United States District Court, M.D. Pennsylvania
Christopher C. Conner, Chief Judge
Robert M. Mumma, II (“Mumma”), on behalf of Mann
Realty Associates (“Mann Realty” or
“debtor”), filed a voluntary petition for Chapter
11 bankruptcy. The United States Trustee
(“Trustee”) filed a motion for conversion or
dismissal under 11 U.S.C. § 1112, and a hearing took
place on January 25, 2018. During the hearing, the Bankruptcy
Court limited Mann Realty’s testimony and converted the
case to Chapter 7 rather than appoint a Chapter 11 trustee.
Mumma appeals the Bankruptcy Court’s decision.
Factual Background & Procedural
is Mann Realty’s president and a 37.5% shareholder in
the company. (Doc. 26-2 at ¶ 357). Mann Realty owns 12
pieces of property-mainly commercial real estate and one
quarry. (Id. at ¶ 362-64). The most valuable
and most important property here is the quarry, known as
Fiddler’s Elbow, which Mann Realty valued at $12
million. (Id. at ¶ 303, A407).
of its Chapter 11 duties, Mann Realty submitted disclosure
statements and a reorganization plan. (Id. at ¶
245-432). These filings documented Mann Realty’s
intention to sell some of its properties, to continue to
generate income on others, and to use the proceeds to pay its
creditors. (See, e.g., id. at
¶ 314-45). Both disclosure statements, however, noted
that “[c]urrently, the quarry cannot be mined due to
its flooding.” (Id. at ¶ 257, A358). The
statements also flagged Mann Realty’s struggles to
generate cashflow: “With several vacancies in its
commercial properties and the inability to generate
significant revenue from the limestone quarry, Debtor was
unable to maintain adequate cash flow to address its mortgage
obligations and real estate taxes.” (Id.) The
disclosure statement also explained that Mann Realty planned
to “commence litigation” against the
quarry’s holdover tenant, Pennsy Supply, Inc., to
compel payment of overdue rent and to drain the quarry so it
can be mined. (Id. at ¶ 362).
Realty also submitted monthly operating reports for April
through December 2017. (See Doc. 26-1 at ¶
97-222; Doc. 26-2 at 223-33). Together, these reports showed
net operating losses. (Id.) Mann Realty amended its
November 2017 report to lower its net operating loss by over
$125, 000, but still reported a net loss. (Hr’g Tr.
Trustee moved for conversion or dismissal under 11 U.S.C.
§ 1112. (Doc. 26-2 at ¶ 234-41). The Trustee argued
in its motion that Mann Realty had suffered
“substantial or continuing loss to or diminution of the
bankruptcy estate” and had “fail[ed] to timely
provide information reasonably requested.”
(Id. at ¶ 237).
Bankruptcy Judge Robert N. Opel, II, held the conversion
hearing on January 25, 2018. (Id. at ¶ 433).
Mumma, the Trustee, and representatives from four creditors
(S&T Bank, Santander Bank, Double M Real Estate LLC, and
McCormick 108, LLC) attended the hearing. (Id. at
¶ 433-34). Each creditor has outstanding debts owed to
them by Mann Realty and interests in Mann Realty’s
properties. (Id. at ¶ 360, A367-69, A401).
beginning of the hearing, the Trustee and Mann Realty
informed Judge Opel that they had agreed to appoint a Chapter
11 trustee rather than seek conversion or dismissal.
(Hr’g Tr. 6:6-15, 6:19-21). Three of the four creditors
objected and favored conversion, and the fourth did not
object to conversion. (Id. at 12:7-13:23,
13:25-19:17, 22:16-21). Mann Realty objected to conversion:
“I’m not sure it makes sense to shut the debtor
down and do a fire sale in Chapter 7, whereas a Chapter 11
trustee may be able to sell certain of the debtor’s
properties, pay off the creditors, and have a viable business
remaining.” (Id. at 7:22-8:1). The Trustee
also pointed out that some properties had significant equity,
a sign that conversion may be inappropriate. (Id. at
hearing continued with an exploration of Mann Realty’s
ongoing activities. According to Mumma, only two properties
were generating income, (id. at 24:9-17), and one of
those properties was scheduled for a sheriff’s sale in
April 2017 to satisfy a debt owed to Santander Bank,
(id. at 12:21-13:18, 22:22-23:1). Mann Realty,
through Mumma, had otherwise consented to liquidating its
properties, except the quarry. (Id. at 24:18-21,
28:15-22; see also Doc. 26-2 at ¶ 366).
Realty valued the quarry at roughly $12 million. (Doc. 26-2
at ¶ 303, A407). Yet Mumma testified that it was not
generating income and had not since 2015. (Hr’g Tr.
34:9-12). Instead, the valuation included a potential
“contract … that would have generated $20, 000 a
month for parking trucks” on the quarry’s
property. (Id. at 31:17-32:7). Mumma did not
identify the prospective party to the contract or present
evidence of this contract. He also testified that he had the
necessary permits to operate and mine the quarry through
another company he owned, Rocky Licensing. (Id. at
26:9-12). Mumma did not physically have the permits at the
hearing. (Id. at 35:9-18). The quarry was also
partially flooded, (id. at 40:23-41:10), had a
holdover tenant, (Doc. 26-2 at ¶ 358), and required
roughly $200, 000 of unidentified funds to become
operational. (Hr’g Tr. 25:22-28:25).
testified that Pennsy Supply, the holdover tenant, owed
roughly $1.5 million in rent, (id. at 33:15-21),
that Mumma intended to pursue through litigation, (Doc. 26-2
at ¶ 362). As for the $200, 000, Mumma testified that he
would personally provide the money, (Hr’g Tr. 29:1-7),
despite the “multiple confessed judgments entered
against [him] in excess of $5, 000, 000.00, ” (Doc.
26-2 at ¶ 363). As to Mann Realty’s other assets,
Mumma could not identify specific assets that made up a $5
million line-item for “buildings” in its
financial reports, (Hr’g Tr. 37:8-38:8), or an $8
million line-item for “Mortgages/Real Estate Loans,
” (Id. at 38:9-24).
Realty sought to offer testimony from two witnesses in
opposition to the creditors’ request to convert: Mumma
and the real estate agent listing Mann Realty’s
property. (Id. at 49:13-21). Mann Realty and Mumma
wanted the agent to testify about the “valuation and
his efforts in regard to marketing the properties.”
(Id. at 49:13-21). Judge Opel did not permit this
testimony because he did not view “valuation testimony
as helpful at this stage.” (Id. at 49:22-23).
Each of the creditors agreed. (Id. at 49:23-52:2).
Judge Opel explained that “we’re at a narrow
issue here, ” (Id. at 51:5), and confined his
decision to “door one, appointment of a Chapter 11
trustee, or door two, conversion to Chapter 7.”
(Id. at 52:18-53:3).
Bankruptcy Court’s Ruling
Opel began with “cause” to convert, noting Mann
Realty’s consistent operating losses. Mann
Realty’s monthly operating reports showed net operating
losses for several months before the conversion hearing.
(Id. at 54:17-55:8). This alone cast doubt on the
likelihood that Mann Realty could operate as a going concern:
“[O]ne wonders … what good will or what going
concern value there is for an entity that, best case, using
the debtor’s numbers, is showing an operating
loss.” (Id. at 55:2-5). Judge Opel also
expressed concern and skepticism of Mann Realty’s
amended operating report for November 2017, which showed
decreased losses, but losses all the same. (Id. at
Opel also addressed Mann Realty’s “gross
mismanagement.” Judge Opel found that Mann Realty
incorrectly reported its finances and “either
erroneously or purposely, has inflated its … equity
and its balance sheet value by over $8.3 million. That is at
least evidence of gross mismanagement ….”
(Id. at 55:18-23). That the company’s
president had “basically no information as to what
mortgages are held by” the company troubled Judge Opel.
(Id. at 55:15-18). This, in his view, is “not
anything like candor to creditors or financial
transparency.” (Id. at 55:23-25). As more
evidence of gross mismanagement, Mumma also made unauthorized
payments to, and took unauthorized loans from, Mann Realty.
(Id. at 56:13-57:2). Judge Opel also acknowledged
that the company had been unable to confirm a Chapter 11 plan
of reorganization. (Id. at 52:11-12).
Opel then explained why conversion, and not appointment of a
Chapter 11 trustee, was in the best interests of the
creditors and the estate. (See Id . at 57:3-12,
62:16-18). He found Mumma’s testimony about the
quarry’s going-concern value lacked credibility:
“Mumma had an opportunity to testify in an effort to
convince the Court that appointment of the Chapter 11 trustee
is in the best interest of creditors. His – in his
testimony, he first said that the quarry is operational; then
said there’s no equipment there; and later admitted
that it has received no income since September of
2015.” (Id. at 58:16-21). Mumma did not
produce evidence that an entity was permitted to operate the
quarry, so Judge Opel discounted the suggestion that there is
“some operational value or going concern value to the
quarry.” (Id. at 59:5-13). The purported
agreement with Rocky Licensing was insufficient.
(Id. at 59:14-60:3).
Opel was also concerned that a Chapter 11 trustee
“would lack the funds to pay the most basic
expenses” and operate Mann Realty as a going concern.
(Id. at 61:9-22). To Judge Opel, Mumma’s
assurance that he would personally provide the $200, 000 to
revive the quarry was not persuasive. (Id.) On the
other hand, that there was some rental property favors
Chapter 11. (Id. at 60:14-24). But that property was
spoken for; it was scheduled for a sheriff’s sale and
would be liquidated even if a trustee were appointed.
(Id. at 60:21-24).
credibility was important to Judge Opel. Mumma testified that
the quarry could be mined, but the disclosure statements said
that it could not. (Id. at 51:23-52:6). Judge Opel
found that “those two statements … are
irreconcilable. And it suggests that Mr. Mumma has been
purposely overly optimistic in his testimony, or that the
disclosure statement was false in suggesting that there is no
operational capacity.” (Id. at 62:6-10). Judge
Opel concluded with this observation:
All of these -- this accumulation of inaccuracies or
falsehoods, you choose the pronoun, tell me that it is time
for a Chapter 7 trustee to be appointed to take control of
these assets, try to figure out what is really owned, and
what is truly owed by this corporation, and that management
-- current management be ousted. I find that it would be in
the best interest of creditors that the ...