Pinnacle Foods of California LLC

1 UNITED STATES BANKRUPTCY COURT 2 EASTERN DISTRICT OF CALIFORNIA 3 FRESNO DIVISION [4] 5 In re ) Case No. 24-11015-B-11 ) 6 PINNACLE FOODS OF CALIFORNIA LLC, ) ) Docket Control No. MB-4, VP-2 7 Debtor. ) ) 8 ) In re ) Case No. 24-11016-B-11 9 ) TYCO GROUP, LLC, ) Docket Control No. MB-4, VP-2 10 ) Debtor. ) 11 ) ) 12 In re ) Case No. 24-11017-B-11 ) 13 CALIFORNIA QSR MANAGEMENT, INC., ) Docket Control No. MB-4, VP-2 ) 14 Debtor. ) Date: March 25, 2025 ) Time: 9:30 a.m. 15 Place: 2500 Tulare St. Dept. B, Fifth Floor 16 Courtroom 13 [17] 18 MEMORANDUM RULING ON FLAGSTAR FINANCIAL & LEASING, LLC’S AND POPEYES LOUISANA KITCHEN, INC.’S MOTIONS TO REMOVE DEBTORS FROM 19 POSSESSION AND EXPAND POWERS OF SUB V TRUSTEE 20 ————————————————————————————— 21 Glenn D. Moses, Venable LLP, for Popeyes Louisiana Kitchen, Inc., Hagop T. Bedoyan, Garrett R. Leatham, Garrett J. Wade, McCormick, 22 Barstow Sheppard, Wayte & Carruth, for Popeyes Louisiana Kitchen, Kevin J. Etzel, Vedder Price, P.C. for Flagstar Financial & 23 Leasing LLC, Movants. 24 Michael J. Berger, Law Offices of Michael J. Berger, for Pinnacle Foods of California, LLC, Tyco Group, LLC, CA QSR Management, 25 Inc., Debtors/Respondents. 26 Walter R. Dahl, Subchapter V Trustee. 27 ————————————————————————————— 28 RENÉ LASTRETO II, Bankruptcy Judge: 1 INTRODUCTION 2 While wandering Wonderland, Alice reached a fork in the 3 road. She encountered the Cheshire Cat in a tree who gave her 4 two suggestions: Go one way and reach the March Hare; go the 5 other way and reach the Hatter. The only problem, the Cheshire 6 Cat said they both were mad. Alice was left with two unappealing 7 choices.1 8 These three chapter 11 subchapter V cases have reached a 9 fork in the road. Unlike Alice, the court has three tines in 10 this fork: Expand the subchapter V trustee’s powers, dismiss the 11 cases, or convert them to chapter 7. After considering the 12 development of these cases, determining cause exists to follow 13 one of the forks, and considering the interest of the creditors 14 and the estates, the court chooses the fork that results in 15 conversion of these cases to chapter 7. [16] 17 BACKGROUND 18 I. 19 Pinnacle Foods of California, LLC (“Pinnacle”), Tyco Group, 20 LLC (“Tyco”) and California QSR Management, Inc. (“QSR”) each 21 filed Chapter 11 bankruptcy proceedings in April 2024 and elected 22 to proceed under Sub Chapter V. Pinnacle and Tyco are 23 franchisees of Popeye’s Louisiana Kitchens (“PLK”). QSR is the 24 operating entity for both. 25 Flagstar Financial & Leasing, LLC (“Flagstar”) is the 26 primary secured creditor. Flagstar is owed approximately 3.1 27 million dollars secured by all three Debtors’ personal property [28] 1 assets including inventory, equipment, leases, accounts, goods, 2 and general intangibles. There is no dispute as to the extent or 3 validity of Flagstar’s interest. 4 PLK is owed approximately $1.3 million from Pinnacle and 5 $221,000.00 from Tyco for unpaid franchise and advertising fees. 6 From the beginning of these cases, PLK has maintained that 7 it would not consent to either Pinnacle or Tyco assuming their 8 franchise agreements under 11 U.S.C. § 365 (c).2 Pinnacle 9 operates six PLK fast food restaurants – five in Fresno, 10 California and one in Turlock, California. Tyco operates one PLK 11 restaurant in San Diego, California. Pinnacle, Tyco and PLK 12 entered into separate franchise agreements for each restaurant. 13 These cases have been fraught with polarized legal positions 14 from the onset. The Subchapter V Trustee, Walter Dahl, has 15 endeavored to close the gap between the factions without success. 16 Four months after the cases were filed, PLK filed its first 17 motion to remove the Debtors-in-possession and expand the powers 18 of the Subchapter V Trustee. Flagstar joined in the motion. 19 Debtors opposed. The court denied the motions because the cases 20 were relatively new and no party had formally brought the issue 21 of the ability of Pinnacle and Tyco to assume the franchise 22 agreements before the court. PLK (and by joinder Flagstar), 23 initially argued that controlling Ninth Circuit law clearly 24 precluded Pinnacle and Tyco’s assumption of the franchise 25 agreements under Perlman v. Catapult Entertainment, Inc. (In Re 26 Entertainment, Inc.) 165 F.3d 747 (9th Cir.g13 1999). Because of 27 Ninth Circuit Law, PLK and Flagstar argued that it was gross [28] 1 mismanagement on the part of the Debtors to prosecute these cases 2 since without PLK’s consent, the Debtors could not reorganize. 3 The court nevertheless denied the motion finding that, among 4 other things, the Debtors asserting a contrary legal position did 5 not evidence gross mismanagement. 6 Then, in September 2024 Pinnacle filed a motion to assume 7 the franchise agreements under § 365. In October 2024, following 8 briefing and oral argument, the court denied Pinnacle’s motion 9 based in part on Catapult, the Lanham Trademark Act (Title 15 Ch. 10 22 U.S. Code) and relevant provisions the California Franchise 11 Relations Act ( Cal. Bus. & Prof. Code § 20000 et seq.). 12 Fourteen days later, Pinnacle filed a motion to reconsider 13 which the court denied in December 2024. Pinnacle appealed both 14 orders. The appeal is pending. 15 After receiving an extension of time to file a plan, the 16 Debtors filed three plans which would require assumption of the 17 franchise agreements in order to implement the reorganization. 18 These plans went nowhere. Then in early 2025, the Debtors filed 19 other plans that required assumption of the franchise agreements 20 PLK again said it would not consent. 21 As these efforts proceeded, the Debtors sought and obtained 22 an extension of time when the leases for their franchise 23 locations had to be assumed. Pinnacle also obtained lessor 24 consents for short extensions beyond the 210 days permitted under 25 § 365(d)(4). Those extensions expired February 14, 2025. There 26 have been no further extensions ordered by the court. Pinnacle 27 claims that two landlords have agreed to subsequent extensions. 28 But a majority of the landlords have not agreed. 1 Pinnacle did file a motion to assume the leases. However, 2 the motion was opposed by the Subchapter V Trustee who argued, 3 correctly, that given the administrative burden that a default 4 would be on Pinnacle’s estate, and the uncertainty of the 5 reorganization, it was not an appropriate exercise of business 6 judgment to assume the leases. The court agreed and denied the 7 motions. 8 Based on the Debtors’ monthly operating reports for the last 9 five months there is a total loss of over $48,000.00.3 10 Pinnacle’s most recent Monthly Operating Report shows only 11 $22,000.00 of cash on hand and a negative cash flow of 12 $58,000.00. (Doc. #502). 13 California QSR’s most recent monthly operating report shows 14 a negative net profit of $45,327.00. (QSR Doc. #321). Tyco is 15 inactive since the store was closed. 16 At the end of January 2025, PLK and Flagstar filed these 17 motions. A week later, on February 4, 2025, the court held a 18 hearing on other matters in all three cases. At that hearing, 19 the court noted that modified plans had been filed by the Debtors 20 but those plans still depended upon the assumption of the 21 franchise agreements to implement them. The court also 22 acknowledged the filing of these motions by PLK and Flagstar. 23 The court continued the hearings on the motions to March 25, 24 2025, to give all parties the opportunity to oppose the motions. 25 But for reasons indicated on the record, the court also noted 26 that the court was going to treat the hearing on March 25 as also 27 encompassing the options of either dismissal or conversion of all [28] 1 three cases. The court was clear that any new plan to be filed 2 by March 5, 2025, must put these cases on a different trajectory. 3 (Pinnacle Doc. #481). 4 The Debtors did file second modified plans on March 5, 2025. 5 But the Pinnacle plan depends again upon assumption of the 6 franchise agreements for its implementation. The plan does 7 provide that if the appellate process results in Pinnacle being 8 unable to assume the franchise agreements, the franchises will be 9 liquidated. Notwithstanding the court’s admonishments, no 10 significant change in trajectory occurred. [11] 12 II. 13 In its motion, PLK contends there is cause to remove the 14 debtors-in-possession because the Debtors are conflicted. PLK 15 contends that Pinnacle’s efforts to continue to litigate its 16 ability to assume the franchise agreements is now contrary to the 17 best interests of the creditors and the estate. Pinnacle not only 18 filed a motion to assume the franchise agreements which was 19 denied but filed and prosecuted a motion for the court to 20 reconsider its order which, PLK argues, demonstrates the debtor 21 prioritizing its own self-interest as opposed to what is best for 22 the creditors or the estates. Since the Ninth Circuit has 23 settled the issue for now, prosecution of the appeal and further 24 litigation is not in the estate’s best interest. PLK also argues 25 that the financial position of Pinnacle and QSR is precarious. 26 As further evidence of mismanagement, PLK stresses that the 27 failure of the Debtors to preserve the rights to assume the 28 commercial leases. 1 Flagstar essentially argues the same. Flagstar contends 2 that it is gross mismanagement of the estate by the Debtor 3 relentlessly pursuing a reorganization involving assumption of 4 the franchise agreements and relying upon the landlord’s consent 5 to allow the Debtors to continue to occupy the restaurant space. 6 Both PLK and Flagstar urge the court to remove the debtors7 in-possession and expand the Subchapter V Trustee’s powers to 8 those included in § 1183(b)(2) and (5). In addition, Flagstar 9 and PLK want the Subchapter V Trustee’s duties to be expanded to 10 include authority to sell the franchises as a going concern. 11 Flagstar contends that converting the cases will result in a 12 lower collateral value leaving Flagstar exposed to a large 13 unsecured claim.4 14 In contrast, the Debtors argue that neither Flagstar nor PLK 15 have provided adequate evidence to establish the necessity for 16 the debtors-in-possession to be removed for fraud, incompetence, 17 or gross mismanagement of the affairs of the Debtors. The 18 Debtors note that Pinnacle has pursued an appeal of the denial of 19 the motion to assume the franchise agreements and the denial of 20 the motion for reconsideration. The Debtors have also filed a 21 Second Amended Chapter 11 Small Business Plan. The Debtors have 22 stipulated to extend two leases for two Fresno locations on 23 McKinley and Cedar Avenues. As to the other leases, Pinnacle has 24 filed a motion to assume. The Debtors claim that all Flagstar 25 and PLK really want is to sell the business when the Debtors want 26 to preserve the business’ value. 27 /// [28] 1 As an alternative position, the Debtors argue that if the 2 court rules that the Subchapter V Trustee’s duties should be 3 expanded, those duties should not include control of the pending 4 appeal and a litigation involving Pinnacle and PLK pending in 5 Florida. The Debtors contend that both litigations could result 6 in a larger payout for unsecured creditors. 7 Flagstar’s reply emphasizes that the Debtors continued 8 accumulation of administrative expenses as a result of the 9 litigation strategy amounts to gross mismanagement. Flagstar 10 also notes that the recent closure by Pinnacle of the McKinley 11 Avenue location is evidence that the Debtor is struggling. 12 In addition, Flagstar urges that the Second Modified Plan 13 filed by the Debtors on March 7, 2025, is a “placeholder plan” 14 which was contrary to what the court required as stated on the 15 record at the February 4, 2025, hearing. The Second Modified 16 Plan still requires the assumption of the franchise agreements. 17 Only if the Debtors cannot assume the franchise agreements would 18 they agree to liquidate. Accordingly, Flagstar contends, the 19 Debtors have placed their own self-serving interests or those of 20 their principal, Mr. Damani, ahead of the interests of the 21 creditors and the estate. 22 PLK also replied asserting that the Debtors should be 23 removed as debtors-in-possession or alternatively the cases 24 should be converted to Chapter 7. PLK points to several recent 25 developments supporting removal of the debtors-in-possession. 26 They include the closure of two restaurants.5 27 /// [28] 1 In addition, PLK lists the estates now teetering on 2 administrative insolvency; the proposed Second Modified Plan is 3 unconfirmable and ignored the court’s directives; Pinnacle 4 allegedly disregarded a $3.25 million dollar offer for four 5 restaurants without a response. (Doc. #481). 6 PLK also raises the Debtors’ effort to seek a stay of the 7 bankruptcy proceedings pending appeal from the District Court 8 even though Fed. R. Bankr. Proc. 8007 requires that such requests 9 come before this court initially. Finally, PLK contends that in 10 the Second Modified Plan, Pinnacle wrongfully disclosed 11 settlement communications between PLK, Flagstar, the Debtors and 12 the Subchapter V Trustee. 13 PLK also contends that “cause” for removal of the debtors14 in-possession or dismissal or conversion has been established. 15 It notes that there is no feasible path forward for these debtors 16 without a liquidation of the franchises. Further, the Debtors 17 have failed to preserve assets because they have not had all 18 leases extended under § 365. These facts demonstrate gross 19 mismanagement, says PLK as well as failure of the Debtors to 20 follow this court’s directives. 21 At oral argument on these motions on March 25, 2025, PLK and 22 Mr. Dahl, the Subchapter V Trustee, urged the court to convert 23 the cases to chapter 7. Flagstar did not oppose conversion. [24] 25 JURISDICTION 26 This is a civil proceeding arising under Title 11 of the 27 United States Code. The District Court has jurisdiction under 28 28 U.S.C. § 1334 (b). The District Court referred this matter to 1 this court under 28 U.S.C. § 157 (a). This is a proceeding that 2 the Bankruptcy Court may hear and finally determine under 28 3 U.S.C. § 157 (b)(2)(A). [4] 5 DISCUSSION 6 I. 7 In a subchapter V chapter 11 case, the court shall order 8 that the debtor not be a debtor-in-possession for “cause”: 9 Including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the 10 debtor, either before or after the date of commencement of the case, or for failure to 11 perform the obligations of the debtor under a plan confirmed under [subchapter V]. § 1185(a) [12] 13 Notably, once “cause” is found, the court “shall” remove the 14 debtor-in-possession. Also, the word “including” in § 1185(a) is 15 not limiting. § 102(3). Whether to remove a debtor-in16 possession, dismiss, or convert a case is determined by the best 17 interest of creditors and the estate. In Re Pittner, 638 B.R. 18 255, 260 (Bankr. D. Mass. 2022)(Removal of debtor from possession 19 under § 1185(a) resulting in increasing powers of the trustee 20 under § 1183(b)(5)). 21 Section 1112 is part of subchapter V of chapter 11 of the 22 Bankruptcy Code. § 1181(a). The process for converting or 23 dismissing a case under chapter 11 involves a few steps. 24 First, conversion of a case to chapter 7 or dismissal 25 “shall” be ordered “whichever is in the best interest of 26 creditors and the estate for cause.” § 1112(b)(1). Subdivision 27 (b)(4) lists sixteen alternatives that would be “cause” to 28 convert or dismiss. However, as with “cause” to remove a debtor1 in-possession under subchapter V, the alternatives are not 2 limiting. The court is free to consider other factors. In Re JJ 3 Arch LLC, 663 B.R. 258 , 275 (Bankr. S.D.N.Y. 2024). Once cause 4 for relief is shown, the Bankruptcy Court has broad discretion to 5 either convert or dismiss the chapter 11 case. In Re Ghatanfard, [6] 666 B.R. 14 , 23 (S.D.N.Y. 2024). 7 Second, once the movant establishes that “cause” exists, the 8 burden shifts to the respondent to demonstrate by evidence the 9 unusual circumstances that establish that dismissal or conversion 10 is not in the best interests of creditors and the estate. 11 § 1112(b)(2); In Re JJ Arch LLC, 663 B.R. at 275. 12 Third, the debtor or any other party in interest must 13 establish that there is a reasonable likelihood that a plan will 14 be confirmed within a reasonable period of time; and the grounds 15 for converting or dismissing the case include an act or omission 16 of the debtor (other than substantial or continuing loss to or 17 diminution of the estate and the absence of a reasonable 18 likelihood of rehabilitation) and there exists a reasonable 19 justification for the act or omission, and that the act or 20 omission will be cured within a reasonable period of time fixed 21 by the court. § 1112(b)(2)(A) and (B). 22 The Bankruptcy Court has broad discretion to determine 23 whether unusual circumstances exist and whether conversion or 24 dismissal is in the best interest of creditors and the estate. 25 In Re Ghatanfard, 666 B.R. at 25 quoting Andover Covered Bridge, 26 LLC, 553 B.R. 162, 172 (B.A.P. 1st Circuit 2016). “The code does 27 not define unusual circumstances; however, courts have determined 28 that it contemplates conditions that are not common in most 1 chapter 11 cases.” In Re Van Eck, 425 B.R. 54, 63 (Bankr. D. 2 Conn. 2010 ). “Such conditions must not only be unusual, they 3 must also demonstrate that dismissal or conversion is not in the 4 best interest of creditors and the estate.” Id. 5 Applying both the specific provisions in subchapter V for 6 the removal of the debtor-in-possession, § 1185(a), and the 7 provisions for conversion and dismissal of a chapter 11 case 8 generally, § 1112, there is cause for either form of relief. [9] 10 II. 11 There is cause to either remove the debtors-in-possession, 12 convert these cases to chapter 7 or dismiss the cases. 13 First, since September 2024 there has been inconsistent and 14 primarily negative cash flows based upon the monthly operating 15 reports for these entities. There is some suggestion that these 16 entities have operated at a profit. However, it does not appear 17 that there is administrative solvency that would warrant 18 continuation of the status quo. Given the cash positions of the 19 two remaining operating entities, there is insufficient cash to 20 continue. 21 Second, the Debtors, primarily Pinnacle, have continued to 22 litigate the issue of assumption of the franchise agreements with 23 the objective of reversal of settled Ninth Circuit law. The 24 court has denied Pinnacle’s motion to assume the franchises and 25 denied the motion to reconsider. The Debtors continue to pursue 26 the litigation by filing both an appeal and a motion for stay 27 pending appeal. 28 /// 1 Though it may be true that the Debtors or their principal 2 want to pursue the rights they have available, that cannot be 3 done without consideration of the creditors’ and the estates’ 4 interests. That suggests a conflict of interest which is a cause 5 for removal. In Duling Sons, Inc., 650 B.R. 578 , 581 (Bankr. 6 S.D. 2023 ). (“Notwithstanding the presence of experienced 7 professionals and extensive legal work in the case, the debtor8 in-possession has made scant progress in securing support of 9 creditors for a plan of reorganization”). 10 Third, Pinnacle has allowed a majority of commercial leases 11 for the franchise locations to be deemed rejected under 12 § 365(d)(4) leaving future operations tenuous. Pinnacle has 13 reported to the court that two landlords have agreed to continued 14 extensions. But the majority have not.6 15 Fourth, the Debtors have continued to propose plans and 16 modified plans that cannot be confirmed and are contrary to what 17 the court has directed. The plans cannot be confirmed for 18 several reasons not the least of which is that the court has 19 determined that the franchise agreements cannot be assumed 20 without PLK’s consent. That is consistent with Ninth Circuit 21 authority. Even the Second Modified Plan filed on March 7, 2025, 22 contains a liquidation option but only after it is determined the 23 franchise agreements cannot be assumed. That is unrealistic. 24 Fifth, the cases are teetering on administrative insolvency. 25 Maintenance of the status quo results in accrual of attorneys’ 26 fees and professional fees with no feasible means of paying those 27 fees at plan confirmation without a major capital infusion which [28] 1 has not been proposed to date. That is also a basis for cause to 2 convert or dismiss. Hassen Imports Partnership v. City of West 3 Covina (In Re Hassen Imports Partnership), CC-13-1019 KiPaD, 2013 4 Bankr. LEXIS 3870 *38 (B.A.P. 9th Cir. August 19, 2013). 5 Any of these factors would be sufficient “cause” to either 6 remove the debtors-in-possession, convert the cases to chapter 7 7 or dismiss the cases. [8] 9 III. 10 A. 11 The Debtors have provided and established no unusual 12 circumstance that converting or dismissing the case is not in the 13 best interest of creditors and the estate. 14 Debtors claim that there is no evidence of fraud, 15 incompetence, dishonesty, or gross mismanagement. But as 16 discussed above, those “causes” are not limiting. Conflicts 17 between the interests of the debtors-in-possession and the 18 creditors in the estate are also causes. See, Ghatanfard, 19 Pittner, and In Re Sillerman, 605 B.R. 631 , 642 (Bankr. S.D.N.Y. 20 2019). (Listing conflicts of interest as an example of non21 enumerated misconduct found to constitute cause). 22 The Debtors also argue that it is pursuing an appeal on the 23 assumption litigation and pursuing the Florida litigation could 24 result in additional returns to unsecured creditors. However, 25 “mere hope of prevailing on potential litigation claims is not a 26 sufficient basis to defeat a showing of cause to convert.” In Re 27 BH S&B Holdings, LLC, 439 B.R. 342, 350 (Bankr. S.D.N.Y. 2010). 28 /// 1 In an effort to make pursuit of litigation in this case an 2 “unusual circumstance,” the Debtors assert that its’ principal, 3 Mr. Damani, is going to pay for all appellate costs in pursuing 4 the appeal on the assumption issue and paying for the Florida 5 litigation. However, that does not solve the conflict issue. 6 Litigation will still involve significant delay. Even the 7 proposed Second Modified Plan has a small distribution to 8 unsecured creditors (3%). So, the Debtors principal proposes 9 that all other interests simply be placed on “pause” while 10 litigation proceeds. That is an unsatisfactory result. 11 Maintenance of the uncertain status of the reorganization is 12 simply contrary to one of the primary purposes of subchapter V. 13 “Subchapter V of chapter 11 was created with the passage of the 14 Small Business Reorganization Act to create an expedited process 15 for small business debtors to efficiently reorganize.” Lafferty 16 v. Off-Spec. Sols., LLC (In Re Off-Spec. Sols., LLC), 651 B.R. 17 862, 868 (B.A.P. 9th Cir. 2023). 18 The Debtors claim the circumstances are unusual because all 19 the movants want is to sell the business. But based upon what 20 has occurred so far in the cases, all the debtors-in-possession 21 want is to continue to litigate the issue of franchise 22 assumption. An impasse is not a building block to 23 reorganization. [24] 25 B. 26 The Debtors have not established a reasonable likelihood of 27 a plan being confirmed in a reasonable time and that the grounds 28 for conversion, dismissal, or removal of the debtors-in1 possession and expand the powers of the Subchapter V Trustee can 2 be reasonably justified and cured within a reasonable time. 3 The Debtors have not provided any evidence that a plan can 4 be confirmed within a reasonable time. The current plan before 5 the court cannot be confirmed for the reasons indicated above. 6 It is further not consensual that means a cramdown would be 7 necessary. Even if the plan was confirmable - it is not - given 8 the Debtors experience in chapter 11, it is not at all clear the 9 Debtors would be able to make the payments under the plan. 10 Further, the plan does not provide remedies if payments are not 11 made. Liquidation is only triggered under the Second Modified 12 Plan if the Debtors are unable to assume the franchise 13 agreements. So, there is no current pathway to an appropriate 14 reorganization. 15 This is also troubling as PLK has presented a declaration of 16 a potential purchaser for four of the franchises. Apparently an 17 offer was made for the purchase but no response was made to the 18 offer other than a later comment by the Debtors’ principal, Mr. 19 Damani, that the offer was “too low.” All of this establishes a 20 lack of an ability to reorganize within a reasonable period of 21 time. [22] 23 C. 24 The Debtors have not justified the problems facing these 25 cases or proposed a prompt cure. 26 The Debtors have said that they have an agreement on two 27 leases, one of which is for a closed restaurant. The majority of 28 the lessors are not in agreement. The Debtors did file a motion 1 to assume leases that the court did not grant because of the 2 substantial administrative expense that may be incurred if the 3 Debtors default. 4 No change in litigation strategy has been evidenced by the 5 Debtors. In fact, they have “doubled down” by hiring a separate 6 appellate firm to pursue the appeal of the assumption issue. 7 No capital infusion is contemplated by the Debtors to shore 8 up the unreliable cash flow and administrative solvency issues. 9 So, there is cause to convert the cases to chapter 7, 10 dismiss the cases, or remove the debtors-in-possession and expand 11 the powers of the Subchapter V Trustee. There is no sustainable 12 defense to these motions. [13] 14 IV. 15 The issue then becomes whether the court should remove the 16 debtors-in-possession and expand the powers of the Subchapter V 17 Trustee, convert the cases to chapter 7, or dismiss the cases. [18] 19 A. 20 Dismissal at this time does not seem viable. 21 PLK could pursue any remedies it has under the franchise 22 agreements which may result in the closure of the restaurants. 23 However, the creditors will receive nothing as a result of the 24 transfer or sale of the restaurants. Flagstar will maintain its 25 lien. However, the value of its collateral will rapidly 26 deteriorate. There are many creditors in these cases including 27 PLK, Flagstar and a subordinate lienholder. Those creditors 28 pursuing their remedies will not only negatively affect the 1 administrative claimants who have allowed claims in this case but 2 creditors with unsecured claims as well. [3] 4 B. 5 Expanding the powers of the subchapter V trustee has no real 6 advantage in resolving the cases. 7 One difficulty is that a subchapter V trustee cannot file a 8 Plan. Only the debtor can file a plan under subchapter V. 9 § 1189(a). Though it is possible that a subchapter V trustee 10 could file a joint plan with the debtor to achieve a mutual 11 objective, based on the court’s observations in these cases so 12 far, that seems highly unlikely. 13 One advantage to expanding the powers of the subchapter V 14 trustee would be the continuation of the business for a short 15 period of time to permit an orderly liquidation. At the hearing 16 on these motions, Flagstar’s counsel indicated Flagstar may 17 consent to cash collateral use to facilitate a sale. On the 18 other hand, without a liquidation Plan, the cases will likely end 19 up being converted anyway. That means there will be additional 20 administrative expenses incurred as the liquidation process 21 proceeds. 22 A subchapter V trustee with expanded powers would also face 23 the reality that a majority of these Debtors’ landlords have not 24 consented to extensions of the leases. Under § 365(d)(4), absent 25 affirmative agreements from all of the landlords, the subchapter 26 V trustee would need to surrender possession of the franchise 27 premises at the landlords insistence. 28 /// 1 Even if the court expanded the subchapter V trustee’s 2 authority to include control of the pending appeal and the 3 Florida litigation, the court envisions problems lurking. The 4 Debtors’ fall back position on this motion is to limit the 5 expanded powers to exclude control of these litigations. Any 6 question as to standing of the subchapter V trustee may result in 7 this court having to be involved in additional litigation 8 concerning how the appeal and Florida litigation will proceed. 9 That is an inefficient use of judicial resources. 10 There is also at least a question as to the limits of any 11 expanded power. Notably absent in subchapter V is any reference 12 to a subchapter V trustee having the power to liquidate assets 13 parallel to a duty of a chapter 7 trustee. See §704(a)(1). On 14 the other hand, the power of a debtor-in-possession under 15 subchapter V is not exclusive. § 1184; See In Re Roe, 23-3207716 thp11, 2024 WL 206678 (Bankr. D. Or. January 18, 2024). The 17 expansion of a subchapter V trustee’s powers may be somewhat 18 murky. 19 Finally, payment of the subchapter V trustee’s fees may be 20 questionable if the trustee’s powers are expanded in these cases. 21 The trustee will have duties under § 1183(a)(2) to investigate 22 the debtor and report. The trustee will have to file operating 23 reports and may have to file tax returns and provide tax 24 information. See §§ 704(a)(8); 1183(a)(5). It is not clear that 25 all of those duties would be compensated by way of a surcharge on 26 secured creditors’ collateral under § 506(c). But even if all 27 services of the subchapter V trustee with expanded powers could 28 /// 1 be compensated by surcharge or otherwise, there is very little 2 advantage over conversion of the cases to chapter 7. [3] 4 C. 5 Though disruptive, the best interests of creditors and the 6 estates will be served by conversion of all cases to chapter 7. 7 Conversion will give full authority to the chapter 7 trustee 8 without the necessity for further court orders or interpretation 9 of those orders. 10 The court is mindful of the concerns of both PLK and 11 Flagstar concerning valuation of the franchises if they are 12 closed and liquidated. Though unusual, under § 721, a chapter 7 13 trustee can operate one or more franchise locations for a limited 14 period. Obviously, the chapter 7 trustee will need to make that 15 assessment and be comfortable with use of cash collateral to 16 operate the business. As mentioned above, a chapter 7 trustee 17 will have surcharge authority under § 506(c) for some or all of 18 the expenses incurred by the chapter 7 trustee. 19 A chapter 7 trustee will be able to objectively assess 20 whether the appeal of this court’s rulings on the assumption 21 issue and the Florida litigation should be pursued. 22 Also, any fees allowed for the chapter 11 professionals 23 which have been unpaid will maintain their priority status 24 (subject to chapter 7 fees and costs). A chapter 7 trustee can 25 pursue any claw back from any “overpaid” administrative claimant 26 if that claimant has been paid more than a pro rata portion of 27 any distribution to that priority. 28 /// 1 If there are any intercompany transactions among the 2 Debtors, a chapter 7 trustee can investigate and pursue recovery 3 of those as well. The cases have been pending for one year. A 4 chapter 7 trustee will have some time to evaluate and investigate 5 those issues. 6 Finally, it may be that unsecured creditors receive a 7 distribution from a chapter 7 trustee in one or more of these 8 cases. Mention was made at the oral argument on these motions 9 that a relative of the Debtors’ principal may be willing to buy 10 the franchises for over three million dollars. Whether that sale 11 | would be a possibility remains to be seen. However, that 12 suggests the possibility that the franchises may bring some value 13 to these estates and the creditors. 14 On balance, then, conversion seems the best alternative 15 under the facts of these cases and conversion will be ordered. [16] 17 CONCLUSION 18 For the foregoing reasons, the court will enter separate 19 orders converting Pinnacle Foods of California, LLC; Tyco Group, 20 LLC; and California QSR Management, Inc. to chapter 7 of the 21 Bankruptcy Code. [22] 23 Dated: Mar 27, 2025 By the Court [24] a“ ené Lastreto II, Judge 26 United States Bankruptcy Court [28] 1 Instructions to Clerk of Court Service List - Not Part of Order/Judgment [2] 3 The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the 4 parties below. The Clerk of Court will send the Order via the BNC or, if checked , via the U.S. mail. [5] 6 Pinnacle Foods of California LLC Tyco Group, LLC 7 California QSR Management, Inc. 764 P. St., Ste. 105 8 Fresno, CA 93721 9 Walter R. Dahl 8757 Auburn Folsom Rd #2820 10 Granite Bay, CA 95746-2820 11 Office of the U.S. Trustee United States Courthouse 12 2500 Tulare Street, Room 1401 Fresno, CA 93721 [13] Michael Jay Berger 14 Law Office of Michael J. Berger 9454 Wilshire Blvd 6th Fl 15 Beverly Hills, CA 90212-2929 16 Hagop T. Bedoyan McCormick Barstow 17 7647 N. Fresno Street Fresno, CA 93720 [18] Glenn Moses 19 Venable, LLP 801 Brickell Avenue, Suite 1500 20 Miami, FL 33131 21 Kevin J. Etzel Vedder Price, P.C. 22 1633 Broadway, 31st Floor New York, NY 10019