Memorandum of Decision Re: Derelication of Debtor in Possession

DO NOT PUBLISH This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
Decisions
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re CARL SCHNEIDER,                                                                       No. 91-12917      Debtor(s). ______________________________________/
Memorandum of Decision
     Debtor Carl Schneider filed his Chapter 11 petition in 1991. For the past seven years, he has acted as debtor in possession. His plan of reorganization was confirmed in 1994. After so many years of litigation and hearings, the court is very disturbed to discover that Schneider has been grossly derelict in performing his responsibilities as debtor in possession and the case must now, at this late date, be converted to Chapter 7.      Section 1107(a) of the Bankruptcy Code requires a debtor in possession to perform all of the duties of a trustee. Section 1106(a)(1) of the Code requires a trustee to examine all proofs of claim and object to the allowance of any claim that is improper. In dereliction of his duties, Schneider ignored a claim for $235,000.00 timely filed by his former law firm in 1992. Compounding his neglect, Schneider attempted to obtain a final decree closing this case without objecting to the claim or paying it.      On March 9, 1998, Schneider filed a motion for a final decree alleging that his plan had been substantially consummated and that all funds to be distributed had been distributed in accordance with his plan. The law firm of Hale, Skemp, Hanson & Skemp objected, alleging that it had received no dividend on its claim. Only then, some six years after the claim was filed and four years after plan confirmation, did Schneider object to the claim. That objection, and the U.S. Trustee's motion to convert the case to Chapter 7 pursuant to §1112(b)(2) for inability to effectuate his plan, are now before the court.      Pursuant to § 502(a) of the Code, a claim is deemed allowed unless someone objects. A debtor in possession is not free to simply ignore the claim. Unless a claim is disallowed or withdrawn, it must be honored and paid along with other claims. A debtor in possession breaches his fiduciary duty when he simply ignores a claim he does not like.      Schneider concedes that he owes a large debt to his former law firm. His argument for disallowance is that he had an unfiled cause of action against the firm for malpractice and that a former partner of the firm told him that in return for agreeing not to bring a malpractice action he would cause the claim to "go away." Schneider has failed to meet his burden of proof that there was any such agreement. Not only does it appear that the partner had no authority to bind his former firm if he in fact made the vague agreement in December 1993, but the evidence reflects correspondence between the claimant and Schneider's bankruptcy counsel in 1994 in which there is no mention of such an agreement.      In view of the matters discussed above, and Schneider's equivocal answer when asked by the court if he had failed to pay any other claims which had not been withdrawn or disallowed, the court has lost all faith in Schneider as a debtor in possession and concludes that he is in gross dereliction of his duties and has failed to effectuate his confirmed plan. Accordingly, the motion of the U.S. Trustee will be granted and the case will be converted to Chapter 7 forthwith. Schneider's objection to the claim will be overruled, without prejudice to the right of a Chapter 7 trustee to seek reconsideration pursuant to FRBP 3008.      Counsel for the U.S. Trustee shall submit an appropriate form of order.
Dated: September 3, 1998                                                               ____________________________                                                                                                            Alan Jaroslovsky                                                                                                            United States Bankruptcy