## Facts

- Gateway Access Solutions, Inc. (Gateway) filed a Chapter 11 petition on January 9, 2007, and qualified as a “small business debtor,” which triggered accelerated reporting duties and plan-related deadlines.
- Andrew C. Nester, Benjamin C. Steele, David F. Wiesner, Steele & Associates LLC, and Anchor Bay Corporation (collectively, the creditors) were creditors of Gateway and moved to convert the case from Chapter 11 to Chapter 7 under 11 U.S.C. § 1112(b)(1).
- By the time of the conversion hearing, Gateway had not filed a disclosure statement or a plan of reorganization during the exclusivity period, and it had not sought an extension of exclusivity.
- Gateway acknowledged substantial income losses during the case but offered only speculation about improved future income trends, without supporting testimony, documentation, or written projections.
- Financial records and monthly operating reports filed with the court showed negative cash flow and insolvency.
- Gateway’s reporting was unreliable: of seven operating reports filed, Gateway amended five because they were erroneous, and it did not keep adequate track of filings.
- Gateway did not provide creditors with satisfactory information about its financial status and entered into loans during the Chapter 11 case without creditor authorization.
- At a protracted evidentiary hearing on September 13, 2007, Gateway’s sole corporate officer testified about the company’s status and a proposed business direction; the court evaluated the record as of the hearing date.
- Evidence presented to the court placed responsibility for Gateway’s financial condition on Gateway rather than on the creditors, supporting the creditors’ position that liquidation would better serve creditor interests.

## Issues

1. Whether “cause” existed under 11 U.S.C. § 1112(b) to convert Gateway’s small-business Chapter 11 case to Chapter 7.
2. If cause existed, whether Gateway proved “unusual circumstances” under § 1112(b)(2) such that conversion (or dismissal) would not be in the best interests of creditors and the estate.
3. If relief was required, whether conversion to Chapter 7 (rather than dismissal) was in the best interests of creditors and the estate.

## Decision

- The court found that the creditors established “cause” under § 1112(b), including continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.
- The court relied on Gateway’s negative cash flow, insolvency, conceded losses, and the lack of credible evidence supporting a workable turnaround.
- The court also treated Gateway’s repeated errors in operating reports, poor tracking of filings, and lack of meaningful financial disclosure to creditors as additional grounds supporting cause, reflecting deficient management and compliance during the Chapter 11 case.
- The court held that Gateway did not prove “unusual circumstances” under § 1112(b)(2) sufficient to avoid conversion, because Gateway’s claims of future improvement were unsupported and it had not made timely progress toward confirmation.
- The court concluded that conversion to Chapter 7, rather than dismissal, was in the best interests of creditors and the estate and granted the motion to convert.

## Legal Principles

- After BAPCPA, 11 U.S.C. § 1112(b) directs the court to convert or dismiss a Chapter 11 case once “cause” is shown, unless the debtor proves the statutory exception in § 1112(b)(2).
- “Cause” includes (among other grounds) a continuing loss to or diminution of the estate together with an absence of a reasonable likelihood of rehabilitation; rehabilitation requires more than hopeful assertions about future performance.
- In small-business Chapter 11 cases, failure to timely move toward confirmation—such as failing to file a disclosure statement or plan within the required time frames—may support a finding of cause.
- Repeatedly inaccurate operating reports, inadequate financial recordkeeping, and failure to provide reliable financial information to creditors may support cause as indicators of mismanagement and a breakdown in Chapter 11 duties.
- The “unusual circumstances” exception requires a concrete showing that conversion or dismissal is not in the best interests of creditors and the estate and that the problems constituting cause are likely to be cured within a reasonable time.
- When the debtor shows ongoing losses, lacks a viable reorganization path, and fails to provide dependable reporting, conversion to Chapter 7 may best protect creditors by placing asset collection and administration under a Chapter 7 trustee.

## Conclusion

The bankruptcy court converted Gateway’s small-business Chapter 11 case to Chapter 7 because the creditors proved cause under § 1112(b), including continuing losses and no reasonable likelihood of rehabilitation, and Gateway failed to show unusual circumstances that would justify keeping the case in Chapter 11 despite its lack of a filed plan, unreliable reporting, and unsupported projections.


Nester v. Gateway Access Solutions, Inc. (In Re Gateway Access Solutions), 374 B.R. 556 (2007)