John Campbell McTiernan, Jr.

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
In re
JOHN CAMPBELL MCTIERNAN, JR.
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)
)
)
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Case No. 	13-20987
Chapter 11
Debtor.
OPINION ON MOTION TO CONVERT CASE TO CHAPTER 7
On August 27,2014, the Motion to Convert Case to Chapter 7, filed by First
Interstate Bank ("Bank") came before the court for an evidentiary hearing. John
McTiernan, Jr. ("Debtor") filed a response. At the conclusion of the hearing, the court
took the matter under advisement. Having reviewed the record, testimony and other
evidence, and parties' arguments, the court is prepared to rule.
Jurisdiction
This court has jurisdiction over this contested matter under 28 U.S.C. § 157. This
is a core proceeding within the definition of28 U.S.C. § 157(a)(2)(A). 1
Findings of Fact
Debtor's voluntary chapter 11 bankruptcy petition was filed on October 18, 2013.
At the time of filing, Debtor was incarcerated and the petition was filed by Gail Sistrunk,
Debtor's spouse, with a power of attorney. After an updated power of attorney was filed,
the court entered its Order Defining the Allowed Use by the Debtor in Possession of a
1 Unless otherwise noted, all statutory references are to Title II of the United States Code.
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Power of Attorney, allowing Ms. Sistrunk to "appear and sign for the Debtor in all matters
before the Court consistent with the General Power given to her by the Debtor" due to the
extraordinary circumstances Debtor's incarceration presented.
Debtor's initial§ 341 meeting of creditors was scheduled for November 18, 2013.
The United States Trustee continued and rescheduled the meeting to April 16, 2014. At
that time, Debtor attended the meeting.
On August 9, 2007, Bank loaned Debtor the amount of$5,500,000.00 securing the
note with the collateral, commonly described as: Bear Claw Ranch, 5 Columbus Drive, 23
Columbus Drive and 20 Columbus Drive near Sheridan, Wyoming. According to Marlin
Norling, Assistant Vice President of First Interstate Bank and loan officer with personal
knowledge of the loan transaction, the unpaid balance as of the date of the hearing was
$6,100,224.92, and accruing interest at the rate of$1,606.38 per day.
The properties were appraised by Brent Brooks, ("Brooks") on behalf of the Bank
in June 2014. 	The properties were appraised to have the following values:
Bear Claw Ranch
5 Columbus Drive
23 Columbus Drive
20 Columbus Drive
$8,385,000.00
130,000.00
200,000.00
230,000.00
The collateral also appears to include an assignment of 720 acres of a State of Wyoming
lease? Mr. Brooks estimated that it would take one year to market and sell the property.
In June 2014, the Debtor retained, with the court's approval, John Pierce of
2 Bank's Exhibit No.2.
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Sotheby's Realty, Jackson, Wyoming to market the Bear Claw Ranch. Cyndee Jacobson,
a residential real estate professional in Sheridan, Wyoming was retained, also with the
court's approval, to market and sell the Columbus Drive properties.
Debtor is a film maker with numerous hit films to his credit. He reported to prison
in April2013. He testified that his petition and schedules were prepared by Ms. Sistrunk,
and filed to stop the foreclosure of the Bear Claw Ranch to preserve Debtor's equity in
the property. Debtor testified that he reviewed the petition, schedules and other
bankruptcy documents upon his release in February or March, 2014. Debtor testified that
he intends to liquidate the Sheridan properties and move using the equity from the sale
proceeds to pay his creditors. He stated that he wants to "preserve the equity and dig
himself out of this financial hole." As of the day of the hearing, Debtor testified that he
had a screen play and expected to receive income of approximately one million dollars.
He admitted that there is an offer for the purchase of the ranch for the amount of$7.3
million dollars, but feels that the buyer's offer is too low.
Ms. Sistrunk testified that, acting under a power of attorney to file Debtor's
bankruptcy, she provided the information for preparing the petition and schedules and she
prepared the monthly operating reports. Both the Debtor and Ms. Sistrunk testified that
she handles the financial side of Debtor's life. She also testified that the Debtor's 2012
tax return, balance sheets or profit and loss statements have not been prepared since
Debtor's accountant's employment was terminated. 	Ms. Sistrunk pays some bankruptcy
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estate expenses separate from the DIP account, which the court finds subsidizes Debtor's
bankruptcy estate. Ms. Sistrunk stated she is owed about $9,000.00. With Ms. Sistrunk's
contributions, the bankruptcy estate shows a positive cash flow in the amount of
$3,210.00 for the period October, 2013 to June, 2014. However, the court's review of the
record shows that July 2014 reflects an additional loss in the amount of$2,441.74. It
appears that Debtor's cash flow is nearly at a "break-even" point. Debtor and Ms.
Sistrunk testified that Debtor's current income is based upon distributions and residuals
from past films.
Discussion
Bank moves to convert this chapter 11 bankruptcy case to a chapter 7 case under
§ 1112(b), alleging: (1) Debtor filed his case in bad faith; and, (2) cause exists to convert
this case as there is (a) a substantial and continuing loss to or diminution of the estate and
absence of a reasonable likelihood of rehabilitation; 3 (b) gross mismanagement of the
estate; 4 (c) unexcused failure to timely satisfY filing or reporting requirements established
by the Bankruptcy Code or by any rule applicable to a case under Chapter 11 ;5 and, (d)
failed to attend the Section 341(a) meeting of creditors. 6
3 § 1112(4)(A).
4 § 1112(4)(B).
5 § 1112(4)(F).
6 § 1112(4)(0).
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The Bankruptcy Code states,
"(b) ... [0 ]n request of a party in interest, and after notice and a
hearing, the court shall convert a case under this chapter to a case under
chapter 7, or dismiss a case under this chapter, whichever is in the best
interest of creditors and the estate, for cause unless the court determines that
the appointment under section 11 04( a) of a trustee or an examiner is in the
best interest of the creditors and the estate. " 7
(2) The court may not convert a case under this chapter to a case
under chapter 7 or dismiss a case under this chapter if the court finds and
specifically identifies unusual circumstances establishing that converting or
dismissing the case is not in the best interests of creditors and the estate,
and the debtor or any other party in interests establishes that-
(A) there is a reasonable likelihood that a plan will be confirmed
within the time frames established in sections 1121(e) and 1129(e) of this
title, or if such sections do not apply, within a reasonable period of time;
and
(B) the grounds for converting or dismissing the case include an act
or omission of the debtor other than under ( 4 )(A)-
(i) for which there exists a reasonable justification for the act or
omission; and
(ii) that will be cured within a reasonable period of time fixed by the
court." 8
Additionally, the Bankruptcy Code requires,
"The court shall commence the hearing on a motion under this
subsection not later than 30 days after filing of the motion, and shall decide
the motion not later than 15 days after commencement of such hearing,
unless the movant expressly consents to a continuance for a specific period
of time or compelling circumstances prevent the court from meeting the
time limits established by this paragraph. " 9
A chapter ll bankruptcy case may be converted or dismissed for cause. Thus, the
7 § 1112(b)(l).
8 § 1112(a)(2).
9 § 1112(a)(3).
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threshold issue under§ 1112(b) is cause. 	The movant bears the burden of establishing
cause by a preponderance of the evidence. 10 If cause is established, the burden shifts to
the debtor to prove that it falls within the "unusual circumstances" exception to
mandatory conversion or dismissal recognized by § 1112(b )(2). 11
The court notes that the Bank consented to scheduling the evidentiary hearing
beyond the deadline under§ 1112(a)(3). Additionally, due to Debtor filing Debtor's
Supplement to the Record and the Bank's Motion to Strike, the court delayed entering its
ruling on the Bank's Motion to Convert until disposition of the Motion to Strike. The
court finds that there are compelling circumstances that prevent it from meeting the
requirement of "deciding the motion not later than 15 days after commencement of the
hearing."
(I) Case filed in bad faith
Determining whether the debtor's filing for bankruptcy relief is in good faith
depends upon the bankruptcy court's on-the-spot evaluation of the debtor's financial
condition, motives, and the local financial realities. Findings of lack of good faith based
on § 1112(b) have been predicated on certain recurring but non-exclusive patterns.
Several, but not all, of the following conditions usually exist. The debtor has one asset,
such as a tract of undeveloped or developed real property. The secured creditors' liens
10 In re Vaughan Company, Realtors, No. ll-10-10759, 2013 Bankr. LEXIS 2091 (Bankr. N.M., May 21,
2013).
11 In re L & T Machining, Inc., Case No. 11-11045,2013 Bankr. LEXIS 2693 (Bankr. Kan., July 3, 2013).
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encumber this tract. There are generally no employees except for the principals, little or
no cash flow, and no available sources of income to sustain a plan of reorganization or to
make adequate protection payments. Typically, there are only a few, if any unsecured
creditors whose claims are relatively small. The property has been posted for foreclosure
because of arrearages on the debt and the debtor has been unsuccessful in defending
actions against the foreclosure in state court. Filing a bankruptcy petition on the eve of a
schedule foreclosure sale is not, by itself, sufficient to constitute bad faith. 	The
determination of the question whether to dismiss a case for bad faith requires an
examination of all the particular facts and circumstances in each case. 12
The court's review of the Debtor's fmancial condition reveals that prior to his
criminal legal proceeding, Debtor's income was substantially more than this court
generally sees of a debtor in bankruptcy, generally in the millions of dollars. Debtor
testified that he intended to work to regain his prior income level and has a contract
pending for the sale of a screen play. The real property that Debtor is attempting to sell is
prime property located in an area of Wyoming with high income properties. The court's
review of Debtor's operating reports reflect that his cash flow is limited but he appears to
have a potential source of a large income to sustain the bankruptcy estate while selling the
real property. The Bank is adequately protected by an equity cushion of over 2.8 million
12 In the Matter of Little Creek Development Company, Debtor, eta/. v. Commonwealth Mort. Corp., 779
F.2d 1068 (5'" Cir. 1986), citing In re Surgical Associates, Inc .. Case No. 13-10081, 2013 Bankr. LEXIS 1070
(Mar. 21,2013, Bankr. N.D. Okla.).
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dollars. The court is aware that the equity is eroding at the rate of$1,606.38 per dayY
Debtor's schedules reflect that he lists numerous secured, priority and unsecured
creditors with varying claim amounts. Debtor admitted that his bankruptcy petition was
filed to stop the foreclosure sale; preserve the equity and pay his debts. The court finds
Debtor's testimony credible and his intent, genuine. In examining the facts and
circumstances, the court does not find that Debtor filed his bankruptcy case in bad faith.
(2) Cause exists to convert
(a) Substantial and continuing loss to or diminution of the estate and absence of a
reasonable likelihood of rehabilitation
In evaluating whether a bankruptcy debtor has suffered continuing losses or
diminution of the estate to support conversion or dismissal of a chapter 11 bankruptcy
case, the court considers all relevant information, including the bankruptcy estate's
financial history and financial prospects and the financial records on file in the case.
Under certain circumstances, negative cash flow alone can establish a continuing loss to
or diminution of the estate for the purposes of establishing the first element. Diminution
of the estate may also be established by showing declining asset values. 14
As the court previously found, with Ms. Sistrunk's financial assistance, the
bankruptcy estate's cash flow is approximately breaking even each month. Overall, the
13 The court calculated the equity amount by subtracting the amount owed to the Bank on the date ofthe
hearing from the appraised values. The court also calculates that the accruing interest will cost the estate
approximately $586,328.00 over the span of one year.
14 Vaughan at 2 I.
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accruing interest and Ms. Sistrunk's subsidies reflect that Debtor's estate is operating at a
loss. Debtor admits his intent is to liquidate the real property and move, not reorganize.
In determining whether the debtor can rehabilitate, the court does not find that an
interpretation of "rehabilitation" precludes liquidation under a chapter 11 bankruptcy
case. The testimony did not reflect that the Bear Claw Ranch is declining in value. As
stated previously, there is a continuing loss and diminution of the estate. However the
court does not find that there is an absence of a reasonable likelihood of rehabilitation by
the debtor. The Debtor may successfully liquidate. Bank failed to meet its burden that
cause exists to convert the case under § 1112(4)(A).
(b) Gross mismanagement of the estate
The Bank asserts that cause to convert exists under§ 1112(b)(4)(B) based on
Debtor's gross mismanagement of the estate. The alleged gross mismanagement must
occur post-petition. 15 Examples of gross-mismanagement found by several courts
include: failure to pay outstanding real property tax and employment tax obligations; 16
debtors' paid for personal life insurance rather than other expenses;17 debtor's post-
petition behavior supported a finding of gross mismanagement due to Debtor's failure to
submit monthly operating reports depicting the Debtor's income and expenses by
15 ln re Rent-Rite Super Kegs West Ltd., 4&4 B.R. 799, 809 (Bankr. D. Colo. 2013).
16 In re Builders Group & Dev. Corp., Case No. 13-04867,2014 Bankr. LEXIS 2092, (Bankr. D. P.R.,
May 8, 2014).
17 In re Patel, Case No. 5:11-bk-73416, 2012 Bankr. LEXIS 4215, (Bankr. W.D. Ark., Aug. 22, 2012).
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property; 18
Bank argues that cause exists to convert Debtor's bankruptcy case based upon
Debtor's gross mismanagement of the estate. Ms. Sistrunk is not only Debtor's spouse,
but also takes care of the finances. 	Ms. Sistrunk testified that post-petition taxes are paid
on the real property; explained the questionable payments reflected on Debtor's bank
statements for the estate as being domestic support obligation, child support obligation or
foreign judgment payments. Debtor and Ms. Sistrunk explained that Debtor's income
resources from distributions and residuals payments from past film projects. The court's
review of the record reflects that the Debtor failed to timely file numerous monthly
operating reports required by the UST, and the initial report required under Rule 2015.3.
Gross mismanagement is not defined in the Bankruptcy Code. Mismanagement is
defined as "ineptly, incompetently or dishonestly" managing. Gross is defined as "glaring,
flagrant, very bad."19 The court finds that there is gross mismanagement of this estate. A
debtor in bankruptcy must comply with the reporting requirements so that creditors and the
court may determine whether the bankruptcy case is being properly administered while a
debtor enjoys the benefits of the bankruptcy process. Debtor, in this case, has not timely
complied with the reporting requirements. This failure appears to be glaring obvious as
Debtor's counsel is an experienced bankruptcy attorney and well aware of these deadlines
18 In re Hala/4 U LLC, Case No. 08-15216,2010 Bani<. LEXIS 3335 (Bankr. S.D.N.Y., Sept, 24, 2010).
19 Your Dictionary, http://www.yourdictionary.com/gross.
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and requirements. The court finds that Bank met its burden establishing cause to convert
under§ 1112(4)(B).
(c) Unexcused failure to satisfy timely any filing or reporting requirement established by
the Bankruptcy Code or by any rule applicable to a case under Chapter 11
Wyoming LBR 2015-3 requires that a Debtor in Possession "timely file ... all other
required post-petition tax returns with the Internal Revenue Service. Ms. Sistrunk testified
that Debtor has not filed his 20 13 federal tax return, but properly requested an extension.
Fed. R. Bankr. P. 2015.3 requires a chapter 11 debtor-in-possession to file periodic
financial reports of the value, operations and profitability of each entity in which the
debtor or the estate holds a substantial or controlling interests. The first report "shall be
filed no later than seven days before the first date set for the meeting of creditors" with
subsequent reports filed "no less frequently than every six months thereafter."20 Debtor
filed his first report on July 3, 2014. Debtor should have filed the first report on or before
November 11, 2013.
The United States Trustee established Operating Guidelines and Reporting
Requirements for Debtors in Possession and Chapter 11 Trustee. The debtor must file a
monthly operating report by the 21 ''day of the month following the report period.
The court's review of the docket reflects the monthly operating reports were filed
as indicated:
20 Fed. R. Bankr. P. 2015.3(a).
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For month of: 	Dated report filed
October- November, 2013 	February 3, 2014
December, 2013 	February 3, 2014
October- November, 2013 	February 25, 2014
December, 2013 	February 25, 2014
February, 2014 	March 26, 2014
January, 2014 	April8,2014
March, 2014 	May 7, 2014
April, 2014 	May 7, 2014
May, 2014 	June 23, 2014
June,2014 	August 4, 2014
July, 2014 	August 25, 2014
August, 2014 	Not filed
Bank asserts that cause exists to convert the Debtor's bankruptcy case to a chapter 7
based upon Debtor's failure to timely filed required reports. As previously discussed, the
court found that Debtor failed to timely file his required reports. The bank established
cause to convert the Debtor's case under§ lll2(4)(F).
(d) Failed to attend the Section 341 (a) meeting of creditors.
The court noted previously, that the Debtor's § 341 meeting of creditors was
rescheduled by the UST. The Bank did not object. Debtor testified that he attended the
meeting in April, 2014, upon his release from prison. The court finds that the Bank failed
to meet its burden that Debtor failed to attend the creditors' meeting.
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Exception to conversion under "unusual circumstances"
As stated by the District of New Mexico Bankruptcy Court, the BAPCPA's
amendments to §1112(b)(l) limit a bankruptcy court's discretion to deny a motion to
convert or dismiss a chapter 11 bankruptcy case for cause; if cause is established,
conversion or dismissal is mandatory unless the debtor falls within the "unusual
circumstances" exception. 21
Debtor admits that he filed for bankruptcy protection to halt Bank's foreclosure
proceeding. Debtor asserts that the equity in the Bear Claw Ranch will allow him to pay
his debts. Due to his incarceration, this case has not proceeded as a "normal" bankruptcy
case generally does. Debtor did not attend his initial § 341 meeting. He did attend the
rescheduled meeting upon his release. Debtor has not filed a proposed plan. Debtor did
not timely file reports required by the Bankruptcy Code, Bankruptcy Rules and UST
requirements. His reports were filed, mostly en masse to rectizy this delinquency. Debtor
retained, with court approval, real estate agents to market and sell the estate's real
property.
The Bank's witnesses testified regarding the values of the property and amount of
its secured claiming, providing the court evidence that there is substantial equity in the
property. Additionally, the Debtor testified regarding his efforts to regain his financial
footing since his release from prison. The Debtor's testimony was credible and the court
21 Vaughan at 21.
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finds his intent to be genuine. Debtor has the potential income to maintain the estate
during the pendency of this estate. The court finds that: (I) unusual circumstances exist to
apply the exception to conversion under § 1112(b ); and, (2) converting the case is not in
the best interest of the estate, debtor's secured creditors other that the Bank, the Debtor's
priority or unsecured creditors. The court finds that Debtor is capable of administering
this case, as he is no longer incarcerated, for the benefit of selling the property and paying
all creditors from the proceeds.
Debtor has not filed a disclosure statement or plan as required under§§ 1121(e) and
1129(e). However the court finds that there is a reasonable likelihood that a plan
involving liquidation can be confirmed within a reasonable time. The court also finds that
Debtor's failure to timely file reports can be cured by Debtor's diligent adherence to the
Bankruptcy Code, Fed. R. Bankr. Pro and UST chapter II reporting requirements.
In conclusion, Bank failed to carry its burden that Debtor's chapter 11 bankruptcy
case should convert to a chapter 7 due to lack of good faith; the second element under
§ 1112(4)(A), (likelihood of rehabilitation); and, failure to attend his §341 meeting of
creditors.
Bank met its burden that the case should be converted due to the gross
mismanagement of the estate and Debtor's failure to timely file required reports. The
court found that the unusual circumstance exception exists. The court denies Bank's
motion to convert and shall require Debtor to (I) file a disclosure statement and plan; (2)
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timely file all required reports; and, (3) strictly comply with all requirements of the
Bankruptcy Code, Federal Rules of Bankruptcy Procedure and Wyoming Local
Bankruptcy Rules during the pendency of this bankruptcy case.
This opinion constitutes the Court's findings offact and conclusions of law. A
separate order shall be entered pursuant to Fed. R. Bankr. P. 9021.
DATED thi~ day of September, 2014.
Service to:
James Belcher
Ken McCartney
By the Court
J.MCNIFF
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