The United States Trustee filed a motion to dismiss or convert Debtor’s chapter 11 case. The Subchapter V Trustee joined in the motion and requested dismissal rather than conversion. After a two-day evidentiary hearing, Debtor conceded that cause to dismiss or convert existed and consented to dismissal. The UST and administrative expense claimants also expressed a preference for dismissal rather than conversion. The Court determined that it must evaluate whether dismissal or conversion is in the best interests of creditors and the estate even when the Debtor concedes “cause” exists to dismiss or convert and all parties appearing before the Court request dismissal. After applying the relevant factors, the Court concluded that dismissal was in the best interests of the estate and creditors. 

Plaintiff asserted state law claims against Debtor in state court based on Debtor’s alleged breach of a compensation agreement with Plaintiff and the state court held a 5-day bench trial and scheduled a jury trial on Plaintiff’s damages. Before the jury trial began, Debtor filed its bankruptcy petition and removed the State Court Action to this Court, initiating adversary proceeding No. 25-1010. Plaintiff filed a motion to remand in the AP and for relief from stay to proceed with the state court jury trial in the bankruptcy case. The Court remanded the removed State Court Action back to the state court and found cause to grant the motion for relief from stay to proceed with the jury trial in state court. The Court found there is cause under 11 U.S.C. § 362(d)(1) to grant relief from the stay for the same reasons that remand was warranted. Specifically, stay relief was warranted because, among other reasons, (1) the State Court Action is based wholly on state law; (2) the Court does not have authority to issue a final judgment on Plaintiff’s claims against third-party defendants, whereas the state court may issue a final judgment as to all claims; (3) judicial economy was served by lifting the stay to proceed with the jury trial because the state court had presided over the case for four years; (4) under principles of comity, this Court should not hold a new bench trial to revisit the State Court’s findings and conclusions; and (5) Debtor had not shown that any prejudice posed to Debtor by modifying the stay outweighs the prejudice to Plaintiff if the stay is not modified. The Court therefore granted Plaintiff’s motion for relief from stay only to permit prosecution of the State Court Action to final judgment on all claims. 

After a New York trial court entered a judgment of over $6.8 million against him and others, the Debtor appealed. While the appeal was pending in the New York court, the Debtor filed his petition for relief under chapter 11, subchapter V in June 2023. The Court modified the automatic stay to permit the Debtor to continue to pursue his state court appeal and approved retention of counsel to represent him in the appeal pursuant to 11 U.S.C. § 327(a). In March 2025, the case was converted to a case under chapter 7 and a chapter 7 trustee was appointed, thus raising two issues: (i) whether the conversion of the bankruptcy case from a case under chapter 11 to a case under chapter 7 impacts the Debtor’s authority to prosecute the appeal, independently of the chapter 7 trustee, of the New York state court judgment and (ii) whether the law firm retained by Debtor, to represent him in the appeal while this case was pending under chapter 11 may continue to represent the Debtor without Bankruptcy Court approval after conversion of the case to chapter 7.

The Court concluded first that there is no bankruptcy law impediment to the Debtor’s authority to prosecute the New York appeal independently of the chapter 7 trustee because of the Debtor’s personal interest in its outcome. Certain creditors seek to show the judgment against the Debtor is nondischargeable in an adversary proceeding, which is a claim not against the bankruptcy estate but against the Debtor in his personal capacity because, if the creditors are successful, the Debtor will remain liable for the debt represented by the judgment after the chapter 7 case is closed. Because the New York appeal implicates the validity and amount of the debt owed by the Debtor personally, separately from any claims against the bankruptcy estate, the Debtor has the authority to prosecute the New York appeal independently of the chapter 7 trustee. Second, there is no conflict between the law firm representing the Debtor personally in the New York appeal following case conversion where the chapter 7 trustee did not object to the representation at no cost to the estate and has opted not to get involved in the appeal. Further, Court approval is not required for the Debtor to retain the law firm to continue to represent him personally in the appeal because § 327, which governs retention of professional persons by the trustee, does not apply to a chapter 7 debtor’s retention of a professional person to represent his personal interests.

The Court denied Defendant’s request that the Court dismiss this adversary proceeding, brought by the United States Trustee (“UST”), due to improper venue. Defendant argued that the UST’s claims must be brought in the district in which he resides because her claims seek monetary relief in amounts below the limits in 28 U.S.C. § 1409(b), which governs venue for claims or proceedings brought by “a trustee in a case.” The Court concluded that “a trustee in a case” refers generally to a person who is appointed or selected to serve as trustee in a particular case under sections 701, 702, 703, 1104, 1163, 1183, 1202, or 1302, and that, while a United States trustee may serve in a dual capacity as a United States trustee and a trustee in a case under certain circumstances, the United States trustee does not act as a “trustee in a case” unless appointed or selected to do so in a specific case. Because the UST has not been appointed or selected to serve as a “trustee in a case” in Debtor’s bankruptcy, she was not serving in the capacity of a “trustee in a case” when she commenced this adversary proceeding. Hence, § 1409(b) does not limit venue to the district where Defendant resides. Rather, § 1409(a) permits the UST to bring this adversary proceeding in the District of New Mexico, the “home court.”