In re Marshall
| Decision Date | 26 August 2003 |
| Docket Number | No. LA 02-30769 SB.,LA 02-30769 SB. |
| Citation | 298 B.R. 670 |
| Parties | In re J. Howard MARSHALL et ux., Debtors. |
| Court | U.S. Bankruptcy Court — Central District of California |
David L. Neale, Levene Neale Bender Rankin & Brill, Los Angeles, CA, for debtor.
G. Eric Brunstad, Bingham McCutchen, LLP, Hartford, CT, for Pierce Marshall.
OPINION ON PLAN CONFIRMATION AND MOTION TO DISMISS (NON-CONSTITUTIONAL ISSUES)
In this case Pierce Marshall, acting as trustee for three family trusts (collectively referred to as "Pierce"), opposes confirmation of the chapter 111 plan proposed by his brother J. Howard Marshall, III ("Howard") and his wife Ilene O. Marshall. Pierce also moves to dismiss the case. However, Pierce has declined and refused to file a claim in this case.
The court finds that this bankruptcy case was filed and prosecuted in good faith and for a proper purpose, notwithstanding minor discrepancies or inaccuracies in the debtors' schedules. The court further finds that the plan meets the requirements of good faith and the best interests of creditors.
The debtors filed their chapter 11 petition on July 23, 2002. This was the eve of a hearing in a Texas court where Pierce sought an order requiring the debtors to transfer substantially all of their assets to Texas in order to satisfy a judgment in the Texas probate case of their father J. Howard Marshall, II ("J.Howard"). The judgment, which was then on appeal, was for $11 million plus ten percent interest and costs. By the bankruptcy filing date this debt totaled more than $12 million.
Fifteen days after filing their petition, the debtors filed their schedules, which they amended thirty days thereafter. As amended, their schedules showed that the debtors possessed assets worth $13,138,311.38 and liquidated debts of $13,914,112.39. In addition to the valued assets, the schedules disclosed interests in a revocable family trust and claims made in the probate estate of Howard's father J. Howard. The schedules also disclosed an interest in the Eleanor P. Stevens Irrevocable Gift Trust ("the Stevens Trust"), a gift from Howard's mother which was described in detail in a full-page exhibit to Schedule C. In addition to the quantified debts, the schedules listed nonpriority debts in an unknown amount owing to Wells Fargo Bank Texas, the City of Pasadena, a Dallas law firm and the Marshall Museum & Trust.
It appears that the debtors calculated that they were owed more from the J. Howard estate than they owed to that estate (including any debt owing to Pierce). In consequence, the interest in the decedent estate was listed as an asset rather than a liability, notwithstanding the outstanding $12 million judgment owing to Pierce.
In addition to the $12 million judgment, Howard had been named as a defendant in a $ 5 million lawsuit in Louisiana. Furthermore, Pierce's lawyer had also sent a letter to Howard's lawyer on May 20, 2002 providing substantial detail for another claim against Howard in an amount exceeding $100 million.
In contrast to the debtors' financial status, Pierce inherited virtually all of the assets of their father J. Howard, who was said to be the richest man in Texas. These assets are worth perhaps $2 billion today. Howard inherited nothing from his father, and is entitled to only a comparatively small amount from the Stevens trust.
The court set a claims bar date of November 15, 2002. Pierce declined to file a proof of claim in this case, either on his own behalf or on behalf of his family trusts.
The debtors filed a plan of reorganization that assumed that Pierce would file his $12 million claim. After Pierce failed to file a timely claim, the debtors amended their plan to pay in full all of their creditors except for Pierce. The plan as amended will discharge Pierce's unfiled claim for more than $12 million. Pierce has objected to the confirmation of the plan as amended.
On December 13, 2002 Pierce filed his motion to dismiss this case. After several continuances agreed to by the parties, the court heard oral argument on the dismissal motion on April 22, 2003. On April 16, 2003, the debtors filed their first amended chapter 11 plan, to which Pierce objected. After oral argument on May 23, 2003, the court took these matters under submission.
Under sections 1109(b) and 1112(b), any "party in interest" may "raise and may appear and be heard on any issue in a case under this chapter." In addition, any "party in interest" may file a motion to dismiss a chapter 11 bankruptcy case for cause. A scheduled creditor who has failed to file a proof of claim remains a "party in interest" with standing for a motion to dismiss. See Johnston v. Jem Development Co. (In re Johnston), 149 B.R. 158, 161 (9th Cir. BAP 1992) (); Gaudio v. Stamford Color Photo (In re Stamford Color Photo, Inc.), 105 B.R. 204, 206-07 (Bankr.D.Conn.1989); but see In re Abijoe, 943 F.2d 121, 125 (1st Cir.1991) ().
Under § 1109(b), any "party in interest" may also object to a debtor's chapter 11 reorganization plan. Although Rule 3003(c)(2) states that "any creditor who fails [to file a proof of claim] shall not be treated as a creditor with respect to such a claim for the purposes of voting and distribution," Pierce is still a "party in interest" for the purpose of objecting to the plan. Thus, even though Pierce may not vote on the plan or receive a distribution under the plan, the court finds that he has standing to object to debtors' chapter 11 plan and to make his motion to dismiss the case.
Pierce makes both statutory and constitutional objections to the confirmation of the chapter 11 plan proposed by debtors. In this opinion the court takes up the statutory objections. The constitutional issues are addressed in a separate opinion.
A. Relevant Statutory Requirements
Section 1129(a) specifies thirteen requirements that a chapter 11 plan must satisfy to qualify for confirmation.2 The debtor has the burden of proof on each of these issues. See, e.g., In re Silberkraus, 253 B.R. 890, 902 (Bankr.C.D.Cal.2000).
In his objection to confirmation of the debtors' chapter 11 plan, Pierce contends that the plan does not meet two of the statutory requirements. First, he argues that the plan does not meet the "good faith" requirement of § 1129(a)(3). Second, he argues that it does not meet the "best interests of creditors," as required by § 1129(a)(7)
Section 1129(a)(3) requires that a plan of reorganization be "proposed in good faith and not by any means forbidden by law." A chapter 11 plan is proposed in good faith where it achieves a result consistent with the objectives and purposes of the bankruptcy code. See Platinum Capital, Inc. v. Sylmar Plaza, L.P. (In re Sylmar Plaza, L.P.), 314 F.3d 1070, 1074 (9th Cir.2002). In determining whether a debtor has acted in good faith in proposing a reorganization plan, the court must take into account the totality of the debtor's circumstances. See id.; Jorgensen v. Federal Land Bank (In re Jorgensen), 66 B.R. 104, 108-09 (9th Cir. BAP 1986).
Pierce cites six published opinions in support of his contention that the debtors have proposed their chapter 11 plan in bad faith. The court finds these opinions unhelpful in this case.3 This is not surprising, however, because the good faith evaluation must be made on a case by case basis. See Sylmar Plaza, 314 F.3d at 1075; Jorgensen, 66 B.R. at 108-09. Thus this court must make its own independent evaluation of the debtors' good faith for the purpose of plan confirmation.
Part of the good faith analysis is that the plan must deal with the creditors in a fundamentally fair manner. See, e.g., Jorgensen, 66 B.R. at 108-09. However, a chapter 11 debtor has no duty of fairness to a creditor who has refused to file a claim in the case. In addition, a debtor need not consider every feasible alternative form of plan, so long as the proposed plan meets the requirements of § 1129(a). See In re General Teamsters, Warehousemen & Helpers Union Local 890, 225 B.R. 719, 729 (Bankr.N.D.Cal.1998).
Pierce contends that the debtors lack good faith in proposing their chapter 11 plan because (1) the debtors are solvent and thus capable of paying all of their debts in full, (2) after filing their case, the debtors made misrepresentations to the court and engaged in misconduct, (3) the proposal to pay all debts in full except for the Texas judgment demonstrates that the purpose of the plan is to discharge the Texas judgment, and (4) the debtors commenced this case for the improper purpose of avoiding a supersedeas bond.
Pierce maintains that the debtors did not act in good faith because they are solvent. However, under Ninth Circuit case law a chapter 11 debtor is not required to be insolvent to propose a plan in good faith. The Ninth Circuit held in Sylmar Plaza that insolvency is not a prerequisite to a finding of good faith under § 1129(a)(7). See 314 F.3d at 1074. In that case the court affirmed the confirmation of a chapter 11 plan that provided for interest to the objecting unsecured creditor at its non-default rate (instead of the default rate), which was lower than the rate of interest paid under the plan to other unsecured creditors.
Moreover, when the debtors filed their chapter 11 petition, Howard faced litigation that, if lost, would certainly render him insolvent. He had been named as a defendant in a $ 5 million lawsuit in Louisiana shortly before the bankruptcy filing. In addition, he faced Pierce's judgment of $11 million (plus 10% interest that had already accrued for two years) and the threat of a $100 million lawsuit...
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In re Marshall
...issued opinion on the non-constitutional issues involved in the pending plan confirmation and motion to dismiss. See In re Marshall, 298 B.R. 670 (Bankr.C.D.Cal.2003). The filing of this bankruptcy case was precipitated in part by a judgment in favor of Pierce and against Howard in the Texa......
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...issued opinion on the non-constitutional issues involved in the pending plan confirmation and motion to dismiss. See In re Marshall, 298 B.R. 670 (Bankr.C.D.Cal.2003). The filing of this bankruptcy case was precipitated in part by a judgment in favor of Pierce and against Howard in the Texa......