In re Economy Cab & Tool Co., Inc.
| Decision Date | 31 October 1984 |
| Docket Number | Bankruptcy No. 5-84-88. |
| Citation | 44 BR 721 |
| Parties | In re ECONOMY CAB & TOOL COMPANY, INC., a Minnesota Corporation, Debtor. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
John A. Hedback, Minneapolis, Minn., for U.S. Trustee.
Shawn M. Dunlevy, Duluth, Minn., for movant.
James J. Bang, Duluth, Minn., for debtor.
Michael A. Ronchetti, Duluth, Minn., for unsecured creditors committee.
The above-captioned matter came on before the undersigned United States Bankruptcy Judge on October 19, 1984, upon the Motion of General Motors Acceptance Corporation (hereinafter "Movant"), to convert this case to a proceeding for liquidation under Chapter 7. Movant appeared by its attorney, Shawn M. Dunlevy. Debtor appeared by its attorney, James J. Bang. The Unsecured Creditors Committee appeared by its attorney, Michael A. Ronchetti. The Office of the United States Trustee appeared by the written Affidavit of John A. Hedback, attorney to the U.S. Trustee. Upon the testimony adduced at the hearing, the moving documents submitted by counsel for all parties, and all of the other files, records, and proceedings herein, the Court makes the following Findings of Fact and Order.
Debtor Economy Cab & Tool Company, Inc. filed its Petition under Chapter 11 of the Bankruptcy Code in this Court on March 28, 1984. Since then Debtor has regularly filed all of the written reports required by the Office of the United States Trustee, including statements summarizing profit and loss, aging of accounts, periodic cash flow, and tax accrual. Movant and the attorney for the U.S. Trustee relied upon the information disclosed in these statements as the basis for their respective Motions. Movant has moved the Court for an Order converting the case to a liquidation proceeding under Chapter 7. The United States Trustee supports Movant's Motion for conversion. He has requested the Court to either convert or dismiss the case, as may be in the best interest of creditors or to set a deadline for filing and confirmation of a Plan of Reorganization. Though the attorney for the U.S. Trustee did not present a formal Motion to this effect, the request set forth in his Affidavit will be treated as a Motion.
Debtor is in the business of metal fabrication and manufacture. Its operations are focused on the manufacture of special cabs for heavy equipment, the manufacture of an electric sauna heater, the performance of metal fabricating contracts with various entities of the United States Government and the partial assembly of bridge cranes. Debtor presently employs fifteen people at its Esko, Minnesota plant. It has no fixed long-term production and supply contracts which would furnish it with regular income. Rather, it is dependent on the influx of orders generated by its publicity efforts, referrals from past customers, and its own successful bidding on government contracts as they are opened. A substantial portion of its business is generated by contracts with the United States Government; during the past year it has performed substantial work on contracts with the Department of Defense and the United States Fish and Wildlife Service. Debtor's business and generation of income fluctuate on a seasonal basis; its cab manufacturing operations are busiest from September until February and its sauna heater manufacturing operations are busiest in the summer months.
Debtor has operated as a Debtor-in-possession for over six months. Debtor's monthly profit and loss statements filed during this period reveal that it has enjoyed four months in which it made a net profit, varying from $363.20 up to $5,481.59. During the months of July and August, 1984, it incurred a net loss of, respectively, $2,276.39 and $4,026.02. During this period Debtor's new accounts payable have steadily increased to a total of $12,250.20, as of September 30, 1984. During this same time period, however, Debtor has performed work which has generated accounts receivable of a total of $69,099.11. Debtor's bookkeeper, Don Buchholz, did not include these accounts receivable on the reports prior to those of September 30, 1984, out of confusion as to whether an unbilled receivable for work in progress should be included. These accounts receivable include the United States Fish and Wildlife Service. Debtor has performed work and expended funds for materials and labor on this contract for several months but has billed it in full only upon completion of the work on September 30, 1984. This single account receivable is in the sum of $50,650.00. Debtor's president, Donald Gustafson, anticipates that this account will be paid within thirty days of the initial billing.
As of September 30, 1984, Debtor has accumulated post-petition accounts payable of $12,250.20. It has also accumulated $17,546.90 of post-petition income, sales, and Social Security tax liability. Mr. Buchholz and Mr. Gustafson acknowledge that these sums have been withheld from employee wages and sales but not paid over. The amounts so derived have been used to purchase materials for several major contracts, as an alternative to obtaining post-petition financing. Mr. Gustafson testified that the federal and state taxes and a substantial number of the aged accounts payable would be paid in full upon receipt of the payment on the United States Fish and Wildlife Service account. Debtor further anticipates receipt of payment on another United States Government contract in the approximate amount of $15,000.00 within twenty days of approval by the government agency of the product to be produced.
As of September 30, 1984, Debtor's accounts receivable exceeded its tax liabilities and accounts payable by $39,302.01.
Debtor's major consumer product is an electric sauna heater, which Mr. Gustafson alleges can be produced by Debtor for a retail price of approximately one-half of the price of comparable heaters currently on the market. Since the filing of Debtor's Petition, Debtor has made an intensive effort to market this product throughout the states of Minnesota, Michigan, and North Dakota, and is currently selling forty to fifty of these heaters per month. Debtor's average per-unit profit on this product is $70.00. Debtor projects sales of up to one hundred units of this product per month by April, 1985, based on its intensive sales and marketing activity and projections from the growth of sales thus far. Debtor has $47,000.00 worth of firm orders for cab manufacture at present, work which will be completed within the next six weeks. Debtor presented no evidence on projections for cab manufacture beyond that point, but Mr. Gustafson did testify that Debtor is entering its busy season for this sort of work.
The statute to be applied on this Motion is 11 U.S.C. § 1112(b), which provides in pertinent part as follows:
In considering any Motion under Section 1112(b), the Court must begin by recognizing that the stated purpose of Chapter 11 is to further the rehabilitation of businesses in economic distress. "A Court should not precipitously sound the death knell for a debtor by prematurely determining that the debtor's prospects for economic revival are poor." In Re Shockley Forest Industries, Inc., 5 B.R. 160, 162 (Bankr.N.D.Ga.1980). As a result, Section 1112(b) requires a party moving for dismissal or conversion to show cause. The determination of whether cause has been shown or not rests in the sound discretion of the Court. In Re Levinsky, 23 B.R. 210 (Bankr.E.D.N.Y.1982); In Re L.S. Good & Co., 8 B.R. 310, 3 C.B.C.2d 75 (Bankr.N.D. W.Va.1980). The burden of proof in a Motion for conversion or dismissal rests squarely upon the moving party. In Re Earth Services, Inc., 27 B.R. 698 (Bankr.D. Vt.1983); In Re Karl A. Neise, Inc., 16 B.R. 602 (Bankr.S.D.Fla.1981). A moving party discharges this burden by demonstrating the existence of one of the nine statutory grounds enumerated under Section 1112(b), or by showing other cause.1
To show cause under Section 1112(b)(1), a moving party must demonstrate that there is both a continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation. In Re Garland Corp., 6 B.R. 456 (Bankr. 1st Cir.1980); In Re Karl A. Neise, Inc., supra; In Re Steak Loft of Oakdale, Inc., 10 B.R. 182, 4 C.B.C.2d 45, 49 (Bankr.E.D. N.Y.1981). To determine whether a moving party has proved continuing loss to or diminution of the estate, the Court must look beyond the bare form of the debtor's filed reports and the form of its financial statements. Financial statements may have been prepared for the purpose of income tax authorities. The Court must look beyond the facial inadequacies of the information supplied by these forms and must make a full evaluation of the present condition of the estate. See, e.g., In Re Powell Bros. Ice Co., 37 B.R. 104, 10 C.B.C.2d 328 (Bankr.D.Kans.1984). At early stages in the proceedings, in order to prove "absence of a reasonable likelihood of rehabilitation" a moving party must show that there is no more than a "hopeless and unrealistic prospect" of rehabilitation. In Re Steak Loft of Oakdale, Inc., supra, at 49, 10 B.R. 182.2 Courts have found a sufficient likelihood of rehabilitation where the debtor's own projections show a "near certainty of short-term operating losses", In Re Garland Corp., supra, at 460 (emphasis added); and, in an extreme case, even where...
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