Small Business Reorganization Converted to Liquidation After Blanket Security Interest Dooms Restructuring Efforts A Subchapter V case was converted

Small Business Reorganization Converted to Liquidation After Blanket Security Interest Dooms Restructuring Efforts A Subchapter V case was converted

to Chapter 7 after a bankruptcy judge found that the debtor could not propose a confirmable plan. The court declined to grant the debtor additional time to file a new plan after

the 90-day deadline passed. In In re S-Tek 1, LLC, the U.S. Bankruptcy Court for the District of New Mexico held that the need for the extension was attributable to circumstances for which the debtor should be held accountable, namely: deficiencies in the financial projections of previous plans and prolonged and costly litigation with the secured creditor, during which the debtor made little or no payment on the secured claim.

The court also rejected the debtor’s request for a structured dismissal. It concluded that such relief was not appropriate because the secured creditor held a blanket security interest over the debtor’s assets, including a perfected security interest in its existing and after-acquired accounts receivable.

The court reasoned that, upon case dismissal, Section 552(a) of the Bankruptcy Code would no longer limit the secured creditor’s security interest from attaching to after-acquired accounts receivable and the proceeds thereof. According to the court, enforcement of the security interests against the accounts receivable and cash proceeds of the receivables would thus put the debtor out of business.

In deciding that conversion to Chapter 7 was more appropriate than dismissal, the court was persuaded by the additional costs that the secured creditor would incur in foreclosing its collateral in state court, as well as the secured creditor’s offer to carve-out 25% of the net sale proceeds for the benefit of the bankruptcy estate, which would allow for a meaningful distribution to unsecured creditors.