Opinion
Case No. 23-13002-JGR Adv. Proc. No. 23-1223-JGR
2024-01-25
IN RE: PALMER DRIVES CONTROLS AND SYSTEMS, INC., EIN: 45-3701425, Debtors. Autotech Technologies, LP, Plaintiff, v. Palmer Drives Controls and Systems, Inc., Defendant.
Jonathan Feinstein, JMF Law LLC, Lake IN The Hills, IL, Anish Parikh, Chicago, IL, for Plaintiff. Aaron A. Garber, Littleton, CO, for Defendant.
Jonathan Feinstein, JMF Law LLC, Lake IN The Hills, IL, Anish Parikh, Chicago, IL, for Plaintiff. Aaron A. Garber, Littleton, CO, for Defendant.
ORDER GRANTING DEFENDANT'S MOTION TO DISMISS
Joseph G. Rosania, Jr., United States Bankruptcy Judge
This matter is before the Court on Palmer Drives Controls and Systems, Inc.'s ("Palmer") Motion to Dismiss Autotech Technologies, LP's ("Autotech") Complaint to Determine the Dischargeability of a Debt Under 11 U.S.C § 523(a)(4) (Doc. 14).
This Court has subject matter jurisdiction over this core matter pursuant to 28 U.S.C. §§ 1334, 157(a), and 157(b)(2)(I).
BACKGROUND
I. Pre-Petition Actions
On March 11, 2019, Autotech filed a civil suit against Palmer in the United States District Court for the District of Colorado (Civil Action No. 19-cv-00718-PAB-NRN). Autotech's main cause of action was a Breach of Fiduciary Duty. Following a five-day jury trial, the Jury returned a verdict in favor of Autotech and against Palmer, awarding damages of $195,900, plus pre-judgment interest.
II. Palmer's Bankruptcy Filing
As a result of the verdict, Palmer filed a voluntary Chapter 11 Subchapter V petition in the United States Bankruptcy Court for the District of Colorado on July 10, 2023. On September 5, 2023, Autotech filed a non-priority, allowed unsecured claim against Palmer for $418,194.70 (Claim No. 26). Palmer does not dispute Autotech's claim.
On October 2, 2023, Palmer filed its first plan (Doc. 88). On October 10, 2023, Palmer filed its first amended plan (Doc. 94). The amended plan modified language requested by the Small Business Administration. Soon thereafter, Palmer was notified by Autotech that its claim was not accurately reflected in the plan due to a technical glitch in the claims register. An Errata to the Amended Subchapter V Plan (Doc. 96) was filed on October 13, 2023, which corrected Exhibit A of the amended plan and included the correct amount of Autotech's claim. At this time, Palmer and Autotech were working together to craft a joint statement confirming Autotech's allowed claim in the amount set forth in Claim No. 26. This statement was never filed with the Court because, despite Palmer's best efforts, Autotech ended communication and eventually revoked the proposed agreement. At the confirmation hearing, Palmer confirmed Autotech had an allowed claim in the amount of $418,194.70.
On October 12, 2023, the Court entered an order resetting the last day to object to the confirmation of the plan and the last day to accept or reject the plan as November 24, 2023 (Doc. 99). This order was properly noticed and served on all parties eligible for notice through first class mail and electronic notice.
On November 27, 2023, Palmer filed a second amended plan (Doc. 109). This second amendment corrected typographical errors and incorporated the corrections to Exhibit A reflected in the errata to the first amended plan. Both the first and second amended plans made changes that were not material to the overall plan and only affected the rights of an unrelated creditor, who was in a different class than Autotech.
The same day, Palmer filed a Summary of Voting Results (Doc. 111), in which all classes accepted the plan, or the plan was deemed accepted by classes who did not submit a ballot. There were no votes to reject the plan or objections to confirmation of the plan from any member of any class. The classes who did vote, voted unanimously to accept the plan.
Four days after the balloting had concluded, Autotech voted to reject the plan (Doc. 119). The ballot, though dated October 31, 2023, was not filed with the Court or submitted to Palmer until November 28th.
On December 4, 2023, ten days after the last day to object, Autotech filed an objection to the confirmation of the plan (Doc. 119), on the grounds the plan was filed in bad faith and did not adequately compensate it for the judgment, as the plan impaired its claim.
The Court held a hearing on plan confirmation and Autotech's objection thereto on December 14, 2023. At the hearing, Autotech argued its objections to confirmation as well as explained the late arrival of the ballot. Autotech's main argument for rejecting the plan was that the pro-rata amount proposed was not sufficient and sought the full amount of its claim, reflected in Claim No. 26. Autotech failed to provide a substantive explanation for the late submission of the ballot and the late objection to confirmation of the plan.
The Court found that the ballot was late without sufficient justification and would not be accepted. The Court also overruled the objection and confirmed the Second Amended Plan (Doc. 131) on December 21, 2023.
a. The Late Ballot
"Ballots shall not be counted or considered for any purpose in determining whether the Plan has been accepted or rejected [for] any ballot received after the Voting Deadline unless the Debtor has granted an extension of the Voting Deadline with respect to such ballot." In re Amelia Island Co., No. 3:09-bk-09601, 2010 WL 6560764, 2010 Bankr. LEXIS 5395, at *13 (Bankr. M.D. Fla. July 9, 2010).
However, the Court is permitted to extend the balloting period to allow a late vote after a motion showing cause that the delay was a consequence of excusable neglect. Fed.R.Bankr.P. 9006(b)(1). The Supreme Court's test for excusable neglect analyzes multiple factors, including the reason for the delay, whether it was within the reasonable control of the movant, and whether the movant acted in good faith. Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 395, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993).
Autotech did not file a motion pursuant to Rule 9006(b)(1) to allow for enlargement of the balloting window to enable the counting of the late vote. An extension could only be granted on motion by Autotech, as the specified window had expired. Despite Autotech's failure to file such a motion, the Court permitted arguments on why the ballot should be accepted during the December 14th hearing. Autotech did not offer cause sufficient to meet the excusable neglect standard. The primary assertion made in this regard is that its counsel, Anish Parikh, entered his appearance a short time before the hearing. However, the entry of appearance was filed on October 30, 2023 (Doc. 105), almost a full month before the end of balloting. Autotech also argued that work on the joint statement, which was never filed, delayed the filing of their ballot. Due to a lack of excusable neglect, Autotech's vote rejecting the plan was disregarded.
b. The Late Objection
Fed.R.Bankr.P 3020(b) governs objections under 11 U.S.C. § 1128(b). This section provides that "[a]n objection to confirmation of the plan shall be filed and served on the debtor, the trustee, the proponent of the plan, any committee appointed under the Bankruptcy Code, and any other entity designated by the court, within a time fixed by the court". Fed.R.Bankr.P 3020(b). Late objections are governed by Fed.R.Bankr.P. 9006(b)(1) which utilizes the same excusable neglect standard from Pioneer Inv. Servs. as a late ballot.
Autotech filed an objection to confirmation of the plan (Doc. 119) on December 4, 2023, ten days after the last day to object. While Autotech did not file the motion for enlargement of time required under Rule 9006(b)(1), the Court permitted arguments on the objection at the confirmation hearing. Autotech failed to file a list of exhibits or witnesses as required by the October 12, 2023, order (Doc. 99). At the hearing, the bulk of the arguments made against confirmation pertained to the aforementioned issues with the claims register, which was corrected in the errata to the first amended plan, and again correctly reflected in exhibit A of the second amended plan. As with the ballot, Autotech failed to provide sufficient explanation for why the objection to confirmation was untimely and did not make an argument that the delay was a result of excusable neglect.
The Court overruled the objection due to the disregard of the deadlines, as well as the lack of articulated deficiencies in the plan. The Court then confirmed Palmer's second amended plan. Both the untimely objection to confirmation and ballot shows a continued pattern of disregard of deadlines by Autotech and neither the uncounted vote rejecting the ballot, nor the overruled objection bear any weight on the consensual nature of Palmer's plan as explained below.
III. The Adversary Proceeding
On October 6, 2023, Autotech initiated the instant action and filed the Complaint (Doc. 1). Autotech sought to except its claim from discharge pursuant to 11 U.S.C § 523(a)(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. The claim under § 523(a)(4) stems from the same claim arising in the aforementioned actions adjudicated in the federal civil trial and reiterated in the objection to confirmation.
On November 9, 2023, Palmer filed a Motion to Dismiss (Doc. 14), under Fed. R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted. Palmer argues that a claim to except a discharge under 11 U.S.C. § 523 does not apply to corporate debtors seeking bankruptcy protection under Chapter 11 Subchapter V. Autotech filed a response on December 6, 2023 (Doc. 15) asserting that a recent ruling by the Fourth Circuit allowed for § 523 to be utilized in cases involving corporate debtors in Subchapter V seeking a discharge in the case of a non-consensual plan under § 1192.
LEGAL STANDARD
I. Motion to Dismiss
Fed.R.Bankr.P. 7012(b) incorporates Fed.R.Civ.P. 12(b)(6), which provides that dismissal for failure to state a claim may be brought by motion prior to the filing of a responsive pleading. In considering a motion to dismiss, this Court must accept all well-pled facts in the Complaint as true and view them in the light most favorable to the Plaintiff. Barnes v. Harris, 783 F.3d 1185, 1191-92 (10th Cir. 2015) (citing Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir. 1999)). But "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
Motions to dismiss are disfavored. "Granting a motion to dismiss is a harsh remedy which must be cautiously studied, not only to effectuate the spirit of the liberal rules of pleading but also to protect the interests of justice." Dias v. City and Cnty. of Denver, 567 F.3d 1169, 1178 (10th Cir. 2009) (citing Duran v. Carris, 238 F.3d 1268, 1270 (10th Cir. 2001)).
II. Consensual and Non-Consensual Discharges
A Chapter 11 Subchapter V Debtor has two paths forward to confirmation under 11 U.S.C. § 1129 - either a consensual plan or a non-consensual plan.
When no class of impaired claims votes to reject the plan and all requirements of 11 U.S.C. § 1129(a) are met, plans are deemed consensual. In re S-Tek 1, LLC, No. 20-12241-j11, 2023 WL 1785711 at *10, 2023 Bankr. LEXIS 328, at *29 (Bankr. D.N.M. Feb. 6, 2023), 11 U.S.C. § 1191(a). "Acceptance (or non-impairment) for all classes of creditors certainly indicates consensus." In re Creason, No. 22-00988-swd, 2023 WL 2190623, at *1, 2023 Bankr. LEXIS 478, at *2 (Bankr. W.D. Mich. Feb. 23, 2023). The discharge of debt in consensual plans is governed by 11 U.S.C. § 1141(d). Avion Funding, LLC v. GFS Indus., LLC (In re GFS Indus., LLC), 647 B.R. 337, 341 (Bankr. W.D. Tex. 2022).
When a plan fails to meet the requirements of § 1129(a), but still meets the requirements of that section except for paragraphs (8), (10), and (15), it can be confirmed under § 1191(b). 11 U.S.C. § 1191(b). A plan confirmed under § 1191(b) is known as a nonconsensual plan. Avion Funding, 647 B.R. at 341. For non-consensual plans, the statute governing discharge of debts is 11 U.S.C. § 1192. Lafferty v. Off-Spec Sols., LLC (In re Off-Spec Sols., LLC), 651 B.R. 862, 866 (B.A.P. 9th Cir. 2023), Avion Funding, 647 B.R. at 337 (Bankr. W.D. Tex. 2022).
Here, all classes either voted to accept or did not vote and were deemed to have accepted Palmer's Plan, creating a consensual plan under § 1191(a). Even in the event the late ballot had been permitted, it would not affect the consensual nature of Palmer's plan.
If a class of creditors is impaired by the plan, it can accept the plan "if such plan has been accepted by creditors . . . that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors . . . that have accepted or rejected such plan." 11 U.S.C. § 1126(c). Autotech is a part of class 4, specifically class 4(b), representing general unsecured claims exceeding $3,000. The timely filed ballots in class 4 totaled $1,129,928.67, cast by 10 creditors, and if the Autotech ballot is counted, the total amount of claims filed by voting creditors would be $1,548,123.36. Autotech's claim for $418,194.69 represents 27% of the amount of claims by class 4 creditors and less than 10% of the number of voting creditors. As all other class 4 creditors submitted a ballot unanimously accepted the plan, class 4 has thus accepted the plan regardless of the counting of the untimely ballot.
Therefore, the dischargeability of debts owed by Palmer is governed by 1141(d).
III. Limitation of Discharge of Debts under 11 U.S.C. § 1141(d)
The pivotal nature of distinguishing between a consensual and non-consensual plan arises from the distinct language employed in each respective section governing discharge as related to § 523(a).
Section 1141 states, "A discharge under this chapter does not discharge a debtor who is an individual from any debt excepted from discharge under section 523 of this title." 11 U.S.C. § 1141(d)(2). This section diverges from § 1192 by explicitly limiting the discharge of debts under § 523 to only individuals. The only exception to this section is found in § 1141(d)(6), which excepts debts from discharge owed to a governmental unit by a corporate debtor. The limitation to individual debtors is further bolstered by the language of § 523(a) which states that "a discharge under section 727, 1141, 1192, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt." 11. U.S.C. 523(a). The plain meaning of § 1141 is unambiguously clear that the remedies of § 523 for a non-governmental debt are only available when the debtor is an individual.
Here, Palmer is a corporation in good standing registered with the state of Colorado with its principal headquarters situated therein. The debt owed to Autotech stems from a judgment between two corporations, neither of which is a governmental unit. Thus, under § 1141(d), due to the consensual nature of this plan, Autotech has no remedy to deny the discharge under § 523. The Court does not need to reach a conclusion on whether § 1192 applies to a corporate debtor in Subchapter V, as it is not necessary since this case involves a consensual plan.
CONCLUSION
For the reasons set forth above,
IT IS ORDERED that the Motion of Defendant Palmer Drives and Control Systems, Inc. to Dismiss the Claim Against Them Pursuant to Fed.R.Bankr.P. 7012(a) and (b) and Fed.R.Civ.P. 12(b)(6) is GRANTED.