Dismissing the chapter 11 case begun in December by former New York mayor Rudolph Giuliani after he was saddled with a $148 million judgment for defamation, New York Bankruptcy Judge Sean H. Lane employed tried-and-true concepts in deciding that creditors would not profit from any form of bankruptcy going forward.

Creditors were not of a mind about the future, but all were dissatisfied with the progress in the chapter 11 case that Giuliani began on December 21. As a consequence of Giuliani’s disregard of his discovery obligation, a district court in the District of Columbia had entered a default as to his liability for defaming two Georgia election workers. After a jury trial, the jury awarded them $148 million in damages, including $75 million for punitive damages. Giuliani filed his chapter 11 petition one week later.

Conversion or Dismissal

On consent, Judge Lane had modified the automatic stay, allowing Giuliani to file post-trial motions addressing the defamation judgment. After the district court denied the motions, Judge Lane denied Giuliani’s second lift-stay motion aiming to take an appeal. Judge Lane said that he declined to modify the stay “given the lack of progress in the bankruptcy case” and his concern that an appeal would become “an excuse” for further delay in the chapter 11 case.

By April, the official creditors’ committee had filed a motion demanding that Giuliani file missing operating reports. In May, the committee filed a motion for appointment of a chapter 11 trustee, given what the committee called Giuliani’s numerous significant and undisputed deficiencies in his financial disclosure obligations. Two weeks later, Giuliani filed a motion for conversion of the chapter 11 case to chapter 7.

The holders of the defamation judgment joined in the trustee motion, but Giuliani opposed. Additionally, the holders of the defamation judgment opposed conversion. Ultimately, the committee was seeking appointment of a chapter 11 trustee while the judgment-holders wanted dismissal. Giuliani consented to either dismissal or conversion to chapter 7.

An ‘Absolute’ Right to Conversion?

In his July 12 opinion, Judge Lane considered whether Giuliani had an “absolute right” to convert his chapter 11 case to chapter 7. “Consistent with prior decisions in this district,” he decided, “a debtor does not have an absolute right to convert a case from Chapter 11 to Chapter 7.”

Judge Lane noted “that the statutory language providing for conversion is permissive, not mandatory, stating that a debtor ‘may’ convert his case.” He buttressed his conclusion by alluding to the Supreme Court’s Marrama decision, where he said that the Court “held that a debtor does not have an absolute right to convert a case from a Chapter 7 to a Chapter 13.”

‘Cause’

Judge Lane turned to Section 1112(b)(1) to decide whether there was “cause” for dismissal or conversion to chapter 7. The statute goes on to say that the court must dismiss or convert, “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.”

Judge Lane found cause to dismiss or convert for several reasons.

First, Judge Lane cited Giuliani’s “continued failure to meet his reporting obligations and provide the financial transparency required of a debtor in possession.” “Most significantly,” he said, Giuliani’s “businesses have made no production whatsoever,” even though they were “required to do so by the Rule 2004 Order.”

Judge Lane said that Giuliani “has not fully met his obligation to file certain schedules and lists detailing his financial condition.” Next, he said that Giuliani “has failed to fulfill his obligations to file accurate, complete monthly operating reports.” Furthermore, the reports he did file were “incomplete or inaccurate.”

Judge Lane said that the “lack of financial transparency” was “particularly troubling” because all of Giuliani’s income went to his companies, but he reported no income from those entities. The judge went on to say that Giuliani’s “own disclosures demonstrate that he uses personal funds to pay expenses associated with his businesses without Court approval.”

Best Interests

Having found cause, Judge Lane turned to the question of whether to dismiss, convert or appoint a chapter 11 trustee. He quickly ruled out conversion as being “not in the best interests of creditors,” given how the committee and the holders of the defamation judgment “vigorously opposed” conversion.

Having ruled out conversion, Judge Lane looked to the choice between dismissal or appointment of a chapter 11 trustee, which the committee sought “strongly.” The judgment-holders just as urgently sought dismissal.

Judge Lane found “many reasons” for dismissal. “First,” he said, “there is legitimate concern that remaining in Chapter 11 will result in administrative expenses that would erode much, if not all, of the value of the estate.”

Saying “that ‘what’s past is prologue,’” Judge Lane saw “little reason to conclude that Mr. Giuliani’s uncooperative conduct will change after the appointment of a Chapter 11 trustee.”

Second, Judge Lane said that a chapter 11 case would be “lengthy” and that “a Chapter 11 trustee would not be able to make any distributions to creditors until liquidating the claims of the rest of the creditors other than the [holders of the defamation judgment].”

Third, the defamation plaintiffs said they had administrative claims in view of Giuliani’s alleged defamation made during the chapter 11 case. Judge Lane said that the new defamation claims would “severely” threaten any recovery by unsecured creditors.

Fourth, Judge Lane said there was a “credible risk” that Giuliani would “cease any income-producing activity” if there were a chapter 11 trustee. Fifth, Giuliani had agreed to a one-year bar to refiling following dismissal.

Finally, Judge Lane said that the holders of the defamation judgment “should be given substantial deference as the largest unsecured creditors with a fully liquidated judgment . . . . Forcing creditors to wait years while they are prevented from pursuing their rights for, at best, a modest distribution seems inequitable and ill-advised.”

“Considering the totality of circumstances,” Judge Lane ordered dismissal, because “the interests of creditors and the estate are better served by dismissal.”