In re Sunnyland Farms, Inc., Case No. 14-10231-t11

• Decision Date: 28 March 2016
• Docket Number: Case No. 14-10231-t11
• Parties: In re: SUNNYLAND FARMS, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of New Mexico

In re: SUNNYLAND FARMS, INC., Debtor.

Case No. 14-10231-t11

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

March 28, 2016

MEMORANDUM OPINION

Before the Court is Jerry Capussi's motion to compel the Debtor to issue shares of stock in accordance with Debtor's confirmed Chapter 11 plan. Capussi argues that the Plan is ambiguous and should be interpreted to allow him to receive stock rather than cash. Debtor counters that the Plan requires Capussi to settle for cash. The Court agrees with Capussi's position.

I. FACTS¹

The Court finds² the following facts:³

Debtor is a New Mexico corporation that owns a large greenhouse near Grants. Capussi assisted Debtor in developing its New Mexico greenhouse business.

Because of a large fire at a former greenhouse location, Debtor fell on hard times. Creditors filed an involuntary bankruptcy case against Debtor, which it converted to a voluntary Chapter 11 case.

Debtor filed a fourth amended plan of reorganization on January 14, 2015. The plan contains the following:

6.5. Allowed Class 5 claim holders shall be able to choose from one of the two following treatments, with such election being made on the ballot accepting or rejecting this Plan.

6.5.1. Claim holder shall be paid 1.00% of their allowed claim no later than thirty (30) days after the Effective Date or, in the case of disputed claims, on the later of the Effective Date or the date upon which Orders resolving all pending claims objections have been Entered and have become Non-Appealable; or

6.5.2. Claim holder shall be issued an amount of shares of New Common Stock in the Debtor equal to one (1) share for every dollar of their allowed claim, rounded to the nearest dollar, on the Stock Distribution Date.

If no ballot is received, Claim Holder shall receive a payment pursuant to paragraph 6.5.1 herein and shall not have an option to receive stock.

(Italics added). The disclosure statement stated:

All holders of allowed unsecured claims... will be given the opportunity to receive either shares of the Reorganized Debtor ... Alternatively, if a creditor opts for a payout rather than shares in the Reorganized Debtor, it will be paid 1% of its allowed claim. The voting ballot to accept or reject the Plan will allow unsecured creditors to elect their preferred treatment. In the event the creditor fails to vote on the plan, it will be assumed that the creditor elects to receive a payment rather than stock.

And elsewhere:

When voting to confirm or reject the Plan, holders of allowed general unsecured claims (including those who hold deficiencies on secured claims) shall have the option to elect to receive either payment or a stock distribution as set forth in paragraphs 6.3.5 of this disclosure statement and 6.5 of the Plan.

The Plan treatment is for allowed Class 5 claims. During the crucial voting process, Capussi's Class 5 claim was disputed, so he could not vote.⁴ The plan does not say whether, how, or when the holder of a Class 5 claim may elect to receive cash or stock when his claim is disputed during the voting period but later allowed.

Despite being unable to vote, Capussi cast a ballot against the Plan. He did not elect a distribution preference on his ballot. The Court disregarded Capussi' ballot. Capussi did not object to the plan or actively oppose confirmation.

The Court confirmed the Plan by an order entered April 8, 2015. The confirmation order included a finding that the plan complied with all applicable provisions of the Bankruptcy Code.

After confirmation, the Court held an evidentiary hearing on Debtor's objection to Capussi's claim. On August 18, 2015, the Court entered an order allowing the claim in the amount of $108,000. By then, the voting was long over. The same day, Capussi notified Debtor that he elected to take stock rather than cash. The Debtor refused to issue the shares.

The Plan provides that the Court shall retain jurisdiction after the effective date for "interpretation or construction of the Plan."

II. DISCUSSION

A. Jurisdiction.

There is little question that interpretation of the language of a confirmed plan involving distribution to creditors is within the core jurisdiction of the Court. See In re Allegiance Telecom, Inc., 356 B.R. 93, 98 (Bankr. S.D.N.Y. 2006); In re Resorts Int'l, Inc., 372 F.3d 154, 166-67 (3d Cir. 2004) (interpretation of plan will typically have close nexus to bankruptcy plan); In re Thickstun Bros. Equip. Co., Inc., 344 B.R. 515, 522 (6th Cir. BAP 2006); Donaldson v.Bernstein (In re Donaldson), 104 F.3d 547 (3d Cir.1997) (interpretation of the plan will have the requisite close nexus to the bankruptcy plan); In re Lacy, 304 B.R. 439, 444 (D. Colo. 2004) ("After confirmation, the Bankruptcy Court retains jurisdiction to interpret, enforce, or aid the operation of a plan of reorganization."); Matter of Case, 937 F.2d 1014 (5th Cir. 1991) (dispute affecting the distribution of the debtor's assets following confirmed chapter 11 plan was a core proceeding). See also Miller v. United States, 363 F.3d 999, 1004-05 (9th Cir. 2004) ("Although confirmation of a plan generally acts as a final order which binds all parties, regardless of whether they assented to the plan, a plan which is ambiguous as to a material term is subject to interpretation by a reviewing court.").

B. Interpreting Confirmed Plans.

1. Plan and Disclosure Statement Construed together. When determining the meaning of a chapter 11 plan, the plan and disclosure statement may be construed together. See, e.g., In re Penberthy, 211 B.R. 391 (Bankr. W.D. Wa. 1997) (disclosure statement may be extrinsic evidence of parties' intent). However, the Plan is controlling. See In re Sonoma V, 34 B.R. 758, 761, (9th Cir. BAP 1983) ("whatever was said in the disclosure statement, the language of the plan itself is controlling"); In re Futter Lumber Corp., 2011 WL 5417094, at *5-6 (Bankr. E.D. NY 2011) (plan controls, and disclosure statement does not have res judicata effect.).

2. Contract Interpretation Rules. Confirmed chapter 11 plans are interpreted "under the rules governing the interpretation of contracts." Miller v. United States, 363 F.3d 999, 1005-06 (9th Cir. 2004); re Heartland Steel, Inc., 389 F.3d 741, 744-45 (7^th Cir. 2004); Official Comm. of Unsecured Creditors v. Dow Corning Corp. et al (In re Dow Corning Corp.), 456 F.3d 668, 676 (6^th Cir. 2006); In re W. Integrated Networks, LLC, 322 B.R. 156, 160-61(Bankr. D. Colo. 2005) ("A chapter 11 plan is a contract between a debtor and the creditors of the bankruptcy estate. As such, it must be interpreted according to the general rules for contractual interpretation.") (citations omitted). Plans may be interpreted according to either state or federal common law canons of contract interpretation.⁵ There does not appear to be any relevant difference between federal and New Mexico law on how to interpret ambiguous contracts.

A contract is ambiguous if it is "capable of more than one reasonable interpretation." Miller v. United States, 363 F.3d 999, 1004 (9th Cir. 2004); see Smart v. Gillette, 70 F.3d 173, 178 (1st Cir. 1995) ("Contract language is usually considered ambiguous where an agreement's terms are inconsistent on their face or where the phraseology can support reasonable differences of opinion as to the meaning of the words employed and obligations undertaken.") (quoting Fashion House, Inc. v. K mart Corp., 892 F.2d 1076, 1083 (1st Cir. 1989); Mark V, Inc. v. Mellekas, 845 P.2d 1232, 1235 (N.M. 1993) (an ambiguity exists when the parties' expressions of mutual assent lack clarity). The parties have admitted an ambiguity exists.

Generally, where an ambiguity exists courts consider extrinsic evidence to determine the parties' intent. If no such extrinsic evidence is available, however, courts apply rules of contract interpretation. See Mark V, Inc. v. Mellekas, 845 P.2d at 1235-36 ("In the event the parties do not offer evidence of the facts and circumstances surrounding execution of the agreement andleading to conflicting interpretations as to its meaning, the court may resolve any ambiguity as a matter of law by interpreting the contract using accepted canons of contract construction and traditional rules of grammar and punctuation.").

3. Restatement (Second) of Contracts. New Mexico courts often refer to the Restatement (Second) of Contracts (West 2009) (the "Restatement") for contract interpretation rules. See, e.g., Chisos, Ltd. v. JKM Energy, L.L.C, 258 P.3d 1107, 1111-12 (N.M. Ct. App. 2011); Farmington Police Officers Ass'n v. City of Farmington, 137 P.3d 1204, 1213 (N.M. Ct. App. 2006). The Restatement also reflects federal common law. See, e.g., Defenders of Wildlife v. Salazar, 877 F. Supp. 2d 1271, 1292 (M.D. Fla. 2012) (when applying federal common law to contract cases, courts generally look to the Restatement for guidance); Castle v. Caldera, 74 F. Supp. 2d 4, 10 (D.D.C. 1999) (stating that the Restatement "embodies" federal common law). The Restatement contains the following contract interpretation rules:⁶

• Courts should interpret contract as a whole and interpret words in light of all the circumstances and the principal purpose of the parties (§ 202);

• An interpretation that gives a reasonable, lawful, and effective meaning to all terms is preferred to an interpretation that leaves a part unreasonable, unlawful, or of no effect (§ 203(a));

• When the parties to a contract have not agreed to a term essential to their rights and duties, reasonable terms should be supplied by the court (§ 204); and

• When choosing among reasonable meanings, the meaning is preferred that operates against the drafter (§ 206).

C. Applying the Restatement's Rules to This Dispute.

1. The Plan Should Be Interpreted In Light of Circumstances and Principal Purpose. As with contracts, the Court must interpret the Plan in light of the circumstances andthe principal purpose of the parties. Restatement, § 203; Mark V., 845 P.3d at 1237 (interpret agreement in light of all...