Bleak House Comes to the Bankruptcy Court

Posted by NCBRC - April 28, 2016

In a scenario worthy of Dickens, a once-thriving family business, Ainsworth Feed Yards (AFY), was liquidated and distributed to creditors while the family members engaged in six years of legal battles with each other. In the Matter of Sears, 2016 Bankr. LEXIS 926, No. 10-40275 (Bankr. D. Neb. March 23, 2016).

Robert Sears filed chapter 11 bankruptcy but, over the six years since filing, never proposed a reorganization plan, electing instead to pin his hopes for financial redemption on the success of litigation against his family members. In this particular skirmish, the main characters were Robert and his son, Korley, on one side, and Robert’s brother, Ronald, on the other. Ronald had filed a claim for almost three million dollars arising out of a Pledge and Security Agreement securing an obligation owed by Korley. Ronald, joined by the United States Trustee, filed a motion to appoint a trustee under section 1104(a)(2) due to Robert’s alleged violations of various criminal statutes by his sale of property outside the ordinary course of business for which he kept the profits, and by his failure to disclose certain property interests to the bankruptcy court.

Appointment of a trustee is an “extraordinary remedy” for which the moving party must overcome a presumption in favor of allowing the debtor-in-possession to remain in possession of estate property. Under section 1104(a)(2) the court shall order the appointment of a trustee “if such appointment is in the interests of creditors, any equity security holders, and other interests of the estate[.]”A court will consider “the materiality of any misconduct, the debtor-in-possession’s evenhandedness or lack thereof in dealings with insiders and affiliated entities in relation to other creditors, the existence of pre-petition voidable preferences or fraudulent conveyances, whether any conflicts of interest on the part of the debtor-in-possession are interfering with its ability to fulfill its fiduciary duties, and whether there has been self-dealing or squandering of estate assets,” (citing In re Veblen West Dairy LLP, 434 B.R. 550, 553 (Bankr. D.S.D. 2010)). The movant bears the burden of proof either by a preponderance of the evidence or by clear and convincing evidence. In this case, the court found that it need not decide the level of proof as the movant met the more stringent clear-and-convincing-evidence standard.

It appeared to the court that the chapter 11 bankruptcy filed by Robert Sears was intended not to promote reorganization of the feedyard business but to provide a forum for maintaining the family feud. The court ran through a list of Robert Sear’s actions giving rise to its conclusion that Mr. Sears was not a proper fiduciary for the estate, including: 1) selling two irrigation systems owned by AFY and keeping the proceeds for himself, 2) failing to reveal income from property he leased or sublet, 3) failing to show income from a business in which he is 50% owner, 4) engaging in numerous transactions outside the ordinary course of business without obtaining leave of court, and 5) failing to propose a plan over the six years the chapter 11 case had been pending.

The court found Mr. Sears’ behavior to be motivated not by a desire to reorganize but to exact revenge upon his family members who refused to cooperate with his initial attempt to reject pre-petition contracts to sell feed yard properties and reorganize AFY. His actions, the court found, constituted “fraud, dishonesty, incompetence and gross mismanagement of the case.”  It concluded that “Robert’s clear vendetta against his family members clouds his ability to properly perform the fiduciary duties of a debtor in possession and to act in the best interests of his bankruptcy estate. Therefore, I find that a trustee should be appointed pursuant to 11 U.S.C. § 1104(a)(2).”

Sears Bankr Neb March 2016 opinion

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