In re Original IFPC Shareholders, Inc.

• Decision Date: 19 November 2004
• Docket Number: No. 04 B 13843.,04 B 13843.
• Citation: 317 B.R. 738
• Parties: In re ORIGINAL IFPC SHAREHOLDERS, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

317 B.R. 738

In re ORIGINAL IFPC SHAREHOLDERS, INC., Debtor.

No. 04 B 13843.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

November 19, 2004.

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Kathryn Gleason, for Movant/U.S. Trustee.

Michael J. Chmiel, for Respondent/Debtor.

Charles H.R. Peters, Chicago, IL, for Cre

MEMORANDUM OPINION

JACQUELINE P. COX, Bankruptcy Judge.

The procedural history of this matter is relatively straightforward. The debtor-inpossession, Original IFPC Shareholders, Inc. ("IFPC"), incorporated under Illinois law in 1995 for the sole purpose of prosecuting a trade-secret-misappropriation claim against AT & T Wireless Devices, Inc. ("AT & T") and Hughes Network Systems, Inc. in the Circuit Court of Du-Page County, Illinois (Case No. 93 CH 1065). The decade-old claim became one of two bankruptcy-estate assets after IFPC filed a Chapter 11 bankruptcy case on April 7, 2004. By that time two state court judgments had been entered in favor of the defendants. The first judgment resulting from a bench trial was reversed on appeal after the Appellate Court of Illinois found that the plaintiff had a right to trial by jury. The second trial was by jury; it produced the same result after a six-week trial in 2003, a verdict in favor of the defendants.

By means of its July 6, 2004 Chapter 11 Plan of Reorganization, IFPC intends to use the second estate asset, a bank account worth approximately $17,000, and expected post-petition investments of approximately $1,750,000 (given priority repayment status under the plan) to finance both an appeal seeking a third trial and the third trial, should the second adverse verdict get reversed on appeal. The proceeds from an IFPC triumph in a third trial would fund 100% payment of all allowed prepetition and postpetition claims plus interest under the proposed plan, with equity security holders retaining their ownership interests in the debtor corporation.

IFPC totaled the nonpriority unsecured claims in this case at $14,828,444, an amount which can be broken down into three groups: 1) a group of investors holding a "Promissory Note and Equiditor. Interest;"¹ 2) a group of professionals providing legal, expert-witness, and other litigation-support services for the trial of the trade secret claim;² and 3) AT & T's and Hughes' contingent, unliquidated, and disputed claims for costs as prevailing defendants in the state court litigation— claims which will ultimately be valid only if IFPC continues to lose in state court. The listings for the first group do not reveal whether one portion of each scheduled dollar amount is attributable to a promissory note and the other portion to an equity interest or, alternatively, whether each dollar represents both types of interests.

The U.S. Trustee filed a "Motion to Convert or Dismiss Case" pursuant to 11 U.S.C. § 1112(b), arguing that IFPC did not file this Chapter 11 case in good faith, that it has no real need for business-reorganization bankruptcy relief, that its plan is both unconfirmable and unfeasible, and that the true creditor body (as opposed to shareholders) will not be well served by continued prosecution of the trade-secretmisappropriation claim in state court.

Discussion and Analysis

A. Continuing Loss and Inability to Rehabilitate under § 1112(b(1)

As the first basis for dismissal or conversion to Chapter 7, the U.S. Trustee relies on § 1112(b)(1), which provides in pertinent part as follows:

(b) Except as provided in subsection (c) of this section, on request of a party in interest or the United States trustee..., and after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is in the best interest of creditors and the estate, for cause, including—

(1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation....

11 U.S.C. § 1112(b). Each of the two elements in subsection (1) must be present for this ground to apply. 7 Lawrence P. King et al. Collier On Bankruptcy ¶ 1112.045a, at 1112-30 (15th ed. rev. 2004)

In this case, the debtor IFPC has continued to incur post-petition quarterly U.S. Trustee fees and administrative costs, primarily for legal representation in this bankruptcy case, and will continue to incur costs of up to $1,750,000 for legal representation in the state court litigation (assuming it wins the first of at least two rounds) if IFPC concurrently remains in Chapter 11. It is undisputed that IFPC sells no goods or services to produce a cash flow to raise this amount; IFPC would be required to gather post-petition investors to either lend this amount and/or buy additional stock. The U.S. Trustee, furthermore, has established the "continuing loss" element of § 1112(b)(1): IFPC has an ongoing negative cash flow resulting in a net decrease in value and no definite source of income. See In re Citi-Toledo Partners, 170 B.R. 602, 606-07 (Bankr.N.D.Ohio 1994); 7 King et al, supra, ¶ 1112.045aI, at 1112-31.

The second "standard under section 1112(b)(1) is not the technical one of whether the debtor can confirm a plan, but, rather, whether the debtor's business prospects justify continuance of the reorganization effort." 7 King et al, supra, ¶ 1112.045aii, at 1112-33. In a traditional Chapter 11 case, the second element, whether the debtor has a "reasonable likelihood of rehabilitation," would not turn on the anticipated future outcome of a single lawsuit, because cash flow from another valuable activity would provide the means for paying at least a portion of prepetition debt from post-confirmation profits. In this unusual case, however, the "reasonable likelihood of rehabilitation" test must be conflated with the anticipated future outcome of a single lawsuit. This would be a difficult task were the cause of action at the discovery stage, having never been tried once. In this case, however, two neutral triers of fact, a judge and a jury, have independently evaluated the debtor's claim on the merits and found its primary asset to be worth zero. While the third time might indeed be a charm (assuming that the appellate court or trial court first orders a new trial), this information is simply too much to ignore and must be given substantial weight in an evaluation of the totality of the circumstances under both subsections 1112(b)(1) and (b)(2). Aside from the unwieldy task of acquiring and then taking a third bite at the apple, the debtor has no other "business plan" that would reverse the negative cash flow. Cf. Quarles v. U.S. Trustee, 194 B.R. 94, 98 (W.D.Va.), affirmed, Quarles v. Miller, 86 F.3d 55 (4th Cir.1996). Its "premise that outcomes in pending litigation favorable to him will cure its financial ills is pure speculation." Id. at 96-97; see also Matter of Imperial Heights Apartments, 18 B.R. 858, 863-64 (Bankr. S.D.Ohio 1982); In re Citi-Toledo Partners, 170 B.R. 602, 606-07 (Bankr. N.D.Ohio 1994); In re N.R. Guaranteed Retirement, 112 B.R. 263, 278-79 (Bankr. N.D.I11.1990),³affirmed, 119 B.R. 149 (N.D.I11.1990). "When visionary schemes for rehabilitation entail significant risk to creditors without any reasonable probability that the debtor can successfully rehabilitate, conversion or dismissal is generally in order." In re Great American Pyramid Joint Venture, 144 B.R. 780, 790-91 (Bankr.W.D.Tenn.1992).

The Court concludes that cause for conversion or dismissal has been established under § 1112(b)(1).

B. Inability to Effectuate a Plan under § 1112(b)(2)

The U.S. Trustee similarly requests conversion or dismissal due to the debtor-in-possession's "inability to effectuate a plan." 11 U.S.C. § 1112(b)(2). Other courts have focused on two different types of issues in applying this standard: the existence of a viable business enterprise as well as the more technical Chapter 11 plan-confirmation standards. See 7 King et al., supra, ¶ 1112.045b, at 1112-34 to -39.

1. Feasibility Issues

As to the first type of issue, it overlaps with the plan-confirmation requirement of § 1129(a)(ll), which mandates that "confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan." 11 U.S.C. § 1129(a)(ll). On either account, it is significant that the debtor has no marketable goods or services and no other types of income-producing investments that would sustain payments to prepetition and post-petition creditors if any one of its uphill litigation battles does not resolve in its favor. See 7 King et al, supra, ¶ 1112.045bii, at 1112-35. As discussed, the two prior losses against AT & T and Hughes indicate at the very least that the evidence is not overwhelmingly in IFPC's favor, and other than the cause of action, no means of satisfying claims (aside from liquidating the bank account) are available. By its own estimation, IFPC must raise at least $250,000 to prosecute its appeal and $1,500,000 to prevail in a new trial; not discussed at the hearing is the further cost of defending a judgment on a third appeal that would probably be filed by AT & T or Hughes should IFPC prevail on the second appeal and at the third trial. IFPC has submitted a chart dated July 21, 2004, listing sixteen individuals who have purportedly committed the $250,000 for the appeal. Because no testimony was presented corroborating the information summarized in the chart, and because no accompanying contracts or other documents indicate whether any of the listed individuals are actually legally bound to the commitments, the evidentiary weight of the chart is limited. Cf. In re Great American Pyramid Joint Venture, 144 B.R. 780, 786-87 (Bankr.W.D.Tenn. 1992). Even if the Court were to give it full weight, still lingering is the question of how the...