In re Peak Serum, Inc., Case No. 19-19802-JGR

• Decision Date: 08 December 2020
• Docket Number: Case No. 19-19802-JGR, Case No. 19-19803-JGR
• Citation: 623 B.R. 609
• Parties: IN RE: PEAK SERUM, INC., EIN: 47-2816472 Debtor. In re: Thomas Kutrubes, SSN: xxx-xx-xxxx Debtor.
• Court: U.S. Bankruptcy Court — District of Colorado

623 B.R. 609

IN RE: PEAK SERUM, INC., EIN: 47-2816472 Debtor. In re: Thomas Kutrubes, SSN: xxx-xx-xxxx Debtor.

Case No. 19-19802-JGR

Case No. 19-19803-JGR

United States Bankruptcy Court, D. Colorado.

Signed December 8, 2020

Aaron A. Garber, Littleton, CO, for Debtor.

Jointly Administered Under Case No. 19-19802-JGR

ORDER

Joseph G. Rosania, Jr., United States Bankruptcy Judge

Peak Serum, Inc. and Thomas Kutrubes (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on November 13, 2019, Case Nos. 19-19802-JGR; 19-19803-JGR (collectively, the "Cases"). The Court entered an Order Granting Motion for Joint Administration of the Cases under Case No. 19-19802-JGR on November 18, 2019 (Doc. 38).

PARTIES

Peak Serum, Inc. ("Peak") is a privately owned, independent supplier of life science laboratory products. Peak's core focus is supplying fetal bovine serum for clinical trials and research, and diagnostics applications. Thomas Kutrubes ("Kutrubes") is the owner, president, and CEO of Peak.

Peak is a competitor of Atlas Biologicals, Inc. ("Atlas"). Kutrubes is a former employee and shareholder of Atlas. Atlas is a creditor of both Debtors by virtue of a September 23, 2019 judgment issued jointly and severally against the Debtors in the United States District Court for the District of Colorado, Case No. 15-cv-00355-CMA-KMT, in the amount of $2,048,180.50 (the "Judgment"). The Judgment was issued based upon Atlas's claims against Peak and Kutrubes for federal trademark infringement, Colorado common law trademark and trade name infringement, misappropriation of trade secrets, and breach of fiduciary duty. The Judgment is currently on appeal in the Tenth Circuit Court of Appeals, Case No. 19-1404. The Debtors and Atlas agree that the Judgment prompted the filing of the bankruptcy petitions in these Cases.

Biowest, LLC ("Biowest") is a competitor of Atlas and supplier of fetal bovine serum to Peak. In addition to being a creditor of Peak, Biowest is also a party-in-interest in the Cases pursuant to a purported stock transfer by Kutrubes to Biowest of all of his stock in Atlas in exchange for a shipment of fetal bovine serum. Whether the purported stock transfer was valid is in dispute, and the ownership of the stock is the subject of certain pre-petition litigation which is currently pending before the District Court, Case No. 18-cv-00969-CMA-MEH (the "Stock Ownership Suit"). Biowest supports the Debtors in the matters now before this Court.

PROCEDURAL HISTORY

On March 4, 2020, Atlas moved in both Cases to appoint a Chapter 11 trustee under 11 U.S.C. § 1104(a)(1) or, in the alternative, under 11 U.S.C. § 1104(a)(2) (Case No. 19-19802, Doc. 135; Case No. 19-19803, Doc. 92) (collectively, the "Trustee Motions"). The Debtors objected on March 24, 2020 (Case No. 19-19802, Doc. 149; Case No. 19-190803, Doc. 97). On March 25, 2020, Biowest joined in Kutrubes's objection (Case No. 19-190803, Doc. 98). On April 2, 2020, Peak filed a supplement to its objection (Case No. 19-19802, Doc. 151).

Thereafter, on April 28, 2020, the Debtors filed a Motion to Convert Cases to Sub-Chapter V Cases or in the Alternative to Allow Dismissal and Refiling of Cases (Case No. 19-19802, Doc. 161) (the "Subchapter V Motion"), and a Supplemental Brief in Support on May 26, 2020 (Doc. 190). The United States Trustee and Atlas objected on May 11, 2020 (Doc. 174), and May 12, 2020 (Doc. 175), respectively.

The Court held an evidentiary hearing on both matters on June 10, 11, 16, 18, and 24, 2020, at which it admitted more than one hundred exhibits into evidence; heard testimony of six witnesses—Kutrubes; Rick Paniccia, the owner and president of Atlas; Michelle Cheever, the director of operations and quality assurance at Atlas; Jim DeOlden, the Debtors' rebuttal witness; Mark Dennis, the Debtors' accountant; and Suresh Daniel, the Debtors' expert witness—received an offer of proof from Biowest regarding the proposed testimony of Wendell Leinweber, the president and CEO of Biowest (Doc. 228); and heard legal argument of the parties.

At the evidentiary hearing, the Court noted that the Debtors' eligibility to proceed under Subchapter V is a threshold issue because, if the Debtors were to proceed under Subchapter V, Atlas's request to appoint a trustee would be moot.¹ Accordingly, the Debtors first presented their case on the Subchapter V Motion, after which Atlas presented its case on the Trustee Motions. At the close of the hearing, the Court took the matters under advisement.

The Court has jurisdiction over these contested matters pursuant to 28 U.S.C. §§ 157(b)(1), 157(b)(2)(A), and 1334.

DEBTORS' SUBCHAPTER V ELIGIBILITY

The Small Business Reorganization Act of 2019 ("SBRA") was enacted prior to the filing of the Cases on August 23, 2019. See Pub. L. No. 116-54, 133 Stat. 1079 (2019). Pursuant to § 5, the effective date of SBRA was February 19, 2020—approximately three months after the Cases were filed. See § 5, 133 Stat. 1079, 1087. SBRA authorizes small business debtors to proceed under the new provisions of Subchapter V of Chapter 11 of the Bankruptcy Code. To qualify as a small business debtor under SBRA, a debtor must have aggregate, noncontingent, liquidated, secured and unsecured debts, as of the date of the filing of the petition or the order for relief, in an amount not more than $2,725,625. See § 2, 133 Stat. 1079; 11 U.S.C. §§ 101(51D) and 104.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted, which, in relevant part, amends SBRA. See Pub. L. No. 116-136 § 1113, 134 Stat 281. Specifically, § 1113 of the CARES Act temporarily increases the debt limit to qualify as a debtor under SBRA to $7.5 million. However, § 1113(a)(3) of the CARES Act expressly states that the increased debt limit "shall apply only with respect to cases commenced under title 11, United States Code, on or after the date of enactment of this Act ." § 1113(a)(3), 134 Stat 281, 311 (emphasis added).

I. Facts

The following facts pertinent to the Subchapter V Motion are undisputed.

On page 2, line 8 of its petition, Peak did not check that either of the following applied:

• Debtor's aggregate noncontingent liquidated debts (excluding debts owed to insiders or affiliates) are less than $2,725,625; or

• The debtor is a small business debtor as defined in 11 U.S.C. § 101(51D)

(UST's Ex. II). Peak's Schedules D and E/F, filed contemporaneously with its petition on November 13, 2019, reflected aggregate secured and unsecured debts in the amount of $3,580,644.67 (Id. ). Peak did not mark any of its debts as contingent, unliquidated, or disputed (Id. ). Peak amended its Schedule E/F on January 14, 2020, to increase the amount of its unsecured debt by $8,000, for aggregate secured and unsecured debts in the amount of $3,588,644.67 (UST's Ex. IV). Peak did not mark any of the debts on its Amended Schedule E/F as contingent, unliquidated, or disputed (Id. ).

On page 4, line 13 of his petition, Kutrubes checked: "I am filing under Chapter 11, but I am NOT a small business debtor according to the definition in the Bankruptcy Code" (UST's Ex. III). Kutrubes's Schedules D and E/F, filed contemporaneously with his petition on November 13, 2019, reflect aggregate secured and unsecured debts in the amount of $3,326,778.97 (Id. ). Kutrubes did not mark any of his debts as contingent, unliquidated, or disputed (Id. ).

The Debtors do not dispute that, as of the filing of the Cases, their aggregate, noncontingent, liquidated debts exceeded the $2,725,625 debt limit to qualify as a small business debtor under SBRA. Moreover, the Debtors concede that the "CARES Act provides that the increased debt limit applies only to cases filed after its enactment" (Doc. Atlas's Ex. 41, ¶ 14). Nonetheless, the Debtors seek authority from this Court to proceed under Subchapter V because "[t]he CARES Act was designed, among other things, to save small businesses such as Peak" that are impacted by the COVID-19 pandemic (Id. at ¶ 21). The Debtors argue that, in addition to reducing estate expenses, proceeding under Subchapter V would promote efficiency in the bankruptcy process and provide for oversight of the Debtors by a trustee to satisfy, to some extent, Atlas's request for appointment of a Chapter 11 trustee.

The United States Trustee and Atlas argue that § 1113(a)(3) of the CARES Act expressly states that it applies only to cases filed on or after the date the CARES Act was enacted. Because the Cases were filed more than four months prior to the enactment of the CARES Act, the United States Trustee and Atlas contend that the increased debt limit provided for by the CARES Act does not apply to the Cases. Thus, the United States Trustee and Atlas agree that because the Debtors' aggregate, noncontingent, liquidated debts exceeded the $2,725,625 debt limit set forth in 11 U.S.C. § 101(51D) to qualify as small business debtors under SBRA on the date the Cases were filed, the Debtors are not eligible to proceed under Subchapter V. Atlas also argues that the Debtors are ineligible to proceed under Subchapter V because they are incapable of complying with certain statutory deadlines imposed on all Subchapter V debtors, including that debtors must file a plan within 90 days of the petition date and the Court must hold a status conference within 60 days of the petition date, as those deadlines have passed. The Court notes that 11 U.S.C. §§ 1188(b) and 1189(b) provide for the extension of such deadlines "if the need for an extension is attributable to circumstances for which the debtor should not justly be held accountable," and most courts that have considered these deadlines in cases of retroactive election to proceed under Subchapter V have found that they may be extended. See In re Ventura , 615 B.R. 1 (Bankr. E.D.N.Y. 2020) ; In re Trepetin , 617 B.R. 841 (Bankr. D. Md. 2020) ; In re Twin Pines, LLC , Case No. 19-10295-j11, 2020 WL...