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In re Saratoga and North Creek Railway, LLC, Bankr. Case No. 20-12313 TBM (Bankr. D. Colo. Jan. 13, 2022) (confirmation of Chapter 11 Plan pursuant to 11 U.S.C. § 1129) 01/13/2022

The Debtor, Saratoga and North Creek Railway, LLC (the “Debtor”), is a “common carrier” that filed for protection under Chapter 11 of the Bankruptcy Code.  In the Debtor’s Chapter 11 plan of liquidation, the Debtor proposed to sell through auction its largest non-cash asset:  a real property easement created by virtue of a federal stipulated judgment.  The State of New York, the New York State Department of Environmental Conservation, and the New York State Olympic Regional Development Authority (together, “New York”) contested confirmation on the basis of 11 U.S.C. §§ 1129(a)(1), (3), and (7).

The Court determined that requiring bidders to assume the common carrier obligation was a valid exercise of the Debtor’s business judgment and did not violate Section 1129(a)(1), as the Debtor had reason to believe that sale to a party willing to assume the common carrier obligation would be more readily approved by the Surface Transportation Board (“STB”).  The Court further found that the plan satisfied the good-faith requirement of Section 1129(a)(3) in that the Debtor was engaged in an honest, sincere, and non-abusive effort to promptly confirm its plan, sell the easement, pay creditors, and exit bankruptcy.  The Court further found that the plan was feasible, dismissing the argument that a prior denial, on procedural grounds, of the stalking-horse bidder’s pre-sale application to the STB, demonstrated that the plan was not feasible. 

The Court dismissed the notion that determining feasibility under Section 1129(a)(3) was impossible because the plan did not provide for sale until after confirmation, noting that such procedure was common in Chapter 11 and is contemplated in Section 1123(a)(5)(D).  While STB approval of the sale was not guaranteed, the Debtor had offered evidence that it had structured the sale with the intention of maximizing the odds that the sale would be approved, and had demonstrated that there is at least a “reasonable prospect” that the stalking horse or another bidder would be able to secure STB approval.  The Court also rejected the argument that the plan was not proposed in good faith, citing the Debtor’s extensive efforts to market and sell the easement, including its establishment of a data room for potential purchasers and its entry into nondisclosure agreements with multiple potential buyers, and its securing of a stalking-horse bidder as evidence of its good faith effort. 

The Court next rejected New York’s contention that the plan did not satisfy the best interests of creditors test of Section 1129(a)(7).  The Court found the plan did not prohibit a bid in excess of the stalking horse’s bid; it merely established the requirement, deemed necessary in the Debtor’s business judgment, that a potential purchaser assume the Debtor’s common carrier obligation.  And the plan did not propose to involve a Chapter 11 trustee in the management of the debtor’s assets, but rather an unpaid plan administrator.  Since the manager would not be compensated, the proposed plan would be less expensive than liquidation by a Chapter 7 Trustee.

Having rejected New York’s objections, the Court confirmed the Debtor’s Chapter 11 plan.

 

In re Donald R. Johnson and Linda A. Johnson, Bankruptcy Case No. 20-15951 TBM, Docket No. 66 (Bankr. D. Colo. Dec. 15, 2021). 12/15/2021

The Debtors filed for bankruptcy protection under Chapter 7.  Their case started out uneventfully.  However, after the Debtors received their discharge, the Chapter 7 Trustee moved to employ a broker to sell the Debtors’ residence.  The Trustee contended that there was sufficient equity in the house to pay the mortgage, closing costs and the Debtors’ homestead exemption as well as to pay some dividend to the unsecured creditors in the case.  In response, the Debtors moved to convert their case to Chapter 13 to save their home.

The Chapter 7 Trustee objected that the Debtors were not eligible for Chapter 13 relief and that their case would be dismissed promptly upon conversion because the Debtors requested conversion in bad faith.  The Trustee relied on Marrama v. Citizens Bank of Mass., 549 U.S. 365 (2007).  

After considering the facts and law, the Court held that the Debtors were eligible for Chapter 13 relief based upon their financial circumstances at the time of conversion; and that they had not engaged in bad faith in their effort to convert to Chapter 13.  The Court analyzed the facts using a totality of the circumstances test and the seven factors endorsed by the Tenth Circuit in In re Gier, 986 F.2d 1326, 1329 (10th Cir. 1993).  When analyzing one of the Gier factors, the Debtors’ motivation for converting to Chapter 13, the Court found that the Debtors’ sole motivation was to save their home and such was a permissible motivation contemplated by Congress in enacting the provisions of Chapter 13.  The Court granted the Debtors’ motion to convert to Chapter 13.

Harrington v. Neary, Adv. Pro. No. 20-01239-JGR (In re Neary, Case No. 20-10212-JGR). Order entered November 30, 2021 (Doc. 18) (setting aside clerk’s entry of default after 11 months) 11/30/2021

In an adversary proceeding in an individual Chapter 7 case, Plaintiffs objected to Debtor’s discharge and sought a determination of non-dischargeable debt, asserting several fraud-based legal theories. Plaintiffs properly served process on Debtor and obtained a clerk’s entry of default when Debtor failed to respond to the complaint. Plaintiffs never sought default judgment. Approximately 11 months after the clerk’s entry of default, Debtor filed a motion to set it aside.

The Court was tasked with reconciling Debtor’s failure to respond to the complaint with Plaintiffs’ failure to pursue a default judgment. The Court considered the motion to set aside under the good cause standard of Fed.R.Civ.P. 55(c) and the three accompanying factors from Pinson v. Equifax Credit Info. Serv., Inc., 316 Fed Appx. 744, 750 (10th Cir. 2009): (1) whether the default was willful, (2) whether setting it aside would prejudice the other party, and (3) whether there is a meritorious defense. Ultimately, even though Debtor’s default was willful, the Court set aside the clerk’s entry of default because Debtor had now raised a potentially meritorious defense; setting aside the clerk’s entry of default would not cause concrete prejudice to Plaintiffs who had failed to pursue default judgment for 11 months; and federal courts have a strong preference for resolving cases on their merits.

In re NRS Properties, LLC, Bankruptcy Case No. 21-10744 TBM, Docket No. 89 (Bankr. D. Colo. November 22, 2021). 11/22/2021

The Debtor, a limited liability company claiming to be a “family farmer,” filed for protection under Chapter 12 to stop a foreclosure on the Debtor’s dry land ranch by its sole secured creditor.  The Debtor filed an initial Chapter 12 plan and then withdrew it.  The case lagged.  So, the secured creditor filed a motion to dismiss pursuant to 11 U.S.C. § 1208(c) for unreasonable delay, gross mismanagement, and continuing loss to or diminution of the estate.  The secured creditor also argued that the Debtor was ineligible to obtain relief under Chapter 12 pursuant to 11 U.S.C. § 109(f).  The Debtor contested dismissal and filed an amended Chapter 12 plan proposing a “dirt-for-debt” transfer of part of its dry land ranch to the secured creditor.  The secured creditor and the Chapter 12 Trustee objected to confirmation.  The Court conducted a combined evidentiary hearing on confirmation and dismissal.

The Court determined that the Debtor was eligible to file for protection under Chapter 12 To reach its conclusion, the Court engaged in a detailed analysis of the Chapter 12 eligibility statute coupled with other Bankruptcy Code provisions defining the terms “farmer,” “family farmer” (as applicable to corporations), and “family farmer with regular annual income.”  Factually, the Debtor satisfied the eligibility criteria.  Thereafter, the Court assessed confirmation issues and ultimately determined that the amended Chapter 12 plan could not be confirmed because: (1) the amended Chapter 12 plan was internally contradictory, unclear, and ambiguous; (2) the Debtor failed to establish that its proposed treatment of the secured creditor satisfied the “cram down” requirements of 11 U.S.C. § 1225(a)(5)(B); and (3) the Debtor otherwise failed its confirmation burdens under 11 U.S.C. § 1225(a).     

Thereafter, the Court addressed dismissal.  Based upon the facts, the Court concluded that the Debtor’s case should be dismissed under 11 U.S.C. §§ 1208(c)(1) and (9).  The Court determined that the Debtor had engaged in unreasonable delay and committed gross mismanagement by failing to comply with basic Bankruptcy Code reporting and administration requirements as well as by transfer of most of its income to a related entity for no consideration.  The Court also found that the Debtor had suffered continuing losses during the bankruptcy case with no reasonable likelihood of rehabilitation.  The Court dismissed the bankruptcy case.

In re Lost Cajun Enter., Case No. 21-12072-JGR. Order entered November 5, 2021, (Doc. 136) (confirming Subchapter V plan over former insider’s objections and attempted submission of competing plan) 11/05/2021

In two jointly administered Chapter 11 Subchapter V cases, Creditor, a former insider of the two entity Debtors, objected to plan confirmation. Both Debtors were in the food/restaurant industry and experienced a significant downturn with the onset of the COVID pandemic in 2020. Prior to the bankruptcy case, Creditor helped start the businesses in 2012 and sold his ownership interests in 2018, with purchase price payments due to him over eight years. When the bankruptcy case was filed, Debtors had defaulted on the purchase price payments and the parties had failed to reach a corresponding settlement.

Creditor was the only party to object to plan confirmation. He claimed that the plan was not proposed in good faith, was not fair and equitable, and was not in the best interest of the creditors. He also disputed the accuracy of Debtors’ financial projections and liquidation analysis. He proffered his own competing plan.

After holding an evidentiary hearing on confirmation, the Court confirmed Debtors’ plan over Creditor’s objection. The Court found that, considering the totality of the circumstances, Debtors’ plan was proposed in good faith because Creditor’s buyout was not forced upon him, Debtors have been forthright throughout the bankruptcy process, the other creditors either accepted or did not oppose the plan, and because Subchapter V does not allow the Court to consider competing plans like Creditor’s. Although Creditor took issue with Debtors’ liquidation analysis, he did not offer any contradictory evidence. Finally, the plan was fair, equitable, and feasible because Debtors would pay the secured creditor in full and make payments above their projected disposable income to the unsecured creditors, and would have the cash to do so.

In re Gerke, Case No. 21-14171 EEB 10/28/2021

Family farmers in a chapter 12 case filed a motion seeking permission to use the cash collateral of their primary secured lender, a Bank.  The Bank objected, arguing that the Debtors’ offer of adequate protection in the form of replacement liens on future cash, crops, and livestock was too speculative.  The Court rejected this argument, concluding that the Bank was only entitled to additional adequate protection if the metamorphosis of the Bank’s collateral from cattle to cash and from crops to cash, and then from cash back into cattle and crops, would result in erosion of its position.  Because the Debtors established that the Bank’s position would be improved over time, the Court allowed the Debtors to use cash collateral on those items in their budget that would maintain the status quo or improve the Bank’s position.  The Court emphasized that the Bank was not entitled to demand, through the guise of adequate protection, that its farm loan be turned into a more risk-free loan.

In re Michael Bryan Albert, Bankr. Case No. 16-15128 TBM (Bankr. D. Colo. Oct. 27, 2021) (modification pursuant to 11 U.S.C. § 1329(d)) 10/27/2021

The Debtor committed, in his confirmed Chapter 13 plan, to make regular monthly payments to the Chapter 13 Trustee for 5 years.  He made all such payments for four years and eleven months, despite experiencing some financial hardships.  But then, he made the final payment to the Chapter 13 Trustee 23 days after expiration of the plan term (if the beginning date of the plan is calculated according to the most common way to make such calculation).  Thereafter, the Debtor requested that the Court grant him a discharge pursuant to 11 U.S.C. § 1328(a).  No one objected.  However, because the Debtor’s discharge raised complex legal issues concerning the five-year Chapter 13 plan limit, including the issue of when the five-year plan period started, and the issue of whether the Court could grant the discharge to the Debtor if he had made the payment outside of the term of the plan, the Court ordered briefing on the issue.  The Chapter 13 Trustee and the Debtor submitted briefs, and a group of Chapter 13 practitioners also submitted an amicus brief. 

In the meantime, the Debtor filed a motion asking the court to approve a modification of his Chapter 13 plan to extend the term from 60 months to 62 months, relying on 11 U.S.C. § 1329(d), a new amendment to the Bankruptcy Code designed to protect debtors who had “experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic.”  In its judicial discretion, the Court elected to address the modification request first and the discharge request second. 

In its ruling, the Court noted that, while debtors must generally complete plan payments within 5 years, citing a recent binding, appellate decision, Kinney v. HSBC Bank USA, N.A. (In re Kinney), 5 F.4th 1136 (10th Cir. 2021), Section 1329(d) allowed debtors who had suffered a material hardship due, directly or indirectly, to the COVID-19 or the Coronavirus pandemic, to modify their Chapter 13 plans.  The Court then determined that, based on the circumstances set forth in the Debtor’s motion to modify, the Debtor had satisfied the requirements of Section 1329(d) such that the Court could approve his modified plan extending the term for payment to the Chapter 13 Trustee from 60 to 62 months.  Further, upon determining that the Debtor had made “all payments under the plan,” as modified, the Court granted the Debtor a discharge pursuant to 11 U.S.C. § 1328(a).

In re Mattorano, Case No. 20-11814-JGR. Order entered October 5, 2021, (Doc. 221) (confirming Chapter 13 plan over objections of lack of good faith and lack of feasibility, despite debtors’ mistakes on bankruptcy forms and purchase of new home) 10/05/2021

In a Chapter 13 case, Creditors objected to plan confirmation, primarily alleging lack of good faith and lack of feasibility. Prior to the bankruptcy case, Creditors obtained a state court judgment for money damages against Debtors, after which Creditors propounded extensive post-judgment discovery. During the bankruptcy case, Creditors also propounded extensive, contentious discovery. Relief from stay was granted to allow the appeal of the state court judgment to proceed. The appellate court affirmed the trial court and remanded the case to determine if treble damages were appropriate (an issue that was not resolved at the time of confirmation). Debtors admitted that their debt from the state court judgment is non-dischargeable.

The Court confirmed the Chapter 13 plan. The Court found that the plan was feasible based on the amount of the proposed payments and the stability of Debtors’ income. The Court also found that the plan and the bankruptcy case were filed in good faith. Although Debtors made mistakes in completing bankruptcy forms and answering interrogatories, they were accidental, honest mistakes and Debtors amended their bankruptcy schedules twice. Similarly, although Debtors closed on the purchase of a home after the state court judgment entered against them, their mortgage payments did not differ significantly from their previous rental housing payments and they cancelled life insurance payments to provide more return to creditors. Debtors also committed substantial income to pay creditors under the plan. Even though the Chapter 13 Trustee had objected to confirmation, those objections were consensually resolved.

In re Lakeview, Case No. 14-16938 EEB, Chapter 7, September 23, 2021. 09/23/2021
The Debtor’s former CEO and president filed a chapter 11 administrative expense claim for his unpaid salary during the chapter 11 case.  He claimed the reasonable value of his services was the amount set forth in his prepetition employment contract. The chapter 7 trustee objected, arguing that the CEO’s services were of no benefit to the chapter 11 estate.  
 
Under 11 U.S.C. § 503(b)(1)(a), an administrative expense claimant must demonstrate that it provided services to a debtor-in-possession that were beneficial to the operation of the debtor’s business.  In re Amarex, 853 F.2d 1526 (10th Cir. 1988). If the claimant meets the Amarex test, he is entitled to a priority claim for the “reasonable value” of his services.  NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984).  
 
The evidence demonstrated that the CEO’s services provided a benefit to the estate.  There was no dispute that the CEO managed the Debtor’s operations and assisted in the administration of its bankruptcy case and that the Debtor had no other employees who could do that work.  With respect to the value of the CEO’s services, the Court observed that many courts have ruled that there is a rebuttable presumption that the price under a pre-bankruptcy contract equals the reasonable value of services.  Regardless of whether a pre-bankruptcy contract is presumptive, however, it provides some evidence of the value of services.  Here the CEO supplemented that evidence with his detailed testimony about the work he performed during the 11 case and the expert testimony of an executive compensation consultant that his salary was reasonable compared to salaries of executives with similar duties and responsibilities in the CEO’s industry.  
 
The Trustee presented no direct evidence of the reasonableness of the CEO’s salary.  She relied only on prior rulings in the case that expressed the court’s concern over the CEO’s management style and the lack of progress in the case.  She failed to produce her own expert or put into evidence any other facts from which the Court could reach a different opinion as to how to value the CEO’s services.  
The Court concluded that, while it had wide discretion to reject the contract rate, the historical rate paid to the CEO prepetition, or the expert testimony offered, it could not make an arbitrary determination of value.  It must tie its determination of different value to something else in the record.  Finding nothing else in this record to support a differing value, the Court determined that any other valuation it might choose would be purely arbitrary.  As such, the Court allowed the administrative claim in the full amount of the unpaid salary under the CEO’s contract.
In re John Matthew Ikalowych, Bankruptcy Case No. 20-17547 TBM (Bankr. D. Colo. Apr. 15, 2021) (eligibility to be a Chapter 11, Subchapter V debtor pursuant to 11 U.S.C. § 1182). 04/15/2021

The Debtor, John Matthew Ikalowych (“the Debtor”), personally guaranteed most of the debts of Lyceum Hailco, LLC (“Hailco”), 30 percent of which was owned by the Debtor’s wholly-owned limited liability company, JMI Management, Inc. (“JMI”). When Hailco failed, the Debtor filed for bankruptcy relief under Subchapter V of Chapter 11. 

The United States Trustee, joined by Hailco’s lender, objected to the Debtor’s designation under Subchapter V, arguing that the Debtor was not eligible to be a small business debtor because the Debtor was not “engaged in commercial or business activities” when he filed for bankruptcy. The Debtor contested the UST’s objection, arguing that he was eligible to be a Subchapter V debtor by virtue of his full ownership of JMI, which remains in existence and operation, and his indirect ownership of Hailco, as well as his “wind down” work for Hailco.

After undertaking an analysis of the text of 11 U.S.C. § 1182(1)(A), the Court determined that the Debtor was a “person” within the meaning of 11 U.S.C. § 101(41); that the Debtor’s debts did not exceed the $7,500,000 debt cap of Section 1182(1)(A); that the Debtor was “engaged in commercial or business activities”; and that the Debtor’s debts “arose from” from such “commercial or business activities” within the meaning of Section 1182(1)(A).  Specifically, the Court examined the meaning of the term “commercial and business activities” and found that the phrase  is exceedingly broad.  The Court also examined the meaning of the term “engaged in” and found that such language required the Debtor to be “engaged in commercial or business activities as of the date the Debtor filed his bankruptcy petition (the “Petition Date”), deeming relevant the circumstances immediately preceding and subsequent to the Petition Date.  Applying those definitions, the Court found that the Debtor’s continued operation and management of JMI both before and after the filing date, his work to wind down Hailco both before and after the Petition Date, and his work as a wage-earner at an insurance brokerage company in which he held no ownership interest all constituted “commercial or business activities” which the Debtor was “engaged in” as of the Petition Date.  Undertaking further statutory analysis, the Court found that the Debtor’s debts, which were based primarily on his guarantees of Hailco’s debts, arose from such “commercial or business activities.”  Therefore, the Court determined, the Debtor was eligible to be a debtor in Subchapter V.

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