Firestar Diamond’s U.S. Trustee filed with the U.S. Bankruptcy Court a motion to appoint a Chapter 11 Trustee Pursuant to Section 1104 of the Bankruptcy Code or, alternatively, for conversion of these cases to Chapter 7 under liquidation.
The motion explains, “the United States Trustee… will move this Court…for: (a) an order shortening time and scheduling a hearing to consider the U.S. Trustee’s motion for the appointment of a Chapter 11 trustee pursuant to section 1104 of the Bankruptcy Code, or (b) for the conversion of these cases to Chapter 7, and for such other and further relief as this Court may deem just and proper.” The attached memorandum of law explains, “In the instant case, there is cause for the Court to appoint a Chapter 11 trustee under subsection (a)(1) of Section 1104 of the Bankruptcy Code….If a trustee is not appointed to administer these cases, and the Debtors are to remain in control of their cases, the Court and parties-in-interest would have to rely on the director installed by Bhansali and, perhaps, on Modi and the Modi Entities whose alleged actions brought about the Criminal Investigation. Accordingly, “cause” exists under 11 U.S.C. section 1104(a)(1) for the appointment of a Chapter 11 Trustee as an independent fiduciary necessary to restore confidence of the creditors in the liquidation of the estate for the ultimate benefit of all parties in interest.”
In respect of a conversion to Chapter 7, the motion continues, “Here, at least two grounds exist under Section 1112(b)(4) to convert the case to chapter 7. First, conversion is appropriate where there has been “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation….Second, cause for conversion to chapter 7 exists in these cases in the form of gross mismanagement of the estate….The Debtors’ ability to rehabilitate its business was made especially difficult because of the events leading up to the filing of the chapter 11 petitions. Not only was there a shadow cast over the Debtors’ operations by the scandal in India, but also, as a result of the investigation in India, the companies that supplied the Debtors with inventory were shuttered. That action forced the Debtors to sell their assets in a relatively short time frame….Consequently, the success of these chapter 11 cases depended entirely on the success of the sale process. That process, as it turned out, has resulted not in success, but rather in failure…..Under these circumstances, it is highly unlikely that the Debtors will be able to rehabilitate themselves….Given the fraud allegations in India, the Debtors’ management was under an unusually high level of scrutiny in these cases from the beginning of these chapter 11 cases….Current management, fresh off the collapse of the sale process, cannot be expected to see these cases through to confirmation.”
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