A federal judge is set to consider a motion Wednesday to lift Floyd and Betty Squires’ Chapter 11 bankruptcy protection or convert the couple’s case to Chapter 7 based on claims of “gross mismanagement of the estate.”

The request is being made by the Office of the U.S. Trustee, part of the Department of Justice, which essentially acts as a watchdog agency for the proceedings.
Simply put, if Judge William Lafferty were to dismiss the Chapter 11 case — which allows debtors to restructure debt while retaining their assets — the Squireses would lose the legal shield protecting them from their creditors.

Those include Mark Adams, who holds a deed of trust on most of the couple’s properties that he was set to auction off until the couple filed for bankruptcy in November, halting the sale.

A similar situation could happen if the Squireses’ bankruptcy filing is switched over to Chapter 7, in which case a trustee would be appointed to oversee the couple’s estate and likely sell some or all of their 34 properties to pay off debts.

Those could include 26 properties that are the focus of a seven-year legal battle between the Squireses and the city of Eureka, which has described the couple’s management of hundreds of low-income rental units as being akin to that of “slumlords.”

The Office of the U.S. Trustee’s motion suggests Chapter 7 would be the “more appropriate remedy than dismissal based on a number of factors,” including that the “trustee would only need to liquidate a portion of Debtors’ non-exempt assets to pay all required secured, priority and general unsecured creditors.”

According to documents filed in the Squireses' case, the couple owes an estimated $2.6 million to a long list of creditors while holding some $15 million worth of office buildings, apartment complexes and single-family homes.

To back up the motion, the Office of the U.S. Attorney cites an apparent lack of insurance for 15 properties and inconsistencies in the Squireses’ income and spending reports, saying those show “potential incompetency, dishonesty and/or gross mismanagement.”

Additionally, the motion notes the couple has failed to provide a copy of their 2016 tax return and spent nearly twice the $4,000 monthly allowance allotted by the court for personal expenses in December.

Meanwhile, the city of Eureka has asked Lafferty to appoint a Chapter 11 trustee to oversee the Squireses’ assets, if the case were to remain on the currently path, on the grounds the couple has “committed acts constituting fraud, dishonesty, incompetence and gross mismanagement.”

That motion is scheduled to be heard in April.