Sometimes during the Chapter 11 process, it may become evident that a Chapter 11 plan is not going to be possible. This can happen due to many reasons like continuing business losses, loss of a property at foreclosure sale by a creditor who obtained relief from the automatic stay, or other events. In such cases, the next step would be to get the case dismissed outright, or converted to liquidation proceedings under Chapter 7. Normally, if there are only nominal assets remaining in the Chapter 11, a dismissal would be a better course than conversion.
Per Bankruptcy Code Section 1112(a), a debtor has an absolute right to convert his/her Chapter 11 case to Chapter 7, unless:
- s/he is not debtor in possession;
- the case was commenced as an involuntary case under Chapter 11; or
- the case was converted to Chapter 11 on the request of someone other than the debtor.
However, a debtor does not have the absolute right to dismiss his/her case.
A party in interest may file a motion to dismiss or convert a chapter 11 case to a chapter 7 case for cause. Generally, if cause is established after notice and hearing, the court must convert or dismiss the case whichever is in the best interests of creditors and the estate unless it specifically finds that the requested conversion or dismissal is not in the best interest of creditors and the estate. Alternatively, the court may decide that appointment of a chapter 11 trustee or an examiner is in the best interests of creditors and the estate. Bankruptcy Code sets forth numerous examples of causes that would support dismissal or conversion. They include:
- Continued loss of diminution of the estate and lack of likelihood of a successful reorganization
- Gross mismanagement of the debtor’s affair
- Unauthorized use of a secured creditor’s cash collateral
- Failure to maintain public liability or fire insurance
- Failure to comply with court orders for the filing of reports and documents
- Failure to attend the meeting of creditors or attend an examination without good cause;
- Failure to cooperate with the U.S. Trustee’s Office in furnishing requested documents and information
- failure to timely pay post-petition taxes
- Failure to meet Code-imposed or court-imposed deadlines for filing and/or confirmation of a plan and disclosure statement
- Failure to effectuate a plan
- Denial or revocation of confirmation of a plan
- Inability to consummate the terms of a confirmed plan
- Failure to meet post-bankruptcy domestic support obligations.
The Bankruptcy Code also provides an important exception to the conversion process in a chapter 11 case. Per the exception, the court is prohibited from converting a case involving a farmer or charitable institution to a liquidation case under chapter 7 unless the debt or requests the conversion.