In re NRS Props., LLC
| Decision Date | 22 November 2021 |
| Docket Number | Bankruptcy Case No. 21-10744 TBM |
| Parties | IN RE: NRS PROPERTIES, LLC, Debtor. |
| Court | U.S. Bankruptcy Court — District of Colorado |
Daniel A. Hepner, Daniel A. Hepner, Trustee, Broomfield, CO, Trustee, Pro Se.
Robert J. Shilliday, III, Shilliday Law, P.C., Christopher Duncan Yost, Cohen, LLC, Denver, CO, for Debtor.
ORDER DENYING CONFIRMATION OF AMENDED CHAPTER 12 PLAN AND DISMISSING BANKRUPTCY CASE
Chapter 12 of the Bankruptcy Code1 establishes a specialized process for reorganization of family farmers. The Debtor, NRS Properties, LLC (the "Debtor"), filed for protection under Chapter 12 to stave off a foreclosure on its Colorado farm and ranch land initiated by its only creditor, MM Opportunity Fund, LLC ("MMOF"). MMOF has a lien on all of the Debtor's land. Eventually, the Debtor filed a Chapter 12 plan of reorganization proposing to transfer some of its real property (and other consideration) to MMOF. The Chapter 12 Trustee and MMOF both objected to the Debtor's plan on numerous grounds, including lack of eligibility and failure to meet various Chapter 12 confirmation requirements under Section 1225(a). MMOF also requested that the bankruptcy case be dismissed per Section 1208(c). The Court conducted a trial on the confirmation and dismissal disputes.
Regarding eligibility, "only a family farmer ... with regular annual income may be a debtor under Chapter 12." 11 U.S.C. § 109(f). Although the Debtor is a corporate entity (a limited liability company) the broad definition of "family farmer" encompasses closely-held companies owned by one family, provided that such family conducts the farming operation. 11 U.S.C. § 101(18)(B). And, under the Bankruptcy Code, farming encompasses both growing crops and ranching. 11 U.S.C. § 101(21). Trenton M. Lund, the Debtor's Manager, owns all of the equity of the Debtor and conducts the farming operation, which includes cultivation of some crops and livestock ranching on dry land in the San Luis Valley. More than eighty percent (80%) of the Debtor's assets "consists of assets related to the farming operation." 11 U.S.C. § 101(18)(B). The Debtor's aggregate debts are less than $10 million and all of the debt stems from farming operations. Id . So, although the Debtor's actual farming operations are somewhat nominal, the Debtor is eligible to seek bankruptcy protection under Chapter 12. 11 U.S.C. §§ 101(18), 101(19) and 109(f).
But being eligible for bankruptcy relief is only a threshold step in the bankruptcy process. The real objective is reorganization. Every Chapter 12 debtor must propose a plan of reorganization within a short time. Furthermore, to be confirmed, every Chapter 12 plan must meet a series of statutory requirements set forth in Section 1225. After hearing all the evidence, the Court concludes that the Debtor failed to meet its confirmation burden. The Debtor's proposed plan is so contradictory and unclear (especially in its treatment of MMOF) that it simply cannot be administered. Furthermore, since MMOF objected, the Debtor was required to meet a set of cram down mandates under Section 1225(a)(5). But, given a host of valuation problems — for example, the Debtor's dry land is worth much less than the Debtor thinks — the Debtor was unable to prove that "the value ... of property to be distributed ... under the plan on account of [MMOF's Claim] is not less than the allowed amount of such claim." 11 U.S.C. § 1225(a)(5)(B)(ii). The Debtor's plan also was deficient in other ways. So, the Court concludes that confirmation of the Debtor's proposal must be denied.
MMOF also asked for dismissal. If this case was still in its early stages and the Debtor had only had one opportunity to reorganize, dismissal might not warranted. However, this bankruptcy (which is the Debtor's second recent attempt at reorganization) is almost a year old already. And, nothing much has been accomplished. The Debtor's first plan was facially unconfirmable and was withdrawn by the Debtor. Now, the Court has rejected confirmation of another plan. Meanwhile, the Debtor has engaged in both "unreasonable delay" and "gross mismanagement" prejudicing the Debtor's sole creditor. The Debtor's "gross mismanagement" is not trivial. The Debtor has failed to comply with basic requirements of the Bankruptcy Code () and has transferred almost all of its income to a related third-party for no consideration, thus violating its duty of financial transparency. Meanwhile, the Debtor has not made a profit and seems unable to be able to rehabilitate itself. So, dismissal is warranted. In the end, this is a two-party dispute (between the Debtor and its secured creditor, MMOF) which can and should be resolved outside of bankruptcy.
The Court has jurisdiction over the matters in dispute in this bankruptcy case pursuant to 28 U.S.C. § 1334. The Chapter 12 eligibility, confirmation, and dismissal issues are core proceedings under 28 U.S.C. §§ 157(b)(2)(A) (), 157(b)(2)(K) (); (L) (confirmations of plans), and 157(b)(2)(O) (). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. No party has contested this Court's jurisdiction or venue.
The Debtor filed for bankruptcy protection under Chapter 12 on February 17, 2021.2 A few weeks later, the Debtor submitted its Statement of Financial Affairs and Schedules.3 Four months into the bankruptcy proceedings, the Debtor filed an initial Chapter 12 Plan; however, the Debtor voluntarily withdrew it.4 Then, prompted by the seeming lack of progress in reorganization, MMOF filed the Motion to Dismiss on July 27, 2021.5 In the Motion to Dismiss, MMOF contended that the Debtor was ineligible for Chapter 12 relief per Section 109(f). MMOF also argued that the Debtor's bankruptcy case should be dismissed under Section 1208(c) for: "unreasonable delay, or gross mismanagement, by the debtor that is prejudicial to creditors"; "continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation"; and lack of "good faith." Subsequently, the Debtor opposed the Motion to Dismiss contending that the Debtor was eligible to file for protection under Section 109(f) and that dismissal was unwarranted.6
On August 17, 2021, the Debtor filed its "Amended Chapter 12 Plan of Reorganization" (the "Amended Chapter 12 Plan") and "Motion to Confirm Chapter 12 Plan (the "Motion to Confirm").7 Subsequently, both the Chapter 12 Trustee and MMOF objected to confirmation of the Amended Chapter 12 Plan on a myriad of grounds.8 The Court set the disputes for trial. Thereafter, the Debtor, the Chapter 12 Trustee, and MMOF presented a "Stipulation of Agreed Facts"9 (identifying 11 agreed material facts) (the "Stipulated Facts") and submitted legal briefs on the disputed dismissal and confirmation issues.10
The Court conducted an evidentiary hearing on the Motion to Confirm, the Amended Chapter 12 Plan, the Motion to Dismiss, and the various objections on October 29, 2021. Only two witnesses testified. The Debtor presented testimony from Trenton N. Lund, the Managing Member and sole owner of the Debtor. MMOF called Clark Oman, an expert on agricultural real estate valuation. During the trial, the Court admitted into evidence: Exhibits A-B, E, and K-M tendered by the Debtor; Exhibits 3 and 10-16 offered by the Chapter 12 Trustee; and Exhibits MMOF 1-5 presented by MMOF. After the close of evidence, the Court received Closing Arguments from counsel for the Debtor, MMOF, and the Chapter 12 Trustee. Thereafter, the Court took the matter under advisement. In the interim, the Court has reviewed all of the admitted exhibits, considered the testimony of the witnesses, and evaluated the legal arguments.
The disputed issues are ripe for decision.
The Debtor is an Arizona limited liability company wholly owned and managed by Trenton N. Lund ("Mr. Lund"). The Debtor has no employees. Historically, the Debtor has engaged in farming and ranching operations. On its 2020 Federal Income Tax Return, the Debtor asserted a "net farm loss" from "farming."11 Currently, according to Mr. Lund, the Debtor is more focused on ranching than on cultivation, albeit that the Debtor has recently harvested some alfalfa and oats. The Debtor and MMOF have stipulated that "Debtor conducts farming operations in Saguache County, Colorado"12 and "Debtor is a corporation in which more than 50 percent of the outstanding stock or equity is held by one family and more than 80 percent of the value of its assets consists of assets related to the farming operation."13 The Debtor filed for bankruptcy protection under Chapter 12 on February 17, 2021, to stop a foreclosure of its real property initiated by MMOF.14 This bankruptcy case is the Debtor's second insolvency filing in recent years submitted on the eve of foreclosure on the Debtor's real property.15
In its Schedule A/B, the Debtor listed a total of $2,775,977 in assets.16 The asset mix includes the following categories:
Most of the foregoing categories of assets pertain to farming or ranching operations. With respect to crops, the Debtor did not assert that it had any planted or harvested crops when it filed for bankruptcy. Instead, the crops...
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