In re David Green Property Management
| Decision Date | 17 February 1994 |
| Docket Number | Bankruptcy No. 92-60782. |
| Citation | 164 BR 92 |
| Parties | In re DAVID GREEN PROPERTY MANAGEMENT d/b/a Cash Country Theatre, Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
Danny R. Nelson, Springfield, MO, for trustee.
Ronald S. Weiss, Kansas City, MO, for debtor.
On February 8, 1994, a hearing was held on the Trustee's Application for Approval of Proposed Final Distribution to Unsecured Creditors and the objection of Debtor David Green Property Management.1 Trustee Danny Nelson represented himself. Debtor appeared by counsel Ronald Weiss. The facts are undisputed. After consideration of stipulated evidence, the file, briefs, arguments and authorities, the court finds the Application should be granted.
This case presents circumstances not often found in a bankruptcy proceeding: there were sufficient proceeds from the sale of property to pay all allowed claims of creditors, and a surplus will remain of over $1,100,000 cash, plus at least $2,664,000 in real and personal property, for a total of $3,764,000 in cash and property to be returned to debtor. Debtor will also receive $5,100,000 in unused tax loss carryforwards.2
The issue is whether, in a case with a confirmed liquidating Chapter 11 plan, where there is a surplus of funds and property after all claims have been paid in full, the entire surplus should be returned to debtor, or whether the general unsecured claims should receive interest as, by analogy, would occur in a Chapter 7 case pursuant to 11 U.S.C. § 726(a)(5).
In 1991, Debtor began constructing a theater complex in Branson, Missouri, a rapidly developing center for the country music tourism industry. Debtor had performance and licensing contracts with the well-known entertainer Johnny Cash, and the theater was to be named Cash Country. The project ran into financial problems and contractors ceased work, leaving a partially completed theater.
Creditors filed an involuntary Chapter 7 petition on May 27, 1992. After the involuntary petition was filed and before an order for relief was entered, Debtor attempted without success to obtain additional partners to infuse cash in order to allow Debtor to retain an equity interest in the project and satisfy creditors' claims.
The trial on the involuntary petition was set for August 14, 1992. At the hearing, Debtor consented to an order for relief and converted the case to Chapter 11 as a matter of right under § 706. Also pending was the petitioning creditors' motion to reconvert the case to Chapter 7 or appoint a Chapter 11 trustee due to Debtor's alleged fraud and mismanagement. When Debtor converted to Chapter 11 Debtor also agreed to appointment of a Chapter 11 Trustee; Mr. Nelson was appointed Trustee the same day. Debtor later filed a liquidating plan which was confirmed on July 20, 1993. The plan provided for the Trustee to remain in place as a liquidating and disbursing agent. Thus, there has never been a debtor-in-possession during the Chapter 11 proceedings.
When the case was commenced, it did not appear creditors would be paid in full. However, due to the Trustee's exemplary and prompt work and escalating real estate prices in Branson, the Trustee liquidated the theater and some other properties rapidly. All sales of property were effectuated before Debtor's Plan was confirmed.
After the theater complex and surrounding property were sold in November, 1992, it was realized that creditors could be paid in full. By early 1993, before Debtor filed a plan, the Trustee paid all secured claims with interest and all unsecured ticketholder claims.3 All filed administrative and priority claims, and the full principal amounts of all general unsecured claims have also now been paid. After payment of every claim there will be a surplus of at least $1,100,000 cash and $2,664,000 in property, for a total surplus of $3,764,000, plus unused tax loss carryforwards of $5,100,000.
Debtor proposed two plans in this case. The second plan was confirmed. In early Spring, 1993, after the trustee had generated enough funds to pay all creditors in full, Debtor filed the first plan, which was a reorganization rather than a liquidating plan. Rather than paying creditors with funds on hand, it provided for Debtor and partner David Green to use estate funds to enter into real estate development deals which would pay creditors on a speculative basis over a period of many years. The first plan was not approved.
The subsequent liquidating plan, offered by Debtor as a prompt alternative to conversion to Chapter 7, was the one approved by creditors and confirmed on July 20, 1993. Debtor's Plan was actually superfluous and in fact contains provisions which appear calculated to serve only the interests of Debtor and not of the creditors. The Trustee sold the property which generated the funds to pay creditors before the Plan was confirmed. The Plan did not grant the creditors any benefit above what they would have expected in Chapter 7 because the Trustee had done all the work before the Plan was confirmed, secured creditors and unsecured ticketholders were paid in full before the Plan was proposed, there were enough funds to pay the anticipated total of unsecured claims, and only one significant creditor issue — with the IRS — was unresolved.
However, the Plan benefitted Debtor in several respects. It provided a vehicle by which David Green attempted to assume an alleged contract on a piece of property known as the Crawford property in order to obtain it for his own benefit for anticipated development after conclusion of the bankruptcy proceeding. It also allowed debtor to seek payment from the estate of legal fees as administrative expenses for work on plans which benefitted David Green and not the creditors. Such fees included work on both the first plan which provided for a speculative development over several years, which was not approved, and on the confirmed Plan, which provides for return of property to Debtor and the proposed assumption of the Crawford contract for Debtor's benefit. It is likely that in a Chapter 7 proceeding, where there would be no confirmed plan, similar fees would not have been allowed to be paid from the estate because they benefitted only Debtor and David Green and not the creditors and estate. Thus, David Green would have had to pay such expenses up front out of his own resources even though a surplus would have been returned to him eventually.
On January 3, 1994, the Trustee filed his Application for Approval of Proposed Final Distribution to Unsecured Creditors. The Application was amended on January 5, 1994. The Application sought approval to pay the balance of the unsecured claims together with interest on such claims at the federal legal rate from the date the petition was filed, May 27, 1992, to the proposed date of final distribution, January 31, 1994.
At the hearing on the Application to Approve Final Distribution, the Trustee reported the estate had received gross receipts of $7,857,140 and made total distributions in payment of administrative expenses, priority claims, secured claims and unsecured claims through January 31, 1994 totalling $6,474,856, leaving a cash balance of $1,382,284 as of the hearing date.
Debtor objected to payment of interest on unsecured claims. The Trustee and Debtor agreed the principal balances of filed and allowed unsecured claims could be paid on January 31, 1994, with the interest issue to be heard on February 8, 1994. The Trustee proposes to pay $206,698.05 in interest to unsecured creditors, and after payment of remaining administrative expenses, to return to Debtor the surplus, estimated at over $900,000 cash, plus $2,664,000 in property and $5,100,000 in unused tax loss carryforwards.
The issue is whether, under the circumstances of this case, the Bankruptcy Code permits payment of post-petition interest on filed and allowed unsecured claims under a liquidating Chapter 11 plan, or whether the Bankruptcy Code or Debtor's confirmed plan prohibit payment of such interest. The court finds that payment of interest on unsecured claims out of the surplus is not prohibited by any provision of the Bankruptcy Code or the Plan, and to the contrary, payment of interest is permitted by the Code, case law and the Plan. The Trustee's Application, including payment of post-petition interest on unsecured claims, is approved for the following reasons.
The general rule is that creditors cannot recover post-petition interest in a bankruptcy proceeding. 11 U.S.C. § 502(b)(2); Matter of Fesco Plastics Corp., Inc., 996 F.2d 152, 155 (7th Cir.1993). However, there are two major exceptions to the general rule. First, oversecured creditors receive post-petition interest on their claims. 11 U.S.C. § 506(b); United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 246, 109 S.Ct. 1026, 1033, 103 L.Ed.2d 290 (1989). Second, post-petition interest on unsecured claims is payable in Chapter 7 cases where the bankruptcy estate produces a surplus. 11 U.S.C. § 726(a)(5); Fesco, 996 F.2d at 155-56.
Chapter 7 contains an express provision for payment of interest on unsecured claims in the event of a surplus but Chapter 11 does not. If this case had not been converted to Chapter 11 and had proceeded under Chapter 7 as originally filed, unsecured creditors would be entitled to post-petition interest under § 726(a)(5). Debtor concedes this in its brief, but correctly notes that pursuant to § 103, § 726 does not apply in Chapter 11. In fact, Chapter 11 does not address in any fashion the issue of payment of post-petition interest on claims. Nothing in the Bankruptcy Code prohibits payment of post-petition interest in Chapter 11. Matter of Johns-Manville Corp., 68 B.R. 618, 637 (Bankr.S.D.N.Y.1986).
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