Richards Layton & Finger

Delaware Bankruptcy Court Denies Motion to Convert

November 11, 2014

Under a memorandum order dated October 23, 2014, the Delaware Bankruptcy Court denied a party’s request to have the debtors’ chapter 11 cases converted to chapter 7 cases. While sympathetic to the movant’s request, the court ultimately determined that the relevant parties were making some progress toward the goal of a plan of reorganization and therefore conversion was not warranted at this time.

Debtors Simplexity LLC, et al, filed a chapter 11 petition on March 16, 2014. On May 14, 2014, First Third Bank (FTB), in its role as agent under the debtors’ pre-petition secured facility and the debtors’ debtor-in-possession financing, filed a motion to convert the debtors’ three related chapter 11 cases into chapter 7 cases. FTB argued that the debtors could not be rehabilitated, the continued chapter 11 cases would harm creditors of the debtors, and Section 1112(b) of the Bankruptcy Code required the court to convert the debtors’ cases upon their showing of cause. The court denied FTB’s May 14 motion on the grounds that the incomplete record and early nature of the debtors’ cases constituted an unusual circumstance (as provided under Section 1112(b)(2)) that warranted denial of the motion.

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