In re Mulholland
| Decision Date | 14 January 2022 |
| Docket Number | 3:18-bk-4096-JAF |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
| Parties | In re: SPIDERMAN SCOTT MULHOLLAND and TINA MARIE FOLEY MULHOLLAND, Debtors. |
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This Case came before the Court for trial on September 29, 2021 on the Renewed Motion to Dismiss (Doc. 564), filed by the creditor, Rebekka Trahan ("Trahan"). At the trial the Court also considered the competing plans of reorganization filed by the Debtors and Trahan (Docs. 519 525), the Final and Supplemental Applications for Compensation (the "Applications for Compensation") filed by Trahan's counsel (Docs. 529, 552), and the Debtors' Objection to the Applications (Doc. 536). Upon consideration of the evidence and arguments presented by the parties, as well as the protracted litigation in this Case which has not brought the Debtors closer to confirming a plan of reorganization, the Court will dismiss the case.
In November 2018, the Debtors filed a voluntary petition under Chapter 11 of the Bankruptcy Code. The filing was precipitated by a state-court judgment debt obtained by Trahan against both the Debtors in 2018. The judgment, which is the basis for Trahan's secured claim, states that Trahan shall "recover from defendants, Spiderman Scott Mulholland and Tina Mulholland [ ], the sum of $4, 643, 000.00, that shall bear interest at the rate of 5.97 % a year, for which let execution issue." (Claim 14-2 Part 2 at 1) (the "Judgment Debt"). The judgment was affirmed by the state appellate court, in an unwritten opinion. Trahan's claim is secured by a statutory judgment lien on Debtors' "interest in all personal property in [Florida] subject to execution [ ], other than fixtures, money, negotiable instruments, and mortgages." Fla. Stat. § 55.202(2) (2018). The Judgment Debt is nondischargeable, as to Debtor Spiderman Mulholland, pursuant to § 523(a)(6) of the Bankruptcy Code. (Docs. 21 & 23, adv. pro. 3:19-ap-0063). The dischargeability as to Debtor Tina Marie Mulholland remains a pending question in adversary proceeding 3:19-ap-0063. Trahan's claim is an allowed secured claim. (Doc. 133). On July 13, 2020, Trahan filed an amended proof claim, which values the claim at approximately $5.1 million with post-judgment interest. (Claim 14-2).
The Debtors' bankruptcy estate includes one hundred percent of the stock in a Florida corporation named U.S. Building Consultants, Inc. ("US Building"). U.S. Building remediates commercial construction defects related to water intrusion. U.S. Building is operated by Debtor Spiderman Mulholland. Spiderman Mulholland is the face of the business, as well as the owner and an employee of U.S. Building. Debtor Tina Marie Mulholland is his wife and is also an employee.
In July 2019, the Court entered a consent order in which the parties agreed U.S. Building "is valued at a minimum of" $4.8 million (the "Valuation Order"). (Doc. 167). The Valuation Order resolved the Debtors' amended motion to determine the secured status of Trahan's claim, filed under § 506(a) and Bankruptcy Rule 3012. Based on the Valuation Order, the Court finds U.S. Building is valued at no less than $4.8 million for purposes of this Order.
During the course of this Case, the Court has presided over contentious litigation. On December 11, 2020, the Court entered Findings of Fact and Conclusions of Law in which the Court denied confirmation of the Debtors' Fourth Modified Amended Chapter 11 Plan (the "Previous Plan"). (Doc. 436). Ultimately, the Court concluded the Previous Plan did not provide Trahan with the "indubitable equivalent" of her claim. Among other concerns, the Court found:
Even if a potential buyer manifested after turnover [of the U.S. Building stock], it is extremely doubtful that Trahan would receive $4.8 million due to the lack of a noncompete agreement with Spiderman Mulholland or any other employee. Spiderman Mulholland is the face of the business and effectively controls U.S. Building's book of clients. His subject-matter knowledge, as well as the good will and book of clients he controls, are the core assets of the business. Without these, U.S. Building's revenue would likely drop precipitously. (Doc. 436, p. 7).
The Court also entered Findings of Fact and Conclusions of Law that denied Trahan's Motion to Dismiss (the "Initial Motion to Dismiss") and gave the Debtors additional time to "financially reestablish themselves." (Doc. 434, p. 9).
Almost a year after conducting a trial on the Debtors' Previous Plan and Trahan's Initial Motion to Dismiss, the Court held a trial on the Debtors' Fifth Amended Plan of Reorganization (the "Fifth Amended Plan") (Doc. 519), Trahan's Second Amended Chapter 11 Liquidating Plan of Reorganization (the "Competing Plan") (Doc. 525), Trahan's Renewed Motion to Dismiss (Doc. 564), and the Applications for Compensation filed by Trahan's counsel (Docs. 529, 552).
The Debtors filed this Chapter 11 petition over three years ago to halt Trahan's debt collection efforts, and very little progress has been achieved during the pendency of the Case. By their Fifth Amened Plan, the Debtors seek approval of a plan that essentially gives them indefinite time to pursue a state court malpractice claim (the "Malpractice Action") against their former state court trial counsel. The Debtors are relying on the Malpractice Action being resolved in their favor to pay off their administrative claims, followed by their unsecured creditors, with any remainder to be distributed to secured creditors. (Doc. 519, p. 8). Under the proposed terms, the Debtors will not proceed with the marketing and sale of their stock in U.S. Building until after the resolution of the Malpractice Action. Specifically, the Fifth Amended Plan treats Trahan, who is an impaired creditor under § 1124 of the Bankruptcy Code, as follows:
Following the resolution of the Debtors' malpractice claim and distribution of proceeds according to the terms of this Plan, the Debtors will list for sale their stock in USBC in a commercially reasonable manner for a period of ninety (90) days with an independent business broker. Any party may purchase the property, except for any entity having any connection whatsoever to Trahan (or her agents, successors, and/or assigns), as Trahan has disclaimed any interest in ownership or control of USBC, unless the price offered by such entity is equal [to] or greater [than] Trahan's agreed value of the stock per Doc. 167. After the expiration of the ninety (90) day marketing period, the USBC Stock will be auctioned to the highest bidder through an auction process as recommended by the Debtors' business broker. (Doc. 519 p. 8).
Therefore, the timing of when Trahan's secured claim will be paid is directly tied to the resolution of the Malpractice Action, which has not yet gone to trial. Notably, Clay Coward, the attorney who represents the defendants in the Malpractice Action, [1] testified in a deposition that an attempt to mediate the matter has already failed, the defendants intend to vigorously defend the case, and if a "significant verdict" is reached against the defendants, he believes the defendants would pursue an appeal so long as they thought a reasonable basis existed to do so.[2] .
The Fifth Amended Plan also restricts the ability of Trahan to credit bid under 11 U.S.C. Section 363(k):
The ultimate purchaser of the USBC stock shall take the stock free and clear of all liens. Consistent with her prior articulated objections, Trahan shall not exercise any act of possession or dominion over the USBC stock, nor shall Trahan be permitted to credit bid in any amount less than the full amount of her remaining allowed claim. All proceeds from the sale of USBC shall be paid directly to Trahan, and Trahan's secured claim will thus be deemed fully satisfied and discharged pursuant to her agreed valuation of USBC. .
Although Trahan has proposed the Competing Plan, she ultimately seeks to have the case dismissed for cause under 11 U.S.C. § 1112(b)(4).
On the motion of any party in interest, unless the Court "finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate," the court must dismiss a Chapter 11 case or convert the case to a Chapter 7 case if the movant establishes "cause." 11 U.S.C. § 1112(b)(1)-(2) (2018). Further, a bankruptcy court has "wide discretion" to determine whether cause exists. In re BH S & B Holdings, LLC, 439 B.R. 342, 346 (Bankr. S.D.N.Y. 2010).
Section 1112(b)(4) provides that "cause" includes sixteen (16) specific bases. 11 U.S.C. § 1112(b)(4)(A)-(P) (2018). These grounds, however, are "illustrative, not exhaustive." In re AdBrite Corp., 290 B.R. 209 217 (Bankr. S.D.N.Y. 2003) ). "Accordingly, courts have also determined that conversion or dismissal of a Chapter 11 case is warranted for other reasons, including the debtor's inability to effectuate a plan and a debtor's unwarranted delay of the case through unnecessary motion practice." In re Babayoff, 445 B.R. 64, 76 (Bankr. E.D.N.Y. 2011); see also In re DCNC North Carolina I, LLC, 407 B.R. 651, 665 (Bankr. E.D. Pa. 2009) ().
Trahan's Renewed Motion to Dismiss alleges the following bases for "cause": i) substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of...
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