1 NOT FOR PUBLICATION 2 3 UNITED STATES BANKRUPTCY COURT 4 EASTERN DISTRICT OF CALIFORNIA 5 6 In re: Case No. 2019-25064-A-11 7 SLIDEBELTS, INC., BMR-31 8 9 Debtor. MEMORANDUM 10 11
13 Submitted on July 2, 2020 14 at Sacramento, California 15 Honorable Fredrick E. Clement, Bankruptcy Judge Presiding 16
17 Appearances: Brian M. Rothschild, Parsons Behle & 18 Latimer for Slidebelts, Inc. 19
22 23 24 25 26 27 1 Unless otherwise ordered, dismissal of a chapter 11 case results 2 in revesting of property in the estate. 11 U.S.C. § 349(b). 3 Slidebelts, Inc. filed chapter 11, incurring professional fees to its 4 counsel and to committee counsel. It wishes to dismiss the case, pay 5 its counsel, and then immediately re-file the case under Subchapter V 6 of chapter 11. As a condition of dismissal may the court require 7 payment on the same terms to committee counsel? 8 I. FACTS 9 Slibebelts, Inc. manufacturers and sells belts used as articles 10 of clothing. Unlike traditional belts, which employ a hole and tongue 11 method of size adjustments, Slidebelts’ products adjust the size of 12 the belt by a slide mechanism. Doing so allows a near infinite number 13 of size adjustments and flatter, i.e., less obtrusive, look. 14 Facing financial headwinds, Slidebelts filed Chapter 11. Its 15 filing did not avail itself of the “small business debtor,” 11 U.S.C. 16 § 101(51D), or “Subchapter V” small business debtor, 11 U.S.C. § 17 101(51(C) protections.1 18 Slidebelts, Inc. is represented by Parsons Behle & Latimer 19 (“PBL”). This court has approved compensation for PBL in the amount 20 of $192,000, some of which remains unpaid. 21 The U.S. Trustee appointed an Official Committee of Unsecured 22 Creditors. The committee promptly employed Daren R. Brinkman, 23 attorney at law, and Dundon Advisors, LLC, as its counsel and its 24 financial advisor, respectively. Both Brinkman and Dundon’s 25 employment was approved by this court. Each of the committee’s 26 professionals have been working approximately three months but have 27 1 Slidebelts, Inc. only became entitled to Subchapter V protections after the 1 neither made application for fees, nor have been paid for services 2 rendered. 3 Planning to avail itself of the Paycheck Protection Funding 4 Program of the CARES Act2 and then to re-file its Chapter 11 case under 5 Subchapter V of Chapter 11, Slidebelts moved to dismiss its chapter 11 6 case. The Official Committee of Unsecured Creditors opposed, citing 7 Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), and arguing 8 that the failure of the debtor to propose a mechanism for payment of 9 its professional fees amounted to an unlawful defacto structured 10 settlement. The Jevic argument advances in three steps. First, as of 11 the date of the debtor’s request to dismiss the case committee 12 professionals are unpaid for serves rendered. Second, absent 13 dismissal committee professionals would receive egalitarian treatment 14 vis-à-vis other professionals of its fees. For example, if the case 15 continued in chapter 11, committee professionals would be entitled to 16 be paid in full on the effective date of the plan. 11 U.S.C. § 17 1129(a)(9)(A). In contrast, if the case converted to Chapter 7, 18 committee professionals would hold priority claim and be entitled to 19 be paid in full or, if the case was administratively insolvent, pro- 20 rata payment of its priority claim, 11 U.S.C. §§ 503(b), 507(a)(2), 21 22 2 The Small Business Administration, who administers those loans, takes the 23 position that persons under protection of the bankruptcy court are not eligible for the Paycheck Protection Funding Program. Armed with the 24 decisions of some bankruptcy courts, the debtor believes that the Small Business Administration may not deny an application for funds under the Paycheck Protection Program Funding simply because the debtor is under the 25 protection of the bankruptcy court. Roman Catholic Church of The Archdiocese of Santa Fe v. United States (In re Roman Catholic Church of The Archdiocese 26 of Santa Fe), 2020 WL 2096113 (Bankr. D. NM May 1, 2020); Alpha Visions Learning Academy, Inv. v. Carranza (In re James Skefos), 2020 WL 2893413 27 (Bankr. W.D. Tenn June 2, 2020). In an effort to shortcut that dispute, the debtor planned to dismiss the bankruptcy, obtain the Paycheck Protection 1 726(a)(1). Third, if the chapter 11 case is dismissed and then 2 refiled (as now contemplated), committee professionals will lose their 3 priority status and be paid with general unsecured creditors, 4 notwithstanding full payment to the debtor’s own professionals. 5 At the hearing, the court granted the motion to dismiss without 6 requiring Slidebelts Inc. to make provision for unpaid professional 7 fees incurred by the committee. 8 After the hearing, the court reconsidered its ruling and gave all 9 unpaid professionals approximately 40 days to file fee applications 10 and enjoined payment of professional fees until all such applications 11 had been resolved and all professionals paid in full or, if payment in 12 full was not possible, on a pro-rata basis. 13 II. PROCEDURE 14 Slibebelts, Inc. now moves for relief under Rule 60(b) to 15 eliminate those portions of the court’s order the dictate when and how 16 much, e.g., in full or pro-rata, professionals will be paid. It 17 contends that “This additional relief was not discussed by the parties 18 at the hearing, and the Debtor did not have the opportunity to inform 19 the Court of the detrimental effect of the language in the Modified 20 Order will have.” Motion for Rule 60(b) Relief 2:18-20, July 2, 2020.3 21 In Slidebelt’s view, the prejudice arises from the approximate 40 day 22 delay necessary to sort out professional fees and will force it to 23 delay its re-filing or to retain new counsel. Id. at 2:22-28. 24
3 Slidebelts brought this motion under the expedited notice provisions of the 25 Eastern District of California local rules. LBR 9014-1(f)(2) (not requiring written opposition). Apparently, it did so because the date of the hearing 26 was the last date under which it could make an application for Paycheck Protection Payment Funds. Even though written opposition was not required, 27 the committee did so. Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017) was not cited in the committee opposition but was discussed by 1 III. DISCUSSION 2 As the Supreme Court in Czyzewski v. Jevic Holding Corp., 137 S. 3 Ct. 973 (2017), noted a Chapter 11 “foresees three possible outcomes.” 4 The first is a bankruptcy-court-confirmed plan. Such a plan may keep the business operating but, at the same time, help 5 creditors by providing for payments, perhaps over time. See §§ 1123, 1129, 1141. The second possible outcome is 6 conversion of the case to a Chapter 7 proceeding for liquidation of the business and a distribution of its 7 remaining assets. §§ 1112(a), (b), 726. That conversion in effect confesses an inability to find a plan. The third 8 possible outcome is dismissal of the Chapter 11 case. § 1112(b). A dismissal typically “revests the property of the 9 estate in the entity in which such property was vested immediately before the commencement of the case”—in other 10 words, it aims to return to the prepetition financial status quo. § 349(b)(3). 11 Jevic, 137 S.C.t at 979 (emphasis added).
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1 NOT FOR PUBLICATION 2 3 UNITED STATES BANKRUPTCY COURT 4 EASTERN DISTRICT OF CALIFORNIA 5 6 In re: Case No. 2019-25064-A-11 7 SLIDEBELTS, INC., BMR-31 8 9 Debtor. MEMORANDUM 10 11
13 Submitted on July 2, 2020 14 at Sacramento, California 15 Honorable Fredrick E. Clement, Bankruptcy Judge Presiding 16
17 Appearances: Brian M. Rothschild, Parsons Behle & 18 Latimer for Slidebelts, Inc. 19
22 23 24 25 26 27 1 Unless otherwise ordered, dismissal of a chapter 11 case results 2 in revesting of property in the estate. 11 U.S.C. § 349(b). 3 Slidebelts, Inc. filed chapter 11, incurring professional fees to its 4 counsel and to committee counsel. It wishes to dismiss the case, pay 5 its counsel, and then immediately re-file the case under Subchapter V 6 of chapter 11. As a condition of dismissal may the court require 7 payment on the same terms to committee counsel? 8 I. FACTS 9 Slibebelts, Inc. manufacturers and sells belts used as articles 10 of clothing. Unlike traditional belts, which employ a hole and tongue 11 method of size adjustments, Slidebelts’ products adjust the size of 12 the belt by a slide mechanism. Doing so allows a near infinite number 13 of size adjustments and flatter, i.e., less obtrusive, look. 14 Facing financial headwinds, Slidebelts filed Chapter 11. Its 15 filing did not avail itself of the “small business debtor,” 11 U.S.C. 16 § 101(51D), or “Subchapter V” small business debtor, 11 U.S.C. § 17 101(51(C) protections.1 18 Slidebelts, Inc. is represented by Parsons Behle & Latimer 19 (“PBL”). This court has approved compensation for PBL in the amount 20 of $192,000, some of which remains unpaid. 21 The U.S. Trustee appointed an Official Committee of Unsecured 22 Creditors. The committee promptly employed Daren R. Brinkman, 23 attorney at law, and Dundon Advisors, LLC, as its counsel and its 24 financial advisor, respectively. Both Brinkman and Dundon’s 25 employment was approved by this court. Each of the committee’s 26 professionals have been working approximately three months but have 27 1 Slidebelts, Inc. only became entitled to Subchapter V protections after the 1 neither made application for fees, nor have been paid for services 2 rendered. 3 Planning to avail itself of the Paycheck Protection Funding 4 Program of the CARES Act2 and then to re-file its Chapter 11 case under 5 Subchapter V of Chapter 11, Slidebelts moved to dismiss its chapter 11 6 case. The Official Committee of Unsecured Creditors opposed, citing 7 Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), and arguing 8 that the failure of the debtor to propose a mechanism for payment of 9 its professional fees amounted to an unlawful defacto structured 10 settlement. The Jevic argument advances in three steps. First, as of 11 the date of the debtor’s request to dismiss the case committee 12 professionals are unpaid for serves rendered. Second, absent 13 dismissal committee professionals would receive egalitarian treatment 14 vis-à-vis other professionals of its fees. For example, if the case 15 continued in chapter 11, committee professionals would be entitled to 16 be paid in full on the effective date of the plan. 11 U.S.C. § 17 1129(a)(9)(A). In contrast, if the case converted to Chapter 7, 18 committee professionals would hold priority claim and be entitled to 19 be paid in full or, if the case was administratively insolvent, pro- 20 rata payment of its priority claim, 11 U.S.C. §§ 503(b), 507(a)(2), 21 22 2 The Small Business Administration, who administers those loans, takes the 23 position that persons under protection of the bankruptcy court are not eligible for the Paycheck Protection Funding Program. Armed with the 24 decisions of some bankruptcy courts, the debtor believes that the Small Business Administration may not deny an application for funds under the Paycheck Protection Program Funding simply because the debtor is under the 25 protection of the bankruptcy court. Roman Catholic Church of The Archdiocese of Santa Fe v. United States (In re Roman Catholic Church of The Archdiocese 26 of Santa Fe), 2020 WL 2096113 (Bankr. D. NM May 1, 2020); Alpha Visions Learning Academy, Inv. v. Carranza (In re James Skefos), 2020 WL 2893413 27 (Bankr. W.D. Tenn June 2, 2020). In an effort to shortcut that dispute, the debtor planned to dismiss the bankruptcy, obtain the Paycheck Protection 1 726(a)(1). Third, if the chapter 11 case is dismissed and then 2 refiled (as now contemplated), committee professionals will lose their 3 priority status and be paid with general unsecured creditors, 4 notwithstanding full payment to the debtor’s own professionals. 5 At the hearing, the court granted the motion to dismiss without 6 requiring Slidebelts Inc. to make provision for unpaid professional 7 fees incurred by the committee. 8 After the hearing, the court reconsidered its ruling and gave all 9 unpaid professionals approximately 40 days to file fee applications 10 and enjoined payment of professional fees until all such applications 11 had been resolved and all professionals paid in full or, if payment in 12 full was not possible, on a pro-rata basis. 13 II. PROCEDURE 14 Slibebelts, Inc. now moves for relief under Rule 60(b) to 15 eliminate those portions of the court’s order the dictate when and how 16 much, e.g., in full or pro-rata, professionals will be paid. It 17 contends that “This additional relief was not discussed by the parties 18 at the hearing, and the Debtor did not have the opportunity to inform 19 the Court of the detrimental effect of the language in the Modified 20 Order will have.” Motion for Rule 60(b) Relief 2:18-20, July 2, 2020.3 21 In Slidebelt’s view, the prejudice arises from the approximate 40 day 22 delay necessary to sort out professional fees and will force it to 23 delay its re-filing or to retain new counsel. Id. at 2:22-28. 24
3 Slidebelts brought this motion under the expedited notice provisions of the 25 Eastern District of California local rules. LBR 9014-1(f)(2) (not requiring written opposition). Apparently, it did so because the date of the hearing 26 was the last date under which it could make an application for Paycheck Protection Payment Funds. Even though written opposition was not required, 27 the committee did so. Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017) was not cited in the committee opposition but was discussed by 1 III. DISCUSSION 2 As the Supreme Court in Czyzewski v. Jevic Holding Corp., 137 S. 3 Ct. 973 (2017), noted a Chapter 11 “foresees three possible outcomes.” 4 The first is a bankruptcy-court-confirmed plan. Such a plan may keep the business operating but, at the same time, help 5 creditors by providing for payments, perhaps over time. See §§ 1123, 1129, 1141. The second possible outcome is 6 conversion of the case to a Chapter 7 proceeding for liquidation of the business and a distribution of its 7 remaining assets. §§ 1112(a), (b), 726. That conversion in effect confesses an inability to find a plan. The third 8 possible outcome is dismissal of the Chapter 11 case. § 1112(b). A dismissal typically “revests the property of the 9 estate in the entity in which such property was vested immediately before the commencement of the case”—in other 10 words, it aims to return to the prepetition financial status quo. § 349(b)(3). 11 Jevic, 137 S.C.t at 979 (emphasis added). 12 Section 349(b)(3) provides: 13 Unless the court, for cause, orders otherwise, a dismissal 14 of a case other than under section 742 of this title . . . (3) revests the property of the estate in the entity in 15 which such property was vested immediately before the commencement of the case under this title. 16 11 U.S.C. § 349 (emphasis added). 17 Jevic explained that as a rule dismissal revests property in the 18 debtor and reinstates the status quo but that “for cause,” 11 U.S.C. § 19 349(b), the court may make “appropriate order” to avoid prejudice. 20 Referring to such orders as “structured dismissals” the court 21 commented: 22 Nonetheless, recognizing that conditions may have changed 23 in ways that make a perfect restoration of the status quo difficult or impossible, the Code permits the bankruptcy 24 court, “for cause,” to alter a Chapter 11 dismissal's ordinary restorative consequences. § 349(b). A dismissal 25 that does so (or which has other special conditions attached) is often referred to as a “structured dismissal,” 26 defined by the American Bankruptcy Institute as a 27 “hybrid dismissal and confirmation order ... that ... typically dismisses the case while, among other things, 1 certain third-party releases, enjoining certain conduct by creditors, and not necessarily vacating orders or 2 unwinding transactions undertaken during the case.” American Bankruptcy Institute Commission To Study the 3 Reform of Chapter 11, 2012–2014 Final Report and Recommendations 270 (2014). 4 Jevic, 137 S.C.t at 979. 5 Reliance by a party in interest “on the bankruptcy case” presents 6 a textbook example of § 349(b) cause. HR. Rep No. 95-595 at 338; 7 Wiese v. Community Bank of Central Wis., 552 F.3d 584, 590 (7th Cir. 8 2009) (“upholding, under § 349(b), a Bankruptcy Court’s decision not 9 to reinstate a debtor’s claim against a bank that gave up its lien in 10 reliance on the claim being released in the debtor’s reorganization 11 plan”), cited by Jevic, 137 S. Ct. 984. 12 Slidebelts Inc.’s dismissal presents such a case of reliance by 13 committee professionals, i.e., Daren R. Brinkman, attorney at law, and 14 Dundon Advisors, LLC, which have rendered services that would 15 ordinarily be paid in chapter 7 or chapter 11, at least to the extent 16 of administrative solvency. 11 U.S.C. § 1129(a)(9) (chapter 11 17 professional fees paid in full on the effective date of the plan); 11 18 U.S.C. §§ 503(b), 507(a)(2), 726(a)(1) (professionals entitled to a 19 first order priority in chapter 7); In re Cochise College Park, Inc., 20 703 F.2d 1339, 1356 fn. 22 (9th Cir. 1983) (insolvent estates pay 21 administrative claims pro-rata); In re Lazar, 83 F.3d 306, 308-09 (9th 22 Cir. 1996). Moreover, payment administrative professionals fall in 23 neatly within the realm of structured dismissals. 24 Any prejudice to the debtor is outweighed by the need to protect 25 professionals who have rendered services in reliance on the bankruptcy 26 case. Here, prejudice occasioned by delay is minimal, i.e., 27 approximately 40 days. Moreover, the decision to dismiss and re-file 1 belonged to Slidebelts, Inc. Any prejudice occasioned by its course 2 of action is the result of its own making. 3 Without the order made by the court after the hearing, Slidebelts 4 Ine.’s second Chapter 11 filing will relegate them to the fate of 5 general unsecured creditors. As a result, the court finds the cause, 6 i.e., reliance by attorney Brinkman and financial advisor Dundon, 7 exists. 8 Iv. CONCLUSION 9 For each of these reasons, the debtor’s motion will be denied. 10 The court will issue an order from chambers. 11 Dated: Jul 06, 2020 12 3 UfS. Cher Fredrick E. Clement “4 United States Bankruptcy Judge 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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
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