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finding the released non-debtors' contributions substantial in part because it "nearly double[d] the projected monthly payments to unsecured creditors."
Summary of this case from In re Kalos Capital, Inc.Opinion
Case No.: 3:22-bk-01736-BAJ
2023-02-17
IN RE: CENTRAL FLORIDA CIVIL, LLC, Debtor.
Robert Altman, Palatka, FL, Trustee, pro se. Scott E. Bomkamp, United States Trustee, Orlando, FL, for U.S. Trustee. Bryan K. Mickler, Mickler & Mickler, Jacksonville, FL, for Debtor.
Robert Altman, Palatka, FL, Trustee, pro se.
Scott E. Bomkamp, United States Trustee, Orlando, FL, for U.S. Trustee.
Bryan K. Mickler, Mickler & Mickler, Jacksonville, FL, for Debtor.
ORDER OVERRULING OBJECTIONS TO NON-DEBTOR CHAPTER 11 PLAN INJUNCTION
Jason A. Burgess, United States Bankruptcy Judge
This Case came before the Court on January 13, 2023, for a trial on confirmation of the Debtors’ Amended Plan of Reorganization (the "Amended Plan") (Doc. 118), the Objection to Confirmation (Doc. 157) filed by North Mill Credit Trust ("North Mill") and the Objection to Confirmation (Doc. 162) filed by Alta Construction Equipment Florida, LLC ("Alta") (collectively the "Objections"). At the conclusion of the trial, the Court took the matter under advisement and asked the parties to submit memorandums of law in support of their positions. (Docs. 204, 205, 206). The contested issue concerns language in the Amended Plan, which provides that the "[a]utomatic [s]tay of 11 U.S.C. § 362(a) shall extend to any co-debtor who personally guaranteed secured, unsecured, or leased debt of the corporation." (the "Plan Injunction") (Doc. 118, p. 14). In the Objections, Alta and North Mill cursorily state their opposition to the Plan Injunction. As set forth below, the Court will overrule the Objections and approve the Plan Injunction.
The Court permitted the United States Trustee (the "UST") to file a memorandum. However, the UST elected to take no position and, therefore, did not submit a memorandum.
Background
The Debtor operates a civil engineering and site prep business throughout the state of Florida. (Doc. 6, p. 1). Chad and Cara Converse (the "Converses"), husband and wife, collectively own 100% of the Debtor and actively manage the Debtor's day-to-day operations. Prepetition, merchant cash advance ("MCA") lenders initiated lawsuits against the Debtor to collect on delinquent debts. In addition to the MCA lenders, two suppliers, Alta and Blevins Road Boring, Inc., initiated lawsuits against the Debtor. (Doc. 1, pp. 46-47; Claims 3, 7). The Debtor filed this case on August 31, 2022 (the "Petition Date"), in large part to halt these collection actions, some of which had proceeded to judgment. (Doc. 1, pp. 46-47; Doc. 6, p. 1; see, e.g., Claim 6).
The Preliminary Injunction Issued
On September 28, 2022, the Debtor initiated an adversary proceeding seeking multi-faceted injunctive relief against six MCA lenders. (Adv. Pro. 3:22-ap-00054-BAJ, Doc. 1) (the "MCA Adversary"). Additionally, the Debtor filed a Motion for Preliminary Injunction against the named defendants to enjoin them from collecting on their guaranty claims against Chad Converse. (the "Motion") (MCA Adversary, Doc. 2). The Fundworks, LLC ("Fundworks"), and Fiji Funding, LLC ("Fiji"), filed responses in opposition to the Motion. (the "Responses") (MCA Adversary, Docs. 9, 18). After a trial, the Court temporarily enjoined the named defendants from further collection through January 13, 2023. (MCA Adversary, Doc. 47).
In its oral ruling, the Court held that all four criteria for a preliminary injunction weighed in the Debtor's favor. First, the Court found that the Debtor would suffer irreparable harm absent an injunction because the success of the Debtor's reorganization hinges on Chad Converse directing his full attention to the Debtor's operations. If forced to defend at least six suits against him personally, Chad Converse would be prevented from devoting his full energy to the Debtor's operations. Furthermore, the Debtor's case presents unique circumstances because five trucks owned by Chad Converse, individually, are used by the Debtor. Enforcement of a judgment against him would deprive the Debtor of these assets. Although the trucks are encumbered, used vehicles are currently in high demand. Thus, the status of the used car market represents one aspect of the unusual circumstances present to justify the injunction. As a final note regarding irreparable harm, the Court concluded that further litigation against Chad Converse would potentially impact the Debtor through discovery or collateral estoppel. Second, the Court found the Debtor was likely to prevail on the merits, or stated differently, that the injunction would aid in a successful reorganization based on the lack of evidence to the contrary and the pendency of a confirmable plan. Third, the Court found that the harm to the Debtor, diverting Chad Converse from the Debtor's business, outweighs the harm to the creditors, maintaining the status quo pending the conclusion of plan payments. By tolling all applicable statutes of limitations, the harm to creditors is mitigated because they will be able to proceed with collection on their guaranty claims when the injunction ends. Finally, the Court found that the public interest weighs in favor of the Debtor successfully reorganizing, which will preserve the jobs of the Debtor's thirty employees and repay numerous secured debts and significant priority debt of the Internal Revenue Service. The Chapter 11 Plan and the Plan Injunction
On November 10, 2022, the Debtor filed a plan of reorganization, which included neither personal capital contributions from the Converses nor specific protections for enjoined creditors. (Doc. 83) (the "Initial Plan"). On December 6, 2022, the Debtor filed the Amended Plan. Both the Initial Plan and the Amended Plan contain Section 9.03, which provides that upon confirmation "the [a]utomatic [s]tay of 11 U.S.C. 362(a) shall extend to any co-debtor who personally guaranteed secured, unsecured, or leased debt of the [Debtor]." (Doc. 118, p. 14). Notably, the Amended Plan added protections for enjoined creditors as outlined in Section 9.04. (Doc. 118, p. 15). These added protections include: (i) providing a quarterly report to the Subchapter V Trustee and all creditors; (ii) allowing creditors to object to the Debtor's calculation of disposable income; (iii) supplying post-confirmation tax returns to creditors upon request; (iv) capping officer salary at the same levels set by the Court at confirmation; (v) the Converses contributing $5,000 annually towards unsecured claims over five years; and (vi) tolling all applicable statutes of limitations.
The Debtor served a notice of the confirmation hearing on all creditors and parties in interest. (the "Notice") (Doc. 128). Because of the Plan Injunction, the Notice included the information required by Bankruptcy Rule 2002(c)(3). Specifically, the Notice defined the Plan Injunction as limited to "secured and unsecured creditors on which Chad and Cara Converse personally guaranteed." (Doc. 128, p. 2).
Analysis
First, the Court will address the scope of the Plan Injunction. Based on the statement in the Notice provided pursuant to Bankruptcy Rule 2002(c)(3), ostensibly, the Plan Injunction only applies to protect the Converses and only on account of personal guaranty claims related to debts of the Debtor. However, the plain language of the Plan Injunction may be interpreted much broader as it extends the stay to "any co-debtor" without expressly limiting such protection to the Converses. Furthermore, the Plan Injunction does not expressly limit protection to guaranty claims related to debts of the Debtor . As set forth below, the Court will approve the Plan Injunction, but rather than extend the automatic stay to any co-debtor, equity and due process guide the Court to construe the Plan Injunction more narrowly, consistent with the narrower definition expressed in the Notice. Therefore, rather than extending the automatic stay to all co-debtors, the Court construes the Plan Injunction to temporarily enjoin creditors of the Debtor from pursuing their guaranty claims against the Converses.
Next, in determining whether to approve the Plan Injunction, as clarified above, the Court finds two recent cases instructive. In re Seawalk Investments, LLC, 2021 WL 5016600 (Bankr. M.D. Fla. Oct. 28, 2021) ; In re Global Travel International, Inc., 2022 WL 4690426 (Bankr. M.D. Fla. Sept. 30, 2022). Although not binding, the Court finds the opinions of Seawalk and Global Travel issued by my learned fellow jurists in this district to be extremely insightful. In each of these cases, the bankruptcy court approved a non-debtor injunction after considering the Dow Corning factors. Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648, 658 (11th Cir. 2002). The Eleventh Circuit Court of Appeals has approved a bankruptcy court's use of the Dow Corning factors to permit a non-debtor release in a Chapter 11 plan. In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070, 1079 (11th Cir. 2015). The Eleventh Circuit noted that bankruptcy courts are free to "flexibly" apply these factors, but also cautioned that "bar orders ought not to be issued lightly." Id.
In Dow Corning, the Sixth Circuit Court of Appeals relied upon the confluence of two catch-all provisions to uphold a bankruptcy court's power to enjoin a non-consenting creditor's claim against a non-debtor to facilitate a Chapter 11 plan of reorganization. Dow Corning, 280 F.3d at 656-57 (discussing 11 U.S.C. §§ 105(a), 1123(a)(6) ). The Sixth Circuit determined that a bankruptcy court may issue such an injunction after identifying "unusual circumstances" based on the following factors:
(1) There is an identity of interests between the debtor and the third party, usually an indemnity relationship, such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate; (2) The non-debtor has contributed substantial assets to the reorganization; (3) The injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor; (4) The impacted class, or classes, has overwhelmingly voted to accept the plan; (5) The plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction; (6) The plan provides an opportunity for those claimants who choose not to settle to recover in full and; (7) The bankruptcy court made a record of specific factual findings that support its conclusions.
Id. at 658 (internal citations omitted). The Court notes that it has "discretion to determine which of the Dow Corning factors will be relevant in each case." Seaside Engineering, 780 F.3d at 1079. Furthermore, unlike the releases in Dow Corning and Seaside Engineering, the Plan Injunction requested by the Debtor is impermanent. Id. at 1076 ; Dow Corning, 280 F.3d at 655. This important difference certainly warrants consideration as the Court applies the Dow Corning factors to the instant case. In re Bernhard Steiner Pianos USA, Inc., 292 B.R. 109, 116 (Bankr. N.D. Tex. 2002) (noting that the Fifth Circuit prohibits permanent plan injunctions post-confirmation but permits such temporary injunctions under certain circumstances).
i. Identity of Interests between the Debtor and Non-debtors
The identity of interests typically manifests itself based on the existence of an indemnity relationship. See, e.g., Dow Corning, 280 F.3d at 654-55 (release of Dow Corning's insurers based on insurers’ $2.35 billion contribution to Chapter 11 plan). There is no evidence of an indemnity relationship between the Debtor and the Converses. Instead, certain creditors hold guaranty claims against the Converses for debts of the Debtor. If subject to continued litigation related to these guaranty claims, the Converses will expend substantial time and energy on such litigation. As recognized by the Subchapter V Trustee, absent an injunction, the Debtor's business will suffer as will the prospects for a successful reorganization, because the Converses’ professional services are vital to the Debtor's post-confirmation operations. Seaside Engineering, 780 F.3d at 1079-80 (approving release based on the "skilled labor of the releasees" and finding, absent the bar order, the releasees would focus on ongoing litigation rather than their "professional duties for the reorganized entity"). Ongoing litigation against the Converses would deplete their contribution of human capital, which is a significant asset of the bankruptcy estate. Likewise, any judgments resulting from that litigation would likely lead to repossession of the five trucks owned by the Converses, which are used for the Debtor's business. This further demonstrates the identity of interests between the Debtor and the Converses because the potential levy of those trucks would diminish the resources of the Debtor. Id. (applying the first Dow Corning factor and finding an identity of interests present where ongoing litigation against non-debtors would deplete the assets of the reorganized debtor). Accordingly, there is an identity of interests between the Debtor and the Converses that weighs in favor of granting the Plan Injunction.
ii. Non-debtors Contributed Substantial Assets to the Reorganization
The Amended Plan requires the Converses to contribute $5,000 annually for a total of $25,000 over the five-year Plan term. (Doc. 118, pp. 15-16; Doc. 128, pp. 2-3). The Initial Plan contained no contributions from the Converses and projected only $500 per month in disposable income to unsecured creditors. (Doc. 83, p. 24). The Amended Plan added the personal capital contributions from the Converses to make "additional distributions" going "towards unsecured claims." (Doc. 118, pp. 15-16). The Court finds the additional contribution of $25,000 noteworthy as it nearly doubles the projected monthly payments to unsecured creditors, increasing projected payments to $916.67 per month to Class 19. Moreover, Cara Converse worked for much of the Chapter 11 case without compensation. (Docs. 44, 65, 120). Accordingly, based on the increased payments to the unsecured creditors and the post-petition services performed by Cara Converse without compensation, the Court finds the Converses are making a substantial contribution to the Debtor's reorganization. In re Global Travel International, Inc., 2022 WL 4690426, at *4 (Bankr. M.D. Fla. Sept. 30, 2022) (finding $25,000 payments from guarantors plus limitations on principals’ salaries to be substantial and sufficient consideration for an injunction).
iii. Injunction is Essential to the Reorganization
At the confirmation hearing, the Subchapter V Trustee, Mr. Robert Altman, voiced clear support for the Plan Injunction stating, "I don't think that this case can go on without the temporary bar." He further stated that Chad Converse is "absolutely necessary to the case." Mr. Altman is an unbiased third party with many years of business reorganization experience. As such, the Court finds his input is especially instructive. In re Corinthian Communications, Inc., 642 B.R. 224, 225 (Bankr. S.D.N.Y. 2022) (finding Subchapter V Trustees to be "honest brokers" who provide "credibility in evaluating the debtor's business prospects for a successful reorganization"). The Court agrees with Mr. Altman's evaluation that the Converses’ knowledge, skills, and experience are critical to the Debtor's operation. Absent the injunction, the ongoing litigation will hinder their obligations, which in turn will seriously jeopardize the viability of the reorganization.
Furthermore, the Converses own five trucks the Debtor uses for its business. (Doc. 44). If left unchecked, continued collection against the Converses could result in the repossession of these trucks, which would directly disrupt the Debtor's operations. Based on the foregoing, the injunction is essential to the Debtor's reorganization. Global Travel, 2022 WL 4690426, at *4 (finding non-debtors "critical" to the debtor's business, thereby demonstrating the need for an injunction).
For these reasons, the Court finds this factor weighs heavily in favor of allowing the Plan Injunction. iv. Impacted Class(es) Overwhelmingly Accepted the Plan
The Debtor seeks to impose the Plan Injunction on "secured and unsecured creditors on which Chad and Cara Converse personally guaranteed." (Doc. 128, p. 2).
Upon thorough review of the Amended Plan, including oral amendments at the most recent confirmation hearing, the claims register, and the Debtor's schedules, the Court finds that the Plan Injunction impacts classes 4-11, 14, and 17-19 (the "Impacted Classes"). Of the Impacted Classes, classes 4-11 and class 19 have accepted the Plan, either by vote or agreement. (Docs. 124, 155, 164). Although several creditors objected to the Plan Injunction earlier in the case, these objections were resolved by agreements between the Debtor and various creditors. As recognized by the Subchapter V Trustee, these agreements resulted from significant effort by all parties involved, and the Court appreciates that hard work. As a result of the agreements, Alta and North Mill were the only creditors to voice an objection to the Plan Injunction at the confirmation hearing.
John Deere is the only secured creditor delineated in the Amended Plan that holds a guaranty claim and affirmatively supports confirmation of the Amended Plan. (Doc. 124). John Deere's claims total $618,494.49 and are treated in classes 4-10. Class 1 creditors are government agencies, and any personal liability of the Converses for these debts is statutory and not the result of the Converses signing a guaranty agreement. Therefore, Class 1 creditors are not impacted by the Plan Injunction. (Doc. 128, p. 2) (limiting the Plan Injunction to debts "personally guaranteed" by the Converses). At the confirmation hearing, the Debtor's counsel announced that classes 2, 3, 12, and 13 will be treated as unimpaired and withdrew motions pursuant to 11 U.S.C. § 1191(b). (Docs. 170, 171, 172, 173). Accordingly, those unimpaired classes are not impacted by the Plan Injunction. 11 U.S.C. § 1124. Amur Equipment Finance, Inc. ("Amur") filed claim 14, which indicates that Amur does not hold a guaranty claim against the Converses. ENGS Commercial Finance Co. ("ENGS") filed claims 8-9, which indicate that ENGS does not hold a guaranty claim against the Converses. Therefore, classes 15-16, which provide for the claims of Amur and ENGS, are not impacted by the Plan Injunction. Centra Funding, LLC ("Centra"), and Wells Fargo Bank, N.A. ("WF"), are secured creditors that hold guaranty claims against the Converses. The claims of Centra and WF are treated in classes 14 and 18, respectively. (Doc. 118). Centra and WF did not object to confirmation, and the Court entered cramdown orders for classes 14 and 18. (Docs. 175, 176). The Plan Injunction impacts Centra and WF, but neither creditor took affirmative action in the case. The only secured creditor that continues to prosecute its objection to the Plan Injunction is North Mill, whose secured claim is treated in 17.
While the Plan Injunction impacts secured claimants with guaranty claims, such secured claimants are not overly prejudiced by the Plan Injunction, to the extent their claims are fully secured and paid in full. The unsecured class, which includes wholly unsecured claims and unsecured claims resulting from the bifurcation of secured claims, is the class primarily impacted by the Plan Injunction.
Fundworks holds a general unsecured claim for $136,766.84. Notably, Fundworks was the only unsecured creditor to cast a ballot in Class 19, the unsecured class. Additionally, Fiji, who actively participated both in this case and the MCA Adversary, reached an agreement with the Debtor. (Doc. 155). That agreement called for the bifurcation of Fiji's claim and for Fiji to receive a distribution in Class 19 on account of its allowed unsecured claim of $610,824. Furthermore, as Debtor's counsel announced on the record at the confirmation hearing on January 13, 2023, Core & Main, LP ("Core & Main"), has agreed to resolve its Limited Objection to Confirmation (Doc. 156). Pursuant to that announced resolution, Core & Main will consent to the Plan Injunction and will receive a distribution in Class 19 on account of its unsecured claim of $21,974.13. Based on the foregoing, at least three unsecured creditors have agreed to the Plan Injunction with claims totaling $769,564.97.
The two dissenting creditors are North Mill and Alta. North Mill holds an unsecured claim of $48,426.76, based on the valuation of its secured claim, and filed a ballot in Class 17 rejecting the Amended Plan on account of its secured claim. (Docs. 158, 164, 192). Alta, which holds a purely unsecured claim of $50,543.24, did not file a ballot to either accept or reject the Amended Plan. (Docs. 162, 164). Although North Mill did not designate its ballot in Class 19, even if the objections of North Mill and Alta were designated as rejecting ballots in Class 19, the unsecured class would still have accepted the Amended Plan based on the votes of Core & Main, Fiji, and Fundworks. 11 U.S.C. § 1126(c).
The acceptance of the Amended Plan by the unsecured class and classes 4-10 may not alone be considered overwhelming acceptance. However, classes 1-3 and 12-13 are unimpaired and not entitled to vote, and creditors in classes 15-16 do not have guaranty claims against the Converses and are not impacted by the Plan Injunction. See 11 U.S.C. § 1126(f) (creditors in unimpaired class are presumed to have accepted the plan). Further, creditors in classes 14 and 18 did not actively participate in the reorganization. Upon considering the creditors that actively participated, are entitled to vote, and are impacted by the Plan Injunction, those classes overwhelmingly accepted the Plan. Therefore, this factor weighs in favor of the Plan Injunction.
v. Plan Provides a Mechanism to Pay All, or Substantially All, of the Impacted Class(es)
Of the Impacted Classes, the Amended Plan provides for full repayment of the secured claims in classes 4-11, 14, and 17-18. (Doc. 118). Therefore, the Amended Plan provides a "mechanism to pay for all, or substantially all, of the class or classes affected by the injunction." In re Dow Corning Corp., 280 F.3d 648, 658 (6th Cir. 2002).
Nevertheless, the Plan Injunction potentially prejudices the unsecured class, Class 19, which will receive much less than full repayment through the Amended Plan. This potential prejudice is alleviated by two considerations. First, the unsecured creditors’ rights to collect on their guaranty claims are not terminated, merely delayed. The injunction will end in five years or less, whether upon successful completion of the confirmed plan or some other contingency. At that time, the affected creditors may pursue their claims against the Converses because the Plan Injunction provides for the tolling of all applicable statutes of limitations. Second, the Amended Plan provides a mechanism to potentially increase the disposable income payments to Class 19. The Amended Plan allows unsecured creditors to review the Debtor's annual tax returns and ongoing financial reports. Aided by this review, the unsecured creditors may seek a post-confirmation modification of the projected disposable income payments based on the Debtor's actual disposable income. For these reasons, the Court finds that this factor weighs in favor of granting the Plan Injunction.
vi. Plan Provides Non-consenting Claimants Opportunity to Recover in Full
As discussed above, the injunction is impermanent and essentially maintains the status quo between enjoined creditors, including non-consenting claimants, and the non-debtors. There is no provision for recovery in full, however, absent the injunction there is similarly no certainty of full recovery. What is certain is that the injunction will end, whether or not the Debtor successfully makes all plan payments. As eloquently stated by the Subchapter V Trustee at the confirmation hearing, the prejudice to non-consenting claimants is limited because they may proceed with collection once the injunction ends. In re Global Travel International, Inc., 2022 WL 4690426, at *5 (Bankr. M.D. Fla. Sept. 30, 2022) (finding a plan injunction left non-consenting claimant's rights intact by tolling all applicable statutes of limitations and terminating no later than the end of the plan term). The Amended Plan provides for the tolling of all applicable statutes of limitations, thereby preserving the rights of the non-consenting claimants until the injunction ends. (Doc. 118, p. 16).
Conclusion
The Debtor filed for relief under Subchapter V to reorganize its business, which employs at least thirty people. The Court understands the difficulties of operating a business while simultaneously navigating the Chapter 11 reorganization process. The Court commends the Converses for their dedication to complete the most difficult component of that process.
Although the Court understands that Alta and North Mill prefer to immediately enforce their guaranty claims against the Converses, that is simply not what is in the best interest of all the parties. The Court gives substantial weight to the comments voiced by the Subchapter V Trustee at the confirmation hearing that the Plan Injunction is necessary to realize a successful reorganization because the Converses are essential to the Debtor. Without the Plan Injunction, the Debtor's reorganization will likely fail, resulting in a negative outcome for not only the Converses and the thirty people employed by the Debtor, but for all the creditors involved as well. Furthermore, the Plan Injunction will not unduly prejudice Alta and North Mill because it is only temporary in nature.
"Bar orders must be essential to a successful reorganization, fair, and used cautiously and infrequently." Global Travel, 2022 WL 4690426, at *3. Based on the Court's analysis of the Dow Corning factors above, the Plan Injunction meets this stringent standard. Ultimately, this case is reflective of what can be accomplished when the principals of a debtor are willing to work hard and negotiate with creditors, which are critical prerequisites for a successful reorganization. For all the foregoing reasons, the Court will overrule the Objections and approve the Plan Injunction. Accordingly, it is
ORDERED:
1. The Objections are overruled.
2. Any Confirmation Order shall include language clarifying that the Plan Injunction only applies to Chad and Cara Converse and clarifying that the Plan Injunction only applies to creditors of the Debtor.