In re Cherry
| Decision Date | 25 March 1988 |
| Docket Number | Bankruptcy No. 87 B 04882. |
| Parties | In re Ashley CHERRY and Betty Cherry, Debtors. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
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John Ruddy, Ruddy, Myler, Ruddy & Fabian, Aurora, Ill., for debtors.
Richard L. Hirsh, Bashaw & Associates, P.C., Hinsdale, Ill., for CitiCorp.
Ashley and Betty Cherry filed for protection under Chapter 11 of the Bankruptcy Code on April 1, 1987. A plan of reorganization was filed with the Court on September 1, 1987. An Amended Plan of Reorganization was filed by the Debtors on January 7, 1988. Only CitiCorp Savings and Loan, a secured creditor, has objected to the amended reorganization plan. The hearing on confirmation of the plan and CitiCorp's objection was held on February 9, 1988.
CitiCorp holds a first mortgage on the Debtor's primary residence. The present principal balance on the mortgage is approximately $94,394. The arrearage on the loan is approximately $50,031. CitiCorp and the Debtors entered an agreed order providing adequate protection to CitiCorp by requiring that current mortgage payments be made in the amount of $1,153 per month beginning in June, 1987.
The reorganization plan calls for payments of approximately $23,467 to CitiCorp each year until March 1, 1993 when the entire remaining balance of the arrears will be paid off. By the Court's calculation, the balance of the arrears in March of 1993 will be approximately $44,000. Balloon payments in 1993 will also retire a $60,000 debt to the Class III creditor (First National Bank of Joliet) and a $10,000 debt to the Class IV creditor (Aurora National Bank). Additional payments of approximately $7,909 each year will be made to the unsecured creditors, all of whom are receiving a 10% dividend under the plan. In addition to the payments specified under the plan, the Debtors will continue to be responsible for their general living expenses which include the support for Mr. and Mrs. Cherry and their ten year old son and all expenses associated with their fourteen room home and their automobile. The amount of these living expenses has not been specified.
The living expenses are to be paid out of two sources: Mrs. Cherry's income of approximately $600 per month and rental income of approximately $350 per month. This amount must be enough to cover food for three people, utilities for a fourteen room house, insurance for the house and one automobile, any employment or income taxes that may be due on such income and any miscellaneous expenses that arise during each month.
The payments specified in the plan will be made out of Mr. Cherry's salary from Providence Sod Farms, of which Mr. Cherry is a 50% shareholder and chief executive officer. Initially, Mr. Cherry indicated that his salary from the sod farm would be $24,000 per year. When it was pointed out that a $24,000 per year salary would be insufficient to cover the payments of $31,376 under the plan, Mr. Cherry testified that his salary would be increased to cover the deficiency.
Finally, the plan specifies that the 1993 balloon payments of $44,000, $60,000 and $10,000 will be made from the proceeds of Mr. Cherry's personal injury and workmen's compensation suit now pending in the Illinois courts. The suit arose from injuries Mr. Cherry sustained after falling through the doors of an abandoned Nike missile silo in 1985. Alternatively, if there are insufficient funds from the personal injury suit, the Debtors have proposed that they sell their primary residence in 1993 to make the balloon payments.
CitiCorp objects to confirmation of the Debtors' amended plan of reorganization on two grounds. First, CitiCorp contends that the plan is not feasible and therefore may not be confirmed under 11 U.S.C. § 1129(a)(11). CitiCorp claims that feasibility is at best tenuous, in part because the Debtors' ability to make the 1993 balloon payments and pay their litigation expenses is dependent on the Debtors recovering over $170,000 in the personal injury case. Second, CitiCorp has raised questions about the Debtors' good faith in proposing the reorganization plan in light of the Debtors' failure to apply a $38,000 gift to the mortgage arrears.
Confirmation of the Debtors' plan of reorganization is denied because the Court cannot find that, "confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor." 11 U.S.C. § 1129(a)(11).
Good Faith:
A confirmable reorganization plan under Chapter 11 of the Bankruptcy Code must be "proposed in good faith and not by any means forbidden by law." 11 U.S.C. § 1129(a)(3). Good faith is not given a specific definition under the Code, but it is generally held that good faith exists "when there is a reasonable likelihood that the plan will achieve a result consistent with the objectives and purposes of the Bankruptcy Code." In re Nite Lite Inns, 17 B.R. 367, 370 (Bankr.S.D.Cal.1982), Matter of Nikron, Inc., 27 B.R. 773, 778 (Bankr. E.D.Mich.1983). The question of good faith should therefore focus on whether the reorganization plan is capable of confirmation. Id. Chapter 11 contemplates rehabilitation of the Debtor without destruction of the bankrupt's estate and with protection of the creditors' rights. In re Nite Lite Inns, 17 B.R. at 370.
CitiCorp claims that the use of funds to purchase irrigation equipment for Providence Sod Farms in 1986 instead of using the funds to retire the mortgage arrears constitutes bad faith when the Chapter 11 petition was filed only three days prior to the hearing on summary judgment for foreclosure.
Mr. Cherry testified that his parents gave him $38,000 for the express purpose of investing in the sod farm enterprise. There has been no showing that Mr. Cherry's parents would have given him the $38,000 to pay the CitiCorp arrearage or that he could have used the money for that purpose without violating the condition of the gift.
Further, CitiCorp misses the focus of the good/bad faith considerations. The focus should be on the plan. It is true that bad faith may be found if the bankruptcy petition is filed merely as a means to stall foreclosure proceedings. In re Langguth, 52 B.R. 572 (Bankr. N.D.Ill.1985). Still, a realistic plan that would protect the creditors' rights and provide sufficient payments to the creditors may still be proposed in good faith regardless of the timing of the petition's filing. The facts presented by CitiCorp are not sufficient to convince this Court that the plan was proposed in bad faith.
Feasibility:
A plan of reorganization under Chapter 11 is confirmable only if all requirements of § 1129(a) are met. Section 1129(a)(11) requires that "confirmation of the plan is not likely to be followed by 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." 11 U.S.C. § 1129(a)(11).
Satisfaction of the feasibility requirement has generally required some reasonable expectation of success. In re White, 41 B.R. 227 (Bankr. M.D.Tenn.1984). In the case at bar, the ultimate success of the reorganization plan depends on the relative success of two intermediate endeavors. First, Providence Sod Farms must experience moderate success over the next five years and provide Mr. Cherry with income sufficient to pay the $31,376 per year to secured and unsecured creditors. Second, Mr. Cherry's personal injury suit must yield a settlement or judgment within the next five years sufficient to cover the 1993 balloon payments and any costs of the litigation. The Debtors have not contended that extraordinary success of the sod farm will yield sufficient accumulated income in 1993 to retire the debts without recourse to proceeds from the personal injury suit. Therefore, reasonable expectations of success must be established independently for both operation of the sod farm and favorable judgment or settlement of the personal injury action.
The Court will first consider the feasibility of the plan in light of Providence Sod Farms' operations. When examining the feasibility of a business operation the Court should...
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