In re Copy Crafters Quickprint, Inc.

• Decision Date: 14 October 1988
• Docket Number: Bankruptcy No. 88-00018.
• Citation: 92 BR 973
• Parties: In re COPY CRAFTERS QUICKPRINT, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of New York

92 B.R. 973 (1988)

In re COPY CRAFTERS QUICKPRINT, INC., Debtor.

Bankruptcy No. 88-00018.

United States Bankruptcy Court, N.D. New York.

October 14, 1988.

Pelland & Shockey (David W. Pelland, of counsel), Syracuse, N.Y., for debtor.

Costello, Cooney & Fearon (Dale B. Johnson, of counsel), Syracuse, N.Y., for J. Robert White.

Kevin Purcell, Office of U.S. Trustee, Albany, N.Y.

MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

STEPHEN D. GERLING, Bankruptcy Judge.

Four pre-confirmation matters arose within the Title 11 case of Copy Crafters Quickprint, Inc. ("Debtor"): 1) the approval of the Debtor's first amended Disclosure Statement in the face of an objection lodged by the United States Trustee ("UST"), pursuant to § 1125 of the Bankruptcy Code, 11 U.S.C.A. §§ 101-1330 (West 1979 & Supp.1988) ("Code"), 2) the Debtor's motion to approve the lease of its inventory and equipment nunc pro tunc from January 14, 1988, pursuant to Code § 363(b), 3) the UST's motion to dismiss or convert the Debtor's Chapter 11 case, pursuant to Code § 1112(b), and 4) the motion by J. Robert White ("White") to authorize the sale of the Debtor's assets, pursuant to Code § 1123(a)(5)(D) or Code § 363(b). Hearings on all of the motions were held over a four month period, after which the Court took them under advisement together.

JURISDICTIONAL STATEMENT

The Court has jurisdiction of the parties and subject matter pursuant to 28 U.S.C.A. §§ 1334 and 157 (West Supp.1988). These are core proceedings, 28 U.S.C.A. § 157(b)(2)(A), (M), (N) and (O), and the following constitutes findings of fact and conclusions of law rendered in accordance with Bankruptcy Rules ("Bankr.R.") 1017, 2002, 3016, 3017, 6004, 7052, 9006, 9013 and 9014.

FACTS

The Debtor, a closely-held corporation having as its sole equity security holder and sole officer (President) Keith F. Maloney ("Maloney"), operated a printing, copying and duplicating business in Syracuse, New York. On January 8, 1988, it filed a voluntary petition under Chapter 11 of the Code. The Debtor's schedules recited a total debt of $110,922.75 and assets amounting to $25,877.30. Its assets consisted of $100.00 in a Norstar Bank checking account, $777.30 of accounts receivables and equipment, furniture and non-production equipment accorded a market value of $25,000.00.

The most recent inventory of the property was taken in 1985, pursuant to an agreement for the purchase of the business with White, dated December 5, 1985, which the petition described as executory. White was listed as holding the larger of the Debtor's two secured claims in the amount of $40,000.00 and secured by a "second lien on equipment, and inventory (amount disputed)" valued at $25,000.00. White filed a proof of claim on February 10, 1988 in the amount of $104,497.96.

Solvay Bank ("Bank") was listed as holding a claim for $10,000.00 and secured by a first lien on equipment, inventory and accounts receivables valued at $25,000.00. The Bank filed a proof of claim in the amount of $9,768.92 on January 19, 1988. Schedule A-1 indicated federal unemployment and withholding taxes of $17,635.42 and state withholding, unemployment insurance, sales and "corporation tax (12/31/86)" of $16,419.76, for a total of $34,055.18. None of the listed taxes were identified as pre or post-petition. Thirty-nine unsecured claims amounted to $26,867.57.

The Debtor terminated its business operations January 19, 1988.

The Debtor filed a Disclosure Statement and Plan on February 29, 1988. Containing a disclaimer, it reported that the business was purchased as a going concern from its former operator one and a half years ago at a price "far in excess of revenues which the business could generate over and above normal operation expenses." Disclosure Statement, 3 (Feb. 25, 1988). It also stated that substantially less ("twenty percent of value as estimated in its Schedules") would be realized through either a forced sale in the Chapter 11 or through a Chapter 7 than through the plan. Id. Noting the lack of unencumbered assets, the Debtor also acknowledged substantial tax claims asserted by both the Internal Revenue Service and the New York State Department of Taxation & Finance. The Debtor disclosed a prepetition purchase agreement and a post-petition lease agreement "with the proposed purchaser for the continued operation of the business pending the approval or rejection of the Debtor's Disclosure Statement and Plan of Reorganization." Id; see also id. at Exhibits C & D (copies of both documents).

The purchase agreement, dated December 18, 1987, was made with Richard Kuhn ("Kuhn") and signed by Maloney alone. See id. at Exh. D. In pertinent part, this agreement sets out a purchase price of $35,000.00, from which payment in full of the monies owed to the Bank and the federal and state tax authorities would be satisfied.¹

The lease agreement dated January 14, 1988, with the Genesee Printing & Copy, Inc., ("Genesee") is signed by Maloney and Kuhn, on behalf of the Debtor and Genesee, respectively. It set out a month-to month tenancy commencing January 18, 1988 and involved a lease of the premises and the equipment, supplies, inventory and all else utilized in the business. Genesee Printing agreed to pay for all utilities and materials used in the business, the wages and benefits of the Debtor's employees, the loan payments to the Bank, the medical insurance premiums to White and his wife and rent and insurance for the premises. Genesee also agreed to pay Maloney personally fifty percent of the business' net monthly profit with a $1,200.00 ceiling.

The Plan contemplates that the sale proceeds would be distributed to pay in full the Code § 507(a)(1) administrative expenses in Class 1, Code § 507(a)(2)-(6) sic federal and state tax priority claims in Class 2 and the Bank, Class 3 — the "unimpaired classes." See Plan of Reorganization, Article III (Feb. 25, 1988). "The balance of any sums remaining" would then be applied to the claim of the Class 4 creditor, White, after which the unsecured claims held by Class 5 creditors would be paid. See id. at Art. IV. "At present, it is not anticipated that the proceeds of sale of the Debtor's assets will provide sufficient monies for any distribution to the creditors in Class 5." Id. The Plan indicated the purpose of the lease was "if this matter did not close quickly, that sufficient revenues might be generated so that the claim of White would be paid and there might even be some assets available for distribution to unsecured creditors." Id. at Art. V.

The UST objected to the Disclosure Statement on the grounds that it should 1) describe impairment in a detailed and accurate form 2) show the amount of cash the Debtor needs for plan confirmation, 3) explain the voting requirements under Code § 1126 and advise creditors where and when their ballots must be sent, 4) give an estimated liquidation analysis, 5) include a recent balance sheet by the Debtor, 6) describe the accounting methods used and identify the person who prepared financial information, setting forth his or her credentials, 7) list the names, addresses and relationship to the Debtor or Debtor's principal of purchaser, 8) signify that Debtor sought or is seeking court approval of lease it executed with purchaser and 9) not allow Maloney to receive any net profit under lease since that is property of the estate. Objection Of The United States Trustee To Proposed Disclosure Statement (Apr. 14, 1988). The Court then adjourned the hearing on April 19, 1988 to May 3, 1988 upon the Debtor's representations that an amended Disclosure Statement and motion to enter into the lease would be submitted by April 28, 1988.

The Debtor filed an Amended Disclosure Statement on May 2, 1988, attaching a balance sheet dated November 30, 1987 and a liquidation balance sheet as exhibits. The Amended Statement also identified the proposed purchaser as "a former employee . . . who has no financial or other relationship with the Debtor or its principal officers or shareholders." First Amended Disclosure Statement, 3 (Apr. 27, 1988). The Debtor stated that the plan required approximately $35,000.00 in cash within ten days of closing to pay Classes 1, 2 and 3 — the "state and federal tax claims, the lien of Solvay Bank" — and to apply any balance to White and the unsecured creditors. Id. at 4.

The Statement made reference to six classes and identified, without differentiating, six entities who apparently comprise these classes. It provided a description of impairment and voting procedures, under Code §§ 1124(1) and 1126(c), the alternative "fair and equitable" standard that can result in confirmation over a rejecting class and that the ballots needed to be completed and sent to the Court. Additionally, the Amended Disclosure Statement attached a copy of the lease agreement where Maloney's name was replaced by the Debtor's in the clause providing for receipt of fifty percent of the net profits of the business. See id. at Exhibit E.

On the same date, the Debtor moved for nunc pro tunc court approval of the lease of its business pursuant to Code § 363(b) and effective the date of execution, January 14, 1988. The notice of motion was served on April 29, 1988 and made returnable in Syracuse May 10, 1988. The motion consisted of an affidavit by the Debtor's attorney, David W. Pelland, Esq. ("Pelland") and a copy of the lease agreement. It states that, in the face of the Bank's and White's perfected security interests on all of its assets totalling roughly twice their fair market value, federal and state tax liabilities in excess of $34,000.00 and the possible seizure of its assets and closing of the business by New York State, it filed Chapter 11 to keep the business running, maintain the value of its assets and continue payments to its creditors. Affidavit In Support Of Motion To Lease Debtor's Inventory And Equipment, paras. 2-4 (Apr. 28, 1988). At...