In re Dernick
| Decision Date | 20 November 2020 |
| Docket Number | Case No: 18-32417, Case No: 18-32494 |
| Citation | 624 B.R. 799 |
| Parties | IN RE: Stephen Harry DERNICK, et al David Dernick; aka Dernick Debtors |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Johnie J. Patterson, Miriam Goott, Walker & Patterson PC, Houston, TX, for Debtors.
Was the filing of a joint objection along with ballots rejecting confirmation of Debtors’ jointly administered chapter 11 plan of reorganization motivated by business judgment or some other ulterior motive? Just days before the confirmation hearing on this now two-year-old dispute, Debtors filed an emergency motion to designate ballots submitted by NorthStar Gas Ventures, LLC and David H. Russell Family Limited Partnership, LLP as being cast in bad faith. On September 16, 2020, the Court held a hearing on both the joint objection to confirmation and Debtors’ motion to designate. For the reasons set forth herein, Debtors’ emergency motion to designate ballots submitted by NorthStar Gas Ventures, LLC and David H. Russell Family Limited Partnership, LLP is denied, the joint objection filed by NorthStar Gas Ventures, LLC and David H. Russell Family Limited Partnership, LLP is sustained in part and overruled in part, and Debtors’ Jointly Administered Plan of Reorganization dated July 11, 2020, is not confirmed.
This Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure 52, which is made applicable to contested matters pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014. To the extent that any finding of fact constitutes a conclusion of law, it is adopted as such. To the extent that any conclusion of law constitutes a finding of fact, it is adopted as such.
Stephen Dernick and David Dernick ("Debtors ") filed their voluntary chapter 11 petitions on May 4, 2018, and May 9, 2018, respectively.1 Subsequently, Debtors’ bankruptcy cases were jointly administered under 18-32417.2 It has taken Debtors two years, multiple contested hearings, and a mediated settlement agreement to arrive at confirmation of their July 11, 2020 jointly administered chapter 11 plan of reorganization ("Plan ").3 However, like everything else in this case, confirmation is contested; there were three separate objections filed by four different creditors. Additionally, two of the objecting creditors filed ballots rejecting the Plan. Two of the objections were resolved and withdrawn leaving only the Joint Objection ("Joint Objection ")4 filed by NorthStar Gas Ventures, LLC ("NorthStar ") holding an allowed claim in the amount of $3,723,091.92, and Russell Family Limited Partnership, LLP, ("Russell ") with an allowed claim in the amount of $11,417,740.29 (collectively "Objecting Creditors " or "Creditors "). In response to the rejecting ballots and Joint Objection, Debtors ask this Court to find that the NorthStar and Russell ballots, pursuant to 11 U.S.C. § 1126(e), were cast in bad faith ("Debtors’ Motion ").5
This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides "the district courts shall have original and exclusive jurisdiction of all cases under title 11." Section 157 allows a district court to "refer" all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter.6 This Court determines that pursuant to 28 U.S.C. § 157(b)(2)(A), (L), and (O), this proceeding contains core matters.
Furthermore, this Court may only hear a case in which venue is proper.7 Pursuant to 28 U.S.C. § 1408, a case under title 11 may be commenced where a debtor has been domiciled, resided, or maintained its principal place of business for 180 days immediately preceding debtor's petition date. Venue is proper here because Debtors resided within the Southern District of Texas for the 180 days immediately preceding their petition date.8 Venue is also proper pursuant to 28 U.S.C. § 1409(a) because Debtors’ Chapter 11 bankruptcy cases are presently pending in this Court.
This Court must evaluate whether it has constitutional authority to enter an order in this case. In Stern, which involved a core proceeding brought by the debtor under 28 U.S.C. § 157(b)(2)(C), the Supreme Court held that a bankruptcy court "lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim."9 The pending disputes before this Court are core proceedings pursuant to § 157(b)(2)(A), (L), and (O). The ruling in Stern, however, was only limited to the one specific type of core proceeding involved in that dispute, which is not implicated in this case. Accordingly, this Court concludes that the narrow limitation imposed by Stern does not prohibit this Court from entering a final order here.10 Alternatively, even if Stern applies to all of the categories of core proceedings brought under § 157(b)(2),11 this Court still concludes that the limitation imposed by Stern does not prohibit this Court from entering a final order in the dispute at bar. In Stern, the debtor filed a counterclaim based solely on state law; whereas here, the objection filed by NorthStar and Russell is based on §§ 1129 and 1126(c) of the Bankruptcy Code and Debtors’ Motion to Designate is pursuant to § 1126(e) of the Code. Similar provisions do not exist under state law.
Finally, this Court has constitutional authority to enter a final order on the Joint Objection to the Motion to Designate because Objecting Creditors and Debtors have consented, impliedly if not explicitly, to adjudication of this dispute by this Court.12 Since 2018, the parties have engaged in extensive litigation and motion practice before this Court. None of these parties has ever objected to this Court's constitutional authority to enter a final order or judgment. These circumstances unquestionably constitute implied consent. Thus, this Court wields the constitutional authority to enter a final order here.
On July 11, 2020, Debtors filed their Amended Joint Disclosure Statement and Plan.13 NorthStar and Russell objected to confirmation of the Plan and Debtors sought to have Creditors’ ballots designated as being cast in bad faith. On September 16, 2020, the Court held a hearing on both the Debtors’ Motion and Objecting Creditors’ Joint Objection ("Hearing ").
The instant dispute arises from a mediated settlement agreement ("MSA ") between the parties and approved by this Court on January 30, 2020.14 The MSA, inter alia, provided that the terms of the MSA would be incorporated into a plan of reorganization to be filed by Debtors.15 The gravamen of Debtors’ Motion is that both NorthStar and Russell filed a joint objection to Debtors’ Plan in violation of the MSA because pursuant to the MSA, neither NorthStar nor Russell were permitted to "object to a Plan that is consistent with th[e MSA], and that does not contain any other provision that is adverse to [them]."16 Debtors insist that the Plan is consistent with the MSA and does not contain any additional provisions that are adverse to either Creditor. As set forth in their Joint Objection to Designate Ballots,17 NorthStar and Russell vehemently disagree.
1. Whether the NorthStar and Russell ballots should be deemed filed in bad faith pursuant to 11 U.S.C. § 1126(e).
Section 1126(e) of the Bankruptcy Code states that "[o]n request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title."18 Debtors request that this Court designate the Objecting Creditors’ ballots rejecting the Plan as cast in bad faith pursuant to § 1126(e).19
Debtors allege, inter alia, that the votes were cast in bad faith because NorthStar and Russell's motives in casting their ballots are only tangentially related to their status as creditors and are actually for the purpose of preventing Debtors from curing any payment default to the Unsecured Creditors’ Trust ("UCT " or "Trust "), so that the Objecting Creditors may foreclose on their liens on the Riley Exploration Permian, LLC ("REP " or "Riley ") Units.20 Debtors value their interest in Riley at $13,650,000.21 Debtors cite In re Save Our Springs Alliance, Inc. , for the proposition that votes cast for an ulterior motive that is only incidentally related to the creditor's status as a creditor should be designated as cast in bad faith.22 Debtors conclude that this is an attempt by NorthStar and Russell to re-trade the MSA because they see excess value in the REP Units and want those Units for themselves.23
For this Court to confirm a plan of reorganization, such plan must comply with § 1129(a). Section 1129(a)(10) requires that "[i]f a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan." To determine whether a plan has been accepted, this Court looks to § 1126. Under § 1126(c), a plan is accepted by a class of claims if "at least one-half of the claims holding two-thirds of the total dollar amount ... vote in favor."24 Here, if this Court designates the Objecting Creditors’ ballots as having been cast in bad faith, pursuant to § 1126(e), those ballots will be "disregarded in the counting of votes to determine whether a class has accepted or rejected the instant Plan."25
The Bankruptcy Code does not define either "good faith" or "bad faith," and therefore, determining which exists is a fact specific venture.26 Mere self-interest on behalf of the creditor, such as attempting to obtain the best recovery possible on its claim, does not rise to the level of bad faith.27...
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