Honorable Ralph B. Kirscher, Chief U.S. Bankruptcy Judge.
At Butte in said District this 14th day of October, 2016.
In this Chapter 11 bankruptcy, the Court held a hearing in Missoula after notice on October 6, 2016 on: (1) Debtor's Objection to Proof of Claim No. 4 filed by First Interstate Bank; (2) the Motion to Convert of Dismiss filed by First Interstate Bank, successor by merger to Mountain West Bank, N.A.; (3) the United States Trustee's Motion to Dismiss or Convert; (4) final approval of Debtor's Disclosure Statement filed June 7, 2016;
This Court has jurisdiction of this Chapter 11 bankruptcy case under 28 U.S.C. § 1334(a). Debtor's Objection to First Interstate Bank's claim is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and the
Debtor was represented at the hearing by James A. Patten of Billings, Montana. First Interstate Bank was represented at the hearing by Benjamin P. Hursh of Missoula, Montana. The UST was represented at the hearing by Neal G. Jensen of Great Falls, Montana. John C. Foster (Debtor's President and sole shareholder) and Jim Koontz (Debtor's accountant) testified and Exhibits 1 through 16 and Exhibits A, B and C were admitted into evidence.
Debtor filed a prior Chapter 11 bankruptcy case on August 18, 2011. See Case No. 11-61605-11. Debtor's Chapter 11 plan was confirmed in that case on September 7, 2012. As part of the confirmation process, Debtor entered into a stipulation with Mountain West Bank wherein Debtor and Mountain West Bank agreed to the following treatment of Mountain West Bank's secured claim:
A final decree was entered and that case was closed on March 7, 2013.
Debtor commenced this Chapter 11 bankruptcy case on December 10, 2015. On Schedule D filed December 24, 2015, Debtor listed First Interstate Bank as having a secured claim in the amount of $683,102. On April 22, 2016, First Interstate Bank filed Proof of Claim No. 4 asserting a secured claim in the amount of $942,380.42. Attachments to Proof of Claim No. 4 show that Debtor has not made a payment to First Interstate Bank since June 4, 2014, that the remaining principal balance owing is $804,751.42 and that an additional $51,911.97 is owed in post-judgment interest. The attachments also show that First Interstate Bank is claiming $85,717.03 for the 2010-2014 real property taxes First Interstate Bank paid on August 28, 2015. Debtor objects to First Interstate Bank's Proof of Claim arguing that First Interstate Bank is not, under the approved stipulation with Mountain West Bank, entitled to late fees and charges and that the Proof of Claim should be allowed in the amount of $886,617.45. Debtor's objection does not provide any explanation as to how Debtor's counsel arrived at the figure of $886,617.45.
Despite having not made any payments to First Interstate Bank since June 2014, and despite having not paid any real property taxes since 2010, Debtor only had $5,015.00 in cash on hand and an additional $352.00 in the bank at the time Debtor commenced this case on December 10,
"A proof of claim executed and filed in accordance with [the Federal Rules of Bankruptcy Procedure] shall constitute prima facie evidence of the validity and amount of the claim." FED.R.BANKR.P. 3001(f). This evidentiary presumption is a rebuttable one. Litton Loan Servicing, LP v. Garvida (In re Garvida), 347 B.R. 697, 706 (9th Cir. BAP 2006); In re Eiesland, 19 Mont. B.R. 194, 208-09 (Bankr. D. Mont. 2001). "The mechanics of what it takes to rebut the Rule 3001(f) presumption are driven by the nature of the presumption as `prima facie' evidence of the claim's validity and amount." Id. at 706-07. Thus, a properly executed proof of claim constitutes prima facie evidence, and "[o]ne rebuts evidence with counter-evidence." Id.
Foster testified that Debtor quit making payments to First Interstate Bank because First Interstate Bank changed the terms of the stipulation that was approved in
The record in the case sub judice shows that First Interstate Bank executed and filed its proof of claim in accordance with the Federal Rules of Bankruptcy Procedure. Thus, its proof of claim provided prima facie evidence as to the validity and amount of its claim and the burden was thus on Debtor to supply sufficient evidence "tending to defeat the claim by probative force equal to that of the allegations of the proofs of claim themselves." Lundell v. Anchor Const. Specialists, Inc., 223 F.3d 1035, 1039 (9th Cir. 2000) (quoting In re Holm, 931 F.2d 620, 623 (9th Cir.1991)). Debtor failed to produce any evidence to cause the burden to revert to First Interstate Bank to prove the validity and amount of its claim. Debtor's objection to First Interstate Bank's claim is, therefore, overruled and First Interstate Bank's claim is allowed as filed.
Conversion or dismissal is provided for at § 1112(b), which sets forth a nonexclusive list of factors that warrant conversion of dismissal. In re Shockley, 15 Mont. B.R. 114, 116 (Bankr. D. Mont. 1996); In re Mechanical Maintenance, Inc., 128 B.R. 382 (Bankr. E.D. Pa. 1991). Formerly, the analysis involved a two-step process, first to determine whether cause exists to dismiss or convert, and second whether dismissal is in the best interests of creditors and the estate. In re BTS, Inc., 247 B.R. 301, 308-09 (Bankr. N.D. Okla. 2000) (quoting In re Superior Siding & Window, Inc., 14 F.3d 240, 242 (4th Cir. 1994)); In re Shockley, 15 Mont. B.R. at 117 (quoting Superior Siding). Section 1112(b) was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub. L. 109-8 Stat. 23 § 442 (Apr. 20, 2005) and now provides:
The determination under § 1112(b) rests with the sound discretion of the court. Pioneer Liquidating Corp. v. United States Trustee (In re Consol. Pioneer Mortg. Entities), 264 F.3d 803, 806-07 (9th Cir. 2001); In re Henson, 289 B.R. 741, 752-53 (Bankr. N.D. Cal. 2003); In re Shockley, 15 Mont. B.R. at 116; In re BTS, Inc., 247 B.R. at 309. The initial burden of proof is on the moving party. In re BTS, Inc., 247 B.R. at 303.
Based on the evidence admitted at the hearing, this Court finds that "cause" is established under elements (A) (substantial or continuing loss or diminution of the estate and absence of a reasonable likelihood of rehabilitation) and (N) (material default by the debtor with respect to a confirmed plan). First, Debtor is in material default under the terms of Debtor's confirmed plan in Case No. 11-61605-11. Debtor has not made a monthly payment to First Interstate Bank since June 2014, and it has not paid any real property taxes since 2010.
Second, the Court finds that Debtor has no reasonable likelihood of rehabilitation. At the commencement of this case, those amounts that Debtor should have paid under its confirmed plan, but did not, totaled $148,797.19 (18 payments of $5,256.68 each to First Interstate Bank and taxes of $85,717.03). In its prior bankruptcy case, Debtor estimated that it would have net income of $147,717 as of the fiscal year ending June 30, 2013, $157,280 as of the fiscal year ending June 30, 2014, and $160,380 as of the fiscal year ending June 30, 2015, or $465,377 for the three years combined. The foregoing numbers included property tax payments totaling $50,906. Based upon Debtor's prior projections, Debtor should have had ample cash flow to make the payments to First Interstate Bank of $94,620.24 and pay the additional property taxes that exceeded what was in Debtor's projections. If Debtor's prior projections were anywhere near accurate and because Debtor did not make its payments to First Interstate Bank or pay its property taxes, Debtor's cash balance should have been fairly substantial at the commencement of this case, yet Debtor only had $5,367.00 in cash and cash equivalents at the commencement of this case. Hindsight shows that Debtor's projections in its prior bankruptcy case missed their mark.
In those prior projections that missed their mark, Debtor anticipated total receipts of $547,793 and total costs of sales of $242,254 (or a gross profit of $305,539) for the fiscal year ending June 30, 2015,
The evidence and testimony further exacerbate Debtor's current projections. Foster testified that Debtor's current projections assume that Debtor is receiving the rental income from its tenants in a timely fashion and that tenants are sticking around so that all units are full. At least one tenant is not paying its rent in a timely fashion and the evidence suggests that Debtor does not have all its rental units rented. The Court has a duty under § 1129(a)(11) to protect creditors against "visionary schemes." Id.; In the Matter of Pizza of Hawaii, Inc., 761 F.2d 1374, 1382 (9th Cir. 1985). While a reorganization plan's success need not be guaranteed, the Court cannot confirm a plan unless it has at least a reasonable chance of success. In re Hungerford, 19 Mont. B.R. at 120, 2001 WL 36211305 at *10, quoting In re Danny Thomas Properties II Ltd. Partnership, 241 F.3d 959, 963 (8th Cir. 2001); Monnier Brothers, 755 F.2d 1336, 1341 (8th Cir. 1985). While Debtor cannot control whether its units are rented, or whether tenants are paying their rent in a timely fashion, Debtor's historical performance shows that Debtor's plan is not feasible. In fact, Foster conceded during his testimony that Debtor's plan is not, at this date and time, feasible without an outside source of money coming in from third parties.
Debtor's First Amended Chapter 11 Plan ("Plan") filed September 9, 2016, at docket no. 62, contemplates an infusion of cash from outside sources, namely, Foster and Montana Motors, Inc., a holding company owned solely by Foster. Unfortunately for Debtor, the outside sources of cash are speculative at best. According to Foster, Montana Motors, Inc. sold a piece of property under a contract for deed and receives approximately $1,793 per month under that contract for deed. Foster testified that he will contribute $1,731 of the $1,793 that Montana Motors, Inc. receives under the contract for deed to Debtor's monthly Plan payment. While those payments are critical to the feasibility of Debtor's Plan, Debtor did not produce any document that would obligate Montana Motors or Foster to assign those funds to Debtor every month.
Debtor's cash projection and budget also contemplates additional contributions by Foster of $28,000 in September 2016, and $10,060 in November 2016, May 2017 and November 2017, May 2018 and November 2018, May 2019 and November 2019, May 2020 and November 2020, May 2021 and November 2021. Foster was unsure about the $28,000 contribution that would be required at the time of confirmation and thought perhaps that number should be removed from Debtor's projections. Foster
First Interstate Bank's claim is not an unknown at this juncture. The Court has overruled Debtor's objection to First Interstate Bank's claim; the claim is allowed as a secured claim in the amount of $942,380.42. Debtor's monthly payment on First Interstate Bank's claim should be roughly $5,962. Debtor's projections provide for a monthly payment to First Interstate Bank of $5,490.
Finally, counsel for First Interstate Bank highlighted a discrepancy between Exhibit F attached to Debtor's Plan, which shows that $32,000 in administrative expenses are payable on the effective date of the plan, and Exhibit G attached to that same plan, which only provides for payment of $18,000 of administrative fees on the effective date of the plan. If Foster could not contribute $28,000 upon confirmation and factoring in the $14,000 discrepancy, it is clear that Debtor's plan would fail immediately upon confirmation.
Section 1112(b)(4)(A) requires the bankruptcy court to find an absence of a reasonable likelihood of rehabilitation. "The issue of rehabilitation for purposes of § 1112(b)(4)(A) is not the technical one of whether the debtor can confirm a plan, but, rather, whether the debtor's business prospects justify continuance of the reorganization effort." In re Wallace, 2010 WL 378351 at *4 (Bankr. D.Idaho Jan. 26, 2010) (quotations and citations omitted). "Rehabilitation is a different and much more demanding standard than reorganization." In re Creekside Senior Apartments, L.P., 489 B.R. 51, 61 (6th Cir. BAP 2013) (citing In re Brutsche, 476 B.R. 298, 301 (Bankr.D.N.M.2012) (citing 7 COLLIER ON BANKRUPTCY at ¶ 1112.04[6][a][ii])). Foster maintained throughout his testimony that Debtor's Plan could work without his contributions. Debtor's historical performance, coupled with the uncertainty surrounding Foster's contributions, the $14,000 discrepancy and the fact that Debtor's cash projections and budget provide for a monthly payment of $5,490 to First Interstate Bank, when such payment should be $5,962, shows that Debtor's Plan simply has no chance of success and that Debtor has no reasonable likelihood of rehabilitation. Moreover, the Court cannot envision any set of circumstances that would change such finding. For the reasons discussed above, cause exists for the dismissal or conversion of this case under § 1112(b)(1).
The Court must next decide whether dismissal, conversion, or the appointment of a trustee is in the best interests of creditors, and whether unusual circumstances exist that establish whether dismissal or conversion is not in the best interests of creditors and the estate. In re Sullivan, 522 B.R. 604, 612 (9th Cir. BAP 2014); In re Hinesley Family Ltd. Partnership No. 1, 460 B.R. 547, 552-53
Turning to the evidence relating to the best interests of the creditors, this Court initially notes that First Interstate Bank seeks conversion of this case to Chapter 7. First Interstate Bank argues for conversion to a Chapter 7 liquidation arguing such conversion will maximize the value of Debtor's estate and the distribution to unsecured creditors by minimizing administrative expenses and the additional accrual of property taxes. The UST argues for either conversion or dismissal. Neither First Interstate Bank nor the UST argue for the appointment of a Chapter 11 trustee.
In Sullivan, the BAP concluded that the bankruptcy court abused its discretion when it dismissed a chapter 11 case as a bad faith filing "by failing to consider whether conversion or dismissal was in the best interests of all creditors and the estate." 522 B.R. at 612. The BAP wrote that the bankruptcy court "had an independent obligation under § 1112 to consider what would happen to all creditors on dismissal and, in light of its analysis, whether dismissal or conversion would be in the best interest of all creditors, not just the largest and most vocal creditor. See In re Owens, 552 F.3d 958, 961 (9th Cir. 2009) (agreeing with the Fourth Circuit that "when deciding between dismissal and conversion under 11 U.S.C. § 1112(b), `the court must consider the interest of all of the creditors.'") (quoting Rollex Corp. v. Assoc. Materials (In re Superior Siding & Window, Inc.), 14 F.3d 240, 243 (4th Cir. 1994))." Sullivan, 522 B.R. at 613.
The BAP explained:
Sullivan, 522 B.R. at 613.
The BAP reversed the bankruptcy court's dismissal of the case in Sullivan when the bankruptcy court did not consider the option of conversion instead of dismissal. Sullivan, 522 B.R. at 612, 613. The unrefuted evidence in Sullivan was that certain creditors had judgment liens superior to all of the unsecured creditors upon dismissal, but the judgment liens were subject to attack as preferences. Id. at 613. In addition, no evidence existed that the unsecured creditors had any avenue for meaningful payment outside of a bankruptcy case and recovery of a tax refund would be enhanced in bankruptcy. Id. From this evidence the BAP concluded that dismissal was far less advantageous than conversion of the case for all creditors of the estate other than the judgment creditors; the BAP reversed dismissal because it was not harmless error. Id.
Dismissal of the case would force First Interstate Bank to proceed with foreclosure against the Debtor in district court.
On the other hand, if the case is converted to chapter 7 or a trustee is appointed in chapter 11, the automatic stay would remain in place and a trustee would be appointed to investigate the Debtor's business affairs and marshall assets. No evidence exists in the record that the unsecured creditors "have any avenue for prompt or meaningful payment outside a bankruptcy case." Sullivan, 522 B.R. at 613.
This Court, when considering whether to dismiss the case, convert to chapter 7, or appoint a trustee, is convinced that the evidence shows that dismissal would be "far less advantageous for all creditors of the estate" than conversion. See Sullivan, 522 B.R. at 613. While it is certainly possible that Debtor could, upon dismissal of this case, continue with its operations and repay all its creditors, it is in this Court's view, unlikely given Debtor's historical performance. A trustee appointed in either chapter 7 or 11, by contrast, would start with a blank slate with creditors and the UST. A trustee could preserve estate property, marshall assets and could investigate the Debtor's businesses and financial affairs.
Weighing all factors and after consideration of the evidence and the factors enumerated in Sullivan, 522 B.R. at 613, this Court finds and concludes that conversion or appointment of a trustee in chapter 11 is far more advantageous to all creditors than dismissing the case and leaving Foster in control.
Turning to conversion versus appointment of a trustee in chapter 11, the Court concludes that conversion to chapter 7 is in the best interests of creditors and the estate. While the Debtor has an ongoing business, appointment of a trustee in chapter 11 pursuant to § 1104(a) would impose distractions and, in this Court's view, unnecessary and substantial costs and expenses related to the preparation of a disclosure statement and plan, approval of a disclosure statement, dissemination to creditors, solicitation, voting and participating in chapter 11 plan confirmation proceedings. In a chapter 7 case a trustee would eliminate all of those administrative burdens and expenses and would be able to investigate the Debtor's financial affairs and liquidate Debtor's assets. What limited authority a trustee may need to operate a business of the Debtor in chapter 7, the trustee can request from this Court under 11 U.S.C. § 721.
After review of the record, this Court finds and concludes that conversion of the case to a case under Chapter 7 is in the best interests of creditors and the estate. Accordingly, First Interstate Bank and the UST's Motions to Convert are granted and this case is converted to a case under Chapter 7.
1. This Court has jurisdiction of this Chapter 11 bankruptcy case under 28 U.S.C. § 1334(a).
2. Debtor's Objection to First Interstate Bank's claim is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
3. The UST and First Interstate Bank's motions to dismiss or convert are core proceedings under 28 U.S.C. § 157(b)(2).
4. Cause exists under 11 U.S.C. §§ 1112(b)(1) & (b)(4)(A) and (N) to dismiss or convert this case to a case under Chapter 7 of the Bankruptcy Code.
5. Conversion of the case to Chapter 7 is in the best interests of creditors and the estate.
6. No unusual circumstances are shown by the evidence, which establish that converting the case is not in the best interests of creditors and the estate.
IT IS ORDERED that final approval of Debtor's Disclosure Statement is DENIED; and approval of Debtor's Amended Disclosure Statement is DENIED.
IT IS FURTHER ORDERED that Debtor's Objection to Proof of Claim No. 4 filed by First Interstate Bank is OVERRULED.
IT IS FURTHER ORDERED that the Motions to Convert filed by First Interstate Bank, successor by merger to Mountain West Bank, N.A., and the United States Trustee, are GRANTED; and this case is immediately converted to Chapter 7 of the Bankruptcy Code.
IT IS FURTHER ORDERED that the Motions to Dismiss filed by First Interstate Bank and the United States Trustee are DENIED as moot.
