In re Trans Max Technologies, Inc.

• Decision Date: 15 August 2006
• Docket Number: No. BK-S-05-19263-BAM.,BK-S-05-19263-BAM.
• Citation: 349 B.R. 80
• Parties: In re TRANS MAX TECHNOLOGIES, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Nevada

349 B.R. 80

In re TRANS MAX TECHNOLOGIES, INC., Debtor.

No. BK-S-05-19263-BAM.

United States Bankruptcy Court, D. Nevada.

August 15, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Cane Clark LLP, Las Vegas, NV, for Debtor.

OPINION ON CONFIRMATION

BRUCE A. MARKELL, Bankruptcy Judge.

On September 8, 2005, Trans Max Technologies, Inc. ("Trans Max") filed a voluntary petition for chapter 11 bankruptcy, and thereafter has served as debtor in possession. The court held hearings on confirmation of debtor's plan on April 26-27, 2006. At these hearings, Samuel Higgins ("Higgins"), Trans Max's president, testified as to all confirmation issues. The Office of the United States Trustee ("UST") appeared and objected; several creditors filed written objections but did not appear.

At the conclusion of the hearing, the court took the matter under submission after requesting post-hearing briefs from Trans Max and the UST. After reviewing the evidence and these briefs, the court denies confirmation.

I. Description of Trans Max and Its Proposed Plan

Trans Max is not a typical debtor in possession. To understand the confirmation issues raised by its plan, some explanation of Trans Max's background is appropriate.

A. Trans Max

For many years, Trans Max was known as Perma-Tune Electronics. It manufactured ignition systems for automobiles and boats. During this period, Perma-Tune registered its common stock with the Securities and Exchange Commission, and listed its stock for sale on the OTC Bulletin Board.¹ Sometime in 2004, Perma-Tune was acquired by a company in which Higgins had majority control, and Higgins then changed its name to Trans Max. After the acquisition, Higgins, who splits his time between Bakersfield, California, and Dubai, United Arab Emirates, controlled about 66% of Trans Max's common stock.² After reviewing Trans Max's activities, Higgins soon closed down its manufacturing operations.

Higgins had other plans for Trans Max. Initially, he caused Trans Max to invest in developing a technology radically different from that found in its ignition systems manufacturing. Between 2004 and 2005, Trans Max explored ways to produce water from air. Those investigations proved disappointing, and Trans Max abandoned that effort.

Higgins next directed Trans Max to investigate and invest in the technologies that are at issue in this confirmation. Higgins has previously paid $50,000 to acquire the rights to exploit the patented design of a Vertical Takeoff and Landing (VTOL) aircraft.³ Higgins is also an officer and principal in a company called Axial Vector Engine Company, the proprietor of a new type of engine technology, called "axial vector technology." Higgins asserts that this technology can produce significant power despite its relatively small size and weight, making it ideal for flying cars. Based on this belief, Higgins decided that this engine technology could be married with the patent license he had acquired, and that Trans Max could be the entity that would make the idea, well, fly.

But Trans Max had a hangover of debts arising from its prior life, including some outstanding judgments and employee claims. To rid the new Trans Max of these legacy debts, Higgins caused Trans Max to file this chapter 11 case, and to file its plan of reorganization.

B. Trans Max's Proposed Plan

Trans Max's reorganization plan is simple. On the financial side, the plan cancels all outstanding debt and all outstanding equity securities. It then proposes to issue to creditors only, on a pro-rata basis, 1,000,000 shares of new Trans Max common stock. The plan also calls for Higgins to contribute $50,000 and his design rights to the VTOL aircraft to Trans Max. In return for these contributions of "new value," Higgins will receive 9,000,000 shares of newly-issued Trans Max common stock. Trans Max will keep its stock registration with the Securities and Exchange Commission, and its listing on the OTC Bulletin Board, so that the new common stock will be freely tradeable. See 11 U.S.C. § 1145.

On the operational side, Trans Max intends to press ahead with development of its flying car business plan. It plans to build prototype flying cars (to be tested in the United Arab Emirates), and if the prototypes prove successful, to manufacture and market these cars. It is critical to Trans Max's plan that the reorganized Trans Max will not incur any debt for these development activities. It is to function simply as a royalty licensing vehicle by licensing its design for flying cars incorporating the axial vector technology to joint ventures which will be funded 100% by unspecified outsiders. In Trans Max's view, this gives the current creditors no worse than they would get in liquidation — which Trans Max estimates to be zero — and some potential upside if the idea takes flight.

II. Legal Problems with Trans Max's Plan

Two creditor groups objected to Trans Max's plan, as did the UST. These are discussed in order.

A. Creditors Holding Disallowed and Unified Claims

A group of creditors made up of former employees filed the first objection. With respect to these creditors, however, their claims either had been successfully objected to and disallowed before confirmation, or they were not listed on Trans Max's schedules.⁴

As to those claims disallowed by prior court order, Section 1126(a) permits a creditor to vote only if the creditor is a "holder of a claim [that has been] allowed under Section 502...." Disallowed claims are not allowed claims, perforce, and thus their holders may not vote. See RICHARD F. BROUDE, REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE § 11.05[1] (2006).

As to the remaining claimants, they did not file proofs of claim and were not listed on Trans Max's schedules. That they had knowledge of Trans Max's bankruptcy is evident from the fact that they filed an objection to confirmation. They thus also had an obligation to file a proof of claim in order for their claims to be recognized. Under FED. R. BANKRP. 3003(c)(2) "any creditor whose claim ... is not scheduled... shall file a proof of claim ...; any creditor who fails to do so shall not be treated as a creditor with respect to such claim for the purposes of voting and distribution." Thus, these claimants may not vote, and they do not have standing to object to the plan. Kinney v. IRS (In re Kinney), 123 B.R. 889, 890-91 (Bankr. D.Nev.1991). Their objections are thus overruled.

B. Improper Solicitation

Another creditor, joined by the UST, alleges that Trans Max's counsel engaged in improper solicitation of votes. Based upon this allegation, the UST and the creditor asserted that confirmation must be denied because the plan proponent did not comply with the requirements of title 11 with respect to balloting. 11 U.S.C. § 1129(a)(2) (plan proponent must comply "with the applicable provisions of this title.").

The specific conduct at issue occurred when affirmative votes were not coming in as fast or as numerous as Trans Max wanted. On April 10 and 11, 2006, approximately one week before the ballot deadline, Trans Max's counsel sent an email to various holders of large claims.⁵ Each email was essentially identical in all material details, and stated:

By now, you should have received a ballot for the proposed chapter 11 plan and a booklet containing the plan, a disclosure statement, and other documents. You appear to have one of the largest claims in the case. It is therefore very important that you mark your ballot with a "yes" vote in favor of the plan and return the ballot to me so that it is received by April 19.

As discussed in the disclosure statement, Trans Max has no cash with which to pay claims and no operating business. The plan calls for Sam Higgins to contribute new capital to the company, for the current stock in the company to be cancelled, and for creditors (like yourself) to be issued new, free-trading stock in the company. Please note that the alternative to the plan is a chapter 7 liquidation, a scenario that would provide nothing whatsoever for creditors. The nub of the objection is that this message contains false and misleading statements,⁶ and that it constitutes an improper directive as to how a particular creditor should vote.

It is of course beyond doubt that a plan may not be confirmed if the proponent solicits votes before approval and distribution of a disclosure statement.⁷ That result flows from the text of Section 1125(b): "An acceptance or rejection of a plan may not be solicited after the commencement of the case ... from a holder of a claim ... unless, at the time of or before such solicitation, there is transmitted to such holder the plan ..., and a written disclosure statement approved ... by the court as containing adequate information." Section 1129(a)(2) then elevates Section 1125(b)'s prohibition into a confirmation requirement.

But the solicitation here — and it was a solicitation because it directly requested that creditors exercise their vote on a specific plan in a particular way — occurred after the court had approved debtor's disclosure statement. Under such circumstances, the need addressed by Section 1125(b) has been met. Creditors possess a disclosure statement that the court has vetted, usually with assistance of interested party objections. Although not many courts have addressed this issue, those that have addressed it have recognized that not all post-approval solicitation must be court-approved. Century Glove, Inc. v. First Am. Bank, 860 F.2d 94, 100-01 (3d Cir.1988) ("Thus, we find that § 1125 does not on its face empower the bankruptcy court to require that all communications between creditors be approved by the court.... A creditor may receive information from sources other than the disclosure statement."); Official Comm. of Equity Sec. Holders v. Wilson Law Firm, P.C. (In re Mirant Corp.), 334 B.R. 787, 792 (Bankr.N.D.Tex.2005); In re Apex Oil Co., 111 B.R. 245 (Bankr.E.D.M...