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In re: ) Chapter 11
)
CANOPY FINANCIAL, INC., ) Case No. 09-44943
)
Debtor. ) Hon. Eugene R. Wedoff
)
NOTICE OF MOTION
PLEASE TAKE NOTICE that on December 30, 2009, at 10:00 a.m., or as soon
thereafter as counsel may be heard, we shall appear before the Honorable Eugene R. Wedoff or
any other judge sitting in his stead in Court Room 744 of the United States Bankruptcy Court for
the Northern District of Illinois, located at 219 South Dearborn Street, Chicago, Illinois, and then
and there present the attached Debtor’s Motion to Convert Case to a Chapter 7 Case, at which
CERTIFICATE OF SERVICE
caused a true and correct copy of Debtor’s Motion to Convert Case to a Chapter 7 Case and
the related Notice of Motion to be served upon the parties on the attached Service List via
facsimile to the parties listed on Exhibit 1, via overnight mail on the parties listed on Exhibit 2,
and via this Court’s ECF system to the parties listed on Exhibit 3.
SERVICE LIST
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EXHIBIT 1
FACSIMILE SERVICE
Martin Hancock
4735 Kelvington Dr.
Indianapolis, IN 46254
Telephone: 317-549-5395
Facsimile: 866-235-2935
E-Mail: mh@mh-in.com
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EXHIBIT 2
Kelly Burgon
10091 S. 1330 W.
South Jordan, UT 84095
Carol D’Angelo
3366 SE Snow Rd.
Port Saint Lucie, FL 34984
William Duncan
276 Via Linda Vista
Redondo Beach, CA 90277
Daniel Fitzsimmons
515 Fenelon Place
Dubuque, IA 52001
Susan Patton
309 E. Main St.
West Frankfort, IL 62896
Thomas Simpson
49070 N. Bonita Ridge Ave.
Tucson, AZ 85750
Daniel Young
479 Eisenhower Dr.
Louisville, CO 80027-1155
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EXHIBIT 3
In re: ) Chapter 11
)
CANOPY FINANCIAL, INC., ) Case No. 09-44943
)
Debtor. ) Hon. Eugene R. Wedoff
)
Canopy Financial, Inc., the above captioned debtor and debtor-in-possession (“Canopy”
or the “Debtor”), by and through its undersigned counsel, hereby moves (the “Motion”) for entry
of an Order, pursuant to 11 U.S.C. §§ 105(a) and 1112(a), converting the Debtor’s chapter 11
case to one under chapter 7. In support of this Motion, the Debtor states as follows:
1. This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. Venue
is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding
2. The statutory predicates for the relief requested herein are sections 105(a) and
Background
3. On November 25, 2009 (the “Petition Date”), the Debtor filed a voluntary petition
for relief under chapter 11 of the Bankruptcy Code. Background regarding the Debtor’s
bankruptcy filing is set forth in the Declaration of Dan Stevenson [Doc. No. 11] previously filed
In broad terms, Canopy’s customers place in custodial accounts monies deposited by the
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customers’ employees or their own customers in health savings accounts or flexible spending
accounts. Using its software, Canopy then processes debits and transfers from those accounts as
its customers’ employees and customers incur charges. Certain individuals also maintained
investors and lenders were fraudulent, and, upon further investigation, uncovered other
significant financial and accounting irregularities, including transfers of funds from Canopy’s
operating accounts for non-business related expenses. As set forth in the Stevenson Declaration,
upon this discovery, the Debtor’s board of directors formed a special committee of outside
directors, and -- with assistance from Paul Hastings, its independent legal counsel and Alvarez
and Marsal, its forensic accountants -- began conducting an investigation into these irregularities.
The special committee also notified the relevant authorities, and the Debtor has been cooperating
6. The two officers of the Debtor implicated in the fraud have been removed from
management. One of those officers has since been arrested and charged with wire fraud.
7. The Debtor initially believed that the financial and accounting irregularities
described above included a misappropriation of outside investor and Canopy’s own funds but did
not impact any customers whose accounts were serviced by the Debtor. As a result of its
continuing investigation, however, the Debtor determined shortly after the Petition Date that a
substantial amount of health savings account (“HSA”) funds belonging to certain of the Debtor’s
customers also were misappropriated. The custodial accounts in which the HSA funds of
affected customers were supposed to be maintained have been frozen, and the affected HSA
customers have been notified of the misappropriation. All other customer transactions are
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8. On December 20, 2009 the Debtor filed a motion for the sale of substantial all of
its assets (the “Sale Motion”). This Court approved the sale procedures requested in the Sale
Motion on December 23, 2009, and a sale approval hearing is scheduled for January 27, 2010.
9. As set forth in the Sale Motion, in light of the circumstances leading to the
commencement of this chapter 11 case, the Debtor does not believe that there is a realistic
prospect of reorganizing its business. Moreover, the investigation and prosecution of claims and
causes of action as a debtor-in-possession will be problematic in several respects, and the costs
and expenses associated with a chapter 11 proceeding do not appear to be justified in this case.
10. The Debtor is in the process of finalizing, and intends to file before the hearing on
this motion, its Schedules and Statement of Financial Affairs. With the Court’s December 23,
2009 approval of sale procedures motion, the Debtor believes this bankruptcy case is at a stage
where a trustee can take over the remaining administration of the case (including servicing
existing customer accounts pending a sale), sell the assets as contemplated in the Sale Motion,
and conduct an independent investigation into causes of action and pursue any litigation that is
warranted. Accordingly, by this Motion the Debtor seeks the conversion of its chapter 11
11. Pursuant to section 1112(a) of the Bankruptcy Code, the Debtor has a right to
convert this case to chapter 7. Section 1112(a) of the Bankruptcy Code provides:
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11 U.S.C. § 1112.
12. Both the House and Senate Reports contain the following language explaining the
import of the section: “[s]ubsection (a) gives the debtor an absolute right to convert a voluntarily
commenced case in which the debtor remains in possession to a liquidation case.” H.R. Rep. No.
95-595, at 405 (1977); S. Rep. No. 95-989, at 117 (1978) (emphasis added). Thus, where the
statutory conditions are met, the “debtor has the absolute right to convert and . . . it is simply a
ministerial act for [the Court] to enter an order on a debtor’s motion.” In re High Strength Steel,
Inc., Case No. 99-4369 (MFW), tr. at 32 (Bankr. D. Del. March 16, 2000). Other courts have
similarly recognized that section 1112(a) of the Bankruptcy Code gives the debtor an absolute
right to convert. See, e.g., In re Texas Extrusion Corp., 844 F.2d 1142, 1161 (5th Cir. 1988)
(conversion allowed one week prior to confirmation hearing); In re Schuler, 119 B.R. 191, 192
(Bankr. W.D. Mo. 1990); In re Marill Alarm Systems, Inc., 100 B.R. 606 (Bankr. S.D. Fla.
1989); In re Dieckhaus Stationers of King of Prussia, Inc., 73 B.R. 969, 970-71 (Bankr. E.D. Pa.
1987).
13. In Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007), the Supreme Court
held that notwithstanding the language of section 706(a) of the Bankruptcy Code, a chapter 7
debtor does not have an “absolute right” to convert to chapter 13. Id. at 372. The Court held that
the debtor’s right to convert its case to one under chapter 13 was conditioned on its ability to
qualify as a chapter 13 debtor, and that the debtor’s bad-faith conduct rendered it ineligible for
chapter 13. Id. Even if the Marrama holding extends to chapter 11 cases and section 1112, here
the Debtor is eligible for chapter 7 and has not engaged in conduct that would compel dismissal
of its case under any chapter. Therefore, the Debtor’s request for conversion should be granted.
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14. In the present case, the Debtor voluntarily filed its chapter 11 petition and is
addition, the Debtor brings this Motion in good faith, as conversion is in the best interests of
creditors and the Debtor’s estate. A reorganization of the Debtor’s business is simply not
plausible, particularly in light of the misappropriation of customer funds discovered shortly after
the Petition Date. There also is no improper tactical or other reason underlying the Debtor’s
decision to convert; indeed, to the contrary, one of the primary reasons underlying the conversion
is to permit a trustee to conduct an independent investigation into causes of action and pursue
any litigation that is warranted. The decision to convert also was made following consultation
with federal authorities investigating wrongdoing at the Debtor and the United States Trustee,
15. Prior to filing this Motion, the Debtor sought and obtained approval of sale
procedures for the sale of its assets. The Debtor believes it was important to commence the sale
process prior to conversion so that the sale of the assets would not be delayed, and assuming the
chapter 7 trustee determines to operate the business, conversion from chapter 11 to chapter 7
should not disrupt the sale process or prevent the continued servicing of existing customer
16. The Debtor does not believe that in this case the chapter 11 process, which would
include the considerable expense associated with a creditors committee and confirmation of a
plan, would provide material benefit to creditors. The same results can be achieved for less
expense in a chapter 7 case. Therefore, the Debtor respectfully submits that it has a right to
convert its chapter 7 case to a case under chapter 11, and that conversion is warranted and is in
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Notice
17. Notice of this Motion has been given to: (a) the Office of the United States
Trustee; (b) the Securities and Exchange Commission; (c) the Internal Revenue Service; (d) the
United States Attorney Office for the Northern District of Illinois; (e) the Prepetition Lenders;
(f) the Debtor’s 20 largest unsecured creditors as set forth in the amended list filed on December
7, 2009; and (g) all parties who have requested notice in this case. In light of the relief
WHEREFORE, the Debtor respectfully requests that the Court enter an Order converting
this case to one under chapter 7, and granting such other relief as may be just.
Respectfully submitted,