Opinion
Case No. 11-23633 RAG
2012-05-22
In re: MARYLAND PAVING & SEALANT, INC. Debtor.
SO ORDERED
___________________________
U. S. BANKRUPTCY JUDGE
Chapter 11
AGREED STIPULATION AND CONSENT ORDER REGARDING
THE EMERGENCY MOTION TO PRECLUDE USE OF CASH COLLATERAL
This Stipulation and Consent Order, entered into between Maryland Paving and Sealant, Inc., the debtor and debtor-in-possession (the "Debtor"), and the United States of America, on behalf of the Internal Revenue Service, secured creditor herein (the "Service"), constitutes the Service's consent to the Debtor's use of cash collateral and other assets securing the federal tax liens.
1. The Debtor filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the "Code") on June 30, 2011 (the "Petition Date").
2. Since the Petition Date, the Debtor has continued to operate its business as a Debtor-in-Possession pursuant to §§ 1107 and 1108 of the Code, and has used its cash collateral with the consent of the Service, but through inadvertence without this Court's approval as required under § 363(c)(2) of the Code.
3. Pursuant to Rule 9014 of the Federal Rules of Bankruptcy Procedure, a copy of this Stipulation and Consent Order was served upon all entities and individuals entitled to notice. This Stipulation and Consent Order is subject to the approval of the United States Bankruptcy Court for the District of Maryland, Baltimore Division.
4. In the event any other person, corporation, association or other entity seeks an order pursuant to the Bankruptcy Code for adequate protection, or is otherwise given adequate protection of its interests in the Debtor's assets and in this proceeding, the Service must be provided with notice and an opportunity to be heard prior to entry of such Order.
5. Prior to the Petition Date, a duly authorized delegate of the Secretary of the Treasury filed notices of federal tax liens for tax liabilities of the Debtor. The liens encumbered certain property or rights to property belonging to the Debtor and secured the payment of unpaid taxes, penalties and interest owed by the Debtor. The Service is a secured creditor of the Debtor by virtue of its having filed notices of federal tax liens prior to the Petition Date.
6. Pursuant to 26 U.S.C. §§ 6321 and 6322, the federal tax liens attach to all property and rights to property whether real or personal belonging to the Debtor and the liens arise upon the date of assessment. The liens attach to the Debtor's cash and cash equivalents, which are defined as cash collateral pursuant to § 363(a) of the Code (the "Cash Collateral"). The filing of notices of federal tax liens prior to the Petition Date perfects the lien interest of the Service in the Debtor's Cash Collateral against subsequent bona fide purchasers and is not avoidable under § 545 of the Code.
7. The Service asserts a secured claim against the Debtor's Cash Collateral in the amount of $864,162.19 (the "IRS Secured Claim"). However, the parties enter into this Stipulation without prejudice to Debtor's right to contest all or any part of the Service's claims.
8. The Debtor represents that as of the Petition Date, the nature and value of assets to which the federal tax liens attach were as follows: cash, accounts receivable, and personal property and had a total estimated value in excess of the IRS Secured Claim (the "Petition Date Assets").
9. The Debtor requires the use of Cash Collateral in the ordinary course of its business to pay its current operating expenses, including payroll.
10. Debtor was making Adequate Protection Payments to the Service, but has since fallen behind on those payments and its post-petition payroll tax obligations, which defaults prompted the Service to file an Emergency Motion to Prohibit Use of Cash Collateral (Dkt. 194).
11. The Debtor and the Service have reached an agreement regarding the Emergency Motion to Prohibit Use of Cash Collateral (Dkt. 194), which allows the Debtor to continue operations and modify the previously agreed Adequate Protection terms.
12. Debtor is authorized to use Cash Collateral and other personal property in which the Service holds a lien interest for the purpose of paying the reasonable, necessary and ordinary expenses of operating the business that accrue from and after the Petition Date subject to the terms and conditions of this Stipulation and Consent Order. The Debtor's use of Cash Collateral shall be expressly limited to those amounts specified in the Budget attached to this Stipulation as Exhibit 1, or as otherwise ordered by this Court.
13. This Stipulation and Consent Order will enable the Debtor to continue business operations during the period of this Stipulation and Consent Order (the "Stipulation Period") and is necessary to provide the Service with adequate protection as defined in § 361 of the Code.
14. Except as provided in this Stipulation, other than for reasonable wages earned, the Debtor may not make any payments of Cash Collateral to or for the benefit of itself, its employees, insiders, affiliates, or any corporation, partnership, sole proprietorship or any other individual or entity related to or affiliated with the Debtor, without the express prior written consent of the Service.
15. The Debtor will not use cash collateral during the Stipulation Period for any purpose which is not authorized by the Code or by an Order of this Court.
16. The Debtor will provide James McDonough, Internal Revenue Service, 31 Hopkins Plaza, Room 1150, Baltimore, Maryland 21201 with copies of all monthly operating reports filed with the United States Bankruptcy Court and/or the United States Trustee, as well as any monthly reports of all receipts and disbursements from the Debtor-in-Possession Operating Account and serve James McDonough with copies of any and all pleadings or other documents Debtor files in this Chapter 11 proceeding.
17. The Debtor will provide the Service with the following financial information: (i) monthly reports on the Debtor's accounts receivable specifying the amounts by age; (ii) monthly reports stating collection of accounts receivable made during the prior month; and (iii) monthly reports of the Debtor's cash flow, including major sources of cash receipts and expenditures by general categories.
18. The Service has the right to, by itself or through its representative, monitor the Debtor's assets and to inspect the assets upon providing reasonable notice to the Debtor.
19. The Debtor will maintain a Debtor-in-Possession Operating Account (the "DIP Account") at a bank selected by the Debtor. The Debtor represents that all funds received during the pendency of this case will be deposited into the DIP Account or other account disclosed to the Service (the "Approved Account") and that all expenses of the Debtor during the pendency of this case will be paid from the DIP or Approved Account. The Debtor will not prepay expenses except in the ordinary course of business. The Debtor will deposit all cash, checks or monies which the Debtor receives into the DIP or Approved Account and those funds are subject to the provisions for use of Cash Collateral stated herein. In addition, the Debtor will also deposit any and all cash, checks or monies the Debtor collects, receives or derives from the operation of its business, including, but not limited to, all cash, checks and monies received by the Debtor from the collection of its accounts receivable (whether pre- or post-petition), into the DIP or Approved Account and those funds are also subject to the provisions for use of Cash Collateral stated in this Stipulation.
20. The Debtor agrees to deposit the withheld income and FICA taxes ("Payroll Taxes") arising out of each payroll subsequent to the Petition Date into the DIP account and to pay the Payroll Taxes as and when due, either directly through the Service's EFTPS payment system or through a payroll service. Additionally, the Debtor shall provide the Service, within two (2) business days of each deposit, a written verification of the deposit of Payroll Taxes directly with James McDonough, Internal Revenue Service, 31 Hopkins Plaza, Room 1150, Baltimore, Maryland 21201.
21. The Debtor shall file all its 2010 and 2011 tax returns by May 31, 2012 and for any additional periods after the Petition Date on or before the due date, and shall pay any balance due upon filing the return. Proof of payment and filing, as well as a copy of the return, will be provided within three (3) business days of filing to James McDonough, Internal Revenue Service, 31 Hopkins Plaza, Room 1150, Baltimore, Maryland 21201.
22. The Debtor will maintain applicable hazard and liability insurance on all real and personal property as required by the Office of the United States Trustee. The Debtor will also provide to the Service promptly upon request copies of all such insurance policies, paid receipts evidencing payment of premiums due and any notices of proposed cancellation. This hazard and liability insurance will be provided by a well-rated and responsible insurance company or companies satisfactory to the Service in such amounts as the Service reasonably requires. The insurance will provide that the benefits thereof are for the Debtor as the insured and shall name the Service as the secondary loss payee as soon as practicable.
23. The Debtor will make a minimum monthly payment on the IRS Secured Claim in the amount of $25,000 from the DIP Account on the 5th day of each month beginning in May, 2012 and continuing until the date that the Debtor's Plan is confirmed by the Bankruptcy Court ("Confirmation Date"). The Debtor agrees that this amount is a fair approximation of the diminution in the value of the Petition Date Assets during the Stipulation Period. Each payment shall be made payable to the United States Treasury and shall be sent to James McDonough, Internal Revenue Service, 31 Hopkins Plaza, Room 1150, Baltimore, Maryland 21201.
24. The monthly payments made by the Debtor to the Service, pursuant to this Stipulation and Consent Order, are to be applied to the IRS Secured Claim. Payments shall be deemed to be made on the date that the check is received by the IRS.
25. This Stipulation and Consent Order shall remain in effect until the Confirmation Date. If the Debtor fails to obtain confirmation of the Plan, this Stipulation and Consent Order remains in effect until the date that the Bankruptcy Court dismisses or converts this case.
26. As additional adequate protection for the existing rights and interests of the Service, the Service is granted a post-petition replacement lien and security interest co-extensive with and to the extent of the liens and security interests held by the Service immediately prior to the Petition Date in the following: all present and future cash; noncash proceeds; cash equivalents; inventory; accounts receivable; contract rights; general intangibles; chattel paper; equipment; all other personal property of the Debtor, including proceeds and products thereof, which have been or will be acquired, generated or received by the Debtor subsequent to the Petition Date; and all real property of the Debtor which has been or will be acquired, generated or received by the Debtor subsequent to the Petition Date and the proceeds thereof. These lien and security interests in post-petition property shall be subject only to the payment of fees and expenses of professionals allowed by the Bankruptcy Court to professionals retained in this Chapter 11 case. The federal tax liens continue to attach to the newly arising assets and protect the secured federal tax claim. The security interest and liens as granted in this paragraph are in addition to all security interests and liens now existing in favor of the Service and not in substitution thereof, and effective as of the Petition Date. The liens granted in this paragraph are deemed perfected without the necessity of the filing or execution of documents which might otherwise be required under non-bankruptcy law for the perfection of liens. Nothing set forth in this paragraph prohibits or requires the Service from filing or executing any documents or this Stipulation and Consent Order among the financing statement records of the appropriate jurisdiction. Notwithstanding any termination of the Debtor's authorization to use Cash Collateral under this Stipulation and Consent Order, any and all liens granted under this Stipulation and Consent Order will continue in full force and effect until the obligations of the Debtor to the Service are satisfied. This perfection is binding upon any subsequently appointed Chapter 7 or Chapter 11 trustee and upon all creditors of the Debtor who have extended or who may hereafter extend credit to the Debtor.
27. The liens of the Service may not be subordinated, altered or otherwise be adversely affected by any financing under § 364, any priority claimed or granted pursuant to 11 U.S.C. §§ 364, 503, 507(a)(2), et. seq., or any other provision of the Bankruptcy Code or by any other action of the Debtor or any other party, or the Bankruptcy Court, unless specifically agreed to by the Service.
28. These replacement liens and security interests are be in addition to the liens that the Service has in the assets and property of the Debtor as of the Petition Date, which liens extended to and encumbered the proceeds and products of the property of the Debtor in existence as of the Petition Date.
29. The Debtor agrees that the Service is entitled to a superpriority lien under either 11 U.S.C. § 364(d) or § 507(b) in the amount of any decrease of the Cash Collateral balance from the Petition Date to the date of this Stipulation and Consent Order.
30. The Debtor is permitted to use Cash Collateral in the ordinary course of its business in accordance with the terms and conditions of this Stipulation and Consent Order unless and until the Debtor defaults by failing to comply with one of the terms set forth herein.
30. Default for the purpose of this Stipulation and Consent Order includes the following:
(a) the failure of the Debtor to perform any of the terms and conditions set forth herein;
(b) the dismissal of the Debtor's Chapter 11 proceeding for any reason prior to confirmation of a Chapter 11 plan;
(c) entry of an order converting the Debtor's Chapter 11 proceeding to a case under Chapter 7 of the Bankruptcy Code; or
(d) the appointment in the Debtor's Chapter 11 proceeding of a trustee or examiner with authority to affect the operation of the Debtor's business.
32. In the event of a default under this Stipulation and Consent Order, the Service is not required to provide any notice of default to the Debtor and the Debtor may cure the default within five business days from the date of default. If the Debtor does not cure the default within five business days, the Service may, without providing any prior notice to the Debtor, file a motion to prohibit the further use of cash collateral. Upon the filing of said motion, the Debtor will immediately cease and be enjoined from using Cash Collateral and will provide appropriate evidence to the Service, including but not limited to any Order executed by the Bankruptcy Court, of the Debtor's cessation of the use of Cash Collateral. Any forbearance by the Service in declaring a default under this Stipulation and Consent Order and/or filing a motion to prohibit the further use of cash collateral is a waiver of and does not preclude the exercise by the Service of any right or remedy afforded the Service by this Stipulation and Consent Order or by law. 33.
In the event that the Debtor defaults under the terms of this Stipulation and Consent Order and continues to use Cash Collateral without curing the default within five business days from the date of default, and in the event that such use of Cash Collateral erodes the IRS Secured Claim, the Service is entitled to a superpriority administrative claim pursuant to 11 U.S.C. § 507 of the Bankruptcy Code to the extent of the erosion of the IRS Secured Claim. Any such administrative claim shall survive any conversion of the Debtor's Chapter 11 proceeding to a Chapter 7 case.
34. In the alternative, and at the sole discretion of the Service, upon the Debtor's failure to cure a default under this Stipulation and Consent Order within five business days, the automatic stay provided by 11 U.S.C. § 362 will be lifted and the Service permitted to proceed with an administrative collection action. Upon lifting of the Stay, the Service will have the right to levy and liquidate all unencumbered assets of the Debtor and to retain all proceeds of any asset sale and to apply the same to the tax obligations of the Debtor in the manner the Service designates and determines, all without further order of the Bankruptcy Court, and without prohibition or restraint by virtue of the automatic stay, 11 U.S.C. § 362 of the Bankruptcy Code, or other provision of the Bankruptcy Code; provided, however, that no administrative collection action will be taken sooner than 3 business days after providing written notice to the Debtor that the Service intends to pursue an administrative collection action.
35. This Stipulation and Consent Order, as approved by the Bankruptcy Court, is sufficient and conclusive evidence of the validity, enforceability, priority, and perfection of the security interest and liens granted to the Service as adequate protection hereunder, whether or not the Service elects to file or record a financing statement or other documents, or takes any other steps as may otherwise be required to obtain, evidence, or perfect such security interests or liens under applicable law.
36. The adequate protection and liens set forth in this Stipulation and Consent Order remain in full force and effect until the Debtor's obligations to the Service are paid in full.
37. However, nothing contained in this Stipulation and Consent Order prevents the Service and the Debtor from amending, modifying or extending the Stipulation and Consent Order after the entry of an order approving it. The Debtor and the Service, by written mutual agreement, may amend or modify or extend the terms of this Stipulation and Consent Order, by filing a proposed Order approved as to form by the Service and the Debtor.
38. The Stipulation and Consent Order constitutes the entire agreement between the parties and it, as well as any amendments, modifications or extensions thereto, is binding upon approval by the Bankruptcy Court.
38. Nothing in this Stipulation and Consent Order constitutes an admission by the Service that the protection provided to it under this Stipulation and Consent Order has become inadequate to fully and properly protect its interests, and at any time the Service may apply to the Court for additional adequate protection. Further, nothing in this Stipulation and Consent Order binds the Service or constitutes its agreement to treatment of its claim under any plan of reorganization.
CONSENTED TO:
___________________________
Nancy D. Greene
Fed. Bar No:
Seeger Faughnan Mendicino PC
Counsel for Maryland Paving & Sealant, Inc.
___________________________
Nancy M. Gilmore Fed. Bar No: 17289
Special Assistant United States Attorney
I HEREBY CERTIFY that the terms of the copy of this Stipulation and Consent Order submitted to the Court are identical to those set forth in the original Stipulation and Consent Order; and the signatures represented by the /s/ on this copy reference the signatures of consenting parties on the original Stipulation and Consent Order.
___________________________
Nancy D. Greene
END OF ORDER