In re Stacy's, Inc.

• Decision Date: 04 April 2014
• Docket Number: Case No. 13–03600–dd
• Citation: 508 B.R. 370
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: In re Stacy's, Inc., Debtor.

508 B.R. 370

In re Stacy's, Inc., Debtor.

Case No. 13–03600–dd

United States Bankruptcy Court, D. South Carolina.

Signed April 4, 2014

Robert C. Byrd, A. Smith Podris, Parker, Poe, Adams & Bernstein, LLP, Charleston, SC, for Bank of the West.

Linda Barr, John Timothy Stack, Office of United States Trustee, Columbia, SC, for U.S. Trustee.

Barbara George Barton, Adam J. Floyd, Barton Law Firm, PA, Columbia, SC, for Debtor.

Chapter 11

ORDER DENYING MOTION TO USE CASH COLLATERAL

David R. Duncan, Chief US Bankruptcy Judge

This matter is before the Court on a motion to use cash collateral filed by the debtor, Stacy's Inc. (“Debtor”), on November 15, 2013. Bank of the West (“BOTW”) objected to the motion. Debtor filed a supplement to its motion on December 19, 2013, which, although labeled as a supplement, includes other grounds for relief, more specifically requesting that BOTW's collateral be surcharged under 11 U.S.C. § 506(c). The Official Committee of Unsecured Creditors (“Committee”) filed a response in support of Debtor's motion and supplement. After several continuances, due to inclement weather and other reasons, the Court held a hearing on March 12, 2014. Two days before the hearing, BOTW filed a supplement to its objection addressing the arguments raised in Debtor's supplement and filed a reply to the Committee's response in support of Debtor's motion.¹ While the United States Trustee did not file a formal response to Debtor's motion, it indicated its support for the motion at the hearing. After careful consideration of the applicable law, evidence submitted, and arguments of counsel, the Court issues the following finding of fact and conclusions of law under Federal Rule of Civil Procedure 52(a), made applicable by Federal Rule of Bankruptcy Procedure 9014. ²

FINDINGS OF FACT

Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code on June 21, 2013. Debtor's primary operation consisted of cultivating large quantities of plants and selling them wholesale to large retailers such as Wal–Mart, Home Depot, and Lowe's. The same day it filed its petition it also filed a motion seeking an order authorizing a sale of substantially all of its assets free and clear of liens, claims, encumbrances, and other interests pursuant to 11 U.S.C. § 363(f) (“Sale Motion”). In the Sale Motion, Debtor also sought authorization to sell free and clear of liens assets owned by entities related to Debtor, including the real property on which Debtor conducted most of its operations. The related entities did not file bankruptcy petitions. Debtor had an asset purchase agreement with a stalking horse bidder in place and planned to hold an auction on August 23, 2013, with the closing occurring on or before August 30, 2013.

BOTW is Debtor's largest secured creditor by far. Its security interest encumbers Debtor's accounts, chattel paper, inventory, equipment, fixtures, farm products, water rights, instruments, investmentproperty, documents, commercial tort claims, deposit accounts, letter of credit rights, general intangibles, supporting obligations, and records of, accession to and proceeds and products of the foregoing. BOTW also had a first mortgage on the real property owned by entities related to Debtor where Debtor conducted most of its operations. Debtor did not negotiate with BOTW regarding the prospect of selling its assets through a bankruptcy sale or notify BOTW of its plans prior to filing bankruptcy.

BOTW objected to the Sale Motion, and the Court held an evidentiary hearing on August 12, 2013. One of the major disputes between the parties was regarding a carve-out from the sale proceeds for payment of allowed general unsecured claims and allowed 11 U.S.C. § 503(b) administrative expense claims. Until the day before the hearing, Debtor listed BOTW's claim as undisputed on its schedules. On August 11, 2013, Debtor amended its schedules to list BOTW's claim as disputed and filed an adversary proceeding against BOTW in an effort to obtain Court approval of the sale over BOTW's objection pursuant to 11 U.S.C. § 363(f)(4). Debtor included in the complaint initiating the adversary proceeding a cause of action for surcharge of BOTW's collateral under 11 U.S.C. § 506(c). Coincidentally, the Committee, on August 11, 2013, filed a motion seeking authorization to proceed with litigation on behalf of Debtor against BOTW and others.

At the conclusion of the August 12th hearing, the Court took the matter under advisement. While prepared to issue its ruling two days after the hearing, the Court delayed ruling at the request of Debtor, the Committee, and BOTW to allow the parties more time to negotiate a consensual sale, which the parties did. On August 21, 2013, the Court entered a consent order authorizing the sale of Debtor's assets, which was signed by Debtor, BOTW, and the Committee. Among the terms in the consent order was a carve-out from the sale proceeds of $950,000 for allowed administrative expense claims, a $450,000 carve-out for allowed general unsecured claims, an agreement by Debtor to promptly dismiss with prejudice its adversary proceeding against BOTW, and an agreement by the Committee to amend its August 11, 2013 motion to reflect it was no longer seeking authorization to pursue litigation against BOTW. The consent order also contained a release of BOTW by Debtor and the Committee:

Upon entry of this Order, the Debtor, the Committee and its members grant BOTW a full and general release of any and all claims of every type, kind, nature, description or character, whether known or unknown, suspected or unsuspected, liquidated or unliquidated, that the Debtor, the Committee and its members now have or may acquire as of the date of this Order related to the loans made by BOTW to the Debtor and the Trust, and the Debtor and Committee shall include a full and general release of BOTW by the creditors claiming through the bankruptcy estate in any plan of liquidation filed by the Debtor, the Committee or a liquidating trust in this case.

Finally, the consent order provided that BOTW would have an allowed secured claim in the “maximum amount” of $22,580,896.87. There were no competing bidders at the auction scheduled for August 23, 2013, and on August 26, 2013, the Court entered an order approving the sale of assets to the stalking horse bidder, MG Acquisition, Inc (“MG”).³ The sale closed on August 30, 2013. Debtor filed a notice of voluntary dismissal with prejudice of its adversary proceeding against BOTW on August 27, 2013. The Committee amended its motion on August 22, 2013.

In its motion for use of cash collateral filed November 15, 2013, Debtor seeks to use BOTW's cash collateral to pay the following expenses:

1. Approximately $525,000 in income taxes as a result of income generated through August 30, 2013 based on a tax analysis dated February 10, 2014 (Debtor's ex. B–4);

2. $33,000 in independent contractor wages for two officers employed by Stacy's until the sale of its assets for services performed in winding down the company after the sale;

3. $2,472.33 owed to Debtor's worker's compensation insurance carrier as a result of an audit conducted by the carrier following the termination of the policy on August 30, 2013; and

4. Approximately $31,000 in U.S. Trustee fees for the fourth quarter of 2013 through the projected closing of this case.

In the supplement to its motion filed December 19, 2013, Debtor seeks, in addition to the above expenses, to use BOTW's cash collateral to pay approximately $10,000 in fees for termination of its 401k plan and $5,000 for a computer consultant. The computer consultant was involved with storing the data on the computers and related equipment formerly owned by Debtor but now owned by MG. At the hearing on March 12, 2014, Debtor indicated, in addition to the above, it was seeking to use cash collateral to pay $6,055.96 in federal unemployment taxes. Debtor's ex. A. Tim Brindley, who was Debtor's president until the sale of substantially all of Debtor's assets to MG, testified the unemployment taxes have been paid with unencumbered assets. The primary focus of the parties in their briefing and at the hearing was on the $525,000 estimated income tax liability. The tax liability is the result of more money being collected post-petition than anticipated, lower expenses than expected, and a higher working capital adjustment defined below.

The asset purchase agreement (“APA”) under which Debtor sold its assets contained a requirement that Debtor have at least $11.5 million in working capital at closing. Working capital consisted of inventory and accounts receivable. The APA referred to the amount by which the working capital exceeds $11.5 million as the “working capital adjustment.” The purchase price under the APA was adjusted upward based on the working capital adjustment. Brindley and Debtor's counsel indicated at the August 12, 2013 hearing that the working capital adjustment might be as much as $2 million. Transcript of August 12, 2013 hearing, docket entry 178, pp. 17, 21, 110, 148. Debtor's accountant and financial advisor, Marty Ouzts, testified at the March 12, 2014 hearing that shortly before the closing on August 30, 2013, there was concern expressed by BOTW's representatives involved with the inventorying of Debtor's working capital during the week preceding the closing that Debtor would not have the $11.5 million working capital minimum required under the APA. At the time of closing, the working capital adjustment was calculated to be $300,000. Following the closing, the working capital adjustment was amended upward to $585,006. Brindley, in his capacity as Debtor's president, signed a letter, dated September 27, 2013, directing the $585,006 constituting the working capital adjustment be transferred to BOTW by MG. Debtor's ex. J.

In order to fund its operations during this bankruptcy until the sale of its assets, Debtor sought and obtained...