In re Troutman Enterprises, Inc.

• Decision Date: 24 January 2000
• Docket Number: Bankruptcy No. 99-35371.
• Citation: 244 BR 106
• Court: U.S. Bankruptcy Court — Southern District of West Virginia
• Parties: In re TROUTMAN ENTERPRISES, INC., Reorganized Debtor.

244 B.R. 106 (2000)

In re TROUTMAN ENTERPRISES, INC., Reorganized Debtor.

Bankruptcy No. 99-35371.

United States Bankruptcy Court, S.D. Ohio, Western Division at Dayton.

January 24, 2000.

William A. Sherman, II, Tim J. Robinson, Cincinnati, OH, for Alleged Debtors.

Ira Rubin, Dayton, OH, Special Counsel for Trustee, Donald F. Harker, III.

Donald F. Harker, Dayton, OH, Chapter 7 Trustee.

Arthur P. Hollencamp, Dayton, OH, for Petitioning Creditor, National City Bank.

L. Michael Bly, Dayton, OH, for Petitioning Creditor Roberds, Inc.

James R. Kirkland, Dayton, OH, Petitioning Creditor, James R. Kirkland & Associates.

Robert F. Cowdrey, Dayton, OH, for Nationwide Insurance Company.

James C. Ellis, Dayton, OH, for Citywide Building Finance Corporation.

DECISION ON ORDER GRANTING MOTION TO DISMISS INVOLUNTARY PETITION

THOMAS F. WALDRON, Chief Judge.

This matter comes before the court on the motion of Troutman Enterprises, Inc., as the Reorganized Debtor, to dismiss the involuntary Chapter 7 petition brought against it by National City Bank, the Conover Realty Company, Roberds, Inc., and James R. Kirkland & Associates, the Petitioning Creditors. Dismissal of the involuntary petition is appropriate.

I. FACTS

The relevant facts are undisputed. Troutman Enterprises, Inc. ("TEI") filed a Chapter 11 case on April 23, 1992. On September 1, 1993, an order was entered confirming TEI's Amended Plan of Reorganization. On October 30, 1995, the Internal Revenue Service moved to convert TEI's Chapter 11 case to one under Chapter 7 pursuant to 11 U.S.C. § 1112(b) for defaulting on its obligations under the confirmed Chapter 11 plan. The IRS's motion to convert was set for hearing, and all creditors who were scheduled in the Chapter 11 case were noticed. The names and addresses of each of the Petitioning Creditors appear on the certificate of service. No objections were filed, and an order converting the confirmed Chapter 11 case to Chapter 7 was entered on January 4, 1996. (A more detailed description of the circumstances of the converted Chapter 7 case and related litigation may be found in In re Troutman Enterprises, Inc., Case No. 92-01988, Adv. 99-3099, Decision On Order Granting In Part And Denying In Part Trustees's Complaint For Turnover And Authorizing Distribution Of Funds, which is contemporaneously entered.)

On October 18, 1999, an involuntary Chapter 7 petition was filed against TEI by the Petitioning Creditors. On November 10, 1999, TEI moved for dismissal of the involuntary petition. The parties filed memoranda in support of their respective positions.

II. JURISDICTION

In accordance with the Standing Order of Reference entered in this district on July 30, 1984, the court has jurisdiction in this matter pursuant to 28 U.S.C. § 1334(a) and (b). The within matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) — matters concerning the administration of the estate; § 157(b)(2)(B) — allowance or disallowance of claims against the estate; and § 157(b)(2)(O) — other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship.

III. ANALYSIS

Section 303(b) of the Bankruptcy Code permits creditors to bring an involuntary petition under Chapter 7 or 11 as follows:

(b) An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title —

(1) by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute, or an indenture trustee representing such a holder, if such claims aggregate at least $10,775 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims;

(2) if there are fewer than 12 such holders, excluding any employee or insider of such person and any transferee of a transfer that is voidable under section 544, 545, 547, 548, 549, or 724(a) of this title, by one or more of such holders that hold in the aggregate at least $10,775 of such claims.

11 U.S.C. § 303(b)(1) & (2).

Pursuant to § 303(b)(1), an involuntary petition can only be sustained under subsection (1) or (2) if the petitioning parties have claims, as defined in § 101(5), "not contingent as to liability or the subject of a bona fide dispute." 11 U.S.C. § 303(b)(1); Booher Enters. v. Eastown Auto Co. (In re Eastown Auto Co.), 215 B.R. 960, 965 (6th Cir. BAP 1998). "`The legislative history makes it clear that Congress intended to disqualify a creditor whenever there is any legitimate basis for the debtor not paying the debt, whether that basis is factual or legal.'" Eastown, 215 B.R. at 965 (quoting In re Lough, 57 B.R. 993, 997 (Bankr.E.D.Mich.1986)).

The Bankruptcy Appellate Panel further adopted the test employed in Lough for determining whether a petitioning creditor's claim is the subject of a bona fide dispute under § 303(b): "`If there is either a genuine issue of material fact that bears upon the debtor's liability, or a meritorious contention as to the application of law to undisputed facts, then the petition must be dismissed.'" Id. (quoting Lough, 57 B.R. at 997). The Panel also noted "that in determining the number of the alleged debtor's creditors . . . the bankruptcy court should only count creditors that qualify as petitioning creditors." Id. The involuntary Chapter 7 petition filed against TEI by the Petitioning Creditors must be dismissed if the application of law to undisputed facts establishes that the Petitioning Creditors do not possess claims against the Reorganized Debtor.

The Petitioning Creditors' involuntary petition comes before the court in an unusual posture: TEI's Chapter 11 plan was confirmed on September 1, 1993; its Chapter 11 was converted to Chapter 7 on January 4, 1996; and the involuntary petition was filed more than three-and-a-half years postconversion on October 18, 1999. However, as stated in the Petitioning Creditors' memorandum in opposition to TEI's motion to dismiss, all of the claims asserted by the Petitioning Creditors as the basis for the involuntary petition are preconversion claims provided for in TEI's confirmed Chapter 11 plan.

In the present case, the Petitioning Creditors seek to make use of one bankruptcy law remedy, an involuntary petition against TEI as a reorganized debtor, more than three years after another remedy occurred, the conversion of TEI's Chapter 11 case to a Chapter 7 on January 4, 1996. Accordingly, the determinative issue in the unique circumstances of this case becomes whether the Petitioning Creditors, who obtained claims against the Reorganized Debtor pursuant to the terms of the confirmed Chapter 11 plan, possess in the case which has been, postconfirmation, converted to Chapter 7, any claims against the Reorganized Debtor.

"The confirmation of a plan discharges the debtor from any debt that arose before the date of such confirmation." 11 U.S.C. § 1141(d)(1)(A). Confirmation also "vests all of the property of the estate in the debtor," and "except as otherwise provided in the plan or in the order confirming the plan . . ., the property dealt with by the plan is free and clear of all claims and interests of creditors." 11 U.S.C. § 1141(b) & (c). Section 1141(a) further provides, "the provisions of a confirmed plan bind the debtor . . . and any creditor . . . whether or not the claim or interest of such creditor . . . is impaired under the plan, and whether or not such creditor . . . has accepted the plan." 11 U.S.C. § 1141(a). Noting that "the effect of confirmation under the plain language of § 1141(a) is to bind all parties to the terms of a plan of reorganization," the Sixth Circuit further observed the necessary finality of confirmation in defining subsequent relationships between creditors and the reorganized debtor: "Confirmation of a plan of reorganization by the bankruptcy court has the effect of a judgment by the district court and res judicata principles bar relitigation of any issues raised or that could have been raised in the confirmation proceedings." Still v. Rossville Bank (In re Chattanooga Wholesale Antiques, Inc.), 930 F.2d 458, 463 (6th Cir.1991). See also Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 480 (6th Cir.1992) ("Confirmation of a plan of reorganization constitutes a final judgment in bankruptcy proceedings."); Bank of Louisiana v. Pavlovich (In re Pavlovich), 952 F.2d 114, 118 (5th Cir. 1992) ("§§ 1141(d)(1) and 1144 statutorily preclude the creditor's complaints to the extent that they are based on events and actions pre-dating the debtor's confirmation."). As one court described the Chapter 11 confirmation and discharge process:

The discharge provided by Section 1141(d) presumes that, in the process of formulating and voting on a reorganization plan, all classes of claimants will be able to use whatever leverage they may have, such as priority status, to effect the best treatment they can obtain for their particular claims. However, once the reorganization plan is approved by the bankruptcy court, each claimant gets a "new" claim, based upon whatever treatment is accorded to it in the plan itself. Thereafter, each claimant\'s remedies for any future nonpayment of claims acknowledged in the plan are limited to the usual remedies for the type of claim granted by the plan\'s provisions.

In re Benjamin Coal Co., 978 F.2d 823, 827 (3rd Cir.1992).

Once a Chapter 11 plan is confirmed, the plan operates similar to a contract between the reorganized debtor and its creditors. See, e.g., Guardian Savs. & Loan Ass'n v. Arbors of Houston Assocs. Ltd. Partnership (In re Arbors of Houston Assocs. Ltd. Partnership), 172 F.3d 47, 1999 WL 17649, *3 (6th Cir. Jan. 4, 1999) (stating "a plan of reorganization, which resembles a consent decree, is akin to a contract between the debtor and its...