IN RE: GRASSO et al

Filing 36

MEMORANDUM OPINION. SIGNED BY HONORABLE CYNTHIA M. RUFE ON 3/31/2014. 3/31/2014 ENTERED AND COPIES MAILED TO PRO SE AND COUNSEL AND E-MAILED. (amas)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
____________________________________
JOSEPH GRASSO, et al.,
:
Appellants,
:
CIVIL ACTION
:
v.
:
NO. 13-4308
:
MADISON CAPITAL CO.,
:
Appellee
:
MEMORANDUM OPINION
RUFE, J.

MARCH 31, 2014

Before the Court is Joseph Grasso’s appeal from the Bankruptcy Court’s Order of June
12, 2013, converting his Chapter 11 case to Chapter 7. Because the Bankruptcy Court’s factual
findings are not clearly erroneous, its legal conclusions are correct, and it did not otherwise
abuse its discretion in converting the case, the Bankruptcy Court’s Order will be affirmed.
BACKGROUND
This appeal is the latest chapter in the ongoing bankruptcy proceedings of the Debtor,
Joseph Grasso. An abbreviated history of the case follows to contextualize this Memorandum
Opinion.
On February 6, 2012, Joseph Grasso filed a voluntary petition for bankruptcy under
Chapter 11 of the Bankruptcy Code. His earliest schedules disclosing creditors revealed at least
$2,950,020.19 in secured claims; an unknown amount in unsecured priority claims; and at least
$36,169,174.00 in unsecured nonpriority claims. On October 16, 2012, the Bankruptcy Court
ordered the appointment of a trustee on creditor Madison Capital’s motion, finding that Madison

had demonstrated by clear and convincing evidence “(1) the Debtor’s unrelenting dishonesty;
and (2) gross mismanagement of estate assets.”1
On March 22, 2013, Marshall Katz, a creditor, filed a Motion to Convert the case from
Chapter 11 to Chapter 7, arguing, among other things, that Grasso had failed to comply with his
financial disclosure obligations and was administratively insolvent.2 Madison filed a
memorandum in support of the Katz motion, arguing that substantial and continuing losses to the
estate and the impossibility of a successful plan of reorganization required conversion.3 The
Trustee argued that the best interests of the creditors would be served by continuing to have the
Trustee oversee the estate in order to develop a plan of reorganization.4 The Trustee did not give
significant details of the contents of the plan in her response, in part because her investigation
into the estate was ongoing.5
On May 27, 2013, Katz withdrew the Motion to Convert; Madison, however, did not
withdraw its argument, and the Bankruptcy Court treated Katz’s motion as one by Madison. The
Bankruptcy Court held an evidentiary hearing on the motion on May 28, 2013, at which it
received documents and witness testimony, including testimony by the Trustee and Charles N.
Persing, an accountant for the Trustee. After consideration of the arguments before it, on June

1

In Re Grasso, No. 12-bk-11063 (Bankr. E.D. Pa, 2012) Doc. No. 301 at ¶ H . This procedural history
relies on the docket below, of which the Court may take judicial notice. In re Indian Palms Assocs., Ltd., 61 F.3d
197, 205–206 (3d Cir. 1995).
2

Bankr. Doc. No. 507.

3

Bankr. Doc. No. 524.

4

Bankr. Doc. No. 546.

5

On appeal, the Trustee now supports affirming the Bankruptcy Court’s opinion because “[s]ince the time
this case was converted, the Debtor has done nothing to further his efforts to cooperate in the formulation of a
confirmable plan of reorganization.” Doc. No. 34 at 3.

2

12, 2013, the Bankruptcy Court converted Grasso’s Chapter 11 to Chapter 7.6 On July 11, 2013,
the Bankruptcy Court issued a memorandum opinion explaining the reasons for its order.7
I.

Applicable Law
Chapter 11 of the Bankruptcy Code supplies a process by which debtors may reorganize

and emerge from the protection and stewardship of the courts, ideally to the benefit of all
relevant stakeholders. Chapter 7 provides for orderly liquidation of debtors’ estates, allowing
debtors to satisfy creditors to the extent possible and to discharge remaining obligations.
The Bankruptcy Code provides that if a movant, who may be any party in interest,
establishes “cause”8 by a preponderance of the evidence, the Bankruptcy Court must convert the
case from Chapter 11 to Chapter 7 or dismiss the case, or, if it is in the best interests of the
creditors and the estate, appoint a trustee or an examiner.9 This requirement is subject to an
6

Bankr. Doc. No. 652.

7

Bankr. Doc. No. 720.

8

The Code defines “cause” at section 1112(b)(4), with a lengthy, nonexhaustive list of examples,
including, as relevant here:
(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; . . .
(D) unauthorized use of cash collateral substantially harmful to 1 or more creditors; . . .
(F) unexcused failure to satisfy timely any filing or reporting requirement established by this title or by any
rule applicable to a case under this chapter; . . .
(H) failure timely to provide information or attend meetings reasonably requested by the United States
trustee (or the bankruptcy administrator, if any) . . . .
9

The Bankruptcy Technical Corrections Act of 2010, Pub.L. No. 111-327, changed 11 U.S.C. § 1112(b)
subtly on this point. From 2005 until December 22, 2010, § 1112(b)(1) stated that conversion or dismissal was
required once cause was shown “absent unusual circumstances specifically identified by the court that establish that
the requested conversion or dismissal is not in the best interests of creditors and the estate.” Now, § 1112(b)(1)
states that the case must be converted or dismissed for cause “unless the court determines that the appointment under
section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.” The “unusual
circumstances” exception has now been moved to § 1112(b)(2). This change clarifies that upon a showing of cause,
a court must (subject to § 1112(b)(2) or (c)) either (1) convert or dismiss the case, or (2) appoint a trustee or
examiner. Cf. In re Charles St. African Methodist Episcopal Church of Boston, 499 B.R. 66, 117 (Bankr. D. Mass.

3

exception that prohibits the court from converting the case if the nonmoving party can
demonstrate that two conditions are satisfied: (1) “the 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”;10 and (2) the debtor or another party in interest establishes
all of the following three circumstances: (a) “there is a reasonable likelihood that a plan will be
confirmed within [applicable] timeframes”;11 (b) “the grounds for converting or dismissing the
case include an act or omission of the debtor other than under paragraph (4)(A) . . . for which
there exists a reasonable justification for the act or omission;”12 and (c) the act or omission “will
be cured within a reasonable period of time fixed by the court.”13 If the exception is not satisfied,
the court must balance all the interests in the case to determine whether conversion, dismissal, or
appointment (or retention14) of a trustee or examiner is in the best interests of the creditors and
the estate.15

2013) (appointing an examiner on a showing of cause to convert or dismiss); In re Cranney, No. 13-11220, 2013
WL 2383594, at *6 (Bankr. D. Mass. May 30, 2013) (appointing trustee on showing of cause). Before 2010, §
1112(b) could have been read to be in some tension with § 1104(a), which allowed appointment of a trustee for
cause, and careful statutory construction was required to harmonize the provisions. The 2010 amendment did not
change the burden-shifting analysis that courts had adopted after 2005. In re Dr. R.C. Samanta Roy Inst. of Sci.
Tech. Inc., 465 F. App’x 93, 96 (3d Cir. 2011); In re Attack Properties, LLC, 478 B.R. 337, 342 (N.D. Ill. 2012).
10

Id. § 1112(b)(2)

11

Id. § 1112(b)(2)(A).

12

Id. § 1112(b)(2)(B) & (b)(2)(B)(i).

13

Id. § 1112(b)(2)(B)(ii).

14

In this case, the Bankruptcy Court had already appointed a trustee, but the statute should be read to allow
the court to retain the appointed trustee if doing so is in the best interests of creditors and the estate. A contrary
reading would allow a party seeking conversion or dismissal to circumvent a Bankruptcy Court’s order appointing a
trustee after a motion showed cause to convert or dismiss simply by refiling the motion immediately after the trustee
is appointed. Congress could not have meant to create such a loophole. See, e.g., In re Vaughan Co., Realtors, No.
11-10-10759, 2013 WL 2244285, at *12 (Bankr. D.N.M. May 21, 2013) (“It is in the best interests of creditors as a
whole, and the estate, for the Trustee to continue to serve in this Chapter 11 case rather than to convert this case to a
case under Chapter 7.”).
15

7-1112 Collier on Bankruptcy ¶ 1112.04[7] & n.128 (collecting cases).

4

A Bankruptcy Court’s decision to convert a case from Chapter 11 to Chapter 7 is
reviewed for abuse of discretion.16 Factual findings are reviewed for clear error, but legal
determinations are subject to plenary review because “a court abuses its discretion when its
ruling is founded on an error of law or a misapplication of law to the facts.”17
II.

The Bankruptcy Court’s Determination
The “cause” that the Bankruptcy Court found for converting the case was primarily

“substantial or continuing loss to or diminution of the estate and the absence of a reasonable
likelihood of rehabilitation.”18 It concluded that there was substantial diminution of the estate
from “(1) the Debtor’s postpetition expenses; (2) the sale of the [a]ntique [a]utomobiles; (3) the
diversion of the three payments from Curtis Investors, LP; and (4) the estate’s negative cash
flow.”19 The postpetition expenses that the Bankruptcy Court referred to include “at least
$282,870 of estate assets to fund renovations to his personal residence, the expenditure of
$25,506 of estate assets at ‘Restaurants,’ $68,300 of estate assets to purchase an automobile, and
$20,000 of estate assets to fund gifts to the Debtor’s family.”20 The sale of antique automobiles
was a transaction that, like the postpetition expenses, Grasso failed to disclose to the Court.21 The
three payments from Curtis amounted to $341,500 that should have accrued to the estate but that
16

In re Am. Capital Equip., LLC, 688 F.3d 145, 161 (3d Cir. 2012).

17

Coast Auto. Grp., Ltd. v. VW Credit, Inc., 34 F. App'x 818, 823 (3d Cir. 2002) (internal quotation marks
omitted); Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir. 1988) (discussing
standards of review).
18

11 U.S.C. § 1112(b)(4)(A).

19

Bankr. Doc. No. 720 at 9. Neither party included the Bankruptcy Court’s Memorandum Opinion in
support of the Order from which Grasso appeals in the initial record on appeal. However, it is part of the record both
by operation of law, Fed. R. Bankr. P. 8006 (“The record on appeal shall include the items so designated by the
parties, the notice of appeal, the judgment, order, or decree appealed from, and any opinion, findings of fact, and
conclusions of law of the court.”), and because Madison Capital filed a Motion to Supplement the Record to include
the Memorandum, which this Court granted. In Re Grasso, No. 14-4308, Doc. No. 31.
20

Bankr. Doc. No. 720 at 10.

21

Id. at 10–11.

5

Grasso appropriated to himself (and concealed from the Court).22 The Bankruptcy Court
concluded on the basis of the April 2013 Monthly Operating Report (“MOR”) that the estate had
a substantial negative cash flow, and it determined that the estate was administratively insolvent,
supporting the conclusion that the estate suffered continuing losses.23
In a footnote, the Bankruptcy Court also found that certain acts and omissions of Grasso
amounted to gross mismanagement of the estate, the harmful and unauthorized use of cash
collateral, an unexcused failure to satisfy the Code’s reporting requirements, and the failure
timely to provide information reasonably requested by the U.S. Trustee.24 Grasso does not appeal
these findings, which form an independent basis to affirm the Bankruptcy Court with respect to
its finding of cause to convert. In the interests of completeness and resolving the substance of the
disputed issues before the Court, this Court will discuss Grasso’s argument that the Bankruptcy
Court erred in its conclusions that the estate had experienced substantial or continuing loss or
diminution and that there was an absence of a reasonable likelihood of rehabilitation.
III.

Grasso’s Arguments on Appeal
Grasso does not dispute the existence and impropriety of the postpetition expenses, the

sale of the antique cars, and the diversion of the three payments from Curtis that the Bankruptcy
Court relied on in determining cause for conversion existed. Rather, he makes four arguments to
attack the Bankruptcy Court’s holding: (1) the conclusion that the three transactions contributed
to a substantial or continuing loss to or diminution of the estate was clearly erroneous because
the April 2013 MOR reveals positive cash flow for April and throughout the life of the

22

Id. at 4.

23

Id. at 11–12. The April MOR can be found at Tab 14 to the Record on Appeal filed July 10, 2014, Bankr.
Doc. No. 710-2, and at Bankr. Doc. No. 629.
24

Bankr. Doc. No. 720 at 12 n.11. These actions run afoul of 11 U.S.C. §§ 1112(b)(4)(B), (D), (F), & (H).

6

bankruptcy; (2) the Bankruptcy Court abused its discretion in failing to consider the testimony of
Charles Persing that Grasso’s cash position had improved; (3) the Bankruptcy Court committed
legal error by failing to address whether there was a reasonable likelihood of rehabilitation under
Chapter 11; and (4) conversion was not in the best interests of creditors and the estate.25 All of
Grasso’s arguments fail.
IV.

Discussion
A.

The Record on Appeal

Grasso has failed to include an official transcript of the proceedings below as required to
make the record adequate to review the Bankruptcy Court’s factual determinations.26 Instead, in
his appeal brief, he requested—in a footnote and without citation to any legal authority—that this
Court “excuse him from the obligation required under Bankruptcy Rule 8006 to make
satisfactory arrangements for the reproduction of the transcript.”27 In his brief, he frequently
cited an audio recording of the hearing, which is also not included in the record. His reason for
failing to provide a transcript was that “[t]he Debtor does not have funds to pay for reproducing a
transcription.”28
The Court declines Grasso’s footnote request to excuse compliance with Rule 8006.
Grasso has provided the Court—and the Court’s own research has uncovered—no authority to
waive the Rule. Grasso had ample opportunity to expand the record in the eight months during
25

Although some of the factors applicable to the question of whether cause for conversion exists overlap
with the framework of § 1112(b)(2), the exception to the provision mandating conversion, dismissal, or appointment
of a trustee or examiner upon a showing of cause, Grasso does not appeal the Bankruptcy Court’s holding that he
failed to demonstrate “unusual circumstances” prohibiting conversion.
26

Fed. R. Bankr. P. 8006 (“Within 14 days after filing the notice of appeal . . . the appellant shall file with
the clerk and serve on the appellee a designation of the items to be included in the record on appeal and a statement
of the issues to be presented.”).
27

Doc. No. 24 at 6 n.3.

28

Id.

7

which this case has been pending. This eleventh-hour, unsupported footnote request cannot be
granted without creating an unfortunate precedent excusing litigants from the obligation to
supply the Court with a record adequate to resolve disputes.29 This Court is unable to determine
whether the Bankruptcy Court clearly erred in its evaluation of the testimony before it without an
official transcript. Therefore, the Bankruptcy Court’s factual findings with respect to the
testimony before it will be affirmed.30 In the alternative, and to highlight why Grasso should not
be afforded an opportunity to cure his failure to file an official transcript, the Court will accept
the summaries of the testimony provided in Grasso’s brief as accurate representations of the
testimony before the Bankruptcy Court and nonetheless hold that the Bankruptcy Court should
be affirmed.
B.

It was not Clearly Erroneous to Find Substantial or Continuing Loss or
Diminution

Grasso argues that it was clearly erroneous for the Bankruptcy Court to have concluded
that the estate was suffering from a continuing or substantial loss. He points primarily to the
MOR that details the expenditures and receipts to the estate for April 2013, and he argues that
29

Although it is likely within this Court’s authority to give Grasso more time to supply the Court with a
transcript of the hearing, no party has requested time to supplement the record, and Grasso and his attorney have
disregarded too many deadlines for the Court sua sponte to delay this case further by giving Grasso a second bite at
the appellate record apple. See Doc. No. 23.
30

In re Rose, 483 B.R. 540, 544 (B.A.P. 8th Cir. 2012) (“The record before us therefore comprises only the
bankruptcy court's memorandum order and judgment and Debtor's notice of appeal. Significantly, that record does
not include an official transcript of the three-day trial before the bankruptcy court. As we are thus unable to review
the evidence presented to the bankruptcy court, we cannot conclude the bankruptcy court's findings of fact are
clearly erroneous.” (internal citation and footnote omitted)); In re Kritt, 190 B.R. 382, 387 (B.A.P. 9th Cir. 1995)
(“Here, the debtor has filed only 20 pages of excerpts from a transcript that exceeds 50 pages in length. . . . It is
impossible for the Panel to review for clear error the court's finding . . . . Accordingly, we affirm the bankruptcy
court's findings of fact on the grounds that the debtor has failed to show that they were clearly erroneous.”); In re
Eads, 69 B.R. 730, 734 (9th Cir. BAP 1986) (“Absent a transcript, it is impossible to determine if the trial judge's
conclusion . . . was clearly erroneous. Therefore, we have no choice but to affirm on this point.”), rev’d in part on
other grounds sub nom. In re Probasco, 839 F.2d 1352 (9th Cir. 1988) ; Acosta v. I.R.S., 184 B.R. 544, 546 (W.D.
Tenn. 1995) (“Although debtors designated the transcript of the bankruptcy court proceeding as part of the record on
appeal, it appears they never ordered a copy of the transcript, as required by Bankruptcy Rule 8006. Accordingly,
debtors fail to carry their burden of proving that the bankruptcy court's finding . . . was clearly erroneous.” (footnote
omitted)).

8

this MOR demonstrates an improved cash position both for April and throughout the life of the
bankruptcy. The MOR does indeed reflect that at the beginning of the month, Grasso had
$168,295 in cash, and at the end, his cash holdings equaled $251,545. Therefore, a cursory
reading of the MOR would support the conclusion that he had positive cash flow of $83,250 (end
of month cash balance minus the beginning balance).
However, the third line from the bottom of the MOR’s “Individual Debtor Cash Receipts
and Cash Disbursements” chart states that Grasso’s net cash flow (receipts minus disbursements)
was negative $18,456. The apparent discrepancy is resolved by Grasso’s intercompany balance
(the second and last lines of the same chart), which at the beginning of the month was negative
$754,121, and at the end of the month was negative $855,828. The change in his intercompany
balance is negative $101,707. The increased liability of the intercompany balance corresponds
perfectly with the improved cash position, as subtracting the month’s disbursements from the
receipts and adding $101,707 equals $83,251—only one dollar more than the difference between
the starting and ending cash amounts.31 In other words, the entire apparent positive cash flow for
April 2013 is subsumed by Grasso’s intercompany balance, which is listed at the end of the
month as a liability of $855,828, approximately $100,000 more deeply in the red than this
balance had been on April 1.
Put simply, it appears that Grasso obtained cash from the companies he controlled, and
while this acquisition is reflected in the cash line of the MOR (which is more positive at the end
of April than the beginning), it is also reflected in the intercompany balance line (which is more
negative at the end of April than the beginning). Therefore, even if the Court accepts Grasso’s
cheerful characterization of his financial situation as having an improved cash position, it cannot
31

The numbers are all on page 3 of the MOR, Bankr. Doc. No. 629. The figures are these: $129,807 –
$148,263 + $855,828 – $754,121 = $83,251.

9

disregard that the changed cash position was accompanied by worsened liabilities that overcome
the alleged cash improvement.32
Since a careful reading of the April 2013 MOR reveals worsening liabilities, it was not
clearly erroneous to conclude that Grasso had negative net cash flow. Looking only at the line of
the MOR that represents cash in a bank account at two different points in time does not paint an
accurate picture of Grasso’s financial position; the Bankruptcy Court was correct to focus on the
cash flow as represented by the difference between receipts and disbursements, which
unquestionably represents a substantial and continuing loss to the estate.
C.

The Bankruptcy Court did not Abuse its Discretion in Failing to Credit Charles
Persing’s Testimony

In holding that Grasso had net negative cash flow for April 2013 and for the bankruptcy
as a whole, the Bankruptcy Court did not discuss the testimony of Charles Persing, the Debtor’s
accountant. He testified in line with Grasso’s argument that the April 2013 MOR reflected a
positive cash flow balance, and that the cumulative cash balance had improved since the filing of
the bankruptcy petition.33 He also testified that Grasso was in the process of formulating a plan
of reorganization.
Grasso argues that it was an abuse of discretion not to consider Persing’s testimony.
However, nothing in the record reflects that the Bankruptcy Court ignored Persing; the judge just
did not write about him extensively.34 There is no obligation for a court to discuss every piece of
32

Similar calculations reveal that throughout the time of the bankruptcy Debtor’s improved cash position is
merely a reflection of his increasingly significant negative intercompany balance. His cumulative net cash flow
ending April 2013 was negative $581,331. Bankr. Doc. No. 629 at 3, third line from the bottom of large table,
furthest column to the right.
33

Br. of Appellant, Doc. No. 24, at 8.

34

The Bankruptcy Court’s Memorandum Opinion does discuss Persing’s testimony with respect to his
company’s fees, which are administrative expenses, Doc. No. 720 at 11–12 n.10, and about the need for outside
financing for any plan of reorganization. Id. at 6.

10

conflicting testimony that may be relevant to a given factual dispute. More to the point, it was
entirely within the Bankruptcy Court’s discretion to choose not to credit Persing’s optimistic
outlook: he testified about the change in cash position without discussing the way the
intercompany balance related to it, and in general, courts have broad discretion to make
credibility determinations about witnesses. A permissible inference from Persing’s overly breezy
summary of the balance sheet is that Persing’s testimony should not have been afforded much
weight. Therefore, the Bankruptcy Court did not abuse its discretion in declining to discuss the
testimony in depth or rely on it in the face of competing facts.
D.

The Bankruptcy Court Committed no Legal Error in its Analysis of
§ 1112(b)(4)(A)

Grasso argues that the Bankruptcy Court erred by failing to consider whether there was a
reasonable likelihood that Grasso’s business could be rehabilitated in Chapter 11, as required for
a finding of “cause” under § 1112(b)(4)(A). But he is simply wrong in asserting that the
Bankruptcy Court did not reach this question. The Bankruptcy Court held: “The administrative
insolvency of the Debtor’s estate also established the absence of a reasonable likelihood of
rehabilitation.”35 For this proposition, the Bankruptcy Court cited In re American Capital
Equipment, LLC, which held, “Prolonging this case will only burden the estate with mounting
attorney and administrative fees. . . . A Chapter 7 bankruptcy can be accomplished more
efficiently, thus halting the mounting liabilities against the estate.”36 The Bankruptcy Court also
noted that “the ‘concept of rehabilitation necessarily hinges upon establishing a cash flow from
which current obligations can be satisfied.’”37
35

Bankr. Doc. No. 720 at 11.

36

688 F.3d 145, 163 (3d Cir. 2012).

37

Bankr. Doc. No. 720 at 11 (quoting In re Schriock Const., Inc., 167 B.R. 569, 576 (Bankr. D.N.D.

1994)).

11

The Bankruptcy Court further held that any plan of reorganization was not likely to be
confirmed because any conceivable plan depended on receiving outside funding, and there was
not “one iota of evidence in support of the availability of such financing.”38 And even the
optimistic Persing conceded that any plan of reorganization would require outside funding.39
While Persing did testify that he believed that the creditors would recover more under a Chapter
11 reorganization than a Chapter 7 liquidation, the Bankruptcy Court found that the “testimony
regarding the availability of outside financing was based entirely on conversations with the
Debtor[,and n]o corroborating evidence was provided.”40 Nor has Grasso pointed to any
corroborating evidence on appeal.
Grasso argues that the question of whether there is a reasonable likelihood of
rehabilitation is broader than the question of whether a plan can be confirmed. This contention is
true in general, but here the lack of evidence of the contents of a plan coupled with the absence
of evidence supporting the existence of necessary funding for a plan suggest that staying in
Chapter 11 would be pointless for the estate and the creditors. The case had been pending for
fifteen months before the hearing on the motion to convert, which itself had first been filed two
months before the hearing.41 The Bankruptcy Court found that “[t]he Debtor and the Chapter 11
Trustee offered no details as to what a Chapter 11 plan would entail,” and Grasso has provided
no details of any plan to this Court nor pointed to any evidence to contradict this finding.42
Considering the facts that no plan had been proposed, that there were no details before the
38

Id. at 5–6.

39

Id. at 6. Grasso does not dispute the Bankruptcy Court’s characterization of Persing’s testimony on this

40

Id.

41

Bankr. Doc. Nos. 1, 507, 643.

42

Bankr. Doc. No. 720 at 13.

point.

12

Bankruptcy Court of even an inchoate plan, that any plan would need outside financing to be
confirmed, and that there was no evidence that such financing was available, the Bankruptcy
Court was entitled to conclude that Grasso would not be able to put together a confirmable plan
and to deduce from this conclusion that the estate would not be rehabilitated in Chapter 11.43
The Bankruptcy Court considered both prongs of § 1112(b)(4)(A), and it considered them
correctly. Since there was plausible evidence that rehabilitation was unlikely and, so far as
appears from the record on appeal, hardly any suggestion that rehabilitation was even possible,
the Bankruptcy Court did not abuse its discretion in concluding that Madison had shown by a
preponderance of the evidence that there was no reasonable likelihood of rehabilitation.
E.

The Bankruptcy Court did not Abuse its Discretion in Determining that
Conversion was in the Best Interests of the Creditors and the Estate

Grasso finally argues that the record before the Bankruptcy Court on the conversion
motion clearly established that remaining in Chapter 11 was in the best interests of the creditors
and the estate. The Court understands him to argue that even if cause for conversion has been
established, the Bankruptcy Court abused its discretion by converting the case rather than
reaffirming its order that had appointed the Trustee to oversee the estate in Chapter 11.44
In support of this argument, Grasso cites only Persing’s testimony which, if credited,
would support Grasso’s position. But there was also evidence before the Bankruptcy Court that
the estate had worsening finances as the case progressed and that any Chapter 11 plan would be
43

Cf. In re Gateway Access Solutions, Inc., 374 B.R. 556, 562 (Bankr. M.D. Pa. 2007) (“Further, the
Debtor did not offer any documentary evidence at the hearing; no draft plan, no financial projections nor any
purchase offers.”).
44

If Grasso means to argue that the Bankruptcy Court erred by not finding under § 1112(b)(2) “unusual
circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the
estate,” the Court notes that he still has not made any argument that he has satisfied the other prong of that exception
to the conversion or dismissal requirement, that “the grounds for converting or dismissing the case include an act or
omission of the debtor other than under paragraph (4)(A) . . . for which there exists a reasonable justification for the
act or omission . . . that will be cured within a reasonable period of time fixed by the court.” 11 U.S.C. § 1112(B).

13

contingent on outside financing which may well not have been available. It was not abusive for
the Bankruptcy Court to credit the representation of worsening liabilities reflected in the MOR in
the face of conflicting testimony from Persing, particularly since Persing conceded the need for
outside funding and, as appears from Grasso’s own appeal brief, was unable to identify the
funding’s source. Especially because no details of a contemplated plan were before the
Bankruptcy Court, it was impossible to determine definitively whether a reorganization would be
preferable to a liquidation, and this Court has no basis to find that the Bankruptcy Court abused
its discretion in holding that a Chapter 7 liquidation was the better course than merely leaving the
Chapter 11 trustee in place.
F.

Mootness

Madison and the Trustee argue that the appeal is moot because the Trustee has been
diligently administering this case in Chapter 7. Because this Court will affirm the Bankruptcy
Court’s conversion order, it need not address the mootness arguments.
CONCLUSION
For the foregoing reasons, the Bankruptcy Court’s Order converting the case from
Chapter 11 to Chapter 7 is affirmed. Grasso failed to present any record evidence to suggest that
the Bankruptcy Court’s factual findings were clearly erroneous, and in any event the record
(such as it is) supports the Bankruptcy Court’s conclusions. This court therefore cannot hold that
the Bankruptcy Court abused its discretion in finding substantial or continuing loss or
diminution. Grasso has not appealed the Bankruptcy Court’s finding that Grasso’s actions
amounted to gross mismanagement of the estate, harmful and unauthorized use of cash collateral,
unexcused failure to satisfy the Code’s reporting requirements, and failure timely to provide
information reasonably requested by the U.S. Trustee. Furthermore, the Bankruptcy Court did

14

not abuse its discretion in determining that conversion was in the best interests of the creditors
and estate.
An appropriate Order follows.

15