1 UNITED STATES DISTRICT COURT

2 DISTRICT OF NEVADA

3 CHRIS MCALARY, 4 Appellant, Case No.: 2:23-cv-01580-GMN 5 vs. ORDER 6 CASH CLOUD INC., et al., 7 Appellees. 8

9 10 This case is before the court on appeal from the United States Bankruptcy Court for the 11 District of Nevada. Before the Court is the Opening Brief, (ECF No. 20), filed by Appellant 12 Chris McAlary, appealing the bankruptcy court’s Order on Motion to Convert Case to Chapter 13 7. Appellees Cash Cloud Inc. and Official Committee of Unsecured Creditors (“UCC”) filed 14 an Answering Brief, (ECF No. 35), to which Appellant filed a Reply Brief, (ECF No. 39). For 15 the reasons set forth below, the Court AFFIRMS the bankruptcy court’s denial of McAlary’s 16 Motion to Convert Case to Chapter 7. 17 I. BACKGROUND 18 The following factual findings are taken from the bankruptcy court’s Order. On 19 February 7, 2023, Appellee Cash Cloud filed a voluntary petition for relief under Chapter 11 of 20 Title 11 of the United States Code. (Order on Mot. Convert 1:19–2:1, ROA 001603–1610, 21 Appx. 8 to Opening Br., ECF No. 26). The Petition was signed by Chris McAlary, Appellant in 22 this case, as Cash Cloud’s president. (Id. 2:3–4). On February 17, 2023, an official committee 23 of unsecured creditors was appointed in this Chapter 11 proceeding. (Id. 2:8–9). On March 9, 24 2023, Cash Cloud filed its schedules of assets and liabilities and its statement of financial 25 affairs which attests that McAlary was the Chief Executive Officer who holds 100% of the 1 interest in Cash Cloud. (Id. 2:10–13). A few months later, Cash Cloud filed a proposed 2 Chapter 11 plan of reorganization providing for implementation alternatives based on whether 3 the Cash Cloud completed a sale of its assets, which was signed by McAlary as Chief 4 Executive Officer. (Id. 2:15–19). 5 On June 8, 2023, McAlary resigned as Chief Executive Officer. (Id. 3:1). A few months 6 later, Cash Cloud filed an amended proposed Chapter 11 plan implementing the asset-sale 7 alternative. (Id. 3:4–5). Six days later, McAlary filed the Conversion Motion at issue here. (Id. 8 3:10). Cash Cloud filed an opposition to the Conversion Motion, and the UCC joined. (Id. 4:9– 9 12). On September 18, 2023, the bankruptcy court denied McAlary’s Motion to Convert Case 10 to Chapter 7. McAlary then appealed the bankruptcy court’s Order overruling his objection. 11 The Court now addresses that appeal below. 12 II. LEGAL STANDARD 13 “The decision to convert [a] case to Chapter 7 is within the bankruptcy court’s 14 discretion.” Pioneer Liquidating Corp. v. United States Trustee (In re Consol. Pioneer Mortg. 15 Entities),

(9th Cir. 2001). “A court reverses a bankruptcy court only if its 16 decision was ‘based on an erroneous conclusion of law or when the record contains no evidence 17 on which [the bankruptcy court] rationally could have based [its] decision.’” In re Baroni, 36

, 965 (9th Cir. 2022) (quoting Pioneer,

). 19 The standard for converting a Chapter 11 case to Chapter 7 is set out in 11 U.S.C. 20 § 1112. This statute provides that the bankruptcy court “shall convert a case under this chapter 21 to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests 22 of creditors and the estate, for cause.”

(b)(1). However, even if cause is

23 established, § 1112(b)(2) prohibits a bankruptcy court from granting relief under § 1112(b)(1) 24 if the bankruptcy “court finds and specifically identifies unusual circumstances establishing that 25 converting or dismissing the case is not in the best interests of creditors and the estate, and the 1 debtor or any other party in interest establishes [one of two enumerated circumstances].” Id. 2 § 1112(b)(2). Thus, there are three primary inquiries: (1) whether cause exists for granting 3 relief under § 1112(b)(1); (2) whether granting relief is in the creditors’ and the estate’s best 4 interests; and (3) if so, which form of relief best serves the creditors’ and the estate’s interests. 5 III. DISCUSSION 6 McAlary argues that the bankruptcy court erred in applying

(b)(2), and 7 in finding that § 1112(b)(2) was satisfied by the unusual circumstances in this case. (Opening 8 Br. 23:14–30:2). The Court disagrees. 9 Section 1112(b)(2) states that a court “may not” convert Chapter 11 proceeding to 10 Chapter 7 if it “finds and specifically identifies unusual circumstances establishing that 11 converting . . . the case is not in the best interests of creditors and the estate, and the debtor or 12 any other party in interest establishes that:” 13 (A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 1121(e) and 1129(e) of this title, or if such 14 sections do not apply, within a reasonable period of time; and (B) the grounds for converting or dismissing the case include an act or 15 omission of the debtor other than under paragraph (4)(A)— 16 i. for which there exists a reasonable justification for the act or omission; and 17 ii. that will be cured within a reasonable period of time fixed by the court. 18

(b)(2). 19 20 The bankruptcy court denied McAlary’s Motion to Convert because it found unusual 21 circumstances established that converting the case is not in the best interest of creditors and the 22 estate. (Order on Mot. Convert 6:3–7, ROA 001603–1610, Appx. 8 to Opening Br., ECF No. 23 26). It also found that § 1112(b)(2)(A) was satisfied because the plan had already been 24 confirmed, so it was more than likely to be confirmed. (Id. 5:20–22). Lastly, the bankruptcy 25 court explained that § 1112(b)(2)(B) was satisfied because it specifically excludes 1 § 1112(b)(4)(A), which is the only ground for conversion that McAlary argued in his Motion. 2 (Id. 5:22–25). 3 McAlary first argues that the bankruptcy court erred when it found the unusual 4 circumstances test applicable. (Opening Br. 24:10–11). He contends that where there is a 5 showing that the provisions of § 1112(b)(4)(A) apply, the saving features of § 1112(b)(2) do 6 not apply. (Id. 24:15–25:8). Thus, because he showed the requirements of (b)(4)(A), he argues 7 that the bankruptcy court erred in applying the unusual circumstances exception in the first 8 place. (Id. 25:5–8). The Court disagrees. As the Ninth Circuit has recently explained, 9 “even if cause is established, Section 1112(b)(2) prohibits a bankruptcy court from granting relief under Section 1112(b)(1) if the bankruptcy ‘court finds and specifically 10 identifies unusual circumstances establishing that converting or dismissing the case is 11 not in the best interests of creditors and the estate, and the debtor or any other party in interest establishes [one of two enumerated circumstances].’” 12

13 In re Baroni,

(9th Cir. 2022) (emphasis added). The language of the 14 statute makes clear that, even if there is cause for conversion, a court cannot convert a case to 15 chapter 7 if it finds that the requirements of § 1112(b)(2) are satisfied.

(b)(2). 16 Thus, even if McAlary had successfully shown that there was cause for conversion under § 17 1112(b)(4)(A), the bankruptcy court did not err in applying § 1112(b)(2) once it found that 18 unusual circumstances were present. 19 McAlary next argues that the “unusual circumstances” identified by the bankruptcy 20 court were neither unusual nor establish that conversion is not in the best interest of the 21 creditors and the estate. (Opening Br. 26:2–4). The Court reviews the bankruptcy court’s 22 finding of unusual circumstances for clear error; the question is whether the “record contains no 23 evidence on which the bankruptcy court could have based its decision.” In re Baroni,

at 965. The term “unusual circumstance” “contemplates conditions that are not common in 25 chapter 11 cases.”

at 968 (quoting Mohmood v. Khatib (In re Mahmood), No. 15-BK-25381, 1

, at *8 (B.A.P. 9th Cir. Mar. 17, 2017) (unpublished)). “[C]ircumstances 2 inherently present in bankruptcy, such as disputes regarding the validity and amount of a 3 creditor’s claim, are not ‘unusual.’”

To meet the standard in § 1112(b)(2), “there must be 4 something beyond the inherent financial pressures and adversarial differences involved in a 5 bankruptcy case to establish that the purposes of Chapter 11 or the creditors’ interests are better 6 served by continuing under that chapter.” Id. 7 The bankruptcy court identified the following unusual circumstances: 8 1. “McAlary’s commencement of the Chapter 11 proceeding as the Debtor’s sole shareholder, officer and director; 9 2. McAlary’s execution of the Schedules, SOFA, and other material under penalty of perjury; 10 3. McAlary’s resignation after submission of a Chapter 11 plan that permitted 11 substantially all of the estate assets to be sold; 4. McAlary’s subsequent resignation and transition to the independent director; 12 5. The UCC’s investigation and pursuit of estate claims against multiple parties including McAlary; 13 6. The Debtor’s decision to pursue confirmation of the Amended Plan rather than 14 voluntary dismissal or conversion to Chapter 7; and 7. The absence of any other creditor support in favor of conversion.” 15 16 (Order on Mot. Conversion 6 n.7). The bankruptcy court concluded that those circumstances 17 establish that conversion of the Chapter 11 proceeding to Chapter 7 is not in the best interests 18 of creditors and the estate. (Id. 6:3–7). The circumstances that the bankruptcy court identified 19 are not those “inherently present in bankruptcy, such as disputes regarding the validity and 20 amount of a creditor’s claim.” In re Baroni,

. Further, this list of identified 21 circumstances itself demonstrates that there is evidence in the record that supports the 22 bankruptcy court’s finding that conversion was not in the best interests of the creditors. The 23 unusual facts present in this case, including McAlary’s various roles in the bankruptcy and the 24 lack of support from all other creditors in favor of conversion, support the bankruptcy court’s 25 conclusion. Accordingly, the Court finds that the bankruptcy court did not clearly err in 1 || concluding that unusual circumstances in this case establish that conversion of this proceeding 2 Chapter 7 is not in the best interest of the creditors. Further, the bankruptcy court did not err 3 ||in finding that the requirements of § 1112(b)(2)(A) and (B) were met. 4 Even if cause is established, Section 1112(b)(2) prohibits a bankruptcy court from 5 || converting the case if its requirements are satisfied. Because the bankruptcy court did not err in 6 || finding that the requirements of § 1112(b)(2) were met, the remainder of McAlary’s arguments 7 ||regarding cause are moot. Accordingly, the Court AFFIRMS the bankruptcy court’s order 8 || denying McAlary’s Motion to Convert. 9 ||IV. CONCLUSION 10 IT IS HEREBY ORDERED that the bankruptcy court’s Order Denying McAlary’s 11 || Motion to Convert to Chapter 7 is AFFIRMED. 12 DATED this_4 __ day of August, 2025. 13 Yj, 14 LW □□ 15 Gloria M. fy arro, District Judge 16 UNITED STATES DISTRICT COURT 17 18 19 20 21 22 23 24 25

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