ANDERSON, Circuit Judge:
SE Property Holdings, LLC, and affiliated entity Vision-Park Properties, LLC, (collectively "Vision") appeal the district court's order upholding decisions in the bankruptcy restructuring proceedings of Seaside Engineering and Surveying, LLC ("Seaside" or "Debtor"). After careful review of the record, and with the benefit of oral argument, we affirm. In doing so, we provide guidance to the Circuit's bankruptcy courts with respect to a significant issue: i.e., the authority of bankruptcy courts to issue non-consensual, non-debtor releases or bar orders, and the circumstances under which such bar orders might be appropriate.
Seaside is a civil engineering and surveying firm that conducts forms of technical mapping. Seaside provided services to, among other clients, the U.S. Army Corps of Engineers. Seaside's principal shareholders prior to all bankruptcy litigation were John Gustin, James Mainor, Ross Binkley, James Barton, and Timothy Spears. The principals branched out from their work as engineers and entered the real estate development business, forming Inlet Heights, LLC, and Costa Carina, LLC. These wholly separate entities borrowed money from Vision with personal guaranties from the principals. Inlet Heights and Costa Carina defaulted on the loans, and Vision filed suit to recover amounts under the guaranties.
Gustin filed for Chapter 7 bankruptcy protection for himself. Mainor and Binkley followed suit. All were appointed Chapter 7 trustees. Gustin, Mainor, and Binkley listed their Seaside stock as non-exempt personal property in their required filings. In April 2011, the Chapter 7 trustee in the Gustin case conducted an action to sell Gustin's shares of Seaside stock. Gustin bid $95,500.00, and Vision defeated the bid with a purchase price of
Seaside proposed to reorganize and continue operations as the entity Gulf Atlantic, LLC ("Gulf"), an entity managed by Gustin, Mainor, Binkley, and Bowden, and owned by four members, the respective irrevocable family trust of each manager. The outside equity holders would receive promissory notes with interest accruing at a rate of 4.25% in exchange for their interest in Seaside and thus be excluded from ownership in Gulf. The bankruptcy court approved the Second Amended Plan of Reorganization ("Second Amended Plan" or "Reorganization Plan"), over objection of Vision, valuing Seaside at $200,000.00. The district court affirmed the bankruptcy court.
Vision raises myriad issues on appeal. The arguments all essentially reduce to Vision's objections to the bankruptcy court's valuation and to the composition of the reorganized entity under the Second Amended Plan of Reorganization. We address each argument in turn.
Vision argues that the bankruptcy court improperly valued Seaside under a forced-sale analysis as opposed to a going-concern analysis. Vision continues that even under a forced-sale analysis, the bankruptcy court selected an inadequate discount rate by considering impermissible factors — particularly the risk of critical employees leaving the firm — and inadmissible expert testimony. The valuation of Seaside is a mixed question of law and fact. In re Ebbler Furniture & Appliances, Inc., 804 F.2d 87, 89 (7th Cir.1986). Selection of a valuation method is a legal matter subject to de novo review, and findings made under that standard are facts subject to clear error review. Id.
We disagree with Vision that the bankruptcy court valued Seaside using a forced-sale method. To begin, the bankruptcy court explicitly stated that "the correct method of valuation of the [D]ebtor is that as a going concern." The bankruptcy court also considered future losses, which are necessary to a discounted cash flow analysis, the core of a going-concern valuation. Most telling, the bankruptcy court discussed and selected a discount rate, the critical input to calculate the present value of a business based on a cash flow.
Having established use of the proper valuation method, the bankruptcy court committed no error in considering the risk of losing key employees in selecting a discount rate. "[A]ll relevant factors to property value must be considered to arrive at a just valuation of a property." In re Webb MTN, LLC, 420 B.R. 418, 435 (Bankr.E.D.Tenn.2009). Seaside's civil engineering and mapping operations rely upon human expertise, and its client base relies upon established relationships. The loss of key employees could equate to a complete deterioration of Seaside's value. Employee retention is certainly a relevant risk if not the key risk in calculating the discount rate in a case like this. The bankruptcy court also has discretion to weigh expert testimony and select portions to accept or reject. Id. Vision's argument
As part of the Reorganization Plan, the bankruptcy court approved releases of claims against non-debtors:
Reorganization Plan Art. IX.C. The district court upheld the propriety of these non-debtor releases. Although this Circuit has considered the propriety of such a release by a bankruptcy court, it has not done so recently. The issue warrants significant discussion.
This Circuit has spoken at least once on the validity of non-debtor releases in bankruptcy restructuring plans. We approved a release of claims against a non-debtor in In re Munford, 97 F.3d 449 (11th Cir.1996). There, the debtor sued several defendants alleging breach of fiduciary duties related to a leveraged buy out. Id. at 452. One defendant offered to settle the claims but denied liability and conditioned its offer of settlement on issuance by the bankruptcy court of a protective order enjoining the non-settling defendants from pursuing contribution or indemnity claims against the settling defendant. Id. In order to make the settlement possible and to fund the bankruptcy estate, the bankruptcy court issued a protective order barring the non-settling defendants from seeking contribution or indemnification from the settling defendant. Id. We held that 11 U.S.C. § 105(a)
Munford is the controlling case here, indicating that this Circuit permits non-debtor
Other circuits are split as to whether a bankruptcy court has the authority to issue a non-debtor release and enjoin a non-consenting party who has participated fully in the bankruptcy proceedings but who has objected to the non-debtor release barring it from making claims against the non-debtor that would undermine the operations of the reorganized entity. Collier Bankruptcy Practice Guide
As indicated in Part II.B.1 above, we believe that our Munford case places this Circuit within the majority rule on this issue. As noted above, in Munford, we held that § 105(a) provided authority for the bankruptcy court to enter the bar order in that case, where the settling defendant provided funds for the bankruptcy estate, but would not have entered into the settlement in the absence of such bar order, and where the bankruptcy court found that the bar order was fair and equitable. In particular, we respectfully disagree with the position of the minority circuits with respect to § 524(e). As noted, that section, in relevant part, provides that the "discharge of a debt of the debtor does not affect the liability of another entity on ... such debt." We agree with the Seventh Circuit in Airadigm: "The natural reading of this provision does not foreclose a third-party release from a creditor's claims." 519 F.3d 640, 656 (2008). Pursuant to § 524(e), the discharge of the debtor's debt does not itself affect the liability of a third party, but § 524(e) says nothing about the authority of the bankruptcy court to release a non-debtor from a creditor's claims. As the Airadigm court noted, if Congress had meant to limit the powers of bankruptcy courts, it would have done so clearly, as it did in other instances, or it would have done so by creating requirements for plan confirmation as in 11 U.S.C. § 1129(a) ("The court shall confirm a plan only if the following requirements are met....").
Consistent with the majority view, we agree that § 105(a) codifies the established law that a bankruptcy court "applies the principles and rules of equity jurisprudence." Airadigm, 519 F.3d at 657 (quoting Pepper v. Litton, 308 U.S. 295, 304, 60 S.Ct. 238, 244, 84 L.Ed. 281 (1939)). We also agree, however, with the majority view that such bar orders ought not to be issued lightly, and should be reserved for those unusual cases in which such an order is necessary for the success of the reorganization, and only in situations in which such an order is fair and equitable under all the facts and circumstances.
Like the Fourth Circuit in Behrmann v. National Heritage Foundation, 663 F.3d 704, 712 (2011), we commend for the consideration of bankruptcy courts the factors set forth by the Sixth Circuit in Dow Corning Corp., 280 F.3d at 658. There, the Sixth Circuit established a seven-factor test to guide bankruptcy courts, as follows:
Id. Again, we agree with the Fourth Circuit in Behrmann that bankruptcy courts should have discretion to determine which of the Dow Corning factors will be relevant in each case. 663 F.3d at 712. The factors should be considered a non-exclusive list of considerations, and should be applied flexibly, always keeping in mind that such bar orders should be used "cautiously and infrequently," id. at 712, and only where essential, fair, and equitable. Munford, 97 F.3d at 455.
Having set forth the foregoing standard, we turn next to review the bankruptcy court's application of the Dow Corning factors.
Recognizing the existing split among the circuits as to whether a third-party release is permissible for non-debtors, but then relying on decisions of other Florida bankruptcy courts, the bankruptcy court applied the Dow Corning factors in a manner consistent with this opinion. We review a bankruptcy court's approval of non-debtor releases for abuse of discretion. In re Munford, 97 F.3d 449, 456 (11th Cir.1996). Vision argues that this release satisfies none of the Dow Corning factors. We disagree.
The bankruptcy court concluded that this factor favored Seaside and favored inclusion in the Reorganization Plan of the non-debtor release. The bankruptcy court concluded that Gulf would deplete its assets continuing to defend against the voluminous litigation. The releasees in this case include Gustin, Mainor, Binkley, Bowden, and other former principals of Seaside who will be the key employees of the reorganized entity, Gulf. The reorganized entity's business is completely dependent upon the skilled labor of the releasees, its professional surveyors and engineers, as was the former business of the Debtor.
The bankruptcy court stated that "[n]one of the releases [sic] contributed any new value to the reorganized debtor other than the contribution of their labor." As other findings of the bankruptcy court make clear, the contribution of their services to the reorganized entity is the very "life blood of the reorganized debtor." Doc. 474-1 at 47-48 (emphasis in original). We conclude that this factor too favors Seaside.
The bankruptcy court noted the close relationship between the first factor and this factor. The bankruptcy court found that the bar order was absolutely essential. It found: "To say that this case has been highly litigious would be an understatement." Doc. 474-1 at 46. It found: "Without [the bar order] it would be doubtful that the engineers and surveyors would ever be able to perform their professional work, complete contracts and create receivables necessary for the life blood of the reorganized debtor." Id. at 47-48. The court also found that the time and efforts expended by Vision "would appear disproportionate to the value of Vision's equity interest." Id. at 48. We agree that, without the bar order, the litigation would likely continue, bleeding Gulf dry and dashing any hope for a successful reorganization. We conclude that this factor weighs heavily in favor of inclusion of the non-debtor release.
The bankruptcy court noted that Vision did reject this plan, as did two of the bankruptcy trustees (for Mainor and Binkley). However, the bankruptcy court noted that all other classes of creditors, whether impaired or not, have unanimously accepted the Reorganization Plan. Significantly, the court found that the equity holders rejecting the Plan will be paid the full value of their interests under the Plan. We cannot conclude that this factor favors Vision.
The bankruptcy court again noted that Vision will be paid in full for its share of
The bankruptcy court stated that this factor was inapplicable. We cannot conclude that the bankruptcy court abused its discretion in this regard. Other than its claims for payment for the full value of its equity interest in the Debtor — which of course is to be paid in full under the Plan — Vision's identification of any other claims is vague. To the extent we can identify such other claims that Vision may be asserting, we conclude that they were made by Vision in challenging the Reorganization Plan and were rejected.
The bankruptcy court made thorough factual findings in reaching its decision. Its findings are amply supported by the evidence. The bankruptcy court's extensive consideration of this case weighs heavily against any abuse of discretion.
Whether or not the bankruptcy court had specifically in mind the "fair and equitable" requirement of Munford, 97 F.3d at 455, it went on to further discuss considerations relevant to such a finding. The bankruptcy court referred to this case as a "death struggle" and recognized the apparently disproportionate expenditure of time for what Vision claimed to be a company valued at $960,000.00. Also very telling of the fairness and equity of the releases is that the bankruptcy court required the Debtor to voluntarily cease litigation of its claims for sanctions against Vision. This requirement prevented an asymmetrical benefit for Seaside from the Reorganization Plan. Finally, the release itself is narrowly limited in scope to claims arising out of the Chapter 11 case
We conclude that the bankruptcy court did not abuse its discretion in approving the non-debtor releases. The releases are fair and equitable, and wholly necessary to ensure that Gulf may continue to operate as an entity. This case has been a death struggle, and the non-debtor releases are a valid tool to halt the fight.
Vision argues that Seaside proposed the Reorganization Plan in bad faith in contravention of the good faith requirement of 11 U.S.C. § 1129(a)(3). Vision characterizes the plan as intended "for the sole and exclusive benefit of its insiders." In re Davis Heritage GP Holdings, LLC, 443 B.R. 448, 461 (Bankr.N.D.Fla.2011).
"While the Bankruptcy Code does not define the term, courts have interpreted `good faith' as requiring that there is a reasonable likelihood that the plan will achieve a result consistent with the objectives and purposes of the Code." In re McCormick, 49 F.3d 1524, 1526 (11th Cir.1995). Those purposes include preserving jobs in the community, allowing the business to continue to operate instead of liquidation, and achieving a consensual resolution between debtors and creditors. In re United Marine, Inc., 197 B.R. 942, 947 (Bankr.S.D.Fla.1996). "Bad faith exists if there is no realistic possibility of reorganization and the debtor seeks merely to delay or frustrate efforts of secured creditors." Id. (citing In re Albany Partners, Ltd., 749 F.2d 670, 674 (11th Cir. 1984)).
The Reorganization Plan benefits more than just the Seaside insiders. Seaside's non-shareholder employees will maintain their jobs; other creditors will receive compensation over time; and the Corps of Engineers will continue to receive engineering services. The Plan falls well within the purposes of the Bankruptcy Code and is therefore proposed in good faith. Simply because one creditor is dissatisfied is insufficient to show bad faith. Furthermore, with Vision as a shareholder, Seaside risked losing its small-business status, which would have eliminated a vital credit line, thus completely dooming the company. This consideration justifies Seaside's desire to reorganize Gulf without Vision as a shareholder. See In re Texaco Inc., 84 B.R. 893, 907 (Bankr.S.D.N.Y. 1988) (concluding a plan that enables to bring current, and resume future payments on, obligations signals good faith). The plan to remove Vision from control is not just some nefarious plot. Moreover, the record indicates that the key employees of the business would not continue to serve — the very life blood of the business — if Vision had a substantial role in the reorganized entity.
Relying upon both 11 U.S.C. § 1123(a)(4) ("A plan shall — ... (4) provide the same treatment for each claim or interest of a particular class") and 11 U.S.C. § 1129(b)(1) (a provision commonly known as the "cram down" provision), Vision argues that the Plan of Reorganization was unfair and inequitable in that it discriminated against Vision as a stockholder of the Debtor, in comparison to other stockholders of the Debtor. First, Vision argues that the Plan violated § 1129(b)(2)(C)(i) (providing that each equity interest holder must receive the full value of its interest). The gist of this argument is that the bankruptcy court undervalued the equity interests, and therefore Vision did not receive full value for its
Vision also argues that the Plan was discriminatory in that other stockholders of the Debtor received stock in the reorganized entity, while it did not. The bankruptcy court held that Vision received full value for its stock interest, and therefore § 1129(b)(2)(C)(i) was satisfied, and thus there was no discrimination.
Vision did not receive an immediate cash payment for its interest in Seaside; rather, Vision received promissory notes accruing with an interest rate of 4.25%. Vision argues that this rate does not adequately compensate for the highly prospective nature of the notes. This Court reviews the adequacy of the interest rate for clear error. In re Brice Rd. Devs., 392 B.R. 274, 280 (6th Cir. BAP 2008).
The Supreme Court adopted the formula approach for determining the interest rate payable to creditors in bankruptcy proceedings. Till v. SCS Credit Corp., 541 U.S. 465, 478-79, 124 S.Ct. 1951, 1961, 158 L.Ed.2d 787 (2004). "Taking its cue from ordinary lending practices, the approach begins by looking to the national prime rate.... Because bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly." Id. Here, the bankruptcy court applied this formula, adding a 1% adjustment to the prime rate of 3.25%. The 1% adjustment is within the range suggested by the Supreme Court in Till, 124 S.Ct. at 1962, and therefore the bankruptcy court committed no clear error.
Vision contends that the bankruptcy court abused its discretion by allowing Seaside to take Bankruptcy Rule 2004 exams of Vision officers. See In re Piper Aircraft Corp., 362 F.3d 736, 738 (11th Cir.2004) (concluding that this Court reviews any discovery order for abuse of discretion). This argument is wholly without merit. The bankruptcy court has wide discretion with respect to such discovery matters. A broad inquiry was necessary here to establish, for example, that Vision's policies may result in continued litigation, thus bolstering the case for the non-debtor releases.
Vision's initial brief has wholly failed to articulate a constitutional claim of arguable merit. Even if Vision had adequately
The bankruptcy court committed no reversible error by approving the Second Amended Plan.
AFFIRMED.
Id. at 973 (quoting 3 R. Babitt, A. Herzog, R. Mabey, H. Novikof, & M. Shinfeld, Collier on Bankruptcy, ¶ 524.01 at 524-16 (15th ed.1987) (emphasis added in Eleventh Circuit opinion)). Jet Florida held that the tort claimant could proceed with suit against the debtor to establish the fact of liability for purposes of the insurance coverage; and that, as a practical matter, the insurer would be required to defend because the debtor, protected from personal liability, would be free to default. Jet Florida, 883 F.2d at 976. Thus, nothing in Jet Florida addresses the issue before us — i.e., the authority of bankruptcy courts to issue a non-consensual, non-debtor release. And, contrary to the citation of the Fifth Circuit, nothing in Jet Florida suggests that the Eleventh Circuit is aligned with the minority view discussed below.
