Ben Barry United States Bankruptcy Judge
Chapter 11 ORDER AND OPINION CONVERTING CASE TO CHAPTER 7On April 29, 2014, Acme Holding Company, Inc. [Acme or the debtor] filed this chapter 11 case. On October 27, 2014, Acme filed its first disclosure statement and a plan of reorganization [the plan]. On November 19, 2014, secured creditor Chambers Bank [Chambers] objected to the adequacy of the debtor's first disclosure statement. C Holdings, LLC [C Holdings] also objected on November 20, 2014. Chambers moved to dismiss or, alternatively, to convert the debtor's case to a case under chapter 7 on December 12, 2014. On December 29, Hildene Asset Management, LLC and Hildene Opportunities Master Fund, Ltd. [collectively referenced as Hildene or TruPS holders] the Court took the matters under advisement. For the reasons stated below, the Court grants Chambers's, C Holdings's, and Hildene's motions to convert the debtor's case to a case under chapter 7.
The plan that the debtor filed on October 27, 2014, is the only plan that the debtor has filed to date.
Chambers loaned the debtor $3,000,000.00 on September 29, 2010, and $2,000,000.00 on December 16, 2010. The loans were payable on demand and secured by the debtor's pledge of its stock in Allied Bank. Chambers is currently in possession of the stock certificates pledged as collateral for the two loans.
In August 2001, the debtor loaned the Bank of Mulberry Employee Stock Ownership Trust n/k/a the Acme Holding Company, Inc. Employee Stock Ownership Plan [Acme ESOP] $2,535,000.00 to purchase 103,132.63 shares of newly issued common stock in the debtor. Acme ESOP then pledged the stock to the debtor as collateral for repayment of the loan. In 2009, the debtor borrowed $2,000,000.00 from First Southern Bank. As security for the loan, the debtor assigned to First Southern Bank the loan, promissory note, and pledge agreement executed by Acme ESOP in favor of the debtor in 2001. On May 15, 2014, C Holdings bought the debtor's note from First Southern Bank's receiver, making C Holdings a secured creditor in Acme's bankruptcy case. The debtor owes C Holdings $1,420,222.50, as reflected in the debtor's disclosure statement and the proof of claim filed by C Holdings on June 3, 2014.
Trust preferred securities [TruPS] "are preferred equity securities issued by a statutory trust in order to raise capital for the parent bank holding company." FMB Bancshares, Inc. v. Trapeza CDO XII, Ltd. (In re FMB Bancshares, Inc.), 517 B.R. 361, 365 n.1 (Bankr. M.D. Ga. 2014). "To achieve favorable tax treatment, a bank holding company does not issue TruPS directly. Instead, a bank holding company forms a wholly-owned trust subsidiary, and that trust issues . . . the TruPS to investors." Id. at 365. Although considered equity for tax purposes, Alex Golden testified at the April 2, 2015 hearing that TruPS are considered debt for regulatory purposes. Trial Tr. vol I, 106. On March 26, 2003, the debtor created a statutory trust for the purpose of issuing TruPS under a trust indenture. U.S. Bank National Association [U.S. Bank], as the indenture trustee of the March 26, 2003 statutory trust, filed a proof of claim on behalf of the TruPS holders on July 25, 2014, in the amount of $3,329,003.68. On November 21, 2014, U.S. Bank authorized Hildene to act on behalf of the TruPS holders in this case, ostensibly because Hildene owns the majority of the issued and outstanding TruPS. Due to its majority ownership of the TruPS, Hildene contends that it is a creditor of the debtor-a characterization with which the debtor appeared not to disagree from the inception of this case on April 29, 2014, until March 29, 2015, when the debtor filed its Supplement to Appendix to Amended Disclosure Statement & Plan of Reorganization of ACME Holding Company, Inc. [March 29 Supplement]. Prior to filing the March 29 Supplement, the debtor acknowledged the TruPS holders (now acting through Hildene) as "unsecured claimants" in its original and amended disclosure statements and plan. In the debtor's March 29 Supplement and post-trial brief, the debtor changed its prior treatment of the TruPS holders from a separate class of unsecured claimants that would share in some form of recovery under the debtor's proposed plan of reorganization to equity security holders that the debtor now proposes to pay nothing. While the Court acknowledges the disagreement between the parties regarding the nature of their relationship, the issue of whether the TruPS holders are creditors or equity security holders is not directly before the Court and, in any event, is not pertinent to the Court's resolution of the motions and objections currently before it.
Although Quinn had not filed a proof of claim as of the April 2 hearing, the debtor listed the debt in its schedules and recognized in its disclosure statement that Axys Corporation had a claim in the amount of $2,000,000.00 that was "believed [by the debtor] to have been assumed by another person or entity." Therefore, the debtor treated the claim as filed pursuant to 11 U.S.C. § 1111(a).
The Court references the three objecting parties as "the creditors" for ease, but, as discussed in footnote 4, makes no finding regarding Hildene's status as either a creditor or an equity security holder at this time.
At the parties' request, the Court gave Chambers, C Holdings, and Hildene 30 days (running from the parties' receipt of the trial transcript) within which to submit their respective post-trial briefs. The Court gave the debtor 21 days from the date of the latest-filed creditor's brief to file its post-trial brief. On April 6, 2015, the Court requested that the debtor's attorney provide to the Court the next Consolidated Report of Condition and Income for A Bank With Domestic Offices Only [April Call Report]. The Court notified the parties that it planned to take judicial notice of the April Call Report when it became available and invited the parties to address the contents of the April Call Report in their respective post-trial briefs if they wished to do so. The debtor's attorney filed the April Call Report on the Court's electronic filing system on April 30, 2015.
BackgroundThe debtor is a single-bank holding company that Alexander Peyton Golden, III [Lex Golden] formed in 1986 for the purpose of acquiring the Bank of Mulberry, an Arkansas state-chartered bank. Approximately nine years later, Lex Golden's son, Alexander Peyton Golden, IV [Alex Golden] became an officer of the debtor. Currently, Lex Golden is the Chief Executive Officer [CEO], Chairman of the Board, and Controller of the debtor and Alex Golden is the debtor's Director and President. The debtor acquired a second Arkansas bank, the Bank of Mansfield, in 2001. In 2002, the debtor created Allied Bank [or Allied] when it merged the Bank of Mulberry and the Bank of Mansfield. The debtor owns 100% of the common capital stock of Allied Bank. The Allied Bank stock is the debtor's only asset and provides income to the debtor in the form of dividend distributions. Allied was profitable for the six years following its inception. In 2008, the national economic downturn coincided with two events that affected Allied Bank's capital position. First, Allied lost approximately $1,500,000.00 as a result of the fraudulent loan scheme that two attorneys-now in prison-committed against several Arkansas banks. Second, Allied entered into a credit facility with an automobile dealership that grew at a speed sufficient to garner the attention of Allied's federal regulator, the Federal Reserve Bank of St. Louis [the Federal Reserve or the Fed]. As a result, the Federal Reserve conducted a full-scale examination of Allied Bank in 2010. In below 50% of primary capital. The C & D Order specifically prohibited Allied from making dividend distributions to the debtor without the express permission of the Arkansas State Bank Department. Because the C & D Order extinguished the debtor's only source of income, the debtor was unable to service its debt. As a result, the debtor filed this chapter 11 case on April 29, 2014. On October 27, 2014, the debtor filed a plan and disclosure statement. The debtor filed the amended disclosure statement [disclosure statement] currently before the Court on January 6, 2015. The disclosure statement drew objections for its perceived inadequacies and served as the apparent catalyst for the creditors' respective motions to dismiss and convert. Summary of Debtor's Disclosure Statement According to the disclosure statement, the debtor's ability to fund a plan is entirely dependent upon the Arkansas State Bank Department and the Federal Reserve granting Allied Bank permission to resume paying dividends to the debtor. Specifically, the debtor discloses that
[i]n order to provide funding for the Plan the Debtor's only asset Allied Bank will reform and reorganize its operations under its own corporate governance and such reform and reorganization of Allied Bank is the foundation of the Debtor's plan to reorganize; therefore, Allied Bank will "shrink" over the next three (3) years such that it meets or exceeds its 10% Tier I Capital required by banking regulations and which is tangible equity in the Bank.
The disclosure statement provides that "by December 31, 2015, Effective Tier 1 Capital is projected to be . . . [at] 9.95% leaving Tier 1 Capital only 5 basis points below bank's goal of 10%." In its disclosure statement and plan, the debtor proposes to pay Chambers Bank (Class 1) the full amount of Chambers's secured claim in the amount of $4,593,775.00 at an interest rate of 3.25% over a ten-year period. The debtor intends to commence quarterly payments to Chambers on "the first day of the first full quarter following removal of regulatory restrictions that currently bar the payment of stock dividends by Allied Bank to its shareholder ACME." The debtor plans to address the secured claim of C Holdings in the amount of $1,420,222.50 by transferring to C Holdings 300,000 shares of preferred stock that the debtor will issue within 30 days of the effective date of the plan. Similarly, the debtor intends to pay the $2,000,000.00 general unsecured claim (ostensibly now held by Walter Quinn) constituting Class 3 by issuing and transferring to Quinn 2,000,000 shares of preferred stock. Class 4 is made up of TruPS holders, that, until the March 29 Supplement, the debtor proposed to give 250,000 shares of newly issued preferred stock in satisfaction of the claim filed by the indenture trustee in the amount of $3,329,003.68 and now pursued by Hildene. The disclosure statement explains that
[t]he Preferred Stock issued to unsecured creditors under this Plan is a non-voting class of stock in ACME. The holders of Preferred Stock are not entitled to any representation on the Board of Directors of ACME. The Preferred Stock is freely transferrable and may be inherited. The Preferred Stock is entitled to dividends before any dividend is paid to the holders of the common stock of ACME and otherwise according to this Plan.
The debtor's plan provides that the preferred stock "shall have a par value of $00.01 per share." Under the debtor's plan, Class 5-composed of the debtor's equity holders-will retain their shares of common stock but will not receive distributions under the terms of the proposed plan until "all secured creditors are paid in full and those classes of unsecured claims receiving Preferred Stock receive dividends in an amount equal to their respective claims as determined by this Plan with such amounts determined as of 29th April 2014." The debtor acknowledges the risk that it will be unable to effectuate its proposed plan if Allied Bank fails to "emerge timely" from its current regulatory restrictions and included in its disclosure statement a "drop dead" provision stating that
[i]n the event the projections for Allied Bank's emergence from regulatory restriction to allow it pay dividends to its shareholders does not occur by the second (2nd) anniversary of the Effective Date ACME will, at its sole option and after a third-party appraisal of the value of Allied Bank stock, surrender to Chambers Bank or its successor in interest stock of Allied Bank in the equivalent value of the claim of Chambers Bank at that time unless ACME and Chambers Bank expressly agree to extend the period.
In the March 29 Supplement, the debtor states that
When Allied Tier 1 Capital reaches 11.25%, then dividends will be paid out and money used to pay on loans and accrued interest. This is actually dependent on regulatory approval, but we are assuming that once we reach 11.25% tier I capital, that approval will be granted.
The debtor's plan also provides that
[i]f this Plan is not confirmed, the Court could allow the Debtor to file another plan of reorganization. The Debtor does not currently have an alternative plan finalized and Debtor does not believe that it would be able to propose a plan which offers significantly better treatment to creditors based on current conditions.
In addition to serving as officers of the debtor, Lex and Alex Golden are also officers of Allied Bank. Lex Golden is Allied Bank's Special Assets Officer and Alex Golden is Allied Bank's President, CEO, and Chairman of the Board.
"A 'credit facility' is similar to a revolving line of credit." Dahlgren v. Comm'r, No. 5002-94, 1998 Tax Ct. Memo LEXIS 31, at *9 (U.S.T.C. Jan. 26, 1998).
Bank examiners "assign quality ratings to extensions of credit that exhibit potential problems or well-defined weaknesses . . . primarily based upon the degree of risk and the likelihood of orderly repayment, and their effect on the bank's safety and soundness." Div. of Banking Supervision & Regulation, The Federal Reserve Board, Commercial Bank Examination Manual section 2060.1 (4th ed. 1994, Supp. 2015).
The Federal Reserve "uses two ratios to help assess the capital adequacy of state members: the risk-based capital ratio and the tier 1 leverage ratio. State member banks may also be subject to separate capital requirements imposed by state banking supervisors." Div. of Banking Supervision & Regulation, The Federal Reserve Board, Commercial Bank Examination Manual section 3020.1 (Supp. 2011). Alex Golden testified during the April 2 hearing that "the most common [ratio used by regulators to calculate risk associated with a bank] is the Tier 1 capital ratio, or some call it leverage ratio . . . and that is your Tier 1 capital divided by your total assets." Trial Tr. vol II, 8, Apr. 3, 2015. Tier 1 capital is "generally defined as the sum of core capital elements less any amounts of goodwill, other intangible assets . . . and nonfinancial equity investments that are required to be deducted." The Federal Reserve Board, Commercial Bank Examination Manual section 3020.1.
At the April 2 hearing, there was conflicting testimony regarding whether the C & D Order, like the Written Agreement, is public. Regardless, neither the C & D Order nor the Written Agreement were introduced into evidence.
"Extensions of credit that exhibit . . . well-defined weaknesses and a distinct possibility of loss" are deemed classified assets by bank regulators. The Federal Reserve Board, Commercial Bank Examination Manual section 2060.1. The debtor did not define the term "primary capital" in its disclosure statement or plan; however, Alex Golden testified that the regulators ordered Allied to reduce its substandard assets to below 50% of total capital. Trial Tr. vol I, 20, Apr. 2, 2015.
Theoretically, Allied could seek permission from the Arkansas State Bank Department and the Federal Reserve to make a distribution to the debtor at any time; however, it was undisputed at the April 2 hearing that such a request would be futile at this time.
The disclosure statement instructs creditors to read the disclosure statement and plan together.
The plan provides that "[w]ithin thirty (30) days of the Effective Date [of the plan] the debtor will issue Preferred Stock." The effective date of the plan is defined as 14 days following confirmation.
Summary of ArgumentsThe creditors' overarching-but far from only-objection to the disclosure statement is that it fails to disclose any financial information about the debtor, but instead discusses the testified that although Allied's numbers do not look good at this time, some areas are showing improvement. Dominick could not guarantee that Allied was stable as of the April 2 hearing, but testified that Allied is in a better position at this time than it "has been over the past few years." Trial Tr. vol II, 166, 184-86. The debtor did not respond to the creditors' arguments relating to the confirmability of the debtor's plan. Specifically, the debtor failed to address the contention that the plan violates the absolute priority rule. Likewise, the debtor failed to explain why the provision that calls for the debtor's issuance of new non-voting preferred stock in satisfaction of the claims of three classes of creditors-two after the March 29 Supplement that proposed to exclude the TruPS holders from plan participation-is not a violation of the code provision specifically prohibiting that very thing.
In its reply to the debtor's post-trial brief, Chambers cites a total of 17 perceived inadequacies with the debtor's disclosure statement. However, based upon the Court's decision to convert this case to a case under chapter 7, discussed below, the Court summarizes only the objections to the disclosure statement that are also relevant to the creditors' motions to dismiss or convert.
Section 1123(a)(6) provides that the plan of a corporate debtor shall "provide for the inclusion in the charter of the debtor . . . a provision prohibiting the issuance of nonvoting equity securities . . . ." 11 U.S.C. § 1123(a)(6).
Findings of Fact and Conclusions of LawAs a threshold matter, the Court recognizes that confirmation of the debtor's plan is not before it at this time. However, the debtor's ability to effectuate a confirmable plan is relevant to the resolution of the creditors' respective motions to dismiss or convert and to the approval or disapproval of the debtor's disclosure statement. Fossum v. Fed. Land Bank (In re Fossum), 764 F.2d 520, 521-22 (8th Cir. 1985) (dismissal is proper if the court finds that a debtor is unable "to effectuate any plan which would be confirmable"); In re Schriock Constr., Inc., 167 B.R. 569, 576 (Bankr. D.N.D 1994) (in determining whether to dismiss or convert a case, a court must assess the feasibility of rehabilitation, evaluate "confirmational prerequisites under § 1129," and consider "whether it is reasonable to believe that the debtor will be able to effectuate a confirmable plan of reorganization under any scenario."); see also In re Am. Capital Equip., Inc., 405 B.R. 415, 423 (Bankr. W.D. Penn. 2009) (disclosure statement must be rejected when it describes a facially unconfirmable plan). Therefore, in deciding the matters before it, the Court must take into consideration the statement in the debtor's plan providing that the debtor "does not believe that it would be able to propose a plan which offers significantly better treatment to creditors based on current conditions." Because the resolution of the creditors' respective motions to dismiss or convert may moot the issue of the adequacy of the debtor's disclosure statement, the Court will first determine whether dismissal or conversion is mandated in this case before addressing, if necessary, the objections to the debtor's disclosure statement. See Hunt v. Griffin (In re Hunt), 550 F.3d 1002, 1003 (10th Cir. 2008) (holding that the conversion of a case under chapter 13 to one under chapter 7 rendered moot issues relating to chapter 13). Based on the pleadings before it, the Court must consider the dismissal or conversion of the debtor's case. Chambers alone moved to dismiss the debtor's case. The creditors (including Chambers, pleading in the alternative) moved to convert the debtor's case from a chapter 11 to a chapter 7 under 11 U.S.C. § 1112(b), which states:
(1) Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing, 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, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.
As the movants, the creditors bear the burden of establishing cause to dismiss or convert this case. Loop Corp. v. U.S. Trustee, 379 F.3d 511, 517-18 (8th Cir. 2004). Grounds constituting cause to dismiss or convert are enumerated in § 1112(b)(4) and include "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation." 11 U.S.C. § 1112(b)(4)(A). The examples of cause cited in § 1112(b)(4) are not an exhaustive list. Reagan v. Wetzel et al. (In re Reagan), 403 B.R. 614, 620 (B.A.P. 8th Cir. 2009). As stated previously, cause may also be established by a debtor's inability to effectuate a confirmable plan. In re Fossum, 764 F.2d at 521-22. I. Cause under § 1112(b)(4)(A)
The Court finds that the creditors proved that the debtor's estate has incurred substantial likelihood that the debtor will be rehabilitated." Because the Court finds both substantial and continuing losses to the estate and the absence of a reasonable likelihood of rehabilitation, the Court finds that there is cause to dismiss or convert under § 1112(b)(4)(A).
The most recent operating report filed by the debtor on June 22, 2015, shows a cumulative loss since of $1,960,259.00 since filing this case fifteen months ago.
Chambers also called Landi Mkhize, the Chief Financial Officer of Chambers Bank since 2014, and a former Arkansas State Bank examiner, to testify on April 2. Mr. Mkhize testified, like Southard, that the debtor's projected speed for Allied's disposal of ORE by the end of 2015 is "very unusual and very unlikely." Trial Tr. vol I, 171-73.
The Court would likely have accorded significant weight to the testimony of a bank examiner or regulator had any party to the April 2 hearing called one to testify.
Although the Court anticipated that the April Call Report would be of assistance in evaluating whether Allied was on track to meet the debtor's predicted improvements to Allied's capital position, the parties' respective post-trial briefs raised additional questions regarding the correct interpretation of the figures in the report. As a result, the Court did not accord much, if any, weight to the report. However, even had the Court accepted without question the debtor's interpretation of the April Call Report, the improvement to Allied's position would not have been enough to tip the scales in the debtor's favor when weighed against the rest of the evidence before the Court.
Additionally, there is authority for the proposition that a holding company cannot "rehabilitate" within the meaning of § 1112(b)(4)(A). See, e.g., In re First Fin. Enter. Inc., 99 B.R. 751, 755 (Bankr. W.D. Tex 1989) ("this case should be dismissed pursuant to section 1112(b) since there is an absence of a reasonable likelihood of rehabilitation. The Debtor is a holding company and has no ongoing business operations.")
II. Cause due to debtor's inability to propose confirmable planDue to the speculative nature of the debtor's plan as detailed in the preceding section, and for the additional reasons discussed below, the Court finds that the creditors proved that the plan filed by the debtor on October 27, 2014-the only plan proposed by any entity since this case was filed approximately a year and a half ago-is not confirmable. Because of the debtor's representation that it cannot propose a plan containing significantly better terms for creditors-a representation supported by the debtor's March 29 Supplement that worsened the TruPS holders' treatment under the plan-the Court finds that the debtor's inability to propose a confirmable plan establishes additional grounds for the Court to dismiss or convert this case. In re Babayoff, 445 B.R. 64, 76 (Bankr. E.D.N.Y. 2011) (citing In re DCNC North Carolina I, LLC, 407 B.R. 651, 665 (Bankr. E.D. Pa. 2000) ("the inability to effectuate a plan, by itself, provides cause for dismissal or conversion of a chapter 11 case.")). Section 1129 contains the requirements for plan confirmation and provides, in part, that the court "shall confirm a plan only if all of the following requirements are met[.]" 11 U.S.C. § 1129(a). The first requirement for confirmation is that "the plan complies with the applicable provisions of this title." 11 U.S.C. § 1129(a)(1). One such applicable provision is § 1123(a)(6), which provides that a chapter 11 plan "shall provide for the inclusion in the charter of the debtor, if the debtor is a corporation . . . of a provision prohibiting the issuance of non-voting equity securities . . . ." 11 U.S.C. § 1123(a)(6) (emphasis added).
This section codifies a position long supported by the Securities Exchange Commission that participation in, and control of, the selection of the management of a reorganized debtor must be considered as part of a fair and equitable plan and provided for accordingly. The securities must be distributed so that the allocation of voting power properly recognizes the respective position of the claimants and stockholders.
In re Mesa Air Group, Inc., No. 10-10018, 2011 WL 320466, at *8 (Bankr. S.D.N.Y., Jan. 20, 2011) (citing 7 Collier on Bankruptcy ¶ 1123.01[6] (16th ed. 2010)). Section 1123(a)(6) "prevents the issuance of a class of stock without the possibility of exercising any vote." Id. Despite this statutory proscription against the issuance of non-voting stock, the debtor's plan provides that "[w]ithin thirty (30) days of the Effective Date [of the plan] the debtor will issue Preferred Stock." The disclosure statement makes clear that the preferred stock is a "non-voting class of stock in ACME" and that "[t]he holders of Preferred Stock are not entitled to any representation on the Board of Directors of ACME." The debtor has, inexplicably, opted not to address the creditors' objections to this plan provision or offer to the Court any basis upon which it could approve the issuance of non-voting stock as proposed in the debtor's disclosure statement and plan. As a result, the Court finds that the debtor's plan cannot be confirmed because it does not comply with §1123(a)(6). debtor's equity holders in Class 5 "will retain their shares of common stock but will not receive distributions under the terms of the proposed plan until all secured creditors are paid in full and those classes of unsecured claims receiving Preferred Stock receive dividends in an amount equal to their respective claims as determined by this Plan with such amounts determined as of 29th April 2014." The debtor's equity holders, therefore, are retaining "property" in the form of shares of common stock without paying unsecured claims in full. As a result, the Court finds that the debtor's plan as proposed violates the absolute priority rule. The debtor's "ability to comport to the requirements of the absolute priority rule . . . sheds a powerful ray of light on the debtor's ability to rehabilitate and its prospects for effectuating a confirmable plan." In re Schriock Constr., Inc., 167 B.R. at 579. In this case, the debtor's violation of the absolute priority rule forms another basis for the Court's finding that the debtor cannot effectuate a confirmable plan under the strictures of the code, constituting cause for dismissal or conversion.
The code defines an "equity security" as "a share in a corporation, whether or not transferable or denominated 'stock', or similar security[.]" 11 U.S.C. § 101(16)(A).
The Court was able to locate one chapter 11 plan in another jurisdiction that was confirmed despite providing for the issuance of non-voting stock. See In re CIB Marine Bancshares, Inc., Case No. 09-33318, (Bankr. E.D. Wis. 2009). However, the plan that was confirmed in In re CIB Marine Bancshares, Inc. was designated as a "prepackaged plan of reorganization" to which all creditors agreed prior to filing and was confirmed prior the Supreme Court's ruling in United States Aid Funds, Inc. v. Espinosa, 560 U.S. 260 (2010), that bankruptcy courts have an obligation not to confirm a plan containing provisions contrary to the code, even if there are no objections.
If the success of the debtor's rehabilitation were dependent only upon the willingness, sincerity, and optimism of the Goldens, the debtor would have prevailed.
During the April 2 hearing, Alex Golden confirmed on redirect that the par value of the preferred stock would be one cent. Trial Tr. vol I, 99. However, when asked to confirm that the TruPS holders would receive stock worth $2500.00, Golden stated that it was his understanding that the TruPS holders would receive $250,000.00 worth of preferred stock, not 250,000 shares of preferred stock valued at $2500.00. Trial Tr. vol I, 101. Under either scenario, the debtor proposes to give the TruPS holders preferred stock with a par value less than that stated in their proof of claim of $3,329,003.68. He likewise attempted to clarify that it was his understanding that Quinn would receive $2,000,000.00 worth of preferred stock. Although Alex Golden testified that the actual value of the preferred stock would be, he assumed, $1.00 per share rather than one cent per share, the Court has no objective evidence regarding the actual value of preferred stock that has not been issued (and cannot be issued pursuant to §1123(a)(6)).
The creditors also emphasize that the debtor's plan does not require the debtor's equity holders to provide any new capital or otherwise contribute to the plan. To the extent that they are asserting that the uncodified "new value" exception to the absolute priority rule is not applicable in this case, the Court agrees-assuming that the exception is available at all in this jurisdiction-because the Court finds that the debtor's equity holders are contributing no new value under the proposed plan. See In re Civic Partners Sioux City, LLC, No. 11-00829, 2013 WL 5534743, at *34 (Bankr. N.D. Iowa Oct. 7, 2013) (declining to rule on the applicability of the purported new value exception because the amount of the new value proposed in the debtor's plan was "entirely insufficient" even had the exception applied). --------
III. Exception to dismissal or conversion inapplicableBecause the creditors have successfully proven cause, the Court must dismiss or convert the case unless
the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor or any other party in interest 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 converting or dismissing the case include an act or omission of the debtor other than under paragraph (4)(A)[.]
11 U.S.C. § 1112(b)(2). Consequently, for the debtor to avoid dismissal or conversion in the face of established cause, the Court must find and specifically identify unusual circumstances that make conversion or dismissal not in the creditors' best interests and the debtor must establish that (1) there is a reasonable likelihood that the debtor will confirm a plan within the time allowed by the code or the Court; and (2) cause for dismissing or converting the case does not include paragraph (4)(A)'s "substantial or continuing loss to or diminution of the debtor's estate and the absence of a reasonable likelihood of rehabilitation." Id. The Court finds that the prerequisites for the application of this section are not met for two reasons. First, as discussed in this Opinion, the Court finds that the debtor did not establish that it is reasonably likely that it will confirm a plan at any point. Second, because the Court finds cause under § 1112(b)(4)(A), the Court does not have the ability to grant the debtor a reprieve from dismissal or conversion under the exception in § 1112(b)(2). See In re Plymouth Oil Co., LLC, No. 12-01403, 2014 WL 3812078, at *5 (Bankr. N.D. Iowa, Aug. 1, 2014) (because cause to convert a chapter 11 to a chapter 7 was established under §1112(b)(4)(A), the exception to conversion or dismissal found in § 1112(b)(2)(B) was unavailable to the debtor as a matter of law). Conclusion
For the reasons stated above, the Court finds that it must dismiss or convert the debtor's case pursuant to § 1112(b), whichever is in the best interests of the creditors and the estate. "'There is no 'bright-line' test to determine [whether] conversion or dismissal is in the best interests of creditors and the estate.'" In re Babayoff, 445 B.R. at 81 (quoting In re Westhampton Coachworks, Ltd., Nos. 09-73008-ast, 09-73009, 2010 WL 5348422, at *6 (Bankr. E.D.N.Y. Dec. 21, 2010); In re Tuscan Sun Ristorante, Inc. 2010 WL 4929444, at *3 (Bankr. E.D.N.Y. Nov. 30, 2010). When a majority of creditors favor conversion over dismissal or vice versa, their consensus may guide the court in deciding which option is in the best interests of the creditors and estate. Rollex Corp. v. Assoc. Materials, Inc. (In re Superior Siding & Window), 14 F.3d 240, 242 (4th Cir. 1994). Chambers is the only creditor that moved to dismiss the debtor's case. However, Chambers also moved, in the alternative, to convert the debtor's case to a case under chapter 7, and thus, effectively promoted both options. C Holdings and Hildene moved solely to convert. In this case, the Court concurs with the consensus of the creditors and finds that conversion would result in an orderly liquidation of the debtor's sole asset, the stock in Allied Bank, and effectuate the code's "policy of 'vigorous maximization of the value of the economic enterprise.'" Id. at 82 (quoting In re Staff Inv. Co., 146 B.R. 256, 261 (Bankr. E.D. Cal. 1992)). The Court finds that this case should be converted to a case under chapter 7. The Court further finds that the creditors' objections to the debtor's disclosure statement are rendered moot by the Court's order converting the case to a case under chapter 7. IT IS SO ORDERED.
/s/_________
Ben Barry
United States Bankruptcy Judge
Dated: 07/22/2015 cc: Stanley V. Bond, attorney for debtor
James Paul Beachboard, attorney for Chambers Bank
Cyril E. Hollingsworth, attorney for Chambers Bank
Charles S. Trantham, attorney for C Holdings, LLC
Rex M. Terry, attorney for Hildene Asset Management, LLC and
Hildene Opportunities Master Fund, Ltd.
United States Trustee
Comments