03/10/2008 399 Motion to Convert Case From Chapter 11 to 7, filed by James D. Lyon Fee Amount 15. Hearing scheduled for 4/10/2008 at 02:30 PM at Lexington Courtroom, 3rd Floor. (Attachments: # 1 Proposed Order) (Barnes, Stephen) (Entered: 03/10/2008)
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Doc 399
OCR extract
IN RE:
CASE NO. 07-50934
CHAPTER 11
HON. WILLIAM S. HOWARD
PLASTICON INTERNATIONAL , INC.
DEBTOR
CHAPTER 11 TRUSTEE JAMES D. LYON'S MOTION TO CONVERT CASE TO CHAPTER 7 FOR CAUSE
Comes now the Chapter 11 Trustee James D. Lyon (the "Chapter 11 Trustee"), solely in his capacity as the Trustee for the Chapter 11 Bankruptcy Estate of Plasticon International, Inc. (the "Debtor"), pursuant to §1112(b) of Title 11 of the United States Code (the "Bankruptcy Code"), and hereby respectfully requests this Court to enter an Order converting this case to Chapter 7 of the Bankruptcy Code.
For his Motion, the Trustee states as follows:
1. Cause exists to convert this Bankruptcy Estate from a Chapter 11 to Chapter 7 case, and conversion is in the best interests of the creditors of the Bankruptcy Estate. The Bankruptcy Estate is administratively insolvent and continues to diminish, administrative expenses continue to mount, there is no reasonable likelihood of rehabilitation. The Debtor has failed to make required filings or to comply with various order of this Court, and no disclosure statement or plan has been filed. Lastly, neither taxes nor U.S. Trustee's fees have been paid.
JURISDICTION AND VENUE
2. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. §1334, and venue is proper under 28 U.S.C. §1409.
BACKGROUND AND PROCEDURAL HISTORY
3. This case was commenced by the filing of a voluntary Chapter 11 Petition on May 16, 2007 (the "Petition Date"). The Bankruptcy Court entered a Chapter 11 Operating Order (Docket No. 6) on May 17, 2007. The Operating Order required the Debtor, among other things, to file Monthly Operating Reports if the Debtor was operating its business.
4. The Debtor operated its business from the Petition Date through October of 2007. However, during the five months of post-petition operation, the Debtor filed only one (1) Monthly Operating Report (for a three month period) (Docket No. 156) on August 9, 2007.
5. Also on August 9, 2007, the U.S. Trustee's Office filed a Motion to Appoint Chapter 11 Trustee (Docket No. 156). The Motion to Appoint Chapter 11 Trustee contained allegations that the Debtor had committed numerous violations of the Operating Order and the Bankruptcy Code. In support of the U.S. Trustee's Motion, the U.S. Trustee's Bankruptcy Analyst John Todd Wright, C.P.A. filed an Affidavit (Docket No. 215) on September 14, 2007. Wright's Affidavit states that post-petition, without Court authorization the Debtor made payments to pre-petition creditors, employed professionals, and borrowed funds from an entity controlled by the Debtor's president James Turek.
6. The Court entered an Order (Docket No. 271) granting the U.S. Trustee's Motion on October 10, 2007 and appointed Stephen Palmer as Chapter 11 Trustee. On January 31, 2008, Stephen Palmer resigned as Chapter 11 Trustee (see Docket No. 366), and on February 8, 2008, the Court entered an Order (Docket No. 371) appointing James D. Lyon as successor Chapter 11 Trustee.
7. The Debtor's only operating subsidiary, Pro Mold, Inc. ("Pro Mold"), is also in Chapter 11 Bankruptcy (E.D. Ky. Case No. 07-50935) and is not generating any revenue for the Plasticon Bankruptcy Estate. On January 14, 2008 this Court entered an Order (Docket No. 349) approving a compromise of a dispute involving the Plasticon Debtor, the Pro Mold Debtor, and several interests controlled by John P. Murphy, III (the "Murphy Interests"). Pursuant to this compromise, the Murphy Interests were entitled to tender an Order for relief from stay authorizing the Murphy Interests to foreclose on Pro Mold's personal property, stock, and requiring the Debtor Pro Mold to turn over its office and manufacturing facility. As secured creditors, the Murphy Interests were also authorized to take possession of the property and operate the Pro Mold business.
8. Also pursuant to this compromise, the Chapter 11 Trustee is entitled to retrieve certain proprietary product and molds (the "Property") from the Debtor's former facility in St. Louis, Missouri. The Property includes thirteen (13) tractor trailer loads of Plasticon inventory. Unless the Chapter 11 Trustee is able to sell it to a purchaser willing to pick it up from its current location, the Property will likely be extremely costly to transport and store, and these costs would likely be an administrative expense to be borne by the Bankruptcy Estate.
9. The compromise further provides that accounts receivable will be paid to the Chapter 11 Trustee, and it is estimated that these amounts will not exceed $15,000.
10. The compromise further provides that the Murphy Interests shall pay to the Trustee the sum of $27,504.25, "minus any and all costs and expenses that have been paid in regard to the Plasticon proprietary product or molds since October 10, 2007 including the moving and storage of the Plasticon proprietary product or molds by Flexway Trucking, Inc." Storage fees continue to accrue as to this property, which continues to reduce this $27,504.25 sum. As of February 29, 2008, the net amount to be paid to the Chapter 11 Trustee is estimated to be approximately $21,000.
11. Additionally, the Debtor's former attorney Wyatt, Tarrant & Combs, LLP is holding a retainer in the amount of $32,060.71 in escrow. On March 6, 2008 the Court entered an Order (Docket No. 397) directing Wyatt, Tarrant & Combs, LLP to deliver to the Chapter 11 Trustee the sum of $25,643.46.
12. On February 25, 2008, Wise DelCotto, the attorneys for the Official Committee of Unsecured Creditors, filed a First Interim Fee Application requesting approximately Thirty- Seven Thousand Dollars ($37,000) as an administrative expense.
13. Debtor's Counsel Fowler Measle & Bell ("FMB") has not yet filed its fee application. However, the Debtor has been extremely active in this matter and their attorneys will likely request fees and expenses.
14. Debtor's Counsel FMB has repeatedly contacted the Chapter 11 Trustees and his counsel and requested that the Chapter 11 Trustee pay several months of health insurance premiums for the former employees of the Debtor. The requested payment is approximately Nine Thousand Dollars ($9,000). The Chapter 11 Trustee does not believe that these expenses are administrative expenses of the Bankruptcy Estate, but it is possible that these expenses may be classified as such by the Court.
15. To date, no U.S. Trustee Fees have not been paid in this case. As of the date of this Motion, the estimated amount of U.S. Trustee Fees may be $2,000.
16. To date, no taxes have been paid in this case. Although the Chapter 11 Trustee has not hired an accountant, the Bankruptcy Estate may have tax or compliance liability.
17. As of the date of this Motion, the Chapter 11 Trustee has $23,598.80 on deposit. Once the Chapter 11 Trustee receives the estimated $21,000 pursuant to the settlement agreement and the $25,643.46 from Wyatt, Tarrant, & Combs, LLP, the Chapter 11 Trustee will have a grand total of approximately $70,242.26.
18. The First National Bank of Barnesville in Barnesville, Georgia ("BOB") has filed a secured Proof of Claim in the approximate amount of $1.4 Million (Claim No. 6). The BOB Proof of Claim form lists the Plasticon Debtor's "patents" as the only collateral securing the $1.4 Million debt. However, the security agreement attached to the BOB Proof of Claim provides that the BOB debt is secured by Inventory, Equipment, Accounts, Instruments, Documents, Chattel Paper and Other Rights to Payment, General Intangibles, and Assignment of Patents from International Plastics Corp. As of the date of this pleading, no party has objected to the BOB Proof of Claim.
19. Harry M. Kaelin ("Kaelin") has filed a secured proof of claim in the approximate amount of $80,000 (Claim No. 12). Kaelin's Proof of Claim states that Kaelin has obtained a judgment lien against the Debtor, but does not have any supporting documents attached and does not contain any additional details. As of the date of this pleading, no party has objected to the Kaelin Proof of Claim.
20. As of the date of this Motion, no party to this Bankruptcy has submitted a proposed Chapter 11 Plan or Disclosure Statement.
CONVERSION TO CHAPTER 7 IS APPROPRIATE UNDER 11 U.S.C. 41112
21. The Debtor is eligible to be a debtor under Chapter 7 of the Bankruptcy Code.
22. §1112(b)(1) of the Bankruptcy Code provides that a party in interest may request conversion or dismissal of a Chapter 11 case to Chapter 7, and if the movant establishes "cause," the motion should be granted "absent unusual circumstances."
23. The Chapter 11 Trustee submits that sufficient "cause" exists for the case to be converted to Chapter 7 under Section 1112(b)(4) of the Bankruptcy Code. The Bankruptcy Estate is administratively insolvent. Since the entry of the Order for Relief in this case there has been a continuing loss to and diminution of the Bankruptcy Estate, and the prospects are that such loss and diminution will continue. It has become obvious that there is no reasonable likelihood of rehabilitation of the debtor or its business. The Debtor has failed to comply with Orders of this Court, has failed to timely file its Monthly Operating Reports, and has failed to file a disclosure statement or to file or confirm a plan. Neither U.S. Trustee fees nor taxes have been paid in this case.
24. The first "cause" for conversion that is present in this Plasticon Bankruptcy case is "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation[.]" 11 U. S .0 . §1112(b)(4)(A). This section "contemplates a `twofold' inquiry into whether there has been a 'continuing diminution of the estate and absence of a reasonable likelihood of rehabilitation."' In re Citi-Toledo Partners, 170 B.R. 602, at 606 (Bkr. N.D. OH 1994) (citations omitted). The value of the Plasticon Bankruptcy Estate has continued to diminish since the Petition Date. The Debtor's only operating subsidiary, Pro Mold, Inc., is also in Chapter 11 Bankruptcy and is not generating any revenue for the Plasticon Bankruptcy Estate. During its months of operation in 2007, the Debtor had an overdrawn bank account by approximately $18,000, and maintained a negative cash flow. See Debtor's Monthly Operating Reports (Docket No. 158) and Affidavit of Todd Wright (Docket No. 215). Post- petition negative cash flow has been held to constitute "substantial and continuing loss." See e.g. Schriock Construction, Inc., 167 B.R. 569 (Bkr. N.D. 1994) (holding that substantial and continuing loss "can be satisfied by demonstrating that the debtor incurred continuing losses or maintained a negative cash flow position after the entry of the order for relief') (citing 5 Collier on Bankruptcy 1112.03{i], at 1112-18 (15th ed. 1994) ("Obviously, if the debtor has a negative cash flow after entry of the order for relief in the chapter 11 case, the first of two elements of section 1112(b)(1) is satisfied.")). Since October of 2007, Plasticon has not operated and has not generated any income. Both of these facts support a finding of "substantial or continuing loss." See Citi-Toledo, 170 B.R. at 606 (holding that the fact that the debtor had "remained idle" had "further impaired its value.").
25. Simultaneously, administrative costs continue to mount and demands are being made on the Plasticon Estate's limited funds. A finding of "substantial or continuing loss" for purposes of Section 1112(b)(4)(A) may be based on continually increasing administrative expenses to be borne by the Estate. See e.g. Loop Corp. v. U.S. Trustee, 290 B.R. 108 (D. Minn. 2003) (affirming Bankruptcy Court's finding of diminution of the Estate based in part on $1.3 million dollars of legal and consulting fees). Storage fees for the St. Louis personal property continue to accrue, as do professionals' fees. Taxes and U.S. Trustee fees are unpaid, as well as employee health insurance premiums, which the Debtor's counsel urges are also administrative expenses.
26. The second prong of the "twofold analysis" under §1112(b)(4)(A) is whether there is an "absence of a reasonable likelihood of rehabilitation." The Chapter 11 Trustee submits that there is no "reasonable likelihood of rehabilitation" for the Plasticon Debtor. The Colliers on Bankruptcy Treatise explains that in the context of §1112(b)(4)(A), the "likelihood of rehabilitation" analysis "is not the technical one of whether the debtor can confirm a plan, but, rather, whether the debtor's business prospects justify continuance of the reorganization effort." 7 Colliers on Bankruptcy 1112.04[5][a][ii] (15th ed. rev. 2004). The Bankruptcy Court for the Northern District of Ohio describes the term "rehabilitation" as meaning "`to put back in good condition; re-establish on a firm, sound basis."' Cit-Toledo, supra, 170 BR. at 607 (citing in re Wright Air Lines, Inc., 51 B.R. 96 (Bkr. N.D. OH 1985)). Plasticon has no employees, is administratively insolvent, and has not operated for several months. Plasticon's key source of revenue, Pro Mold, has itself filed Bankruptcy and its property and facility have been taken over by a secured creditor. Administrative expenses continue to accrue, and creditors have alleged secured claims exceeding One Million Dollars. No party to the bankruptcy has put forth a proposal to return the Plasticon business back to good condition. Cause exists to convert this Bankruptcy because there is a "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).
27. The Plasticon Debtor's failure to file monthly operating reports is further independent "cause" for conversion. 11 U.S.C. §1112(b)(4)(E) and (F) ("Cause" includes failure to comply with Court orders (see §1112(b)(4)(E)), and unexcused failure to satisfy reporting requirements (see §1112(b)(4)(F)). See also In re Continental Holdings, Inc., 170 B.R. 919 (Bkr. N.D. OH 1994) ("[T]imely and accurate financial disclosure is the life blood of the Chapter 11 process. Monthly operating reports are much more than busy work imposed upon a Chapter 11 debtor for no reason than to require it do so something. They are the means by which creditors can monitor a debtor's post-petition operations." Id., at 929. (citing In re Berryhill, 127 B.R. 427 (Bkr. N.D. Ind. 1991)); see also In re All Denominational Church, 268 B.R. 536 (8th Cir. BAP 2001) ("A failure to file monthly operating reports, whether based on inability to do so or otherwise, undermines the Chapter 11 process and constitutes cause for dismissal or conversion of the Chapter 11 proceeding." Id. at 538.) Numbered Paragraph 44) of the Chapter 11 Operating Order (Docket No. 6) included under "GENERAL RESPONSIBILITIES" filing Monthly Operating Reports with the Court and the U.S. Trustee's office. Notwithstanding the terms of the Chapter 11 Operating Order, the Plasticon Debtor only filed a single operating report (Docket No. 156) during the five months of its post-petition operations. The failure to file operating reports is "cause" for conversion under both §1112(b)(4)(E) and (F).
28. In addition to violating the Court's Operating Order by failing to file Monthly Operating Report, the Debtor violated this Court's Orders and the Bankruptcy Code by making unauthorized disbursements totaling $14,135.09, by employing attorneys and accountants without Court approval, and by borrowing funds without Court approval. (See Todd Wright Affidavit) (Docket No. 215). These violations of this Court's Orders are further "cause" for conversion pursuant to §1112(b)(4)(E). See e.g. Continental Holdings, supra, 170 B.R. at 929 ("In certain circumstances, violation of court orders can constitute cause for conversion or dismissal under §1112(b).") (citations omitted).
29. Although no final date for filing a Plan or Disclosure Statement has been set by this Court, the fact that no party has submitted either a Plan or Disclosure Statement in the ten (10) months since the Petition Date can constitute "cause" for conversion. See §1112(b)(4)(J) [1].
[1]The cited provision (§1 I12(b)(4)(F)) was formerly §1112(b)(4), and was generally interpreted in conjunction with former §I112(b)(3), which listed "inability to effectuate a plan" as one "cause" for conversion. Former §1112(b)(3) has been amended to read "inability to effectuate substantial compliance of a confirmed plan" (emphasis added) and is now codified as §1112(b)(4)(M).
The failure by any party to submit a Plan or Disclosure Statement is yet another indication that the Plasticon business will never be rehabilitated. In a 1987 case in which the Debtor had failed to timely submit a plan, the Bankruptcy Court for the Northern District of Ohio explained that "Nile purpose of Chapter 11 reorganization is to assist financially distressed business enterprises by providing them with breathing space in which to return to a viable state. there is not a potentially viable business in place worthy of protection and rehabilitation, the Chapter 11 effort has lost its raison d'etre. . ." In re Walton, 80 B.R. 870, at 874 (Bkr. N.D. OH. 1987) (citing Matter of Winshall Settlor's Trust, 758 F.2d 1136 (6th Cir. 1985); see also In re Tornheim, 181 B.R. 161 (Bkr. S.D.N.Y. 1995) (IA] debtor cannot wallow in chapter 11. The debtor must prosecute his or her case to a prompt and successful conclusion through confirmation of a plan." Id., at 165) (citing various cases holding that failure to file a plan after several months may be "cause" for conversion or dismissal). There can be no serious contention that the Plasticon company can be rehabilitated, which is presumably the reason that no party has submitted any plan.
30. Lastly, neither taxes nor Chapter 11 U.S. Trustee fees have been paid, both of which constitute "cause." See §1112(b)(4)(D (failure to pay taxes) and §1112(b)(4)(K) (failure to file fees or charges required under Chapter 123 of title 28, which includes 28 U.S.C. 1930(a)(6), requiring payment of quarterly U.S. Trustee fees). In the Tornheim case, supra, the Bankruptcy Court for the Southern District of New York held that the failure to pay quarterly U.S. Trustee fees, "without more, provides cause to dismiss or convert the case." In re Tornheim, supra, 181 B.R. at 164. The Chapter 11 Trustee has not been able to retain an accountant and consequently has not evaluated the Estate's tax liability or the amount of any U.S. Trustee fees. To the extent that either taxes or U.S. Trustee fees are due, however, the failure to pay such amounts constitutes "cause" for conversion.
WHEREFORE, the Chapter 11 Trustee respectfully requests that this Court enter an Order:
1. Converting this Case to a Case under Chapter 7 of the Bankruptcy Code; and
2. Granting any and all other relief that is just, equitable, and appropriate.
NOTICE
A hearing on this Motion shall be held at 2:30pm on Thursday, April 10th, 2008 in the 3rd Floor U.S. Bankruptcy Courtroom, 100 E. Vine Street, Lexington, KY 40507.
Dated this the 10th day of March, 2008.
Respectfully submitted,
/s/ Stephen Barnes
Stephen Barnes, Attorney
Jonathan L. Gay, Attorney Walther,
Roark & Gay, PLC
163 E. Main Street, Suite 200
P.O. Box 1598
Lexington, KY 40588-1598 (859) 225-4714 (tel)
(859 225-1493 (fax)
igay@wrgfirmeom
sbarnes@wrgfirm.coni
COUNSEL FOR TRUSTEE |
