MEMORANDUM OPINION AND ORDER DENYING (1) DEBTOR'S MOTION TO APPROVE COMPROMISE (DOC. NO. 138) AND (2) CONFIRMATION OF DEBTOR'S PLAN OF REORGANIZATION (DOC. NO. 175)
Caryl E. Delano, United States Bankruptcy Judge.
The Chapter 11 Debtor seeks approval of a compromise with several creditors and confirmation of its proposed plan of reorganization. Court approval of broad release provisions and the issuance of a "bar order" that would prohibit parties from asserting any claims against Debtor and
Debtor, HWA Properties, Inc. ("Debtor"), is a Michigan corporation owned by Harry and Suzann Albright, each of whom owns 50% of Debtor's stock. Mr. and Mrs. Albright also own or control other entities, including Allied Capital Corp., Least, LLC, FMIRE, Inc., TarpHunt, LLC, RVHunt, LLC, Westnedge Square, LLC, TarpEst, LLC, and TP3, LLC. These entities, together with Mr. and Mrs. Albright and their respective attorneys, agents, predecessors, successors, and assigns, are defined in Debtor's Amended Plan of Reorganization ("Plan") as the "Albright Entities."
Over the past 20 years, Debtor owned and developed real estate. On the date of its Chapter 11 bankruptcy filing, Debtor owned 13 undeveloped lots in the Tarpon Estates subdivision in Cape Coral, Florida (the "Tarpon Estates Lots"), vacant land in Portage, Michigan (the "Michigan Property"), and a beneficial interest in five acres of vacant land in Clewiston, Florida (the "Clewiston Property").
The 13 Tarpon Estate Lots are encumbered by mortgages. Branch Banking & Trust ("BB & T") holds mortgage liens securing claims of $2,816,640.67 on ten of the Tarpon Estates lots;
Prior to filing its bankruptcy case, Debtor had transferred five lots in Tarpon Estates (Lot Nos. 22, 28, 34, 36, and 42) to an Albright Entity, TarpHunt, LLC ("TarpHunt"). The five lots were subject to mortgage liens held by Huntington National Bank ("Huntington"), securing a debt of over $1,400,000.00. Huntington agreed to accept the discounted payment of $750,000.00 in full satisfaction of its mortgage liens. TarpHunt then quitclaimed the five lots to another Albright Entity, FMIRE, Inc. ("FMIRE"), which funded the $750,000.00 payoff to Huntington. Also prepetition, Debtor transferred three other lots in Tarpon Estates (Lot Nos. 23, 33, and 35) to FMIRE.
As of the petition date, FMIRE still owned five of the lots it had acquired from TarpHunt and Debtor. Davis Trust I and Davis Trust II (together, the "Davis Group") made loans to FMIRE on four of those lots (Lot Nos. 23, 33, 35, and 36) and holds mortgages securing claims totaling $1,750,000.00. Mr. and Mrs. Albright personally guaranteed the loans to the Davis Group. The parties agree that the value of the four lots financed by the Davis Group far exceeds its loans.
Least, LLC ("Least"), another Albright Entity, holds a mortgage on the Michigan Property. Debtor listed Least in its bankruptcy schedules as holding a secured
IberiaBank holds a claim for $241,384.62 secured by a mortgage on the Clewiston Property.
Debtor's primary unsecured creditor is BCB Tarpon, LLC ("BCB Tarpon"). Prior to Debtor's bankruptcy filing, BCB Tarpon sued Debtor and Mr. Albright in state court. Although the lawsuit was stayed as to Debtor upon its bankruptcy filing, BCB Tarpon obtained a stipulated judgment against Mr. Albright for $3,444,039.93. BCB Tarpon filed a proof of claim for $3,636,330.16,
As set forth in its Motion to Appoint Chapter 11 Trustee or, in the Alternative, to Dismiss Case,
Last, although Community & Southern Bank ("C & S") is not a creditor of Debtor, it holds a judgment against Mr. Albright of approximately $1,912,000.00.
The Proposed Compromise and Chapter 11 Plan
Debtor engaged in considerable negotiations with several of its creditors in an effort to reorganize. Ultimately, Debtor reached a global compromise between BCB Tarpon, BB & T, and FineMark, on the one hand, and Debtor, Mr. Albright, Mrs. Albright, FMIRE, and Least on the other.
Debtor's Chapter 11 plan (the "Plan")
In consideration of the proposed bar order, FMIRE is to transfer four of the five Tarpon Estate Lots it now owns to BCB Tarpon (through Debtor as the intermediate transferee), TarpEst is to pay $65,642.20 toward outstanding property taxes on the lots being transferred to BCB Tarpon, and Mr. and Mrs. Albright are to pay Debtor's attorney's fees incurred in this case, estimated at $145,000.00.
The net result of the Compromise and the Plan, if approved by the Court, would be as follows:
(a) FMIRE (an Albright Entity) returns four of the five Tarpon Estates Lots transferred to it by Debtor prepetition; those four lots would be transferred to BCB Tarpon; BCB Tarpon acquires title to 15 lots (the four FMIRE lots and 11 lots from Debtor) to satisfy its approximately $3.6 million claim;
(b) FMIRE (an Albright Entity) retains ownership of Lot No. 42; TarpEst (an Albright Entity) purchases Lot No. 41 from Debtor with the proceeds going to BB & T; Debtor transfers Lot No. 29, subject to Finemark's lien, to either FMIRE or TarpEst (both Albright Entities); and Least (an Albright Entity) obtains title to the Michigan Property;
(c) IberiaBank, under the terms of the separate compromise already approved by the Court, obtains ownership of the Clewiston Property;
(d) HWA, as the reorganized debtor, no longer owns any assets, and its stock interests are transferred to BCB Tarpon; and
(e) Mr. and Mrs. Albright and the Albright Entities are released of all liability by BCB Tarpon and BB & T; and their individual creditors, including the Davis Group and C & S, are barred from pursuing claims or taking any action against them.
The United States Trustee, the Davis Group, and C & S object to the proposed release and bar order provisions of the Compromise and Plan.
A. Bankruptcy Court's Authority to Approve Releases of Non-Debtor Parties and to Issue Bar Orders
In In re Transit Group, Inc.,
Courts that approve non-debtor releases and enter bar orders typically find such releases to be legally permissible under two provisions of the Bankruptcy Code. First, under 11 U.S.C. § 105(a), bankruptcy courts enjoy broad equitable power to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." Second, § 1123(b)(6) states that a plan of reorganization may "include any other appropriate provision not inconsistent with the applicable provisions of this title."
Of course, neither of these provisions of the Bankruptcy Code expressly addresses a release of claims by third parties against non-debtors. And because a court's power under § 105 is not unlimited (courts invoking their § 105 powers must still act within the confines of the Bankruptcy Code),
Courts that refuse to approve non-debtor releases look to § 524(e) to resolve the issue. Section 524(e) states that the "discharge of a debt of the debtor does not affect the liability of any other entity on,
But the courts that will approve non-debtor releases have concluded that there is no conflict between §§ 105(a) and 524(e). These courts reason that § 524(e) does not expressly state that another party's debt cannot be discharged under a confirmed plan of reorganization, but merely provides that the discharge of the debtor's liability under a reorganization plan does not, by itself, affect the liability of other parties. So, these courts reason, because § 524(e) does not expressly prohibit a plan from providing for non-debtor releases, the bankruptcy court has the power to approve the release and issue a bar order under § 105(a) as long as the circumstances justify such extraordinary relief.
The Eleventh Circuit Court of Appeals first approved a release of non-debtor claims in In re Munford.
On appeal, the Eleventh Circuit held that the bankruptcy court had ample authority under § 105(a) and Fed.R.Civ.P. 16 to issue the bar order. The Eleventh Circuit cited three justifications for entering bar orders in bankruptcy cases: (i) public policy strongly favors pretrial settlement due to the potential of a complex case to drain resources; (ii) litigation costs are particularly burdensome on the bankruptcy estate given the financial instability of the estate; and (iii) bar orders play an integral role in facilitating settlement.
In In re Dow Corning Corp.,
To determine whether such unusual circumstances exist, the Dow Corning court listed seven factors for courts to consider when asked to enjoin a non-consenting creditor's claims against a non-debtor:
Recently, the Eleventh Circuit Court reaffirmed the legality of bar orders in In re Seaside Engineering & Surveying, Inc., 780 F.3d 1070 (11th Cir.2015)
In Seaside Engineering, the Eleventh Circuit expressly rejected the position that § 524(e) altogether restricts the bankruptcy court's authority under § 105(a) to issue bar orders.
B. Application of the
Dow Corning Factors to the Requested Bar Order
As directed by the Eleventh Circuit in Seaside Engineering, the Court has
1. Whether there is an identity of interests between the debtor and the third party (against whom the claim would be barred), such that a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the estate
Litigation by other creditors against the Albrights or the Albright entities will have no impact upon the estate and will not deplete the assets of the estate. This is because the Plan provides for the assets of Debtor's estate to be transferred to BCB Tarpon and Albright Entities; the reorganized debtor will have no assets.
This factor militates against the bar order.
2. Whether the non-debtor has contributed substantial assets to the reorganization
Courts evaluating this factor have found a contribution to be "substantial" where the contribution consists of most of the assets of the contributing party. For example, in In re J.C. Householder Land Trust # 1,
In contrast, where released parties have not contributed substantial assets to the reorganization efforts, courts have refused to approve the proposed release. In In re Mahoney Hawkes, LLP,
In In re M.J.H. Leasing, Inc.,
In this case, the Plan proposes three sources of non-debtor contributions: FMIRE's transfer of four Tarpon Estates Lots to Debtor for transfer to BCB Tarpon; TarpEst's payment of $65,642.20 in property taxes; and the Albrights' payment of Debtor's attorney's fees in the approximate amount of $145,000.
But FMIRE's contribution of the four Tarpon Estate Lots does not inure to Debtor's benefit, as Debtor will immediately transfer the lots to BCB Tarpon.
Likewise, TarpEst's payment of property taxes does not inure to the bankruptcy estate. While facilitating the Compromise, the payment benefits only two parties: BCB Tarpon, the recipient of the Tarpon Estates Lots on which the taxes are owed, and BB & T, the lienholder on those lots.
Regarding the Albrights' payment of Debtor's attorney's fees, there was no proffer regarding the Albright's financial circumstances that would permit the Court to evaluate whether their contribution is "substantial." And, under the Plan and the Compromise, Lots 29, 41, 42 and the Michigan Property will be owned by Albright Entities, which are owned or controlled by Mr. and Mrs. Albright. Last, the Court concludes that the Albrights' payment of Debtor's attorney's fees does not benefit or contribute to Debtor's reorganization because there is no true reorganization under the Plan. Rather, it is obvious that the Plan's purpose was to resolve the Albrights' liability to their own creditors, particularly BCB Tarpon and C & S.
As in M.J.H. Leasing, the Court cannot conclude that the proposed contributions by FMIRE, TarpEst, or the Albrights are "substantial."
This factor militates against the bar order.
3. Whether the injunction is essential to the reorganization (i.e., whether the reorganization hinges on the debtor being free from indirect suits by parties who would have indemnity or contribution claims against the debtor)
This factor does not apply because neither the Davis Group nor C & S has a claim against Debtor. Therefore, there is little likelihood that Debtor would be subject to indemnity or contribution claims.
4. Whether the impacted class or classes of creditors has overwhelmingly voted to accept the plan
C & S and the Davis Group are most affected by the proposed releases and bar order. Neither has voted to accept the Plan. Although the Plan classifies the Davis Group as a creditor, Debtor has no obligation to it; its borrower is FMIRE. The Davis Group could be subject to treatment under the Plan only if its collateral is brought into Debtor's bankruptcy estate. And C & S, the holder of a large judgment against Mr. Albright alone, is not a creditor and is not included in a class under the Plan. As such, C & S will receive no distribution under the Plan, and it has no ability to vote on the Plan.
This factor militates against the bar order.
5. Whether the plan provides a mechanism to pay for all, or substantially all, of the class or classes affected by the injunction
C & S is not a creditor in this case and will receive nothing under the Plan. Even if C & S were able to participate in a distribution under the Plan, its distribution, given the amount of BCB Tarpon's claim, would be de minimis.
This factor militates against the bar order.
6. Whether the plan provides an opportunity for those claimants who choose not to settle to recover in full
C & S has not settled with Debtor or Mr. Albright, and the Plan does not provide C & S an opportunity to recover on its judgment in full. To the contrary, the bar order would eliminate any possibility of a future recovery.
7. Whether the bankruptcy court made a record of specific factual findings that support its conclusions
The Court's findings, as set forth above, do not support the entry of a bar order.
Given the facts of this case, the Court cannot find that a bar order is necessary to Debtor's reorganization or fair and equitable. The Court appreciates that Debtor, the Albrights, the Albright Entities, BCB Tarpon, FineMark, and BB & T have worked hard to resolve their disputes. Accomplishing a global compromise among these parties was surely a difficult endeavor, and their efforts have not gone unnoticed by the Court. But the fundamental problem in this case is that the Plan does not propose a true reorganization; instead, the Plan is a restructuring of various obligations in an effort to obtain releases for Mr. and Mrs. Albright and their entities.
For the Albrights to seek to resolve their issues with C & S in the context of Debtor's Chapter 11 case, a case in which C & S is not even a creditor, is a step too far. If Mr. Albright wants a discharge of his obligation to C & S, he should file his own bankruptcy. It is not fair and equitable for a judgment debtor to obtain what is, in effect, a Chapter 7 discharge when that party has not made full disclosure of his assets and liabilities and submitted to the administration of a Chapter 7 trustee. While the Court does not necessarily find such an attempt to be an exercise in bad faith, it weighs heavily against the issuance of the requested bar order.
Accordingly, for the foregoing reasons, the motion for approval of the Compromise is denied and confirmation of Debtor's Plan is denied, without prejudice to Debtor's filing an amended plan. By separate order, the Court has terminated exclusivity