Opinion
Case No. 4:17-bk-11112-BMW
2019-10-17
IN RE: FARWEST PUMP COMPANY, Debtor.
Rohit Talwar, Talwar Law PLLC, Tucson, AZ, for Debtor.
Rohit Talwar, Talwar Law PLLC, Tucson, AZ, for Debtor.
MEMORANDUM DECISION REGARDING PLAN CONFIRMATION
Brenda Moody Whinery, Chief Bankruptcy Judge
This matter came before the Court pursuant to the Second Amended Plan of Reorganization Dated June 12, 2018 (TE 14) filed by Farwest Pump Company (the "Debtor") on June 15, 2018, as modified by the First Stipulated Non-Adverse Modification to Second Amended Plan of Reorganization Dated June 12, 2018 - Class 6 Secured Claim of David Leonard (Dkt. 269), the Second Stipulated Non-Adverse Modification to Second Amended Plan of Reorganization Dated June 12, 2018 - Class 1 Priority Claims and Secured Tax Claims (Dkt. 270), and the Notice of Filing to Correct Errata (Dkt. 530), (collectively, the "Debtor's Plan"); the competing Committee's Liquidating Plan (Dkt. 175) filed by the Official Committee of Unsecured Creditors (the "Committee") on March 30, 2018, as modified by the Committee's First Non-Adverse Modification (Dkt. 330) and the Committee's Amended Non-Adverse Modification of Plan of Liquidation with Respect to David Leonard's Claim (Dkt. 459) (collectively, the "Committee's Plan"); the Committee's Objection to Debtor's Chapter 11 Plan of Reorganization Dated June 12, 2018 (the "Committee's Objection") (Dkt. 253), which was joined by creditors ANC Orchard, LLC, BMR III, L.P., The Morgan Rose Ranch, L.P., Doug and Christina Dunlap, and High Desert Irrigation (Dkt. 254; Dkt. 255); the Debtor's Objection to Plan of Reorganization filed by Official Committee of Unsecured Creditors (the "Debtor's Objection") (Dkt. 258); and all pleadings related thereto.
References to exhibits admitted into evidence at trial are indicated by "TE __."
A trial was conducted on May 2, 2019, May 8, 2019, and May 23, 2019, at which time the parties presented evidence. Testimony was provided by Channa Crews-Vaught ("Ms. Crews-Vaught"), the president and co-owner of the Debtor; Clark Vaught ("Mr. Vaught"), the general manager and the co-owner of the Debtor (collectively, Ms. Crews-Vaught and Mr. Vaught are referred to as "the Vaughts"); Edward M. Burr, Jr. ("Mr. Burr"), a financial advisor and expert for the Debtor; and Sandra Obelsky ("Ms. Obelsky"), an expert for the Committee. The Debtor and Committee submitted post-trial briefs on June 6, 2019, and presented closing arguments on June 12, 2019, at which time the Court took this matter under advisement.
Based on the pleadings, arguments of counsel, testimony offered, exhibits entered into evidence, and entire record before the Court, the Court now issues its ruling.
I. Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(L). This is a contested matter governed by Federal Rule of Bankruptcy Procedure 9014. The following constitute the Court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, as made applicable to contested matters by Federal Rules of Bankruptcy Procedure 9014(c) and 7052.
II. The Vaught Family Companies
A. Farwest Pump Company
The Debtor was incorporated in 1988 by Mr. Vaught and his first wife. (5/2/2019 Trial Tr. 20:23-25). The Debtor is currently owned and operated by Mr. Vaught and Ms. Crews-Vaught, who are the Debtor's only two employees. (5/2/2019 Trial Tr. 14:14-16, 25:23-25; 5/23/2019 Trial Tr. 11:15-20).
References to the trial transcripts are by page and line number. For example, "5/2/2019 Trial Tr. 100:5-10" would refer to page 100, lines 5-10 of the trial transcript from May 2, 2019.
The Debtor has offices in Willcox and Tucson, Arizona. (5/2/2019 Trial Tr. 200:13-14). Historically, the Debtor did well drilling, pump installation, and electrical support for pump installations, and at its peak, the Debtor had more than twenty employees. (5/2/2019 Trial Tr. 21:2-4, 180:1-3).
In 2013, the Vaughts discovered that Joel Rodriguez, who was the vice president of the Debtor and ran the Willcox office, was embezzling money from the Debtor (the "Rodriguez Embezzlement"). (5/2/2019 Trial Tr. 29:11-16, 30:6-33:7, 62:5-7). Because of the criminal investigation that followed, the Debtor fell behind on its accounting and had to spend significant time, pre- and post-petition, reconciling its books. (5/2/2019 Trial Tr. 61:19-62:4, 62:23-63:1, 86:2-88:22). Ms. Crews-Vaught testified that in an attempt to recover its losses stemming from the Rodriguez Embezzlement, the Debtor filed a civil lawsuit against Mr. Rodriguez and others, which lawsuit remains pending, and the Debtor began pursuing crime insurance claims, which claims the Debtor has continued to pursue. (5/2/2019 Trial Tr. 62:11-15, 65:23-66:1, 128:24-129:5; see also Dkt. 82).
In early 2017, the Debtor was unable to obtain liability insurance necessary to continue to operate as a well drilling contractor. (5/2/2019 Trial Tr. 21:8-11, 187:24-188:9, 196:14-18). Further, a judgment in the approximate amount of $900,000 was entered against the Debtor in California Superior Court. (5/2/2019 Trial Tr. 74:6-9). According to Ms. Crews-Vaught, it was the judgment creditors' collection efforts that led the Debtor to file for relief under Chapter 11. (5/2/2019 Trial Tr. 74:19-75:11).
The Debtor adjusted its business model and cancelled several of its licenses. (5/2/2019 Trial Tr. 21:2-22:3; TE 32-3; TE 32-4; TE 32-5; TE 32-6; TE 32-7; TE 32-8). The Debtor now does consulting work for well drilling, pump design, and electrical design. (5/2/2019 Trial Tr. 21:14-15, 22:1-3). The Debtor also leases equipment to Vaught Equipment, a related entity, which according to the testimony should generate approximately $31,250 in lease income each month. (5/2/2019 Trial Tr. 23:3-4; 5/8/2019 Trial Tr. 24:5-8).
B. Vaught Equipment
Vaught Equipment, which is owned by Mr. Vaught, Ms. Crews-Vaught, and Ms. Crews-Vaught's daughter's trust, is an equipment holding company that was formed in late 2004 or early 2005. (5/2/2019 Trial Tr. 22:4-7, 22:15-16). Vaught Equipment has no employees and its only business is holding and leasing equipment. (5/2/2019 Trial Tr. 22:5-8). Currently, Vaught Equipment leases equipment from the Debtor, and then subleases that equipment to related entities Reliant Well Drilling and Pump Corporation ("Reliant") and/or FARCO Perforaciones y Bombeo, S.A. De C.V. ("FARCO"). (5/2/2019 Trial Tr. 22:11-14, 99:20-25). Vaught Equipment does not lease equipment to any unrelated third parties. (5/2/2019 Trial Tr. 23:5-8).
C. Reliant
Reliant is a well drilling and pump company. (5/2/2019 Trial Tr. 26:17-19). Ms. Crews-Vaught testified that Reliant was formed in 2013 in order to distance the Vaught business in Willcox from Mr. Rodriguez's crimes. (5/2/2019 Trial Tr. 26:21-27:7). Reliant is owned by Mr. Vaught. (5/2/2019 Trial Tr. 27:8-9; 5/23/2019 Trial Tr. 17:23-24).
Reliant began doing business in April 2017. (5/2/2019 Trial Tr. 27:12-13). Reliant now performs the work that the Debtor used to perform, using the Debtor's equipment. (See 5/2/2019 Trial Tr. 22:13-14, 27:14-21, 93:25-94:1, 180:22-181:25, 183:1-24).
In 2017, the name on the signage at the Debtor's Willcox location was changed from Farwest to Reliant. (5/2/2019 Trial Tr. 202:8-16). Reliant uses the same address and phone number as the Debtor and Reliant's website is substantially the same as the Debtor's website. (5/2/2019 Trial Tr. 200:13-201:15, 5/8/2019 Trial Tr. 34:9-25; TE 32-1; TE 32-2).
D. FARCO
FARCO is a Mexican entity based in Hermosillo that was formed in 2010 and is owned by Mr. Vaught and Ms. Crews-Vaught. (5/2/2019 Trial Tr. 24:6-13). FARCO does drilling, pump installation, test pumping, and related work primarily for mining and government clients. (5/2/2019 Trial Tr. 24:21-25). FARCO has acquired and leased equipment from the Debtor, and FARCO currently leases equipment from Vaught Equipment. (5/2/2019 Trial Tr. 25:7-8; 5/23/2019 Trial Tr. 18:19-19:3; see 5/2/2019 Trial Tr. 99:20-25; TE II). III. The Bankruptcy
On September 20, 2017 (the "Petition Date"), the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. (Dkt. 1).
The Debtor's assets consist primarily of cash, equipment, inventory, vehicles, accounts receivable, and various litigation and insurance claims, which assets the Debtor valued at $2,817,174.23 as of the Petition Date. (See Dkt. 82). The Debtor scheduled secured debt in the amount of $771,958.60, plus unknown amounts, and unsecured debt in the approximate amount of $1,365,829.67, plus unknown amounts, much of which was scheduled as disputed. (See Dkt. 82).
The Debtor calculated that as of April 30, 2019, after applying the amounts remitted pursuant to various adequate protection agreements, it had a secured debt balance of $504,995.06. (Dkt. 542 at Ex. A).
On November 14, 2017, the Committee was appointed. (Dkt. 49).
On January 18, 2018, the Debtor filed its first plan of reorganization and first disclosure statement, which were amended on multiple occasions. (See Dkt. 116; Dkt. 117; Dkt. 163; Dkt. 164; Dkt. 269; Dkt. 270; Dkt. 530; TE 14; TE 15). On March 30, 2018, the Committee filed the Committee's Plan and an accompanying disclosure statement. (Dkt. 174; Dkt. 175). After the parties made certain Court-required edits to their respective disclosure statements, the Court approved the Debtor's Disclosure Statement Regarding Second Amended Plan of Reorganization Dated June 12, 2018 (the "Debtor's Disclosure Statement") (TE 15) and the Committee's Amended Disclosure Statement Regarding Committee's Liquidating Plan (the "Committee's Disclosure Statement") (Dkt. 219), and set confirmation hearings on the competing plans. (Dkt. 208; Dkt. 209; Dkt. 221; Dkt. 228).
Flaska JCB ("Flaska"), David Leonard ("Mr. Leonard"), and the Committee objected to the Debtor's Plan. (Dkt. 249; Dkt. 251; Dkt. 253). The Debtor and Mr. Leonard objected to the Committee's Plan. (Dkt. 252; Dkt. 258). The Debtor and Committee filed modifications to their respective plans, and as of the contested confirmation hearing, only the Committee's Objection to the Debtor's Plan, the joinders filed therewith, and the Debtor's Objection to the Committee's Plan remained outstanding.
The Committee's Objection was joined by creditors ANC Orchard, LLC; BMR III, L.P.; The Morgan Rose Ranch, L.P.; Doug and Christina Dunlap; and High Desert Irrigation. (Dkt. 254; Dkt. 255).
(Dkt. 269; Dkt. 270; Dkt. 330; Dkt. 459; Dkt. 530).
Mr. Leonard's objections to the Debtor's Plan and Committee's Plan (Dkt. 251; Dkt. 252) were resolved by a Court-approved settlement. (See Dkt. 444). Flaska, which filed a limited objection to reserve its right to participate in the confirmation proceedings (Dkt. 249), ultimately chose not to participate in the confirmation proceedings.
A. The Competing Plans
1. Overview of the Debtor's Plan
The Debtor's Plan is a plan of reorganization, under which the Vaughts would continue to own and manage the Debtor so long as they make an equity contribution. (TE 14 at §§ 4.09, 7.03).
The Debtor's Plan provides for the payment of priority and secured claims in full over time. (See TE 14 at art. I & art. IV; Dkt. 269; Dkt. 270). General unsecured creditors would be paid a pro rata share of annual distributions from an unsecured claim fund (the "Unsecured Claim Fund") for a period of six years, which distributions would total at least $475,000. (Dkt. 530 at § 7.02).
The Debtor proposes to fund its plan through the Vaughts' new value contribution, cash flow from continued operations as a leasing and consulting business, asset sales, and litigation proceeds. (TE 14 at art. I). Under the Debtor's Plan, the Vaughts would continue to manage the Debtor and would be compensated for rendering professional services to the Debtor post-confirmation in an amount equal to 35% of the fees paid by the reorganized Debtor's customers for such services. (TE 14 at § 7.04).
The reorganized Debtor will continue to be referred to herein as the "Debtor."
The Debtor's Plan provides for the appointment of a plan administrator (the "Plan Administrator"), who would be responsible for making disbursements from the Unsecured Claims Fund (defined in § 7.01 of the Debtor's Plan) and making payments to secured and priority unsecured creditors. (Dkt. 530).
The Debtor's Plan proposes the appointment of Mr. Burr as the Plan Administrator, to be approved by this Court through the filing of a motion that discloses Mr. Burr's proposed compensation. (Dkt. 530). No such motion has been filed with the Court.
2. Overview of the Committee's Plan
The Committee's Plan is a liquidating plan under which all estate property would vest in a liquidating plan trust (the "Liquidating Trust"), to be administered by the Committee's counsel, who would serve as liquidating plan trustee (the "Liquidating Trustee"). (Dkt. 175 at §§ 2.7, 2.8, 5.1-5.2). The Committee's Plan would be funded through the liquidation of estate property, the collection of accounts receivable, the collection of lease payments, and the pursuit of other litigation claims. (Dkt. 175 at § 5.1.1.). The Committee's Plan proposes to have the Liquidating Trustee evaluate the Debtor's unexpired personal property leases, assume those that are profitable, reject those that are not profitable, and sell the underlying equipment that is the subject of any rejected lease. (See Dkt. 175).
The Committee's Plan includes a purchase option that would allow the Vaughts to purchase the Liquidating Trust's interest in all estate property. (Dkt. 175 at § 2.12 & art. IV).
3. Comparison of Claim Treatment Under the Competing Plans
The plans, as modified, propose to classify and treat the claims in this case as follows:
a. Administrative Expense Claims & U.S. Trustee Fees
The administrative expense claims in this case are estimated to total approximately $400,000. (6/12/2019 Hearing Tr. 24:24-25:10; Dkt. 542 at Ex. A). Both plans propose to pay allowed administrative claims in full, in cash, on the Effective Date. (TE 14 at § 3.02; Dkt. 175 at § 3.1). Both plans propose to pay all U.S. Trustee fees timely. (TE 14 at § 3.04; Dkt. 175 at § 3.1).
The Effective Date under the Debtor's Plan would be "the first business day following the date that is 14 days after the entry of the confirmation order that the conditions precedent to the Effective Date have occurred or have been waived unless stayed by Court order." (TE 14 at § 8.02). The conditions precedent require the Debtor to establish an unsecured claim fund account and require the Vaughts to fund their equity contribution to the Debtor's DIP operating account. (TE 14 at § 7.01).
The Effective Date under the Committee's Plan would be the date the confirmation order becomes a final non-appealable order. (Dkt. 175 at § 2.6).
b. Allowed Priority Tax Claims
The parties do not believe there are any allowed priority tax claims in this case. To the extent any exist and are allowed, both plans propose to pay any such claims in full. The Debtor's Plan proposes to pay all such claims in full on the later of the Effective Date or the date on which any such claim is allowed. (Dkt. 270 at § 1.01). The Committee's Plan proposes to pay any allowed priority tax claims in full within five years of the Petition Date, to the extent funds are available, with interest to accrue at the statutory rate. (Dkt. 175 at § 3.2).
c. Other Allowed Priority Claims
This class consists of all allowed claims entitled to priority under § 507 except administrative expense claims under § 507(a)(2) and priority tax claims under § 507(a)(8). Both plans propose to pay these claims in full, in cash, upon the later of the Effective Date or the date on which any such claim is allowed by a final non-appealable order. (Dkt. 175 at § 3.2; TE 14 at § 4.01).
Unless otherwise indicated, statutory references are to the Bankruptcy Code, 11 U.S.C. §§ 101 -1532.
d. Allowed Secured Claims of UMB Bank (the "UMB Class")
This class consists of the claims of UMB to the extent allowed under § 506 arising from that certain loan dated January 6, 2015, and secured by various collateral. During the course of these proceedings, UMB's claim was transferred to Minera Hartelpool, S. De R.L. de C.V. ("Minera"), which does business with FARCO. (5/23/2019 Trial Tr. 18:10-16, 28:11-20; Dkt. 520).
Specifically, a 2015 Kenworth Chassis VIN #1 NKDX4TX8FR975278 with FOREMOST Model DR12/26P-80/24H-900 DUAL ROTARY DRILL Serial #142711, 1978 Challenger M-280 Water Well Drilling Rig Serial, and also including all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (A) All accessions, attachments, accessories, replacements of and additions to any of the collateral described herein, whether added now or later. (B) All products and produce of any of the property described in this Collateral section. (C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other disposition of any of the property described in this Collateral section. (D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section and sums due from a third party who has damaged or destroyed the Collateral or from that party's insurer, whether due to judgment, settlement or other process. (E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize. create, maintain, and process any such records or data on electronic media (collectively, the "UMB Collateral").
The Debtor's Plan proposes to pay the secured claim in full over thirty-two (32) months with payments of principal and interest, calculated at 5% per annum, in the approximate amount of $19,765.75 per month. (TE 14 at § 4.02). On the Effective Date, the Debtor would pay the holder of this claim cash in an amount equal to 1% of the balance of the claim as a restructuring fee, and the holder of the claim would retain its lien. (TE 14 at § 4.02).
Under the Committee's Plan, the Liquidating Trustee would assume any profitable leases of the UMB Collateral and continue to collect lease payments for the duration of the leases. UMB, now Minera, would retain its lien and be paid in the amount necessary to service its allowed secured claims. (Dkt. 330 at § 3.3). Interest would accrue at the lesser of 5% or the interest rate contemplated under the note. (Dkt. 330 at § 3.3). In no event would payments be greater than any lease income less amounts necessary to insure the UMB Collateral. (Dkt. 330 § 3.3).
Upon the expiration of any UMB Collateral lease, the Liquidating Trustee would liquidate the subject UMB Collateral, with liens to attach to the proceeds. (Dkt. 330 at § 3.3). If any UMB Collateral is not subject to a profitable lease and the holder of UMB's claim does not agree to accept payments at an amount less than the lease payments, such UMB Collateral would be surrendered or liquidated with liens to attach to the proceeds. (Dkt. 330 at § 3.3).
e. Allowed Secured Claims of Bank of the West (the "Bank of the West Class")
This class consists of the claim of Bank of the West to the extent allowed under § 506, which claim is secured by two 2015 JCB 3CX-14 Backhoe Loaders. One of the backhoe loaders is, or at one point was, in Flaska's possession under a garageman's lien (the "Flaska Backhoe"). The other is in the Debtor's possession.
The Debtor filed a motion to sell the Flaska Backhoe in July 2018 (Dkt. 256), but the Debtor has not pursued the sale motion.
Under the Debtor's Plan, the Flaska Backhoe would be sold, with liens to attach to the proceeds in order of priority. (TE 14 at § 4.03). Bank of the West would release its lien on the proceeds in exchange for proceeds equal to half of its claim. (TE 14 at § 4.03). On the Effective Date, the Debtor would pay Bank of the West cash in an amount equal to 1% of the balance of its claim as a restructuring fee. (TE 14 at § 4.03). Post-Effective Date, the Debtor would pay Bank of the West in equal monthly payments of principal such that its secured claim is paid in full no later than September 1, 2020. (TE 14 at § 4.03). Bank of the West would retain its lien pursuant to the terms of its pre-bankruptcy security agreement. (TE 14 at § 4.03).
The Court notes that the Debtor's Plan does not provide for the payment of interest to Bank of the West. (See TE 14 at § 3.03).
Under the Committee's Plan, the Liquidating Trustee would sell the Flaska Backhoe, with Bank of the West's lien to attach to the proceeds. (Dkt. 175 at § 3.4). The Liquidating Trustee would assume the lease for the other backhoe loader, if it is determined to be a profitable lease, and continue to collect lease payments for the duration of the lease. (Dkt. 175 at § 3.4, art. VI, Ex. A). Bank of the West would retain its lien and be paid in the amount necessary to service its allowed secured claim, with interest to accrue at the lesser of 5% or the interest rate contemplated under the note. (Dkt. 175 at § 3.4). Upon expiration of the lease, the Liquidating Trustee would liquidate the backhoe with liens to attach to the proceeds. (Dkt. 175 at § 3.4).
If not subject to a profitable lease, the Liquidating Trustee would either surrender the backhoe loader or liquidate the backhoe loader with liens to attach to the proceeds. (Dkt. 175 at § 3.4).
f. Secured Claims of Flaska
This class consists of the secured claims of Flaska to the extent allowed under § 506 arising from its claims against the Debtor secured by a garageman's lien against the Flaska Backhoe, which lien is junior to the lien of Bank of the West.
Under the Debtor's Plan, the Flaska Backhoe would be sold with liens to attach to the proceeds in order of priority. (TE 14 at § 4.04).
The Committee's Plan also proposes to sell the Flaska Backhoe. (Dkt. 175 at § 3.5). The Committee does not believe there is any equity in the collateral to support Flaska's garageman's lien, so the Committee's Plan proposes to strip Flaska's lien and treat this claim as unsecured. (Dkt. 175 at § 3.5).
g. Secured Claims of Ford Motor Credit ("Ford")
This class consists of the allowed claims of Ford secured by six vehicles: one 2014 Ford F150, one 2014 Ford F250, one 2015 Ford F250, and three 2015 Ford F350s (collectively, the "Ford Collateral"). The Ford Collateral is currently leased to Vaught Equipment. (TE 12-2).
Under the Debtor's Plan, the maturity date of each of the six vehicle loans would be extended by six (6) months and the monthly payments would be adjusted so that the balance would be paid in full, in equal installments of principal and interest, by the new maturity dates. (TE 14 at § 4.05). Ford would retain its liens. (TE 14 at § 4.05). On the Effective Date, the Debtor would pay Ford cash in an amount equal to 1% of the balance of its claims as a restructuring fee. (TE 14 at § 4.05).
Under the Committee's Plan, the Liquidating Trustee would assume the Ford Collateral leases, if profitable, and continue to collect lease payments for the duration of the leases. (Dkt. 175 at § 3.6, art. VI, Ex. A). Ford would retain its liens and be paid in the amount necessary to service its allowed secured claims. (Dkt. 175 at § 3.6). Interest would accrue at the lesser of 5% or the interest rate contemplated under the respective note(s). (Dkt. 175 at § 3.6). Upon the expiration of any lease of the Ford Collateral, the Liquidating Trustee would liquidate the subject Ford Collateral with liens to attach to the proceeds. (Dkt. 175 at § 3.6).
Any Ford Collateral not subject to a profitable lease would be surrendered or liquidated with liens to attach to the proceeds. (Dkt. 175 at § 3.6).
h. Secured Claims of David Leonard ("the Leonard Class")
In accordance with the Court's Order Approving Settlement with David Leonard (Dkt. 444), Mr. Leonard's treatment would be the same under either plan. For purposes of his secured claim, Mr. Leonard would be paid 50% of all insurance proceeds up to $200,000. (Dkt. 269; Dkt. 459).
Mr. Leonard would also have an allowed general unsecured claim in the amount of $243,762.94. (Dkt. 280). There is an overlap of $51,700 between Mr. Leonard's allowed secured claim and allowed unsecured claim, which amount could be paid as a secured claim from insurance proceeds, as an unsecured claim, or as a combination of the two, whichever occurs first. (Dkt. 280).
i. Unsecured Claims
The liquidated non-priority unsecured claims in this case total approximately $1.5 million. (See Dkt. 82; Dkt. 280; Dkt. 444; Dkt. 581; Proofs of Claim 1-1, 2-1, 3-1, 4-1, 5-1, 6-1, 12-1, 13-1, 14-1, 15-1, 17-1, 18-1, 20-1, 21-1, 22-1, 24-1, 28-1).
The Debtor's Plan provides for: (1) an administrative convenience class of unsecured claims, which consists of non-priority unsecured claims that are allowed in an amount less than $3,000 or are allowed in a greater amount but are held by creditors who elected to reduce their claims to $3,000 and accept administrative convenience treatment in full satisfaction; and (2) a general class of unsecured claims for all other allowed non-priority unsecured claims. (TE 14 at § 4.07; Dkt. 530 at § 4.08).
Under the Debtor's Plan, the administrative convenience class creditors would be paid the lesser of their allowed claims or $3,000 on the Effective Date. (TE 14 at § 4.07). The remaining general unsecured creditors would be paid a pro rata share of the annual distributions from the Unsecured Claim Fund until the earlier of: (1) the date all general unsecured creditors are paid in full; or (2) the fifth anniversary of the first payment to general unsecured creditors, which payment would be made no later than forty-five (45) days after the Effective Date. (Dkt. 530 at § 4.08). The Plan Administrator would have sole authority to disburse funds from the Unsecured Claim Fund to general unsecured creditors. (Dkt. 530 at § 7.01).
The Unsecured Claim Fund distribution scheme is as follows:
Distribution #1: No later than forty-five (45) days after the Effective Date, general unsecured creditors would receive a pro rata share of the greater of: (a) $100,000; or (b) Net Distributable Profits, defined as "net profit after tax (if any) from leasing and consulting operations after payments to secured claims under plan plus net proceeds from the sale of any assets, plus net proceeds from any litigation, plus net proceeds from any insurance claims, less funds reserved for taxes and working capital sufficient to pay [six] months operating expenses" that have accumulated "during the Reorganization Case," after reserving funds sufficient to pay allowed administrative claims. (Dkt. 530 at §§ 4.08, 7.02, 8.01).
"Reorganization Case" is not defined in the Debtor's Plan. The Court interprets "Reorganization Case" to mean this bankruptcy case.
Distributions #2-6: Approximately one (1) month after the first anniversary of the Effective Date, and every anniversary thereafter for a period of five (5) years, general unsecured creditors would receive a pro rata share of the greater of: (a) $75,000; or (b) the Net Distributable Profits that accumulated in the twelve (12) month period following the Effective Date or immediately preceding anniversary thereof. (Dkt. 530 at §§ 4.08 & 7.02).
Under the Committee's Plan, to the extent funds are available, holders of allowed general unsecured claims would receive pro rata quarterly distributions from the Liquidating Trust, with the first distribution to occur at the end of the first full quarter following the Effective Date. (Dkt. 175 a § 3.8). The Liquidating Trust would maintain a reserve of $25,000 for any retainers needed to pursue avoidable transfer claims and/or preferences until the final distribution. (Dkt. 175 at § 3.8).
j. Equity Security Holders
This class consists of Mr. Vaught and Ms. Crews-Vaught's interests in the Debtor.
Under the Debtor's Plan, the Vaughts would receive nothing on account of their respective interests in the Debtor unless they contribute cash, or the equivalent of cash, on the Effective Date, with a value: (a) at least equal to 10% of the value of the Debtor's assets, excluding cash; and (b) greater than 10% of the amount of all allowed unsecured claims. (TE 14 at § 4.09). The Debtor's Plan proposes a total contribution of $140,000. (Dkt. 530; 5/2/2019 Trial Tr. 167:1-3; 5/23/2019 Trial Tr. 11:21-25).
Under the Committee's Plan, the Vaughts would be given the option of purchasing the Liquidating Trust's interest in all estate property. (the "Purchase Option"). (Dkt. 175 at § 3.9). In order to exercise the Purchase Option, the Vaughts would have to: (1) exercise their rights under the Purchase Option within sixty (60) days of the Effective Date by notifying the Liquidating Trustee; (2) remit a $50,000 non-refundable deposit to the Liquidating Trustee within sixty (60) days of the Effective Date; and (3) remit the amount necessary to pay all scheduled claims and all claims asserted against the estate in full to the Liquidating Trustee within ninety (90) days of the Effective Date. (Dkt. 175 at § 2.13 & art. IV).
If the Vaughts opt not to exercise the Purchase Option or if the Purchase Option is deemed void, the Vaughts' distribution under the Committee's Plan would be limited to any excess proceeds after payment of all estate creditors in full. (Dkt. 175 at § 3.9).
B. The Votes
The only impaired class that voted in favor of the Debtor's Plan was the Leonard Class. (Dkt. 271; see Dkt. 270). All other voting impaired classes voted to reject the Debtor's Plan. (Dkt. 271).
The UMB Class, Bank of the West Class, and both unsecured creditor classes voted to reject the Debtor's Plan. (Dkt. 271). After the solicitation period expired, UMB transferred its claim to Minera. Minera has filed Creditor Minera Hartlepool's Memorandum in Support of Preference Under 11 U.S.C. § 1129(c) (Dkt. 531) indicating its preference for the Debtor's Plan, but Minera's preference statement does not affect the votes and, in any event, UMB/Minera's claim is treated substantially the same under both plans. Pima County cast a vote accepting the Debtor's Plan, but to the extent Pima County has a claim, its claim is unimpaired under the Debtor's Plan, and it would therefore not be entitled to vote. (See Dkt. 270).
All voting classes except the class of allowed priority tax claims and the Leonard Class voted to accept the Committee's Plan. (Dkt. 265; Dkt. 268). The Committee does not anticipate that there are any priority tax claims in this case. (Dkt. 175 at § 3.2). Furthermore, the Committee has modified its proposed treatment of Mr. Leonard's claims to reflect the Court-approved settlement between Mr. Leonard and the Debtor such that Mr. Leonard would receive the same treatment under both plans. (See Dkt. 459).
The UMB Class, Bank of the West Class, Flaska Class, and the class of general unsecured creditors voted to accept the Committee's Plan. (Dkt. 265; Dkt. 268). As indicated in the preceding footnote, the claims previously held by UMB were transferred to Minera, which has indicated a preference for the Debtor's Plan.
IV. Legal Analysis & Conclusions of Law
The requirements for confirmation of a Chapter 11 plan are set forth in §§ 1129(a)(1)-(16). If all the requirements in § 1129(a) are satisfied except § 1129(a)(8), a plan can nevertheless be confirmed if it satisfies § 1129(b). The plan proponent bears the burden of establishing by a preponderance of the evidence that its plan satisfies the confirmation requirements. In re Arnold & Baker Farms, 177 B.R. 648, 654-55 (B.A.P. 9th Cir. 1994), aff'd, 85 F.3d 1415 (9th Cir. 1996).
The Committee objects to confirmation of the Debtor's Plan on the basis that: (i) the Debtor's Plan was not proposed in good faith as required by § 1129(a)(3) ; (ii) the Vaughts' continued management of the Debtor is inconsistent with the interests of creditors and public policy in violation of § 1129(a)(5) ; (iii) the Debtor's Plan fails to satisfy the best interest of creditors test set forth in § 1129(a)(7) ; (iv) the Debtor's Plan is not feasible as required by § 1129(a)(11) ; and (v) the proposed new value contribution is inadequate and fails to satisfy the absolute priority rule in § 1129(b). The Debtor objects to confirmation of the Committee's Plan on the basis that: (i) the Committee's Plan fails to satisfy the best interest of creditors test set forth in § 1129(a)(7) ; and (ii) the Committee's Plan is not feasible as required by § 1129(a)(11).
In the Committee's Objection, the Committee also raises a § 1129(a)(2) objection on the basis that FARCO has failed to comply with an order granting the Committee's application for a Rule 2004 examination. Because this objection was not raised in the Amended Joint Pre-Trial Statement (the "Joint Pre-Trial Statement") (Dkt. 498) or at trial, the Court deems the Committee's § 1129(a)(2) objection waived. In any event, § 1129(a)(2) requires "[t]he proponent of the plan" to comply with the provisions of the Bankruptcy Code, and FARCO is not the proponent of the Debtor's Plan.
In the Debtor's Objection, the Debtor also raises §§ 1129(a)(1) and (a)(9) objections. Because these objections were not raised in the Joint Pre-Trial Statement or at trial, the Court deems the Debtor's §§ 1129(a)(1) and (a)(9) objections waived. That being said, given that the Court has an independent duty to evaluate whether a plan satisfies the requirements for confirmation, the Court finds that the Committee's Plan complies in all material ways with the applicable provisions of Chapter 11, satisfying § 1129(a)(1), and proposes to pay all administrative claims in full in cash on the Effective Date, satisfying § 1129(a)(9).
A. Section 1129(a)(3) – Good Faith
The Committee argues that the Debtor's Plan was not proposed in good faith because: (i) the proposed new value contribution is inadequate and fails to satisfy the absolute priority rule; (ii) the Debtor's Plan fails to provide for the pursuit of potential fraudulent transfers to the Debtor's related entities; and (iii) the Debtor has allowed its accounts receivable to balloon and has failed to pursue any collection of past-due payments on leases with related entities.
Section 1129(a)(3) requires that a plan be "proposed in good faith and not by any means forbidden by law." 11 U.S.C. § 1129(a)(3). In order to determine whether a plan has been proposed in good faith, courts must look at the totality of the circumstances surrounding the plan, apply the principal of fundamental fairness in dealing with creditors, and determine whether the plan will achieve a result that is consistent with the objectives and purposes of the Code. In re Bashas' Inc., 437 B.R. 874, 910 (Bankr. D. Ariz. 2010) ; see also In re Sylmar Plaza, L.P., 314 F.3d 1070, 1074 (9th Cir. 2002).
The Court will address the Committee's good faith objections in turn.
Whether or not the proposed new value contribution is sufficient does not impact the § 1129(a)(3) analysis in this case given that there is a proposed new value contribution, which contribution is not nominal, and that contribution can be evaluated in connection with the Court's application of § 1129(b), to the extent such provision is triggered.
With respect to the pursuit of fraudulent transfers, Ms. Crews-Vaught testified as to her belief that there are no fraudulent transfers because the transfers at issue were for value at a time when the Debtor was solvent. (5/2/2019 Trial Tr. 158:17-166:11). Mr. Burr did not analyze the transfers at issue given his understanding that the transfers occurred before the Debtor became insolvent and were for consideration. (5/8/2019 Trial Tr. 144:7-145:21). Given that the Committee did not present any controverting evidence or establish that any transfers were fraudulent, the Court does not find that the Debtor's failure to provide for the pursuit of fraudulent transfers in its plan violates § 1129(a)(3).
With respect to the collection of accounts receivable, it is clear that the Debtor's accounts receivable have increased significantly since the Petition Date and that the majority of the accounts receivable are owed by related entities. (Compare Dkt. 83 at 6 with TE YYYYY at 14; see 5/8/2019 Trial Tr. 51:16-19, 142:8-143:1). Ms. Crews-Vaught testified that she has been working to collect the Debtor's accounts receivable and intends to continue to do so. (5/2/2019 Trial Tr. 112:16-113:1, 123:14-124:12). While this testimony is not substantiated by the totality of the evidence, no evidence was presented to show that the Debtor's failure to collect accounts receivable was in bad faith.
Ms. Crews-Vaught testified that the Debtor filed for relief under Chapter 11 in response to collection efforts by judgment creditors and because the Debtor was unable to obtain insurance necessary to operate. Neither of the Debtor's reasons for filing is improper on its face.
Given the totality of the circumstances, the Court finds that the Debtor's Plan was proposed in good faith and not by any means forbidden by law. The Committee's § 1129(a)(3) objection is therefore overruled.
See Garvin v. Cook NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019) (determining that when deciding whether a plan has been proposed by any means forbidden by law, a court need only look to the proposal of the plan, not the terms therein).
B. Section 1129(a)(5) – Continued Management
The Committee argues that the Court should consider management's post-petition performance in evaluating the Debtor's Plan, including the Debtor's Plan's proposal to leave the Vaughts in place as managers. The Committee contends that, post-petition, the Debtor has: (i) failed to meet basic reporting obligations on numerous occasions; (ii) disobeyed the law and Court's directives by, among other things, taking secured equipment to Mexico and diverting insurance proceeds that should have been deposited in a DIP account; and (iii) refused to respond to Court-ordered discovery.
"A Chapter 11 plan may not be confirmed if the continuation in management of the persons proposed to serve as officers or managers of [the] debtor is not in the interests of creditors and public policy." In re Bashas' Inc., 437 B.R. at 912 ; see 11 U.S.C. § 1129(a)(5)(A)(ii). "[C]ontinued service by prior management may be inconsistent with the interests of creditors and public policy if it directly or indirectly perpetuates incompetence, lack of discretion, inexperience or affiliations with groups inimical to the best interests of the debtor." In re Bashas' Inc., 437 B.R. at 912.
The Vaughts have managed the Debtor and related entities for years. The Debtor suffered a number of pre-petition setbacks related to the Rodriguez Embezzlement scheme, and under the management of the Vaughts, the Debtor has increased the funds in its bank accounts from $1,037.70 as of the Petition Date to $99,283.85 as of April 2019. (Dkt. 82; TE YYYYY). Although the Vaughts did not properly deposit a $26,000 insurance payment into the Debtor's DIP account, Ms. Crews-Vaught testified that such funds were used to facilitate a sale of certain of the Debtor's equipment for the benefit of creditors. (5/8/2019 Trial Tr. 64:2-20). Finally, under the Vaughts' management, the Debtor has made some adequate protection payments to secured creditors, and has obtained a $750,000 settlement of a bad faith insurance claim (the "INIC Settlement"). (See 5/2/2019 Trial Tr. 101:23-24; Dkt. 502; Dkt. 557).
The Debtor's September 2019 monthly operating report ("MOR"), however, reflects an ending cash balance of $82,423.00. (Dkt. 611).
Based on a review of the docket, it does not appear any such sale has occurred.
The Court notes, however, that a review of the Debtor's MORs for May 2019 through September 2019 indicates that the adequate protection payments may not have been paid in full. (Dkt. 607, Dkt. 608; Dkt. 609; Dkt. 610; Dkt. 611).
That being said, under the Vaughts' management the Debtor has regularly failed to meet basic reporting obligations by, among other things, failing to file accurate or timely required operating reports. (See, e.g., Dkt. 83; Dkt. 84; Dkt. 138; Dkt. 139; Dkt. 185; Dkt. 607; Dkt. 608; Dkt. 609; TE 13-19; 5/8/2019 Trial Tr. 40:8-43:6, 136:3-21). It is also clear that under the Vaughts' management the Debtor has failed to enforce the terms of its lease agreements with Vaught Equipment, and as a result, the Debtor has allowed its accounts receivable to skyrocket during this case. (5/8/19 Trial Tr. 29:7-31:9; compare Dkt. 83 with TE YYYYY and Dkt. 611). The Debtor's accounts receivable have gone from approximately $162,754.90 as of the Petition Date to $387,196.38 as of April 2019, to $408,009.95 as of September 30, 2019. (Dkt. 82 at 2; TE YYYYY at 14; Dkt. 611 at 16). Despite Ms. Crews-Vaught's testimony regarding the collection of accounts receivable, there is no indication that any collection efforts have been taken or that efforts have been made to terminate any lease agreements that are in default. Further, although the Debtor relies almost entirely on Vaught Equipment and its related entities to generate income, the Vaughts have refused to disclose documents about the financial health of their related entities in violation of Court orders granting applications for Rule 2004 examinations. (5/8/2019 Trial Tr. 52:19-56:12; TE 5; TE 6). Perhaps most egregiously, during the pendency of this case, the Vaughts directed the transportation of the Debtor's most valuable piece of equipment to Mexico in direct contravention of an order of this Court. (5/2/2019 Trial Tr. 102:20-106:1; 5/23/2019 Trial Tr. 29:22-24, 79:24-80:8; see Dkt. 274 at 7).
The Debtor's May 2019, June 2019, July 2019, August 2019 and September 2019 MORs were filed on October 8, 2019. (Dkt. 607; Dkt. 608; Dkt. 609; Dkt. 610; Dkt. 611). The Court surmises that such reports were filed at the prompting of the Committee pursuant to its Notice Re: Debtor's (1) Failure to File Monthly Operating Reports ... (Dkt. 596).
The Vaughts set up a business structure of related entities wherein Reliant took over the Debtor's well drilling and pump operations, and all of the Debtor's vehicles and income-producing equipment are leased to Vaught Equipment. Vaught Equipment subleases such equipment to Reliant or FARCO. This business structure, which was finalized shortly before the Petition Date, gives the Vaughts complete control over the flow of income to the Debtor. Further, such structure appears to be an attempt to insulate Reliant and FARCO from collection efforts by the Debtor or its creditors.
The Vaughts, as the principals and only employees of the Debtor, have failed to take action to collect accounts receivable of the Debtor and have likewise failed to enforce and/or terminate the leases with the related entities, which leases are in default. Although the Debtor's Plan proposes to designate a third party as Plan Administrator, the Vaughts would nevertheless retain ultimate control over the flow of money into the Debtor given that Ms. Crews-Vaught transfers funds to the Debtor as and when she deems fit. (See 5/2/2019 Trial Tr. 123:15-124:1). The evidence presented in this case reflects that the Vaughts have at best displayed incompetence in operating and managing the Debtor, and at worst have put their personal interests and the interests of their related entities ahead of the Debtor's fiduciary duties to the estate and its creditors.
Additionally, it is clear from the ballots that the creditors in this case have no confidence in the continued management of the Vaughts.
Given management's post-petition conduct, and based upon the totality of the evidence presented, the Court finds that the Vaughts' continued management is not in the best interest of creditors or public policy. The Committee's § 1129(a)(5) objection is therefore sustained.
C. Section 1129(a)(7)(A) – Best Interest of Creditors Test
Each plan proponent argues that the other's plan fails to satisfy the best interest of creditors test set forth in § 1129(a)(7)(A), which requires that each holder of a claim or interest in an impaired class either accept the plan or receive or retain under the plan at least as much as it would receive in a Chapter 7 liquidation. 11 U.S.C. § 1129(a)(7)(A) ; In re Bashas' Inc., 437 B.R. at 914. In order to determine whether a plan satisfies § 1129(a)(7), a court must determine what creditors and interest holders would receive under a hypothetical Chapter 7 liquidation, and compare that hypothetical liquidation return with what creditors and interest holders would receive under the proposed plan. In re Tenderloin Health, 849 F.3d 1231, 1237 (9th Cir. 2017).
The hypothetical liquidation analyses used by the parties in their disclosure statements are outdated. (See TE 15 at Ex. G; Dkt. 219 at Ex. E; 5/8/2019 Trial Tr. 63:16-20, 182:4-10). At trial, appraisal reports prepared by George Cunningham (the "Cunningham Reports") were admitted into evidence by the Committee. These reports opine the forced liquidation value of a substantial portion of the Debtor's property, plant, and equipment. (TE 2; TE 2-1). After trial, as part of its post-trial brief, the Debtor filed an updated hypothetical liquidation analysis (the "Debtor's Updated Liquidation Analysis"), which adopts the Cunningham Reports and attempts to update other liquidation analysis line items. (Dkt. 542 at Ex. A).
Drawing from the evidence, the Debtor's Updated Liquidation Analysis, the Committee's liquidation analysis, and the testimony presented at trial, it is the Court's determination that the following presents a more accurate hypothetical Chapter 7 liquidation analysis:?
[Editor's Note: The preceding image contains the reference for footnotes , , , , , , , , , , , , , , , , , , , , , ]. 1. Debtor's Plan
(TE YYYYY).
(Dkt. 502; Dkt. 557; 5/2/2019 Trial Tr. 73:16-23).
This figure takes into account special counsel's 33% contingency fee and $72,422.18 in costs sought in the Final Application for Allowance and Payment of Professional Compensation to Schmidt, Sethi & Akmajian, PC for Fees and Costs Incurred (the "Final Application") (Dkt. 571). (See also Dkt. 483). However, the Court will note that there is an outstanding objection to the Final Application, so this number could increase.
(5/2/2019 Trial Tr. 133:3-12).
This estimated recovery is drawn from the Debtor's Updated Liquidation Analysis, which takes into account the credit bid and closing costs. (Dkt. 542 at Ex. A).
(TE YYYYY at 14).
$40,688 of this amount the Debtor listed as uncollectible on TE YYYYY. Ms. Obelsky testified that an entity listed as owing approximately $100,000 of the remaining amount took the position that it had paid such amount. (5/23/2019 Trial Tr. 103:3-18). Given that the accounts receivable that are left are owed by related entity Vaught Equipment, the Court will adopt this reduced recovery, which estimates a 0% recovery of the third-party accounts receivable and a 40% recovery of the Vaught Equipment accounts receivable.
(TE YYYYY at 10).
The Court will adopt the Committee's estimated recovery without modification given that the inventory at issue is new well casing and given that the Debtor could not justify its estimated 10% recovery. (5/8/2019 Trial Tr. 62:1-63:2).
Notes receivable in the amount of $446,045.00 owed by related entities are listed on the Debtor's original and amended schedules. (TE 11 at 8; Dkt. 82 at 7). The Debtor maintains that bank reconciliations show that these notes receivable were paid in full pre-petition. (TE 15 at 17). The Debtor has not amended its schedules to reflect this reconciliation or presented evidence to support this assertion. Notes receivable are included on the Debtor's MORs for the months of September 2017 through March 2018, and are simply removed from the MORs filed thereafter. (Compare Dkt. 186 with Dkt. 206). The Court is not persuaded by the evidence that there are no outstanding notes receivable. The Court will ascribe a low recovery percentage to notes receivable given the uncertainty surrounding them and the fact that they are owed by related entities.
The Committee and Debtor agree on this estimated recovery. The Court finds this estimated recovery to be reasonable and will adopt it.
This figure is drawn from the Debtor's Updated Liquidation Analysis. (See Dkt. 542 at Ex. A). The Court notes that this starting figure is based only on a forced liquidation valuation.
No explanation is given as to why the forced liquidation value of the property, plant, and equipment should be further reduced. (See Dkt. 542 at Ex. A).
This figure is drawn from the Debtor's Updated Liquidation Analysis, which takes into account the Cunningham Reports. (Dkt. 542 at Ex. A; see also TE 2; TE 2-1).
Given that neither the Debtor nor the Committee ascribed any net value to any potential avoidance actions in their respective hypothetical liquidation analyses, the Court will assume there are no avoidance actions for purposes of this § 1129(a)(7) analysis only.
This is the scheduled value of the Rodriguez Litigation. (Dkt. 82). Because the Debtor failed to comply with an order compelling discovery, the Debtor was precluded from presenting evidence regarding the value of the Rodriguez Litigation at trial. (5/2/2019 Trial Tr. 7:4-22).
Given that neither the Debtor nor the Committee ascribed any net value to the Rodriguez Litigation in their respective hypothetical liquidation analyses, and given the risk and uncertainty of litigation, the Court will assume that the Rodriguez Litigation has no net value for purposes of this § 1129(a)(7) analysis only.
In their respective liquidation analyses, the Debtor uses $350,000 as its starting value, while the Committee uses $45,000 as its starting value. Neither party has explained how their starting values were calculated. The scheduled value of the Crime Insurance Claims is $750,000. (Dkt. 82). The Court will adopt the $700,000 figure set forth in the Debtor's Disclosure Statement given that the MORs do not disclose any substantial payouts since the Debtor's Disclosure Statement was filed. (See TE 15 at 35).
Although evidence on the alleged value of the Rodriguez-related claims was precluded, the Court must assume some net value for purposes of this hypothetical liquidation analysis.
The Committee's liquidation analysis assumes a 100% recovery. (Dkt. 219 at 25, Ex. E). The Debtor's liquidation analysis assumes a 0% recovery, but according to the Debtor's Disclosure Statement: "The Debtor is making claims under several policy years. If those claims are paid the Debtor anticipates receiving over $700,000." (TE 15 at 35).
For purposes of this liquidation analysis, the Court will average the parties' anticipated returns and estimate a 50% recovery, which estimate takes into account the fact that: (1) the Debtor has been successful in receiving money from insurance claims; (2) Mr. Leonard entered into a stipulation under the terms of which he agreed to a secured claim to be paid in an amount up to $200,000 from the proceeds of insurance claims; and (3) Mr. Leonard, who is an attorney, will likely aid in pursuing insurance claims; but (4) there is inherent uncertainty with respect to insurance claims. (See Dkt. 280; Dkt. 444; 5/2/2019 Trial Tr. 48:6-9; 5/8/2019 Trial Tr. 114:24-115:10, 176:13-16).
See § 326(a).
The Debtor and Committee both estimated $75,000 for Chapter 7 professional fees.
This was the Debtor's estimate as of April 30, 2019. (Dkt. 542 at Ex. A).
Under the Debtor's Plan, general unsecured creditors would receive approximately $234,661.57 shortly after the Effective Date, plus a minimum of $375,000 to be paid in annual increments over a five-year period beginning one (1) year post-Effective Date, for a minimum total of approximately $609,661.57. Accordingly, at this juncture, general unsecured creditors would only receive an approximate return of 40.75% under the Debtor's Plan. As a result, the Debtor's Plan fails to satisfy the best interest of creditors test in § 1129(a)(7)(A). The Committee's § 1129(a)(7)(A) objection is therefore sustained.
See infra § III.D.1.
2. Committee's Plan
The Committee's Plan is a liquidating plan under which the Liquidating Trustee would liquidate the assets of the estate in an orderly manner over time. Although the Committee's Plan may generate less for unsecured creditors than the Debtor's Plan, it necessarily provides holders of claims and interests with full liquidation value, thus satisfying § 1129(a)(7)(A). The Debtor's § 1129(a)(7)(A) objection is therefore overruled.
Under the Committee's Plan the Liquidating Trustee would assume profitable leases, but all of the Debtor's unexpired leases expire on or before March 31, 2022 and would not be renewed. (See TE 12-2; TE X; TE Y; TE Z; TE AA; TE BB; TE CC; TE DD; TE FF; TE GG; TE II; Dkt. 175).
D. Section 1129(a)(11) – Feasibility
Each plan proponent argues that the other's plan does not satisfy the feasibility requirements set forth in § 1129(a)(11).
Section 1129(a)(11) requires that a plan be feasible in order to be confirmed. A plan is feasible if confirmation "is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan." 11 U.S.C. § 1129(a)(11). "The purpose of section 1129(a)(11) is to prevent confirmation of visionary schemes which promise creditors and equity security holders more under a proposed plan than the [plan proponent] can possibly attain after confirmation." Matter of Pizza of Hawaii, Inc., 761 F.2d 1374, 1382 (9th Cir. 1985) (quoting 5 Collier on Bankruptcy ¶ 1129.02[11] at 1129-34 (15th ed. 1984)).
A plan is feasible if it "offers a reasonable prospect of success and is workable." In re Patrician St. Joseph Partners Ltd. P'ship, 169 B.R. 669, 674 (D. Ariz. 1994). "The Code does not require the [plan proponent] to prove that success is inevitable or assured, and a relatively low threshold of proof will satisfy § 1129(a)(11) so long as adequate evidence supports a finding of feasibility." In re Loop 76, LLC, 465 B.R. 525, 544 (B.A.P. 9th Cir. 2012), aff'd, 578 F. App'x 644 (9th Cir. 2014).
While "[t]he mere potential for failure of the plan is insufficient to disprove feasibility[,]" In re Patrician St. Joseph Partners Ltd. P'ship, 169 B.R. at 674, the plan proponent must present "ample evidence to demonstrate that the [p]lan has a reasonable probability of success." In re Acequia, Inc., 787 F.2d 1352, 1364 (9th Cir. 1986).
The Ninth Circuit B.A.P. has instructed courts to consider the following factors when evaluating the feasibility of a plan:
(1) the adequacy of the capital structure; (2) the earning power of the business; (3) economic conditions; (4) the ability of management; (5) the probability of the continuation of the same management; and (6) any other related matters which determine the prospects of a sufficiently successful operation to enable performance of the provisions of the plan.
In re Bashas' Inc., 437 B.R. 874, 915 (Bankr. D. Ariz. 2010) (citing In re Wiersma, 324 B.R. 92, 113 (B.A.P. 9th Cir. 2005), aff'd in part and rev'd in part on other grounds, 483 F.3d 933 (9th Cir. 2007) ).
1. Debtor's Plan
The Committee asserts that the Debtor's Plan is not feasible because: (i) the Debtor has struggled to generate income, let alone a profit; (ii) the Debtor's main source of income is from leasing its equipment to insiders, and without the threat of enforcement of the lease terms, that income is sporadic and unreliable; (iii) the Debtor's Plan will fail to pay administrative claims on the Effective Date; (iv) the monthly operating reports do not support the Debtor's proposed new value contribution or proposed payments to general unsecured creditors; and (v) the success of the Debtor's Plan depends on the Debtor's success in the Rodriguez litigation, which success is uncertain and speculative.
The Committee's Objection was filed before the INIC Settlement was reached, and as a result, the Debtor will have more cash on hand on the Effective Date than initially anticipated. Under the Debtor's Plan, it was anticipated at the time of trial that on the Effective Date the Debtor would hold cash in the approximate amount of $670,077.82: approximately $100,000 of this amount was to come from the cash in the Debtor's DIP accounts; $430,077.82 of this amount represents the projected net proceeds from the INIC Settlement; and the remaining $140,000 of this amount was to come from the Vaughts in the form of a new value contribution. The Effective Date payments under the Debtor's Plan are estimated to total approximately $423,416.25, which would leave the Debtor with approximately $246,661.57 in cash. The majority of this balance would go to the general unsecured class pursuant to section 7.02 of the Debtor's Plan, although approximately $12,000 would be retained by the Debtor for working capital.
The cumulative balance in the Debtor's DIP accounts in the month preceding the confirmation trial was $99,283.85. Based on the September 2019 MOR, the cumulative balance in the Debtor's DIP accounts has decreased to $82,423.00. (Dkt. 611).
There is no evidence before the Court that the Vaughts have $140,000, or any amount available to contribute as new value.
The estimated Effective Date payments include approximately $400,000 to pay attorney and professional fees, approximately $5,040 to pay the restructuring fees to secured creditors under the terms of the Debtor's Plan, $9,376.25 to pay Flaska's administrative claim, and approximately $9,000 to pay administrative convenience class claims. (See Dkt. 542 at 4; Dkt. 481).
In the first year following confirmation, Mr. Burr projected that the Debtor would generate approximately $32,500-38,000 per month in lease income and $1,000 per month in net consulting income, for combined annual income of between $402,000 and 468,000. (TE V at 11 & 17; 5/8/2019 Trial Tr. 153:21-24). Mr. Burr estimated less than $1,000 in monthly operating expenses and $28,147 per month in payments to secured creditors, which would leave the Debtor with between $52,236 and $118,236 on hand at the end of the first twelve months following the Effective Date of the Debtor's Plan. (See TE V at 11; 5/8/2019 Trial Tr. 156:6-13, 157:12-21).
Ms. Crews-Vaught testified about various consulting jobs that she suggested could generate more than the estimated $1,000 per month in net consulting income, but the MORs filed in the five months following the trial do not reflect any increase. (5/2/2019 Trial Tr. 91:190-99:11; TE MMMMM; TE NNNNN; TE XXXXX; Dkt. 607; Dkt. 608; Dkt. 609; Dkt. 610; Dkt. 611).
This amount does not take into account any fees incurred by Mr. Burr for serving as the proposed Plan Administrator.
However, Mr. Burr's projections are inconsistent with the Debtor's performance during the five (5) months following the conclusion of the trial. During the five (5) months preceding the trial, the Debtor's receipts, exclusive of transfers from other DIP accounts, ranged from $32,400.00 to $60,500.54 per month, with an average of $43,026.56 per month. (See TE 13-17; TE U; Dkt. 441; Dkt. 491; Dkt. 503). In the five (5) months since the conclusion of the trial, the Debtor's receipts, exclusive of transfers from other DIP accounts, have ranged from $404.00 to $29,741.45 per month, with an average of only $11,599.09 per month. (See Dkt. 607; Dkt. 608; Dkt. 609; Dkt. 610; Dkt. 611). Furthermore, it does not appear that the Debtor has paid adequate protection payments in full in recent months. (See Dkt. 106; Dkt. 274; Dkt. 607; Dkt. 608; Dkt. 609; Dkt. 610; Dkt. 611).
Pursuant to the stipulation with UMB (Dkt. 274 at 5), the Debtor is to make monthly payments on the UMB secured claim in the amount of $19,765.75. The Debtor is also to make monthly adequate protection payments to Ford in the amount of $6,071.73. (Dkt. 106 at 2).
Under the Debtor's Plan, the Debtor would be required to distribute a minimum of $75,000 to the general unsecured class shortly after the first anniversary of the Effective Date. Mr. Burr testified that if the Debtor does not have sufficient funds on hand to make this distribution to the general unsecured class, the Debtor would liquidate some of its unutilized assets in order to make the required distribution. (5/8/2019 Trial Tr. 159:10-12). Mr. Burr did not elaborate as to what assets could be liquidated or the value of any such assets.
Given that some of the secured debt would be paid off in years two and three, Mr. Burr testified that there would be sufficient cash flow for the Debtor to make subsequent annual distributions to general unsecured creditors and complete its plan. (See TE V). Mr. Burr's projections do not, however, take into account the fact that all of the leases with Vaught Equipment terminate on or before March 31, 2022. (See TE 12-2; TE X; TE Y; TE Z; TE AA; TE BB; TE CC; TE DD; TE FF; TE GG; TE II; Dkt. 175). No evidence of replacement sources of income was presented at trial. Further, from May through September 2019, the Debtor did not generate enough income to service even its secured debts, let alone set aside funds for payments to unsecured creditors. (See Dkt. 607; Dkt. 608; Dkt. 609; Dkt. 610; Dkt. 611). The Debtor's primary stream of revenue comes from leasing its equipment to its related entity, Vaught Equipment, which generates all of its revenue from subleasing such equipment to Reliant and FARCO. Thus, in order for the Debtor to generate sufficient revenue to fund its plan, Vaught Equipment would need to collect its lease payments from Reliant and FARCO, and the Debtor would need to collect its lease payments from Vaught Equipment. The Vaughts refused to disclose financial information about Vaught Equipment, Reliant, or FARCO to the Committee, and the Vaughts did not provide the Court with evidence as to the collectability of such receivables. (See 5/2/2019 28:8-15, 91:19-25; 5/23/2019 Trial Tr. 38:9-11, 38:20-22). Further, contrary to Ms. Crews-Vaught's testimony, there has been no increased collection of the Debtor's receivables. (See Dkt. 607; Dkt. 608; Dkt. 609; Dkt. 610; Dkt. 611). Although the Debtor collected between $32,000 and $60,500 per month in accounts receivable in the five (5) months preceding the trial, the Debtor has only collected between $0 and $14,000 per month since the trial concluded, and the Debtor's outstanding receivables have increased from $162,754.90 to $408,009.95 during the pendency of this case. (See TE 13-17; TE U; Dkt. 82; Dkt. 441; Dkt. 491; Dkt. 503; Dkt. 607; Dkt. 608; Dkt. 609; Dkt. 610; Dkt. 611). At this point, it appears that the Debtor has failed to take actions necessary to collect these receivables or to terminate its leases and find new lessees.
Mr. Burr further testified that the Vaughts had indicated to him a willingness to "backstop" the payments to general unsecured creditors. (5/8/2019 Trial Tr. 170:24-171:1). There is, however, no guarantee language in the Debtor's Plan, so any representations by the Vaughts on this point are irrelevant for purposes of this analysis.
For all of the foregoing reasons, the Court does not find Mr. Burr's testimony on feasibility to be persuasive or convincing. Ultimately, the Debtor has failed to show that its plan has a reasonable probability of success. Further, as the Court has already determined, the Debtor's owners/managers have either shown incompetence in operating the Debtor or have put the interests of themselves and their related entities ahead of the Debtor's fiduciary duties to its creditors.
Based upon the totality of the evidence, the Court finds and concludes that confirmation of the Debtor's Plan would likely be followed by a liquidation of assets or further need for financial reorganization, and is therefore not feasible. The Committee's § 1129(a)(11) objection is sustained.
2. The Committee's Plan
The Debtor essentially argues that its plan is more feasible than the Committee's Plan because the Committee would allegedly be unable to obtain any recovery from the estate's crime insurance claims and because under the Committee's Plan, there would be no consulting income, lease income, or new value contribution. However, § 1129(a)(11) does not require the Court to consider which of two competing plans is more feasible. Section 1129(a)(11) only requires the Court to determine whether either or both of the competing plans is feasible.
The Committee's feasibility expert, Ms. Obelsky, testified that the Committee's Plan was feasible; however, she did not express any opinion about the feasibility of the Committee's Plan in her report. (5/23/2019 Trial Tr. 101:11-109:23; TE 1). Regardless, the Committee's Plan is a liquidating plan, and "the relatively low threshold of proof to satisfy § 1129(a)(11) is even more easily met where the plan itself calls for liquidation rather than reorganization...." In re Hand, No. 08-61264-11, 2009 WL 1306919, at *12 (Bankr. D. Mont. May 5, 2009). If the things that must be done under the liquidating plan after confirmation can be done as a practical matter given the facts, the plan is feasible. Id.
The Court finds that the Committee's Plan is feasible given that it is a liquidating plan that necessarily cannot be followed by a subsequent liquidation or further financial reorganization, and would be implemented by standard liquidating mechanisms in a timely fashion by competent professionals. The Debtor's § 1129(a)(11) objection is overruled.
After a § 1129(a) analysis of the respective plans, the Court finds that the Debtor's Plan does not satisfy §§ 1129(a)(5), (a)(7), (a)(8), or (a)(11). The Committee's Plan does not satisfy § 1129(a)(8). The Court will therefore undertake an analysis under § 1129(b).
E. Section 1129(b) – Absolute Priority Rule
For purposes of this analysis only, the Court will assume that the Debtor could somehow cure its §§ 1129(a)(5), (a)(7), and (a)(11) defects.
Section 1129(b)(1) of the Code provides that if all applicable requirements of § 1129(a) are met, with the exception of § 1129(a)(8), the Court can confirm a plan so long as it does not discriminate unfairly and is fair and equitable with respect to any objecting classes.
Given that there have been no allegations that either plan discriminates unfairly, and the classifications in the plans are substantially similar, the only outstanding § 1129(b) inquiry would be whether the plans are fair and equitable.
Pursuant to § 1129(b)(2)(A), a plan is fair and equitable with respect to a class of secured claims if: (1) the plan provides that the holders of such claims retain their liens securing their claims and receive deferred cash payments at least equal to the present value of their claims; (2) the property securing any such claims is sold with lien(s) to attach to the sale proceeds; or (3) the holders of such claims realize the indubitable equivalent of their secured claims. In re Arnold & Baker Farms , 177 B.R. at 659 ; 11 U.S.C. § 1129(b)(2)(A).
Pursuant to the absolute priority rule set forth in § 1129(b)(2)(B), a plan is fair and equitable with respect to a class of unsecured claims if:
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property....
The Ninth Circuit has recognized a new value exception to the absolute priority rule, which allows old equity to retain an interest in the reorganized debtor without having to pay objecting creditors' claims in full. In re Gen. Teamsters, Warehousemen & Helpers Union, Local 890, 265 F.3d 869, 873 (9th Cir. 2001) ; In re Ambanc La Mesa Ltd. P'ship, 115 F.3d 650, 654 (9th Cir. 1997). "The theory of the new value exception is that former equity owners retain property in exchange for the new contribution, and not on account of their prior equity interest." In re Dollar Assocs., 172 B.R. 945, 949 (Bankr. N.D. Cal. 1994). "To satisfy the new value exception to the absolute priority rule, and to satisfy § 1129(b)(2)(B)(ii) notwithstanding the objection by an unsecured class that is not paid in full, former equity owners are ‘required to offer value that [is] 1) new, 2) substantial, 3) money or money's worth, 4) necessary for a successful reorganization and 5) reasonably equivalent to the value or interest received.’ " In re Dunlap Oil Co., Inc., No. BAP AZ- 14-1172-JUKID, 2014 WL 6883069, at *21 (B.A.P. 9th Cir. Dec. 5, 2014) (quoting In re Bonner Mall P'ship, 2 F.3d 899, 908 (9th Cir. 1993) ).
No argument has been made that the Committee's Plan does not satisfy § 1129(b). The Committee's Plan is a plan of liquidation that conforms with the priority scheme in the Code and thereby satisfies § 1129(b).
The Committee argues that the Vaughts' proposed new value contribution is inadequate and fails to satisfy the absolute priority rule. The Committee believes that based on the Debtor's schedules there is at least $1.61 million in unencumbered equity in the estate that the Debtor's equity holders must contribute on the Effective Date in order to satisfy the new value exception.
Under the Debtor's Plan, post-Effective Date, the Vaughts would retain all of their rights, title, and interest in the Debtor without paying all objecting creditors' claims in full. The Vaughts propose to satisfy the new value exception to the absolute priority rule by contributing $140,000 of new value.
The Vaughts assert that their proposed $140,000 contribution would be: (1) "new" given that they would not otherwise be obligated to make such contribution; (2) "substantial" given that it represents approximately 10% of the unsecured debt in this case; and (3) "necessary" given that the Debtor would need these funds to make its proposed distributions to the general unsecured class under its proposed plan.
As a threshold matter, the proposed $140,000 new value contribution is not sufficient under the terms of the Debtor's Plan to allow the Vaughts to retain their respective equity interests in the Debtor. As of April 30, 2019, two days before the commencement of the confirmation trial, the Debtor valued its non-cash assets at $1,391,019.56, and the allowed unsecured claims in this case total approximately $1.5 million. Even assuming the Debtor's valuation of its assets is accurate, equity would be required to contribute at least $150,000.
(See TE YYYYY). The Court notes that the Debtor's schedules, as amended on December 11, 2017, indicate an asset value of $2,817,174.23. (Dkt. 82 at 8). A significant asset, specifically the notes receivable from related parties with a scheduled value of $446,045, was suddenly deleted from the Debtor's MORs beginning in April 2018. (Dkt. 82 at 12; compare Dkt. 186 with Dkt. 206). No explanation was provided except Ms. Crews-Vaught's testimony that when she reconciled the books, she determined this amount was not due. (5/8/2019 Trial Tr. 61:2-10). The Court does not find Ms. Crews-Vaught's testimony on this subject to be credible or persuasive. If these notes were added to the Debtor's asset valuation, the total would be $1,837,064.56 of value to be retained by the Vaughts.
Even if the Vaughts have $150,000 available to contribute, the proposed contribution is not reasonably equivalent to the value or interest the Vaughts would retain under the Debtor's Plan, and therefore fails to satisfy the new value exception.
As owners and managers of the Debtor, the Vaughts would retain control over an entity with assets they scheduled as valuing approximately $2,817,174.23. They would also retain ultimate control over the flow of money into the Debtor given that the Debtor's income is primarily derived from related entities, and is transferred into the Debtor's accounts in the sole discretion of Ms. Crews-Vaught. (See 5/2/2019 Trial Tr. 123:23-124:1). Given that the Vaughts would retain control over the flow of income into the Debtor, the Vaughts would necessarily have control over how much money would be distributed to general unsecured creditors under the Debtor's Plan, and would be eligible for equity distributions after the final scheduled distribution to general unsecured creditors. Furthermore, the Vaughts would retain immediate and considerable non-monetary benefits from the continued existence of the Debtor given that Reliant depends on the Debtor to obtain government jobs and generate income, and Mr. Vaught owns and presumably generates income from Reliant. (See 5/2/2019 Trial Tr. 90:11-91:9).
The MORs reflect a $1.4 million decrease in the value of the Debtor's assets during the pendency of this case, for which no explanation has been provided. The Court notes that the MORs are prepared and signed by Ms. Crews-Vaught, with no independent financial review.
Even if the Court were to find that the new value contribution proposed in the Debtor's Plan was sufficient in terms of amount, the Vaughts have indicated that the source of this new value contribution would be proceeds from the sale of a piece of real property owned by Mr. Vaught's trust in New Mexico. (5/23/2019 Trial Tr. 12:7-12). In order to satisfy the "money or money's worth" requirement, the Vaughts would have to make their new value contribution by the Effective Date. In re Ambanc La Mesa Ltd. P 'ship, 115 F.3d at 655. Nothing has been filed with this Court to show that the anticipated sale closed or that these funds are available. At this juncture, the Vaughts have no verifiable new value to contribute.
When asked on the stand how she and her husband would fund the new value contribution, Ms. Crews-Vaught testified that the new value contribution would come from proceeds generated from the sale of real property located at 600 S Country Club Rd, Tucson, AZ (the "Country Club Property"). The Country Club Property was owned by Country Club at the Park, LLC ("CCP"), which filed for bankruptcy in October 2017 (4:17-bk-12733-BMW). The Country Club Property was sold through a § 363 sale during CCP's bankruptcy case, which sale was overseen and approved by this Court. The sale generated enough funds to pay all of CCP's creditors in full, leaving excess proceeds for equity interest holders. Given an equity fight between Mr. Vaught and a third-party, the Court ordered that these excess funds be held pending further Court order. The equity fight was not resolved and no further Court order was sought or issued. The Vaughts transferred these excess proceeds out of CCP's DIP account in direct violation of this Court's order and attempted to divert those funds to this case. When this was revealed at trial, the Court noted that there was no longer any legitimate proposed new value. The Vaughts introduced this alternative funding source the following day.
Mr. Vaught testified that he expected the sale to close before June 17, 2019. (5/23/2019 Trial Tr. 12:17-19).
Based upon the totality of the evidence presented, the proposed new value contribution is not reasonably equivalent to the value the Vaughts would retain under the Debtor's Plan, and therefore does not satisfy the new value exception to the absolute priority rule. The Committee's § 1129(b) objection is sustained.
Based upon the foregoing, the Debtor's Plan fails to satisfy § 1129(a) or § 1129(b). The Committee's Plan satisfies the requisite provisions of §§ 1129(a) and (b), and is therefore the only confirmable plan before the Court. F. Section 1129(c) – Preference of Creditors & Equity Security Holders
In the event the Court had two confirmable plans before it, the Court can nevertheless only confirm one plan. 11 U.S.C. § 1129(c). In determining which plan to confirm, "the court shall consider the preferences of creditors and equity security holders in determining which plan to confirm." Id.
At this point, the analysis under § 1129(c) is purely hypothetical given that the Debtor's Plan fails to meet the requirements for confirmation pursuant to §§ 1129(a)(5), (a)(7), (a)(8), (a)(11), and (b).
Generally, because the policy of Chapter 11 is to successfully rehabilitate debtors, reorganization plans are preferable to liquidation plans. In re Holley Garden Apartments, Ltd. , 238 B.R. 488, 495 (Bankr. M.D. Fla. 1999). However, courts should give preference to the more feasible plan, and when faced with competing confirmable plans, "[t]he court should confirm the plan that provides better treatment for the creditors and equity security holders." Id. at 495.
Creditors, both in terms of number and amount, voted overwhelmingly in favor of the Committee's Plan. (Dkt. 265; Dkt. 268; Dkt. 271). Although some of the creditors that voted in favor of the Committee's Plan hold unliquidated, disputed, and/or contingent claims, the great majority of the creditors that voted to accept the Committee's Plan are non-insiders who hold liquidated claims to which the Debtor has not objected. These creditors, which hold the largest secured and unsecured claims in this case, are Minera, Bank of the West, Flaska, ANC Orchard LLC, Ace Bit & Supply, BMR III, L.P., Burris & Macomber, FedEx Corporate Services, Specialty Freight Solutions, Stubbs & Schubart PC, and The Morgan Rose Ranch, LP, which together hold liquidated claims totaling approximately $ 1.7 million. (Dkt. 265; Dkt. 268).
Minera filed a preference statement in support of the Debtor's Plan, but UMB, which previously held Minera's claim, voted to accept the Committee's Plan and reject the Debtor's Plan.
Creditors who voted for both plans or who cast votes but were required to file proofs of claim and did not are not included in this tally.
Two preference statements were filed with the Court, one by Mr. Leonard and one by Minera, both of which express a preference for the Debtor's Plan. (Dkt. 500; Dkt. 531). Minera prefers the Debtor's Plan because Minera is in the mining industry and anticipates that it and the Debtor would profit if the Debtor were to remain an operating entity. (Dkt. 531). Mr. Leonard prefers the Debtor's Plan because under the Debtor's Plan, Ms. Crews-Vaught would remain a manager of the Debtor and it is his belief that she has the ability to recoup more on outstanding crime insurance claims than others would be able to recoup. (Dkt. 500).
Minera became a creditor in this case when it acquired UMB's claims after the voting period had expired and UMB had already voted in favor of the Committee's Plan. Minera is a client of FARCO and any agreements between Minera and FARCO are not guaranteed to benefit the Debtor. Furthermore, Mr. Leonard is being treated identically under both plans. If Minera's and Mr. Leonard's preference statements were to be weighed against the votes of other creditors in this case, such statements would not be sufficiently persuasive to sway the § 1129(c) analysis in favor of the Debtor's Plan. Although the Code favors reorganization, in this case the Debtor's Plan would effectuate a minimal reorganization at best. There is nominal business to reorganize, the Debtor has no employees other than the Vaughts, the Debtor proposes to generate its primary income from only related entities, and the Debtor has already effectively restructured by transitioning its principal business operations to Reliant and Vaught Equipment.
Ultimately, the creditors in this case have spoken. They would clearly prefer an orderly liquidation by an independent party to a reorganization overseen by the Vaughts. The creditors of this Debtor clearly do not trust the Vaughts, and the Court finds that the Debtor's Plan, even if it could meet the requirements of §§ 1129(a)(5), (a)(7), (a)(11), and (b), would subject creditors to an unacceptable level of risk. It is the determination of the Court that the Committee's Plan would be preferable to the Debtor's Plan under a § 1129(c) analysis.
V. Conclusion
Based on the foregoing analysis of all outstanding factual and legal issues, and based on the totality of the evidence presented in this case, the Court finds and concludes that the Debtor has failed to meet its burden of establishing that its plan satisfies the provisions of §§ 1129(a)(5), (a)(7), (a)(11), and (b). The Committee's Plan, on the other hand, satisfies the requisite provisions of § 1129(a) and § 1129(b), and if applicable, would be the preferred plan under § 1129(c), and will thus be confirmed by the Court. A separate order will issue consistent with this Memorandum Decision.