In re: Samuel Jesse Christian Morreale

Filing 29

ORDER re: 2 Bankruptcy Appeal, filed by Samuel Jesse Christian Morreale, the judgment of the Bankruptcy Court is AFFIRMED, by Judge William J. Martinez on 6/1/2015. (evana, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 15-cv-0008-WJM
Bankruptcy Case No. 13-27310-ABC
IN RE:
SAMUEL JESSE CHRISTIAN MORREALE,
Appellant,
v.
2011-SIP-1 CRE/CADC VENTURE, LLC, and
UNITED STATES TRUSTEE,
Appellees.

ORDER AFFIRMING DECISION OF BANKRUPTCY COURT

Samuel Jesse Christian Morreale (“Morreale”) appeals the final judgment of the
Bankruptcy Court converting his Chapter 11 proceeding to a Chapter 7 proceeding. For
the reasons stated below, the judgment of the Bankruptcy Court is affirmed.
I. STANDARD OF REVIEW
In reviewing a bankruptcy court’s decision, the district court functions as an
appellate court, reviewing the bankruptcy court’s legal conclusions de novo and its
factual findings for clear error. 28 U.S.C. § 158(a); In re Warren, 512 F.3d 1241, 1248
(10th Cir. 2008). On mixed questions of law and fact, the Court reviews de novo any
question that primarily involves the consideration of legal principles, and applies the
clearly erroneous standard if the mixed question is primarily a factual inquiry. In re Wes
Dor, Inc., 996 F.2d 237, 241 (10th Cir. 1993).

II. STATUTORY BACKGROUND
This appeal focuses on the Bankruptcy Court’s decision to convert a Chapter 11
(reorganization) proceeding to a Chapter 7 (liquidation) proceeding. Before describing
the facts of this case, a brief review of the relevant statute, 11 U.S.C. § 1112, is in
order.
Section 1112 states that, “on request of a party in interest, and after notice and a
hearing, the [bankruptcy] court shall convert a case under [chapter 11] to a case under
chapter 7 or dismiss a case under this chapter, whichever is in the best interests of
creditors and the estate, for cause . . . .” 11 U.S.C. § 1112(b)(1). In this context, “for
cause” can mean several things, including:
(A) substantial or continuing loss to or diminution of the
estate and the absence of a reasonable likelihood of
rehabilitation;
(B) gross mismanagement of the estate;
***
(I) failure timely to pay taxes owed after the date of the order
for relief or to file tax returns due after the date of the order
for relief . . . .
Id. § 1112(b)(4).
But, “if the [bankruptcy] court finds and specifically identifies unusual
circumstances establishing that converting or dismissing the case is not in the best
interests of creditors and the estate,” then the court should not conv ert the case so long
as the debtor can establish various elements, including the ability to confirm a
reorganization plan within a reasonable time and ability to cure whatever difficulties led
to the potential for Chapter 7 conversion in the first place. Id. § 1112(b)(2).
2

Importantly, however, this “unusual circumstances” exception does not apply if the
Bankruptcy Court finds cause to convert based on a “substantial or continuing loss to or
diminution of the estate and the absence of a reasonable likelihood of rehabilitation.”
Id. § 1112(b)(2)(B), (b)(4)(A).
III. FACTUAL BACKGROUND
Morreale is the sole member of Morreale Hotels, LLC. (ECF No. 23 at 8.) 1
Morreale Hotels took out certain loans, now owned by Appellee 2001-SIP-1 CRE/CADC
Venture, LLC (“CRE”), and Morreale himself personally guaranteed those loans. (Id.;
Record on Appeal (“R.”) (ECF No. 21), Vol. VI at 133.) 2 Morreale Hotels became
delinquent on those loans and filed for bankruptcy protection in 2012 to avoid
foreclosure. (ECF No. 23 at 8; ECF No. 24 at 15–16.) CRE then obtained a judg ment
on Morreale’s personal guaranties. (R., Vol. VI at 133.) In October 2013, Morreale f iled
his own Chapter 11 bankruptcy petition, admittedly to “hold [CRE] at bay pending the
outcome of [his] efforts to reorganize Morreale Hotels.” (ECF No. 23 at 8 (internal
quotation marks omitted); R., Vol. I at 12–14.)
In July 2014, the United States Trustee (“Trustee”) filed a 11 U.S.C. § 1112(b)
motion to convert Morreale’s Chapter 11 proceeding to a Chapter 7 proceeding (“Motion
to Convert” or “Motion”). (R., Vol. II at 488.) As “cause” for conversion, the Trustee
argued the three forms of cause quoted in Part II above: “(A) substantial or continuing

1

All ECF citations are to the page number in the ECF header, which does not always
match the document’s internal pagination.
2

Volume VI of the Record is filed under Restricted Access. To the extent it is quoted or
summarized in this order, the Court has concluded that the quoted or summarized material
does not meet the qualifications for Restricted Access under D.C.COLO.LCivR 7.2.

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loss to or diminution of the estate and the absence of a reasonable likelihood of
rehabilitation,” “(B) gross mismanagement of the estate,” and “(I) failure timely to pay
taxes owed after the date of the order for relief or to file tax returns due after the date of
the order for relief.” (Id. at 490, 502, 503.) CRE joined the Motion. (Id. at 557.)
The Bankruptcy Court held a four-day hearing on the Motion in December 2014.
After hearing all of the evidence, the Bankruptcy Court concluded that no “gross
mismanagement of the estate” was taking place and therefore refused to convert the
case to Chapter 7 on that ground. (R., Vol. VI at 97–99.) But the Bankruptcy Court
sustained the motion on the Trustee’s other two grounds. (Id. at 99–103.)
Given this Court’s analysis below of the parties’ arguments on appeal, a
summary of the evidence leading to the Bankruptcy Court’s conclusion regarding failure
to pay taxes is unnecessary. (See Part IV.D, infra.) Concerning “substantial or
continuing loss to or diminution of the estate and the absence of a reasonable
likelihood of rehabilitation,” however, the relevant evidence was as follows.
Regarding losses to or diminution of the estate, the Bankruptcy Court received
evidence and testimony that Morreale had incurred about $150,000 in attorney s’ fees in
the fourteen months since filing for bankruptcy protection. (R., Vol. VI at 197.) The
Bankruptcy Court deemed these “substantial administrative expenses” sufficient to
satisfy the “substantial or continuing loss to or diminution of the estate” element. (Id. at
102.)
Concerning likelihood of rehabilitation, the evidence and testimony focused on
Morreale’s proposed plan of reorganization (“Plan”). (R., Vol. III at 101.) The Plan
established eight classes of creditors. (Id. at 107–08.) Of particular relevance is Class
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4, entirely comprising CRE. (Id. at 107.) Morreale staked part of his ability to repay
CRE on the Morreale Hotels reorganization plan. (Id. at 110–12.) The Bankruptcy
Court had refused to confirm the Morreale Hotels plan, but that refusal was then (and
remains) on appeal to this Court. See In re Morreale Hotels, LLC, Case No. 1:14-cv01537-WJM (D. Colo., filed May 30, 2014).3 Assuming eventual victory on appeal for
Morreale Hotels, the Plan stated that CRE’s secured and unsecured claim s would be
repaid in full through Morreale Hotels. (R., Vol. III at 110.) But if the Morreale Hotels
appeal were to fail, the Plan created certain contingencies. Morreale would pay CRE’s
secured claim by “transfer[ring] his interest in [a certain rental property] to [CRE] by
means of a deed in lieu of foreclosure.” (Id. at 111.) As for CRE’s unsecured claim,
Morreale noted that it would be paid at least in part through CRE’s foreclosure on the
Morreale Hotels properties securing the loan at issue, and any deficiency would be paid
“from liquidation of the Appeal Bond.” (Id. at 112.)
The attorney who drafted the Plan, Jeffrey Weinman, testified on Morreale’s
behalf at the hearing on the Motion to Convert. (R., Vol. VI at 433–34.) A significant
portion of his testimony was prompted by a Plan provision stating that Morreale “will
sell, refinance, or liquidate his non-Exempt Assets as provided for in this Plan to pay his
creditors with allowed claims as set forth in this Plan.” (R., Vol. III at 113–14.)
Weinman pointed this out as one of the “features” of the Plan, but opined that it was
“vastly different” from liquidation under Chapter 7 because Chapter 11 proceeding s

3

The Morreale Hotels appeal is currently stayed pending a Bankruptcy Court hearing to
determine whether the Trustee may liquidate Morreale Hotels’ assets, which would moot the
appeal. (See 14-cv-1537, ECF No. 28.)

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permit much more freedom of negotiation regarding the value of various assets. (R.,
Vol. VI at 477–78.) Nonetheless, W einman confirmed that the Plan was a “[c]omplete
liquidation” plan, and that the Plan was in fact “not reliant for its viability upon
confirmation of the [Morreale] Hotels plan” because that liquidation could, and to some
extent would, take place regardless of success in the Morreale Hotels appeal. (Id. at
482–85.)
Based on the foregoing, the Bankruptcy Court concluded that “there is no
likelihood of rehabilitation. The [Plan] does not propose or purport to rehabilitate. It
proposes complete liquidation.” (R., Vol. VI at 102.) The Bankruptcy Court therefore
ordered conversion to Chapter 7. (Id. at 103.)
IV. ANALYSIS
As already noted, the provision under which the Bankruptcy Court converted
Morreale’s case to Chapter 7 has two elements: “substantial or continuing loss to or
diminution of the estate and the absence of a reasonable likelihood of rehabilitation.”
11 U.S.C. § 1112(b)(4) (emphasis added). “[B]ecause the statute is written in the
conjunctive, both requirements must be satisfied.” In re Miller, 496 B.R. 469, 479
(Bankr. E.D. Tenn. 2013). The Court will address each in turn.
A.

“Substantial or Continuing Loss to or Diminution of the Estate”
Morreale claims the Bankruptcy Court erred by relying on the attorneys’ fees he

had incurred to find continuing loss to or diminution of the bankruptcy estate. (ECF No.
23 at 18–21.) Morreale emphasizes that, at least at the time of the Motion to Convert
hearing in December 2014, the Bankruptcy Court had not approved any payments to

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Morreale’s attorneys, and that the Trustee was in fact objecting to the amounts those
attorneys were seeking. (ECF No. 23 at 11–12, 19–20.) 4 Thus, Morreale argues, his
bankruptcy estate had actually sustained no loss due to attorneys’ fees. (Id. at 20–21.)
In support, Morreale cites In re Gabriel Technologies Corp., 2013 WL 2318581
(Bankr. N.D. Cal. May 28, 2013), where the court reasoned that “accrual of liabilities are
not the same as the incurring of actual out-of-pocket losses, such as the dissipation of
assets that diminishes the estate.” Id. at *3. The court accordingly refused to find loss
to or diminution of the estate based on “accrual of fees of professionals employed by
the Debtors.” Id. at *2–3.
The Trustee responds by citing to various other cases in which accruing
professional fees were deemed losses to or diminution of the estate. (ECF No. 24 at
35–36.) For example, In re Gateway Access Solutions, Inc., 374 B.R. 556 (Bankr. M.D.
Pa. 2007), specifically noted the large amount of professional fees claimed in
yet-to-be-approved applications. Id. at 564. That, among other factors, prompted the
court to conclude that “there is a substantial and continuing diminution of the estate.”
Id. Other cases likewise found such diminution through mounting professional fees,
although these cases do not directly address whether those fees remained subject to
court approval. See In re Sterling Bluff Investors, LLC, 515 B.R. 902, 919–20 (Bankr.
S.D. Ga. 2014); In re Brutsche, 476 B.R. 298, 305 (Bankr. D.N.M. 2012); In re FRGR
Managing Member LLC, 419 B.R. 576, 581 (Bankr. S.D.N.Y. 2009); In re Plymouth Oil
Co., L.L.C., 2014 WL 3812078, at *3 (Bankr. N.D. Iowa Aug. 1, 2014).
4

This Court has not been informed whether any fee applications have since been
approved.

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Morreale attempts to distinguish these cases by noting that all of them rely on “at
least one other reason, coupled with accruing professional fees, in finding a substantial
or continuing loss [to] or diminution [of] the estate.” (ECF No. 26 at 4–5.) Morreale
believes it was error for the bankruptcy court to rely “solely . . . upon accrued but unpaid
attorneys’ fees.” (Id. at 6.)
Although Morreale is correct that none of the Trustee’s cited cases rest their
holdings exclusively on accruing professional fees, the Court is not convinced that
looking only to accruing professional fees is error. “To determine the existence of a
continuing loss to, or diminution of, the estate, the bankruptcy court must look beyond
financial statements and fully evaluate the present condition of a debtor’s estate.” In re
Hassen Imports P’ship, 2013 WL 4428508, at *13 (B.A.P. 9th Cir. Aug. 19, 2013). Fully
evaluating the present condition of a bankruptcy estate surely involves looking at
accruing liabilities, even if the exact amount of those liabilities has yet to be determined.
The Court sees no relevance to the fact that the Bankruptcy Court here only looked at
one significant accruing liability (attorneys’ fees).
Moreover, whether there exists a continuing loss to or diminution of the
bankruptcy estate is a factual finding this Court reviews only for clear error. Id. at *14.
Clear error means that “[a] finding of fact is . . . without factual support in the record or
. . . after reviewing all of the evidence, [the reviewing court is] left with the definite and
firm conviction that a mistake has been made.” In re Vaughn, 765 F.3d 1174, 1180
(10th Cir. 2014). Here, the facts before the bankruptcy court showed an attorneys’ fees
bill of about $150,000 for roughly fourteen months of proceedings in what the

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Bankruptcy Court described as “a non-operating Chapter 11,” i.e., a case where
Morreale had done barely anything to move the process along, but was instead using it
solely to forestall CRE’s claim on his personal guaranty while hopefully arranging for
Morreale Hotels to pay the liability that would otherwise fall under that guaranty. (R.,
Vol. VI at 97–98, 102.) The Bankruptcy Court was at least entitled to consider the fees
and the surrounding circumstances as part of its analysis, and this Court is not left with
“the definite and firm conviction that a mistake has been made” in relying on that
evidence to find loss to or diminution of the estate. In re Vaughn, 765 F.3d at 1180.
Accordingly, the Bankruptcy Court’s finding in this regard is affirmed.
B.

“Absence of a Reasonable Likelihood of Rehabilitation”
Regarding likelihood of rehabilitation, the Bankruptcy Court noted that Morreale’s

Plan was a liquidating plan, not a rehabilitation plan, and theref ore no reasonable
likelihood of rehabilitation existed. (R., Vol. VI at 102.) The Bankruptcy Court’s
conclusion is consistent with a number of cases on this issue. See Loop Corp. v. U.S.
Trustee, 379 F.3d 511, 516 (8th Cir. 2004) (holding, and citing cases standing for the
proposition, that rehabilitation plans may not be based on liquidation).
Morreale’s challenge to the Bankruptcy Court’s holding is somewhat convoluted.
He says that “a careful reading of the Plan . . . evidences that it was not a liquidating
Plan,” or at least that it was “much more than a simple liquidating plan.” (ECF No. 23 at
22 & n.50.) Moreover, Morreale quotes the liquidation portion of the Plan—“Following
confirmation of the Plan, [Morreale] will sell, refinance, or liquidate his non-Exempt
Assets as provided for in this Plan to pay his creditors with allowed claims as set forth in

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this Plan.” (R., Vol. III at 113–14)—and insists that the words “as provided for in this
Plan” and “as set forth in this Plan” were “intended to explain that [Morreale] would
liquidate non-Exempt assets to pay claims if, and only if, [Morreale Hotels’] Appeal was
unsuccessful and only to the extent that creditors remained unpaid after liquidation of
[Morreale Hotels’] property.” (ECF No. 23 at 24.) Morreale states that “these nuances
would have come to light” if “the bankruptcy court [had] allowed the plan conferral
process to mature.” (Id.)
This argument fails for several reasons. First, Morreale does not argue that the
Bankruptcy Court misunderstood the Plan as written—and as written, the Plan
obviously calls for liquidation. Thus, the Bankruptcy Court would likely have been
committing error as a matter of law to find that the plan allows for rehabilitation. See
Loop Corp., 379 F.3d at 516. Yet that is the only finding that would have “allowed the
plan conferral process to mature,” thus permitting “nuances” to emerge showing that
this was not a liquidation plan. In other words, the Bankruptcy Court would have to
erroneously conclude that the Plan, as written, was not really a liquidation plan so that
the Bankruptcy Court could later learn that the Plan, as nuanced by Morreale’s
supposed intentions, was not really a liquidation plan. The absurdity is evident.
Moreover, the great weight of evidence in the record points away from the
nuances that Morreale now tries to bring out. Out of eight creditor classes, only Class 7
says anything about paying through Morreale Hotels first and then through Morreale’s
personal liquidation second. (R., Vol. III at 113–14, §§ 4.6–4.8.) And if the words of the
Plan (or their absence) were not sufficiently clear, testimony about the Plan from
Weinman, Morreale’s attorney, left no ambiguity. Weinman testified that the Plan was a
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“[c]omplete liquidation” plan and “not reliant for its viability upon confirmation of the
[Morreale] Hotels plan” because at least some liquidation would take place regardless
of success in the Morreale Hotels appeal. (R., Vol. VI at 482–85.) 5
Here, however, Morreale claims that Weinman was poised “to further explain the
unique features of the proposed Plan”—supposedly including the “nuance” regarding its
liquidation provisions—“but [the] Bankruptcy Court sustained the [Trustee’s] objection
thereby precluding such explanation.” (ECF No. 26 at 9–10.) Morreale has not
appealed that evidentiary ruling and otherwise grossly misstates the record.
The Trustee objected when Weinman began to offer his opinion regarding the
eventual confirmability of the Plan. (R., Vol. VI at 474–75.) Specif ically, the Trustee
objected that Weinman could not offer that opinion because he had not been disclosed
as an expert witness. (Id. at 475.) The Bankruptcy Court sustained that objection. (Id.)
There was no objection, however, when the examining attorney (another of Morreale’s
attorneys) asked, “Mr. Weinman, would you describe the features of this plan?” (Id. at
477.) Weinman then went on to summarize various aspects of the Plan, including that
it “provide[s] for the liquidation of all of [Morreale’s] nonexempt assets to be distributed
pro rata according to the classes and in particular in payment of unsecured creditors
since secured creditors will be paid pursuant to their rights they hold relative to their
collateral.” (Id.) Weinman elsewhere explained that the Plan “liquidates all of the

5

Weinman does not say so explicitly, but he was presumably referring at least to
creditor Classes 1 and 2 (relating to outstanding tax bills). (See R., Vol. III at 108–09.)
Morreale’s personal liquidation proceeds were specifically earmarked to pay these Classes. (Id.
at 105, § 1.29.) Although Morreale was disputing the Class 1 and 2 claims, he nonetheless
proposed to set aside the cash needed to pay them in full pending resolution of those disputes.
(Id. at 108–09.)

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assets of the estate for the benefit of creditors and that’s what—that’s what most
liquidating plans do. Some [plans] are really partial liquidations and this is a complete
liquidation.” (Id. at 481.) Weinman nowhere stated that liquidation was contingent on
the Morreale Hotels appeal. Accordingly, nothing in the record supports Morreale’s
contention that Weinman would have made everything clear but for the Bankruptcy
Court sustaining the Trustee’s evidentiary objection.6
Given all this, the Bankruptcy Court did not clearly err in finding no likelihood of
rehabilitation. Even if a “careful reading” of the Plan (ECF No. 23 at 22 n.50) yields a
meaning nearer to what Morreale now asserts, the evidence actually before the
Bankruptcy Court fully supported its conclusion that the Plan was a liquidation plan and
therefore not an appropriate rehabilitation plan. T he Bankruptcy Court’s finding is
affirmed.

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This is not the only instance where Morreale’s appeal briefs mischaracterize the record
or cited authority. For example, Morreale elsewhere states that the Plan “contemplated the
possibility of liquidation as a last resort in the event that [Morreale Hotels’] Appeal was
unsuccessful and creditors remained unpaid after liquidation of the Hotels’ property,” citing
“Record Volume III, pp. 110–112, § 4.8,” which is a portion of the Plan. (ECF No. 26 at 8 & n.5
(emphasis in original).) The cited passages do not generally reflect this “last resort”
characterization, and Morreale can offer only one specific supporting example, i.e., that Class 7
creditors would be repaid through his personal liquidation to the extent Morreale Hotels could
not cover it. (Id. at 8–9.) Morreale says nothing about, e.g., Classes 1 and 2, for which
liquidation proceeds were earmarked, see note 5 supra, except to say that those Classes would
be paid from “cash reserved.” (ECF No. 23 at 22.) But again, the “cash reserved,” or at least
the ultimate cash to pay any allowed claim, was to come from liquidation. See note 5 supra. In
addition, Morreale cites In re Miller, 496 B.R. at 479, in support of the notion that incurring but
not yet paying attorneys’ fees does not count as a loss to the bankruptcy estate. (ECF No. 23
at 20.) The cited portion of Miller, however, discusses the accruing fees of a creditor, not a
debtor. Morreale’s counsel cannot be unaware of the grievous injury their credibility suffers
before this Court when they mischaracterize the record and provide inaccurate citations in this
manner.

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C.

Failure to File Taxes
As noted previously, the Bankruptcy Court also determined that conversion to

Chapter 7 was appropriate based on Morreale’s failure to file tax returns. (R., Vol. VI at
99–102.) This basis for conversion is subject to 11 U.S.C. § 1112(b)(2)’s “unusual
circumstances” exception. Morreale argues that unusual circumstances existed in his
case. (ECF No. 23 at 25–30.) But Morreale also acknowledges that the unusual
circumstances exception does not apply to a finding that conversion is appropriate
based on “substantial or continuing loss to or diminution of the estate the absence of a
reasonable likelihood of rehabilitation.” 11 U.S.C. § 1112(b)(2)(B), (b)(4)(A). (See ECF
No. 26 at 11.) Because the Court has af firmed that finding, the Court need not and
does not reach Morreale’s arguments regarding the unusual circumstances exception.
V. CONCLUSION
For the reasons set forth above, the judgment of the Bankruptcy Court is
AFFIRMED.
Dated this 1st day of June, 2015.
BY THE COURT:

William J. Martínez
United States District Judge

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