In re NLG, LLC

1

In re NLG, LLC, Debtor.

No. 21-11269 (JKS)

United States Bankruptcy Court, D. Delaware

February 16, 2023

Chapter 7

OPINION

RELATED D.I. 71, 92,134, 135 AND 136

J. Stickles United States Bankruptcy Judge

Before the Court is Chris Kosachuk's ("Kosachuk") Motion to Convert Involuntary Chapter 7 Case to Voluntary Chapter 11 Case (the "Conversion Motion")^[1] pursuant to 11 U.S.C. § 706(a) and rule 1017 of the Federal Rules of Bankruptcy Procedure. Having carefully reviewed the motion the responses, the facts of this case, and arguments presented, for the reasons set forth below, the Conversion Motion will be denied.

JURISDICTION

This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 1334 and 157(a) and (b)(1). Consideration of this matter constitutes a core proceeding under 28 U.S.C § 157(b)(2)(A) and (O). Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409.

BACKGROUND

A. The Involuntary Bankruptcy Case

On September 24, 2021, Kosachuk filed an involuntary petition for relief under chapter 7 of title 11 of the Bankruptcy Code against NLG, LLC (the "Debtor" or "NLG"). Kosachuk, the founder of NLG, was the sole petitioning creditor. NLG did not answer the involuntary petition. No party objected to, moved to dismiss, or otherwise challenged the involuntary petition. On January 7, 2022, the Court entered the Order for Relief in an Involuntary Case ("Order for Relie) ^[2]

On the same day, the United States Trustee appointed Alfred T. Giuliano as the interim chapter 7 trustee (the "Trustee"), which appointment remains in effect.^[3] The Trustee is now the sole fiduciary for NLG and is responsible for recovering all assets of the estate and prosecuting causes of action on behalf of the estate,^[4]

On February 9 and 10, 2022, the Trustee filed Debtor's Schedule of Assets and Liabilities and Statement of Financial Affairs, respectively.^[5] On March 3, 2022, the Court entered an Order authorizing the Trustee to retain Fox Rothschild LLP ("Fox Rothschild") as his counsel.^[6] On August 16, 2022, Kosachuk filed the Conversion Motion.^[7] On November 2, 2022, creditor Juan Ramirez ("Ramirez") filed a declaration in support of the Conversion Motion.^[8]

On December 19, 2022, the Trustee filed the Notice of Change from Asset to No Asset^[9](the "Notice of No Asset") and the Chapter 7 Trustee Report of No Distribution (the "Trustee's Final Report").^[10] The Trustee's Final Report states, in part:

I have neither received any property nor paid any money on account of this estate; that I have made a diligent inquiry into the financial affairs of the debtor(s) and the location of the property belonging to the estate; and that there is no property available for distribution from the estate over and above that exempted by law. Pursuant to Fed. R. Bank. P. 5009,1 hereby certify that the estate of the above-named debtor(s) has been fully administered. I request that I be discharged from any further duties as trustee. Key information about this case as reported in schedules filed by the debtor(s) or otherwise found in the case record; This case was pending for 15 months. Assets Abandoned (without deducting any secured claims): $ 0.00, Assets Exempt: Not Available, Claims Scheduled: $ 0.00, Claims Asserted: Not Applicable, Claims scheduled to be discharged without payment (without deducting the value of collateral or debts excepted from discharge): $ 0,00,^[11]

No response or opposition was filed to the Trustee's Final Report.^[12]

On January 24, 2023, three responses were filed to the Conversion Motion: (i) Liza Hazan ("Hazan"),^[13] (ii) Selective Advisors Group, LLC ("Selective"), 9197-5904 Quebec, Inc. ("Quebec"), and America Asset Management, LLC ("AAM") (Selective, Quebec and AAM are referred to as the "Objector(s)");^[14] and (iii) Fox Rothschild, the holder of an administrative expense claim against the estate of NLG.^[15]

On January 31, 2023, the Court heard oral argument on the Conversion Motion and took the matter under advisement.

B. The Adversary Proceedings in the Bankruptcy Case

In 2002, Kosachuk formed NLG to facilitate the sale of real property located in Fisher Island, Florida (the "Property") to Hazan by which NLG lent money to Hazan in exchange for a promissory note and mortgage, Soon thereafter, Hazan defaulted on the mortgage.

In 2012, in an unrelated matter, the Supreme Court for the State of New York in 91975904 Quebec, Inc. v. NLG, LLC, Case No. 2012-101875, entered a judgment by confession against NLG in favor of Quebec (the "Quebec Judgment"). Litigation ensued when the Quebec Judgment was offset against the promissory note given by Hazan.^[16] This dispute has been the subject of numerous lawsuits between the Debtor, Kosachuk, Hazan, Selective, and Quebec, in state and federal courts for more than a decade.^[17]

The filing of the involuntary bankruptcy created yet another forum to continue what is essentially a two-party dispute, Significantly, since the filing of this case, three separate adversary proceedings have been commenced in this Court challenging the Quebec Judgment: (i) in the first, Kosachuk asserts NLG's assets were misappropriated by Selective using the "sham" Quebec Judgment;^[18] (ii) in the second, NLG seeks a declaratory judgment that the Quebec Judgment is a "sham" and a declaration that the Quebec Judgment be vacated, set aside, and stricken;^[19] and (iii) in the third, Kosachuk seeks to cancel the indebtedness caused by the Quebec Judgment, mmc pro tunc to the date of entry January 22, 2012.^[20] In effect, the three adversary proceedings seek essentially the same relief - namely, declarations that the Quebec Judgment, a judgment entered in 2012 by the New York state court, is void.

C. Proofs of Claim Filed in the Bankruptcy Case

Since the Order of Relief was entered, seven (7) proofs of claim have been filed in this case by four claimants, including: two claims filed by Ramirez for unpaid legal services provided to NLG;^[21] two claims filed by Kosachuk, one related to money loaned to NLG which was then loaned to Hazan and the other related to the foreclosure action against the Property;^[22] one claim filed by Objector AAM, a judgment creditor;^[23] and two claims filed by Grove Resolutions, LLC, for legal services provided to NLG,^[24] No claims objections were filed; per the Trustee's Final Report, no claims will receive any distribution.

THE PARTIES' ARGUMENT

Kosachuk seeks entry of an order under section 706(a) of the Bankruptcy Code converting NLG's chapter 7 bankruptcy case to a case under chapter 11 of the Bankruptcy Code. He argues that section 706(a) and case law give the Debtor a one-time absolute right of conversion because (1) the chapter 7 case has not been previously converted; and (2) the Debtor is eligible to be a chapter 11 debtor under section 101(9) of the Bankruptcy Code.^[25] He seeks conversion so that "the Debtor may regain possession of its assets and estate, finalize its pending litigation in Florida and New York, where NLG's lawyers are better positioned and more familiar than the Trustee (and his lawyers) and restructure itself [through]... a chapter 11 proceeding, which will maximize value for the Debtor's creditors and the Debtor as a whole."^[26]At oral argument, Kosachuk argued that "[conversion] will provide the highest possible return to all creditors of the estate of NLG, including the potential administrative claim... ."^[27] In opposition to the Conversion Motion, the Objectors argue that NLG is ineligible to be a debtor under chapter 11. Further, they argue a chapter 11 conversion would have all the hallmarks of a bad-faith filing because the Debtor has nothing to reorganize, uses bankruptcy as a litigation tactic and for forum shopping, is being used to resolve what is essentially a two-party dispute, and has few unsecured creditors.^[28] At oral argument, counsel for the Objectors argued that the real purpose for the conversion is to address the underlying two-party dispute between Kosachuk and Hazan.^[29]

APPLICABLE LAW

Section 706(a) of the Bankruptcy Code provides, in part, that "[t]he debtor may convert a case under this chapter to a case under chapter 11 ... at any time, if the case has not been converted under section 1112 ... of this title."

Under section 706(b) of the Bankruptcy Code, "[o]n request of a party in interest and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 11 of this title at any time." "Section 706(b) does not provide guidance on what (or what not) to consider when reaching a decision,"^[30] Courts have therefore concluded that a bankruptcy court has "broad discretion in exercising this power based on a determination of what 'will most inure to the benefit of all parties in interest."'^[31] "Since there are no specific grounds for conversion, a court should consider anything relevant that would further the goals of the Bankruptcy Code,"^[32]Courts have considered a variety of factors in determining whether to convert a case from . chapter 7 to chapter 11 under section 706(b), depending on the circumstances of the case, including: (1) the debtor's ability to repay the debt; (2) whether there are immediate grounds for reconversion; (3) the likelihood of a chapter 11 plan's confirmation; and (4) whether the parties in interest would benefit from conversion.^[33]

The burden of proof is on the moving party to show that the case should be converted.^[34]

ANALYSIS

A. Kosachuk Does Not Have an Absolute Right to Convert the Case

Kosachuk's principal argument is that the Debtor has a one-time absolute right to convert its chapter 7 case to a chapter 11 case under section 706(a) of the Bankruptcy Code.^[35]Kosachuk's...