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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 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.

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.

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 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.

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.

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.

Individual debtor who had elected to proceed under subchapter V of chapter 11 sought confirmation of his proposed plan over the objections of his ex-wife and the U.S. Trustee. The Court held that the Debtor did not qualify for subchapter V because he did not demonstrate that at least half of his debts were business debts, as required by the definition for a “small business debtor” in 11 U.S.C. § 101(51D). The Court rejected the Debtor’s argument that a property settlement debt he owed to his ex-wife constituted a business debt because it compensated the ex-wife for the value of his business. The Court further held that the plan could not be confirmed and that the ex-wife’s request for conversion should be granted because the Debtor was not current on all his postpetition domestic support obligations. Although the Court recognized that the Debtor’s financial situation had changed significantly due the COVID-19 pandemic and that the Debtor had sought a modification of his support obligations in state court, those facts did not alter the Code’s clear mandate that a Debtor be current on all postpetition support obligations to avail himself of the protections of chapter 11.

Days before the Chapter 13 Debtors filed their case, they received funds compensating Mrs. Gosch for injuries related to an automobile accident (the “Funds”).   The Debtors deposited the Funds in a segregated bank account, filed their Chapter 13 case and claimed the Funds as exempt.  The Debtors did not include the Funds in their calculation of Current Monthly Income (“CMI”) and did not propose to contribute any of the Funds to pay creditors under their plan. The Debtors proposed to pay their unsecured creditors roughly 24% on their claims.

The Chapter 13 Trustee relied on Hamilton v. Lanning, 560 U.S. 505 (2010) and objected to confirmation of the Debtors’ plan contending that the Debtors had failed to commit all their “projected disposable income” to payment of creditors under their plan as required by 11 U.S.C. § 1325(b)(1)(B).   The Trustee also objected to confirmation pursuant to 11 U.S.C. § 1325(a)(3) on the grounds that the Debtors had failed to propose their plan in good faith.

Following an evidentiary hearing, the Court overruled the Trustee’s confirmation objections.  The Debtors had received the Funds after the end of the six-month lookback period for calculating CMI (11 U.S.C. 101(10A)) which ends on the “last day of the calendar month immediately preceding the date of the commencement of the case,” but before the case was filed in the early days of the next month.  Thus, the Debtors properly excluded the Funds from their CMI calculation.  In addition, they had claimed the Funds as fully exempt so the Funds did not affect the Debtors’ “best interest of creditors” test in Section 1325(a)(4).  The Trustee also argued under Section 1325(b)(1)(B) that because the Funds would be available to the Debtors to draw on in the future, Lanning would dictate that they should be included as “projected disposable income.”  The Court rejected the Trustee’s argument that the Funds were “future” income for purposes of calculating projected disposable income because the Funds had already been received pre-petition, albeit not during the Section 101(10A) period for calculating CMI.

The Trustee’s only evidence that the Debtors had not proposed their plan in good faith was that they had not included the funds in their calculation of CMI and did not commit any of the Funds to payment of creditors under their plan.  Relying on the instruction of the Tenth Circuit in Anderson v. Cranmer (In re Cranmer), 697 F.3d 1314, 1319 (10th Cir. 2012), the Court rejected the notion that the Debtors, who calculated their plan payments exactly as Congress had contemplated, could be held to have acted in bad faith.

Before the Court were jointly administered Chapter 11 cases, consisting of a corporate debtor and the principal of the same. First, in an issue of first impression, the Court considered whether the debtors, whose cases were filed prior to the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the effective date of the Small Business Reorganization Act of 2019 (“SBRA”), could retroactively elect to proceed under Subchapter V when their respective debts on the petition date exceeded $2,725,625 but were less than $7.5 million.

The Court noted that there is no statutory prohibition to applying SBRA to cases that were pending prior to its effective date. Thus, citing In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa. 2020), the Court found that an eligible pre-SBRA debtor may generally amend its petition to elect to proceed under Subchapter V, subject to providing notice and an opportunity to object to all parties-in-interest under Fed. R. Bankr. P. 1009(a) and 1020(b) and, in the event of an objection to such election, a finding that the level of prejudice to the objecting party does not override the debtor’s right to amend its petition under Rule 1009(a). However, under the principles of statutory construction, the Court concluded that the increased debt limit provided for by the CARES Act to qualify as a debtor under SBRA unambiguously applied only to debtors whose cases were filed on or after the date the CARES Act was enacted. Accordingly, the Court held that because the debtors’ cases were filed prior to the enactment of the CARES Act, and their respective debts exceeded $2,725,625 on the petition date, the debtors were not eligible to proceed under Subchapter V.

Second, the Court weighed the debtors’ alternative request to dismiss both cases to refile under Subchapter V, against their largest creditor’s request to appoint a Chapter 11 trustee in both cases. Notably, the debtors and the creditor were embroiled in pre-petition district court litigation which culminated in a five-day bench trial and a fifty-six-page opinion and judgment in favor of the creditor and against the debtors for federal trademark infringement, Colorado common law trademark and trade name infringement, misappropriation of trade secrets, and breach of fiduciary duty. At the time of this Court’s ruling, the district court judgment was on appeal.

In the corporate case, the Court noted that the creditor advanced a multitude of arguments as to why the Court should order the appointment of a Chapter 11 trustee. In the interest of brevity, the Court focused its analysis on the five arguments which the Court found were most compelling and unrefuted by the debtors. First, the Court found that, pre-petition, the principal of the corporate debtor had admittedly undertaken a series of dishonest actions in the formation of the corporate debtor. Second, the Court found that, by virtue of the principal’s former role as employee and director of the creditor, the principal had admittedly breached his fiduciary duties to the creditor in the formation of the corporate debtor. Third, the Court found that the corporate debtor had mislabeled several lots of product pre-petition and sold the mislabeled, adulterated product to customers at the cost of unadulterated product. The Court further concluded that, post-petition, the corporate debtor failed to take any action to determine whether the mislabeled product was still in use by customers and, if so, to recall the mislabeled product. Fourth, the Court found that the corporate debtor’s monthly operating reports were perpetually inaccurate and untimely amended. Finally, the Court found that the corporate debtor’s monthly operating reports reflected continuing losses, and that certain projected future revenues which could render the corporate debtor profitable, were highly speculative.

For the above reasons, and due to the resulting mistrust, acrimony, and deadlock between the parties, the Court held that there was cause to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a)(1), and that such appointment was in the best interests of the estate and its creditors under 11 U.S.C. § 1104(a)(2).  

In the principal’s case, the Court noted that the same mistrust and acrimony that was present between the parties in the corporate case, was also present between the parties in the principal’s case. However, the Court found that the creditor presented little additional, unrefuted evidence to compel the appointment of a Chapter 11 trustee in the principal’s case. The Court noted that the principal exemplified the purest example of an individual Chapter 11 debtor in that he was not a sole proprietor, did not manage any significant amount of real property, and generated no income outside of his relationship with the corporate debtor. Thus, the Court concluded that, because there would be little for a Chapter 11 trustee to manage in the principal’s case, the costs associated with the appointment of such trustee would outweigh any benefit derived by the estate. In fact, the Court believed that many of the creditor’s concerns regarding the principal’s case were adequately addressed by the appointment of a Chapter 11 trustee in the corporate debtor’s case.

For the above reasons, the Court held that the creditor failed to establish cause for the appointment of a Chapter 11 trustee in principal’s case, or that such appointment was in the best interests of the estate and its creditors.  Instead, the Court found that the debtors had established cause to dismiss the principal’s case.

The Court noted that cause may exist to grant a debtor’s motion to voluntarily dismiss his Chapter 11 case when there has been a material change in circumstances post-petition. Here, the Court found that changes in the law ushered in by both SBRA and the CARES Act constituted such a material change in circumstances. Citing low success rates and obstacles frequently faced by individual Chapter 11 debtors, Court noted that Chapter 11 has historically been a poor fit for many individual debtors. The Court noted why Subchapter V may be a better fit for individual debtors but explained that Subchapter V also affords no shortage of protections for creditors.

The Court ultimately concluded that creditors would not be prejudiced by the dismissal of the principal’s case to refile under Subchapter V. Rather, in light of the streamlined provisions of Subchapter V, intended to achieve a timely and cost-effective reorganization, the Court held that dismissal of the principal’s case under 11 U.S.C. § 1112(b) was in the best interests of the estate and its creditors.

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