Bankruptcy Buyer’s Remorse: When Debtors Want To Dismiss Their Own Chapter 11 Case

Chapter 11 Debtor Dr. Michael BrownMichael Brown did not seem to be a good candidate for bankruptcy. A prominent Houston hand surgeon, he invented a surgical technique to treat carpal tunnel syndrome and franchised 6 surgical centers in the southwest. His Brown Medical Centers had earned between $25 million to $30 million a year. However, while trying to divorce his 4th wife Rachel, Dr. Brown and his companies racked up millions of dollars in unpaid bills at the same time he is reported to have bought an $8 million beachfront property in Miami before filing for bankruptcy (perhaps a bit too ostentatious way to try and justify venue of his case outside of the too-cozy confines of his Houston home?). Claiming that his prior lawyers misled him into beliving that reorganization under Chapter 11 would help bring a close to “divorce-related issues” Dr. Brown has hired a new legal team that wants to help the surgeon dismiss his Chapter 11 case only a month after filing.

Unfortunately for the doctor, getting out of Chapter 11 is not nearly so easy as getting in. Oddly similar to getting a divorce in many states, a bankruptcy judge needs to find that “cause” exists to dismiss a Chapter 11 case. Such cause may include a debtor’s failure to file necessary operating reports, inability to confirm a plan of reorganization or most commonly, continued loss from operations to the detriment of creditors.

From a casual view, it may seem easy for debtors who want to get out of Chapter 11 to create the environment that would justify the finding of such “cause”, but there is a severe penalty for guessing wrong. If it appears that dismissal is not in the best interest of creditors a bankruptcy judge may, instead of dismissing, choose to convert the case to Chapter 7. Under the Bankruptcy Code, a judge has the power to make that choice even if no one has filed a motion asking for the case to be converted. Once conversion to Chapter 7 happens a trustee is appointed to analyze assets for liquidation and investigate litigation opportunities. The dire result: instead of escaping the confines of bankruptcy the debtor loses control of everything.

A debtor’s motion to dismiss is more likely to succeed if a primary goal for filing the case has occurred and there doesn’t seem to be much point in the bankruptcy court maintaining jurisdiction. This could happen if a significant asset has been sold, or a lease default cured, or if the reorganization has failed and a secured creditor has forced the debtor to terminate operations. In these scenarios, a bankruptcy court will dismiss a case if she decides that to do so is in the best interest of creditors.

For Dr. Brown, the prospect of a dismissal is highly doubtful. His case is still in the early stages and there appear to be significant assets that should be analyzed for the benefit of his substantial body of creditors. He should expect that the bankruptcy judge will want to take a very close look at his second thoughts about bankruptcy before letting him loose with millions of dollars in unpaid creditors.

What do you think? Should Dr. Brown be allowed to dismiss his case? Tell us your thoughts in the comments section.

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