Wednesday, November 26, 2014

Two Cases Illustrate How to Bring a Chapter 11 Case to a (Successful) End

This is an article about the end of a Chapter 11 case.  As the Doors put it:
This is the end
Beautiful friend
This is the end
My only friend, the end

Of our elaborate plans, the end
Of everything that stands, the end
No safety or surprise, the end
All cases must come to an end.   Sometimes they linger on the docket until they smell like unwashed sweat socks stuffed behind the sofa.  Other times, the parties are eager to escape the scrutiny of the court and are looking for a creative way out.  This post focuses on how two cases reached their ends.

Structured Dismissal

In a recent case, Judge Harlin Hale wrote:
This case presents the issue of whether a bankruptcy court can approve a structured dismissal of a chapter 11 case, instead of conversion or forcing the parties to confirm a plan, when dismissal is what the parties want and is in the interest of creditors.
 In re Buffet Partners, L.P., et al, No. 14-30699 (Bankr. N.D. Tex. 7/23/14), p.1.    The opinion can be found here (PACER registration required).
What Happened:

Buffet Partners involved the Furr's restaurant chain's second trip to the bankruptcy buffet.   The Court entered an order approving the sale of substantially all of the company's assets within a little more than 90 days after filing.    The Debtor, the Purchaser and the Committee negotiated an agreement for funds to be set aside for the Debtor's and the Committee's professional fees as well as a stipend for unsecured creditors.   

The Debtor and the Committee then filed a motion to dismiss the cases upon certification that:  (1) the Committee had completed its reconciliation process; (2) all UST fees had been paid; (3) the Debtor had distributed funds to unsecured creditors according to a schedule to be filed with the Court; and (4) the Court had approved all final fee applications.   The UST was the only party to object, insisting that the case should be converted or that the Debtor be required to file a plan.

The Ruling:

The Court noted that, "Not much law, statutory or otherwise, exists regarding structured dismissals of this type."   Opinion, p. 4.    The Court concluded that structured dismissal was in the best interest of the creditors.   The Court stated:
In truth, in the present case, there is not much in the way of assets left to be administered. As noted by the In re court, the economic value of the Debtor in this case will be served by dismissing the case, rather than converting it. Converting this case to chapter 7 would interfere with prompt and efficient payment to creditors, a primary goal of chapter 11. The parties with the skin in the game do not wish to prolong the distribution of funds to creditors by a conversion to chapter 7, which undoubtedly will do just that. Nor do those parties want to go through the time and expense of a plan, which will cause the pool of money left to be greatly diminished.

On a smaller scale, structured dismissals occur regularly in this and other bankruptcy courts. Often the parties enter the case on the eve of foreclosure, work out their differences through a sale or giveback of property, and the parties enter an agreement submitted to this court for approval that results in the dismissal of the case. This court begins its look at deals struck in this court with the eye that “it’s not my money.” If appropriate notice is given and the process is fair and does not illegally or unfairly trample on the rights of parties, the proposal should be approved.   (emphasis added).
 Opinion, p. 5.   

Having noted its deferential starting point, the Court stated that "parties do not have carte blanche to enter any settlement they choose."   Opinion, p. 6.    The Court found three criteria that must be met by a settlement of this type as defined by Fifth Circuit precedent:   (1)  senior interests must be given full priority over junior interests; (2) the settlement must not constitute a sub rosa plan;  and (3) the settlement must not discriminate unfairly against parties that have not objected to the proposal.    

There is an interesting tension in Judge Hale's discussion of the Fifth Circuit precedent.   On the one hand, the settlement must satisfy the absolute priority rule and not discriminate unfairly, both of which are requirements for a cram-down under section 1129(b).   On the other hand, the settlement must not be a sub rosa plan.   Thus, it must meet some of the most fundamental requirements for a plan without actually being a plan.    The Court found that the proposed structured dismissal did not prefer junior interests over senior ones and that the settlement did not discriminate unfairly for the reason that there were no non-consenting creditors.   The Court stated that "(a)lthough certain aspects of this dismissal are 'structured,' it does not rise to the level of a sub rosa plan."   Opinion, p. 6.

In conclusion, the Court stated:
It is important to emphasize that not one party with an economic stake in the case has objected to the dismissal in this manner. While this fact is not outcome determinative, it is still worthy of consideration. All of the following parties affirmatively assent to the proposed dismissal: the Debtor, the Lender, and the Committee, which represents a large portion of the unsecured debt. The UST is the sole objecting party. This court does note that the UST is well within its rights to file the objection. The Bankruptcy Code gives thee UST standing. See 11 U.S.C. § 1109(b). In fact, this court looks to the UST to raise issues to cause it to stop and completely consider a matter even when no creditor objects.
Opinion, p. 7.   Here, once again, Judge Hale has stumbled upon an important truth.   Many parties (myself included) find objections from the U.S. Trustee to be an unwelcome annoyance, especially when the parties with an economic stake are in agreement.    However, the U.S. Trustee is given the institutional role of serving up issues for the Court to consider.  When the U.S. Trustee does so in a manner that is cogent and grounded in the Code, it does the parties and the Court a favor.

Of course, just because the UST raises an issue does not mean that the Court will adopt its position.  I am reminded of the scene in My Cousin Vinny where this exchange takes place:

Judge Haller:  Mr. Gambini . . . that is a lucid, intelligent, well thought-out objection.

Mr. Gambini:  Thank you, Your Honor.

Judge Haller:   Overruled.

While the U.S. Trustee was alone and unsuccessful in its objection, the end result was a useful opinion from the Court which will provide valuable guidance to future parties.

Final Decree

While the final decree under Bankruptcy Rule 3020 is the most common way to close a successful chapter 11 case, it is hard to find case law interpreting its requirements.   Judge Craig Gargotta recently added to this thin jurisprudence with his opinion in In re Valence Technology, Inc., No.  12-11580 (Bankr. W.D. Tex. 10/17/14).   The opinion can be found here.

 Debtor confirmed a plan on November 18, 2013 and the effective date occurred on December 4, 2013.    The Debtor appealed the orders partially allowing fees and expenses to two of its investment bankers.   Meanwhile, one of the investment bankers appealed the denial of its request for attorney's fees.   The Debtor requested entry of a final decree on the basis that the case had been "fully administered."   The investment bankers objected on the basis of the pending appeals.  They contended that without a pending case, there was no way to ensure that the Debtor paid their claims once the appeals process was concluded. 

Final decrees are governed by Bankruptcy Rule 3022, which allows the Court to enter a final decree "(a)fter an estate is fully administered in a chapter 11 reorganization case."

Judge Gargotta noted that many courts have relied upon the factors set out in the Advisory Committee Notes to Bankruptcy Rule 3022 in determining when a case has been fully administered.   These factors are:
Factors that the [bankruptcy] court should consider in determining whether the estate has been fully administered include (1) whether the order confirming the plan has become final, (2) whether deposits required by the plan have been distributed, (3) whether the property proposed by the plan to be transferred has been transferred, (4) whether the debtor or the successor of the debtor under the plan has assumed the business or the management of the property dealt with by the plan, (5) whether payments under the plan have commenced, and (6) whether all motions, contested matters, and adversary proceedings have been finally resolved.
Opinion, p. 3.   In the particular case, five out of six factors favored closing the case.   The Debtor further argued that closing the case would relieve it from the burden of paying U.S. Trustee fees and "remove the stigma of being in Chapter 11."    Id.  

The Court held that it was not necessary to meet all six factors and that courts agreed that a pending adversary proceeding alone was not sufficient to deny a closing order.    The Court also noted that the parties whose orders were being appealed could have protected themselves by requesting that the Debtor post a bond and could seek to reopen the case in the event that the Debtor needed to be persuaded to comply with the final orders on appeal.    As a result, the Court granted the application for final decree.

This opinion highlights the court taking a very practical approach to closing a case.   While there were matters still pending, the Bankruptcy Court was not directly involved in their resolution.   As a result, the Court concluded that leaving the case open as not being "fully administered" would be a matter of form over substance.

Note:   Procedurally, the party who would request a stay pending appeal and post a bond would be the appellant rather than the appellees.   However, the appellees could have forced the issue by seeking to execute upon the unstayed order which would have required the Debtor to seek a stay.

Friday, November 07, 2014

Fifth Circuit's Bankruptcy Opinions from October 2014

It's been a slow month in the Fifth Circuit, my home Circuit with just two bankruptcy-related opinions.   This month's cases involve a non-filing spouse who lost her homestead interest and a bank which provided "reasonably equivalent" value but not enough to constitute a complete defense to a fraudulent transfer claim.

Homestead Exemption; Takings Claim by Non-Filing Spouse

Thaw v. Moser (Matter of Thaw), No. 14-40108 (5th Cir. 10/9/14), which can be found here, is another case of the non-filing spouse losing her homestead interest.   Dr. Stanley Thaw filed bankruptcy while his spouse, Kernell Thaw, did not.  Because the Thaws bought their home within 1,215 days, the exemption was capped at $146,450.   However, because Dr. Thaw had liquidated non-exempt property and used it to pay down the homestead, the Bankruptcy Court reduced the homestead exemption to $0 under Sec. 522(o).   Mrs. Thaw argued that  she had a separate homestead interest in the property and that the Bankruptcy Code provisions which eliminated the homestead exemption constituted an unconstitutional taking.   The Fifth Circuit held that because the homestead was purchased after the adoption of BAPCPA, there was not a valid takings claim.    "The Thaws acquired the property after the enactment of BAPCPA, there is no 'gratuitous confiscation,' and the sale is not 'so unreasonable or onerous as to compel compensation.'”   Opinion, p. 9.

Fraudulent Conveyance; Defense for Providing "Value"

In Williams v. Federal Deposit Insurance Corporation (Matter of Positive Health Management), No. 12-20687 (5th Cir. 10/16/14), which can be found here, the Fifth Circuit required an "innocent" recipient of a fraudulent transfer to return the funds received in excess of value given.     

The Debtor occupied a building which was owned by a related party and was subject to a lien.   The Debtor made the payments on the building as "rent."    Because the Debtor was not obligated on the building loan, Trustee Randy Williams brought suit to recover the funds as fraudulent transfers.   The Bankruptcy Court, having read Stern v. Marshall, submitted proposed findings of fact and conclusions of law to the District Court  which adopted them.    

The Bankruptcy Court found that the Debtor received "reasonably equivalent value" for the payments.    The Court found that the reasonable rental value of the property was $253,333.33 while the amount of the payments received was $367,681.35.   Although these two numbers were not equal, they were "reasonably equivalent."     Nevertheless, the Bankruptcy Court found that the transfers were made with actual intent to hinder, delay or defraud.   Unfortunately for the trustee, the Bankruptcy Court also found that the bank was entitled to a defense under 11 U.S.C. Sec. 548(c) for the reason that it took the payments in good faith and gave value in return.   In determining value, the Bankruptcy Court used the same "reasonably equivalent" standard that it used in determining liability.    The Court of Appeals held that for purposes of the defense, value meant dollar for dollar value.   Because the payments received by the bank were more than the rental value received by the Debtor, the bank had to pay back the excess of $114,348.02.

That's the news from the Fifth Circuit where the judges are strong, the clerks are good looking and all of the lawyers are above average.   (Apologies to Garrison Keillor).