In re Brown

Decision Date26 September 2013
Docket NumberNo. 12–14058.,12–14058.
Citation498 B.R. 486
PartiesIn re Steven BROWN and Linda Brown, Debtors.
CourtU.S. Bankruptcy Court — Eastern District of Pennsylvania

OPINION TEXT STARTS HERE

Kevin P. Callahan, United States Trustee, Dept. of Justice, Philadelphia, PA, for United States Trustee.

William Edward Craig, Morton & Craig, Moorestown, NJ, for JPMorgan Chase Bank, N.A.

Allen B. Dubroff, Philadelphia, PA, for Debtors.

Joseph A. Ryan, Ryan, Emory & Ryan, LLP, Paoli, PA, for Joseph Ryan and Mario Ferroni.

Aaron Shotland, City of Philadelphia, Philadelphia, PA, for City of Philadelphia, Law Revenue Department.

Robert John Wilson, Wilson Law Firm, Media, PA, for TD Banknorth, N.A.

MEMORANDUM

BRUCE FOX, Bankruptcy Judge.

Before me are motions filed by Mario Ferroni and Roberta A. Deangelis, Esq., the United States Trustee for Region 3, both seeking to dismiss this chapter 11 case pursuant to 11 U.S.C. § 1112(b)(1).1 Their motions are supported by Michael and Theresa Dolan. Although all four parties contend that this case should be dismissed, their contentions differ slightly, as will be discussed.

The debtors oppose dismissal and request the opportunity to submit another chapter 11 plan to creditors for creditor voting.2 The debtors contend that they can propose a viable plan that can be confirmed. In support of this contention they have filed an amended chapter 11 plan that, the debtors argue, meets the confirmation requirements of section 1129(b).

The movants counter, and the Dolans agree, that submitting any further plans for creditor voting would be pointless, as no plan these debtors can afford could be confirmed. Therefore, they maintain this chapter 11 case should be dismissed.

After reviewing the parties' thoughtful post-hearing submissions, for the following reasons I find that dismissal of this case is warranted. In so concluding, I shall address an issue of almost first impression within this circuit: whether the 2005 amendments to the Bankruptcy Code eliminated the requirement that individual chapter 11 debtors must meet the absolute priority rule when an impaired unsecured creditor class does not vote in favor of their plan.3

I.

After an evidentiary hearing, the following facts, as relevant to this dispute, were proven.4

The debtors, Steven and Linda Brown, filed a joint voluntary bankruptcy petition under chapter 11 on April 25, 2012. Mr. Brown is an architect, licensed in Pennsylvania, and Mrs. Brown is a homemaker and volunteer special education teacher. Only Mr. Brown earns income, see ex. T–1 (Schedule I), and it is with his income that the debtors intend to reorganize.

In addition to providing architectural services, Mr. Brown also earns income as a construction manager and general contractor. He performs all of these services as an employee/member of one or more of the following three entities: Design Associates, Inc.; Design Build, LLC; and Build US, LLC. See ex. T–1; see generally63 P.S. §§ 34.1, et seq. (“Architects Licensure Law”). Mr. Brown explained that he distributes all net income earned by Design Associates and Build U.S. into Design Build, and then takes distributions from Design Build.

Indeed, Mr. Brown now operates primarily through Design Build, averring that he ceased using Design Associates in 2011 and formed Build U.S. in 2011. See ex. F4 (2011 Federal Tax Form 1120 for Build US, LLC). He is the sole member of Design Build, the sole shareholder of Design Associates, and one of two members (along with his bookkeeper) of Build US.5

Design Associates, a subchapter S corporation, although not currently operating, has not dissolved as a corporation and has asserted a mechanics lien claim against real property owned by Mr. and Mrs. Dolanin the approximate amount of $150,000. Ex. F–1. The Dolans, in turn, have alleged causes of action in state court against Mr. Brown individually, as well as against Design Associates. See also exs. F–5, at 2; F–6. Design Associates has incurred $22,000 in legal fees, while Mr. Brown's malpractice insurer is paying for his individual defense. The Dolans filed an unsecured proof of claim in the amount of $143,240.59, docketed as proof of claim # 16, to which the debtors have objected. See docket entry # 178.

Design Build has current contracts for architectural work and has submitted proposals for construction management services. Mr. Brown testified that he takes distributions from this company as needed to pay his family expenses, and asserts that these distributions average about $11,000 per month. See also ex. F–7 (Amended Bankruptcy Schedule I). He further averred that his monthly expenses average approximately $9,710. Id. (Amended Bankruptcy Schedule J). The debtors' monthly operating reports, however, reflect a lower average net monthly income. See ex. T–5.

At the time of their bankruptcy filing, the debtors (and two of their children) resided in real property owned jointly, located at 922 Cedar Grove Road, Broomall, Pennsylvania. They also owned property located at 1334 Burke Road, West Whiteland, Pennsylvania, and Mr. Brown owned realty located at 224 Dutton Mill Road, Willstown, Pennsylvania. Ex. T–1.

The West Whiteland realty is secured by a mortgage held by TD Bank. The mortgagee has obtained relief from the bankruptcy stay to foreclose and the debtors anticipate that this property will be sold at an execution sale with TD Bank asserting a deficiency claim estimated at $50,000. See ex. Dolan–1, at 3, 10.

The Willstown property was secured by a lien held by Mr. Ferroni. Ex. Dolan–1, at 4. Mr. Ferroni confessed judgment against the debtors and began execution proceedings, which is the underlying reason the debtors filed their voluntary bankruptcy petition. Id., at 4; Debtors' Post–Hearing Memorandum, at 2, 6. Mr. Ferroni executed upon the Willstown property and filed a deficiency claim in this court in the amount of $489,000. See Claim Register, Proof of Claim # 13. The debtors were afforded an opportunity to object to this deficiency claim, see docket entry # 119 (Order dated May 15, 2013), but opted not to do so. Thus, for purposes of this contested matter, Mr. Ferroni's claim will be deemed allowed. See11 U.S.C. § 502(a); Debtors' Post–Hearing Memorandum, at 2.

On the debtors' Amended Bankruptcy Schedule C they elected the federal bankruptcy exemptions found in section 522(b)(2). Ex. T–1. Rather than take any homestead exemption under section 522(d)(1),6 the debtors chose to take an additional “wildcard” exemption permitted by section 522(d)(5), see generallyIn re Ladd, 450 F.3d 751, 754 (8th Cir.2006), and claimed as exempt all of their scheduled personal property listed on Bankruptcy Schedule B, except for Mr. Brown's interests in Design Build, Build US, and Design Associates. The debtors contend that the value of these interests is “unknown.” See ex. T– (Amended Schedule B).

As noted above, after confirmation of their initial chapter 11 plan was denied, the debtors filed an amended chapter 11 plan, ex. T–3, which they assert can be confirmed and should be submitted to creditors for voting. This amended proposed plan may be summarized in relevant part as follows:

1. The debtors will continue to pay the first mortgagee, Wells Fargo Bank, and the second mortgagee, Malvern Federal Savings and Loan, their regular monthly mortgage payments secured by their residence, and which obligations they contend are current;

2. The debtors propose to pay a small secured claim asserted by the Pennsylvania Department of Revenue in full within 30 days after an order of confirmation is entered.

3. All allowed unsecured claims, including the deficiency claims held by Mr. Ferroni and TD Bank, are placed in class 6. The debtors propose to pay $15,000 per annum to this class, to be distributed pro rata.7

Ex. T–3, at 7. Although the proposed plan does not so state, the debtors orally argued through their counsel that they intended to distribute payments to class 6 in quarterly installments for five years, thus totaling $75,000. See also Debtors' Post–Hearing Memorandum, at 16 (referring to the “five year term of the plan”).

The interests of the debtors are placed in class 7 of the proposed plan, but the plan does not expressly provide for the treatment of this class, other than as follows:

On the Effective Date and except as otherwise set forth in this Plan, the Reorganized Debtors shall be vested with all assets that comprise the Debtors' estates, free and clear of all Claims, liens, charges, encumbrances, rights and Interests of creditors and equity security holders. As of the Effective Date, the Reorganized Debtors may operate their business and use, acquire and dispose of property and settle and compromise Claims or Interests without supervision of the Bankruptcy Court free of any restrictions of the Bankruptcy Code other than as expressly set forth in the Plan or the Confirmation Order.

Ex. T–3, at 10 (¶ 7.1).

Since [t]he Reorganized Debtors shall fund the payments required under the Plan from husband's continued business operations,” id., at 11 (¶ 7.3.1), I conclude that the proposed plan must provide for Mr. Brown to retain his prepetition interests in his three entities: Design Associates, Design Build, and Build US. Moreover, the income derived from these entities is the debtors' only possible source of plan funding.

At the hearing, it was agreed that Mr. Ferroni's allowed unsecured claim will not and cannot be paid in full. See also Debtors'Post–Hearing Memorandum, at 13. Moreover, the debtors acknowledged at the hearing that Mr. Ferroni will not vote in favor of the debtors' current plan, nor vote in favor of any plan that they could afford to fund. See also id. It is also undisputed that were Mr. Ferroni to vote against the debtors' chapter 11 plan then the unsecured creditor class, class 6, will have rejected the proposed plan, because Mr. Ferroni's allowed claim far exceeds the one-third threshold for a blocking position under section 1126(c). See generally In re Swedeland...

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