In re Save Our Springs (S.O.S.) Alliance, Inc.

• Citation: 388 B.R. 202
• Decision Date: 11 April 2008
• Docket Number: No. 07-10642-CAG.,07-10642-CAG.
• Parties: In re SAVE OUR SPRINGS (S.O.S.) ALLIANCE, INC., Debtor.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas

388 B.R. 202

In re SAVE OUR SPRINGS (S.O.S.) ALLIANCE, INC., Debtor.

No. 07-10642-CAG.

United States Bankruptcy Court, W.D. Texas, Austin Division.

April 11, 2008.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

B. Weldon Ponder, Jr., Austin, TX, for Debtor.

MEMORANDUM OPINION ON CONFIRMATION OF DEBTOR'S FIRST AMENDED PLAN AND RELATED MATTERS

CRAIG A. GARGOTTA, Bankruptcy Judge.

The Court held a hearing commencing on November 5, and continuing on November 7, 8, 15, and 27, 2007, on the Debtor's First Amended Plan Combined with Disclosures for a Small Business Case Pursuant to 11 U.S.C. sec. 1125(f). See Docket no. 52 (the "Plan" or the "First Amended Plan"). Three parties objected to the Debtor's Plan. At the hearing on confirmation, two of the objecting parties—Mak Foster Ranch, L.P. ("Mak Foster") and Cypress-Hays, L.P. ("Cypress-Hays")— reached agreements with the Debtor and cast accepting ballots. The third objecting party, Sweetwater Austin Properties, L.L.C. ("Sweetwater") appeared and argued that the Debtor's Plan should not be confirmed. After five days of hearing and evidence, the Court took the matter under advisement.

Also set for hearing along with the Debtor's Plan were (1) the Debtor's Motion to Designate Sweetwater Austin Properties, LLC, and Related Entities, Pursuant to 11 U.S.C. § 1126(e) (Docket no. 57, the "Vote Designation Motion"), (2) the Debtor's Motion to Extend Time to Confirm Debtor's First Amended Plan of Reorganization, Pursuant to 11 U.S.C. §§ 1121(e)(3) and 1129(e) (Docket no. 59, the "Motion to Extend Time"), and (3) the Debtor's Application to Employ Special Counsel to Represent the Debtor in Certain State Court Litigation (Docket No. 44, the "Employment Application"). As further discussed below, during the hearing the Court partially granted the Motion to Extend Time. At the conclusion of the hearing, in addition to confirmation of the Debtor's Plan, the Court took these three matters under advisement (the Motion to Extend Time only to the extent of the relief requested that had not already been ruled on).

The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334 and 151. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (L), and (O). This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014. Where appropriate, a finding of fact shall be construed to be a conclusion of law, and vice versa. For the reasons stated, below, the Court finds that the Motion' to Extend Time should be GRANTED in part and DENIED in part, the Vote Designation Motion should be DENIED, and confirmation of the Debtor's Plan should be DENIED.¹ A separate order on each matter will be entered in conformity with this Opinion.

                                                          CONTENTS
                PRE-PETITION HISTORICAL BACKGROUND.....................................................  209
                PROCEDURAL HISTORY OF THE CASE THROUGH THE CONCLUSION OF
                THE CONFIRMATION HEARING..............................................................210
                OVERVIEW OF THE DEBTOR'S FIRST AMENDED PLAN AND ITS ASSETS............................211
                

                ISSUES PRESENTED......................................................................214
                EVIDENCE PRESENTED AT THE HEARING...................................................215
                ANALYSIS............................................................................222
                   Preliminary Issue I: Whether the Deadline to Obtain Confirmation Can or
                Should Be Extended...............................................................222
                     Whether the 45-day Period Runs from the Filing of the Original Plan or
                      from the Filing of the First Amended Plan.....................................223
                     Whether the 45-day Period under § 1129(e) Should Be Extended to Allow
                      the Court to Consider the Evidence and Rule...................................225
                     Whether the Debtor Has Shown That It Is More Likely Than Not That It
                      Will Obtain Confirmation Within a Reasonable Time ............................229
                   Preliminary Issue II: Designation of Sweetwater's Vote as Having Been
                Cast in Bad Faith.............................................................229
                   Plan Confirmation Issue I: Gerrymandering by Improper Classification of
                Classes 4, 5, and 6...........................................................233
                   Plan Confirmation Issue II: Lack of an Impaired Accepting Class..................238
                   Plan Confirmation Issue III: Best Interests of Creditors Test Not Met............239
                   Plan Confirmation Issue IV: Feasibility of the Plan..............................239
                   Plan Confirmation Issue V: Discharge Is Not Permissible Where the Plan
                in Essence Does Not Provide for the Debtor's Continuation in
                "Business"....................................................................244
                   Plan Confirmation Issue VI: Cramdown Is Not Permissible Where Insider
                Claims Are Not Subordinated to Payment in Full of All Other Claims............244
                   Plan Confirmation Issue VII: Lack of Good Faith..................................246
                SUMMARY AND CONCLUSION..............................................................249
                

PRE-PETITION HISTORICAL BACKGROUND

The Debtor, Save Our Springs (S.O.S.) Alliance, Inc. (referred hereinafter as the "Debtor" or "SOS") is a citizen action group whose primary purpose is to advance community awareness of water pollution and to protect water sources such as Barton Creek, the watershed in the surrounding community, and the Edwards Aquifer which is the primary or only water supply in central and south Texas.

The Debtor is a non-profit charitable organization as defined-under § 501(c)(3) of the Internal Revenue Code. SOS Exh. 6, IRS letter granting exempt status to SOS. The uncontroverted evidence is that SOS relies almost exclusively on its donors who share the same vision that SOS does for water preservation and conservation. Although the evidence admitted at the hearing suggested that SOS's donors number in the thousands, the majority of its contributions come from a handful of generous donors.

William T. Gunn, III ("Gunn"), through Sweetwater and his other related entities, is a developer of communities and homes in the Austin area and south central Texas. One of Gunn's more recent developments is located in west Austin, in close proximity to Barton Creek. Well before the commencement of its bankruptcy case, SOS sued a municipal utility district ("MUD"), the Lazy Nine MUD, that had been created for that project, in state court in order to stop the development. SOS believed that the development would cause the Barton Creek Springs and the surrounding water supply to be contaminated, and sued on the grounds that the Lazy Nine MUD had been improperly created. The Lazy Nine MUD counterclaimed for its attorney fees and alternative relief.

The state district court found for the Lazy Nine MUD, including its counterclaim for attorney's fees. The decision was upheld on appeal and the Texas Supreme Court declined to grant review. Prior to the filing of the Debtor's bankruptcy case, Sweetwater became the holder of that judgment by assignment and based on it has filed a proof of claim in this case in the amount of $294,847.68. Sweetwater ("SW") Exh. 2, Amended Proof of Claim. It is undisputed that the judgment was properly abstracted in Travis County, Texas, creating a judgment lien against all of SOS's real property in that County. Tx. Prop.Code § 52:001 (2007); SW Exh. 3, Abstract of Judgment.

As a result of the foregoing, SOS and Sweetwater entered into protracted settlement negotiations in an effort to resolve the issues. SOS has limited assets, consisting primarily of office furniture and equipment, with which to pay any judgment. As mentioned above, it relies almost entirely on donations to fund its operations. SW Exh. 1b, SOS's Schedules A, B. Given the nature of Sweetwater's claim against SOS, its donors were reluctant to provide funding that would in essence pay the developer for its attorney fees. Testimony of Ray Goodrich, Kirk Mitchell; see also SOS Exh. 22 and SW Exh. 27, (both) Grant Agreement with George Mitchell (providing grant funds not to be used to pay judgments). When settlement negotiations failed, SOS filed a petition under Chapter 11 on April 10, 2007.

PROCEDURAL HISTORY OF THE CASE THROUGH THE CONCLUSION OF THE CONFIRMATION HEARING

Prior to and during confirmation of Debtor's Plan, this Court had to consider and either rule on or take under advisement a number of matters related to confirmation of Debtor's Plan, including but not limited to those mentioned above.

The Debtor filed its Plan Combined with Disclosures on September 19, 2007. Docket No. 38. On October 11, 2007, the Debtor filed its First Amended Plan Combined with Disclosures and after a contested hearing the Court approved that amended Plan by order entered October 12, 2007, as containing adequate information under § 1125(f)(1). Docket Nos. 52, 53.

The Court then set the confirmation hearing to commence on November 5, 2007. In light of that setting, the Debtor on October 31, 2007, filed a Motion requesting additional time pursuant to § 1121(e)(3) in which to confirm its Plan (the Motion to Extend Time),² which Motion was taken up by the Court at the commencement of the confirmation hearing on November 5th. Docket No. 59. On that date, the Court partially granted that Motion orally, extending the time for Debtor to obtain confirmation of its Plan through the conclusion of the hearing on confirmation and the Motion to Extend Time. Having ruled only whether to extend the deadline that far, the Court took under advisement all other issues raised by the Motion to Extend Time, including whether the time to obtain confirmation ran from the filing of the Debtor's original Plan or from the filing of the amended version that was considered...