Appeals not Accepted for Review.
d Order, granted the defense motion to dismiss, with prejudice, finding (1) that the Legislature
intended for the 2008 amendment to be applied prospectively only and (2) that the changes made to the statute were procedural and not substantive, and, therefore, the Act should not be applied retrospectively.
McHale noted a timely appeal to the Court of Special Appeals. Before consideration of the appeal in the intermediate appellate court, we, on our initiative, issued a writ of certiorari,
411 Md. 598,
984 A.2d 243 (2009), to consider the following question:
With regard to the conclusion that the Legislature intended for the 2008 amendments to have prospective application only, the Circuit Court adopted the reasoning of Judge Harris's opinion in the separate case involving the Commission's Petition for Judicial Review of the variances granted by the Board of Appeals. Judge Silkworth, in the present case, stated that he adopted Judge Harris's opinion, and could dispose of the motion on that ground, but nevertheless wrote further "to examine if, assuming that the Legislature did not intend the Act to be given prospective effect, the changes made by the Act would be deemed procedural or substantive." Hence, Judge Silkworth's "belt-and-suspenders" exposition regarding the procedural versus substantive nature of the statutory amendment.
Did the trial court err in concluding that the provision of the 2008 Amendments to the Critical Area law requiring restoration, mitigation and abatement of Critical Area violations prior to receipt of a critical area variance does not apply to critical area violations in litigation at the time that the amendments took effect?
We answer that question "No" and hold that the trial court did not err.
II. ANALYSIS
A. Standard of Review
When considering on appellate review the grant of a motion to dismiss a complaint for failure to state a claim upon which relief may be granted, a court must assume the truth of, and view in
a light most favorable to the non-moving party, all well-pleaded facts and allegations contained in the complaint, as well as all inferences that may reasonably be drawn from them, and order dismissal only if the allegations and permissible inferences,
if true, would not afford relief to the plaintiff,
i.e., the allegations do not state a cause of action for which relief may be granted.
RRC Northeast, LLC v. BAA Md., Inc., 413 Md. 638, 643, 994 A.2d 430, 433 (2010). "Upon appellate review, the trial court's decision to grant such a motion is analyzed to determine whether the court was legally correct."
Id. at 644,
994 A.2d at 434. We will uphold the dismissal only "`if the alleged facts and permissible inferences, so viewed, would, if proven, nonetheless fail to afford relief to the plaintiff.'"
Sprenger v. Pub. Serv. Comm'n, 400 Md. 1, 21, 926 A.2d 238, 250 (2007) (quoting
Pendleton v. State, 398 Md. 447, 459, 921 A.2d 196, 203 (2007)).
B. Relevant Critical Area Program Statutory Framework
In 1984, the General Assembly enacted the Critical Area Law "[t]o establish a Resource Protection Program for the Chesapeake and the Atlantic Coastal Bays and their tributaries by fostering more sensitive development activity for certain shoreline areas so as to minimize damage to water quality and natural habitats. . . ." § 8-1801(b)(1). The passage of the Critical Area Law was based on the Legislature's recognition that the quality and productivity of the waters of the Chesapeake Bay "have declined due to the cumulative effects of human activity that have caused increased levels of pollutants, nutrients, and toxics in the Bay System and declines in more protective land uses such as forestland and agricultural land in the Bay region. . . ." § 8-1801 (a)(5). The Legislature found also that "[t]he cumulative impact of current development and of each new development activity in the buffer is inimical to [the restoration of the Bays and their tributaries and minimizing further impact to water quality and the shoreline], and it is therefore imperative that State law protect irreplaceable State buffer resources from unpermitted activity. . . ." § 8-1801(a)(9). The "critical area" includes "all land and water areas within 1,000 feet beyond the landward boundaries of State or private wetlands and the heads of tide designated under Title 16 of the Environment Article." § 8-1807(a)(2).
The General Assembly vested the Commission with "all powers necessary for carrying out the purposes" of the Critical Area Law, including the authority to promulgate regulations for the administration and enforcement of the program, including regulations governing the establishment of comprehensive standards and procedures for buffer establishment and the protection and conservation of the buffer. § 8-1806(a)-(b). The "buffer" "means an existing, naturally vegetated area, or an area established in vegetation and managed to protect aquatic, wetlands, shoreline, and terrestrial environments from manmade disturbances." § 8-1802(a)(4). At the time of the operative facts of this case, the "buffer" was, at minimum, a 100-foot area "landward from the mean high water line of tidal waters, tributary streams, and tidal wet-lands." COMAR 27.01.09.01 C(1) (2007). With certain exceptions, "[n]ew development activities, including structures, roads, parking areas, and other impervious surfaces, mining and related facilities, or septic systems may not be permitted in the Buffer. . . ." COMAR 27.01.09.01 C(2). The General Assembly charged the local jurisdictions, however, with the primary responsibility of developing and implementing a critical area program, subject to review and approval by the Commission. § 8-1808(a). The local jurisdiction may grant a variance to the Critical Area criteria when a "literal enforcement of provisions within the jurisdiction's Critical Area program would result in unwarranted hardship to an applicant." COMAR 27.01.11.01 A. The Anne Arundel County Code extends the buffer "to include contiguous sensitive areas, such as slopes of 15% or greater. . . ." Anne Arundel County, Md., Code, § 18-13-104(a) (2005). The contiguous sensitive areas are known as the "expanded buffers." § 18-13-104. All of those provisions were in place before Wagner commenced his extra-legal demolition and construction activities on the Island.
In 2008, the General Assembly increased the minimum buffer area to "200 feet from tidal waters or a tidal wetland." § 8-1808.10(b)(1)(i); 2008 Md. Laws Ch. 119, § 1. The minimum buffer remained at 100 feet for a tributary stream. § 8-1808.10(b)(1)(ii); 2008 Md. Laws ch. 119, § 1. The newly enacted legislation superseded the regulations, which no longer exist.
The local jurisdiction is to make provisions for the granting of variances. At a minimum, the variance provisions must provide for the following:
(1) That findings are made by the local jurisdiction which demonstrate that special conditions or circumstances exist that are peculiar to the land or structure within the jurisdiction's Critical Area program, would result in unwarranted hardship;
(2) That a literal interpretation of this subtitle or the local Critical Area program and related ordinances will deprive the applicant of rights commonly enjoyed by other properties in similar areas within the Critical Area of the local jurisdiction;
(3) That the granting of a variance will not confer upon an applicant any special privilege that would be denied by this subtitle or the local Critical Area program to other lands or structures within the jurisdiction's Critical Area;
(4) That the variance request is not based upon conditions or circumstances which are the result of actions by the applicant, nor does the request arise from any condition conforming, on any neighboring property;
(5) That the granting of a variance will not adversely affect water quality or adversely impact fish, wildlife, or plant habitat within the jurisdiction's Critical Area, and that the granting of the variance will be in harmony with the general spirit and intent of the Critical Area law and the regulations adopted in this subtitle; and
(6) That applications for a variance will be made in writing to the local approving authority with a copy provided to the Commission.
COMAR 27.01.11.01 A(1)-(6).
Critical to the present case, in 2008, the General Assembly adopted House Bill 1253, which amended the Critical Area Law to include a new provision restricting a local jurisdiction from issuing "a permit, approval, variance, or special exception unless the person seeking the permit, approval, variance, or special exception has . . . prepared a restoration or mitigation plan, approved by the local jurisdiction, to abate impacts to water quality or natural resources as a result of the violation" and "[p]erformed the abatement measures in the approved plan in accordance with the local critical area program." § 8-1808(c)(4)(ii)(iii). We shall elaborate on relevant portions of the Session Law of this enactment shortly. C. Retrospective Application of Statutes
Whether the application of a newly enacted statutory provision may be applied in a retrospective manner to given situations has proven tricky business in the appellate reports over the years. The conundrum sometimes presented by this query becomes more complex when the given situation implicates a land use or zoning context. This is so because of a somewhat anachronistic line of cases that carve out a special rule for such contexts. See infra note 14.
Generally, all "statutes are presumed to operate prospectively." Layton v. Howard County Bd. of Appeals, 399 Md. 36, 51, 922 A.2d 576, 585 (2007). See also Wash. Suburban Sanitary Comm'n v. Riverdale Heights Volunteer Fire Co., 308 Md. 556, 560, 520 A.2d 1319, 1321 (1987). This presumption is based on the "fundamental principle of jurisprudence . . . that retroactive application of new laws is usually unfair." Norman J. Singer J.D. Shambie Singer, Sutherland Statutory Construction § 41:2 (7th ed. 2009). "The rationale underlying the general rule provides that retrospective application, which attempts to determine the legal significance of acts that occurred prior to the statute's effective date, increases the potential for interference with persons' substantive rights." Riverdale Heights, 308 Md. at 561, 520 A.2d at 1322.
There is, however "`no absolute prohibition against retroactive application of a statute.'" Grasslands Plantation, Inc. v. Frizz-King Enters., LLC, 410 Md. 191, 218, 978 A.2d 622, 638 (2009) (quoting Langston v. Riffe, 359 Md. 396, 406, 754 A.2d 389, 394 (2000)). "The presumption against retrospectivity is rebutted only where there are clear expressions in the statute to the contrary." Riverdale Heights, 308 Md. at 561, 520 A.2d at 1322. Where it is clear that the Legislature intended the statute to be applied retrospectively, we will construe the law in such a manner. Grasslands, 410 Md. at 218, 978 A.2d at 638. See also Singer, supra, § 41:4 ("[A] law is not construed as retroactive unless the act clearly, by express language or necessary implication, indicates that the legislature intended a retroactive application.").
At least in the context of statutory construction, there is no significant difference between "retrospective" and "retroactive." They "are synonymous in judicial usage and may be employed interchangeably. They describe acts which operate on transactions which have occurred or rights and obligations which existed before passage of the act." Grasslands, 410 Md. at 218, 978 A.2d at 637 (quoting Langston, 359 Md. at 406, 754 A.2d at 394).
If retrospective construction of a statute would interfere, impair, or divest a vested right, a court should construe prospectively the statute. Singer, supra, § 41:6. The converse is that the court may construe a statute as applying retrospectively that affects a non-vested right or mere expectancy, if there is a demonstrated legislative intent to that end. Id. See also Grasslands, 410 Md. at 220, 978 A.2d at 638 ("Another exception [to the presumption against retroactive application of statutes] is for remedial enactments that do not impair vested rights."); Janda v. Gen. Motors Corp., 237 Md. 161, 169, 205 A.2d 228, 232 (1964) ("A statute, even if the Legislature so intended, will not be applied retrospectively to divest or adversely affect vested rights. . . .").
The distinction between vested rights and mere expectancies is perhaps the principal reason this Court identified and continues to recognize an exception in the context of land use and zoning cases to the general presumption in favor of prospective applications of statutes. In Yorkdale Corp. v. Powell, 237 Md. 121, 126, 205 A.2d 269, 272 (1964), we stated that "an applicant for rezoning to a more intense use of his property, who has been successful before the zoning authorities and the circuit court does not acquire a vested or substantive right which may not be wiped out by legislation which takes effect during the pendency in this Court of the appeal from the actions below." We held that, in the context of a zoning or land use matter, we will apply a substantive change to a statute during the course of litigation. Id. at 126-27, 205 A.2d at 272.
" Yorkdale, as an exception to the general rule, provides for the retrospective application of changes to statutes that impact land use issues made during the course of litigation in land use and zoning cases." Layton, 399 Md. at 51, 922 A.2d at 585. In Yorkdale, the Baltimore County Zoning Commissioner granted a residential density variance to a landowner. A neighbor appealed to the Circuit Court for Baltimore County, which reversed the Zoning Commissioner's decision. Yorkdale obtained review by this Court. After oral argument, but before we rendered a decision, the Baltimore County Council passed a bill which provided that "`no increase in residential density . . . shall be permitted as a result of any grant of a variance from height or area regulations.'" 237 Md. at 124, 205 A.2d at 270-71. Upon being apprised of this fact, we set the case for re-argument on whether the change in the law mooted the case. Id. at 124, 205 A.2d at 271. In deciding that question, we stated first that "Maryland has consistently followed the rule that `an appellate court is bound to decide a case according to existing laws, even though a judgment rightful when rendered by the court below should be reversed as a consequence.'" Id. (quoting Woman's Club v. State Tax Comm'n, 195 Md. 16, 19, 72 A.2d 742, 743 (1950)). An appellate court will apply a change in the law "after a decision below . . . unless vested or accrued substantive rights would be disturbed or unless the legislature shows a contrary intent." Id. We distinguished, however, a substantive change in the law versus a procedural one, for purposes of this application. Where the change in the law during the pendency of the zoning or land use litigation works only a procedural change to the law, we will not construe that law as applying retrospectively to the case before the Court. Id. at 126-27, 205 A.2d at 272. Finding no contrary legislative intent in Yorkdale, and thus the case to be moot, we dismissed the appeal. Id. at 133, 205 A.2d at 276. In reaching that conclusion, we relied upon several cases where we held that a material zoning change that occurred during pending litigation of a petition for a zoning reclassification superseded any decision made before the legislative body made the change. See Grau v. Bd. of Zoning Appeals, 210 Md. 19, 23, 122 A.2d 824, 826 (1956); Lake Falls Ass'n v. Bd. of Zoning Appeals, 209 Md. 561, 565-66, 121 A.2d 809, 811 (1956); Banner v. Home Sales Co. D., 201 Md. 425, 94 A.2d 264 (1953).
Apparently, Banner was not reported in the Atlantic Reports.
We re-affirmed the principles of Yorkdale in Layton. Layton operated an exotic wildlife refuge and sanctuary in Howard County for six years before the County issued a notice to Layton that she was in violation of a zoning regulation by operating a charitable and philanthropic institution without an approved special exception. Layton filed a petition for a special exception to operate the existing wildlife rehabilitation center and primate sanctuary. The Board of Appeals granted in part and denied in part the petition. Specifically, the Board granted a special exception to operate as a charitable and philanthropic institution, including the permitting of an animal rehabilitation center on the property, but denied an exception to operate a primate or other exotic wildlife sanctuary. Layton appealed to the Circuit Court for Howard County. Prior to even a hearing before the Circuit Court, Howard County amended the County Code to allow an exotic or wild animal sanctuary as a permitted use. Thus, under the new law, as amended, Layton's sanctuary may have been allowed. The Circuit Court, however, declined to apply the new law retrospectively to Layton's petition. Layton appealed to this Court and we held that the Yorkdale rule applied because the change to the Howard County zoning law was a substantive change. Id. at 70, 922 A.2d at 596.
We re-affirmed Yorkdale expressly and highlighted that in Yorkdale, after Howard County changed the ordinance, we set that case for re-argument:
It is clear that the Court realized the importance of what it was doing. The Court had already heard the case, then directed that it be reargued based upon the possible retrospective applicability of a change in law. The
Yorkdale rule was not an unintended holding related to some larger issue.
It was specifically considered by the Court and it was the major holding of the case. It is a holding that has stood the test of time.
399 Md. at 54 n. 15,
922 A.2d at 586 n. 15.
We noted that, following Yorkdale, "we have reaffirmed those principles in relation to land use and zoning cases several times." Id. at 56, 922 A.2d at 587 (citing Anne Arundel County v. Maragousis, 268 Md. 131, 299 A.2d 797 (1973); Dal Maso v. Bd. of County Comm'rs, 264 Md. 691, 288 A.2d 119 (1972); Springloch Area Citizens Group v. Montgomery County Bd. of Appeals, 252 Md. 717, 251 A.2d 357 (1969); Marathon Builders, Inc. v. Montgomery County Planning Bd., 246 Md. 187, 227 A.2d 755 (1967); Mandel v. Board of County Comm'rs, 238 Md. 208, 208 A.2d 710 (1965)). We stated:
Yorkdale and its progeny have never been overruled. They are still good law and are determinative in evaluating whether, in a land use or zoning case, a change in statutory law taking place during the course of a litigated issue should have retrospective application. As discussed
supra, we shall consider zoning cases based upon the law as it exists at the time the case is before us.
399 Md. at 58, 922 A.2d at 589 (footnote omitted). Although the Court included a quotation from the Court of Special Appeals's decision in
Layton indicating that the intermediate appellate did not find any legislative intent expressed in the statute, it does not appear from the decision whether the amendment expressed any intent with regard to prospective versus retrospective application.
Id. at 46,
922 A.2d at 582 (quoting
Layton v. Howard County Bd. of Appeals, 171 Md. App. 137, 172-73, 908 A.2d 724, 744 (2006)). We held that the amendments applied retrospectively to
Layton's situation.
Id. at 70,
922 A.2d at 596. We remanded the case to the Board of Appeals with directions that it shall apply the law as it existed at the time of our decision.
Id.
Although continuing to honor the Yorkdale doctrine here, we are not unmindful of Judge Wilner's thoughtful dissenting opinion in Layton. Although acknowledging that the majority opinion was based on well established precedent, he expressed his disagreement with the special treatment the Court gives to zoning and land use cases with regard to analysis of prospective versus retrospective application of changes in law occurring during pending litigation. He opined that, subject only to constitutional restrictions, the Court defers typically to the Legislature's determination, expressed in the statute, whether a law should be applied retrospectively. The problem arises when there is no apparent intent discernable on this score. In that instance, Judge Wilner noted that generally we take the opposite approach from that we take in land use and zoning cases.
In those situations, we have generally applied the principle that, if the change is one of procedure only, we will apply the new law even if doing so would produce a different result than not doing so. If the change affects substance, however, we will not apply the new law, at least if doing so would produce a different result. In that circumstance, we do not permit the rules to be changed mid-stream.
399 Md. at 72, 922 A.2d at 597. Judge Wilner, acknowledging that although those distinctions may have merit, questioned why we treat zoning and land use cases differently:
When we start carving out categorical exceptions to them, however, both their rationality and their jurisprudential basis are eroded. Why just zoning or land use cases? What is so special about them? They involve property, but only real property. Is real property somehow more, or less, sacred than other kinds of property, including contractual rights?
Id. He failed to see "any legitimate reason for drawing a distinction between zoning cases and other kinds of cases." Id.
We revisited the Yorkdale rule most recently in Grasslands, a case involving a challenge to a subdivision application by an adjacent property owner. In that case, the County passed ordinances during the pendency of a subdivision application appeal in a circuit court and the Court of Special Appeals. The new ordinances required the local Planning Commission, when considering whether to approve a proposed subdivision or site plan, to determine (1) whether the proposed development conforms to the visions, objective, and policies of the County's Comprehensive Plan Conformity Ordinance ("Conformity Ordinance") and (2) whether the plan provides for public safety through compliance with the State Fire Code and with any applicable County or municipal fire codes ("Emergency Service Ordinance"). The new ordinances did not contain clear expressions of legislative intent regarding prospective versus retrospective application. 410 Md. at 218, 978 A.2d at 638. The issue by which the case was disposed of, however, was whether the Board of Appeals applied correctly the burden of proof in the administrative proceeding. We held that the Board erred in imposing the burden on the landowner-protestant. Id. at 194, 978 A.2d at 623.
As to whether the new ordinances should be applied on remand, we reaffirmed in considered dicta the principle enunciated in Yorkdade and Layton that there is a "general presumption in favor of retroactivity in zoning and land use cases." Id. at 220, 978 A.2d at 639 (emphasis in original). We expressed our disapproval, however, of "imprecise" language in Luxmanor Citizens Ass'n, Inc. v. Burkart, 266 Md. 631, 644-45, 296 A.2d 403, 410 (1972), where we expressed the following reasoning: "This Court has decided that a legislative change in the law in regard to procedure, rather than in regard to substance, will be applied to matters and proceedings taking place after the effective date of the change in the law." We concluded in Grasslands, however, that that language was "imprecise" and "problematic." 410 Md. at 223, 224, 978 A.2d at 640, 641. We opined that " Luxmanor's imprecision lay in articulating the rule about legislative changes in procedural laws as if there were a wholesale distinction between modification of a procedural land use law and modification of a substantive land use law." Id. at 224, 978 A.2d at 641. We, thus, could "fathom no sensible reason for drawing a wholesale distinction between new procedural zoning/land use legislation and new substantive zoning/land use legislation, and applying to the former more restrictively than other procedural legislation, when we still apply the latter less restrictively than other substantive legislation." Id. at 226, 978 A.2d at 642. Rather, "[w]e believe the analysis is slightly more complex, i.e., if the new law is procedural, the decision about retroactivity will turn on what aspect of the administrative/adjudication process is changed, at what point in the administrative/adjudication process the change is made, and the question presented to the reviewing court." Id. at 227-28, 978 A.2d at 643 (footnote omitted).
Luxmanor held that an amendment to a county zoning ordinance requiring an affirmative vote of four member of the Board of Appeals, rather than a majority as the ordinance required formerly, did not render invalid the Board's decision to grant a special exception to construct and operate a medical clinic. 266 Md. 631, 646, 296 A.2d 403, 411. We based the holding largely on appellants' failure to raise the impact of the amendment in the trial court. Id. at 644, 296 A.2d at 410.
We concluded in Grasslands that the Emergency Services Ordinance was substantive, and, thus, should be applied at the new hearing "because it is the law in effect at the time of the hearing, and does not impair vested rights." Id. at 228, 978 A.2d at 644. With regard to the Conformity Ordinance, we determined that provision shall also apply, even if it was procedural, "because the Commission's or Board's process of making its decision will begin anew for an independent reason," i.e., the remand resulting from the improper allocation of the burden of proof in the original administrative hearing. Id. at 229, 978 A.2d at 644 (emphasis in original). Thus, we did not remand the matter simply because the law changed in the intervening time between the administrative hearing and the appeals. "[B]ecause we remand to the Board for a new hearing due to the burden of proof issue, we look forward — to decide what should occur in the future, as the proceedings recommence." Id. at 228, 978 A.2d at 643-44. Therefore, when the Board undertook new hearings with the proper allocation of the burden of proof, the Board was to apply the new procedural requirements. We did not, however, contrary to the Commission's theory in the present case, reject completely the distinction between procedural and substantive changes to zoning law. "[W]e should not duplicate expenditure of the parties' and administrative agency's resources for a new hearing simply to apply a new rule, that is arguably procedural, when the hearing was done correctly in the first place." Id. at 228, 978 A.2d at 644.
In Arundel Corp. v. County Commissioners, 323 Md. 504, 594 A.2d 95 (1991), we considered whether a newly enacted ordinance applied to a pending application for a conditional use of land. In that case, before the Board of Zoning Appeals held a hearing on Arundel's application, the County Commissioners enacted a new ordinance providing that an application for the designation sought by Arundel required special information which was to accompany an application for a conditional use for extracting gravel. The prior ordinance contained general regulations, but no specific requirements. The Board attempted to return the non-compliant applications to Arundel's counsel, but counsel refused to accept the return. Because Arundel Corp.'s application did not comply with the new ordinance, the Board did not hold a hearing on the application, determining that it lacked jurisdiction to process the applications.
Arundel appealed to the Circuit Court, which found that the new ordinance contained substantive changes to the law. Finding the Board's dismissal of the application to be "unfair," the trial court remanded the matter to the Board with instructions that it consider the application in accordance with the provisions in place at the time Arundel filed its applications.
The Court, without discussing Yorkdale or any cases following York-dale, held that the Board dismissed improperly the application and we remanded the matter to the Board. 323 Md. at 510, 594 A.2d at 98. The merits of whether the Board could apply the new ordinance on remand were not reached. Id. Thus, Arundel Corp. treated the matter before it as if it were a generic appeal from an administrative decision instead of, as it should have, as the review of a land use or zoning case. There was no discussion of whether the amendment effected a procedural or substantive change.
In Armstrong v. Mayor and City Council, 409 Md. 648, 976 A.2d 349 (2009), the Baltimore City Council made substantive amendments to the City zoning map while litigation related to a permit to construct a parking lot was ongoing. The amendment did not express the City Council's intent with regard to retrospective versus prospective application, but stated only an effective date. We held that the change applied retrospectively and rendered the pending permit matter moot because the change rendered the parking lot use as allowed. Id. at 674, 976 A.2d at 365.
We re-affirmed again the Yorkdale doctrine in Scrimgeour v. Fox Harbor, LLC, 410 Md. 230, 978 A.2d 645 (2009). Scrimgeour challenged the issuance of a building permit to one of his neighbors to build a structure. The County Board of Appeals and the Circuit Court for Talbot County affirmed the decision to issue the permit. Scrimgeour noted an appeal to the Court of Special Appeals. We granted certiorari prior to consideration by that court. After certiorari was granted, but before oral argument, the Talbot County Council repealed the County's Zoning Code in its entirety and enacted new land use provisions, which worked substantive changes to the provisions relevant to the landowner's permit. The new zoning code included only the effective date; it does not appear from the opinion that the Talbot County Council expressed any other intent regarding the retrospective application of the new code. We asked the parties to submit supplemental briefs concerning the applicability of the code changes. We re-affirmed the Yorkdale doctrine and remanded the matter to the Board of Appeals so that it could "consider[] and determine] . . . the effect of the new code on the dispute." Id. at 234, 978 A.2d at 647.
In the present case, as noted supra, the Circuit Court concluded that the enactment of § 8-1808(c)(4) should not be applied retrospectively because it (1) effects a procedural change to the Critical Area Law, as opposed to a substantive change, and (2) the Legislature intended for the law to apply prospectively. The Commission argues that the 2008 amendments apply to DCW's development activities on the Island, notwithstanding the fact that the revisions became effective approximately three and one-half years after DCW filed its application for variances, the object of which applications was to cure the violations of the Critical Area Law that also pre-dated the 2008 amendments. Citing Yorkdale, the Commission asserts that the Circuit Court should have applied retrospectively the amendments because they affected a substantive change in that they established new duties and obligations that both property owners and local jurisdictions must satisfy before a property owner may obtain a variance.
DCW argues that the Yorkdale doctrine does not apply because the amendments represent procedural, rather than substantive, changes, i.e., the amendments do not change the standards by which the Board would approve or disapprove a variance. Furthermore, DCW argues that the Yorkdale doctrine is inapplicable to the present case because it does not involve a classical "land use" issue, although conceding that the Critical Area Law on which this case hinges may be classified as a "land use" regulation. Rather, DCW argues that this is simply an enforcement action meant to punish DCW.
We shall address first the applicability of Yorkdale and its progeny to the context of a Critical Area Law variance application. Is it a zoning or land use case? Although this Court, before today, has not applied the Yorkdale doctrine in connection with a Critical Area Law matter, the Court of Special Appeals has done so in Becker v. Anne Arundel County, 174 Md.App. 114, 920 A.2d 1118 (2007) and Wharf at Handy's Point, Inc. v. Department of Natural Resources, 92 Md.App. 659, 610 A.2d 314 (1992).
Becker, similarly to the present case, involved an application for a variance from a local Critical Area Law and program requirement. The landowners filed an application for a variance, which the Board of Appeals denied. The Circuit Court affirmed the Board's decision. While the case was pending before the Board of Appeals, the General Assembly amended the requirements for obtaining a variance. The Court of Special Appeals, although not citing or discussing Yorkdale, acknowledged that "absent an express statement to the contrary by an enacting legislative body, changes to both State and County land use laws, affecting the status of property, apply to matters that are pending and not yet decided by the agency responsible for de novo decision making." 174 Md. App. at 134, 920 A.2d at 1130. The court held that because there was neither contrary legislative intent nor had the property owner obtained vested rights, the changes to the county ordinances applied to the pending variance application. Id. at 135, 920 A.2d at 1131.
Wharf at Handy's Point involved an amendment to a Kent County zoning ordinance which provided for direct appeal to the Circuit Court from orders of the county Planning Commission. At the time of the administrative hearing, the zoning ordinance provided that the County Board of Appeals shall hear appeals of a local administrative decision. 92 Md.App. at 660-61, 610 A.2d at 314. The Critical Area Commission, prior to the effective date of the relevant change in the law, appealed directly to the Circuit Court from the decision of the Planning Commission. The Circuit Court held that the Commission possessed a right of direct appeal to the Circuit Court. The wharf owner moved to dismiss the appeal on the ground that the Commission did not have statutory authority to appeal directly to the Circuit Court. The Circuit Court denied the motion and reversed the Planning Commission's grant of final site plan approval.
In the Court of Special Appeals, the wharf owner sought to dismiss the Commission's appeal on the ground that the Commission did not exhaust its administrative remedies because it failed to appeal to the Board of Appeals. The parties agreed that the amendment to the ordinance was procedural and, accordingly, the court held that the Yorkdale doctrine did not apply. Id. at 674, 675 n. 8, 610 A.2d at 321, 321 n. 8. Thus, the amended ordinance did not apply retrospectively to give the Commission the right to appeal directly to the Circuit Court. Id. at 676, 610 A.2d at 322. We find Becker and Wharf at Handy's Point persuasive and see no reason why Yorkdale and its progeny should not be in play in the context of a case involving the application of the Critical Area Law and regulations to a piecemeal variance application seeking relief from its requirements. The Commission brought this suit to prevent the issuance to DCW of variances, a classic land use and zoning application, from the Critical Area Law.
Our review of Yorkdale and its progeny indicates that, in land use and zoning cases, the general presumption is that, in the absence of contrary legislative intent, a substantive change to the law occurring during the pendency of land use litigation and before any substantive rights vest, is to be applied to the pending litigation matter, i.e., understood therefore to be applied retrospectively to some extent. Yorkdale, however, recognized the primacy of the Legislature's intent when determining whether a change to the law applies prospectively or retrospectively. See Yorkdale, 237 Md. at 124, 205 A.2d at 271 ("[A] change in the law after a decision below and before final decision by the appellate Court will be applied by that Court unless vested or accrued substantive rights would be disturbed or unless the legislature shows a contrary intent") (emphasis added) (citations omitted). The Yorkdale doctrine thus is actually the default rule that we apply where there is no clear legislative intent directing retrospective application. The doctrine does not engage where there is clear legislative intent that the law shall be applied prospectively only.
Thus, we apply the traditional rules of statutory construction when there is indication that the Legislature intended for the land use or zoning statute to have prospective application only. Our primary duty when interpreting the language of a statute is to effectuate and ascertain the intent of the Legislature. Rosemann v. Salsbury Clements, 412 Md. 308, 314, 987 A.2d 48, 52 (2010). We do this by construing "`the plain language of the statute, and ordinary, popular understanding of the English language.'" Id. at 314-15, 987 A.2d at 52 (quoting United States v. Ambrose, 403 Md. 425, 438, 942 A.2d 755, 763 (2008)). "If the language of the statute is clear and unambiguous, we need look no further than the language of the statute to ascertain the Legislature's intent." Id. at 315, 987 A.2d at 52. Conversely, where the language of the statute is ambiguous, "we usually look beyond the statutory language to the statute's legislative history, prior case law, the statutory purpose, and the statutory structure as aids in ascertaining the Legislature's intent." Id.
We consider, as the Circuit Court did, the uncodified language in Section 5 of House Bill 1253, as enacted in Ch. 119 of the 2008 Laws of Maryland, to shed light on the legislative intent. Section 5 provides:
That for the purpose of a criminal prosecution under § 8-1815(a)(2)(ii) of the Natural Resources Article, as enacted under Section 1 of this Act, this Act shall be construed prospectively to apply only to a Critical Area violation alleged to have arisen out of an act or omission that originated on or after July 1, 2008,
and this Act may not be applied or interpreted to have any effect on or application
to an alleged critical area violation that originated before the effective date of this Act.
2008 Md. Laws Ch. 119, § 5 (emphasis added). DCW claims that Chapter 119 expresses that the Legislature intended for the amended § 8-1808(c)(4) to be applied prospectively only. The Commission argues that the first clause implicating criminal prosecutions in § 5 indicates that the Legislature intended for the rest of that section to apply only to criminal prosecutions, and not to an enforcement action. We conclude this section to be unambiguous, albeit somewhat oddly worded. Section 5 contains two clauses. The first, as noted supra, involves criminal prosecutions under § 8-1815(a)(2)(ii) of the Natural Resources Article and provides for a three-year statute of limitation for a criminal prosecution for a Critical Area violation. Thus, the first clause of Section 5 provides that, with regard to a criminal prosecution for a Critical Area violation, the three-year statute of limitation shall only apply prospectively to acts or omissions that originated on or after 1 July 2008, the effective date of the Act.
The second clause of § 5 provides: "and this Act may not be applied or interpreted to have any effect on or application to an alleged critical area violation that originated before the effective date of this Act." 1 July 2008 was the effective date. 2008 Md. Laws Ch. 119, § 10. We read the second clause as declarative of a different, but related, intent from the first. The Legislature's use of the conjunctive ("and") to introduce the second part of the section indicates that it did not intend for the prospective nature of the statute to be limited only to criminal prosecutions. Acceptance of the Commission's argument would render meaningless and nugatory the second clause of the section. "We construe the [language of a statute] so as to give effect to each word so that no word, clause, sentence or phrase is rendered superfluous or nugatory." Foley v. K. Hovnanian at Kent Island, LLC, 410 Md. 128, 152, 978 A.2d 222, 237 (2009). Upon a careful reading of the section, and applying the plain meaning rule of statutory interpretation, we agree with DCW that the Legislature intended for the 2008 amendments to be applied prospectively to situations where an underlying violation of the Critical Area Law pre-dated the amendment. Unlike Scrimgeour, Grasslands, Armstrong, Layton, Yorkdale, and Becker, where apparently there was no demonstrative legislative intent that the amendment or new law shall be applied prospectively only, here, there is legislative intent to that effect. Not only did the Legislature include an effective date for the statute, but it also expressed that the Act is to have no effect on Critical Area Law violations originating before that date. Clearly, Wagner's and DCW's misconduct pre-dated the effective date of the amendment. The outcome of the attempt to cure that misconduct through the variance application will be decided in the litigation pending in the Court of Special Appeals. We hold that the requirement in § 8-1808(c)(4), as amended, to prepare and perform an approved restoration or mitigation plan, is to be applied prospectively only to variance applications seeking to cure violations occurring before the effective date of the amendment. Because we conclude that the Legislature intended for the amendments to apply prospectively only, we need not address whether the amendments constituted procedural or substantive changes or, if procedural, how the Grasslands analysis might apply. Accordingly, we hold that the Circuit Court did not err in granting DCW's motion to dismiss.
DCW argues that a retrospective application of the 2008 amendments is unconstitutional as it is prohibited by the Ex Post Facto Clause and represents an unconstitutional bill of attainder. Because we hold that the Legislature intended for the 2008 Amendments to apply prospectively only, we shall not address DCW's constitutional arguments.
JUDGMENT OF THE CIRCUIT COURT FOR ANNE ARUNDEL COUNTY AFFIRMED. COSTS TO BE PAID BY APPELLANT.
uptcy, checks paying for work done by Debtor on contracts entered into by Assaigai were made payable to Assaigai. This was contemplated by the Agreement. The parties had intended to
account to each other on a regular basis but that never really happened. Consequently, as time passed, Debtor lost track of its accounting. In fact, late in 2009, Elvin Chavez asked Assagai's president William P. Biava
to show him how to operate the accounting system.
Three Biavas own Assaigai and YOME: William P. Biava, the CEO of Assaigai; his brother John A. Biava; and John's son John W. Biava, who is essentially the information technology manager for Assaigai. William Biava and John W. Biava testified at trial.
The operating reports on file show that Debtor is not profitable. Exhibit A, attached hereto, is a compilation of the Debtor's monthly operating reports ("MOR") for February, 2008 to May, 2008 (Exh. 6-8 and 22) rounded to the nearest $100.
The top portion of Exhibit A is a monthly income statement with the rightmost column a cumulative income statement for the Chapter 11. The Court has adjusted the figures reported on the MOR to reflect the testimony that Debtor has not been accruing rent or common area space. No months were profitable. The cumulative loss for the Chapter 11 period is $(319,500). The Exhibit shows that direct costs were 73% of revenues. General and administrative costs were 55% of revenues.
The middle portion of Exhibit A shows the accounts receivable at the end of each month. They dropped every month. During the Chapter 11 they dropped a total of $107,600.
Accounts payable increased every month. This means that Debtor was incurring more expenses every month than it paid. The bottom portion of Exhibit A shows the amount that the accounts payable increased every month. The opening figure for January 31, 2010 accounts payable ($691,400) appears on Exh. 9, the Initial Report. Again, because Debtor was not accruing rent or common area charges of $23,000 per month, this amount was added. Exhibit A shows that payables increased $333,700 during the Chapter 11.
In summary, Exhibit A shows a substantial and continuing loss to and diminution of the estate. The Debtor is losing money and funding the losses by living off the accounts receivable and incurring debts beyond its ability to pay on a monthly basis. Debtor did not offer an accountant or other expert to contradict these findings.
Debtor presented an outline of a plan in an attempt to demonstrate that it could rehabilitate itself. See Debtor's Exh. I (Reorganization Plan Outline) and J (Reorganization Projections).
To begin with, DeArmand testified that stock will be retained by the owners under the plan; that is, ARSI would retain 80% and Chavez would retain 20%.
The Plan anticipates three phases. During phase 1, Debtor would start accepting samples again and ship them to outside labs for processing and then report the results to customers. Debtor would also process some samples with existing equipment. This phase lasts six to nine months, but the projection on Exh. J is for nine months.
During phase 1, Debtor starts with no equipment to process its own samples. Therefore, Debtor has to obtain equipment; hence the $49,500 equipment note. The Court suspects that Debtor is rejecting the equipment lease with ARSI with the intent of leasing it again later. Otherwise, there was no testimony that Debtor could obtain financing or that the amount borrowed would be adequate to equip a laboratory. Second, William Biava testified credibly that this business model for a laboratory — brokering the testing work — is simply not profitable because the gross profit margins on testing are barely enough to pay costs. The plan projection for phase 1, which lasts nine months, bears this out. Phase 1 anticipates $600,000 of revenue and expenses of $594,628, for a net profit of $5,372. However, the budget for phase 1 includes nothing for insurance, nothing for lab equipment repair or maintenance, and nothing to pay for disposal of lab waste. It also does not mention that Debtor will incur costs for moving its premises. The Plan later states that Debtor will retain key staff members, yet it budgets only $125,000 for salaries and $25,000 for payroll taxes for nine months. DeArmand testified that the current budget (when little or no work going on) was $20,000 per month for wages (including tax burden). $125,000 for nine months combined with an increase in business activities seems unrealistic. Next, Debtor's projection for subcontract analytical services and freight and delivery are $300,000 and $10,000 respectively. If these are the only direct costs, they are only 51% of revenues. Debtor has never had such a low direct cost figure. For Debtor's 2009 operations it had a 58% direct cost and for January, 2010 it had a 96% direct cost. Exhibit A, which consists of a period where Debtor was doing its own work and not shipping out, had direct costs of 73%. If the projections are correct, Debtor would be better off shipping everything out instead of trying to get back into doing its own work.
During phase 2, Debtor would bring its equipment online and begin operations providing a limited number of tests to customers and continuing to ship other samples to outside labs and process samples with existing equipment. This phase lasts six to nine months but the projection is for nine months. Phase 2 projects revenue of $750,000, expenses of $684,500 and net profit of $65,600. There is no provision for income taxes. Revenues jump by 25%, which seems high without any further explanation. Subcontract services drop to $200,000. The direct costs seem to be unrealistically low: subcontract of $200,000, freight of $15,000, lab supplies of $20,000 and perhaps some wages. The net profit margin is 8.73%.
Debtor had accumulated net operating losses ("NOL"s) of $393,000 by the time it filed for Chapter 11 relief. While bankruptcy generally does not result in forgiveness of debt income, it does result in reductions of certain tax attributes including NOLs. 26 U.S.C. § 108(b). Therefore, confirmation of Debtor's plan would likely wipe out the NOL carryforward.
During phase 3, Debtor would regain its status as a full service chemistry laboratory and return to processing samples in its own laboratory. Some samples will be shipped to outside labs for tests not able to be run on existing equipment. This final phase is supposed to return Debtor to its former position in the market place. The associated projection is for one year. Phase 3 projects revenue of $1,200,000, expenses of $1,138,000 and net profit of $62,000. There is no provision for income taxes. The plan anticipates Debtor moving into a much larger facility during this time, but provides no expense for the move or tenant improvements (if any). Revenues jump by 20%, which seems high without any further explanation. The net profit margin drops to 5.16%.
Phase 2 was only 9 months long. Phase 2 revenues of $750,000 annualize to $1,000,000. Phase 3 is therefore a 20% rise.
Under the Debtor's projections, Debtor will profit (before tax) a total of $132,872 in 30 months of operation. While the Court realizes this proceeding is not a confirmation hearing, the draft Plan presented by Debtor seems to be total gossamer based only on hopes of what might be. This Debtor has never been profitable. Doing a projection that suddenly shows a drastic turnaround without any convincing evidence that it is possible does not translate into actual profitability in the real world. The bottom line is that Debtor started up its business with insufficient capital, then did not get a lucrative government contract that it hoped for, and then the economy went down. The Court finds the plan not feasible and, as discussed below in the Conclusions of Law section, unconfirmable.
[P]rojections of the income necessary to finance a plan of reorganization must be based on concrete evidence of financial progress and must not be speculative, conjectural or unrealistic.
Canpartners Realty Holding Co. IV, L.L.C. v. Vallambrosa Holdings, L.L.C. (In re Vallambrosa Holdings, L.L.C.), 419 B.R. 81, 90 (Bankr. S.D. Ga. 2009) (citing In re Fort Knox Mini Warehouse. Inc., 2002 WL 1842452, at *6 (Bankr. N.D. Iowa 2002)).
Debtor's insistence that Assaigai finance the initial down payment of $750,000 suggests that Debtor was trying to leverage itself as much as possible while risking the least amount possible.
Witnesses discussed a potential valuable contract that LANL was about to let out for bidding. The contract was not opened for bidding until a year later than expected and then LANL did not accept any bids.
When Debtor did not pay the $750,000 down payment, Assaigai was unable to and did not deliver the release of liens under the Agreement. Nor did Assaigai move from the premises it had been sharing with Debtor. To this date both Assaigai and Debtor share the building, a phone system and a networked computer system. All mail goes to one reception area. Assaigai has computer access to view all of Debtor's transactions. It is unclear to the Court if Debtor has reciprocal access and if it does, whether anyone at Debtor has the knowledge to do so. And, they are both very angry.
Debtor attempted to establish "unusual circumstances" that would justify denial of a motion to dismiss or convert. First, DeArmand suggested the possibility that mail had been intercepted. There was no proof of this. DeArmand also suggested the possibility of Assaigai agents listening into Debtor's phone calls or answering calls meant for Debtor. Again, there was no proof offered on this issue. Finally, DeArmand tried to prove that Assaigai interfered with Debtor's access to the computer network post-petition. When questioned, however, he testified that he only knew about the interference from the accounting manager and that when they checked the problem they determined it was not caused by Debtor's computers. He assumed it was Assaigai's fault. He never told Assaigai of the problem and did not know if anyone else told Assaigai either. He finally testified that he really just did not know the cause.
John W. Biava, an engineer and vice president at Assaigai, is responsible for the computer systems at Assaigai, including remote access through a VPN. The computers keep security logs, which William Biava reviewed and testified about at the trial. In January, Assaigai became concerned with the security of its data so it turned off the VPN until it could be reassured that Debtor would not tamper with the data. This was resolved and the new VPN user account password was given back to Debtor. There had been a 3 to 7 day lapse in allowing outsiders (i.e., the Louisiana personnel) into the system. Local access was not impacted. And, as far as John Biava knew Debtor had continuous access after that time with one exception. On May 27, 2010, one R. Burford, employee of ARSI, was online through the VPN deleting the accounts for all the employees that were no longer at Debtor. Unfortunately, Burford apparently deleted many other accounts as well. No one at Assaigai knew of this, nor did anyone tell them until it came out at this trial on June 24, 2010 at which point it was promptly remedied by Assaigai. Other than this, John Biava believed Debtor had continuous access from January to June. The Court finds Assaigai's version of the events to be more credible than Debtor's version which is mostly based on unverified assumptions.
"VPN" is an acronym for "virtual private network", which is "a network that uses a public telecommunication infrastructure, such as the Internet, to provide remote offices or individual users with secure access to their organization's network [as if the user were accessing the database on site]". SearchEnterpriseWAN.com, last accessed July 20, 2010 at 4.49 pm (MDT). Debtor's accounting was mostly done at ARSI's facilities in Louisiana. This was possible through the VPN link to the Albuquerque servers.
After Assaigai made the demand on Debtor the tenor of their relationship changed for the worse. The unrebutted testimony of William Biava was that there was good reason to believe that Debtor was about to abscond with the backup server and probably other equipment as well. Police were called; landlord liens were filed. The server and other equipment remain at the site.
CONCLUSIONS OF LAW
Assaigai filed its Motion to Convert under 11 U.S.C. § 1112(b) citing a) substantial and continuing losses to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation, b) gross mismanagement of the estate, and c) failure to pay post-petition taxes. Assaigai abandoned the third ground at trial, conceding that Debtor had paid its taxes. Section 1112, Conversion or dismissal, provides in relevant part:
(b)(1) Except as provided in paragraph (2) of this subsection, subsection (c) of
this section, and section 1104(a)(3)
, on request of a party in interest, and after notice and a hearing, absent unusual circumstances specifically identified by the court that establish that the requested conversion or dismissal is not in the best interests of creditors and the estate, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this
chapter, whichever is in the best interests of creditors and the estate, if the movant establishes cause.
(2) The relief provided in paragraph (1) shall not be granted absent unusual circumstances specifically identified by the court that establish that such relief is not in the best interests of creditors and the estate, if the debtor or another party in interest objects and establishes that —
(A) there is a reasonable likelihood that a plan will be confirmed within the timeframes established in sections 1121(e) and 1129(e) of this title, or if such sections do not apply, within a reasonable period of time; and
(B) the grounds for granting such relief include an act or omission of the debtor other than under paragraph (4)(A) —
(I) for which there exists a reasonable justification for the act or omission; and
(ii) that will be cured within a reasonable period of time fixed by the court.
(4) For purposes of this subsection, the term `cause' includes —
(A) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation;
(B) gross mismanagement of the estate; . . .
In In re Modanlo the Bankruptcy Court for the District of Maryland described the process for a court to decide a motion to convert under the current version of Bankruptcy Code § 1112:
The mechanics of determining whether a court should convert or dismiss a case under the post-BAPCPA version of
11 U.S.C. § 1112(b) appear to be as follows: First, the movant must demonstrate that cause exists by a preponderance of the evidence. At this point, if cause has been demonstrated, the court must ascertain whether unusual circumstances exist to prevent conversion or dismissal. If no such unusual circumstances
exist, the court must convert or dismiss. The non-moving party is able to try to defeat a motion to convert or dismiss the bankruptcy case by showing that unusual circumstances exist to prevent dismissal or that factors specifically set out in § 1112(b)(2)(A) and (B) exist (
e.g., reasonable likelihood of timely confirmation, reasonable excuse for an omission by the debtor). If these exist, the opponent to the motion to convert or dismiss prevails, unless the court determines that the best interests of the estate are otherwise. And, the court must make this best interests assessment even if the opponent does not carry its burden or even make a defense. Thus, if cause has been demonstrated (and whether or not the motion is opposed),
the court must ascertain whether the best interests of creditors and the estate are served by granting or denying the motion.
In re Hook,
397 B.R. 544,
2008 WL 3906794, at *4 (10th Cir. BAP Aug. 26, 2008) (" [Section 1112(b)(1)] allows the court to deny the motion if doing so would be in furtherance of the best interests of the creditors or the estate.") (unpublished);
In re Orbit Petroleum, Inc.,
395 B.R. 145, 148-49 (Bankr. D. N.M. 2008) ("In this case, because a plan has been filed which purports to pay all creditors in full as of the effective date . . . neither conversion nor dismissal is in the best interest of the creditors of the estate.").
In re Modanlo,
413 B.R. 262, 271 (Bankr. D. Md. 2009) (footnote omitted).
The Court finds cause to convert the case under both § 1112(b)(4)(A) and (B).
SECTION 1112(b)(4)(A): SUBSTANTIAL OR CONTINUING LOSS TO OR DIMINUTION OF THE ESTATE AND THE ABSENCE OF A REASONABLE LIKELIHOOD OF REHABILITATION.
To obtain relief under 11 U.S.C. § 1112(b)(4)(A), movant must show both a continuing loss or diminution and absence of a reasonable likelihood of rehabilitation. In re Fall, 405 B.R. 863, 867 (Bankr. N.D. Ohio 2008), aff'd, 2009 WL 974538 (N.D. Ohio 2009); Vallambrosa Holdings, 419 B.R. at 88.
Rehabilitation is more than reorganization. Fall, 405 B.R. at 867-68. It signifies something more, such as "to put back in good condition" or "to re-establish on a firm, sound basis." Id. (citing In re The V Companies, 274 B.R. 721, 725 (Bankr. N.D. Ohio 2002)). It contemplates the successful maintenance or re-establishment of the debtor's business operations. Vallambrosa Holdings, 419 B.R. at 89. Rehabilitation in Chapter 11 starts with a confirmable plan. Id.
As demonstrated above, Debtor lost $319,500 in the first four months after bankruptcy. Exh. A. DeArmand testified that no new work was coming in after May 1, 2010. Projected future revenues were $-0-for some indefinite future. Projected expenses going forward would be $48,000 per month plus attorney and reorganization fees. These all demonstrate a "continuing loss."
Debtor's accounts receivable have declined $107,600 during the Chapter 11. This demonstrates a "diminution".
Debtor cannot rehabilitate. As discussed above, Debtor's plan is not feasible. It also violates the rule that administrative claims must be paid in full upon confirmation and the absolute priority rule .
11 U.S.C. § 1129 provides, in relevant part:
(a) The court shall confirm a plan only if all of the following requirements are met:
(9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that —
(A) with respect to a claim of a kind specified in section 507(a)(2) or 507(a)(3) of this title, on the effective date of the plan, the holder of such claim will receive on account of such claim cash equal to the allowed amount of such claim;
11 U.S.C. § 1129(b) provides in relevant part:
(b)(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if 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.
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements: . . .
(B) With respect to a class of unsecured claims —
(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, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.
Administrative Claims.
Section 507(a)(2) grants priority to "administrative expenses allowed under section 503(b) of this title." Section 503(b)(1)(A) defines "the actual, necessary costs and expenses of preserving the estate" as administrative expenses. The Tenth Circuit Court of Appeals ("Tenth Circuit") has held that in order to be treated as an administrative expense, "the expense must: (1) arise out of a transaction between the creditor and the bankrupt's trustee or debtor-in-possession; and (2) benefit the debtor-in-possession in the operation of the business."
In re Mid Region Petroleum, Inc.,
1 F.3d 1130, 1133 (10th Cir. 1993) (citing
In re Amarex,
853 F.2d 1526, 1530 (10th Cir. 1988)).
Peters v. Enterasys Networks, Inc. (In re Native American Systems, Inc.),
351 B.R. 135, 138 (10th Cir. BAP 2006). "Such costs and expenses encompass, without limitation, post-petition professional fees, salaries, wages, supplies, rent, utilities and other trade payables-all those ongoing operating and case administration expenses that would not likely be supplied on credit to a chapter 11 debtor without the protection of Section 507(a)'s priority scheme. . . ."
In re Digital Impact, Inc.,
223 B.R. 1, 6 (Bankr. N.D. Okla. 1998). And, lessors are entitled to post-petition rent under this provision in the amounts required under their leases without proof of value or benefit to the estate.
El Paso Properties Corp. v. Gonzales (In re Furr's Supermarkets, Inc.),
283 B.R. 60, 65 (10th Cir. BAP 2002).
Debtor's accounts payables increased postpetition by $241,700 (Exhibit A) and rent and common area expenses due under Debtor's lease amounts to at least $92,000. Together, this $333,700 must be paid as an administrative expense under 11 U.S.C. § 1129(a)(9)(A) in cash upon confirmation. The Debtor's plan makes no reference to this and is unconfirmable on its face.Digital Impact, 223 B.R. at 6. Furthermore, the projections accompanying the plan show that the reorganized Debtor would profit only $132,872 in 30 months of operation (pre-tax), more evidence that Debtor cannot meet this requirement.
Absolute Priority Rule.
The absolute priority rule requires that certain classes of claimants be paid in full before any member of a subordinate class is paid. Under this rule, unsecured creditors stand ahead of investors in the receiving line and their claims must be satisfied before any investment loss is compensated.
11 U.S.C. § 1129(b)(2)(B)(ii);
Unruh v. Rushville State Bank,
987 F.2d 1506, 1508 (10th Cir. 1993). The rule reflects the different degree to which each class assumes the risk of the debtor's insolvency.
See [In re] Granite Partners [L.P.], 208 B.R. [332] at 337, 344 [(Bankr. S.D. N.Y. 1997)].
Allen v. Geneva Steel Co. (In re Geneva Steel Co.),
281 F.3d 1173, 1180 n. 4 (10th Cir. 2002). DeArmand testified that shareholders
would retain their interests in Debtor. Debtor's plan is not feasible and cannot pay unsecured creditors in full. It violates the absolute priority rule.
SECTION 1112(b)(4)(B): GROSS MISMANAGEMENT OF THE ESTATE.
The Court also finds many examples of mismanagement of the estate. Each individual one may not be significant, but, when taken together, they amount to a gross mismanagement.
For example, DeArmand is the Chief Operating Officer. He appeared at the office maybe one day per month. Danny Coleman is the Chief Executive Officer. DeArmand was not sure Coleman ever even came to New Mexico. Elvin J. Chavez was President of Debtor until he resigned in March or April, 2010. There are no other officers of Debtor. Compare Nester v. Gateway Access Solutions, Inc. (In re Gateway Access Solutions, Inc.), 374 B.R. 556, 564-65 (Bankr. M.D. Pa. 2007) ("Failure to maintain an effective corporate management team has been held to constitute gross mismanagement.") (Citations omitted.)
In his testimony, DeArmand did not have a good grasp of daily activities at the Debtor or the operation of the Debtor's bankruptcy estate. Many duties were delegated and not followed up on. For example, DeArmand did not prepare the MOR, seemed unfamiliar with their requirements, and delegated the duty to fill them out to someone in Louisiana. He could not state for a fact that they were accurate, and he did not know when they were filed, or why they were filed late, or when the next ones would be filed. See id. at 565. ("The Court believes that accurate reporting and financial transparency are important requirements in the management of a debtor-in-possession.")
DeArmand did not know the amount of the accounts receivable that were collectible. The Court therefore deduces that no one is working the collectibles. Evidence at trial established that Debtor has not invoiced LANL for work it did on an Assaigai contract since October in an amount probably over $200,000. See Fall, 405 B.R. at 869 (failure to pursue accounts receivable is mismanagement). He did not know the amounts of receivables that had been collected by Assaigai or recite any attempts he had made since the bankruptcy filing to reconcile the amounts other than an adversary proceeding that Debtor filed but appears presently stalled.
DeArmand knew that a Motion to Borrow was filed to legitimize transfers between Debtor and ARSI, but did not follow up on whether any order was actually entered allowing it. He saw no problem with borrowing as needed from ARSI. He knew loans were made, but did not know when or how much, but "maybe" over $100,000. See Gateway Access Solutions, 374 B.R. at 566 (Unapproved, unauthorized corporate borrowings on oral terms is evidence of gross mismanagement.)
After the bankruptcy DeArmand "or someone else" authorized an offset of $91,371 of debts with ARSI without notice to creditors or Court approval. Exh. 8, p. 8. He did not know if the offsets involved pre-or post-petition transactions and did not believe it was improper. The offset was done to "clean up" the books. The Debtor has made no disclosure of any actions that will or will not be taken regarding the allegedly preferential transfer to ARSI in December, 2009. It would be in the creditors' best interests to have all of these transactions reviewed by a trustee. This may be sufficient cause in itself to convert or appoint a trustee. See Oklahoma Refining Co. v. Blaik (In re Oklahoma Refining Co.), 838 F.2d 1133, 1136 (10th Cir. 1988).
At trial, DeArmand accused Assaigai of interfering with their computer systems to such an extent that Debtor could not determine its financial status and claimed that Debtor's employees were "locked out." As discussed above, the Court finds that this simply did not happen. It is Debtor's own fault that it cannot determine its financial condition.
Other examples of mismanagement include the Debtor's failure to account for post-petition rent, failure to list the liability for the Consulting Agreement on its books or bankruptcy schedules, and Debtor's apparent lack of understanding of what assets it owned, leased, or used. Debtor has no IT department.
DeArmand testified that he did not know if Debtor's Schedule B was accurate. He stated that no leased assets appeared on Schedule B then said he was not sure. He knew some assets had liens but did not know the amount owed or the creditor.
On its original schedules, Debtor listed ownership of various assets that appear on the Debtor's Motion to Reject Lease with ARSI.
Finally, after six months in bankruptcy, the Court and creditors do not have a clear picture of Debtor's financial affairs. This is a ground to convert the case. Fall, 405 B.R. at 869 (citing Gateway Access Solutions, 374 B.R. at 565.) See also In re Vaughan, 429 B.R. 14, 29-30 (Bankr. D. N.M. 2010) (collecting cases that find that accurate disclosure is a fundamental duty of a debtor-in-possession.)
Therefore, Assaigai has met its burden of proof of showing cause to convert the case under both 11 U.S.C. § 1112(b)(4)(A) and (B).
Once "cause" has been demonstrated, the Court must convert or dismiss, unless the Court specifically identifies "unusual circumstances . . . that establish that such relief is not in the best interest of creditors and the estate."
11 U.S.C. § 1112(b)(1). However, absent unusual circumstances, the Court must not convert or dismiss a case if (1) there is a reasonable likelihood that a plan will be confirmed within a reasonable time, (2) the "cause" for dismissal or conversion is something other than a continuing loss or diminution of the estate coupled with a lack of reasonable likelihood of rehabilitation; and (3) there is reasonable justification or excuse for a debtor's act or omission and the act or omission will be cured within a reasonable time.
11 U.S.C. § 1112(b)(2); 7 Collier on Bankruptcy ¶ 1112.04[1] (Alan N. Resnick and Henry J. Sommer, eds., 15th ed. rev. 2008).
In re Orbit Petroleum, Inc.,
395 B.R. 145, 148 (Bankr. D. N.M. 2008) (footnote omitted.)
The Courts finds no unusual circumstances that establish that the requested conversion or dismissal is not in the best interests of creditors and the estate. Debtor attempted to prove that all of its problems were caused by Assaigai but failed to prove anything other than a contract dispute (subject to arbitration). This is not unusual. Therefore, under 11 U.S.C. § 1112(b)(1) the Court "shall" convert or dismiss the case unless § 1112(b)(2) applies.
This section of the opinion is addressed only to the finding of mismanagement. The "unusual circumstances" exception does not apply to cases involving continuing loss or diminution of the estate coupled with a lack of reasonable likelihood of rehabilitation. See 11 U.S.C. § 1129(b)(2)(B) ("the grounds for granting such relief include an act or omission of the debtorother than under paragraph (4)(A).") (Emphasis added.)
The conditions set out in Section 1112(b)(2) are not present. There is no likelihood that a plan will be confirmed with a reasonable period of time. This takes Section 1112(b)(2)(A) out of the picture. Section 1112(b)(2)(B) requires both a reasonable justification for the act or omission and a cure of the act or omission within a reasonable period of time fixed by the court. Debtor did not offer any remedial measures to cure the management failures or lack of information. Thus the standard of Section 1112(b)(2)(B) is also not met. Therefore Section 1112(b)(2) does not prevent the Court from converting the case.
Finally, the Court finds that conversion as opposed to dismissal is in the best interests of the creditors. The record shows that there are accounts receivable to be collected. If Assaigai is correct in asserting that ARSI's lien was preferential, a Chapter 7 trustee could avoid that lien, preserve it for the benefit of the estate and pursue collecting the receivables. The case would also benefit from a Chapter 7 trustee reviewing the transactions that have taken place with ARSI since the Debtor was formed, particularly the post-petition offset. Therefore, the Motion to Dismiss will be denied.
Orders consistent with this Memorandum Opinion will be entered separately. Exhibit A-Continued
Exhibit