Honorable Mike K. Nakagawa, United States Bankruptcy Judge.
The humorist Douglas Adams was fond of saying, "I love deadlines. I love the whooshing sound they make as they fly
The best defense is a good offense.
Vince Lombardi, former Green Bay Packers head coach
This is a case where a reorganized debtor missed a deadline set forth in its confirmed Chapter 11 plan and then seeks to "enforce" the confirmed plan to avoid the very consequence it agreed to bear.
On January 5, 2016, Mohave Agrarian Group, LLC ("Debtor") filed a voluntary Chapter 11 petition for reorganization. (ECF No. 1).
On January 19, 2016, Debtor filed its schedules of assets and liabilities ("Schedules"). (ECF No. 17). On its property Schedule "A/B," Debtor listed an interest in approximately 8,888 acres of real property located in Arizona ("Arizona Property") valued at $16,510,000. On its creditor Schedule "D," Debtor listed Contrail Holdings, LLC ("Contrail") as having a claim secured by the Arizona Property with a balance owing of $7,700,172. On its Schedule "E/F," Debtor listed the Assessor of Mohave County ("Mohave County Assessor") as having various priority unsecured claims for unpaid real estate taxes.
On May 3, 2016, Contrail filed a proof of claim in the amount of $8,177,909.05, secured by a promissory note and deed of trust against the Arizona Property.
On June 27, 2016, Debtor filed a motion to value the Arizona Property ("Valuation Motion") and scheduled it for a hearing to be held on August 10, 2016. (ECF Nos. 94 and 98). Contrail submitted appraisal testimony valuing the Arizona Property at $9,625,000,
On August 25, 2016, a stipulation was filed to coordinate discovery in connection with the Valuation Motion, as well as the Debtor's anticipated Chapter 11 plan, in addition to Contrail's anticipated motion for relief from stay. (ECF No. 130).
On September 2, 2016, Debtor filed its "First Amended Chapter 11 Plan of Reorganization Dated September 2, 2016" ("First Amended Plan"), along with a proposed disclosure statement. (ECF Nos. 136 and 137).
On October 5, 2016, an objection to the disclosure statement was filed on behalf of Contrail (ECF No. 176), to which a reply was filed by Debtor on October 12, 2016 (ECF No. 180).
On October 26, 2016, Debtor filed its first amended disclosure statement, along with a redlined version. (ECF Nos. 187 and 188).
On November 2, 2016, a hearing was held on approval of the proposed amended disclosure statement.
On November 9, 2016, an order was entered approving the adequacy of the amended disclosure statement and setting a plan confirmation hearing for January 23, 2017. (ECF No. 195).
On November 18, 2016, the Stay Relief Motion was noticed to be heard on the same date as the plan confirmation hearing. (ECF No. 204). On January 9, 2017, an opposition to the Stay Relief Motion was filed by Debtor (ECF No. 239), and on January 20, 2017, a reply was filed by Contrail (ECF No. 310).
On November 23, 2016, Debtor filed a motion for order authorizing the private sale of Debtor's real property to Encore Investments, LLC ("Encore Sale Motion"), free and clear of liens, which was noticed to be heard on January 23, 2017. (ECF Nos. 208 and 211). On January 12, 2017, an omnibus opposition was filed by Contrail (ECF No. 263), and on January 20, 2017, a reply was filed by Debtor (ECF No. 317).
On December 1, 2016, Debtor filed a motion for order authorizing the private sale of Debtor's real property to James D. Hammer ("Hammer Sale Motion"), which also was noticed to be heard on January 23, 2017. (ECF Nos. 219 and 222). On January 12, 2017, an omnibus opposition was filed by Contrail (ECF No. 263), and on January 20, 2017, a reply was filed by Debtor (ECF No. 317).
On January 13, 2017, a stipulation was filed to move the trial date regarding the following contested matters: First Amended Plan, Valuation Motion, Stay Relief Motion, Encore Sale Motion, and Hammer Sale Motion. (ECF No. 272). The trial was rescheduled to be held on January 26, 30 and 31, 2017. On January 17, 2017, an order was entered approving the stipulation. (ECF No. 283). On January 19, 2017, Debtor filed its redlined version of a proposed second amended plan. (ECF No. 300).
On January 26, 2017, the trial commenced.
On January 31, 2017, the trial was continued to March 13, 2017, in order to permit discovery to be conducted concerning a matter raised in the trial testimony of the Debtor's principal. (ECF No. 359).
On March 13, 2017, the parties informed the court that between January 31 and March 12, 2017 ("Trial Hiatus"), a compromise had been reached. Under the compromise, Contrail would purchase the Arizona Property from the Debtor, subject to an option allowing the Debtor to repurchase the Arizona Property in the future ("Option"). The Debtor and Contrail agreed to file no later than March 16, 2017, a motion to approve a settlement agreement and mutual releases. They also agreed that the Debtor would file a further amended plan incorporating the settlement, as well as a further amended disclosure statement. (ECF No. 407).
On March 16, 2017, Debtor's Motion for Approval of Settlement, Pursuant to Fed. R. Bankr. P. 9019, By and Among Mohave
On March 20, 2017, an order was entered granting Debtor's request to shorten time so that the Settlement Motion could be heard on an expedited basis. (ECF No. 418).
On March 22, 2017, Debtor filed a "Plan Supplement" that included various documents that were not attached to the Third Amended Plan, but which apparently were submitted for the purpose of "supplementing and giving effect to the terms of the plan." (ECF No. 423). One of those documents consisted of a "Memorandum of Option and Purchase and Sale Agreement" to be recorded in Mohave County ("Option Memorandum").
On March 23, 2017, an order was entered granting Debtor's request for conditional approval of the Second Disclosure Statement, as well as scheduling a combined hearing on confirmation of the Third Amended Plan and final approval of the Second Disclosure Statement. (ECF No. 425).
On March 30, 2017, a hearing was held on the Settlement Motion and on April 4, 2017, an order was entered approving the settlement ("Settlement Approval Order"). (ECF No. 436).
On April 13, 2017, a Declaration of James Rhodes in support of confirmation of the Third Amended Plan ("Rhodes Confirmation Declaration") was filed. (ECF No. 443).
On April 18, 2017, a combined hearing was held on confirmation of the Third Amended Plan and final approval of the Second Disclosure Statement. At the hearing, the proposed plan was confirmed and the disclosure statement was approved.
On May 2, 2017, findings of fact and conclusions of law were entered in support of plan confirmation and disclosure statement approval ("Confirmation Findings"). (ECF No. 445).
On May 8, 2017, an order was entered confirming the Third Amended Plan ("Plan Confirmation Order"). (ECF No. 446). A copy of the Third Amended Plan ("Confirmed Plan") is attached as Exhibit "1" to the Confirmation Order.
On March 14, 2018, the Reorganized Debtor's Motion for Order: (I) Reopening Chapter 11 Case; and (II) Enforcing Confirmed Chapter 11 Plan ("Motion") was filed by the Debtor, accompanied by another Declaration of James M. Rhodes ("Second Rhodes Declaration").
On March 16, 2018, an order was entered granting Debtor's request to shorten time so that the instant Motion could be heard on an expedited basis. (ECF No. 487).
On March 29, 2018, Contrail filed an opposition to the Motion ("Opposition"), along with declarations from William M. Noall ("Noall Declaration"), Ryan H. Esplin ("Esplin Declaration"), and Allen Barbarich ("Barbarich Declaration"). (ECF Nos. 489, 490, 491, and 492).
On April 2, 2018, Debtor filed a reply ("Reply"). (ECF No. 493).
On April 4, 2018, the court heard the instant Motion and the appearances of counsel were noted on the record. After oral arguments were presented, the matter was taken under submission.
On April 18, 2018, as instructed by the court at the hearing, the Supplemental Declaration of William M. Noall ("Supplemental Noall Declaration") was filed. (ECF No. 498).
By the instant Motion, Debtor seeks to reopen this Chapter 11 proceeding as permitted by the Final Decree. Debtor's purpose in reopening the case is to obtain a "ruling that the Option remains in full force and effect under the terms of the Confirmed Plan and Confirmation Order..." Motion at 10:7-8. The Motion is brought under Section 105(a) and FRBP 9019(a).
Contrail maintains that the requested ruling cannot be granted by motion, but must be sought through an adversary proceeding for declaratory relief.
Debtor replies that Mohave County has not declared that the Assessor Note is in default and maintains that Contrail has not been prejudiced by a technical default.
The Motion to reopen the Chapter 11 case will be granted inasmuch as Contrail does not oppose and good cause otherwise exists. The Motion to enforce will be denied for the reasons discussed below.
Under the Settlement Agreement, Contrail was permitted to purchase the Arizona Property by credit bidding the amount of its claim.
Under the Settlement Agreement, Contrail also granted to the Debtor a non-assignable option ("Option") to purchase the Arizona Property back from Contrail after the Sale Agreement was completed.
Under the Settlement Agreement, Debtor was required to amend its proposed Chapter 11 plan to include the settlement terms between the parties.
Under the Sale Agreement, Debtor was specifically permitted to pay delinquent taxes and assessments over time pursuant to the Assessor Note.
Under the Option Agreement, a list of purchase prices was set forth in a table ("Take Down Schedule") attached as Exhibit "A" thereto, and the initial plus two additional option periods were set forth.
Under the Assessor Note, Debtor agreed to pay Mohave County the principal amount of $86,331.72.
Under the Second Disclosure Statement, the Debtor's obligation to pay the Mohave Tax Obligations under the Settlement Agreement is disclosed. See Second Disclosure Statement, Art. V, § 5.5(b), 34:3-18. Consistent with the language of the Settlement Agreement, the language in the Second Disclosure Statement specifically states that "if any payment with respect to any Taxable Parcel is
Under the Confirmed Plan, the terms of the Settlement Agreement and description in the Second Disclosure Statement were incorporated as the treatment of Contrail's claim under Class 2.
Under the Plan Confirmation Order, the terms of the Settlement Agreement, the Sale Agreement, and the Option Agreement, among others, are ordered to be "legal, valid, binding, and authorized obligations of the Reorganized Debtor, enforceable in accordance to their terms." Plan Confirmation Order at 3:21 to 4:3.
In support of the Plan Confirmation Order, the court specifically found that "All documents and agreements necessary to implement the Plan, expressly including the Operative Documents, have been negotiated in good faith, at arm's length, and are in the best interest of Debtor, its Estate, and the Debtor's Creditors." Confirmation Findings, ¶ 29. The court also found that "the settlements, compromises, discharges, releases, and injunctions set forth in the Plan are
Attached as Exhibit "4" to the Noall Declaration is a copy of an email dated July 20, 2017, from counsel for Mohave County and counsel for the Debtor. That email includes a chain of prior email messages between the same counsel. The email dated June 19, 2017, at 3:39 p.m., from Debtor's counsel to counsel for Mohave County, expresses their understanding that the first payment under the Assessor Note would be due on June 19, 2017, and on the 18th day of each subsequent month.
Attached as Exhibit "H" to the Esplin Declaration is a copy of a subsequent email dated March 7, 2018, on the subject of the "Verification of Payments by Mohave Agrarian Group." That email is from counsel for Mohave County to counsel for the Debtor. The email lists ten checks of various dates sent on behalf of the Debtor, as
At the hearing in this matter, Debtor conceded that the list of checks set forth in the March 7, 2018, email from counsel for Mohave County, accurately sets forth the dates that payments on the Assessor Note were received by the Mohave County Assessor.
The language in the Settlement Agreement was the result of substantial negotiations between the parties during the Trial Hiatus. Both the Debtor and its principal acknowledged that they were represented by legal counsel in drafting, negotiating, and executing the Settlement Agreement, and fully and clearly understood all of its terms and effects. The pertinent language certainly requires the Debtor's payments to the Mohave County Assessor to be "
The same language from the Settlement Agreement was included in the Third Amended Plan submitted for confirmation by the Debtor. The same language was included in the Confirmed Plan as well as in the Plan Confirmation Order submitted by the Debtor. No appeal was taken from the Plan Confirmation Order.
Contrail asserts that the first payment to Mohave County was due on May 17, 2017, under the language of Section 3 of the Assessor Note.
Alternatively, Contrail argues that even if the first payment was due on June 19, 2017, and the 18th day of each month thereafter, the first payment still was not received by Mohave County until June 26, 2017, well after any ambiguity was resolved.
Debtor does not dispute that on at least two occasions it missed the applicable payment deadline under the Assessor Note,
Debtor's request to be relieved from its agreement is based solely on Section 105(a) and FRBP 9019(a). As to the latter, the rule merely sets forth the manner in which approval of a settlement or compromise may be sought in a bankruptcy proceeding. FRBP 9019(a) does not, however, provide any basis or authority for granting relief from a settlement that previously was approved. The Settlement Approval Order was never appealed.
As to the former, Section 105(a) provides in pertinent part that a bankruptcy court "may issue any order ... that is necessary or appropriate to carry out the provisions of" the Bankruptcy Code. 11 U.S.C. § 105(a). The equitable authority granted by Section 105(a), however, cannot contravene specific provisions of the Bankruptcy Code.
Under Section 1127, a plan proponent or reorganized debtor may modify a confirmed plan only
Under Section 1141, the provisions of a confirmed Chapter 11 plan "bind the debtor, any entity issuing securities under the plan, any entity acquiring property under the plan, and any creditor, equity security holder, or general partner in the debtor ..." 11 U.S.C. § 1141(a). In this case, the Plan Confirmation Order is a final judgment that binds the Debtor, Contrail, Mohave County, any other creditors, and the equity security holders to the terms and effect of the Confirmed Plan.
But even if the court was able to apply equitable considerations and maxims as a source of relief from the payment deadline, the court concludes that the relief requested by the Debtor is inappropriate. In this case, the Third Amended Plan that ultimately became the Confirmed Plan was proposed by the Debtor, rather than a creditor's committee or any other interested party. Irrespective of the statutory import of Section 1141(a), the doctrine of judicial estoppel would prevent the Debtor from asserting a position inconsistent with the express language of its Confirmed Plan.
Instead, the Debtor asserts the equitable maxim that "equity abhors a forfeiture,"
In this case, the Confirmed Plan provided for the payment of creditors only in Class 2 and Class 3, i.e., Contrail and the Mohave County Assessor.
Because relief from requirements under Section 1127(b) and Section 1141(a) is not available under Section 105(a) nor under FRBP 9019(a), the court concludes that the Option terminated under the express terms of the Settlement Agreement, Confirmed Plan, and Plan Confirmation Order. Moreover, to the extent that equitable authority to grant relief exists, the Debtor has failed to meet its burden of persuasion and proof that equitable relief from the Settlement Agreement, Confirmed Plan, and Plan Confirmation Order is appropriate under the circumstances in this case.
For the reasons stated above, the instant Motion will be granted in part and denied in part. This Memorandum Decision constitutes the court's findings of fact and conclusions of law pursuant to FRBP 9014(c), FRBP 7052, and FRCP 52(a). A separate order has been entered contemporaneously herewith.
