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In re Alston

United States District Court, Third Circuit

November 27, 2013

ROBERTA A. DEANGELIS, Appellee Bankruptcy No. 12-15871


TIMOTHY J. SAVAGE, District Judge.

In this bankruptcy appeal, the pro se appellant-debtor, Alson Alston ("Alston"), challenges the Bankruptcy Court's order dismissing his Chapter 11 case for cause. The Bankruptcy Court dismissed Alston's case under 11 U.S.C. § 1112(b)(1) and 4(A), (B), (D), (E), and (F) based on: (1) the pendency of the case for over eight months without the formation of a potentially confirmable Chapter 11 plan; (2) Alston's failure to propose a potentially confirmable Chapter 11 plan after having been given time to cure defects that had been identified in his initial plan; (3) his failure to develop an approvable disclosure statement that complied with 11 U.S.C. § 1125; (4) the lack of adequate income to fund a plan of reorganization; (5) his payments to his former attorney in contravention of both the Bankruptcy Court's order appointing counsel and 11 U.S.C. § 331; and (6) his failure to comply with 11 U.S.C. § 364(b) by obtaining credit outside the ordinary course of business.[1] The Bankruptcy Court further concluded that Alston, who did not appear at the hearing on the United States Trustee's ("UST") motion to dismiss his case, did not satisfy his burden to establish "unusual circumstances" under 11 U.S.C. § 1112(b)(2). It also entered judgment against Alston and in favor of the UST in the amount of $1, 300 for unpaid fees owed to the UST pursuant to 28 U.S.C. § 1930(a)(6).[2]

We conclude the Bankruptcy Court did not make an error of law, did not clearly err in its findings of fact and did not abuse its discretion in dismissing rather than converting the case. Therefore, we shall affirm the Bankruptcy Court's February 25 Order dismissing Alston's Chapter 11 case for cause.[3]

Procedural History and Factual Background

On June 18, 2012, Alston, the owner of nine residential and commercial rental properties in Philadelphia, filed a voluntary Chapter 13 petition in the Bankruptcy Court for the Eastern District of Pennsylvania.[4] In his schedules, he listed as assets nine real properties with a value of $1.7 million and personal property worth $38, 000.[5] His liabilities included secured debt of $2.9 million, consisting of mortgages, federal and local tax liens, utility liens and unsecured priority debt of $145, 000, arising from outstanding state and local taxes and student loans.[6] He also had $113, 543 in unsecured non-priority debt.[7] Alston reported he had monthly income of $11, 917, of which $9, 890 came from rents.[8] His monthly expenses were $30, 046, creating a monthly deficit of $18, 129.[9]

About a month later, on July 24, 2012, Alston filed a notice of conversion, seeking to convert his case from Chapter 13 to Chapter 11.[10] On August 21, 2012, the Bankruptcy Court held a hearing to consider the notice, which it treated as a motion to convert. Despite its skepticism that Alston had the ability to present a confirmable Chapter 11 plan, [11] the Bankruptcy Court concluded that the bankruptcy estate could "be amenable to some type of restructuring in a Chapter 11 case" because Alston had assets and revenue streaming in from some of his properties and it was possible that his creditors would be willing to let him restructure.[12] The next day, the Bankruptcy Court entered an order converting Alston's case to Chapter 11, and ordering Alston to file a disclosure statement and proposed plan by November 20, 2012.[13]

After Alston's case was converted to Chapter 11, three of his secured creditors moved for relief from the automatic stay.[14] On August 31, 2012, Citibank, N.A. ("Citibank") moved for relief regarding Alston's property located at 2836-38 West Girard Avenue, claiming that Alston had not made mortgage payments since April of 2008 and that he owed post-petition mortgage payments totaling nearly $6, 000.[15] Alston opposed the motion, stating that, pursuant to his Chapter 13 plan, he made a payment of $359 to the Chapter 13 trustee, and that he had an insurance policy covering the property. He did not challenge Citibank's claim that he failed to make mortgage payments during the prior four years.[16]

Alston did not attend the hearing on Citibank's motion. His attorney argued that Citibank's interest was adequately protected because Alston had insurance on the property and he was maintaining the value of the property.[17] The Bankruptcy Court rejected these arguments and granted Citibank relief.[18]

On October 19, 2012, Bayview Loan Servicing, LLC ("Bayview") also moved for relief concerning two properties. With regard to 2834 West Girard Avenue, Bayview alleged that Alston made no mortgage payments since June of 2009 and owed post-14 petition mortgage payments of over $5, 000.[19] Concerning the property at 3117-3127 Master Street, Bayview claimed that Alston had not made mortgage payments since March of 2009 and owed four months' worth of post-petition payments totaling over $14, 000.[20]

Opposing Bayview's motions, Alston argued that his Chapter 11 plan would provide for payments in the future, he had insurance coverage for the properties, he was adequately maintaining the physical condition of the properties, and the value of the properties had not declined since he filed for bankruptcy.[21] Alston also argued that he would be substantially prejudiced because challenging Bayview's motions "caused him to expend his limited and precious funds thereby depleting the value of the estate."[22]

Alston was not present at the hearing on Bayview's motions. His attorney conceded that notwithstanding two payments that Alston made to Bayview on December 27, 2012 and January 8, 2013, there had been a post-petition default with regard to both properties.[23] The Bankruptcy Court granted Bayview relief from the automatic stay on both properties.[24]

Household Finance Consumer Discount Company ("Household Finance") moved for relief pertaining to Alston's property at 2825 West Girard Avenue on December 28, 2012. Household Finance claimed that Alston had failed to make mortgage payments of $995 per month since January of 2010 and owed post-petition mortgage payments for six months.[25] At the February 6, 2013 hearing on the motion, Household Finance's counsel disclosed that on the day before the hearing, Alston made a $2, 100 mortgage payment to Household Finance. Prior to that payment, Alston had made two post-petition payments totaling $864 in November and December of 2012.[26]

Alston opposed the motion, stating only that it should not be granted until a hearing was held on his November disclosure statement and proposed plan.[27] The Bankruptcy Court granted Household Finance's motion for relief.[28]

On November 9, 2012, before Household Finance moved for relief, the UST filed a motion to convert or dismiss the case for cause pursuant to 11 U.S.C. § 1112(b)(1). The UST alleged that Alston had failed to file timely monthly operating reports; failed to satisfy his post-petition financial obligations, including fees owed to the UST and post-petition mortgage payments owed to his secured creditors; failed to open and use a debtor-in-possession bank account; and failed to comply with the Bankruptcy Code and U.S. Trustee Guidelines. The UST claimed that Alston's failures showed that he was unable to present a plan of reorganization and there was a continuing loss to or diminution of the assets of the bankruptcy estate with no reasonable likelihood of rehabilitation.[29]

A couple of weeks after the UST filed her motion to dismiss or convert, Alston filed an initial Chapter 11 plan and disclosure statement on November 30, 2012.[30] The plan proposed to modify each of Alston's secured mortgages by reducing the principal loan balances to the current market value of the properties and reducing the interest rate on each mortgage to 3.5 percent.[31] Alston proposed to make interest-only payments on his secured mortgages for six months, to pay his student loan debt in full and to retain each of his properties.[32] The proposed plan did not provide for payments of priority tax claims, or the secured and unsecured claims of various utility companies.[33]

On December 13, 2012, nearly six months into his bankruptcy case, Alston filed a motion seeking to use the cash collateral of his secured creditors.[34] Before filing the motion, Alston had been collecting and using rents from his properties to pay his living expenses, to pay administrative expenses associated with his bankruptcy case, and to maintain his properties.[35] On January 9, 2013, the Bankruptcy Court held a hearing on the motion to use cash collateral, the UST's motion to dismiss and Alston's motion to approve his November 30 disclosure statement. The Bankruptcy Court stated that it was not inclined to grant Alston the use of his secured creditors' cash collateral.[36] Its reluctance was based on the fact that Alston's motion did not include a budget detailing how he would use the rent generated from each of his nine properties, lacked information on the manner in which the properties generated income, and the motion did not state how Alston's creditors were adequately protected. The Bankruptcy Court stated that because Alston did not appear at the hearing, it had no evidence as to how Alston intended to use the cash collateral.[37]

The Bankruptcy Court did not rule on the motions. It continued the hearing to give Alston additional time to propose a confirmable plan.[38]

On February 19, 2013, the night before the hearing on the UST's motion to dismiss, Alston filed an amended disclosure statement and proposed plan.[39] As did the November plan, the proposed plan and disclosure statement did not provide for payment of Alston's state and local tax claims. Alston did not include details on how he planned to sell his property located at 3029-31 West Glenwood Avenue, the proceeds of which he claimed would be used to pay pre-petition arrears. The disclosure statement represented that Alston operated several businesses; but, it did not disclose the nature of each business, how much revenue, if any, Alston generated from them, or whether he would continue to operate the businesses.[40]

By order dated February 25, 2013, the Bankruptcy Court granted the motion to dismiss, explaining its reasons in a footnote.[41] The Bankruptcy Court concluded that the UST had met her burden of establishing cause for dismissal and that Alston had not met his burden of ...

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