In Re General Electrodynamics Corp.

368 B.R. 543, 2007 Bankr. LEXIS 1659, 48 Bankr. Ct. Dec. (CRR) 86, 2007 WL 1394036

• Court: United States Bankruptcy Court, N.D. Texas
• Decided: May 9, 2007
• Docket: 19-40928
• Status: Published

Opinions

MEMORANDUM OPINION

D. MICHAEL LYNN, United States Bankruptcy Judge.

Before the court is the “First Amended Plan of Reorganization, Proposed by General Electrodynamics Corporation" as modified by the “Second Amendment and Supplement to Debtor’s First Amended Plan of Reorganization” (the “Plan”)¹ filed by the above named Debtor (sometimes “GEC’). The court held a confirmation hearing respecting the Plan (the “Hearing”) over 4 days on October 17, November 8, November 13, and November 14, 2006. During the Hearing, the court heard testimony from Debtor’s president, Dick E. Davis (“Davis”); Debtor’s chief operating officer, James Emmons (“Em-mons”); Bryant Needham (“Needham”) an economist who testified as to interest rates on behalf of Debtor and who was called by Esequiel Sanchez (“Sanchez”) to rebut valuation testimony of Christopher J. Kelly (“Kelly”) who was called by Debt- or as a valuation expert; and (by video deposition) Harold Thomas. The court also received into evidence exhibits identified as necessary below.²

Following the Hearing, Debtor and Compass Bank (“Compass”) filed briefs in support of confirmation. Sanchez filed a brief in opposition to confirmation.

This matter is subject to this court’s core jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(L). This memorandum opinion constitutes the court’s findings of fact and conclusions of law. Fed. R. Bankr.P. 7052 and 9014. Much of the transcript of the Hearing was placed under seal at Debtor’s request in order to protect against disclosure of information respecting a business opportunity being pursued by Davis; in part in recognition of that request, the court directs below that this memorandum opinion be placed under seal pending further order of the court. Parties receiving copies of this memorandum opinion (as set forth below) are directed and cautioned to act accordingly.

I. BACKGROUND

GEC is in the business of producing and marketing devices for weighing aircraft and trucks. Compass is GEC’s principal secured lender and is owed approximately $800,000. Although possessed of a checkered history,³ GEC appears currently to be profitable.

On December 30, 2005, Sanchez obtained a judgment against GEC in the amount of $1,439,490⁴ (the “Judgment”)5 GEC appealed the Judgment, but the appeal is stayed pursuant to Code § 362(a)(1),⁶ and the parties estimate that substantial costs will be incurred and substantial time will pass before all proceedings respecting the Judgment are concluded.

Rather than posting a bond to avoid execution against it on the Judgment, GEC commenced this chapter 11 case. The Plan proposes to pay Sanchez 100% of his claim, if any, once appeals of the Judgment are exhausted. Pending conclusion of appeals, however, Sanchez is to receive no distributions on his claim.⁷ Following confirmation Debtor proposes no immediate escrow of funds from its operations against the Judgment and candidly admits its cash flow would not allow for such an escrow. The projections testified to by Kelly (Debtor’s Exhibit 18) do not allow for distributions to (or escrow of funds for the benefit of)⁸ Sanchez until September 2008.

Under the Plan, Sanchez is classified separately from other unsecured creditors.⁹ All classes other than that of Sanchez have accepted the Plan. Sanchez has rejected the Plan.

II. DISCUSSION

A. Alternatives to the Plan

Debtor and Compass argue that the only alternative to the Plan is Debtor’s liquidation. In such a liquidation, unsecured creditors, including Sanchez, would, at best, they assert, receive a tiny dividend. Sanchez, on the other hand, insists Debtor could be sold as a going concern, either pursuant to a chapter 11 plan or by a chapter 7 trustee, who, Sanchez posits, would be able to operate Debtor’s business under Code § 721.

The court is of the opinion that, in the absence of a plan satisfactory to Debtor, liquidation under chapter 7 is the only realistic alternative in this case.¹⁰ In attacking the treatment of his claim under the Plan, Sanchez makes much of the fact that (1) Davis is of an age such that he may not live long enough for Debtor to complete the payments to Sanchez called for by the Plan; (2) Neither Davis nor Emmons nor any of Debtor’s other employees have entered into (or, pursuant to the Plan, will be required to enter into) employment agreements or agreements not to compete with Debtor; and (3) Davis and other of Debtor’s employees could elect at any time to abandon Debtor, thus mooting the Plan, and operate a business identical to Debtor’s elsewhere.

Just as these factors make the Plan unattractive for Sanchez, they make successful marketing of Debtor as a going concern during further chapter 11 proceedings unlikely. As to the alternative of sale by a chapter 7 trustee authorized to operate Debtor’s business under section 721, even assuming the court would authorize such operations,¹¹ it is even less likely that Davis and Debtor’s other employees would serve a chapter 7 trustee in such circumstances than that they would cooperate in a sale under a chapter 11 plan. Moreover, the court finds persuasive the testimony of Emmons, Davis and Kelly¹² that there are no likely buyers who would be prepared to pay a price for Debt- or sufficient to provide a meaningful return to unsecured creditors.

Because liquidation of Debtor would provide much worse treatment to Sanchez (and other creditors) than does the Plan, because sale of the Debtor as a going concern is not practicable and because Debtor provides a benefit to the community through the payroll it supports, Debtor and Compass argue that the Plan should be confirmed. The alternative of lost jobs and destruction of a profitable company, they insist, must be avoided; ergo, the court must rule in favor of confirmation.

Unfortunately, the Code does not provide the court with the authority to confirm a plan simply because it is better for an objecting creditor than is the alternative. Similarly, the Code makes no provision for the court to override the requirements of confirmation in favor of the public interest or on the basis that support for the Plan by creditors other than Sanchez is overwhelming. On the contrary, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPC-PA”), in which Congress undertook a thorough revamping of the Code, evidences no legislative concern for the public interest or the interests of employees or creditors generally.¹³ Instead, Congress enacted provisions favoring special classes of creditors to the exclusion of all other considerations. Thus, in amending, for example, sections 365, 366 and 1121 of the Code, Congress has, presumably intentionally, made chapter 11 much less suitable as a remedy than it was before BAPCPA became effective. Companies such as Kmart, Mirant Corp. and United Airlines, all of which have survived through use of chapter 11, very likely could not restructure effectively under the Code since the passage of BAPCPA.

It would be singularly inappropriate, therefore, for the court to import into chapter 11 an overriding test for confirmation based on the court’s views of Sanchez’s best interest (as opposed to that creditor’s) or based on the public interest or the needs of a debtor’s employees. Certainly if Congress is prepared to see companies like Kmart (which at the time of its chapter 11 filing employed 250,000 workers) collapse at the whim of their landlords, there is no reason to think Congress would care if the strict requirements it has enacted for confirmation of chapter 11 plans should lead to the demise of GEC. Put another way, if the Plan does not meet the requirements of section 1129 of the Code, then the court may not confirm it, however disastrous the consequences for Sanchez, other creditors and the community at large.

The court must administer the Code according to its terms. The role the public interest or the needs of creditors or a debtor’s employees should play in plan confirmation must be left to Congress. As Congress has structured the Code, the court, in its decision whether to confirm the Plan, has no authority to substitute its views of what is best for Sanchez for his own; he has an absolute right under the law to shoot himself in the foot.

B. Requirements for Confirmation

1. Requirements other than Feasibility a. Section 1129(a)

Section 1129(a) of the Code establishes 16 tests for confirmation of a plan of reorganization. In the case at bar, the Plan does not meet the test established by section 1129(a)(8) which requires either that each class of claims or interest must be unimpaired or that the holders of the claims or interests in the classes have, by the requisite majorities, accepted the Plan. Sanchez, whose claim is classified by itself, voted to reject the Plan. There is no dispute that his claim is impaired.

As to the remaining tests of section 1129(a) (other than the feasibility requirement of section 1129(a)(11)), the court finds that each such test is either inapplicable or is met by the Plan, with the possible exception of the requirement of section 1129(a)(1) that the Plan comply with the applicable provisions of the Code. As to this requirement, certain provisions of the Plan such as the injunction protecting Nordic and Davis (really a channeling order) may not comply with the Code in the specific context of the Plan. The injunction (or channeling order), as proposed in this Plan, can only be consistent with section 524(e) of the Code if its effect is no more than to defer pursuit by Sanchez of Nordic or, more importantly, Davis pending full satisfaction of Sanchez’s claim by Debtor. See In re Artra Group, Inc., 300 B.R. 699, 704 (Bankr.N.D.Ill.2003). Given its concerns regarding the likelihood of Sanchez’s claim being so satisfied, which are set out below, the court is not now prepared to find the injunction to be permissible under section 524(e). On the other hand, because of its conclusion that the Plan is, in any event, not confirmable, neither will the court at this juncture hold that the Plan does not satisfy section 1129(a)(1) of the Code.

b. Section 1129(b)

Pursuant to Code § 1129(b)(1), the court may confirm a plan which meets all the requirements of section 1129(a) other than that of section 1129(a)(8) (i.e., that each class of claims and interests is unimpaired or has accepted the plan) if the court determines that the plan is fair and equitable and does not discriminate unfairly as to dissenting classes. A plan is deemed to be fair and equitable if it satisfies, as to any dissenting class, the applicable requirements established by section 1129(b)(2).

In the instant case, for the Plan to be fair and equitable it must, as to Sanchez’s dissenting class, provide on account of his claim “property of a value, as of the effective date of the plan, equal to the allowed amount of such claim.” 11 U.S.C. § 1129(b)(2)(B)(i). For purposes of confirmation of the Plan the parties have stipulated that the allowed amount of Sanchez’s claim is $1,100,000 and that accrual of interest on the claim at 9% will provide full present value of the claim.¹⁴ The Plan, however, provides that Sanchez’s claim will amortize negatively (except to the extent the $100,000 cash bond may be escrowed against interest) for approximately two years. Although not favored (see In re McCombs Properties VIII, Ltd., 91 B.R. 907 (Bankr.C.D.Cal.1988); In re Sunflower Racing, Inc., 226 B.R. 673, 688 (D.Kan.1998); In re M & S Assocs., Ltd., 138 B.R. 845, 850 (Bankr.W.D.Tex.1992); In re Apple Tree Partners, 131 B.R. 380, 395 (Bankr.W.D.Tenn.1991); In re Club Assocs., 107 B.R. 385, 398 (Bankr.N.D.Ga.1989), aff'd, 956 F.2d 1065 (11th Cir.1992)),¹⁵ courts have approved plans under section 1129(b)(2) that provide for negative amortization. See, e.g., In re Club Assoc., 107 B.R. 385, 398 (Bankr.N.D.Ga.1989) (confirming a plan under § 1129(b) despite negative amortization of secured claim; terms of original contract provided for negative amortization); In re Consolidated Properties Ltd. P’ship, 170 B.R. 93, 99 (Bankr.D.Md.1994); In re Bouy, Hall and Howard and Assoc., 141 B.R. 784, 790 (Bankr.S.D.Ga.1992).¹⁶ But confirmed plans that so provide typically involve a dissenting class of secured claims. Indeed, the court has found (and has been cited to) no case in which a plan that provided for negative amortization of a dissenting class of unsecured claims was confirmed pursuant to section 1129(b)(2)(B)(i). Thus, while the court would find, based on the testimony of Kelly and Needham, that the value as of the Plan’s effective date of the payments proposed for Sanchez’s claim is $1,100,000, the court is not now prepared to hold that the proposed treatment of Sanchez’s claim is fair and equitable and not unfairly discriminatory. Because of the court’s finding respecting feasibility, there is no need to resolve at this time whether the Plan, because it negatively amortizes a dissenting class of unsecured claims, fails to satisfy section 1129(b).

2. Feasibility

Code § 1129(a)(ll) requires that, in order for a plan to be confirmed, the court must find that:

(11) Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.

Generally referred to as a requirement that a plan be feasible, section 1129(a)(11) mandates that a debtor satisfy the court that carrying out the terms of the plan, in the context of future operations, is not likely to force the debtor into liquidation or further reorganization proceedings. That a plan meets this test must (like all other requirements for confirmation) be proven by the plan’s proponent by a preponderance of the evidence. In re T-H New Orleans Ltd. P’ship, 116 F.3d 790, 801 (5th Cir.1997); In re Danny Thomas Properties II Ltd. P’ship, 241 F.3d 959, 963 (8th Cir.2001); In re Armstrong World Industries, Inc., 348 B.R. 111, 120 (D.Del.2006); Corestates Bank, N.A. v. United Chemical Technologies, Inc., 202 B.R. 33, 45 (E.D.Pa.1996).

In the case at bar, Debtor has failed to meet this requirement. As Debt- or argues, it was not required to show certainty that the Plan is feasible. Fin. Sec. Assurance, Inc. v. T-H New Orleans Ltd. P’ship, 116 F.3d 790, 801 (5th Cir.1997). That certainty is not required does not equate, though, to giving the Debtor the benefit of every doubt nor does it shift to Sanchez the burden to show that the Plan is not feasible.

Debtor admits in its post-hearing brief that its projections are “tight.” The court would go further. Debtor’s projections reflect that payments on Sanchez’s claim will result in a number of years in which the Debtor will have a negative cash flow (Debtor’s Exhibit 18; testimony of Kelly, Transcript of Hearing, Nov. 13, 2006, p. 92, ll. 6 ff). Kelly testified (id. p. 94, ll. 2 ff) that there were a number of ways Debtor could handle these shortfalls—e.g., additional borrowing or deferring trade payables. If the court had sufficient confidence in Kelly’s projections, it might be prepared to put Sanchez to the risk that Debtor would be unable to overcome these projected cash deficiencies. But Kelly did not instill such confidence. Both Kelly’s testimony and the testimony of Needham elicited by Sanchez on rebuttal left the court with grave concern about the depth of Kelly’s investigation and his methodology in projecting the results of Debtor’s operations.¹⁷ When uncertainties such as Davis’s probable lifespan, the attraction for Davis of other opportunities, the possibility of Debtor’s management defecting to a prospective competitor and the possible fluctuations always inherent in the economy are taken into account,¹⁸ the court cannot find that Debtor has carried its burden; confirmation of the Plan will, as likely as not, be followed by a need for further restructuring or Debtor’s liquidation. Because the court cannot find that the Plan meets the requirements of Code § 1129(a)(11), the Plan cannot be confirmed.

III. CONCLUSION

Notwithstanding its determination that the Plan is not confirmable, the court is convinced that it is in the best interest of all parties, including Sanchez, that GEC survive. The court is thus reluctant to enter an order denying confirmation — an event that would likely be followed promptly by Debtor’s conversion to chapter 7 and all the unfortunate consequences predicted by Debtor and Compass. Accordingly, the court will temporarily defer entry of an order consistent with this opinion. Rather, pursuant to Code § 105(d), Davis, Sanchez, their attorneys and counsel for Debtor are directed to attend a conference with the court to be held in chambers at 9:00 a.m. on December 27, 2006. In addition to those parties, Compass, Nordic and the United States trustee may, but are not required to attend such conference.

The clerk of the court is directed to transmit a copy of this memorandum opinion to counsel for each of the parties named in the preceding paragraph and J. Douglas Cortes, court-appointed examiner in this case. Except as here specified, this memorandum opinion shall be held under seal by the clerk pending further order of the court.

Entered: December 19, 2006

1 . For the purposes of this memorandum opinion the court assumes all amendments and supplements to the Plan satisfy the requirements of section 1127 of the Bankruptcy Code (11 U.S.C. § 101 et seq.; hereafter the "Code'') or, if applicable, Fed. R. Bankr.P. 3019.

2 . J. Douglas Cortes was appointed as examiner in this case. His duties were limited to investigation and reporting, and his final report is also before the court.

3 .Davis testified that he first acquired GEC (actually a predecessor of the same name) in 1978, at a time when it was losing money (Transcript of Hearing, Oct. 17, 2006, p. 62, 11. 8-24). Davis sold the company in 1995 (Id., p. 163, 1. 25). In 2000, Davis acquired the bank note secured by the prior GEC’s assets and so obtained the assets owned by Debtor. (Id., pp. 164, 1. 23, 165, 1. 5). In 2001, Davis resumed operations through Debtor (Id., 11. 6-16).

4 . Sanchez and Debtor have stipulated that, for purposes of confirmation of the Plan (including whether it satisfies Code § 1129(a)(l 1)), Sanchez has a claim of $1,100,000, but the parties do not agree as to how the stream of payments are to be structured and further do not agree on whether the Plan meets the requirements of Code § 1129(b)(2)(B)(i). While the court has some doubt about whether it is appropriate to limit consideration of feasibility of the Plan under section 1129(a)(l 1) as required by the parties’ stipulation, given that distributions under the Plan will ultimately have to satisfy Sanchez's claim in its actual allowed (possibly greater) amount, it will accept the stipulation for purposes of this memorandum opinion.

5 . Davis was also sued by Sanchez, but only a small part of the Judgment was assessed against him. Davis cash-bonded around his share of the Judgment, using funds made available by GEC. Those funds ($100,000 approximately) figure in the Plan, as discussed below.

6 . By order dated April 13, 2006, the court modified the stay to allow Sanchez to file a cross-appeal. The court is unaware, based on the record of this case, whether the parties are proceeding with the appeal notwithstanding section 362(a).

7 . The Plan (as now before the court), proposes release of the cash bond posted on Davis’s behalf and offers Sanchez the option, subject to certain conditions, of receiving that amount — $100,000—immediately. See Plan ¶ 4.7(b)(vii).

8 . If Sanchez does not elect to take immediate distribution of the cash bond posted on behalf of Davis, the cash bond will be escrowed against interest accruing under the Plan on Sanchez’s claim. This fund would cover interest on Sanchez’s claim (in the stipulated amount) for a little more than one year.

9 . Unsecured claims of $423,274 have been filed in addition to Sanchez's claim. These other unsecured claims are divided into two classes: small claims and larger claims. The latter class is to be paid out over 60 months (as opposed to the 72 month term for Sanchez’s claim) at the same 9% interest rate proposed for Sanchez.

10 . Although the court need only test a plan against the alternative of liquidation for purposes of confirmation (section 1129(a)(7)), Sanchez repeatedly urged the court during the Hearing to consider Debtor’s marketability-

11 . Code § 721 provides:

The court may authorize the trustee to operate the business of the debtor for a limited period, if such operation is in the best interest of the estate and consistent with the orderly liquidation of the estate.

Even if the court determined operation of Debtor's business in chapter 7 was appropriate under this provision, there would remain the question of whether Compass would acquiesce in such relief. Assuming the chapter 7 trustee could operate with the inflexible funding afforded through use of just cash collateral, under Code § 362(d)(2), it is probable Compass would be entitled to relief from the automatic stay and so would be able to foreclose upon its cash collateral and virtually all Debtor’s other assets.

12 .Transcript of Hearing, Oct. 17, 2006, p. 75, 11. 23 ff; p. 225, 11. 2 ff, and Transcript of Hearing, Nov. 13, 2006, p. 74, 11. 7 ff, and p. 90, 11. 24 ff.

13 . Where Congress has wished the courts to consider the public interest it has said so. See, e.g., Code § 1165. Likewise, where Congress has felt it appropriate, it has given weight to the interests of employees. See, e.g., Code § § 507(a)(4) and 1113. While the court, in some contexts, may be able to take the public interest into account in the absence of specific statutoiy authority, (see, e.g., Mirant Corp. v. Potomac Elec. Power Co. (In re Mirant Corp.), 378 F.3d 511, 524 (5th Cir.2004)), it must still adhere to the specific terms of the Code.

14 . Sanchez argues that irregular payments provided for in the Plan would prevent its treatment of his claim from complying with section 1129(b)(2)(B)(i).

15 . See also Great Western Bank v. Sierra Woods Group, 953 F.2d 1174, 1177 (9th Cir. 1992) (concluding that while most courts have been reluctant to adopt a per se rule against negative amortization, there are commonly held reservations about the practice).

16 . See also In re D & F Constr. Inc., 865 F.2d 673, 676 (5th Cir.1989) (refusing to hold that negative amortization will never be fair and equitable); In re Apple Tree Partners, L.P., 131 B.R. 380, 395 (Bankr.W.D.Tenn.1991) (rejecting McCombs’ per se rule against negative amortization); In re Orfa Corp. of Philadelphia, 129 B.R. 404, 418 (Bankr.E.D.Pa.1991) (deferral of interest not per se objectionable under 1129(b)); In re Spanish Lake Assoc., 92 B.R. 875, 878 (Bankr.E.D.Mo.1988) (rejecting McCombs' per se rule and listing elements to be considered on a case-by-case analysis of the fairness of negative amortization).

17 . The cross-examination of Needham revealed that Kelly may not have investigated new technologies (including new research or new products) which would arguably allow the Debtor to remain competitive. See Transcript of Hearing, Nov. 14, 2006, p. 51, 11. 9 ff. The cross-examination also revealed that Kelly may not have spoken with any industry experts to analyze the feasibility of making payments on the Sanchez claim. See id., 11. 21 ff. In fact, Needham’s testimony suggests that Kelly may not even possess the training necessary to conduct such analysis. See id., p. 54, ll. 9 ff; pp. 55-56. While Sanchez has not objected to Kelly’s status as an expert (see Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993)), the court must consider the witness's adequacy as an expert in evaluating his testimony. See Moore v. Ashland Chem. Inc., 151 F.3d 269, n. 13 (5th Cir.1998); Edmonds v. Illinois Cent. Gulf R. Co., 910 F.2d 1284, 1287 (5th Cir.1990). Given that Kelly surely may be presumed to have had in mind his client’s agenda (see In re Mirant Corp., 334 B.R. 800, 814 (Bankr.N.D.Tex.2005); In re Coram Healthcare Corp., 315 B.R. 321, 339 (Bankr.D.Del.2004); In re Exide Techs., 303 B.R. 48, 61 (Bankr.D.Del.2003); In re Beker Indus. Corp., 58 B.R. 725, 739 (Bankr.S.D.N.Y.1986)), all these concerns must be taken to affect negatively the court’s confidence in his projections.

18 . Although the court has accepted the parties' stipulation that Sanchez’s claim is $1,100,000, Sanchez’s judgment, in fact, substantially exceeds that amount. Should Sanchez's claim ultimately be allowed in an amount greater than $1,100,000, Debtor would face even greater difficulty in satisfying that claim over the term of the Plan. While the court concludes that the Plan is not feasible even if Sanchez’s claim in fact is allowed for only $1,100,000, the risk that the claim might be allowed in a greater amount, notwithstanding the parties' stipulation, would otherwise weigh heavily against any finding of feasibility. The court need not, at this time, determine whether it could consider this risk despite the stipulation.