In re Computer Optics, Inc.

Citation126 BR 664
Decision Date06 February 1991
Docket NumberBankruptcy No. 90-779.
PartiesIn re COMPUTER OPTICS, INC., Debtor.
CourtUnited States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of New Hampshire

James M. Liston, Kaye, Fialkow P.A., Boston, Mass., for Shawmut Arlington Trust Co.

Robert W. Toan, New York City, for Angenieux, Inc.

Jennifer Rood, Backus, Meyer & Solomon, Manchester, N.H., for Computer Optics, debtor.

John Stanzel, Jay Niederman's Law Firm, Manchester, N.H., for Jay Niederman's Office.

Geraldine Brotherton, Thomas P. O'Neill, Jr., Boston, Mass., for UST Virginia Greiman.

MEMORANDUM OPINION

JAMES E. YACOS, Bankruptcy Judge.

This case presents questions of feasibility of a plan of reorganization, and "cramdown" treatment of a secured creditor's claim under the plan. The present dispute is the latest chapter in a pitched battle between the debtor in possession and the secured creditor, Shawmut Bank, N.A., from the time of the chapter 11 filing on May 11, 1990 through the plan confirmation hearings before this Court on November 21, 1990 and December 13 and 14, 1990.

The Bank, notwithstanding its oversecured position at the time of filing, and the fact that there was no default in payments prebankruptcy on the secured loan, has fought the debtor tooth-and-nail throughout the cash collateral usage hearings, the disclosure statement hearings, and at the evidentiary hearings on confirmation of the plan of reorganization.1

The Court during the course of the confirmation hearings issued bench rulings denying various and sundry objections to the confirmation put forward by the Bank, but left for final hearing and argument the question of the feasibility of the plan of reorganization and the question of whether restructuring the Bank's mortgage loans to a six year period on a consolidated basis under the plan with the same contractual rate of interest could be confirmed over the Bank's objection under the provisions of § 1129(b)(2)(A) of the Bankruptcy Code.

Best Interests

While the Bank as an oversecured creditor does not have standing to raise the "best interests of creditors" requirement under § 1129(a)(7) of the Bankruptcy Code, i.e., whether the plan provides general unsecured creditors more than they would receive under liquidation of the debtor's assets net of liabilities, the Bank nevertheless objected to confirmation on this ground,2 and the Court has an independent obligation to make findings with regard to the best interest requirement. The evidence before the Court in that regard establishes that the debtor's assets at liquidation would net approximately $593,000.00. The Bank's secured claim as of December 13, 1990, in principal and accrued interest, totals $535,754.59.3 Accordingly, at best, the unsecured creditors could expect to receive only some $57,000.00 in distribution in liquidation. Since there are approximately $507,000.00 in unsecured claims, the maximum distribution in liquidation would be approximately 11.2 percent. The plan of reorganization provides for a distribution to general unsecured creditors of 35 percent. Accordingly, the plan clearly satisfies the best interest requirements of § 1129(a)(7).

Feasibility

The Bank contends on the feasibility issue that the projected payout of its secured debt over the six-year period, together with the payment of some 35 percent to general unsecured creditors under the plan, is not feasible, and that the debtor has failed to meet its burden of proof in that regard, in view of the history of this debtor's operations and its conduct and operations during the chapter 11. The Bank notes correctly that the debtor's profitability from its inception in 1985 has been low; that it posted a substantial loss in 1989; and that it has shown both operation and net losses during 1990 both before and after the filing of the chapter 11 petition.4 The Bank also notes that following the chapter 11 filing the debtor has shown negative cash flows in a number of the succeeding months.

The debtor responds, and the record supports, that this chapter 11 proceeding is highly unique for the following reasons: (1) there had been no pre-petition defaults in payment to the Bank; (2) there were no IRS trust fund payroll taxes due either at or after the filing; (3) the debtor is current with the Bank debt except for certain payments that were withheld during the dispute with regard to cash collateral usage at the outset of the case; (4) the debtor historically has shown a collection rate of in excess of 99 percent of its accounts receivable and can accordingly rely on its projections of such collections; (5) the debtor has held its present 30 employees from the time of its inception; (6) both the two controlling shareholders and the employees took substantial pay cuts prior to the bankruptcy filing; (7) the debtor has received an approved federal grant under the New England Trade Adjustment Assistance Center (hereinafter "NETAAC") which will result in some $55,000.00 being funded by the U.S. Department of Commerce under the NETAAC program to assist the debtor in improving the efficiency of its production and operational controls, and to aid in creating a more focused marketing approach for the debtor in its industry.5

The debtor produces commercial and industrial quality zoom lenses and other optical instructions and systems. The debtor has the capability of producing large telephoto lenses that interface into other electronic applications. The company's main strength is its technical capability. It is one of possibly two or three companies in the country that can provide full technology for military/aerospace applications of complex optical telephoto lenses. transcript page 109 Lead times in preparing orders and collecting payment can be extensive in this operation. The evidence is consistent throughout the record that there are "plenty" of "small" contracts ($1 million or less) available to the debtor if it will properly focus its marketing and production in that area.

The debtor's real problems stem not from the quality of their products or market conditions but rather from other factors. First, they prematurely attempted without adequate working capital to shift their business operation from the lower profitability area of "manufacturing components" to the higher profitability area of dealing with "systems and assemblies" of complex optical products. In effect, they tried to make the shift with expenditures out of operations rather than by a new capital infusion, and therefore showed low or negative profitability prior to the bankruptcy filing. Second, an extraordinary event in 1989 occurred when arsenic leaked into the debtor's water wells and caused an etching of some optical work in progress that had to be abandoned at a cost of some $180,000.00, greatly contributing to the net operating loss for that year.6

The debtor's financial and operation history therefore presents the all-too-common present phenomenon in our economy of a business enterprise that can be organized with very little capital investment; that can proceed to become known and competitive in a desirable market area for its products; but that does not have sufficient working capital to cover unexpected negative events and/or sufficient working capital to take advantage of attractive positive opportunities.

The debtor's predecessor corporation was a French concern that produced zoom lenses in this country. The present two stockholders of the debtor, who previously had managed the French concern, ultimately were allowed to buy out the former company in a leveraged buy-out transaction. The name of the corporation was changed to Computer Optics, Inc., in 1985. After a successful 1986 year the debtor was able to obtain its present line of credit and secured borrowing from the Shawmut Bank in 1987. The debtor's two shareholders are individuals who have extensive skills and experience in developing complicated optical systems.

The debtor has historically averaged approximately 2.2 million dollars in sales. Its sales in 1989 were approximately $2,685,000.00. The sales for fiscal 1990 were approximately $1,900,000.00. The debtor's projected sales for fiscal 1991 under its plan are $2,721,843.00. The sales projections for fiscal 1991 were carefully and conservatively done, including calls and contacts with customers as to possible contracts, and review of past history with such customers. On balance, I find the sales projections realistic notwithstanding the sharp drop in sales in 1989-1990 period. The arsenic occurrence in 1989, the disputes with the Bank in 1990, and the natural disruption caused in the early stages of a chapter 11 proceeding explain that reduction as simply an aberration in the otherwise upward trend of sales experienced by the debtor in recent years. It is credible as the debtor's witnesses testified that approximately $500,000.00 in sales were lost during 1990 due to the disputes and litigation with the Bank and the chapter 11 filing. Those customers are available to continue to do business with the debtor once its financial condition is stabilized.

The debtor projects total cash expenditures for fiscal 1991 of $1,504,967.00, which include required debt service to the Bank under the plan of $127,154.00 and payments to the unsecured creditors under the plan. After deducting other expenditures for raw materials and outside vendors, equipment leases, and other miscellaneous items totalling $902,573.00 the projections leave net cash available for fiscal 1991 of $83,004.00. The projections for succeeding years build on those figures largely in line with historical trends. I likewise find those projections realistic and conservative.7

In sum, the debtor made a strong showing in the confirmation hearing that with the aid of the professional advice and funds available under the NETAAC grant, and a refocused effort in its marketing targets and program, it should be able to reach the $2.7 million dollar level in sales...

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