In re Jandous Elec. Const. Corp.
| Decision Date | 13 June 1990 |
| Docket Number | Bankruptcy No. 88 B 20680. |
| Citation | 115 BR 46 |
| Parties | In re JANDOUS ELECTRIC CONSTRUCTION CORP., Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Sidney Turner, P.C., White Plains, N.Y., for debtor.
Pullman, Comely, Bradley & Reeves, Bridgeport, Conn., for Union Trust Company Bank; Stephen Sakonchick, II, of counsel.
Berman, Paley, Goldstein & Berman, and Dreyer and Traub, New York City, for Slattery Associates, Inc.
DECISION ON OBJECTIONS TO CONFIRMATION OF DEBTOR'S PROPOSED FIRST AMENDED PLAN OF ARRANGEMENT
The debtor, Jandous Electric Construction Corp., has filed a liquidating Chapter 11 plan which provides for the sale of all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims, pursuant to 11 U.S.C. § 1129(a)(4). A creditor, Slattery Associates, Inc. ("Slattery"), has objected to the confirmation of debtor's liquidation plan on the grounds that (1) the debtor has diverted trust fund payments, (2) has made unauthorized repayments to Union Trust Company ("Union Trust") which holds a lien on the debtor's assets, and (3) has made unauthorized repayments of superpriority and secured claims held by MacLean Grove & Co., Inc. ("MacLean Grove"), the debtor's parent corporation. Slattery contends that the repayments were for the benefit of MacLean Grove, and the debtor's president, Robert Bierman, because they guaranteed the debtor's obligations to Union Trust. Slattery argues that only Union Trust and MacLean Grove will benefit from a confirmation of the debtor's liquidation plan because the debtor used trust funds received from Slattery to make repayments to Union Trust and MacLean Grove, with the result that Slattery was compelled to assume the debtor's liability to subcontractors who supplied work and materials and held liens against the job on which the debtor was a subcontractor and Slattery was the general contractor.
1. On December 1, 1988, the debtor, Jandous Electric Construction Corp., filed with this court a voluntary petition for reorganizational relief under Chapter 11 of the Bankruptcy Code. Thereafter, the debtor continued to manage its property and conduct business as a debtor in possession in accordance with 11 U.S.C. §§ 1107 and 1108.
2. The debtor is a New York Corporation engaged in the electrical contracting business. MacLean Grove, a Maryland corporation, holds 50% of the stock of the debtor. Union Trust is a Connecticut banking organization and holds a secured claim against the debtor which was originally $1.5 million and was reduced to $400,000.00. The claim of Union Trust is secured by a lien on all the debtor's property.
3. Slattery is the debtor's largest unsecured creditor, having filed a proof of claim for $4,973,000.00, for damages arising out of the debtor's breach of a subcontract, dated November 11, 1986, pursuant to which Slattery was the general contractor under a public improvement contract with the New York City Transit Authority. Slattery's claim includes in excess of $947,908.00 of trust claims under Article 3-A of the New York Lien Law for monies that Slattery paid to the debtor's vendors and materialmen. Slattery has filed proofs of claim and notices of assignments of proof of claims for monies it paid to various of the debtor's suppliers on the debtor's behalf.
4. The debtor's liquidating Chapter 11 plan proposes to fully pay all administration claims and priority claims in cash. The secured claim held by Union Trust will be paid under the plan in a reduced amount. Although impaired, Union Trust has accepted the debtor's plan. MacLean Grove, which holds a superpriority claim under 11 U.S.C. § 507(b) for cash collateral which was advanced pursuant to court order, although not adequately protected, has also consented to the debtor's liquidating plan. The debtor has not obtained the consent of the impaired class holding general unsecured claims because Slattery, which is the holder of the largest unsecured claim against the debtor, has not consented to the liquidation plan and has objected to its confirmation.
5. Because this is a liquidation plan whereby the debtor will discontinue operations after confirmation, and because there are no governmental regulatory agencies involved or any retirement plans affected and all fees payable under 28 U.S.C. § 1930 will be paid, it follows that the following subsections of 11 U.S.C. 1129(a) are not implicated: (4), (5), (6), (7), (9), (11), (12) and (13).
6. Subsection (10) of 11 U.S.C. § 1129(a) is not in issue because despite the lack of acceptance by the impaired class of holders of unsecured claims, the plan will satisfy 11 U.S.C. § 1129(b)(2)(B)(ii) in that the absolute priority test will be met due to the fact that no claims or interests junior to the unsecured creditors will receive or retain any property. The shareholders will receive nothing following the liquidation of the debtor.
7. Accordingly, Slattery's objection to confirmation is addressed to the first three subsections of 11 U.S.C. § 1129(a), which are as follows:
8. Slattery's objection to confirmation is stated as follows:
The Proposed Amended Plan cannot be confirmed because it fails to satisfy the requirements of 11 U.S.C. section 1129(a): (a) it fails to satisfy Slattery\'s trust claims that must be paid in full before any estate claims can be paid; (b) Jandous violated an order of this Court and paid down its pre-petition secured obligation to Union Trust Company ("Union Trust") to circumvent its principals\' liability to Union Trust; (c) the estate has apparently paid various personal obligations of its principals; (d) Jandous has paid down two apparently pre-petition unsecured obligations; (e) Jandous\' operating statements and/or disclosure statement contain inaccurate financial information; and (f) Jandous failed to comply with Bankruptcy Rule 2002(b).
9. On August 29, 1986, Slattery, as a general contractor, entered into a contract with the New York City Transit Authority for $50,000,000.00 in renovations and improvements to the Prospect Avenue elevated subway line ("Construction Contract"). This project called for the installation of new signal equipment, electrical repairs and electrical distribution to twenty-six stations. The project also included rehabilitation of three pump rooms and pumping systems in the East River tunnels to prevent leaking and flooding.
10. Pursuant to a subcontract between the debtor and Slattery, dated November 18, 1986, the debtor agreed to perform electrical work for the project as a subcontractor for an approximate amount of $13 million, in accordance with the terms of the subcontract. Paragraph 4 of the subcontract required the debtor, as subcontractor, to complete the work within the time limit specified in the general contract for the project and in accordance with the Transit Authority's specifications.
11. Paragraph 3 of the subcontract between the debtor and Slattery provided that, from time to time as and when payments were received by Slattery from the Transit Authority, Slattery would make progress payments to the debtor for work, labor, services and materials incorporated in place during the preceding month by the debtor, as subcontractor, less 5% as a retainer. Final payment, including the 5% retainer, was to be paid to the debtor within ten days after final payment was made by the Transit Authority to Slattery.
12. In January 1987, Jandous commenced its work under the $13 million subcontract for Slattery, which was the general contractor under the $50 million Construction Contract with the Transit Authority. During that year, Slattery submitted requisitions to the Transit Authority for work performed on the project. The Transit Authority made progress payments to Slattery for work and materials furnished to the project. Slattery, in turn, made progress payments to its subcontractors, including the debtor, for their participation in the project. According to its figures, Slattery made payments pursuant to the debtor's subcontract exceeding $7,000,000.00. Jandous had spent $8,791,154.00 on the job through November 10, 1988.
13. On December 1, 1988, the debtor filed with this court its petition for Chapter 11 relief, under the Bankruptcy Code, and continued in business as a debtor in possession in accordance with 11 U.S.C. § 1108.
14. On December 7, 1988, the debtor's representatives and Slattery's representatives attended a meeting at Slattery's business office. The debtor informed Slattery that it had filed a Chapter 11 petition because it was experiencing cash flow problems. The debtor's representative, Norman Nadel, said that he was sorry for this situation because he knew that Slattery would be hurt through no fault of its own. However, Mr. Nadel said that the debtor needed an additional $1½ million to continue performance under the contract. Mr. Nadel also informed Slattery that it owed substantial amounts to suppliers who had furnished materials under the debtor's subcontract. Mr. Nadel rejected Slattery's suggestion that the debtor should reduce its work force to ease its cash flow problems because if the workers were laid off it would be difficult to get them back to the job. Mr. Nadel said that the debtor was not prepared to finish the work under the subcontract and that the debtor could not continue in business along the same path. Nadel also concluded that it would cost more to complete the subcontract than the agreed upon $13 million subcontract price. The parties agreed to another meeting to review the figures.
15. On December 19, 1988, the parties held a second...
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