Opinion
Case No. 12-10526
02-17-2012
In re: J.B. Flex, Inc. Debtor
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
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Burton Perlman
United States Bankruptcy Judge
Chapter 11
Judge Burton Perlman
ORDER DENYING MOTION OF U.S. TRUSTEE FOR APPOINTMENT OF A
TRUSTEE
In this recently filed Chapter 11 case, the U.S. Trustee has filed a motion for the appointment of a trustee to take possession and control of the assets of Debtor.
The matter raised by the motion of the U.S. Trustee came on for hearing before the Court on February 15, 2012. Prior to the hearing, the U.S. Trustee had filed a memorandum in support of her motion. Merchants Bank & Trust Company ("Merchants Bank"), Debtor's secured lender, filed an objection to the motion. An objection and memorandum was also filed by Paul Walpole, John Walpole, and Timothy Cole, the majority owners of Debtor. At the hearing, presentations were made by the U.S. Trustee, the attorney for the majority owners, the attorney for Merchants Bank, and the attorney for the largest unsecured creditor in the case. All of the presenters, other than the U.S. Trustee, opposed displacement of Collier from the operation of the business. On the assumption that someone other than Collier would be installed as Chapter 11 trustee in the case, opposers argue that a Chapter 11 trustee would impose greater costs on Debtor in the case. The majority owners, Merchants Bank, and Debtor's largest unsecured creditor are all in favor of continuing Collier as the operator of the business.
DISCUSSION
Debtor, J.B. Flex, Inc., is an Ohio corporation that was incorporated in 1989. The Debtor owns and operates a bar and grill known as "Take 5 Bar and Grill," located at 6959 Harrison Avenue, Cincinnati, Ohio. Debtor leases the property where the business operates. The Court is informed that Debtor leased the premises in February 2004. It expanded the leased space in 2007, financed by a mortgage loan from Merchants Bank. When Debtor defaulted on the loan in 2011, Merchants Bank sued in Hamilton County Common Pleas Court to collect on its note. In its suit, it requested the appointment of a receiver. On October 31, 2011, Debtor, its equity holders, and Merchants Bank entered into an agreed order whereby the Common Pleas Court was to appoint a receiver. The Court did appoint a receiver. James Collier ("Collier") was the individual chosen.
The Court is informed further that after his appointment as receiver on October 31, 2011, Collier assumed custody and control of the assets of Debtor and has been operating the business since his appointment. He has been in custody and control of the accounts of Debtor and has been in contact with most, if not all, of the creditors of Debtor and has worked out agreements with some of the creditors.
After careful consideration, the Court concludes that the motion of the U.S. Trustee should be denied. This Court holds that Collier is the Debtor in Possession.
Since October 2011, Collier has been serving as the de facto operator and manager of Debtor. In the state court receivership order, three pages of very comprehensive powers are given the receiver under "Receiver's Duties and Authority," including the authority to "maintain, secure, manage, operate, repair and preserve the Receivership Property," and "assume control over the Receivership Property and to collect and receive all income." These facts lead to the conclusion we reach.
In support of our conclusion that Collier occupied the role of Debtor in Possession upon filing this bankruptcy case, the Court has considered applicable law. In his objection to the U.S. Trustee's motion, counsel for the majority members of J.B. Flex, Inc. cited Securities and Exchange Commission v. Byers, et al., 591 F.Supp.2d 532 (S.D.N.Y. 2008). Therein, the court had entered an Amended Receiver Order, which authorized the receiver, inter alia, to prosecute any potential bankruptcy petitions. Id. at 538. In dismissing a challenge to this aspect of the Amended Receiver Order, the court stated: "[W]hile the Amended Receiver Order does not designate the Receiver as the debtor-in-possession, in the event of a bankruptcy filing, . . . the Receiver would automatically succeed to that role by operation of the Bankruptcy Code." Id. at 539.
The court in Byers relied on In re Bayou Group, L.L.C., et al., 363 B.R. 674 (S.D.N.Y. 2007), aff'd, 564 F.3d 541 (2d Cir. 2009). Therein, the court found that the order appointing the receiver in another proceeding effectively transformed the receiver into the debtor's management. Id. at 686. Therefore, the court stated:
The management of a bankrupt entity that files in Chapter 11 is automatically authorized to act as the debtor-in-possession, since under the Bankruptcy Code, the term 'debtor-in-possession' quite simply 'means debtor.' 11 U.S.C. § 1101(1).Id. at 686-88.
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[U]pon causing [the debtor] to file its bankruptcy petition, [the receiver's] receivership ended and he immediately became the managing member of a debtor-in-possession.
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[The management] of a debtor-in-possession [] is subject to all of the obligations imposed on such entities by the Bankruptcy Code, see, e.g., 11 U.S.C. §§ 345, 1107(a), 1106(a)(5), 1121(c)(1), as administered by a respected bankruptcy judge.
There is also precedent for the designation of a state court receiver as debtor in possession even without any specific reference to the order appointing that receiver. In In re Global Grounds Greenery, LLC, et al., 405 B.R. 659, 661 (Bankr.D.Ariz. 2009), the bankruptcy court ordered that the state court receiver "be designated as the representative of Debtors' estates pursuant to Bankruptcy Rule 9001(5) and that he have all the rights, powers and obligations of a debtor in possession pursuant to Bankruptcy Code § 1107(a)." Federal Rule of Bankruptcy Procedure 9001(5) defines "Debtor," stating: "When any act is required by these rules to be performed by a debtor . . . and the debtor is not a natural person: (A) if the debtor is a corporation, 'debtor' includes, if designated by the court . . . any person in control."
The Court also notes that the majority owners, Merchants Bank, and Debtor's largest unsecured creditor support the outcome we reach. The motion of U.S. Trustee for appointment of a trustee is denied.
So Ordered. Copies to: Default List Donald K. Swartz
285 E. Main Street
2nd Floor
Batavia, OH 45103
Michael A. Galasso
7 W. 7th Street, Ste 1400
Cincinnati, OH 45202