South River Capital, LLC v. Kane

Background

This was an appeal from a bankruptcy court order denying a motion under section 706(b) of the Bankruptcy Code to convert Evander Kane’s Chapter 7 bankruptcy case to Chapter 11. South River Capital, LLC joined a motion originally filed by another creditor seeking conversion and appointment of a Chapter 11 trustee. South River appealed only the denial of conversion, not the denial of appointment of a trustee.

Kane’s bankruptcy filings reported substantial assets and liabilities. His listed assets included three residential properties, household and personal property, and sports equipment. He reported secured claims totaling more than $23.5 million, including a loan from South River, and more than $4.3 million in unsecured claims. His filings listed only $2,083.33 in monthly income from a podcast, but also disclosed a professional hockey contract with a $3 million salary for the 2020–2021 season. The contract involved salary withholdings and depended in part on the number of games played. Kane also stated that he might end his contract and not play the season because of health concerns related to the birth of his child.

The bankruptcy court considered four main factors: Kane’s ability to repay creditors; whether the case might quickly need to return to Chapter 7; the likelihood that a Chapter 11 plan could be confirmed; and whether conversion would benefit the parties. It found uncertainty about how much of Kane’s income would be available for a plan, considered the possible effect of continued gambling and spending on the bankruptcy estate, identified legal and practical obstacles to confirming a plan, and found that the benefits of conversion were unproven. It concluded that each factor weighed at least somewhat against conversion and denied the motion.

Issues on Appeal

South River argued that the bankruptcy court applied an incorrect legal standard by considering Kane’s interests, including his interest in retaining post-petition income and making career decisions. The district court rejected that argument. It held that considering the interests of all parties, including the debtor, was within the bankruptcy court’s broad discretion under section 706(b). The district court also found that the bankruptcy court had not granted Kane a right to retain nonexempt property or treated his professional career as creating special legal rights.

South River also argued that the bankruptcy court imposed a heightened burden of proof by requiring the moving parties to establish with certainty how much creditors could recover or guarantee that a Chapter 11 plan would be confirmed. The district court disagreed. It found that the bankruptcy court used uncertainty about Kane’s income and plan confirmation to explain its reasoning, not to impose an extra evidentiary requirement. The district court noted that the bankruptcy court expressly required proof by a preponderance of the evidence, meaning that conversion had to be shown to be more likely appropriate than not.

Finally, South River argued that the bankruptcy court’s factual analysis should have led it to grant conversion. The district court reviewed the bankruptcy court’s consideration of Kane’s income, possible reconversion, the feasibility of a Chapter 11 plan, creditor claims, Kane’s career, and the potential benefits of conversion.

District Court’s Analysis

The district court held that the bankruptcy court reasonably considered the uncertainty surrounding Kane’s income. His contract involved salary withholding, revenue-based conditions, and uncertainty about the number of games that would be played during the COVID-19 pandemic. Although conversion could provide additional funds for creditors, the amount available was not clear.

The district court also upheld the bankruptcy court’s consideration of possible reconversion. The bankruptcy court had stated that continued gambling and spending could support a later finding of estate mismanagement and a return to Chapter 7. The district court explained that this conclusion was not inconsistent with the bankruptcy court’s separate decision not to appoint a trustee if conversion occurred, because Kane’s later conduct could justify different action.

Regarding plan confirmation, the district court found reasonable the bankruptcy court’s concerns about non-dischargeable claims, competing creditor interests, security interests, the absolute priority rule, Kane’s ability to fund a long-term plan, and the uncertainty of his professional hockey career. A Chapter 11 plan must be feasible, meaning it must offer a reasonable prospect of success without requiring further financial reorganization. The district court concluded that possible injury, the pandemic, and the unpredictable length of a professional sports career supported the bankruptcy court’s feasibility concerns.

The district court agreed that the bankruptcy court may have overlooked whether the automatic stay could temporarily prevent collection of non-dischargeable claims. It also questioned the bankruptcy court’s consideration of potential security interests in Kane’s post-petition income after recognizing authority indicating those interests were invalid. The district court nevertheless held that any such errors were harmless because other factors independently supported the bankruptcy court’s conclusion, including the competing interests of creditors with possible non-dischargeable claims and the uncertainty surrounding Kane’s career.

Disposition

Judge William Orrick held that the bankruptcy court applied the correct legal standard and burden of proof, made factual findings supported by the record, and did not abuse its discretion. The district court therefore AFFIRMED the bankruptcy court’s order denying conversion of Kane’s Chapter 7 case to Chapter 11. The opinion did not change the bankruptcy court’s separate ruling concerning appointment of a trustee.