In re Naartjie Custom Kids, Inc.
In re Naartjie Custom Kids, Inc.
Opinion of the Court
MEMORANDUM DECISION
Naartjie Custom Kids, Inc. (“Naartjie” or the “Debtor”), joined by the Unsecured Creditor’s Committee (the “Committee”), moves this Court to dismiss its Chapter 11 ease (the “Motion to Dismiss”). Upon dismissal, however, the Debtor requests that the orders of this Court remain in full force and effect and that release and exculpation provisions be included in the order dismissing the case. Only the United States Trustee objected to the Motion to Dismiss, arguing that there is no statutory authority to grant the relief sought. The Court conducted a hearing on June 23, 2015, where it received evidence
1. JURISDICTION, NOTICE, AND VENUE
The Court has jurisdiction over this matter pursuant to .28 U.S.C. §§ 157 and 1334. The matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (0). Venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. The Debtor sent notice to all parties listed on the creditor matrix,
II. BACKGROUND
Naartjie filed for Chapter 11 relief on September 12, 2014 (the “Date of Petition”).
The deadlines to file a proof of claim were January 14, 2015 for nongovernmental creditors and March 11, 2015 for governmental units.
Three of the more active creditors in this case are Target Ease, Mid-America, Overseas, Inc. (“MAO”), and the Secured
The parties reached an agreement (the “Settlement Agreement”) whereby the Debtor will, subject to either a confirmed Chapter 11 plan or a structured dismissal,
At this point in time, the Debtor is winding down and, pursuant to the Settlement Agreement and the sale of substantially all of its assets, the Debtor moves this Court to dismiss its case, but requests that certain provisions be included in the order of dismissal. These provisions include: (1) all of the Court’s orders will remain in full force and effect upon dismissal; (2) the Court shall retain jurisdiction to review and approve professional fees of the Debtor and the Committee; (3) the Court shall retain jurisdiction over any dispute that arises from the interpretation or implementation of the proposed dismissal order; (4) exculpation clauses and general releases shall be included in the dismissal order as contemplated in the Settlement Agreement; and (5) the Debt- or and the Committee shall be authorized to make distributions pursuant to the Settlement Agreement. The Debtor’s requested relief is commonly referred to as a “structured dismissal.”
The Debtor argues that the Court can grant a structured dismissal in this case for two reasons. First, citing to several cases throughout the country that have granted a structured dismissal, the Debtor argues that a structured dismissal is within this Court’s authority pursuant to §§ 105(a), 305(a), and 349(b) and Rule 1017(a).
The Trustee urges this Court to deny the Motion to Dismiss, arguing that the Bankruptcy Code does not authorize the Court to grant a “structured dismissal” and that the Debtor has a viable option of proposing and confirming a plan of reorganization. In advancing his argument, the Trustee first explains that there are only three ways to exit a Chapter 11 case: (1) by confirmation of a plan pursuant to § 1129; (2) by dismissal of the case pursuant to § 1112(b); or (3) by conversion of the case pursuant to § 1112(b). Thus, as the Trustee argues, the Court would have to rely on its inherent authority under § 105(a) to approve the proposed relief, which, citing to Law v. Siegel,
III. DISCUSSION
There are two issues that the Court must address. First, whether this Court has the statutory authority to grant a structured dismissal, and, if so, whether the Debtor has met its burden in establishing cause for the Court to grant the requested relief.
A. Structured Dismissal
The Tenth Circuit Court of Appeals has not addressed the issue of whether a bankruptcy court can authorize a structured dismissal. Several courts throughout the nation have addressed the issue, the majority of which appear to agree that the bankruptcy court can grant a structured dismissal in appropriate circumstances.
The Trustee argues that dismissal of a Chapter 11 case is only permitted under § 1112(b). The Debtor does not dispute that § 1112(b) authorizes dismissal if cause is shown. However, the Debtor is not moving under § 1112(b), but rather § 305(a). Section 305(a) provides in relevant part‘that “[t]he court, after notice and a hearing, may dismiss a case under this title ... at any time if — (1) the interests of creditors and the debtor would be better served by such dismissal or suspension.” The language of § 305(a) is plain: if dismissal of a case, no matter the chapter, would better serve the interests of creditors and the debtor, then the case may be dismissed at any time, whether a plan, if required, has been confirmed or not. There is no ambiguity in the statutory language. Accordingly, the Trustee’s argument that a Chapter 11 case can only be dismissed pursuant to § 1112(b) does not withstand closer examination.
A case under Chapter 11 may be dismissed pursuant to §§ 305(a)(1) or 1112(b) if cause is shown, but does the Court have the statutory authority to grant a structured dismissal? In other words, may the Court alter the effect of dismissal? In answering this question, the Court looks to the plain language of § 349(b), which provides:
Unless the court, for cause, orders otherwise, a dismissal of a case ...
(1) reinstates—
(A) any proceeding. or custodianship superseded under section 543 of this title;
(B) any transfer avoided under section 522, 544, 545, 547, 548, 549, or 724(a) of this title, or preserved under section 510(c)(2), 522(i)(2), or 551 of this title; and
(C) any lien voided under section 506(d) of this title;
(2) vacates any order, judgment, or transfer ordered, under section 522(i)(l), 542, 550, or 553 of this title; and
(3) revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title.
This subsection describes the effect of dismissal, but it qualifies the effect by providing that the Court may, for cause, order otherwise. It follows that, if cause is shown, a bankruptcy court may alter the
Generally, the Court’s inquiry ends if the language of the statute is clear, but the Trustee raises the concern that the plain language of §. 349 is in direct conflict with the legislative intent. In Ron Pair, the Supreme Court explained that the plain language controls unless “the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.”
The Trustee also argues that Federal Rule of Bankruptcy Procedure 3021 does not allow a distribution to creditors until a Chapter 11 plan is confirmed.
B. Dismissal Under § 305(a)(1) and Cause Under § 31.9(b)
Section 305(a)(1) is a narrower provision for dismissing a Chapter 11 case than § 1112(b).
To obtain relief under § 305(a)(1), the Court must find that dis
Here, the sixth and seventh factors do not weigh heavily into the Court’s decision: There were no previous non-federal insolvency proceedings, and the Debtor filed, in good faith, for bankruptcy relief to reorganize, which quickly shifted to an orderly liquidation. The first through fifth factors appear more significant for the Court to consider. As to the first factor, there is no dispute that the economy and efficiency of administration would be better served through a structured dismissal. The Debtor has sold substantially all of its assets, and the Court approved the Settlement Agreement, which lays out the structure of distribution. Further, the ease will not be dismissed until the Debtor submits a certification that: (1) the claims reconciliation process is completed; (2) all proceeds from the sales have been transferred to the Debtor’s estate; (3) the Debtor has given at least fourteen days’ notice to all creditors of its estimated distribution funds and that any objections to the proposed distribution have been resolved; (4) the Trustee’s fees are paid in full; and (5) the Court has entered orders with respect to final fee applications. There is a finite amount of assets, and to deny the request and have the Debtor move forward with
To the second factor, other forums are available to the Debtor and the creditors. The parties’ rights will be protected and preserved with a structured dismissal as this Court’s orders will remain in full force and effect. The parties can enforce those orders in this Court or another, just as they would if a Chapter 11 plan was confirmed. To the third factor, federal proceedings are not necessary to reach a just and equitable solution. The parties have already reached such a resolution through the Settlement Agreement, which this Court found to be in the best interests of creditors and the estate. There were no objections to the Settlement Agreement, and, based on the record, the Settlement Agreement will allow for a distribution to general unsecured creditors where there otherwise may not have been one. To the fourth and fifth factors, the Settlement Agreement is the out-of-court work out and the alternative means for an equitable distribution of estate assets. By dismissing the case, the creditors will be better served because they will receive a larger "return faster, and the Debtor will be better served because it will be able to wind down its affairs more quickly. Even the Trustee agreed at oral argument that dismissing this case made sense.
In weighing the above factors, the Court finds that the Debtor has met its burden under § 305(a), but only if the Court dismisses the case as provided in the requested relief, i.e. through a structured dismissal as allowed by § 349(b). Accordingly, the Court weighs three additional factors in determining whether cause exists to alter the effects of dismissal.
Lastly, the Court considers whether the Debtor is attempting to work around the protections of the Bankruptcy Code. The Court determines that the Debtor is not. Pursuant to the certification that the Debtor must file before the case is dismissed, there will be little left for the Debtor to do other than distribute the
Accordingly, the Court determines that there is cause to alter the effect of dismissal and that both the creditors and the Debtor are better served if the case is dismissed.
IV. CONCLUSION
The Court appreciates the attention that the Trustee has given this and the other cases in this District. The Trustee’s arguments against the structured dismissal appear to be better suited to those cases where there are a myriad of loose ends, lack of unanimity of support from creditors, and a failure to address the needs of creditors. In this particular case, the Court is persuaded that the moving parties have carried their burden of persuasion.
As stated herein, the Court will overrule the Trustee’s objection and grant the relief sought by the Debtor. The Debtor is to prepare the appropriate order for ‘ the Court’s consideration, which should refer to this Memorandum Decision.
. The only evidence offered was the testimony of Jeffrey Nerland, the Debtor’s Chief Restructuring Officer.
. Any of the findings of fact herein are also deemed, to the extent appropriate, to be conclusions of law, and any conclusions of law herein are also deemed, to the extent appropriate, to be findings of fact, and they shall be equally binding as both.
. Case No. 14-29666, Docket 519. Hereinafter, any reference to the docket is to that in Case No. 14-29666.
. Docket 1.
. Docket 69.
. Docket 89.
. See Docket 48.
. See Docket 66.
. Docket 132.
. Docket 290.
. Dockets 462 and 498.
. Docket 68.
. Docket 448.
. Docket 489.
. Docket 535.
. Collectively, the Secured Noteholders are Nogales Investors Fund II, L.P., Zions SBIC, L.L.C., The Brent L Bishop Trust under agreement dated February 8, 1995, Bishop Special Asset Management, LLC, and The B. Attitudes Foundation.
. See Docket 89, Schedule D. Salus', as the DP financer, held the first position lien on virtually all of the Debtor’s assets. Pursuant to the DIP Term Sheet, Docket 48, Exhibit A at 5, if there was a sale of substantially all of the Debtor's assets, Salus was to be paid in full. There was such a sale, and the Debtor paid Salus in full, which included pre-petition debt of approximately $3,490,000. See infra note 46. Accordingly, Salus was not a party to the Settlement Agreement as defined herein.
. Proof of Claim No. 47.
. See Proof of Claim No. 47 and Docket 104.
. Proof of Claim No. 44.
. Docket 424, Exhibit A at 1; Audio Transcript of Court Hearing February 25, 2015, 10:45:04 a.m.
. See Docket 424, Exhibit 1 of Exhibit A (showing an estimated incurred net balance, of $1,292,700 and projected balance of $600,000 for professionals of the Debtor and the Committee, with a funded escrow amount of $1,524,000 as of December 13, 2014).
. Docket 424, Exhibit A.
. Id. at 3.
. Kopp v. All Am. Life Ins. Co. (In re Kopexa Realty Venture Co.), 213 B.R. 1020, 1022 (10th Cir. BAP 1997) (describing the factors necessary to approve a compromise and settlement under Rule 9019).
. Audio Transcript of Court Hearing February 25, 2015, at 10:51:02 a.m. (weighing the probability of success of the underlying litigation on the merits, the difficulty in collection, the complexity and expense of the litigation, and the best interest of creditors); see also Docket 424.
. Dockets 502.
. See Id. and Docket 474.
. See, e.g., Dockets 546 and 560 (pending objection to claim number 81 filed by James A. McGuire and creditor's response).
. Docket 513, Exhibit B, ¶¶ and 2.
. The Trustee argues that a Chapter 11 case may only be dismissed pursuant to § 1112(b). In reply, the Debtor claims that the Court can also grant the Motion to Dismiss pursuant to § 1112(b) as there is no reasonable likelihood of rehabilitation and the estate is suffering a diminution of assets. Although it appears that § 1112(b) may have been an easier standard to meet than the standard required under § 305(a), because the Debtor elected not to move under that provision, the Court will not address it. See Local Rule 9013-l(c)(2) ("A reply memorandum is limited to rebuttal of matters raised in the response.”); see also E.E.O.C. v. Outback Steak House of Fla., Inc., 520 F.Supp.2d 1250, 1260 (D.Colo. 2007) ("When a party puts forth new arguments in a reply brief, a court may avoid error by either: (1) choosing not to rely on the new arguments in determining the outcome of the motion; or (2) permitting the nonmoving party to file a surreply.”).
. - U.S. -, 134 S.Ct. 1188, 1194-95, 188 L.Ed.2d 146 (2014) ("We have long held that whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.”).
. The Trustee and the Debtor both address conversion of the Chapter 11 case to one under Chapter 7, but neither party advocates that position. Further, § 305(a) provides for dismissal or abstention, not conversion. Accordingly, based on the Motion to Dismiss, the Court should either grant a structured dismissal, if possible, or the Debtor should continue with the confirmation process.
.See Official Comm. of Unsecured Creditors v. CIT Grp./Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015) (affirming order granting structured dismissal); In re Biolitec, Inc., 528 B.R. 261 (Bankr.D.N.J. 2014) (denying structured dismissal because the proposed dismissal sought to "alter parties’ rights without their consent and lack[ed] many of the Code’s most important safeguards”); In re Buffet Partners, L.P., No. 14— 30699-HDH-l 1, 2014 WL 3735804 (Bankr. N.D.Tex. 2014) (granting a structured dismissal pursuant to §§ 1112(b) and 105(a)).
. Am. Bankr.Inst., Comm’n to Study Reform of Chapter 11, 2012-2014 Final Report and Recommendations 269-73 (2014).
. See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 240-41, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (“[WJhere ... the statute's language is plain, 'the sole function of the courts is to enforce it according to its terms.' ") (citation omitted).
. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (citation and internal quotation marks omitted); see also Wadsworth v. Word of Life Christian Ctr. (In re McGough), 737 F.3d 1268, 1276 (10th Cir. 2013) ("The words chosen by Congress are a restraint upon the courts.... If a party is unhappy with a statute's plain meaning, it may always seek an amendment from Congress.”) (citations and internal quotation marks omitted).
.See State Bank of S. Utah v. Gledhill (In re Gledhill), 76 F.3d 1070, 1077 (10th Cir. 1996).
. See In re Jevic Holding Corp., 787 F.3d at 181 ("And though § 349 of the Code contemplates that dismissal will typically reinstate the pre-petition state of affairs by revesting property in the debtor and vacating orders and judgments of the bankruptcy court, it also explicitly authorizes the bankruptcy court to alter the effect of dismissal ‘for cause’ — -in other words, the Code does not strictly require dismissal of a Chapter 11 case to be a hard reset.”).
. Ron Pair, 489 U.S. at 242, 109 S.Ct. 1026.
. H.R.Rep. No. 95-595, at 338 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6294.
. Id.
. Id.
. See supra note 34 and accompanying text. The Trustee also raises the concern that any reliance on § 105(a) would be an abuse of this Court’s authority. The Court disagrees. Based on the Court’s analysis, if cause is shown under §§ 305(a) or 1112(b), the Court may grant a structured dismissal pursuant to § 349. Unlike the bankruptcy court in Law v. Siegel, the Court is not providing relief contrary to an express provision in the Bankruptcy Code, but rather acting within the confines of it.
. See Ron Pair, 489 U.S. at 240, 109 S.Ct. 1026.
. As stated in note 17, the DIP Term Sheet provided that Salus would be paid in full if substantially all of the Debtor’s assets were sold. This included a pre-petition debt, which was paid prior to confirmation of a plan. See supra note 17. Notably, the Trustee endorsed the Debtor's proposed interim order authorizing the Debtor to enter into the DP Term Sheet on September 19, 2014, but raised no concern about the application of Rule 3021.
. State of Ohio Dept. of Taxation v. Swallen’s, Inc. (In re Swallen's, Inc), 269 B.R. 634, 637 (6th Cir. BAP 2001) (finding that the bankruptcy court erred in ordering distribution of estate assets over the objections of two creditors where no disclosure statement or plan had been filed). The Sixth Circuit BAP in In re Swallen’s, Inc. discusses that a bankruptcy court cannot bypass the requirements of Chapter 11 when parties object, but emphasizes that its ruling does not address when interested parties agree to such an order, id. at 638 n. 1, as is the case here.
. See Rosenberg Real Estate Equity Fund III v. Air Beds, Inc. (In re Air Beds, Inc.), 92 B.R. 419, 422 (9th Cir. BAP 1988) ("When a sale of all or substantial assets of the estate is proposed in a Chapter 11 case under the aegis of § 363(b)(1), there is the potential for circumventing the requirements attendant to the confirmation of a Chapter 11 plan.”); see also In re Conroe Forge & Mfg. Corp., 82 B.R. 781, 784 (Bankr.W.D.Penn. 1988) ("It is within the discretion of the Bankruptcy Court to determine whether extraordinary circumstances exist so that sale proceeds may be paid to creditors outside the confines of a plan.”).
. Cf. In re Conroe Forge & Mfg. Corp., 82 B.R. at 786 (noting that under the Bankruptcy Act, a sale outside of a plan was allowed only in exigent circumstances, and thus determining that distribution outside of a confirmed plan would "require, at a minimum, a showing of similar immediate need”).
. The Court questions whether Rule 3021 would be applicable when a bankruptcy court grants a structured dismissal. Here, the distribution will occur pursuant to the Settlement Agreement once the case is dismissed. If a case is dismissed, the Federal Rules of Bankruptcy Procedure do not apply unless otherwise specified in the order dismissing the case. No such provision is included in the Debtor’s proposed order.
. Cf. Eastman v. Eastman (In re Eastman), 188 B.R. 621, 624 (9th Cir. BAP 1995) (comparing § 305(a)(1) to § 707(a)).
. In re Monitor Single Lift I, Ltd., 381 B.R. 455, 462 (Bankr.S.D.N.Y. 2008).
. In re Colonial Ford, Inc., 24 B.R. 1014, 1023 (Bankr.D.Utah 1982).
. Section 305(c) provides: "An order under subsection (a) of this section dismissing a case ... is not reviewable by appeal or otherwise by the court of appeals ... or by the Supreme Court of the United States.” See In re Efron, 529 B.R. 396, 404 (1st Cir. BAP 2015) ("[Section] § 305(c) imposes certain limitations on the appellate review available for abstention orders under § 305(a), [but] a bankruptcy court’s order dismissing a case under § 305(a)(1) is subject to review by a bankruptcy appellate panel [or a district court].”); see also In re Colonial Ford, Inc., 24 B.R. at 1018-19 (”[T]he Code encourages workouts outside, or concluded inside, Chapter 11.... [The limited appealability of § 305(a)(1) ] insulates the workout from time-consuming and expensive litigation and thus underscores the role of Section 305(a)(1) in furthering out-of-court solutions to the rehabilitation of debtors.”).
. § 305(a)(1); see also In re Monitor Single Lift I, Ltd., 381 B.R. at 462.
. In re Monitor Single Lift I, Ltd., 381 B.R. at 462 (addressing a motion to abstain under § 305(a)(1)).
. See id. at 462-63.
. In re First Assured Warranty Corp., 383 B.R. 502, 530 (Bankr.D.Colo. 2008) (citation omitted).
. See In re Zapas, 530 B.R. 560, 572 (Bankr. E.D.N.Y. 2015) (considering seven factors in determining a motion to abstain) (citations omitted); In re AMC Investors, LLC, 406 B.R. 478, 488 (Bankr.D.Del. 2009) (noting that all seven factors are considered in determining a motion to abstain); In re RCM Global Long Term Capital Appreciation Fund, Ltd., 200 B.R. 514, 525 (Bankr.S.D.N.Y. 1996) (determining that four of the seven factors were relevant in deciding a motion to dismiss under § 305(a)(1)); In re Picacho Hills Util. Co., No. 11-13-10742 TL, 2013 WL 1788298, at *9 (Bankr.D.N.M. Apr. 26, 2013) (applying seven factors in determining motion to abstain).
.In re Monitor Single Lift I, Ltd., 381 B.R. at 464.
. The Court received testimony from Mr. Nerland regarding the cost to confirm a Chapter 11 Plan. The Court finds Mr. Ner-land's testimony to be credible, but questions whether the $300,000 figure that the firms estimated to Mr. Nerland would be found by this Court to be actual, reasonable, and necessary pursuant to § 330(a).
. See, e.g., In re Biolitec, Inc., 528 B.R. at 269-70 (denying a structured dismissal when creditor protections provided by the Bankruptcy Code were not present and all interested parties had not consented).
Reference
- Full Case Name
- IN RE: NAARTJIE CUSTOM KIDS, INC., Debtor
- Cited By
- 6 cases
- Status
- Published