Opinion
CASE NO: 23-34054
2024-09-20
IN RE: NELKIN & NELKIN P.C., Debtor.
Miriam Goott, Johnie J. Patterson, Walker & Patterson, PC, Houston, TX, for Debtor. Jessica L. Hanzlik, United States Trustee Program, San Antonio, TX, Andrew Jimenez, DOJ-Ust, Houston, TX, for U.S. Trustee.
Miriam Goott, Johnie J. Patterson, Walker & Patterson, PC, Houston, TX, for Debtor.
Jessica L. Hanzlik, United States Trustee Program, San Antonio, TX, Andrew Jimenez, DOJ-Ust, Houston, TX, for U.S. Trustee.
MEMORANDUM OPINION AND ORDER
Eduardo V. Rodriguez, Chief United States Bankruptcy Judge
Confirmation of this subchapter V plan presents some unique issues that have yet to be addressed by this Court, namely whether the Court should consider objections to Nelkin & Nelkin, P.C.'s plan of reorganization by certain parties that have for the most part alleged but have yet proven standing to appear and be heard and whether Nelkin & Nelkin, P.C. is required to reconcile, at least quarterly, its income and expenses that have been projected over the next three (3) years in order to ensure that Nelkin & Nelkin, P.C.
is contributing all of its disposable income to its May 28, 2024 plan of reorganization.
The Court held hearings on May 14, 2024, June 17, 2024, and July 31, 2024, and after considering all the evidence in the record, arguments of counsel, applicable law, and for the reasons stated on the record, the Court now issues the instant Memorandum Opinion and Order.
I. FINDINGS OF FACT
This Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, which is made applicable to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7052. To the extent that any finding of fact constitutes a conclusion of law, it is adopted as such. To the extent that any conclusion of law constitutes a finding of fact, it is adopted as such. This Court made certain oral findings and conclusions on the record. This Memorandum Opinion and Order supplements those findings and conclusions. If there is an inconsistency, this Memorandum Opinion and Order controls.
A. Background
1. On August 25, 2023, Nelkin & Nelkin, P.C ("Debtor") filed for bankruptcy protection under subchapter V, chapter 11 of the Bankruptcy Code initiating the bankruptcy case in the Corpus Christi Division of the Southern District of Texas.
2. On October 16, 2023, and upon the resignation of former Judge David R. Jones, the instant case was randomly reassigned to the Honorable Judge Marvin Isgur.
3. On October 19, 2024, Judge Isgur transferred the instant case to the Houston Division.
4. On October 23, 2023, the undersigned was assigned to this case.
5. On November 2, 2023, the Court issued its Order directing Debtor, inter alia, to file its plan of reorganization no later than November 23, 2023.
6. On November 24, 2023, Debtor timely filed its plan of reorganization.
7. On December 26, 2023, the United States Trustee (the "US Trustee") filed its "Objection Of The United States Trustee To Debtor's Subchapter V Plan."
8. On December 27, 2023, Sarah Schrieber ("Schreiber") filed "Sarah Schreiber's Limited Objection To Debtor's Chapter 11 (Subchapter V) Plan."
9. On December 27, 2023, Wilentz, Goldman & Spitzer, P.A. ("Wilentz") filed its "Objection Of Wilentz, Goldman & Spitzer, P.A. To Confirmation Of Debtor's Subchapter V Plan Of Reorganization, Joinder And Reservation Of Rights."
10. On December 27, 2023, Steven Schreiber, Eugene Schreiber and Two Rivers Coffee, LLC (collectively, the "TRC Parties") filed their "Objection To Nelkin & Nelkin, P.C.'S Subchapter V Plan Of Reorganization."
11. On March 27, 2024, Debtor filed its "First Amended Chapter 11 (Subchapter V) Plan."
12. On April 30, 2024, Wilentz filed its "Objection Of Wilentz, Goldman & Spitzer, P.A. To Confirmation Of Debtor's First Amended Subchapter V Plan Of Reorganization, Joinder And Reservation Of Rights" ("Wilentz's First Plan Objection").
13. On April 30, 2024, Schreiber filed "Sarah Schreiber's Objection To Nelkin & Nelkin, P.C.'S First Amended Chapter 11 (Subchapter V) Plan" ("Schreiber's First Plan Objection").
14. On May 10, 2024, Debtor filed "Debtor's Emergency Motion To Strike And For Sanctions" ("Motion to Strike").
15. On May 13, 2024, TRC Parties filed "Two Rivers Coffee, LLC, Steven Schreiber, And Eugene Schreiber's Response In Opposition To Debtor's Emergency Motion To Strike And For Sanctions" (the "Response").
16. On May 13, 2024, Debtor filed its "First Amended Modified Chapter 11 (Subchapter V) Plan."
17. On May 14, 2024, the Court held an evidentiary hearing on the Motion to Strike and granted it in part.
18. On May 28, 2024, Debtor filed its "Second Amended Chapter 11 (Subchapter V) Plan" (the "Plan").
19. On May 31, 2024, Wilentz filed "Emergency Motion To Estimate And/Or Fix Claim Pursuant To 11 U.S.C. § 502 And Fed. R. Bank. P. 3018(a)" (the "Motion to Estimate") requesting a hearing date of June 17, 2024, the same date the Court scheduled for Plan confirmation.
20. On June 9, 2024, Sara Schreiber filed "Sarah Schreiber's Objection To Nelkin & Nelkin, P.C.'s Second Amended Chapter 11 (Subchapter V) Plan" ("Schreiber's Objection").
21. On June 10, 2024, Wilentz filed "Objection Of Wilentz, Goldman & Spitzer, P.A. To Confirmation of Debtor's Second Amended Chapter 11 (Subchapter V) Plan Of Reorganization, Joinder And Reservation Of Rights" ("Wilentz's Objection").
22. On June 10, 2024, Steven Schreiber, Eugene Schreiber and Two Rivers Coffee, LLC filed their "Objection To Nelkin & Nelkin, P.C.'S Second Amended Chapter 11 (Subchapter V) Plan" (the "TRC Parties' Objection").
23. On June 10, 2024, the US Trustee filed his "Objection Of The United States Trustee To Debtor's Second Amended Chapter 11 (Subchapter V) Plan" (the "US Trustee's Objection").
24. On June 12, 2024, Debtor filed "Debtor's Emergency Motion to Strike" (the "Second Motion To Strike").
25. On June 14, 2024, the TRC Parties filed "Two Rivers Coffee, LLC, Steven Schreiber, And Eugene Schreiber's Response In Opposition To Debtor's Emergency Motion To Strike" (the "Second Response").
26. On June 17, 2024, the Court held an evidentiary hearing on Debtor's Plan, the Second Motion To Strike, the objections to the Plan filed by the US Trustee, Schreiber, the TRC Parties, and Wilentz, and the Motion To Estimate. After the hearing, the Court ordered briefing by August 27, 2024, which the US Trustee and Debtor filed on August 16, 2024. The matter is now ripe and the Court issues this instant Memorandum Opinion and accompanying order.
Any reference to "Code" or "Bankruptcy Code" is a reference to the United States Bankruptcy Code, 11 U.S.C., or any section (i.e.§) thereof refers to the corresponding section in 11 U.S.C.
ECF No. 34.
ECF No. 36.
October 23, 2023 Min. Entry.
ECF No. 59.
ECF No. 64; November 23, 2023, fell on a Federal Holiday.
ECF No. 79.
ECF No. 80.
ECF No. 81.
ECF No. 83.
ECF No. 149.
ECF No. 156.
ECF No. 159.
ECF No. 168.
ECF No. 170.
ECF No. 175.
May 14, 2024 Min. Entry.
ECF No. 195.
ECF No. 200.
ECF No. 213.
ECF No. 217.
ECF No. 222.
ECF No. 223.
ECF No. 232.
ECF No. 237.
June 17, 2024 Min. Entry.
ECF No. 278, ECF No. 279.
II. CONCLUSIONS OF LAW
A. JURISDICTION, VENUE AND CONSTITUTIONAL AUTHORITY
This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides "the district courts shall have original and exclusive jurisdiction of all cases under title 11 or arising in or related to cases under title 11." Section 157 allows a district court to "refer" all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter. This Court determines that pursuant to 28 U.S.C. § 157(b)(2)(A) and (L) this proceeding involves primarily core matters as it "concern[s] the administration of the estate and confirmation of a plan" Furthermore, this Court may only hear a case in which venue is proper. Pursuant to 28 U.S.C. § 1408, venue is proper in the "domicile, residence, principal place of business in the United States, or principal assets in the United States, of the person or entity that is the subject of such case have been located for the one hundred and eighty days immediately preceding such commencement." Debtor's principal place of business is located within this judicial district and therefore, venue of this proceeding is proper.
28 U.S.C. § 157(a); see also In re Order of Reference to Bankruptcy Judges, Gen. Order 2012-6 (S.D. Tex. May 24, 2012).
11 U.S.C. § 157(b)(2); see also In re Southmark Corp., 163 F.3d 925, 930 (5th Cir. 1999) ("[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.").
ECF No. 1.
The pending matter before this Court is a core proceeding pursuant to 28 U.S.C.
§ 157(b)(2)(A) and (L). Accordingly, this Court concludes that the narrow limitation imposed by Stern does not prohibit this Court from entering a final order here. Thus, this Court wields the constitutional authority to enter a final order.
III. ANALYSIS
A. Section 1109 Standing
As a preliminary matter, the Court must determine whether Schreiber and the TRC Parties have constitutional and prudential standing to assert their objections to Debtor's Plan. In its Second Motion To Strike, Debtor requests this Court strike the Objections filed by Schreiber and the TRC Parties in response to Debtor's Plan, on the basis that Schreiber and the TRC Parties lack standing pursuant to 11 U.S.C. § 1109. On May 14, 2024, this Court previously ruled that Schreiber and the TRC Parties did not possess standing under § 1109 in reference to Debtor's First Amended Plan (the "First Plan Ruling") However, the Court acknowledged that this is a fluid case, and Schreiber and TRC Parties assert that they now have standing due to the specific terms of the Plan.
ECF No. 232.
See May 14, 2024, Min. Entry (oral ruling on the record). See also ECF No. 168.
See ECF No. 213, ECF No. 222.
"Courts must determine on a case-by-case basis whether a prospective party has a sufficient stake in reorganization proceedings to be a 'party in interest.'" Section 1109(b) of the Bankruptcy Code expressly permits any "party in interest" to "appear and be heard on any issue" in a Chapter 11 proceeding. The Supreme Court teaches that: "the general theory behind [§ 1109(b)] is that anyone holding a direct financial stake in the outcome of the case should have an opportunity... to participate in the adjudication of any issue that may ultimately shape the disposition of his or her interest." A party in interest, under § 1109(b), may be any party that is "directly affected by a reorganization plan either because they have a financial interest in the estate's assets (the debtor, creditor, and equity security holder) or because they represent parties that do (a creditors' committee, an equity security holders' committee, a trustee, and an indenture trustee)."
Truck Ins. Exch. v. Kaiser Gypsum Co., Inc., 602 U.S. 268, 144 S. Ct. 1414, 1423, 219 L.Ed. 2d 41 (2024).
Any reference to "Code" or "Bankruptcy Code" is a reference to the United States Bankruptcy Code, 11 U.S.C., or any section (i.e.§) thereof refers to the corresponding section in 11 U.S.C.
11 U.S.C. § 1109(b).
Kaiser, 144 S. Ct. at 1424 (quoting 7 Collier on Bankruptcy ¶ 1109.01 (16th ed. 2023)).
Id. at 1424.
Where a proposed plan "allows a party to put its hands into other people's pockets, the ones with the pockets are entitled to be fully heard and to have their
legitimate objections addressed." A court is not limited to the reorganization plan when determining who is a party in interest. "The § 1109(b) inquiry asks whether the reorganization proceedings might affect a prospective party, not how a particular reorganization plan actually affects that party." Section 1109(b) cannot "depend on a plan-specific rule—that standard would be unusable for the Code provisions empowering a party in interest to request acts unrelated to a specific plan or that occur before a plan is confirmed or even proposed."
Id. at 1426.
See id. at 1424 ("The plain meaning of [party in interest] thus refers to entities that are potentially concerned with or affected by a proceeding.").
Id. at 1427.
Id.
Schreiber asserts that she now has standing as a party in interest under § 1109(b) because Debtor filed an adversary proceeding within this bankruptcy case which enjoined a state court lawsuit between Schreiber, and representatives of Debtor styled as Nelkin & Nelkin, P. C. v. Two Rivers Coffee, LLC, Adv. Pro. No. 23-2005, where Debtor sought and obtained a preliminary injunction extending the automatic stay to Carol and Jay Nelkin, which acts as a stay in the New Jersey case styled Nelkin, et al. v. Two Rivers Coffee, LLC, et al, Cause No. MID-C-107-19, Superior Court of New Jersey, Middlesex County Chancery Division (the "Replevin Case").
ECF No. 213 at 1-2.
Schreiber asserts that because she has claims against Carol and Jay Nelkin in the Replevin Case, and the Plan does not discuss how the automatic stay as applied to the Replevin Case will be treated post confirmation, she has a financial interest in the Plan. No evidence has been presented to the Court to support the existence of Schreiber's claims against Jay or Carol Nelkin in the Replevin Case. Nonetheless, the existence of such claims is insufficient to confer standing under Kaiser. In Kaiser, the Supreme Court found that a non-creditor insurer of the debtor had standing because the plan "impair[ed] the insurer's financial interests by inviting fraudulent claims," and exposed the insurer "to millions of dollars in fraudulent tort claims." In contrast, a stay on Schreiber's claims against Jay and Carol Nelkin in the Replevin Case will not affect Schreiber's potential recovery from those claims nor expose Schreiber to any increased liability. Accordingly, any stay on Schreiber's alleged claims is not an adjudication of those claims and merely postpones the distribution of any potential recovery. Thus, the Court finds that Schreiber has not provided sufficient evidence to meet her burden of showing that she is a party in interest under § 1109(b). Accordingly, Schreiber's Objection is overruled for lack of standing. As for the TRC Parties, Debtor agreed to represent Steven Schreiber and Eugene Schreiber (collectively, the "Schreibers") in a lawsuit against multiple defendants over the ownership and control of Two Rivers Coffee, LLC. In exchange for legal services, the Schreibers agreed to pay Debtor a contingency fee equaling one third of any benefits the Schreibers received in the lawsuit. The case eventually settled but Debtor never received its fees.
Id.
Kaiser, 144 S. Ct. at 1426.
See Colvin v. Amegy Mortg. Co., L.L.C., 507 B.R. 169, 184 (W.D. Tex. 2014) ("[M]ost courts have found that hearings on motions for relief from the automatic stay do not involve a full adjudication on the merits of claims, defenses, or counterclaims; instead, the proceedings simply involve a determination as to whether a creditor has a colorable claim to the property of the estate."); United States v. Abbott, 92 F.4th 570, 573 n.2 (5th Cir. 2024) ("[F]indings of fact and conclusions of law by the district court when granting a preliminary injunction do not bind the district court in a trial on the merits.").
ECF No. 213.
ECF No. 195 at 3-4.
Id.
Id. at 5-6.
The TRC Parties assert that they now have standing as parties in interest because they are involved in an action pending against Debtor in the Eastern District of New York ("EDNY") styled as Scheiber, et al. v. Friedman, et al., Cause No. 15-cv-06861, District Court, Eastern District of New York in which the TRC Parties assert that Debtor is not entitled to its fees, (the "Fee Forfeiture Case"). The Fee Forfeiture Case was settled and pursuant to a stipulation of all parties, including the Debtor, an amount of approximately $1,700,000 was deposited into the EDNY Court registry by the TRC Parties (the "Settlement Funds"). Debtor asserted a charging lien against that deposit account to prevent distribution while Debtor's claim to disputed fees remain pending. Article 10.12 of the Plan provides that those funds may be transferred to this bankruptcy court:
Adv. Pro. No. 23-2005, ECF No. 1 at 2-3.
See ECF No. 195, ECF No. 178-9, ECF No. 235-15.
ECF No. 222-1.
All funds currently on deposit with the Federal District Court Clerk in the Eastern District of New York (approximately $1,700,000.00 plus any accrued interest) shall be transferred to the Bankruptcy Court Clerk for the Southern District of Texas upon determination that the proceeding there (Case No. 1:15-cv-06861) has been dismissed or the case is transferred to the Southern District of Texas.
ECF No. 195.
The TRC Parties claim an interest in these Settlement Funds and the Plan requires that the Settlement Funds be potentially transferred to this Bankruptcy Court. Article 10.12 of the Plan gives this Court authority over the Settlement Funds but provides no clarity on whether this Court or the EDNY Court would have exclusive authority to determine who is entitled to the Settlement Funds. Nonetheless, the authority that the Plan grants this Court over the Settlement Funds sufficiently implicates the TRC Parties' claimed interest in the Settlement Funds to confer standing. Furthermore, the Plan's ambiguity cannot be used to defeat standing in this case as Debtor is the party that proposed the Plan. Bankruptcy plans are interpreted in accordance with the rules of contract interpretation, one of which is that ambiguities are to be construed
Truck Ins. Exch. v. Kaiser Gypsum Co., Inc., 602 U.S. 268, 144 S. Ct. 1414, 1426, 219 L.Ed. 2d 41 (2024) (A party that "can be directly and adversely affected by the reorganization proceedings ... [is] a 'party in interest' in those proceedings."); id. at 1424 ("The plain meaning of the phrase [party in interest] refers to entities that are potentially concerned with or affected by a proceeding.").
See 11 U.S.C. § 1189(a).
In re LRI III, Ltd., 464 F. App'x 263, 267 (5th Cir. 2012).
against the drafter. Accordingly, this Court finds that the TRC Parties have standing as parties in interest to object to confirmation of Debtor's Plan.
Deocampo v. Potts, 836 F.3d 1134, 1144 (9th Cir. 2016) ("An ambiguity in a bankruptcy plan drafted by a debtor is construed against the debtor."). See also Bodum USA, Inc. v. J.C. Penney Corp., No. 05-18-00813-CV, 2019 WL 5417748, at *4, 2019 Tex. App. LEXIS 9353 at *11 (Tex. App.-Dallas Oct. 23, 2019) ("[A]mbiguous contracts are construed against their drafters, and only as a last resort.").
B. Objections to confirmation
The following objections to confirmation were filed, (1) the "Objection of The United States Trustee To Debtor's Second Amended Chapter 11 (Subchapter V) Plan," filed by the United States Trustee on June 10, 2024; (2) "Sarah Schreiber's Objection To Nelkin & Nelkin P.C.'s Second Amended Chapter 11 (Subchapter V) Plan" filed by Sarah Schreiber on June 9, 2024; (3) the "Objection of Wilentz, Goldman & Spitzer, P.A. To Confirmation of Debtor's Second Amended Chapter 11 (Subchapter V) Plan of Reorganization, Joinder and Reservation Of Rights" filed by Wilentz, Goldman & Spitzer, P.A. on June 10, 2024; and (4) Steven Schreiber, Eugene Schreiber and Two Rivers Coffee, LLC's "Objection To Nelkin & Nelkin, P.C.'S Subchapter V Plan Of Reorganization" filed by Steven Schreiber, Eugene Schreiber and Two Rivers Coffee, LLC on June 10, 2024. Because the US Trustee's Objection precludes confirmation of the Plan, all other objections are overruled as moot.
ECF No. 223.
ECF No. 213.
ECF No. 217.
ECF No. 222.
1. The US Trustee's Objection
In its Objection, the US Trustee raises four arguments, to wit: (a) Debtor failed to comply with this Court's order regarding solicitation of ballots; (b) the Plan does not provide for appropriate default remedies; (c) Debtor failed to establish feasibility of the Plan; and (d) the Plan fails to provide all of the projected disposable income to make plan payments. The Court will consider each in turn.
ECF No. 223.
a. Whether Debtor failed to comply with this Court's order regarding solicitation of ballots
The US Trustee asserts that Debtor failed to comply with this Court's May 14, 2024, Order that pertained to Debtor's May 13, 2024, plan of reorganization. Nevertheless, Debtor subsequently modified its plan on May 28, 2024, and complied with the solicitation requirements in the Court's May 14, 2024 order. Therefore, the Court finds that the US Trustee's objection is moot.
ECF No. 180.
ECF No. 175.
ECF No. 195.
ECF No. 180, 224, and 229.
Accordingly, the US Trustee's objection as it pertains to whether Debtor failed to comply with this Court's order regarding solicitation of ballots is overruled.
b. Whether the plan fails to provide for appropriate default remedies
The US Trustee submits that Debtor failed to provide for appropriate default remedies, as Article 10.2 of the Plan merely states that Carol Nelkin shall guarantee
the minimum quarterly Plan payments ($31,115) if Debtor does not have sufficient funds to make such payments. The US Trustee further asserts that the promise that Carol Nelkin will guaranty the quarterly Plan payments does not satisfy the requirements of 11 U.S.C. § 1191(c)(3)(B) because the Plan does not provide a remedy to protect the interests of creditors if the Debtor and Carol Nelkin fail to make plan payments. Notably, the US Trustee's reference to Article 10.2 of the Plan refers only to Debtor's commitment to prosecuting all chapter 5 causes of action and there is no reference to the language that the US Trustee complains of. Nevertheless, the language that the US Trustee complains of can be found in'Article 10.4 of the Plan, which provides that the "minimum quarterly Plan Payments shall be guaranteed by Ms. Carol Nelkin, meaning that if sufficient funds are not available for a particular quarterly Plan payment, Ms. Nelkin agrees that she will be responsible for funding any shortfall for that particular payment."
ECF No. 223 at 5, ¶20.
Id. at 5-6, ¶20.
ECF No. 195.
When seeking confirmation under § 1191(b) ("Cramdown"), a court shall confirm a plan if it finds that "... the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan." Section 1191(c)(3)(B) requires that "the plan provide appropriate remedies, which may include the liquidation of nonexempt assets, to protect the holders of claims or interests in the event that payments are not made." This is otherwise known as part of the "fair and equitable" standard for Cramdown.
Section 1191(c)(3) states two alternative tests for meeting the fair and equitable standard. The first alternative, § 1191(c)(3)(A), requires a finding that the debtor "will" be able to make all payments under the plan. That said, a debtor may obtain Cramdown confirmation of a plan that does not include "appropriate remedies" upon default, but doing so subjects the debtor's plan and financial projections to the more stringent feasibility requirement of proving an absolute certainty of payments. The second alternative, § 1191(c)(3)(B), requires only a "reasonable likelihood" that the debtor will be able to make plan payments and that the plan provide "appropriate remedies, which may include the liquidation of nonexempt assets, to protect the holders of claims or interests in the event that the payments are not made."
11 U.S.C. § 1191(c)(3)(A) (emphasis added).
11 U.S.C. § 1191(c)(3)(B)(i) (emphasis added).
Here, other than Carol Nelkin's unsupported testimony that she would be able to make up any financial shortfalls of Debtor, no other evidence was provided to support an argument under § 1191(c)(3)(B). Indeed, Carol Nelkin testified that no guarantee agreement has been provided to Debtor or the creditors. Although Carol
ECF No. 275 at 104.
Id.
Nelkin testified that "I have funds that I intend to use if there is a shortfall," she offers no financial documentation to support this. Carol Nelkin's unsupported oral testimony alone is not sufficient evidence to show that she is capable of guaranteeing the Plan payments. Debtor's only other option is to comply with § 1191(c)(3)(A), which the Court will discuss next.
Id. at 105.
See In re Save Our Springs (S.O.S.) All., Inc., 632 F.3d 168, 173 (5th Cir. 2011) (finding in a chapter 11 case that existence of oral pledges of donations from non-debtor third-parties was not sufficient evidence to show "reasonable assurance" of plan success where the debtor "presented no evidence that the donors would be or were capable of honoring the pledges, and absent any such evidence, these voluntary pledges alone are too speculative to provide evidence of feasibility"); In re Nesbit, No. BAP EP 07-068, 2008 WL 8664762, at *5 (B.A.P. 1st Cir. June 17, 2008) (noting that in Chapter 13 cases, many courts have held that "unsubstantiated expectations of financial contributions from third parties are insufficient to meet the feasibility requirement").
Thus, the US Trustee's objection as to the failure to provide for appropriate default remedies is sustained.
c. Whether Debtor failed to establish feasibility of the plan
The Plan provides for five classes of claims (the "Claims"), classified in the Plan as the following: (1) "Priority Claims"; (2) "Secured Claims"; (3) "Non-Priority Unsecured Claims"; (4) "Non-Priority Unsecured Insider, Related Party Claims"; and (5) "Equity Security Holders." The Plan Provides that Debtor will make minimum quarterly Plan payments of $31,115 over 36 months, which is projected to satisfy all Non-Priority Unsecured Claims in full. The Plan provides that the funding for the Plan payments will come from several sources. First, Debtor will continue to operate as a law firm to raise revenue during its reorganization, and projects to generate yearly revenue of $350,000 in the first year, $600,000 in the second year, and $750,000 in the third year (the "Projected Revenue"). Second, the Debtor will prosecute all claims and causes of action, mainly the collection of the disputed fees in the Fee Forfeiture Case. Finally, the Plan contemplates that Carol Nelkin will guarantee the minimum Plan payments in full if the Debtor is not able to make the minimum payments.
ECF No. 195 at 8.
Id. at 13.
Id. at 7, 17.
Id. at 8.
Id. at 7.
The US Trustee asserts that although Debtor's Plan proposes a term of 36 months to pay its Non-Priority Unsecured Claims in full, the evidence, as demonstrated in the Statement of Financial Affairs ("SOFA") and the Monthly Operating Reports ("MORs"), does not support Debtor's Projected Revenue. Section 1191(c)(3), often referred to as the feasibility test, requires that "[t]he debtor will be able to make all payments under the plan... or ... there is a reasonable likelihood that the debtor will be able to make all payments under the plan." This requirement "fortifies the more relaxed feasibility test that § 1129(a)(11) contains." Section 1129(a)(11) requires only that confirmation
ECF No. 223 at 3.
In re Pearl Res. LLC, 622 B.R. 236, 269 (Bankr. S.D. Tex. 2020).
is not likely to be followed by liquidation or the need for further reorganization unless the plan proposes it. The feasibility requirement for confirmation under § 1191(c)(3) requires a showing that the debtor can "realistically carry out its plan." "Though a guarantee of success is not required, the court should be satisfied that the reorganized debtor can stand on its own two feet." Additionally, a plan proponent must demonstrate the feasibility of a proposed Chapter 11 plan by a preponderance of the evidence. "To confirm a plan, the bankruptcy court must make a specific finding that the plan as proposed is feasible." "When assessing feasibility, courts consider factors such as the adequacy of the debtor's capital structure, the earning power of the business, economic conditions, the ability of management, the probability of the continuation of the same management, and any other related matter."
In re Pearl Res. LLC, 622 B.R. at 269 (Bankr. S.D. Tex. 2020).
Id.
Id. at 263.
In re Samurai Martial Sports, Inc., 644 B.R. 667, 695 (Bankr. S.D. Tex, 2022).
In re Northbelt, LLC, 630 B.R. 228, 279 (Bankr. S.D. Tex. 2020).
Because Debtor's Plan does not provide adequate default remedies, the Plan must meet the more stringent feasibility test of § 1191(c)(3)(A). "One way to assess the reliability and soundness of a debtor's projections for feasibility is to use the debtor's past performance as proof of its ability to meet its obligations under the proposed plan." In the two and a half years preceding bankruptcy, the Debtor earned significantly less than the Plan's Projected Revenue. According to the SOFA and MORs, Debtor had an approximate gross revenue of $0.00 for the year 2021, $23,450.00 for year 2022, and $117,247.00 for the year 2023. The Debtor reports cash receipts in the MORs for the first seven months of 2024 totaling approximately $421,000. Although this significant improvement in revenue is evidence of plan feasibility, Debtor offers little evidence to support that this improvement will continue to the level speculated in the Plan projections asides from Carol and Jay Nelkin's testimony. "Speculative, conjectural or unrealistic projections by Debtor cannot support Debtor's predictions of future performance."
In re Northbelt, 630 B.R. at 281.
Compare ECF No. 24 at 22; ECF No. 27, 37, 63, 84, 106, 132, 147, 148, 155, and 191 with ECF No. 195 at 17.
ECF No. 24 at 22; ECF No. 27, 37, 63, 84, 106, 132, 147, 148, 155, and 191.
ECF No. 132, 147, 148, 155, 191, 258, 270, and 283.
In re Landing Assocs., Ltd., 157 B.R. 791, 819 (Bankr. W.D. Tex. 1993) (finding feasibility under 1129(a)(11) when "monthly operating reports reflect[ed] a strong, consistent growth in net operating income over the pendency of th[e] chapter 11 case").
In re Canal Place Ltd. P'ship, 921 F.2d 569, 579 (5th Cir. 1991).
Carol and Jay Nelkin both testified that Debtor has work pending and will have more work in the next two years that will yield well more than the Projected Revenue. Jay Nelkin described specific cases that Debtor is currently completing work
ECF No. 275, at 19, 164, and 192-97.
on; however, insufficient documentation or records were provided to support the existence of those cases or the extent of revenue the Debtor has or will receive from those cases. Although, the Debtor provided bank statements for their IOLTA account showing deposits for retainers not yet earned, the balance in its IOLTA account and its operating account is not sufficient to pay the Claims in full.
Id. at 192-97.
See, e.g., ECF No. 283 at 5, 16-19.
ECF No. 283 at 10-14.
Besides its Projected Revenue, Debtor's other source of Plan funding will be from potential recovery of the disputed fees in the Fee Forfeiture Case. The Plan proposes that Debtor will "prosecute all claims and causes of action, including collection of their fee from the Schreibers and Two Rivers Coffee," and that "any collection of the Schreiber/Two Rivers Coffee fee shall be allocated 100% to payment of the nonpriority, unsecured claims." This Court finds that such speculative recovery from pending litigation cannot satisfy the feasibility requirement, especially here where the Debtor must show an absolute certainty of payments under § 1191(c)(3)(A). Finally, as the Court explained, Carol Nelkin's unsupported guarantee is not sufficient funding for the Plan. The only source of Plan funding the Debtor has provided evidence for is its Projected Revenue. Although Carol and Jay Nelkin's testimony, along with Debtor's recent MORs and bank statements evidencing cash receipts might well be enough to establish feasibility under § 1129(a)(11) or 1191(c)(3)(B)(i), that is not the relevant inquiry here. Section 1191(c)(3)(A) applies here, which requires that Debtor prove that it "will" make all payments under the Plan.
ECF No. 195 at 7.
See In re Am. Capital Equip., LLC, 688 F.3d 145, 156 (3d Cir. 2012); In re FRGR Managing Member LLC, 419 B.R. 576, 583 (Bankr. S.D.N.Y. 2009) ("[P]otential recovery from a lawsuit is insufficient to create a reasonable likelihood of rehabilitation."); In re Slabbed New Media, LLC, 557 B.R. 911, 917-18 (Bankr. S.D. Miss. 2016).
See supra text accompanying notes 80-83.
See In re Pearl Res., 622 B.R. at 269 (giving "great weight" to uncontroverted testimony that debtors would be able to generate sufficient revenue); In re Landing Assocs., Ltd., 157 B.R. 791, 819 (Bankr. W.D. Tex. 1993).
11 U.S.C. § 1191(c)(3)(A) (emphasis added).
Thus, given that the Plan provides for no adequate default remedies, this Court finds that Debtor has not provided sufficient evidence to meet the stringent feasibility test under § 1191(c)(3)(A) and thus sustains the US Trustee's objection.
d. Whether the Plan fails to provide all of the projected disposable income to make plan payments
In its final argument, the US Trustee asserts that the Plan fails to comply with 11 U.S.C § 1191(c)(2), in that Debtor's Plan fails to contribute all of its disposable income over the life of the 36 month Plan and instead contemplates contribution of its net disposable income in the amount of $557,850 at the end of the 36 month Plan. The US Trustee urges that the Court require Debtor to "true-up" its records at the end of each quarter and require Debtor to pay more into the Plan if its actual disposable income exceeds its
ECF No. 223 at 5.
ECF No. 278 at 5.
Section 1191(c) provides rules of construction for the condition that a plan be fair and equitable as follows:
"For purposes of this section, the condition that a plan be fair and equitable with respect to each class of claims or interests includes the following requirements:
(1) With respect to a class of secured claims, the plan meets the requirements of section 1129(b)(2)(A) of this title.
(2) As of the effective date of the plan—
(A) the plan provides that all of the projected disposable income of the debtor to be received in the 3-year period, or such longer period not to exceed 5 years as the court may fix, beginning on the date that the first payment is due under the plan will be applied to make payments under the plan; or
..."
Section 1191(d) of the Bankruptcy Code defines disposable income as follows:
"For purposes of this section, the term "disposable income" means the income that is received by the debtor and that is not reasonably necessary to be expended—
(1) for—
(A) the maintenance or support of the debtor or a dependent of the debtor; or
(B) a domestic support obligation that first becomes payable after the date of the filing of the petition; or
(2) for the payment of expenditures necessary for the continuation, preservation, or operation of the business of the debtor."
To determine whether § 1191(c)(2)(A) requires a true-up, the Court must first look at the plain language of § 1191(c)(2)(A). One of the requirements of the fair and equitable standard of subchapter V Cramdown is that the debtor either contributes all of its "projected disposable income" to make plan payments or that "the value of the property to be distributed under the plan ... is not less than the projected disposable income of the debtor." "In other words, a plan must commit the debtor's projected disposable income or pledge other payments having a present value of at least that amount." Although the Bankruptcy Code does not define "projected," its normal meaning is unambiguous: "Estimated or forecast on the basis of current trends or data." A true-up would require a debtor to contribute its actual disposable income, which can only be determined retroactively. A retroactive analysis is not one that is estimated or forecasted, as the plain meaning of "projected" requires. Thus, the plain language of the Code precludes a requirement
Puerto Rico v. Franklin Cal. Tax-Free Tr., 579 U.S. 115, 125, 136 S.Ct. 1938, 195 L.Ed.2d 298 (2016) ("The plain text of the Bankruptcy Code begins and ends our analysis....").
11 U.S.C. § 1191(c)(2) (emphasis added).
Legal Serv. Bureau, Inc. v. Orange Cty. Bail Bonds, Inc. (In re Orange Cty. Bail Bonds, Inc.), 638 B.R. 137, 146 (B.A.P. 9th Cir. 2022). See also In re Packet Constr., LLC, No. 23-10860, 2024 WL 1926345, at *___-___, 2024 Bankr. LEXIS 1053, at *10-11 (Bkrtcy.W.D.Tex. 2024).
In re Packet Constr., LLC, No. 23-10860, at *___, 2024 Bankr. LEXIS 1053, at *6 (citing Projected, OXFORD DICTIONARIES, https://premium.oxford dictionaries.com/us/definition/american_english/projected).
of a true-up under § 1191(c)(2)(A).
Id. ("To require that actual income be paid into the plan is to read the word 'projected' out of the statute.").
Moreover, the context in which § 1191(c)(2)(A) appears confirms the plain meaning of "projected disposable income." The alternative projected disposable income test under § 1191(c)(2)(B), known as the "value approach" allows a debtor to cram down a plan "as long as the proposed plan payment or payments, whenever they are made, are equal not in amount but in value—that is, as adjusted based on the time value of money—to the projected disposable income over the relevant plan period." The value approach under § 1191(c)(2)(B) could not work if a debtor was required to adjust its disposable income retroactively. The value approach allows a debtor to make a lump sum property distribution to satisfy § 1191(c)(2) as long as the present value of that distribution is equal to the present value of the projected disposable income referenced in § 1191(c)(2)(A). The payment required under § 1191(c)(2)(B) is thus calculated prospectively, but a true-up would require the payment under § 1191(c)(2)(A) to be calculated retroactively. Thus, since the amount required to be paid under § 1191(c)(2)(B) is based on the amount that would be required to be paid under § 1191(c)(2)(A), reading § 1191(c)(2)(A) to require a true-up would create inconsistencies in the Code.
See FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133, 120 S.Ct. 1291, 146 L.Ed.2d 121 (2000) ("It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.").
In re Packet Constr., LLC, No. 23-10860, at *___, 2024 Bankr. LEXIS 1053, at *9 (emphasis in original) (citing 11 U.S.C. § 1191(c)(2)(B)).
Legal Serv. Bureau, Inc. v. Orange Cty. Bail Bonds, Inc. (In re Orange Cty. Bail Bonds, Inc.), 638 B.R. 137, 146 (B.A.P. 9th Cir. 2022); In re Packet Constr., LLC, No. 23-10860, at *___-___, 2024 Bankr. LEXIS 1053, at *10-11.
See In re Packet Constr., LLC, No. 23-10860, at *___-___, 2024 Bankr. LEXIS 1053, at *12-13.
Although § 1191(c)(2) does not require a true-up, it does not preclude a bankruptcy court's ability to order one under certain conditions. Section 1191(c) provides that "the condition that a plan be fair and equitable with respect to each class of claims or interests includes" the projected disposable income requirements. The terms of construction in the Bankruptcy Code provides that "includes" is not limiting. Section 105(a) provides that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title...." Therefore, if necessary or appropriate to ensure that a non-consensual plan is fair and equitable, a bankruptcy court may order additional requirements, other than the ones specifically enumerated under § 1191(c). However, a bankruptcy court's authority under § 105(a) is not unlimited. A court may not use § 105(a) to "create substantive rights that are otherwise unavailable under applicable law." A court may only use its equitable power "to fulfill some specific Code provision," and "when a specific Code section addresses an issue, a court may not employ its equitable powers to achieve a result not contemplated by the Code." Here, the Court need not determine what specific circumstances warrant a true-up because the Plan itself, requires one.
Id. at *17 (finding that an analysis under § 1191(c)(2) does not "rule out the possibility that circumstances could arise under which a court would have the power to impose a true up").
11 U.S.C. § 1191(c) (emphasis added).
See In re Staples, No. 2:22-CV-157-JES, 2023 WL 119431, at *1-4 (M.D. Fla. Jan. 6, 2023) (held on appeal that a bankruptcy court had authority under 28 U.S.C. § 1651(a) and 11 U.S.C. § 105(a) to enter an order requiring a debtor to file post confirmation quarterly reports and that distributions to unsecured creditors be based on actual disposable income as reflected on the quarterly operating reports).
La. PSC v. Mabey (In re Cajun Elec. Power Coop., Inc.), 185 F.3d 446, 452 n.9 (5th Cir. 1999).
Id.
Id.
According to the Debtor's projections, the Debtor will have a net profit of $557,850 after plan payments at the end of the three-year term. Article 10.4 and 10.5 of the Plan calls for quarterly payments of $31,115, and provides that all disposable income, even in excess of $31,115 must be contributed to fund the Plan. Thus, under the provisions of the Plan, Debtor is required to pay more if the actual disposable income exceeds the projections. However, the Plan does not provide for any mechanism to effectuate this self-imposed true-up. The Plan, at Article 10.8, merely dictates that Debtor will be the dispersing agent, and the proposed confirmation order requires that the dispersing agent file certain status reports that outlines payments made by Debtor and what the dispersing agent has distributed. Such reporting does not require Debtor to report actual disposable income so interested parties have no means of ensuring that Debtor is complying with the Plan's requirement to disburse all of Debtor's projected disposable income. As such, without a proper mechanism to effectuate Debtor's self-imposed true-up proposed by the Plan, the Plan itself does not comply with § 1191(c)(2). Therefore, the US Trustee's objection that the Plan fails to provide albeit a "self-imposed" true-up is sustained.
ECF No. 195.
Id.
Id.
ECF No. 240 at 5-6.
Thus, since the Plan lacks feasibility, adequate default remedies, and a proper mechanism to effectuate a self-imposed true-up, the Court need not consider any other objections. Accordingly, Wilentz's Objection and the TRC Parties' Objection are overruled as moot.
ECF No. 217.
ECF No. 222.
IV. CONCLUSION
Accordingly, for the reasons enumerated supra, it is therefore:
ORDERED: that
1. "Sarah Schreiber's Objection To Nelkin & Nelkin, P.C.'s Second Amended Chapter 11 (Subchapter V) Plan" filed by Sarah Schreiber on June 9, 2024 is OVERRULED for lack of standing.
2. "Debtor's Emergency Motion to Strike" filed by Nelkin & Nelkin P.C. on June 12, 2024 is GRANTED in part and DENIED in part as follows:
ECF No. 213.
ECF No. 232.
a. "Debtor's Emergency Motion to Strike" Sara Schreiber's Objection is GRANTED.
i. "Sarah Schreiber's Objection To Nelkin & Nelkin, P.C.'S Second Amended Chapter 11 (Subchapter V) Plan" filed by Sarah Schreiber on June 9, 2024 is hereby STRUCK from the record.
b. "Debtor's Emergency Motion to Strike" Steven Schreiber, Eugene Schreiber, and Two Rivers Coffee, LLC's Objection is DENIED.
3. The "Objection Of The United States Trustee To Debtor's Second Amended Chapter 11 (Subchapter V) Plan" filed by The United States Trustee on June 10, 2024 is SUSTAINED in part and OVERRULED in part as follows:
a. The United States Trustee's objection that Debtor failed to comply with this Court's order regarding solicitation of ballots is OVERRULED.
b. The United States Trustee's objection that the Plan does not provide for appropriate default remedies is SUSTAINED.
c. The United States Trustee's objection that Debtor failed to establish feasibility of the Plan is SUSTAINED.
d. The United States Trustee's objection that the Plan fails to provide albeit a "self-imposed" true-up is SUSTAINED.
4. The "Objection Of Wilentz, Goldman & Spitzer, P.A. To Confirmation of Debtor's Second Amended Chapter 11 (Subchapter V) Plan Of Reorganization, Joinder And Reservation Of Rights" filed by Wilentz, Goldman & Spitzer, P.A. on June 10, 2024 is OVERRULED as MOOT.
5. "Objection To Nelkin & Nelkin, P.C.'S Second Amended Chapter 11 (Subchapter V) Plan" filed by Steven Schreiber, Eugene Schreiber and Two Rivers Coffee, LLC on June 10, 2024 is OVERRULED as MOOT.
6. Debtor's "Second Amended Chapter 11 (Subchapter V) Plan" filed by Nelkin & Nelkin P.C. on May 28, 2024 is NOT CONFIRMED.
ECF No. 213.
ECF No. 223.
ECF No. 217.
ECF No. 222.
ECF No. 195.