U.S.A. Parts Supply, Cadillac U.S.A. Oldsmobile

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
In re: 	)
)
U.S.A. PARTS SUPPLY, CADILLAC 	)
U.S.A. OLDSMOBILE U.S.A, L.P., 	) 	Case No. 20-bk-241
)
Debtor. 	) 	Chapter 11
___________________________________ 	)
MEMORANDUM OPINION
Christopher Corrado and Michael Chiacchieri (the “Creditors”) seek the dismissal of the
above-captioned case under § 1112(b) of the Bankruptcy Code based upon their allegation that
U.S.A. Parts Supply, Cadillac U.S.A. Oldsmobile U.S.A., L.P. (the “Debtor”), filed the case in bad
faith.1 	Specifically, they contend that Michael Cannan, the principal of the Debtor’s general
partner CUSAPS, Inc., engaged in certain misconduct prepetition. Alternatively, the Creditors ask
the court to excuse Cheryl E. Rose, a state court receiver, from the requirements of § 543 of the
Bankruptcy Code.
The Debtor opposes the motion and contends that it did not file its case in bad faith and
that it has a reasonable likelihood of rehabilitation. Specifically, the Debtor contends that it did
not file its case for any improper purpose such that the court should afford it an opportunity to
reorganize. Additionally, the Debtor asserts that the court should not grant relief to the Creditors
under § 543 because Ms. Rose does not possess or control property of the Debtor.
For the reasons stated herein, the court will enter a separate order denying the Creditors’
motion.2
1 	At the evidentiary hearing on the Creditors’ motion to dismiss, they also asserted that the Debtor lacked the
appropriate corporate authorization to file its case. The court, however, will not address the substance of that argument
as it was raised for the first time at trial.
2 Notably, Ms. Rose has pending an identical motion before the court. The Debtor objected to Ms. Rose’s standing
to seek dismissal of the case, and the court ultimately determined that the Creditors’ motion mooted Ms. Rose’s motion
and the issue surrounding her standing. To clarify the record, to the extent necessary, the court will also deny Ms.
Rose’s motion based upon its analysis herein.
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I. 	BACKGROUND
For over thirty years, the Debtor operated its business selling mostly antique automotive
parts, primarily for Cadillac and Oldsmobile vehicles. Despite being organized in Maryland, the
Debtor operated its business from a leased facility in Manassas, Virginia from 1990 until 2005
when it purchased its current facility in West Virginia. To purchase its facility in West Virginia,
the Debtor executed a Promissory Note for approximately $640,000 on a twenty-year term. 	It
therefore appears that the Note matures in approximately five years. 	But for the two months
immediately preceding the Debtor’s petition, the Debtor is seemingly current on that obligation
secured by its real property based upon the proof of claim that United Bank filed against the
bankruptcy estate.
In 2018, the Debtor’s future became imperiled as it faced multiple legal actions. In April
2018, The Ricky A. Smith and Patricia S. Smith Revocable Living Trust (the “Smith Trust”) filed
a civil action against the Debtor and Mr. Cannan in the Circuit Court of Jefferson County, West
Virginia. 	In August 2018, the Creditors filed a complaint in the Circuit Court for Montgomery
County, Maryland (the “Maryland Receivership Action”) against the Debtor and Mr. Cannan. On
November 5, 2018, the Smith Trust obtained judgment against the Debtor and Mr. Cannan, jointly
and severally, for $189,804.01 plus court costs, attorney fees, and post-judgment interest at 4.5%.
That judgment supports the Smith Trust’s proof of claim against the estate for $205,046.70.
Subsequently, the Maryland court appointed Ms. Rose as Receiver, and on October 8, 2019, the
Creditors obtained summary judgment against the Debtor and Mr. Cannan, jointly and severally,
for $300,000. Neither the Debtor, Mr. Cannan, or Ms. Rose contested the Creditors’ motion for
summary judgment
From her appointment until the time the Debtor filed this case, Ms. Rose took a variety of
actions in an attempt to fulfill her duties as Receiver. 	She examined the Debtor’s books and
records, employed an auctioneer to market and sell the Debtor’s property, and negotiated with Mr.
Cannan on the Debtor’s behalf in an attempt to amicably resolve the Maryland Receivership
Action. 	Those negotiations were ultimately unsuccessful, and the Debtor sought relief under
Chapter 11 by filing this case, which the Creditors seek to dismiss for bad faith in filing. Notably,
Ms. Rose never took control or possession of the Debtor’s property based upon her attempt to
negotiate a resolution with the Debtor.
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On August 6, 2020, the court held an evidentiary hearing in Martinsburg. Only Ms. Rose
and Mr. Cannan testified. Ms. Rose largely testified about her role vis-à-vis the Debtor after being
appointed receiver in the Maryland Receivership Action. 	In that regard, she testified about her
review of the Debtor’s property and its books and records, including how she came to be aware of
the Smith Loan, her employment of an auctioneer, her proposed sale of the Debtor’s real and
personal property, and her interactions with Mr. Cannan and the Debtor’s other limited partners,
including the Creditors. 	Mr. Cannan testified on behalf of the Debtor. 	Regarding the Debtor’s
business, Mr. Cannan explained the history of the Debtor dating back to its formation, his
involvement in creating and operating the Debtor, how he came to possess the majority of the
partnership interest in the Debtor, and generally the Debtor’s plan to reorganize its business,
including whether the Debtor possessed assets valuable enough to fund its reorganization.
Additionally, Mr. Cannan testified as to his perspective of the Smith Loan that ultimately resulted
in a judgment against the Debtor.
II. ANALYSIS
The Creditors contend that the court should dismiss the Debtor’s Chapter 11 case because
it filed its case in bad faith. In that regard, they contend that Mr. Cannan caused the Debtor to file
this case simply to impede their collection efforts in the Maryland Receivership Action. They also
contend that prepetition he abused his role in the Debtor for his personal benefit to the detriment
of the Debtor and limited partners. 	Specifically, they point the court’s attention to various
allegations of mismanagement. 	Moreover, they principally rely on the Smith Loan as evidence
supporting their motion. In the alternative, the Creditors ask the court to excuse Ms. Rose from
the requirements of § 543 of the Bankruptcy Code. In support, they note that the applicable state
law is substantially like the Bankruptcy Code such that Ms. Rose can accomplish a similar result
outside bankruptcy. They therefore ask the court to permit Ms. Rose’s anticipated liquidation of
the Debtor’s estate in a non-bankruptcy forum.
The Debtor opposes both motions. Regarding the motion to dismiss, the Debtor contends
that it was not motivated by any bad faith in filing its petition. Rather, it asserts that it filed this
case in an effort to reorganize its business, including being more competitive in the marketplace
by adopting an online sales platform. Notably in that regard, the Debtor believes that it can pay
all allowed claims 100% and continue postbankruptcy as it has for the past thirty years. 	In
opposition to the Creditors’ motion under § 543 of the Bankruptcy Code, the Debtor contends that
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Ms. Rose does not qualify as a custodian because she did not possess anything as of the petition
date.
“[O]n request of a party in interest, and after notice and a hearing, the court shall . . . dismiss
a case under this chapter . . . for cause . . . .” 11 U.S.C. § 1112(b)(1). Although Congress did not
explicitly define “cause,” it enumerated a non-exhaustive list of what qualifies. See 11 U.S.C. §
1112(b)(4). Additionally, “‘[t]he right to file a Chapter 11 bankruptcy petition is conditioned upon
the debtor’s good faith—the absence of which is cause for summary dismissal.’” In re Nichols,
Case No. 2:16-bk-20427, 2017 WL 160865, at *3 (Bankr. S.D.W. Va. Jan. 13, 2017) (quoting In
re Premier Auto. Servs., Inc., 492 F.3d 274, 279 (4th Cir. 2007)).
It is well settled in this circuit that “a lack of good faith in filing a Chapter 11 petition
requires a showing of ‘objective futility’ and ‘subjective bad faith.’” In re Premier, 492 F.3d at
279-80 (citing Carolin Corp. v. Miller, 886 F.2d 693, 700-01 (4th Cir. 1989)). As explained by
the Fourth Circuit,
The objective test focuses on whether there exists the realistic possibility of an
effective reorganization. The subjective test asks whether a Chapter 11 petition is
motivated by an honest intent to effectuate reorganization or is instead motivated
by some improper purpose. Subjective bad faith is shown where a petition is filed
to abuse the reorganization process or to cause hardship or to delay creditors by
resort to the Chapter 11 device merely for the purpose of invoking the automatic
stay.
Id. at 280 (internal quotations and citations omitted). “The overall aim of the twin-pronged inquiry
must of course be to determine whether the purposes of the Code would be furthered by permitting
the Chapter 11 petitioner to proceed past filing.” Carolin, 886 F.2d at 701.
“If the movant demonstrates ‘cause’ under subsection 1112(b)(1), the burden shifts to the
nonmovant . . . to show ‘unusual circumstances establishing that converting or dismissing the case
is not in the best interests of creditors and the estate.” Nichols, 2017 WL 160865, at *3 (citation
omitted). Notably, however,
The Carolin court made clear that the burden of establishing this two-pronged
requirement is very high. The power to dismiss a bankruptcy petition at the outset
of a case “is obviously one to be exercised with great care and caution. Decisions
denying access at the very portals of bankruptcy, before an ongoing proceeding has
even begun to develop the total shape of the debtor's situation, are inherently drastic
and not lightly to be made.
In re Bestwall LLC, 605 B.R. 43, 48 (Bankr. W.D.N.C. 2019) (internal quotation omitted).
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Section 543(a) of the Bankruptcy Code prohibits “[a] custodian with knowledge of the
commencement of a case . . . [from making] any disbursement from, or to take any action in the
administration of, property of the debtor . . . in the possession, custody, or control of such custodian
. . . .” 11 U.S.C. § 543(a).3 It also burdens such a custodian with delivering to the bankruptcy
trustee “any property of the debtor held by or transferred to such custodian . . . on the date that
such custodian acquires knowledge of the commencement of the case. 	11 U.S.C. § 543(b)(1).
Additionally, the custodian shall “file an accounting of any property of the debtor . . . that, at any
time, came into the possession, custody, or control of such custodian.” 11 U.S.C. § 543(b)(2).
“Thus, the Code provides for effective termination of a receivership . . . except, however,
in two limited circumstances.” In re Sundance Corp., 83 B.R. 746, 747 (Bankr. D. Mont. 1988).
In that regard, § 543 provides that
the bankruptcy court—(1) may excuse compliance with subsection (a), (b), or (c)
of [§ 543] if the interests of creditors . . . would be better served by permitting a
custodian to continue in possession . . . and (2) shall excuse compliance with [§
543(a) and (b)(1)] if the custodian is an assignee for the benefit of the debtor’s
creditors that was appointed . . . more than 120 days before the date of the filing of
the petition . . . .
11 U.S.C. § 543(d).
Although a receiver appointed under applicable state law qualifies as a custodian subject
to § 543, it is not “an assignee for the benefit of the debtor’s creditors.” See In re Sundance, Corp.,
83 B.R. at 747-78 (“A plain reading of § 101(10) with § 543(d)(2) convinces this court that [§
543(d)(2)] is not applicable to the facts here, where a state court receiver is placed in possession
of the [d]ebtor’s property through judicial process . . . .”). Unlike a court-appointed receiver, “[a]n
assignee for the benefit of creditors is one to whom, under an insolvent or bankrupt law, the whole
estate of a debtor is voluntarily transferred to be administered for the benefit of creditors.” Id. at
748 (emphasis added). “Under § 543(d)(2) Congress specifically elected to place an assignee for
the benefit of creditors in a different position than a state court receiver, obviously recognizing
that the trust relationship reposed in the assignee warranted continual possession of the [d]ebtor’s
property in that person.” Id. at 749.
3 The court is uncertain whether Ms. Rose qualifies as a custodian here because the record seemingly indicates that
she did not possess or control any of the Debtor’s property prepetition but for perhaps its books and records. In that
regard, she was authorized to take control or possession but chose to negotiate with the Debtor. For purposes of
resolving the extant motion, however, the court will assume arguendo that Ms. Rose qualifies as a custodian under §
534.
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Here, the court finds that the record before it dictates denying the Creditors’ motion.
Regarding their request to dismiss the Debtor’s case, the court does not believe the Creditors
elicited testimony or put forth other evidence supporting dismissal. 	Indeed, the court finds that
the Creditors failed in their burden to show both objective futility and subjective bad faith. First,
the court is unpersuaded that this case is objectively futile. The Creditors elicited no testimony
from either Ms. Rose or Mr. Cannan tending to show the Debtor lacks a reasonable likelihood to
rehabilitate its business. The closest the Creditors got in that regard was pointing out the financial
difficulties the Debtor is currently experiencing and perhaps questions surrounding the value of
the Debtor’s personal property. The court, however, cannot say those issues amount to establishing
that this case is objectively futile. Moreover, Ms. Rose acknowledged during her testimony that
the Debtors’ assets are more valuable with the Debtor operating and with Mr. Cannan involved.
That notion is corroborated by Ms. Rose’s willingness to permit the Debtor to remain in possession
of its business and assets at Mr. Cannan’s direction for over a year after the state court appointed
her Receiver.
Regarding the Debtor’s extant financial difficulties, however, the court finds that they
cannot be wholly attributed to the Debtor given the circumstances—the Covid-19 pandemic—
currently impairing, at least in part, the Debtor’s business. To the contrary, the record reflects that
the Debtor generated income during 2018 and 2019, all the while not having an online presence.
As Mr. Cannan testified, part of the Debtor’s desire to reorganize is to be better able to compete
in the marketplace by selling through an online portal like the Debtor’s principal competitors. The
Debtor’s income in 2018 and 2019 also bears upon the value of the Debtor’s personal property.
On that point, the court found Mr. Cannan more persuasive than Ms. Rose based upon his
experience as the Debtor’s manager and the revenue generated in 2018 and 2019. 	If past is
prologue, setting aside the current pandemic, and considering the Debtor’s proposal to implement
an online sales platform, the court believes that the Debtor’s personal property has much more
value than perceived by Ms. Rose and her auctioneer. Even if that is ultimately not the case, the
court cannot say that the Debtor lacks a reasonable chance at rehabilitating its business.
Mr. Cannan also testified on the Debtor’s behalf regarding the value of the Debtor’s real
property, which seemingly holds significant equity with which the Debtor may be able to finance
its proposed plan. Despite objection by the Creditors, the court finds his testimony to be persuasive
and reliable. 	The court understands the Creditors’ displeasure with the Debtor’s amended
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schedules at the eleventh hour, but that does not impair the evidence adduced at the trial. Notably,
neither party elicited testimony from an appraiser regarding the value of the Debtor’s real property.
That is generally the best evidence, but the Debtor’s opinion as to the value of its property is
admissible and carries significant weight in the absence of expert testimony. Moreover, the court
is persuaded by the fact that the Debtor’s valuation appears to be consistent with the valuation by
the Jefferson County Assessor. The court is familiar with that process and the fact that the State
of West Virginia intends for counties to assess values at 60% of fair market value.
Although the Creditors’ failure to show objective futility is sufficient alone to deny their
motion, the court also believes that the Debtor did not file this case with any subjective bad faith—
for any improper purpose, to abuse the bankruptcy process or wrongly impair creditors’ collection
efforts, or to merely seek the protection of the automatic stay. 	Rather, the court perceives this
debtor to be like most that come before it on the eve of a judgment, foreclosure, or some other
significant event. 	Facing imminent loss of its business, which operated for over thirty years, it
filed Chapter 11 as a last-ditch effort to reorganize and treat its creditors appropriately. Indeed,
the Debtor filed its case under the newly-enacted Subchapter V on March 22, 2020, and proposed
a plan of reorganization on August 14, 2020. That timing leads the court to believe that the Debtor
possesses an honest intention to reorganize, particularly based upon the Debtor’s proposal to pay
allowed claims a 100% dividend. Additionally, a Subchapter V trustee is in place monitoring the
Debtor’s operation and the bankruptcy estate. Moreover, Mr. Cannan testified that he intends to
personally satisfy the Smith Trust such that the Debtor and its other creditors will not be prejudiced
by his mistaken belief that he alone was liable on the Smith Loan.
Additionally, the Debtor anticipates settling claims it may possess against Mr. Cannan. Its
resolution in that regard will inure to the benefit of the bankruptcy estate and its creditors.
Although the court cannot now determine whether the proposal will be approved, it is persuaded
at least that the Debtor is mindful of its duty to its creditors such that the court does not perceive
an attempt to abuse the bankruptcy process. 	Put succinctly, but for perhaps Mr. Cannan’s
intermittent lack of cooperation prepetition, the court believes the record is generally devoid of
evidence of the Debtor’s subjective bad faith in filing its case. Mr. Cannan may have mismanaged
the Debtor historically, but the court perceives nothing surrounding the Debtor’s filing that leads
it to believe the Debtor sought bankruptcy protection for any improper purpose.
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Regarding the Creditors’ motion for relief under § 543(d) of the Bankruptcy Code, the
court likewise deems it appropriate to deny the motion. Specifically, the court does not believe
that Ms. Rose meets either of the enumerated exceptions to the requirements of § 543(a)-(c).
Specifically, the court does not believe Ms. Rose qualifies under § 543(d)(1) because it perceives
its analysis above leads inexorably to the conclusion that it is not in the creditors’ best interests to
leave Ms. Rose in possession, to the extent she possesses anything. Additionally, the court finds
that Ms. Rose does not qualify under the exception in § 543(d)(2) because she is not an “assignee
for the benefit of the [D]ebtor’s creditors.” See In re Sundance, Corp., 83 B.R. at 747-78.
III. CONCLUSION
For the reasons stated herein, the court does not find cause exists under § 1112(b) of the
Bankruptcy Code to dismiss the Debtor’s case. Additionally, it does not believe Ms. Rose meets
either of the exceptions of § 543(d) to be excused from the operation of § 543 generally to the
extent she otherwise qualifies as a custodian. 	The court will therefore enter a separate order
denying the Creditors’ motion.
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