A Nevada judge has converted American Pacific Financial Corp.'s Chapter 11 case to a Chapter 7 liquidation, despite the investment firm's intent to conduct its own liquidation.

Judge Bruce A. Markell of the U.S. Bankruptcy Court for the District of Nevada in Las Vegas on Feb. 9 granted a motion by APFC's Chapter 11 trustee to convert the case, according to Louis M. Bubala III of Armstrong Teasdale LLP, counsel to the official committee of unsecured creditors.

Also during the hearing, Markell denied approval of a disclosure statement filed by the committee and the debtor on the grounds that it did not contain adequate information, Bubala said.

No orders had been signed as of midday Monday, Feb. 13.

Chapter 11 trustee Christopher R. Barclay of the Office of C.R. Barclay CPA had requested the case conversion on Dec. 9, asserting that an expedited liquidation process would be most beneficial for the debtor's estate and for its creditors.

APFC and the creditors' committee, however, disagreed and were pursuing a liquidation plan that could have provided up to $67.5 million to repay creditors.

APFC is an asset management and private equity firm that purchased distressed assets to turn around and resell for a profit. Barclay was appointed on May 15 at the request of U.S. Trustee August B. Landis, who alleged APFC's president and owner, Larry R. Polhill, had committed several fraudulent and dishonest acts, such as withholding information from investors, and grossly mismanaged the company.

The debtor turned over bank accounts with funds totaling $53,836 to Barclay on his appointment. Barclay then immediately eliminated unnecessary operating costs and terminated all unauthorized payments to insiders, allowing the account balance to increase to $276,201, according to Barclay's motion to convert the case. Administrative costs in the case, however, swelled to $405,000, leaving APFC administratively insolvent.

Barclay said his task of overseeing the debtor has been "impeded" by Polhill's poor record keeping, which has made tracking investments difficult. Barclay called Polhill's management "Byzantine" and said Polhill had drawn or transferred funds for no apparent reason.

According to his investigation, the debtor has only nominal ongoing operations and most of its investments are nonperforming, even though the debtor listed $16 million in investments in its schedules. APFC's largest investment is in Capital Foods LLC, but that investment generates no current income, Barclay said.

Its only performing investments generate less than $15,000 per month and are all passive investments in various stages of liquidation, the trustee said.

Barclay said he opposed the liquidation plan proposed in the case because it left Polhill in control of key assets and did not provide sufficient distribution to creditors. "Polhill's past mismanagement renders any plan premised on his continued involvement unfeasible," Barclay said.

He asserted that a Chapter 7 liquidation would be less costly and more efficient than a liquidation under Chapter 11. He also said a Chapter 7 trustee would better be able to pursue claims against Polhill and other insiders that may have benefited at APFC's expense.

In a Dec. 21 response, APFC called Barclay's conclusions incorrect. The debtor asserted it was not administratively insolvent and that its investments are generating income. APFC also said its Chapter 11 liquidation plan would been overseen by a liquidating trustee and thus Polhill would not be in charge, nor would his past alleged mismanagement affect the liquidation.

"[The] trustee's statement indicates his lack of attention to [the] debtor's assets," APFC wrote. "He has no experience in the business in which [the] debtor has been engaged."

APFC had originally sought to reorganize when it filed for Chapter 11 on Sept. 21, 2010, and filed a reorganization plan on Nov. 3, 2010, under which APFC would have moved to Nevada and changed its name to American Pacific Fidelity Corp. post-bankruptcy. The debtor then filed a liquidation plan on April 1 due to the allegations of mismanagement.

APFC filed an amended plan and disclosure statement in conjunction with the creditors' committee on Jan. 12 and filed a further amended version on Feb. 7.

The latest plan relied on a settlement between the creditors' committee, the debtor and Polhill.

According to the settlement, APFC's primary asset is its interest in Capital Foods, which consists of a 26.5% interest and 87.3% of preferred units. APFC estimated the units would have a value of $45.5 million if APFC continued operations and liquidated through 2017.

Through a series of transactions with entities related to APFC and Polhill, Stillwater Capital -- 40% owned by Polhill -- acquired a 29.66% interest in Capital Foods, doubling in its ownership interest. The committee asserted that Polhill "may have breached his fiduciary duties" in allowing Stillwater to acquire the additional 29.66% interest and that stake, valued at $30 million, should belong to APFC.

While Polhill denied breaching any duties, he agreed that Stillwater Capital would contribute 90% of all distributions from Capital Foods to the liquidating trust for APFC until the debtor received $30 million from any source; 75% of distributions until the trust had $100 million; and 50% until the trust had $150 million.

The amount in the trust also includes the liquidation of APFC's interests. The plan projected the trust would receive $67.5 million in the best-case scenario.

The plan, however, did not guarantee any distributions to creditors. Instead, it only outlined what creditors could possibly receive should the Capital Foods investment prove profitable.

The committee said that its plan, which would provide payments through 2017, was preferable to a "premature liquidation" under Chapter 7.

Under the plan, priority claims, totaling $11,000, were to be paid first. General unsecured creditors with claims of $5,000 or less -- totaling $37,315 -- were to receive 50% of their claims after priority claims were paid in full. Unsecured claims larger than $5,000, totaling $159.5 million, were to receive the net proceeds of the trust.

APFC has no secured creditors.

Founded in 1978 in Grand Terrace, Calif., APFC blamed its bankruptcy on the recession.

It subsequently obtained a $100,000 unsecured debtor-in-possession loan from affiliate American Pacific Management Corp. As of Feb. 7, APFC had drawn only $40,000 of the loan to pay retainers to counsels in the case.

In schedules filed Oct. 5, the debtor listed roughly $16.6 million in assets and $161 million in liabilities.

Debtor counsel Kaaran E. Thomas of McDonald Carano Wilson LLP deferred comment to Bubala.

Barclay could not be reached for comment Monday. Christine A. Roberts, Elizabeth E. Stephens, James P. Hill and Jonathan S. Dabbieri of Sullivan, Hill, Lewin, Rez & Engel represent the trustee.