Friedman v. P+P, LLC (In re Friedman)
| Decision Date | 19 March 2012 |
| Docket Number | AZ–11–1149–JuKiCl.Bankruptcy No. 07–02135.,BAP Nos. AZ–11–1105–JuKiCl |
| Citation | 56 Bankr.Ct.Dec. 57,2012 Daily Journal D.A.R. 3650,466 B.R. 471 |
| Parties | In re Gregory A. FRIEDMAN and Judith Mercer–Friedman, Debtors.Gregory A. Friedman; Judith Mercer–Friedman, Appellants, v. P+P, LLC, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
OPINION TEXT STARTS HERE
Appeal from the United States Bankruptcy Court for the District of Arizona, Honorable Philip H. Brandt, Bankruptcy Judge, Presiding, Honorable James M. Marlar, Chief Bankruptcy Judge, Presiding.*Scott D. Gibson, Esq., of Gibson, Nakamura & Green, PLLC, argued for appellants Gregory A. Friedman and Judith Mercer–Friedman. Daniel Mark Press, Esq., argued for National Association of Consumer Bankruptcy Attorneys, as amicus curiae, by special leave of the Panel, supporting the appellants' position.Before: JURY, KIRSCHER, and CLARKSON,**Bankruptcy Judges.
Chapter 11 debtors, Gregory Friedman (“Gregory”) and Judith Mercer–Friedman (“Judith”) (collectively, the “Friedmans” or “Debtors”), appeal the bankruptcy court's orders denying confirmation of their second amended plan (BAP No. 11–1105) and converting their case to chapter 7 (BAP No. 11–1149).
These consolidated appeals raise the issue whether the absolute priority rule embodied in § 1129(b)(2)(B)(ii) 1 applies to individual chapter 11 debtors. We granted leave to the National Association of Consumer Bankruptcy Attorneys (“NACBA”) to file an amicus brief in support of Debtors' position that the rule does not apply to them. Both the Appellants and the NACBA participated in the oral arguments before us. No party has participated as an appellee in this appeal. For the reasons stated, we hold that the absolute priority rule does not apply in individual debtor chapter 11 cases and REVERSE the bankruptcy court's order denying confirmation of their second amended plan (BAP No. 11–1105). We also REVERSE the bankruptcy court's order converting the Debtors' chapter 11 case to chapter 7 (BAP No. 11–1149). We REMAND these matters to the bankruptcy court for further action consistent with this opinion.
The Friedmans are technology entrepreneurs who founded and operated several internet-related businesses. Several of those businesses suffered financial difficulties and had filed for protection under chapter 11 of the United States Bankruptcy Code. Eventually, however, those businesses were unable to reorganize and their bankruptcy cases were dismissed, leaving the Friedmans with significant tax liabilities and unpaid secured and unsecured business debts.
The Friedmans founded Netbeam, Inc. (“Netbeam”), a company that provided high speed wireless internet services to customers in Summit County, Colorado. On July 10, 2001, Netbeam filed a voluntary petition for chapter 11 relief in the Colorado bankruptcy court (Bankruptcy Case No. 01–19986). Two days prior to Netbeam's filing, the Friedmans formed Peak Speed Communications, Inc. (“Peak”). Ten days after Netbeam's filing, the Friedmans, as officers of Peak, entered into an Operating and Merger Agreement between Netbeam and Peak. Although this agreement was not disclosed to the bankruptcy court, the Friedmans implemented its terms. At some point, the undisclosed agreement surfaced and an examiner was appointed.
Netbeam eventually confirmed a plan which effectively merged Netbeam and Peak. In accordance with the confirmed plan, Peak, the successor, closed a loan from First United Bank (the “Bank”) in the approximate amount of $600,000. P+P, LLC (“P+P”) pledged $200,000 to guarantee the loan. The loan was secured by all of Peak's assets and a second deed of trust on the Friedman's real property located in Breckenridge, Colorado (“the Breckenridge Property”), which they used as a rental property and a part-time residence.
During Netbeam's bankruptcy, significant amounts of employment taxes went unpaid. Eventually, Netbeam ceased making its quarterly payments to the U.S. Trustee and was unable to make other payments required under the plan. On August 22, 2006, the bankruptcy court dismissed Netbeam's case.
A few years earlier, on May 3, 2004, Peak filed a chapter 11 petition in the Colorado bankruptcy court (Bankruptcy Case No. 04–19246). During the course of Peak's bankruptcy, P+P purchased the Bank's loan to Peak. In the process, P+P stepped into the Bank's shoes with respect to the Bank's security interest in virtually all of Peak's assets and the second deed of trust on the Breckenridge Property. P+P then acquired and later sold Peak's assets.
In 2007, P+P commenced an action in the Colorado state court against the Friedmans, seeking a declaration that it had a valid lien on the Breckenridge Property and the right to foreclose. The state court entered a default judgment in favor of P+P which began foreclosure proceedings on the Breckenridge Property.
On October 27, 2007, the Friedmans filed their chapter 11 petition in the Arizona bankruptcy court, thus staying the foreclosure.3 Their Schedule A valued the Breckenridge Property at $750,000 and Schedule D showed the property was overencumbered with three liens. Washington Mutual Home Loans (“Washington Mutual”) had a first lien in the amount of $578,000. P+P had a second lien in the amount of $556,000. Finally, a painting company held a third lien in the amount of $2,500.
Debtors' Amended Schedule B showed personal property consisting of household goods and vehicles. It also showed that Debtors (1) were the sole members in AZCI NET, LLC (“AZCI”), a wireless internet service provider located in Arizona City, Arizona; (2) owned 100% of the stock of Blue River Networks, Inc. (“Blue River”), a technology and management consulting and support company located in Arizona City, Arizona; (3) were partners in a family trust named JGF Family LLP, the purposes of which were resort rental management services and family trust; and (4) held stock or had an interest in Peak, a wireless broadband engineering company located in Breckenridge, Colorado. Debtors assigned a zero value to their interests in all these entities.
Schedule E showed priority unsecured debt consisting of substantial amounts owed to the Colorado Department of Revenue and the Internal Revenue Service for employment taxes by Netbeam or Peak, and for personal income taxes. Schedule F showed debt owed on equipment leases and vehicles for Netbeam. Those amounts, along with credit card and other miscellaneous unsecured debt, totaled $359,000.
Finally, Debtors' Amended Schedule I showed combined average monthly income as $15,094. Of that amount, $9,000 was attributed to income from their businesses and $3,000 was attributed to income from rentals on the Breckenridge Property. Amended Schedule I also reflected that both debtors were collecting social security income and Gregory was receiving a pension from IBM of $594 a month. Amended Schedule J showed average monthly expenses of $13,698, which included $6,730.18 towards the debt on the Breckenridge Property. Debtors' monthly net income was reflected at $1,395.84.
P+P immediately moved for relief from stay on the Breckenridge Property. Washington Mutual later filed a similar motion.
Debtors' initial plan provided for, among other things, payments to satisfy their mortgage and other debt related to the Breckenridge Property, with the exception of the claims of P+P. Debtors stated their belief that they had paid P+P in full.4 Under the heading “Implementation of the Plan”, the plan provided:
Upon confirmation, all of the assets of the Debtors' estate shall be vested in the Debtors and the Debtors shall continue to work in their consulting and business management company. Debtors shall pay all expenses of their personal life, including taxes and insurance costs, on a current basis. The Debtors' disposable income shall be deposited into the Plan Fund and distributed as provided herein.
After a status conference on this plan, Debtors filed a first amended plan which provided for P+P's claim in the event the state court default judgment against them was upheld. The plan also provided that to the extent P+P's claim was unsecured, its claim would be paid pro rata with the other general unsecured claims. Debtors proposed to pay $634 per month to unsecured creditors.5
Before any hearing took place on Debtors' first amended plan, the bankruptcy court granted P+P's motion for relief from stay on the Breckenridge Property by order entered on September 12, 2008. The bankruptcy court later granted Washington Mutual's relief from stay motion on the Breckenridge Property by order entered on April 9, 2009. Eventually, Washington Mutual foreclosed on the Breckenridge Property. Due to the collapse of the real estate market, P+P's secured claim against the Breckenridge property became entirely unsecured.
In early February 2010, Debtors filed their second amended plan. For confirmation purposes, this plan only needed to address the priority and secured claims of the taxing authorities and Debtors' general unsecured claims, including the claims of P+P.6 Debtors' proposed statement of implementation of the plan remained the same; i.e., upon confirmation, their assets, including their equity interests in their businesses, would revest in Debtors and they would continue to work and contribute all their disposable income to the plan. The proposed payment of $634 a month to unsecured creditors was not altered.
According to Debtors' second amended disclosure statement, their combined monthly income went from $15,094 to $6,297. The $6,297 figure consisted of $2,000 income from Debtors' businesses with the remaining amounts attributed to Gregory's IBM pension and Debtors' combined social security...
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