ELIZABETH W. MAGNER, Bankruptcy Judge.
This matter came before the Court on the Motion to Determine Allocation of Purchase Price of Real Estate Assets
On October 15, 2014, 800 Bourbon and Oz filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code (collectively "Debtors"). 800 Bourbon owned a piece of immovable property located at 800 Bourbon Street ("the Property"). Oz rented the Property and operated a nightclub. In addition to furniture, fixtures and inventory, Oz also owned a warehouse located at 1413 Lafitte St. ("the Warehouse").
Debtors filed a Joint Disclosure Statement and Plan of Reorganization which proposed a package sale of substantially all of 800 Bourbon and Oz's assets. Under the proposed plan, a court conducted auction was to be held in conjunction with the confirmation hearing. The Court approved the Disclosure Statement for the Second Amended Joint Plan of Reorganization ("Disclosure Statement")
On June 17, 2015, the Court also granted Debtors' Motion for Sale of Property Free and Clear of Liens which provided procedures for the auction.
FBT filed proofs of claim in the secured amount of $2,357,769.36 in the 800 Bourbon case and an unsecured claim in the same amount in the Oz case.
In addition, claims filed in the Oz case are estimated to be: 1) a secured claim of $260,000 filed by the Moores; 2) priority debt of $9,340.84 owed to the Internal Revenue Service or Louisiana Department of Revenue; and 3) administrative claims of $186,000.00; and unsecured claims of $156,000.00.
Claims filed in the 800 Bourbon case are estimated to be: 1) secured property taxes of $50,571.77; 2) administrative claims of $65,000.00; and 3) unsecured claims of $22,220.26.
The auction took place on July 22, 2015, directly prior to the confirmation hearing. The prevailing bid of $8,175,000.00 purchased the package of assets from both estates. On August 3, 2015, the Court approved the sale
800 Bourbon, Oz, and Quarter Holdings, L.L.C. executed a Sale of Movable Property transferring Oz's movables located at the Warehouse; goodwill; the name "Oz"; inventory, fixtures, and equipment for $100 and "other good and valuable consideration."
Debtors filed the Allocation Motion requesting division of the sale proceeds between the two (2) estates. Debtors propose that $3,475,000.00 of the purchase price be allocated to 800 Bourbon and $4,700,000.00 to Oz. Debtors base the allocation on an appraisal of the Property by Bradley D. Bird, MAI, SRA.
FBT and Bay Bridge object to Debtors' proposed allocation because it differs from the formula Debtors proposed in their Disclosure Statement. FBT and Bay Bridge contend that Debtors are equitably and judicially estopped from proposing an allocation of the price that differs from that represented in the Disclosure Statement. Alternatively, Bay Bridge contends that Oz has a value of $1,547,082.00 based on the appraisal by Ellis J. Roussel, CPA, CVA, and the sales proceeds should be allocated between the two (2) estates based on this value.
Debtors also argue that Bay Bridge is judicially estopped from objecting to Debtors' proposed allocation. Debtors' assert that Bay Bridge did not reserve the right to object to allocation at confirmation; therefore, Bay Bridge is judicially estopped from objecting to Debtors' proposal.
Judicial Estoppel is an equitable principle dependent on the existence of three (3) factors: "(1) clearly inconsistent positions; (2) the court's acceptance of the previous position; and (3) absence of inadvertence."
Equitable estoppel, as opposed to judicial estoppel, involves the application of estoppel against a party based on inconsistent positions made not to a court, but an opponent.
Debtors aver that Bay Bridge is judicially estopped from challenging the allocation of the sale proceeds because the Confirmation Order provides:
In the Disclosure Statement and Sale Motion, Debtors proposed to sell the packaged assets to a third party for $4,750,000.00 unless a higher or better offer was received. Assuming this offer was successful, Debtors proposed to divide the sale proceeds between the estates with $3,600,000.00 being allocated to 800 Bourbon and $1,150,000.00 to Oz.
The allocation assumed that FBT would be completely satisfied by 800 Bourbon. Given this assumption and that the other claims against the Oz estate totaled approximately $612,000.00, the allocation proposed in the Disclosure Statement was more than sufficient to satisfy the confirmation requirements for Oz. The amounts allocated to 800 Bourbon, $3,600,000.00 were thought, as of the Disclosure Statement approval hearing, sufficient to satisfy the claims of FBT, property taxes, administrative and unsecured claims.
Following the solicitation of votes, Bay Bridge filed its secured proof of claim for $1,979,886.47. Based on the proposed allocation of $3,600,000.00, 800 Bourbon lacked sufficient funds to satisfy the secured claims of FBT, Bay Bridge, property taxes and administrative claims. In fact, after satisfying outstanding property taxes and the FBT claim, approximately $992,000.00 remained to pay Bay Bridge. The inclusion of Bay Bridge left no funds with which to pay administrative and unsecured claims of 800 Bourbon. Satisfaction of administrative claims is a requirement for confirmation.
Based on the sale price of $4,750,000.00, the parties agreed to place $1,649,000.00 in escrow for Bay Bridge. The escrow was comprised of funds from both the Oz and 800 Bourbon estates after satisfying the secured claims for property taxes, Moore, FBT, an FBT escrow for disputed amounts, and priority tax debt. Approximately $175,000.00 was also retained by Debtors.
By this Motion, Debtors seek to reduce the allocation of the proceeds attributable to 800 Bourbon from $3,600,000.00 to $3,475,00.00. In addition, Debtors are proposing the allocation of any proceeds in excess of $3,475,000.00 to Oz's estate. This proposed allocation will not provide sufficient funds to pay Bay Bridge, even if its claim is reduced to $1,649,000.00. It will also be insufficient to pay the administrative and unsecured claims of 800 Bourbon as they may only be paid after full satisfaction of the secured claims of Bay Bridge. Debtors may argue that Bay Bridge took this risk at confirmation, but neither the administrative claimants nor the unsecured classes of 800 Bourbon or Oz were provided with information to advise them of this possibility.
The Court finds that the plain language of this provision does not preclude Bay Bridge from objecting to Debtors' proposed allocation. Bay Bridge made it clear at the confirmation hearing on July 22, 2015, that it reserved its right to contest any proposed allocation.
The Plan contemplated a sale of substantially all of both Debtors' assets. The assets were offered as a package because Debtors' believed this would bring more in the marketplace than either a piecemeal sale of each asset or two (2) separate en globo sales of Oz and 800 Bourbon's assets. Prior to confirmation, Debtors obtained an offer to purchase the packaged assets for $4,750,000.00. Despite the receipt of this offer, Debtors proposed an auction at confirmation using the initial offer as the floor on the purchase price. Debtors then set up bidding and sale procedures through a Motion to Sell.
Debtors' Plan provided that the results of the auction would be approved by the Court simultaneously with confirmation. Whatever the results, Debtors' Disclosure Statement provided a methodology for a division of any sale proceeds. The division was based on the relationship the appraised value of each asset bore to the total appraised value of the assets sold. In the Disclosure Statement, Debtors provided the appraised value of each asset and the percentage it bore to the whole. Debtors also represented that following a sale, they would request the Court allocate the proceeds accordingly.
Debtors have requested an allocation which differs from this formula. In doing so they assert that the Disclosure Statement does not create a binding obligation upon them to adhere to its contents. Further, because the sale price greatly exceeds appraised value, Debtors argue that an allocation based on appraisals is not rational. Debtors argue that each component asset does not produce a proportionate and consistent return in relation to the others in the package. As a result, they urge the Court to allocate the sale proceeds based on the potential each asset has to produce a value or profit greater than its present market value. They also seek to reduce the appraised value, or starting point, for the 800 Bourbon asset.
Because Debtors' proposed methodology for distribution of the proceeds so clearly deviates from that contained in the Disclosure Statement, the issue before the Court is whether or not representations in the Disclosure Statement as to the methodology of allocation are binding on Debtors. If so, Debtors may be judicially estopped from proposing an allocation different from that contained in their Disclosure Statement.
It is axiomatic that a plan creates a binding contract between a debtor and its creditors.
The disclosure statement must contain "adequate information" sufficient to "enable [ ] a hypothetical investor of the relevant class to make an informed judgment about the plan."
As the Fifth Circuit explains, "[T]he disclosure statement is the primary notice mechanism informing a creditors' vote for or against a plan."
Hargrove v. Tega Cay Development Co., Inc. (In re the Point Wylie Co.)
After confirmation, the secured creditor/proponent sold its claim to a third party. That entity filed a very large deficiency claim which substantially diluted distributions to the unsecured class. Another unsecured creditor objected, arguing that the creditor's inclusion in the unsecured class was inconsistent with its disclosure statement. Specifically, inclusion of a deficiency claim was contrary to the creditor/proponent's representations both as to the aggregate amount of claims in the class and the anticipated share each might receive from the amounts available for distribution.
The Hargrove Court found that the creditor/proponent and its successor were judicially "estopped from participating in distributions to unsecured creditors because the three disclosure statements — each proposed by [that creditor] and approved by the court-represented that [it] had no unsecured claim for the purpose of voting, confirmation and distribution."
The positions taken by 800 Bourbon and Oz in the Disclosure Statement and Allocation Motion are clearly inconsistent with the position they now assert. Nevertheless, Debtors' argue that the Plan and Disclosure Statement contain language that allows them to modify their position. Debtors' Disclosure Statement contains the following disclaimer:
The Court agrees that the Disclosure Statement "does not constitute an endorsement or determination by the Bankruptcy Court." However, Debtors represented that they would propose the same allocation as contained in the Disclosure Statement. While the Bankruptcy Court is free to make a determination as to whether or not it will accept the proposed allocation, Debtors' clearly represented that they would support a specific proposal.
Debtors also point to the following language contained in the Disclosure Statement:
A change of fact is not the issue. The Disclosure Statement contemplated that the sales price might be more than the initial bid as Debtors clearly stated:
Thus, this provision does not support Debtors' right to modify the allocation method.
Debtors point to yet another disclaimer in the Plan which reads:
FBT and Bay Bridge are not alleging that Debtors stipulated or waived any position as to a fact, nor are they alleging that Debtors have admitted to any legal position. Instead, both seek to bind Debtors to a methodology of plan implementation based on the Debtors' own representations. The Court finds that nothing in the Disclosure Statement or Plan indicates that Debtors might propose a different allocation. As a result, Debtors' position is clearly inconsistent with its representations in the Disclosure Statement.
Debtors also argue that FBT and Bay Bridge are attempting to enjoin this Court's consideration of a differing allocation. FBT and Bay Bridge have not objected to the prerogative of this Court. Instead, they seek to estop Debtors from proposing a different allocation. That is something different than objecting to the Court's right to question any proposal the Debtor submits.
Approval of the Disclosure Statement was based in part on the representations by 800 Bourbon and Oz as to the methodology for dividing the sale proceeds following a package sale of assets. However, confirmation was also dependent on 800 Bourbon and Oz's representations that all secured and unsecured claims, administrative and priority debt would be satisfied. This was achieved through the escrow of a lesser sum for Bay Bridge. These provisions were critical to the Court's decision to confirm the Plan.
The Oz and 800 Bourbon cases were jointly administered in an effort to minimize common administrative costs. Nevertheless, each Debtor operated and accounted for its revenues and expenses without reference to its sister debtor. After each Debtor explored the possibility of selling assets separately, Debtors determined that a global sale of substantially all the assets held by both would garner a greater return to creditors.
One difficulty raised by a global sale of both estates' assets was how to divide the proceeds when the interested parties in each estate were so different. While 800 Bourbon and Oz share common ownership, the creditors of each estate are not the same. Somewhat distinctly, a major secured creditor of 800 Bourbon (Bay Bridge) does not hold a claim against Oz or its assets. Similarly, a major secured creditor of Oz (Thomas and Carolyn Moore) only holds a security interest in one of Oz's assets, the Warehouse. In addition, the priority claims in each case are wholly different. For example, the City of New Orleans filed a proof of claim for property taxes against 800 Bourbon. In the Oz case, the City asserted a separate and distinct claim for ad volorem taxes. Oz also has a substantial administrative claim based on the efforts of a state court receiver, while 800 Bourbon has none. Because Oz is an operating bar, it also has trade and other unsecured debt not present in the 800 Bourbon case.
For the above reason, the allocation of the price was of particular concern to this Court when it considered the Motion to Sell, Disclosure Statement, and Plan. By placing the methodology for division of the proceeds in the Disclosure Statement, Debtors' position regarding the relative worth of the assets was provided. Certainty as to Debtors' position post-sale was also given.
From the Court's perspective, the methodology for allocation provided it with a rational basis for fairly distributing any gains on sale. While not binding on the Court, it allowed the Court to test for conflicts of interest; ascertain if the Plan was likely to satisfy priority, administrative, and secured claims in each estate; and balance the competing interests of two (2) separate estates. Satisfying these concerns was a critical part of the Court's agreement to approve the sale process and grant confirmation.
When problems arose with the appearance of Bay Bridge, Debtors offered a solution to their obvious bar to confirmation by negotiating an escrow while still paying all claims. It should be noted that this compromise was based on the worst case scenario. At the time this agreement was proposed, the auction had not occurred and all parties were motivated to achieve both a sale and confirmation.
Debtors' representation regarding the methodology they would use to divide the sale proceeds is a classic example of a material representation presented to a court in an effort to win that court's approval for the requested relief. As a result, the second prong of FBT and Bay Bridge's argument for judicial estoppel is satisfied. Perhaps more importantly, the same facts support a finding that the creditors justifiably relied on these representations in voting for the Plan's approval.
FBT and Bay Bridge contend that in withdrawing their objections to confirmation, they relied on the allocation proposed by Debtors in the Disclosure Statement. It is clear that the allocation method provided by Debtors in their Disclosure Statement was designed to provide creditors of each estate reassurance as to how the sale proceeds would be divided and a method to calculate their potential distribution. FBT goes so far as to argue that its vote was changed from a rejection of the Plan to an acceptance based on this very explanation.
For the very reasons set forth in Hargrove, FBT and Bay Bridge had the right to rely on Debtors' representations when voting to support Debtors' Plan. The Plan proposed to sell FBT and Bay Bridge's collateral in a package with other assets. Under the Bankruptcy Code, FBT and Bay Bridge were entitled to receive the value of their collateral on their secured claims. The Debtors' position on how the sale proceeds would be divided was crucial to its proof that the secured interests of FBT, Bay Bridge, property taxes and Moore were protected even in a global sale. Since this was a requirement for confirmation, FBT and Bay Bridge were justified in relying on the representation by Debtors in the Disclosure Statement as to the allocation of the proceeds.
Debtors contend that their change in position is inadvertent because they did not know that the packaged assets would bring such a high price at auction.
If the sale proceeds are allocated as Debtors now propose, 800 Bourbon's administrative and unsecured creditors will not be paid.
In the Disclosure Statement, Debtors clearly contemplated the possibility that the assets might sell for more than the initial bid. In an effort to provide for just that possibility, Debtors proposed a formula for dividing any sale price between the estates and assets within those estates. That the assets were sold for a price well in excess of the initial bid does not constitute mistake, nor does it allow Debtors to marshal the sale proceeds in a different fashion.
The Court finds that Debtors are both judicially and equitably estopped from proposing a different allocation than represented in the Disclosure Statement.
Although Debtors are estopped from taking an inconsistent position, the Court is not bound by the terms of the Disclosure Statement. Nevertheless, unless there is a difference of opinion as to the terms of the Plan, the proposal for allocation would lead to absurd results, or a material change in circumstance warrants revision, this Court should apply the terms of the Plan based on the interested parties' understanding at the time of confirmation. For the reasons set forth below, the Court does not believe that the application of the method proposed in the Disclosure Statement will lead to absurd results. Nor does it find that a material change in circumstance warrants revision.
The sale price of the packaged assets was $8,175,000.00. After several parties had examined Oz's operations (including its books and records) as well as the Property, Debtors' received an offer of $4,750,000.00. Thus, in the Disclosure Statement, Debtors estimated the value of the assets at $4,750,000.00. This value was determined by separately appraising each of the assets offered for sale and after inviting offers from the public.
The only asset included in the package of sold assets and belonging to 800 Bourbon is the Property. The Disclosure Statement estimated its value at $3,600,000.00. However, Debtors seek to cap the proceeds available to 800 Bourbon by tying them to an appraisal of the Property by Bradley D. Bird, MAI, SRA, for $3,475,000.00.
To support this position, Debtors offered the testimony of their accountant, Patrick Gros. While Gros is not an expert in corporate valuation, he was qualified as an expert in restaurant accounting. His testimony began by explaining how Debtors will report the sale on their respective tax returns. Because the sale did not delineate the price paid for the various assets, Generally Accepted Accounting Principles ("GAAP") require Debtors to make that determination. Gros testified that this is accomplished by using the appraised values for each tangible asset. If in aggregate those do not equal the sale price, GAAP instructs that the difference be placed into goodwill. In essence, goodwill is the plug category when a sale price cannot be justified by the aggregate appraised value of the assets.
While GAAP is instructive when reporting a gain on sale, in this circumstance it is not controlling. First, the tax consequences of this sale have little effect on how the sales price is allocated. Because Debtors have common ownership and the sales will be in excess of the basis of the assets regardless of allocation, taxes will not be affected by allocation.
A common method for estimating the value of an ongoing business is to use a multiple of earnings approach. After adjustments to annualize expense savings made by Oz during the administration of its case, Gros concluded that Oz had annual earnings of $383,184.26. While Gros is not an expert in valuation, in this Court's experience, a rough valuation of an ongoing concern is typically three (3) to five (5) times yearly earnings. This indicates that Oz's value is roughly $1,915,920.00.
Bay Bridge contends that Oz's value is $1,547,082 based on the appraisal of Ellis J. Roussel, CPA, CVA.
Roussel's calculation requires determination of Oz's annualized net income. Due to the limited access he had to Oz's books and records, he did not dispute Gros' calculation of net income. Roussel then applied a capitalization rate to earnings in order to calculate value. The capitalization rate was calculated by using several components. First is the risk free rate, or the rate paid on investments that bear little to no risk of repayment. Then, an additional rate of return is added to attract equity investment. Next, risk factors to repayment based on the specifics of Oz and its industry are added and then reduced for a long term investment factor. Finally, a size premium based on the amount of the loan is added. The capitalization rate calculated by Roussel is 14.62%.
Using the earnings figure calculated by Gros and reducing for taxes, Oz's after tax income is $270,420.00. The capitalization rate is then divided into the after tax income resulting in a value of $1,849,658.00. Roussel then increased this value by ten percent (10%) as a control premium.
A control premium is the degree to which a company will increase in value once control is vested in unified ownership. The owners of these Debtors have been fighting for control of the companies for years. Two (2) bankruptcies and a state court receivership later, the owners were finally forced to sell their businesses in order to pay off debts. Roussel explained that he used a large control premium because of this history.
According to Rousell's methodology, the final value of Oz is $2,034,620 to which the value of the furniture, fixtures, inventory and warehouse
Adding the appraised value of Oz to the value of the Property results in a total value of $5,909,620.00, an amount substantially less than the $8,175,000.00 sale price. Thus, even diverting from Debtors' originally estimated values, some allocation of the excess price has to be made. Debtors argue that only Oz has the potential for an increase in value over and above its appraisal. The Court disagrees.
While 800 Bourbon's property is real estate, it too has the potential to increase in value over and above expectations. 800 Bourbon's asset was valued based on the income it could generate and comparable sales data. While this is the accepted method of valuing real estate, no one would seriously argue that either factor will remain constant. Appraisals capture the value of an asset for a snapshot in time. Time will tell whether or not the value today rises or falls, but nothing in the record supports Debtors' view that only Oz's assets have the potential for increase in value.
Debtors' assets were sold as a package, rather than piecemeal. Taking the Property's or Oz's appraised value and allocating the rest to the other would not account for the synergy of the package. The Court finds that because the assets of both Debtors were combined, the total effect was greater than the sum of the individual pieces. As a result, the increased value should be apportioned between them.
Finally, how should the Court allocate the sale proceeds? The Disclosure Statement places a value on Oz's assets at $1,150,000.00 while the valuations calculated though a multiple of earnings or capitalization rate approach result in values between $1,915,920.00 and $2,534,620.00. Using any of these values to divide the sale proceeds pro rata with 800 Bourbon has no effect on the creditors of Oz as they will be fully paid. However, deviating from the approach contained in the Disclosure Statement will affect 800 Bourbon's creditors.
The methodology for allocation of the price contained in the Disclosure Statement does not adversely affect Oz's creditors; however, any change in approach will adversely affect 800 Bourbon's creditors. Further, application of the represented method does not lead to absurd results. The Court will apply the methodology contained in the Disclosure Statement. The sales price will be allocated $6,195,832.00 (75.79%) to 800 Bourbon and $1,979,168.00 (24.21%) to Oz. The Court will enter a separate Order in accord with this ruling.
