UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
PANBOWL ENERGY COMPANY CASE NO. 91-00167
This matter is before the Court on the Motion to Dismiss or Convert, to Specify Individual Royalty Payments, and/or to Appoint Trustee of Lou Hunter, Naomi Elaine Temple, and Karen Morgan, creditors of the debtor, as well as the Motion for Rejection and Surrender of Coal Lease and/or Motion to Dismiss or Convert and/or to Appoint Trustee of Hubert Hollon, Carol Hollon, Gary Hollon, Kathy Hollon and the Hollon heirs, also creditors of the debtor.
The debtor has filed a memorandum in response to the Motion for Rejection and Surrender of Coal Lease in which it cites several cases which appear to be dispositive of this issue, including In re Becknell & Crace Coal Co., Inc., 761 F.2d 319 (6th Cir. 1985), which held that under Kentucky law what is commonly termed a coal mining lease is regarded as a conveyance of an estate or interest in minerals as land unless the terms of the instrument require a different construction. The creditors have conceded that Becknell is indeed dispositive of the issue of whether a coal lease can be rejected pursuant to 11 U.S.C.'365(d)(4).
The creditors continue to advance their arguments that the Chapter 11 case should be dismissed or converted, or that a trustee should be appointed to run the debtor's affairs, based on their claims that certain royalty payments have not been made. 11 U.S.C.'1112(b) provides that the court may convert a Chapter 11 case to a Chapter 7 case, or may dismiss a Chapter 11 case for cause. "Cause" is not defined in this section, but a non-exclusive list of grounds is set out which may constitute cause.
As pointed out in In re Ravick Corp., 106 B.R. 834 (Bkrtcy.D.N.J. 1989), "a debtor's bad faith filing of a bankruptcy petition is sufficient 'cause' to warrant dismissal under'1112(b)." At 842. The Ravick court states that a determination of bad faith is made on a case by case basis, with the court looking to whether there is evidence of the "debtor's intent to abuse the judicial process and the purposes of the reorganization provisions of the Code." At 843. The court then goes on to observe that
[g]enerally, where a debtor's reorganization effort involves essentially a two party dispute resolveable in state court, and the filing for relief under the Bankruptcy Code is intended to frustrate the legitimate efforts of creditors to enforce their rights against the debtor, dismissal for 'cause' is warranted.
At 844. The creditors have not established "cause" in this case.
In Matter of Macon Prestressed Concrete Co., 61 B.R. 432 (Bkrtcy.M.D.Ga. 1986), the court dealt with the questions of conversion under'1112(b) and appointment of a trustee in a Chapter 11 case. Concerning conversion, the court observed at page 436 that the equities must be balanced, with all doubts being resolved in favor of the debtor while still taking into consideration the interests of the creditors:
If it is apparent that the debtor has no profitable core around which to structure a plan of reorganization, if the debtor is faced with continuing losses, and if the debtor's assets are declining in value, the best interests of the creditors may require the court to order liquidation of the debtor's estate under Chapter 7.
The Macon court held that the burden of establishing cause for conversion is on the party seeking relief. At 436. Therefore the moving creditors in the case at bar have the burden of proof. Once again, having only alleged that the debtor has not made certain royalty payments, they have not carried forward that burden of proof.
Finally, on the issue of whether a trustee should be appointed pursuant to 11 U.S.C.'1104(a), the Macon court held that the burden of proof is on the moving party, and that there is a "strong presumption that the debtor should be permitted to remain in possession" in the absence of a showing of need, "[o]therwise, the appointment of a trustee would impose a substantial burden on a debtor's estate, thus precluding an effective reorganization due to increased administrative expenses." At 439.
Section 1104(a) provides:
At any time after the commencement of the case but before confirmation of a plan, on request of a party in interest, and after notice and a hearing, the court shall order the appointment of a trustee--
(1) for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor or by current management, either before or after the commencement of the case, or similar cause, but not including the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor; or
(2) if such appointment is in the interest of creditors, any equity security holders, and other interests of the estate without regard to the number of holders of securities of the debtor or the amount of assets or liabilities of the debtor.
It has been held that "the court need not find any of the enumerated wrongs in order to find cause for appointing a trustee. It is sufficient that the appointment be in the interest of creditors." In re Oklahoma Refining Co., 838 F.2d 1133, 1136 (10th Cir. 1988).
In the case at bar, the creditors have not established how the appointment of a trustee is in their interest, stating only that a trustee needs to be appointed to manage the debtor's affairs (presumably to guarantee payment of their royalties). The court apparently has wide discretion pursuant to'1104(a) in appointing a trustee. However, even under the interpretation of Oklahoma Refining it would not appear that the creditors have carried forward the burden of establishing the need for a trustee. It is therefore the opinion of this Court that the creditors' motions should be overruled.
By the Court -
Robert J. Brown, Esq.
Michael A. Stidham, Esq.
Michael E. McGrath, Esq.