In re Rogers
| Decision Date | 24 June 2016 |
| Docket Number | Case Number 14-40219-EJC |
| Parties | In the matter of: GRANT ROBERT ROGERS, and ALLISEN NICOLE ROGERS; Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of Georgia |
Pending before the Court is approval of the Disclosure Statement (dckt. 173) filed by the individual Chapter 11 debtors, Grant and Allisen Rogers (the "Debtors"). The Debtors are the sole members1 of the limited liability company known as Wetdog, LLC ("Wetdog"), which owns the Foley House Inn (the "Inn"), a bed and breakfast in the historic district of Savannah, Georgia. The Debtors primary source of income is from their management of the Inn.
This matter came before the Court on February 25, 2016 upon objections raised by the main creditor in this case, Belle Resources, Ltd. ("Belle"), which holds a first-in-priority lien on the Inn, and the United States Trustee ("UST"). Belle and the UST objected to the Disclosure Statement on several grounds, including violation of the absolute priority rule and the Debtors' valuation of their ownership interests in Wetdog at $-0-.
The principal issue before the Court is the Debtors' ability to confirm theirAmended Plan of Reorganization filed on December 20, 2015 (the "Plan") (dckt. 172) by means of cramdown under 11 U.S.C. § 1129(b). Belle and the UST contend that the Debtors' Plan cannot be confirmed because it violates the absolute priority rule set forth in § 1129(b)(2)(B)(ii), and thus approval of the Disclosure Statement is inappropriate. In addition, Belle contends that if the Debtors seek to satisfy the "new value" exception to the absolute priority rule, the Court must hold an auction to determine the value of the Debtors' ownership interest in Wetdog. However, the Debtors argue that after BAPCPA2, the absolute priority rule no longer applies in individual Chapter 11 cases. But if the absolute priority rule applies, the Debtors contends that the submission of evidence, presumably in the form of expert testimony, is sufficient to establish the value of any property they propose to retain.
For the reasons set forth below, the Court holds that the absolute priority rule still applies to individual Chapter 11 cases post-BAPCPA. In addition, the Court holds that the "new value" exception to the absolute priority rule is also applicable in individual Chapter 11 cases. Because the Court finds that the Debtors' Plan, as proposed, violates the absolute priority rule, the Court will enter an order denying approval of the Disclosure Statement.3 Further, as will be explained, the Court will not require an auction of theWetdog interests, but instead will set a valuation hearing and allow the parties to introduce evidence as to the value of the Debtors' non-exempt property, including the Debtors' ownership interest in Wetdog. Once these values are determined, the Debtors may then file an amended disclosure statement4 and plan of reorganization in an effort to meet the "new value" exception or otherwise satisfy the absolute priority rule.
This Court has subject-matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and the Standing Order of Reference signed by then Chief Judge Anthony A. Alaimo on July 13, 1984. This is a "core proceeding" within the meaning of 28 U.S.C. § 157(b)(2)(L). In accordance with Bankruptcy Rule 7052, the Court makes the following findings of fact and conclusions of law.
Wetdog was established by the Debtors in September 2001 for the sole purpose of purchasing a bed and breakfast in Borrego Springs, California. In April 2006, Wetdog sold the California inn and used the proceeds to make a sizeable down payment on the purchase of the Foley House Inn (the "Inn"). Wetdog financed the remaining balance of the purchase price with a loan from the Sterling Bank. The loan is evidenced by a certainpromissory note (the "Wetdog Note") dated September 15, 2006 in the original principal amount of $1,940,000.00. As collateral, Wetdog granted Sterling Bank a first-in-priority lien on the Inn and the Debtors both executed an unconditional personal guaranty. Wetdog also obtained a $1,361,000.00 loan from the Small Business Administration. To secure this loan, Wetdog executed a promissory note in favor of the SBA (the "SBA Note") and granted SBA a second-in-priority lien on the Inn. As additional collateral, the Debtors also personally guaranteed the SBA Note.
Beginning in 2012, Wetdog fell behind on its monthly payments required under the Wetdog Note. Accordingly, on March 26, 2013, Comerica Bank (as successor in interest to Sterling Bank) notified Wetdog that it was in default and demanded full repayment within ten days. On April 5, 2013, in response to Comerica's demand, Wetdog filed a voluntary Chapter 11 petition, designated as case number 13-40601-EJC. (Wetdog Dckt. 1).
Wetdog's two largest creditors, Belle5 and SBA, held secured claims of $1,882,320.14 and $1,365,762.09, respectively. On September 8, 2014, this Court confirmed Wetdog's Chapter 11 plan of reorganization. (Wetdog Dckt. 187). Under the terms of Wetdog's confirmed plan, Belle's secured claim will be paid in full at 5.25% interest in 228 monthly payments of $11,279.76, and a final balloon payment due nineteen years after thefirst monthly payment. (Wetdog Dckt. 102). Further, Wetdog's plan provides for the bifurcation of SBA's claim into a secured claim of $1,057,080.90 and an unsecured claim of $308,681.19. Id. The secured portion of SBA's claim will be paid in full in monthly payments of $4,610.25 until the claim is satisfied. Id. The unsecured portion of SBA's claim will be paid as a general unsecured claim. Id. Under the confirmed Wetdog plan, general unsecured creditors will receive 47.59% of their claims or their pro rata share of $250,000.00, whichever is greater. (Wetdog Dckt. 138). The Wetdog confirmation order was not appealed6.
As a result of Wetdog's default on the Wetdog Note, the Debtors, as personal guarantors, became liable for the monthly payments. When the Debtors were unable to make such payments, Belle filed a state court lawsuit on November 21, 2013 against the Debtors in the District Court of Harris County (Texas) to recover the amounts owed on the Wetdog Note. On February 5, 2014, while the state court action was still pending, the Debtors filed for Chapter 13 bankruptcy protection7. (Dckt. 1).
The Debtors Chapter 13 plan, as originally filed, proposed monthly payments of $1,350.00 for sixty months. (Dckt. 7). On March 24, 2014, the Debtors' largest creditor, Belle, filed its Objection to Confirmation of Chapter 13 Plan of Reorganization (dckt. 24), which raised a number of issues with the proposed plan but did not assert that the Debtors were ineligible for Chapter 13 relief. On April 8, 2014, the Debtors filed their Amended Chapter 13 Plan and Motion (dckt. 36), in which they added the following treatment of Belle's claim:
On April 11, 2014, O. Byron Meredith III, the Chapter 13 Trustee ("Chapter 13 Trustee") objected to the confirmation of the Debtors' plan. (Dckt. 41). The Chapter 13 Trustee's objection outlined the need for additional information, questioned the Debtors' calculation of disposable income, and asserted that the Debtors' non-exempt equity in various assets may require additional plan payments. Id. Like Belle's objection, the Chapter 13 Trustee's objection also did not assert that the Debtors were ineligible for Chapter 13 relief.
On May 2, 2014, Belle filed its Objection to Confirmation of Amended Chapter 13 Plan of Reorganization and Motion to Convert and/or Dismiss (dckt. 44). In this new objection, Belle did assert, as grounds for dismissal or conversion, the Debtors'ineligibility due to the debt limits of § 109(e). Id. At a June 17, 2014 confirmation hearing, the eligibility issue was argued at some length by the parties, and the Court took the matter under advisement. Before the Court ruled on the § 109(e) issue, on August 5, 2014, the Debtors moved to convert their case from Chapter 13 to Chapter 11. (Dckt. 63).
While in Chapter 11, the Debtors have continued to manage their property as debtors-in-possession pursuant to 11 U.S.C. §§ 1107(a) and 1108. The Debtors' principal asset is their 100% ownership interest in Wetdog, which the Debtors value at $0.00. In this case, the Debtors listed Belle as an unsecured creditor with a contingent, unliquidated, and disputed debt of $1,880,000.00. (Dckt. 1, p.23). However, Belle filed an unsecured claim in the amount of $2,058,945.198. (Claims Register 10-1). In addition, the SBA filed an unsecured claim in this case for $1,253,554.26. (Claims Register 7-1). The amount of SBA's claim has not been disputed by the Debtors.
On December 20, 2015, the Debtors filed their Disclosure Statement and Plan9 (the "Plan"). (Dckt. 172, 173). The Debtors' Plan proposes to pay unsecured creditors(except Belle and SBA) yearly pro rata payments for a period of five years, with the total amount distributed equaling twenty-five percent (25%) of their respective claims. (Dckt. 172). Under the terms of the Plan, Belle and SBA will not receive any payments because, according to the Debtors, their claims are being paid in full in the related Wetdog case10. Id. In addition, the Debtors'...
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