Opinion
Case No. 2019-25064-A-11
07-06-2020
In re: SLIDEBELTS, INC., Debtor.
Appearances: Brian M. Rothschild, Parsons Behle & Latimer for Slidebelts, Inc.
NOT FOR PUBLICATION
BMR-31
MEMORANDUM
Submitted on July 2, 2020 at Sacramento, California Honorable Fredrick E. Clement, Bankruptcy Judge Presiding Appearances: Brian M. Rothschild, Parsons Behle & Latimer for Slidebelts, Inc.
Unless otherwise ordered, dismissal of a chapter 11 case results in revesting of property in the estate. 11 U.S.C. § 349(b). Slidebelts, Inc. filed chapter 11, incurring professional fees to its counsel and to committee counsel. It wishes to dismiss the case, pay its counsel, and then immediately re-file the case under Subchapter V of chapter 11. As a condition of dismissal may the court require payment on the same terms to committee counsel?
I. FACTS
Slibebelts, Inc. manufacturers and sells belts used as articles of clothing. Unlike traditional belts, which employ a hole and tongue method of size adjustments, Slidebelts' products adjust the size of the belt by a slide mechanism. Doing so allows a near infinite number of size adjustments and flatter, i.e., less obtrusive, look.
Facing financial headwinds, Slidebelts filed Chapter 11. Its filing did not avail itself of the "small business debtor," 11 U.S.C. § 101(51D), or "Subchapter V" small business debtor, 11 U.S.C. § 101(51(C) protections.
Slidebelts, Inc. only became entitled to Subchapter V protections after the CARES Act increased applicable debt limits.
Slidebelts, Inc. is represented by Parsons Behle & Latimer ("PBL"). This court has approved compensation for PBL in the amount of $192,000, some of which remains unpaid.
The U.S. Trustee appointed an Official Committee of Unsecured Creditors. The committee promptly employed Daren R. Brinkman, attorney at law, and Dundon Advisors, LLC, as its counsel and its financial advisor, respectively. Both Brinkman and Dundon's employment was approved by this court. Each of the committee's professionals have been working approximately three months but have neither made application for fees, nor have been paid for services rendered.
Planning to avail itself of the Paycheck Protection Funding Program of the CARES Act and then to re-file its Chapter 11 case under Subchapter V of Chapter 11, Slidebelts moved to dismiss its chapter 11 case. The Official Committee of Unsecured Creditors opposed, citing Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), and arguing that the failure of the debtor to propose a mechanism for payment of its professional fees amounted to an unlawful defacto structured settlement. The Jevic argument advances in three steps. First, as of the date of the debtor's request to dismiss the case committee professionals are unpaid for serves rendered. Second, absent dismissal committee professionals would receive egalitarian treatment vis-à-vis other professionals of its fees. For example, if the case continued in chapter 11, committee professionals would be entitled to be paid in full on the effective date of the plan. 11 U.S.C. § 1129(a)(9)(A). In contrast, if the case converted to Chapter 7, committee professionals would hold priority claim and be entitled to be paid in full or, if the case was administratively insolvent, pro-rata payment of its priority claim, 11 U.S.C. §§ 503(b), 507(a)(2), 726(a)(1). Third, if the chapter 11 case is dismissed and then refiled (as now contemplated), committee professionals will lose their priority status and be paid with general unsecured creditors, notwithstanding full payment to the debtor's own professionals.
The Small Business Administration, who administers those loans, takes the position that persons under protection of the bankruptcy court are not eligible for the Paycheck Protection Funding Program. Armed with the decisions of some bankruptcy courts, the debtor believes that the Small Business Administration may not deny an application for funds under the Paycheck Protection Program Funding simply because the debtor is under the protection of the bankruptcy court. Roman Catholic Church of The Archdiocese of Santa Fe v. United States (In re Roman Catholic Church of The Archdiocese of Santa Fe), 2020 WL 2096113 (Bankr. D. NM May 1, 2020); Alpha Visions Learning Academy, Inv. v. Carranza (In re James Skefos), 2020 WL 2893413 (Bankr. W.D. Tenn June 2, 2020). In an effort to shortcut that dispute, the debtor planned to dismiss the bankruptcy, obtain the Paycheck Protection Program Funding Loan and then refile its bankruptcy.
At the hearing, the court granted the motion to dismiss without requiring Slidebelts Inc. to make provision for unpaid professional fees incurred by the committee.
After the hearing, the court reconsidered its ruling and gave all unpaid professionals approximately 40 days to file fee applications and enjoined payment of professional fees until all such applications had been resolved and all professionals paid in full or, if payment in full was not possible, on a pro-rata basis.
II. PROCEDURE
Slibebelts, Inc. now moves for relief under Rule 60(b) to eliminate those portions of the court's order the dictate when and how much, e.g., in full or pro-rata, professionals will be paid. It contends that "This additional relief was not discussed by the parties at the hearing, and the Debtor did not have the opportunity to inform the Court of the detrimental effect of the language in the Modified Order will have." Motion for Rule 60(b) Relief 2:18-20, July 2, 2020. In Slidebelt's view, the prejudice arises from the approximate 40 day delay necessary to sort out professional fees and will force it to delay its re-filing or to retain new counsel. Id. at 2:22-28.
Slidebelts brought this motion under the expedited notice provisions of the Eastern District of California local rules. LBR 9014-1(f)(2) (not requiring written opposition). Apparently, it did so because the date of the hearing was the last date under which it could make an application for Paycheck Protection Payment Funds. Even though written opposition was not required, the committee did so. Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017) was not cited in the committee opposition but was discussed by committee counsel during oral argument. --------
III. DISCUSSION
As the Supreme Court in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), noted a Chapter 11 "foresees three possible outcomes."
The first is a bankruptcy-court-confirmed plan. Such a plan may keep the business operating but, at the same time, help creditors by providing for payments, perhaps over time. See §§ 1123, 1129, 1141. The second possible outcome is conversion of the case to a Chapter 7 proceeding for liquidation of the business and a distribution of its remaining assets. §§ 1112(a), (b), 726. That conversion in effect confesses an inability to find a plan. The third possible outcome is dismissal of the Chapter 11 case. § 1112(b). A dismissal typically "revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case"—in other words, it aims to return to the prepetition financial status quo. § 349(b)(3).Jevic, 137 S.C.t at 979 (emphasis added).
Section 349(b)(3) provides:
Unless the court, for cause, orders otherwise, a dismissal of a case other than under section 742 of this title . . . (3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.11 U.S.C. § 349 (emphasis added).
Jevic explained that as a rule dismissal revests property in the debtor and reinstates the status quo but that "for cause," 11 U.S.C. § 349(b), the court may make "appropriate order" to avoid prejudice. Referring to such orders as "structured dismissals" the court commented:
Nonetheless, recognizing that conditions may have changed in ways that make a perfect restoration of the status quo difficult or impossible, the Code permits the bankruptcy court, "for cause," to alter a Chapter 11 dismissal's ordinary restorative consequences. § 349(b). A dismissal that does so (or which has other special conditions attached) is often referred to as a "structured dismissal," defined by the American Bankruptcy Institute as a
"hybrid dismissal and confirmation order ... that ... typically dismisses the case while, among other things, approving certain distributions to creditors, granting
Jevic, 137 S.C.t at 979.certain third-party releases, enjoining certain conduct by creditors, and not necessarily vacating orders or unwinding transactions undertaken during the case." American Bankruptcy Institute Commission To Study the Reform of Chapter 11, 2012-2014 Final Report and Recommendations 270 (2014).
Reliance by a party in interest "on the bankruptcy case" presents a textbook example of § 349(b) cause. HR. Rep No. 95-595 at 338; Wiese v. Community Bank of Central Wis., 552 F.3d 584, 590 (7th Cir. 2009) ("upholding, under § 349(b), a Bankruptcy Court's decision not to reinstate a debtor's claim against a bank that gave up its lien in reliance on the claim being released in the debtor's reorganization plan"), cited by Jevic, 137 S. Ct. 984.
Slidebelts Inc.'s dismissal presents such a case of reliance by committee professionals, i.e., Daren R. Brinkman, attorney at law, and Dundon Advisors, LLC, which have rendered services that would ordinarily be paid in chapter 7 or chapter 11, at least to the extent of administrative solvency. 11 U.S.C. § 1129(a)(9) (chapter 11 professional fees paid in full on the effective date of the plan); 11 U.S.C. §§ 503(b), 507(a)(2), 726(a)(1) (professionals entitled to a first order priority in chapter 7); In re Cochise College Park, Inc., 703 F.2d 1339, 1356 fn. 22 (9th Cir. 1983) (insolvent estates pay administrative claims pro-rata); In re Lazar, 83 F.3d 306, 308-09 (9th Cir. 1996). Moreover, payment administrative professionals fall in neatly within the realm of structured dismissals.
Any prejudice to the debtor is outweighed by the need to protect professionals who have rendered services in reliance on the bankruptcy case. Here, prejudice occasioned by delay is minimal, i.e., approximately 40 days. Moreover, the decision to dismiss and re-file belonged to Slidebelts, Inc. Any prejudice occasioned by its course of action is the result of its own making.
Without the order made by the court after the hearing, Slidebelts Inc.'s second Chapter 11 filing will relegate them to the fate of general unsecured creditors. As a result, the court finds the cause, i.e., reliance by attorney Brinkman and financial advisor Dundon, exists.
IV. CONCLUSION
For each of these reasons, the debtor's motion will be denied. The court will issue an order from chambers. Dated: Jul 06, 2020
/s/ _________
Fredrick E. Clement
United States Bankruptcy Judge
Instructions to Clerk of Court
Service List - Not Part of Order/Judgment
The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the document via the BNC or, if checked ___, via the U.S. mail. Debtor(s) Attorney for the Debtor(s) (if any) Bankruptcy Trustee (if appointed in the case) Office of the U.S. Trustee Robert T. Matsui United States Courthouse 501 I Street, Room 7-500 Sacramento, CA 95814 All Creditors