissal of the
case is an appropriate remedy”).
25 See In re Integrated Telecom Express, Inc., 384 F.3d 108, 122 (3rd Cir. 2004) (applying one or more of
the factors); In re Nursery Land Development, Inc., 91 F.3d 1414, 1416 (10th Cir. 1996) (same); Trident
Associates Ltd. v. Metropolitan Life Ins. Co. (In re Trident Associates Ltd.), 52 F.3d 127, 130 (6th Cir.
1995), cert denied, 516 U.S. 869 (1995) (same); Phoenix Piccadilly Ltd. v. Life Ins. Co. of Virginia (In re
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No single factor is determinative, and the weight given to each will vary with the facts
and circumstances of the case.26 Whether a bankruptcy petition was filed in bad faith “requires
the court to consider the totality of circumstances and any conceivable list of factors is not
exhaustive nor does one factor create a per se test.” In re Sydnor, 431 B.R. 584, 594 (Bankr. D.
Md. 2010) (citation omitted).27
The party requesting dismissal or conversion of a Chapter 11 case under 11 U.S.C. §
1112(b) bears the burden of establishing cause by a preponderance of the evidence. In re ARS
Analytical, LLC, 433 B.R. 848, 861 (Bankr. D.N.M. 2010).28
Whether dismissal for bad faith is warranted falls within the Court's sound discretion.
See Squires Motel, LLC v. Gance, 426 B.R. 29, 34 (N.D.N.Y. 2010) (citing In re First Conn.
Consulting Group, Inc., 254 Fed. Appx. 64, 68 (2d Cir. 2007), the court held that “a dismissal for
bad faith ... involves a bankruptcy court's exercise of equitable discretion”).
B. 	Discussion.
The Court finds, based on the evidence presented at the final hearing and the findings in
PRC’s Final Order, that Debtor did not file the petition in good faith to the extent it hoped
thereby to avoid its obligations under the Settlement Agreement and Stipulated Partial Judgment.
On the other hand, the Court finds that Debtor filed the petition in good faith when it sought to
use the Bankruptcy Code’s distribution scheme and laws, post-sale. The Court’s finding is based
on the following considerations:
Phoenix Piccadilly, Ltd.), 849 F.2d 1393, 1394 (11th Cir. 1988) (same).
26 Melendez Concrete, 2009 WL 2997920 at *4 (citing Flygare v. Boulden, 709 F.2d 1344 (10th Cir.
1983)).
27 See also In re Marshall, 298 B.R. 670, 681 (Bankr. C.D. Cal. 2003) (analysis of debtor’s alleged bad
faith is based on the totality of the circumstances).
28 See also Lee, 467 B.R. at 917 (“The party seeking dismissal of a case under § 1112(b) must
demonstrate a debtor's bad faith by a preponderance of the evidence.”) (citing Alt v. United States (In re
Alt), 305 F.3d 413, 420 (6th Cir. 2002).
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Factor 	Discussion
1. Valid bankruptcy purpose? 	Post-sale, the case will serve a valid bankruptcy purpose,
namely the liquidation of Debtor’s bankruptcy estate. Pre-
sale, the case would serve an invalid purpose of evading the
Settlement Agreement and Stipulated Partial Judgment;
2. Filed to obtain tactical
litigation advantage?
One of Debtor’s main purposes in filing the case was to
regain control over the process of selling Debtor’s assets.
To that extent, the case was filed to obtain a tactical
litigation advantage;
3. Dispute between the debtor
and secured creditors that can be
resolved in the pending state
court litigation?
The main dispute can be resolved in the Receiver Action.
Thereafter, Debtor can finalize the liquidation and
distribution of its estate in this Court;
4. Single asset case? 	This is not a single asset case;
5. Number of unsecured
creditors?
There appear to be about 16-20 unsecured creditors;
6. Ongoing business or
employees?
Debtor has ongoing businesses, and has employees;
7. Pre-petition conduct of the
debtor improper?
Per the PRC findings, which are binding on Debtor and the
Court, Debtor’s pre-petition conduct was improper;
8. Case filed to evade one or
more court orders?
In part, the case was filed to avoid the Settlement
Agreement and Stipulated Partial Judgment. However, the
case also was filed to finalize liquidation of assets and
payment of net dividend to creditors and/or equity, using the
Bankruptcy Code.
If the Court’s only choices were to dismiss the case or allow Debtor back into possession
of its assets, with the sole right to operate and sell them, the Court likely would either find
“cause” for dismissal under § 1112(b)(1), or else would abstain and dismiss under § 305(a)(1).
However, given the Court’s ruling on the Motion to Excuse Turnover and the Motion to Abstain,
together with the finding that Debtor has a good faith basis to use the Bankruptcy Code to
finalize the liquidation and distribution of its estate, post-sale, the Court concludes that the case
was not filed in bad faith.
V. 	CONCLUSION
Given Debtor’s current financial condition and relationship with its regulators; the status
of the Receiver Action; Debtor’s commitments under the Settlement Agreement and Stipulated
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Partial Judgment; and the other facts discussed above, the Court concludes that it should excuse
the Receiver’s turnover of estate assets and suspend the case under § 305(a)(1) until the Receiver
has sold the assets. 	The Court will not dismiss the case, however, and will reactivate it after a
Receiver sale has been finalized. A separate order will be entered.
______________________________
Honorable David T. Thuma
United States Bankruptcy Judge
Date entered on docket: April 26, 2013.
Copies to:
Paul M Fish
P.O. Box 2168
Albuquerque, NM 87103-2168
William F. Davis
6709 Academy NE, Suite A
Albuquerque, NM 87109
Benjamin Silva, Jr.
Silva & Gonzales, P.C.
P.O. Box 100
Albuquerque, NM 87103
Tommy O'Shea Gilstrap, Jr.
Gilstrap & Associates, P.C.
5915 Silver Springs Bldg. 2
El Paso, TX 79912
James W. Brewer
P.O. Box 2800
El Paso, TX 79999-2800
Michael Smith
NM Public Regulation Commission
P.O. Box 1269
Santa Fe, NM 87504-1269
Kelly P. Albers
Law Office of Kelley P. Albers, PC
650 Montana Ave, Ste. D
Las Cruces, M 88001-4294
Carol Mary Parker
NM Environment Department
1190 S. St Francis Dr., Ste. N-4067
Santa Fe, NM 87501
Leonard Martinez-Metzgar
P.O. Box 608
Albuquerque, NM 87103
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