In re Fryar

• Decision Date: 25 April 2017
• Docket Number: No. 1:16–bk–13559–SDR,1:16–bk–13559–SDR
• Citation: 570 B.R. 602
• Parties: IN RE: William Harry FRYAR, Debtor
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

570 B.R. 602

IN RE: William Harry FRYAR, Debtor

No. 1:16–bk–13559–SDR

United States Bankruptcy Court, E.D. Tennessee, Southern Division.

Signed April 25, 2017

David J. Fulton, Scarborough & Fulton, Chattanooga, TN, for Debtor.

David Holesinger, Kimberly C. Swafford, Office of the United States Trustee, Chattanooga, TN, for U.S. Trustee.

MEMORANDUM¹

Shelley D. Rucker, UNITED STATES BANKRUPTCY JUDGE

The Debtor filed a Notice of Proposed Use, Sale or Lease of Property Outside of the Normal Couse of Business combined with a Motion to Sell Property Free and Clear and Motion for Settlement and Compromise on February 24, 2017. The property to be sold was the Debtor's stock interests in two corporations whose value the Debtor listed as $900,000 on Schedule A/B, Question 19. The buyer of these interests is the other shareholder of the companies. The purchase price for these interests is $350,000 plus the conveyance by one of the companies of a piece of property which it owns. The interests are to be sold free and clear of the tax lien filed by the Internal Revenue Service and any other claim or interest. However, the settlement does not propose for the IRS lien to attach to the proceeds of the sale. Rather the lien will attach to two other properties which the Debtor owns individually on Highway 58, Chattanooga, Tennessee, and the property being conveyed to the Debtor in the settlement. Those Highway 58 properties are currently encumbered by a $531,000 mortgage in favor of Pinnacle Bank, the successor in interest to Cornerstone Bank. The settlement piece of the motion requires Pinnacle's lien to be satisfied by the payment to Pinnacle of the $350,000 in sales proceeds. This would be less controversial if Pinnacle's collateral were worth $350,000, but the Debtor contends that the property is worth only $200,000. The U.S. Trustee and creditors Sammie and Robert Gammenthaler, BBCO, LLC, and SmartBank appeared in opposition to the motion. The Gammenthalers, BBCO and SmartBank have filed unsecured claims totaling $436,000 (after deducting the secured portion of SmartBank's claim). The basis of their objections is that Pinnacle is being preferred and the priorities set for distribution under the bankruptcy code are being reordered to Pinnacle's benefit. As such, the court should not find the settlement to be fair and equitable.

The parties made oral arguments regarding the appropriateness of the settlement at the hearing but put on no evidence. Following the hearing, the parties filed Stipulations of Fact on which the court will rely for making its findings. (Doc. No. 73.) Those stipulations were supplemented with testimony from the Debtor at the hearing on April 13th before the court issued its opinion.

The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (N). These are the court's findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052 as made applicable to contested matters by Fed. R. Bankr. P. 9014.

A. Findings of Facts

The Debtor owns a 50% interest in two businesses: WLF Properties, Inc. and LF Properties, Inc. Stephen Long owns the other 50% of both businesses.

WLF owns a storage operation in Oak Ridge, Tennessee, and four rental houses in Murfreesboro, Tennessee. The storage operation has a value of approximately $2.4 million, and the rental houses have a value of approximately $325,000. WLF has debts of approximately $1.8 million. Based on these stipulations, the court calculates the Debtor's 50% interest to be worth approximately $467,500.

LF owns property located at Belgrade Road, Oak Ridge, Tennessee, and 219 Yearwood Avenue, Murfreesboro, Tennessee. Those properties are worth approximately $265,000. LF has debts of $220,000. Based on these stipulations, the court calculates that the Debtor's equity in LF is worth approximately $22,500.

The value of the Debtor's interest in the two businesses, after debt, is approximately $490,000.

In addition to these business interests, the Debtor individually owns properties at 6308 and 6310 Highway 58, Harrison, Tennessee. In his schedules, the Debtor valued these properties at $100,000 each. The Debtor owes Hamilton County and the City of Chattanooga property taxes on the Highway 58 properties totaling approximately $48,000 based on proofs of claim nos. 5–9 & 14–17. Pinnacle Bank has a mortgage of approximately $531,000 on these two properties based on the documents filed with claim 3. Its deeds of trust were recorded on October 20 and 31, 2008.

The IRS has a claim of approximately $90,000 based on proof of claim no. 4. Approximately $74,000 of this claim was asserted as secured. Notice of the federal tax lien was filed on July 5, 2016. An additional approximately $15,000 of the claim is asserted as priority. The priority of the liens on 6308 and 6310 Highway 58 appears to be: first, the property taxes owed to the City and County, then the mortgage to Pinnacle Bank, and finally the IRS lien to the extent that its claim is not satisfied by other property of the Debtor.

WLF owes Pinnacle Bank $1.1 million, secured by the storage operation and the rental houses owned by WLF. This debt was guaranteed by the Debtor and Mr. Long. Pinnacle Bank has assigned the debt to Mr. Long's company, S.J. Long, Inc. which is now the holder of that debt.

Excluding the claims of Pinnacle Bank and S.J. Long, Inc., there is approximately $700,000 of unsecured debt reflected in the claims filed in this case. No objection to any of these claims had been filed at the time of the hearing on the settlement.

As noted above, the settlement involves a series of transactions that breaks down as follows:

1. Mr. Long will pay $350,000 into the estate. In exchange, the estate will convey all stock interests of the Debtor in WLF Properties and LF Properties to Mr. Long. This is all subject to Mr. Long's obtaining financing from Pinnacle Bank for $350,000.

2. LF Properties will convey one of its properties, 219 Yearwood Ave., to the estate free and clear of liens. Debtor estimates the value of that property to be $150,000. The stipulations state that the property was purchased for $166,000 in 2004 and that the tax appraisal made by Rutherford County, Tennessee is $124,800. The Debtor testified that the property is regularly rented and believes that the property will provide value of that amount, although the Debtor also stated that there are repairs he would like to make to the property.

3. Mr. Long, WLF Properties, and LF Properties will release the Debtor from all claims they may have against him. At the hearing, Mr. Long's counsel clarified that there were debts that WLF Properties and LF Properties have asserted against the Debtor individually. Counsel for the Debtor agreed that these were amounts owed by the Debtor.²

The settlement also provides that the Debtor will release Mr. Long, WLF Properties, and LF Properties from all claims he may have against them. No claims or causes of action were listed in Schedule B filed by the Debtor. (Schedule A/B, Questions 33–34.)

4. S.J. Long, Inc. will release the Debtor's guaranty on the obligation from the debt it purchased from Pinnacle Bank.

5. The estate will pay the sale proceeds of $350,000 to Pinnacle Bank on the $531,000 obligation. Pinnacle Bank will release the mortgage on 6308 and 6310 Highway 58, but will retain a claim for $181,000 for the deficiency which it will subordinate to the other unsecured creditors.

Pinnacle Bank acknowledges that if the $350,000 were paid to the estate, that the IRS lien on the stock and the IRS priority lien would be paid before its unsecured claim. It also acknowledges that if it were to foreclose on the two Highway 58 properties that the tax liens of the City and County would have to be paid, and that it is likely to only receive $140,000 from the sale of its collateral.³

Creditors BBCO, LLC (Claim no. 23 for $57,191), Robert Gammenthaler (Claim no. 22 for $34,360) and Smartbank (Claim no. 24 for $381,843 of which $37,100 is claimed as secured) have objected to the settlement.

The Debtor testified that he will reduce the claims through objections to filed claims and liquidation from other sources to $100,000. The unsecured claim for his school loans will stay in deferment because he intends to return to school to complete his doctorate degree.

B. Legal Analysis

The court can authorize the sale of assets when there is a sound business purpose for such action. Stephens Indus., Inc. v. McClung , 789 F.2d 386, 390 (6th Cir. 1986). The stipulations do not specifically state the business purpose of the sale. However, in oral argument, the Debtor argued that this settlement resolves the issues between the two shareholders and provides a means for WLF to continue and avoid a foreclosure which would subject both shareholders to significant individual tax liability.

The Debtor testified at a hearing on a motion to dismiss, brought by Pinnacle Bank early in the case, that his relationship with Mr. Long had deteriorated and that he was not getting information from Mr. Long nor any income from the properties. At the initial hearing on this motion, the court asked the parties if this settlement was to facilitate a business divorce between two business associates. The parties acknowledged that this was the case. Given that situation, the Debtor faced either buying out his partner or selling to him to resolve these disputes. The court finds that the resolution of the claims arising from the two companies, the avoidance of the tax liability, and realization of value for the creditors from the stock interest provide a sufficient business purpose for the sale. However, because the business terms of the sale also involve a settlement and a payment of one unsecured creditor ahead of other prior parties and other unsecured creditors, the court must also review the standards for approval of a settlement.

The involvement of the court in the approval of a settlement is based on Fed. R. Bankr. P. 9019(a) which...