Chapter 7 Petition

Case 09-44943 Doc 79 Filed 12/23/09 Entered 12/23/09 18:33:28 Desc Main
Document Page 1 of 15
IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In re: ) Chapter 11
)
CANOPY FINANCIAL, INC., ) Case No. 09-44943
)
Debtor. ) Hon. Eugene R. Wedoff
)
NOTICE OF MOTION
TO: ATTACHED SERVICE LIST:
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
time and place you may appear if you see fit.
Dated: December 23, 2009 Respectfully submitted,
CANOPY FINANCIAL, INC.
By: /s/ Vincent E. Lazar

One of its attorneys
Vincent E. Lazar (6204916)
Melissa M. Hinds (6288246)
Landon S. Raiford (6297473)
JENNER & BLOCK LLP
353 North Clark Street
Chicago, IL 60654-3456
Telephone: 312-222-9350
Facsimile: 312-527-0484
CERTIFICATE OF SERVICE
I, Vincent E. Lazar, an attorney, hereby certify that on December 23, 2009, I
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.
/s/ Vincent E. Lazar

Vincent E. Lazar
SERVICE LIST
EXHIBIT 1
FACSIMILE SERVICE
United States Trustee Granite Global Ventures III LP

219 S. Dearborn St., Room 819 GGV III Entrepreneurs Fund LP
Chicago, IL 60604 Robert M. Fishman
Telephone: 312-886-5785 John W. Guzzardo
Facsimile: 312-886-5794 Mark L. Radtke
Shaw Gussis Fishman Glantz Wolfson &
Manish S. Shah Towbin LLC
Assistant United States Attorney 321 N. Clark St., Ste. 800
U.S. Department of Justice Chicago, IL 60654
219 S. Dearborn St., 5th Floor Telephone: 312-541-0151
Chicago, IL 60604 Facsimile: 312-980-3888
Phone: 312-353-5300 E-Mail: rfishman@shawgussis.com
Facsimile: 312-353-2067 jguzzardo@shawgussis.com
mradtke@shawgussis.com
Amy Stahl Cotter
Securities and Exchange Comm’n Comerica Bank
175 W. Jackson, Ste. 900 c/o Kurt M. Carlson
Chicago, IL 60604 Much Shelist Denenberg Ament &
Telephone: 312-886-8501 Rubenstein, PC
Facsimile: 312-353-7398 191 N. Wacker Dr., Ste. 1800
Chicago, IL 60606
Venture Lending & Leasing VI, Inc. Telephone: 312-521-2000
Venture Lending & Leasing V, Inc. Facsimile: 312-521-2199
c/o Edward J. Tredinnick E-Mail: kcarlson&muchshelist.com
Greene Radovsky Maloney Share &
Hennigh LLP Coventry Health Care, Inc.
Fourt Embarcadero Center, Ste. 4000 c/o Neal D. Colton
San Francisco, CA 94111 Cozen O’Connor
Telephone: 415-777-4961 1900 Market St.
E-Mail: etredinnick@greenradovsky.com Philadelphia, PA 19103
Telephone: 215-665-2060
Facsimile: 215-701-2060
E-Mail: ncolton@cozen.com
Integrated Data Storage Spectrum Equity Investors V, LP

c/o George R. Mesires Spectrum V Investment Mgrs.’ Fund LP
Ungaretti & Harris c/o Michael A. Firestein
70 W. Madison St. Proskauer Rose LLP
Chicago, IL 60602 2049 Century Park East, 32nd Floor
Telephone: 312-977-4151 Los Angeles, CA 90067
Facsimile: 312-977-4405 Telephone: 310-557-2900
E-Mail: grmesires@uhlaw.com Facsimile: 310-557-2193
E-Mail: mfirestein@proskauer.com
Plans’ Holding Corp.
c/o David A. Agay UMB Bank N.A.
Kirkland & Ellis LLP c/o Lisa A. Epps
300 N. LaSalle St., 24th Floor Spencer Fane Britt & Browne LLP
Chicago, IL 60654 1000 Walnut St., Ste. 1400
Telephone: 312-862-2342 Kansas City, MO 64106
Facsimile: 312-862-2200 Telephone: 816-474-8100
david.agay@kirkland.com Facsimile: 816-474-3216
E-Mail: lepps@spencerfane.com
Sovereign Bank
c/o William J. Factor Internal Revenue Service
Law Office of William J. Factor, Ltd. Centralized Insolvency Operations
1363 Shermer Rd. P.O. Box 21126
Northbrook, IL 60062 Philadelphia, PA 21126
Telephone: 847-239-7248 Facsimile: 215-516-2015
Facsimile: 847-574-8233
E-Mail: wfactor@wfactorlaw.com Internal Revenue Service
230 S. Dearborn St.
Spectrum Equity Investors V, LP Room 2400, Stop 6604-CHI
Spectrum V Investment Mgrs.’ Fund LP Chicago, IL 60604
c/o Jeff J. Marwil Facsimile: 312-353-4998
Grayson T. Walter
Proskauer Rose LLP Humana, Inc.
70 W. Madison St., Ste. 3800 ATTN: Ralph J. Wilson
Chicago, IL 60602 500 W. Main St.
Telephone: 312-962-3550 Louisville, KY 40202
Facsimile: 312-962-3551 Facsimile: 502-580-3639
E-Mail: jmarwil@proskauer.com
gwalter@prokauer.com Payflex Holdings, Inc.
ATTN: Rob Butler
10802 Farnam Dr.
Omaha, NE 68154
Facsimile: 402-636-8760
Consumer Health Technologies

ATTN: Pradeep Goel KPMG
6750 N. Andrews Ave., Ste. 250 ATTN: Steven Carlin
Ft. Lauderdale, FL 33309 757 Third Ave., 11th Floor
Facsimile: 954-315-0903 New York, NY 10017
Telephone: 212-909-5636
Deccan I Servs. Pvt. Ltd. Facsimile: 212-954-5283
iEnergizer E-Mail: sbcarlin@kpmg.com
ATTN: Ashish Madan
Plot No. 12C/1, South Phase Qwest Communications
Thiru-Vi-Ka Industrial Estate ATTN: Richard Baer
Grundy, Chennai - 600 032 1801 California
INDIA Denver, CO 80202
Telephone: 044-22253611 Telephone: 303-992-1400
E-Mail: ashishmadan@ienergizer.com Facsimile: 303-896-8515
U.S. Contact Address:
1120 Avenue of the Americas Shawnee Administrative Servs., LLC
New York, NY 10036 ATTN: Jamie Simmons
Telephone: 212-626-6684 307 E. Washington St.
Facsimile: 212-626-6685 Benton, IL 62812
Telephone: 618-439-9545
Dell Marketing LP Facsimile: 618-435-4328
ATTN: Kristen Carey
12234 N. IH 35, Building B Statim LLC
Austin, TX 78753-1705 ATTN: Charles Deberry
Telephone: 512-728-3500 820 W. Greenwood Ave., #100
Facsimile: 512-728-2958 Waukegan, IL 60087
Telephone: 847-782-9100
Dewitt Stern Group Facsimile: 847-782-9101
ATTN: Jolyon F. Stern
420 Lexington Ave., Ste. 2700 Thoughtworks
New York, NY 10070 ATTN: Trevor Mather
Telephone: 212-867-3550 200 E. Randolph St., 25th Floor
Facsimile: 212-949-2293 Chicago, IL 60601-6501
Telephone: 312-373-1000
Flexright a/k/a Workable Solutions Facsimile: 312-373-1001
ATTN: Terry McCorvie
7120 Lake Ellenor Driv. Top Layer Security
Orlando, FL 32809 ATTN: Peter Rendall
Telephone: 866-587-3539 1 Cabot Rd.
Facsimile: 866-865-3539 Hudson, MA 01749
Telephone: 978-212-1500
ISU Financial Services Facsimile: 978-212-1600
ATTN: Kaye Chavalas
201 California St., Ste. 200
Telephone: 800-782-9400
Facsimile: 415-248-3534
Martin Hancock
4735 Kelvington Dr.
Indianapolis, IN 46254
Telephone: 317-549-5395
Facsimile: 866-235-2935
E-Mail: mh@mh-in.com
EXHIBIT 2
OVERNIGHT UPS SERVICE
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
EXHIBIT 3
VIA COURT’S ECF SYSTEM
Kurt M. Carlson kcarlson@muchshelist.com

Colleen McManus cmcmanus@muchshelist.com
Daniel Rubin drubin@statmanharris.com
Robert M. Fishman rfishman@shawgussis.com
John Guzzardo jguzzardo@shawgussis.com
Mark L. Radtke mradtke@shawgussis.com
David A. Agay dagay@kirkland.com
William J. Factor wfactor@wfactorlaw.com
Grayson T. Walter gwalter@proskauer.com
IN THE UNITED STATES BANKRUPTCY COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
In re: ) Chapter 11
)
CANOPY FINANCIAL, INC., ) Case No. 09-44943
)
Debtor. ) Hon. Eugene R. Wedoff
)
DEBTOR’S MOTION TO CONVERT CASE TO A CHAPTER 7 CASE
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:
Jurisdiction and Venue
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
pursuant to 28 U.S.C. § 157(b)(2).
2. The statutory predicates for the relief requested herein are sections 105(a) and
1112(a) of the Bankruptcy Code.
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
with the Court.
4. Canopy is a provider of health insurance-related banking and processing services.
In broad terms, Canopy’s customers place in custodial accounts monies deposited by the
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
health savings accounts directly with Canopy.
5. In November 2009, Canopy discovered that financial statements provided to its
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
with their requests for information.
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
presently continuing to be processed in the ordinary course of business.
2
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
bankruptcy case to a case under chapter 7 of the Bankruptcy Code.
Basis for Relief
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:
The debtor may convert a case under this chapter to a case

under Chapter 7 of this title unless –
(1) The debtor is not a debtor in possession;
(2) the case originally was commenced as an

involuntary case under that chapter; or
3
(3) the case was converted to a case under this chapter

other than on the debtor's request.
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.
4
14. In the present case, the Debtor voluntarily filed its chapter 11 petition and is
currently a debtor-in-possession. Therefore, no exception to section 1112(a) is applicable. In
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,
thus further evidencing the Debtor’s good faith.
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
accounts pending a sale.
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
the best interest of the Debtor’s estate and its creditors.
5
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
requested, the Debtor submits that no further notice is required.
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.
Dated: December 23, 2009
Respectfully submitted,
CANOPY FINANCIAL, INC.
By: Vincent E. Lazar__________

One of its attorneys
Vincent E. Lazar (6204916)

Melissa M. Hinds (6288246)
Landon S. Raiford (6297473)
JENNER & BLOCK LLP
353 North Clark Street
Chicago, IL 60654-3456
Telephone: 312-222-9350
Facsimile: 312-527-0484

Chapter 7 Petition

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Case 09-44943 Doc 79 Filed 12/23/09 Entered 12/23/09 18:33:28 Desc Main

IN THE UNITED STATES BANKRUPTCY COURT

TO: ATTACHED SERVICE LIST:

time and place you may appear if you see fit.

Dated: December 23, 2009 Respectfully submitted,

CANOPY FINANCIAL, INC.

By: /s/ Vincent E. Lazar

I, Vincent E. Lazar, an attorney, hereby certify that on December 23, 2009, I

/s/ Vincent E. Lazar

United States Trustee Granite Global Ventures III LP

Integrated Data Storage Spectrum Equity Investors V, LP

Consumer Health Technologies

OVERNIGHT UPS SERVICE

VIA COURT’S ECF SYSTEM

Kurt M. Carlson kcarlson@muchshelist.com

IN THE UNITED STATES BANKRUPTCY COURT

DEBTOR’S MOTION TO CONVERT CASE TO A CHAPTER 7 CASE

Jurisdiction and Venue

pursuant to 28 U.S.C. § 157(b)(2).

1112(a) of the Bankruptcy Code.

with the Court.

4. Canopy is a provider of health insurance-related banking and processing services.

health savings accounts directly with Canopy.

5. In November 2009, Canopy discovered that financial statements provided to its

with their requests for information.

presently continuing to be processed in the ordinary course of business.

bankruptcy case to a case under chapter 7 of the Bankruptcy Code.

Basis for Relief

The debtor may convert a case under this chapter to a case

(1) The debtor is not a debtor in possession;

(2) the case originally was commenced as an

(3) the case was converted to a case under this chapter

currently a debtor-in-possession. Therefore, no exception to section 1112(a) is applicable. In

thus further evidencing the Debtor’s good faith.

accounts pending a sale.

the best interest of the Debtor’s estate and its creditors.

requested, the Debtor submits that no further notice is required.

Dated: December 23, 2009

CANOPY FINANCIAL, INC.

By: Vincent E. Lazar__________

Vincent E. Lazar (6204916)

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