In re: California Palms Addiction Recovery Campus, Inc. v., No. 23-3375 (6th Cir. 2023)
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Ohio revoked the operating license for Ricci's company, Palms, which operated a substance abuse treatment center. The Department of Justice (DOJ) seized $600,000 from Palms for alleged fraud. Pender was attempting to terminate Palms's building lease. Palms sued Ohio to recover its license, sued the DOJ to recover the $600,000, and filed for Chapter 11 bankruptcy, 11 U.S.C. 1187–95. Its plan for reorganization depended on the success of its pending lawsuits. Concerned that the litigation would consume the estate, the Trustee sought conversion to a proceeding under Chapter 7 for liquidation. Weeks later, the seized assets lawsuit was put on hold while the DOJ pursued a criminal indictment. Palms failed to meet the bankruptcy court's deadline for an accounting of post-petition transactions. Two days before a hearing on the conversion, Palms’s attorney (Vitullo) moved to withdraw, citing a conflict of interest. Minutes before the hearing, Rucci (also a lawyer) filed an objection to the motion to convert. Rucci did not object to Vitullo’s withdrawal.
The bankruptcy court granted Vitullo’s motion and converted the proceedings to Chapter 7. Pender successfully evicted Palms. An Ohio court upheld the revocation of its license. A Sixth Circuit panel denied Palms’s petition to return the seized $600,000. The district court and Sixth Circuit affirmed the conversion order as a final, appealable order. Considering the substantial, continuing losses and the unlikelihood of rehabilitation, the court did not abuse its discretion in finding cause to convert.
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