Nestor Geoffrey D. Quilates and Maria Ermelinda A. Quilates

• Court: United States Bankruptcy Court, E.D. California
• Decided: September 7, 2021
• Docket: 20-24259
• Status: Unknown

Opinion

1 NOT FOR PUBICATION 2 3 UNITED STATES BANKRUPTCY COURT 4 EASTERN DISTRICT OF CALIFORNIA 5 6 In re: Case No. 20-24259-A-7

7 NESTOR GEOFFREY D. QUILATES AF-4 and MARIA ERMEDLINA A. QUILATES, 8 9 Debtors 10 11 12 13 14 15 16 17 MEMORANDUM 18 19 20 21 22 23 24 25 26 27 1 Debtors Nestor Quilates and Maria Quilates (“Quilates”) move 2 under Rule 60(b) to reconsider conversion of their case to Chapter 7. 3 Mot. for Recons. 1:26-2:1, ECF No. 98. Oral argument will not be 4 helpful. LBR 9014-1(h); Morrow v. Topping, 437 F.2d 1155, 1156 (9th 5 Cir. 1971). The motion will be denied. 6 I. FACTS 7 On September 4, 2020, Quilates filed a Chapter 11 case. 8 The Clerk of the Court scheduled a status conference for October 9 19, 2021. Order Re Chapter 11 Status Conference, ECF No. 7. That 10 order provided: “This is notice that the court may, sua sponte, at the 11 status conference, order the case dismissed or converted to chapter 7, 12 or may order the appointment of a chapter 11 trustee.” Id. 13 On October 19, 2020, the court held and continued the status 14 conference. The status conference was continued six times. 15 The Quilates have filed five plans of reorganization; none were 16 confirmed. Plans, ECF Nos. 41, 48, 57, 72, 86. Over the course of 17 this case, the court has provided the debtors with detailed 18 discussions of the impediments to confirmation. Civil minutes, ECF 19 No. 67, 83. A lingering problem has been feasibility. “During the 8 20 months since the filing of this case, there have been significant 21 variances between the debtors’ representations of income and expenses. 22 This suggests to the court that these figures lack reliability for the 23 purposes of planning for the future and plan confirmation.” Civ. 24 Minutes para. 1, ECF No. 83. 25 On August 16, 2021, the Quilates sought approval of their fifth 26 combined disclosure statement and plan. The court denied approval of 27 the disclosure statement because it deemed the plan not feasible, 11 1 were improperly classed as unimpaired, 11 U.S.C. § 1124. Civ. Minutes, 2 ECF No. 103. 3 At the continued status conference, also on August 16, 2021, the 4 court converted this case to Chapter 7 finding: (1) cause, i.e., 5 failure to confirm a plan within one year of the filing of the 6 petition and after five unsuccessful efforts, 11 U.S.C. § 7 1112(b)(1),(4); (2) the absence of any of any of the safe harbor 8 provisions, 11 U.S.C. § 1112(b)(2); and (3) that the best interests of 9 creditors and the estate favored conversion, 11 U.S.C. § 1112(b)(1) 10 (“cash” $26,136, Plan p. 13, ECF No. 86); § 1115(a)(2) (earnings from 11 services performed is property of the estate). 12 II. PROCEDURE 13 Quilates ask this court to reconsider its order converting the 14 case to Chapter 7. They contend that the court: (1) incorrectly 15 calculated their income in that Mr. Quilates is paid every two weeks, 16 rather than monthly; and (2) the impairment error for Class 2(b) was 17 “small,” such that they should have been allowed to amend their plan. 18 Mot. 3:25-4:2, ECF No. 98. 19 III. JURSIDICTION 20 This court has jurisdiction. 28 U.S.C. § 1334(a)-(b); see also 21 General Order No. 182 of the Eastern District of California. This is 22 a core proceeding. 28 U.S.C. § 157(b)(2)(A),(L),(O). 23 IV. DISCUSSION 24 Rule 60(b) authorizes the court to remedy its own and other 25 party’s mistakes. Fed. R. Bankr. P. 60(b)(1), incorporated by Fed. R. 26 Bankr. P. 9024. 27 A disclosure statement must contain “adequate information” to 1 the plan.” 11 U.S.C. § 1125(a)(1). The debtor bears the burden of 2 proof on the adequacy of the information provided in the disclosure 3 statement. In re McGee, No. 09-11860, 2010 WL 9463258, at *1 (Bankr. 4 N.D. Ind. Apr. 21, 2010). 5 As a rule, when ruling on the adequacy of the information in the 6 disclosure statement, the court should not consider objections to 7 confirmation. In re Dakota Rail, Inc., 104 B.R. 138, 143 (Bankr. D. 8 MN 1989). But the court may disapprove a disclosure statement where 9 the plan is patently unconfirmable without regard to creditor voting 10 results and based on facts that are not in dispute. In re American 11 Capital Equip., LLC, 688 F.3d 145, 154-155 (3rd Cir. 2012). 12 Here, the court disapproved the disclosure statement because it 13 found the plan patently not feasible. 11 U.S.C. § 1129(a)(11). The 14 court did not err, at least to an extent that changed the outcome.1 To 15 fund the plan the Quilates’ income (wages, self-employment, and rent) 16 must be not less than $10,240.51. That amount is the sum of: (1) 17 living expense for the debtors’ household of 6 persons of $8,225.01, 18 Plan Ex. 3 pp. 14-15, ECF No. 86 (all expenses included except 19 “[p]ayroll [t]axes and [r]elated [w]ithholdings” for Mr. Quilates); 20 (2) Mrs. Quilates’ self-employment tax of $480 (15%, presumably social 21 security only), Id. at p. 14; and (3) plan payments of $1,535.50, Id. 22 at p. 15. 23 Over the life of this case the debtors have reported their 24

1 Concededly, at the hearing on the disclosure statement that court and 25 debtors’ counsel were unclear about the pay period for the debtor. The debtor has augmented and clarified the issue; the court now understands that 26 the pay period involved is, in fact, every two weeks. Quilates Decl., ECF No. 100; Ex. A & B, ECF No. 101. This is made clear by comparing Ex. B 2021 27 Payroll Schedule, ECF No. 101, with Mr. Quilates’ pay advice, dated April 30, 2021 (which shows “pay period 09 21” (which the court reads as the ninth two 1 projected and their actual income.2 It has consistently, almost 2 universally, been less than the amount necessary to fund the debtors’ 3 ongoing living expenses, tax burden and plan payment. The Quilates’ 4 projections and reports of actual income received are summarized as 5 follows. 6 Filing Date Schedules Plan Monthly Operating Citation 7 Report Sept. 4, 2020 $8,056 Vol. Pet. 8 p. 35 line 10, ECF No. 9 1 Oct. 4, 2020 $9,546 MOR Cash 10 Rec. 4:12, 11 ECF No. 24 Nov. 17, 2020 $3,300 MOR Cash 12 Rec. 3:12, ECF No. 32 13 Dec. 15, 2020 $6,0263 MOR Cash Rec. 4:12, 14 ECF No. 39 Dec. 16, 2020 $8,056 Plan Ex. 3 15 p. 13, ECF No. 41 16 Dec. 27, 2020 $8,056 Plan Ex. 3, p. 13, ECF 17 No. 48 Jan. 19, 2021 $8,938 MOR Cash 18 Rec. 4:12, ECF No. 51 19 Feb. 1, 2021 $9,5564 Plan Ex. 3, p. 14, ECF 20 No. 57 21 Feb. 18, 2021 $9,555 Sch. I/J, 5:10, ECF 22 2 For the sake of a true comparison between Schedules I and J, the plan, and 23 the Monthly Operating Reports the court uses Mr. Quilates’ net income (after taxes and other withholdings) and Mrs. Quilates’ gross (pretax) income. This 24 is consistent with the manner in which the debtors’ have calculated income as reported on their Monthly Operating Reports. Where necessary (and possible) the court has adjusted the debtors’ representations for Mr. Quilates so that 25 it is net income, rather than gross income. When the court has done so, it has noted the adjustment. 26 3 The amount reported by the debtors was actually $22,955. But of that amount $16,929 was a “transfer from closed accounts” and is not properly described 27 as income for plan performance purposes. 4 In this instance, the plan describes this as “income,” but does not 1 Filing Date Schedules Plan Monthly Operating Citation Report 2 No. 60 Feb. 18, 2021 $8,982 MOR Cash 3 Rec. 4:12, ECF No. 62 4 Mar. 16, 2021 $9,471 MOR Cash Rec. § 5 3(a), ECF No. 655 6 Apr. 1, 2021 $9,471 MOR Cash 7 Rec. 4:12, ECF No. 71 8 Apr. 1, 2021 $12,1256 Plan Ex. 3 p. 14, ECF 9 No. 72 Apr. 12, 2021 $11,7047 MOR Cash 10 Rec. 4:12, ECF No. 75 11 May 23, 2021 $14,0368 MOR Cash Rec. 4:12, 12 ECF No. 80 May 27, 2021 $11,131 Plan Ex. 3 13 p. 14, ECF No. 869 14 May 27, 2021 $11,131 Sch. I/J 5:10, ECF 15 No. 89 June 14, 2021 $8,69410 MOR Cash 16 Rec. 4:12, ECF No. 90 17 July 15, 2021 $6,10511 MOR Cash 18 5 This Monthly Operating Report is incomplete and does not include the “Cash 19 Receipts” portion of the report and the court has relied on the “Summary of Financial Status.” Detail as to how income was calculated was not provided. 20 6 In this instance the plan describes this as “income,” but does not differentiate between gross and net income. 21 7 The amount reported by the debtors was $13,945. But of that amount $2,241 was a “tax refund” and is not properly described as income for plan 22 performance purposes. 8 The amount the debtors actually reported was $17,786. But of that amount, 23 $3,750 was a “transfer from closed accounts” and is not properly described as income for plan performance purposes. 24 9 Unlike previous plans, this plan listed the debtors’ “gross employment income.” For the sake of a true comparison to the other income calculations provided the court has calculated and listed the debtors’ net income by 25 subtracting $15,924.00 less “[p]ayroll [t]axes and [r]elated [w]ithholdings” of $4,793.00. 26 10 The amount the debtors actually reported was $9,236. But of that amount, $542 was a “Venmo” transfer and is not properly described as income for plan 27 performance purposes. 11 The amount the debtors actually reported was $8,005. But of that amount, 1 Filing Date Schedules Plan Monthly Operating Citation Report 2 Rec. 4:12, ECF No. 92. 3 Aug. 12, 2021 $10,087 MOR Cash Rec. p. 2 ¶ 4 2(b), ECF No. 94 5 6 The most reliable indicator of the Quilates’ net income is their 7 own Monthly Operating Reports. Fed. R. Evid. 801(d)(2) (admission). 8 In only two of the preceding twelve months, April and May 2021, the 9 Quilates’ income exceeded the minimum threshold necessary to support 10 the debtors and their household, as well as fund the plan. The 11 average household income is $8,864 per month, which is well below that 12 necessary to fund the plan. In fact, that income is insufficient to 13 cover the debtors’ living expenses and tax burden, i.e., $9,305 14 ($8,225.01, Plan Ex. 3 pp. 14-15, ECF No. 86 (all expenses included 15 except “[p]ayroll [t]axes and [r]elated [w]ithholdings” for Mr. 16 Quilates) and Mrs. Quilates’ self-employment tax of $480, Id.). 17 Moreover, there is no evidence of a sustained upward income trend. 18 The next best indicator of the Quilates’ income are their 19 projections made in Schedules I and their proposed Chapter 11 plans. 20 Excepting projections for April and May 2021, these projections have 21 also been well below the minimum threshold $10,240.51. 22 The Quilates’ best argument to the contrary is that Mr. Quilates’ 23 most recent pay advice, dated April 30, 2021, shows average year-to- 24 date net income for Mr. Quilates of $9,717.67, Ex. A April 30, 2021, 25 pay advice, ECF No. 101;12 combined with Ms. Quilates’ income, $3,200,

26 income for plan performance purposes. 12 That is calculated based on aggregate gross year-to-date of $42,738.51 and 27 aggregate year-to-date deductions of $4,586.08. Those amount to an average monthly gross income of $10,885.75 per month ($42,738.51 ÷ 17 weeks × 4.33 1 and rent, $1,600, the household net income is $14,517.75. And that 2 amount is more than sufficient to fund the plan. But there are two 3 problems with this evidence. First, these figures are year-to-date as 4 of four months prior to the consideration of the Quilates’ fifth 5 Chapter 11 disclosure statement/plan and are stale. That pay advice 6 does not reflect Mr. Quilates’ income in May, June, July, and August 7 2021. Second, and more importantly, these figures are demonstrably 8 inconsistent with debtors’ representations as to income in the Monthly 9 Operating Reports, particularly those filed in June, July, and August 10 2021, which show considerably less income. 11 Vv. CONCLUSION 12 Even considering the Quilates’ updated evidence as to income and 13 its calculation, the court finds the that Combined Plan of 14 Reorganization dated May 25, 2021, ECF No. 86, is patently not 15 feasible. As a result, the court did not err in its finding of lack 16 of feasibility and the motion will be denied. The court will issue an 17 order from chambers. 18 || Dated: September 07, 2021 CLF 20 Fredrick E. Clement 21 United States Bankruptcy Judge 22 23 24 25 26 27 ($4,586.08 + 17 weeks x 4.33 weeks per month). $10,885.75 gross wages per 28 | month less $1,168.08 = $9,717.67.

1 Instructions to Clerk of Court

2 Service List - Not Part of Order/Judgment

3 The Clerk of Court is instructed to send the Order/Judgment or other court generated document transmitted herewith to the parties below. The Clerk of Court will send the document 4 via the BNC or, if checked ____, via the U.S. mail.

6 Debtor(s) Attorney for the Debtor(s) (if any)

7 Bankruptcy Trustee (if appointed in the case) Office of the U.S. Trustee Robert T. Matsui United States Courthouse 8 501 I Street, Room 7-500 9 Sacramento, CA 95814 All Creditors 10 11 12

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