Georgia Bankruptcy Blog

An involuntary Chapter 11 Bankruptcy Petition was filed against Ply-Marts, Inc. (a/k/a Ply-Mart and PlyMart) on July 1, 2008. Ch. 11 (Invol.) Case No. 08-72687.  See the petition here. The petition was signed by Dixie Plywood Company of Atlanta, JB Hunt Transport, Inc., and Primesource Building Products, Inc..

As discussed in this post, Ply-Marts consented to the appointment of a receiver in the U.S. District Court last week. 

The primary element required to prevail on an involuntary petition is that the would-be debtor is not paying its debts as they become due.  See 11 U.S.C. §303.  Given the Consent Order in the District Court case, it will be difficult for Ply-Marts to overcome this allegation -

E . In the fall and winter of 2007, Ply-Marts experienced significant financial difficulties, and by no later than early 2008, events of Default under (and as defined in) the Loan Agreement had occurred and continue to exist .problems have intensified and accelerated to the point that there is imminent danger that Plaintiffs interests in the Ply-Marts Collateral will be irreparably harmed.

G. Ply-Marts' financial problems have intensified and accelerated to the point that there is imminent danger that Plaintiffs interests in the Ply-Marts Collateral will be irreparably harmed.

H. Ply-Marts has commenced an orderly wind-down and liquidation of its lumber products business . The remaining operating divisions of Ply-Marts have sustained and continue to sustain substantial operating losses .

It appears more likely that Ply-Marts will either not contest the involuntary petition, as in most cases, or it could file its own Chapter 7 or 11 petition.  Although the Receiver is still in control of the company, its board of directors likely have the authority to consent to bankruptcy relief even over the objection of the Receiver.

As the July foreclosure date draws near, here are the Chapter 11 cases filed in the Northern District of Georgia during June 2008 (so far). 

In addition to the list below, filings include transportation company Will-Tech, Inc., Ch. 11 case no. 08-42087 (filed July 2, 2008) (see petition here) and in what is perhaps a sign that even debt collectors are not flourishing, collection agency First Centurion Receivables Management, Inc., Chapter 11 case no. 08-72770 (filed July 2, 2008) (see petition here).  

In re Walker, 383 B.R. 830,  2008 WL 696659 (Bankr. N.D. Ga. March 5, 2008)(Drake).   The primary issue was whether Chapter 7 debtors were permitted to support their adult children in college when those funds would have been available to their creditors in a Chapter 13 plan.

As of the time of the hearing, the Debtors' monthly post-petition debt service included a $157 per month payment to Circuit City for a big-screen television and other electronics and computer equipment; a $139 per month payment on a debt reaffirmed with the Bank of Coweta, a monthly student loan payment of $150 for Timothy and a monthly student loan payment of $69 for Matthew; a payment of $197 per month on the 2001 Dodge Ram; a payment of $309 per month for a 2005 Ford F-150; and a payment of $430 per month for the reaffirmed debt that is secured by the 2001 Ford F-150. The Debtors also testified that they give approximately $500 per month to Timothy and Matthew for spending money and $300 per month to Matthew to assist with his rent. Accordingly, the Debtors' combined monthly expenses and debt payments total $5796.

Many of these installment payments and household expenses were incurred for and are made for the benefit of the Debtors' two adult sons. These expenses include the payment of $309 per month for Timothy's vehicle (the 2005 Ford F-150), $66 per month for car insurance on Timothy's vehicle, $500 to $1,000 per semester for Timothy's books, $120 per month for cellular phones for Timothy and Matthew, the payment of $430 per month for Matthew's vehicle (the 2001 Ford F-150), $144 per month for car insurance, $300 to $400 per semester for Matthew's books, $500 per month for spending money for both sons, and $300 per month for Matthew's apartment rent. As noted above, the Debtors also make a payment of $69 per month on a student loan incurred to permit Matthew to attend college and are repaying a student loan incurred for Timothy's tuition with payments of between $150 and $200 per month. The Debtors also pay for the *835 annual registration and taxes associated with both vehicles.
...

Having considered the testimony of the Debtors and the evidence before the Court, the Court finds that the totality of the Debtors' financial circumstances indicates that granting relief under Chapter 7 would be an abuse. The Debtors have the income to pay a meaningful dividend to unsecured creditors. The impetus for the filing of their petition was not illness, calamity, or job loss. Instead, it appears to the Court that the Debtors simply reordered their priorities once their two oldest children reached college age. The Debtors have re-directed their income to enable them to provide Timothy and Matthew with cell phones, spending money, book money, rent assistance, vehicles, and car insurance. The Court is not implying that supporting college-age children is not admirable when parents have the means to do so. However, the Court agrees with its learned colleagues that supporting adult children at the expense of unsecured creditors is not permissible. See In re Hess, 2007 WL 3028422 (Bankr.N.D.Ohio Oct. 15, 2007) (debtor's contribution of $300 per month to support her 24-year old son while attending optometry school was not proper deduction from income); In re Pfahler, 2007 WL 2156401 (Bankr.N.D.Ohio 2007) (finding abuse where debtor had stable employment and income and was spending $350 per month for the support of his college-age son) (citing U.S. Trustee v. Harrelson, 323 B.R. 176, 179 (W.D.Va.2005), In re Staub, 256 B.R. 567, 571 (Bankr.M.D.Pa.2000), and In re Studdard, 159 B.R. 852, 856 (Bankr.E.D.Ark.1993)); In re Hicks, 370 B.R. 919, 923 n. 7 (Bankr.E.D.Mo.2007) (holding that the debtor was not entitled to deduct under section 707(b)(2) expenses of college-age son because “[f]or an adult to be able to attend college as a full-time student is a luxury, not a necessity, and the costs associated with such attendance do not constitute expenses incurred for the provision of a person's necessary care and support”); In re Haar, 373 B.R. 493 (Bankr.N.D.Ohio 2007) (expenses for maintenance of two cars and cell phones for debtors' adult daughters were not appropriate allocation of debtor's financial resources). 

The Debtors have no legal obligation to support Timothy and Matthew, who are now able-bodied adults. The Debtors propose to shift the use of their income from paying their own obligations to enable their adult children to attend college full time without the burden of working to support themselves. This results in the devotion of at least $1860 per month to support Timothy and Matthew.FN10 Without these expenses, the Debtors' monthly expenses and payments for debt service would total $3,788.16.FN11 Even with the Debtors' lower projected monthly net income of $5,000, the Debtors would be left with approximately $1200 per month with which to pay a substantial portion of their unsecured debt. Permitting a discharge in this case would be an abuse, as the Debtors are not needy. While it would take time and sacrifice to do so, the Debtors can repay a portion of their debt. Contribution of this $1200 per month would amount to $72,000 over the life of a 60-month chapter 13 plan. Even assuming that the $83,448 in scheduled unsecured debt is increased substantially by the filing of deficiency claims by the mortgage and car creditors, contribution of these funds to a chapter 13 plan would still result in a worthwhile dividend to unsecured creditors.

 Notably, the Court listed several legal issues that have not been settled (after the jump):

In another blow to the building and housing market, a large building supplier goes into receivership.  In an Order dated June 23, 2008, U.S. District Court Judge Camp of the Northern District of Georgia, appointed Lee Katz of Grisanti, Galef & Goldress  as the Receiver of Norcross-based Ply-Marts, Inc. (which does business as Ply-Mart and PlyMart).  The Order was entered in the case of Bank of America v. Ply-Marts, Inc., No. 3-08-cv-072-JTC (N.D. Ga. filed June 23, 2008) (download the Complaint and Emergency Motion to Appoint Receiver).  Ply-Marts consented to the appointment of the Receiver.

Rachel Tobin Ramos has an article in the Atlanta Journal Constitution about the Order and Ply-Marts' financial troubles:

Ken Southerland, PlyMart's president and CEO, said that the company has one solid offer for its specialty and custom stair divisions, with several in the wings if the first doesn't go through. Those divisions operate in Georgia, as well as Greer, S.C., and Charlotte, N.C.

In the meantime, two Georgia PlyMart lumber locations are still operating through the liquidation process: 2009 Dorsey Road in Marietta and 1159 Hog Mountain Road in Winder. The stair and special order division is still operating as well, and the Web site is still functional.

Southerland said that the company — which at its peak employed about 1,150 with $360 million in sales — now employs about 300.

The article also mentions the possibility of bankruptcy :

Receivers, similar to bankruptcy trustees, take full control of a company and act as managers to preserve value for creditors, according to Scott Riddle, an Atlanta bankruptcy and litigation attorney, who is not involved with this case. Receivers also have the authority to take a company into bankruptcy if needed, he said, although that has not been determined in the PlyMart case.

Thanks for the mention, Rachel.  Although bankruptcy is often a possibility, here Ply-Marts consented to the appointment of a receiver so it appears unlikely they would opt for bankruptcy (even though the directors could likely authorize a filing even over the objection of the receiver). However, for creditors, bankruptcy is often advantageous because, among other things, it provides for avoidance actions, such as preferential transfer actions, that are not available under state law.  Generally, a bankruptcy trustee has more powers than a receiver.  It is more likely that the creditors of Ply-Marts consider an involuntary bankruptcy petition if it would be advantageous to them.

 The Atlanta Business Chronicle also profiled Ply-Marts' troubles just a few weeks ago in Housing Drive Slams Ply-Marts, by Lisa Schoolcraft. 

With $20 million in accounts receivable uncollected and Ply Mart's sales a quarter of what they once were, Ply Mart Chairman Randy Mahaffey said this market "has been all of the challenge that anyone can stand." ...  Nearly two years ago, Ply Mart had $400 million in annual sales, but today that number is closer to $100 million, Mahaffey said. ...

Ply Mart is one of Atlanta's top 100 private companies, ranking No. 34 in 2007, according to Atlanta Business Chronicle's 2007-2008 Book of Lists. Atlanta Business Chronicle also named it one of Atlanta's Best Places to Work in 2006...  "We've had to reduce operating expenses dramatically," Mahaffey said. In September, the company had 961 employees and cut staff to about 700. Employees also took pay cuts of 10 percent to 20 percent. ...  But then came a second round of staff layoffs to about 515 employees and in April the company pared down staff to a little less than 450, he said. ... Operational cutbacks have closed half of its facilities and reduced the number of lumber yards from 11 to five, Mahaffey said.

The article also mentions another builder, Manis Lumber (d/b/a Wheeler's):

Manis Lumber Co. of Rome, which once had $200 million in annual revenue, filed for Chapter 11 bankruptcy reorganization Feb. 11. The company did business as Wheeler's throughout metro Atlanta.

Like Ply Mart, Wheeler's saw its sales drop from a peak of $20 million a month to $4 million a month and saw its accounts receivable "getting staler and staler," said G. Frank Nason, a bankruptcy attorney with Lamberth, Cifelli, Stokes, Ellis & Nason P.A. in Atlanta.

Nason represented Wheeler's, which recently sold most of its assets to former owners Mark and Jim Manis as Home Team Builders Services LLC.

When Wheeler's filed bankruptcy, 64 percent of its accounts receivables were beyond 90 days, he said.

By: Scott B. Riddle, Esq.

In this February 29, 2008 post, I discussed the adversary complaint filed in the Northern District of Georgia against Countrywide by the Office of the United States Trustee.  See Walton, United States Trustee v. Countrywide Home Loans, Inc., Adv No. 08-6092, filed in the Chapter 13 case of In re Atchley, Ch. 13 Case No. 05-79232. The lawsuit and underlying facts were subsequently picked up by several local and national news outlets.

After several extensions, Countrywide has filed its response to the lawsuit in the form of a Motion and Supporting Brief to Withdraw the Reference (click here for copy)  and a Motion to Dismiss.   Please see the prior post for a summary of the complaint and allegations.

First, the Motion to Dismiss (download the supporting Brief by clicking here).  The grounds for dismissal, according to Countrywide, include:

1.      The United States Trustee Lacks Standing.

2.      The Claims are Moot.

Countrywide withdrew both of the offending motions for relief from stay, sent refund checks for monies received after satisfaction  of the loan, and withdrew its proof of claim. ... Plaintiff fails to  allege any outstanding orders that Countrywide is violating or any provisions of the Bankruptcy  Code that Countrywide is currently violating. Plaintiff has failed to establish any “reasonable  expectation” that Countrywide will engage in any other allegedly improper conduct within the  course of the underlying bankruptcy case or that Countrywide will even have a continuing role in  the underlying case. .... If the Plaintiff’s allegations are  accepted as true, they illustrate how the adversary process effectively resolves disputes. The  dispute over Countrywide’s practices has been resolved. Countrywide procedurally cannot  repeat the allegedly harmful conduct, and any further examination of the issue is moot.

3.      Plaintiff Lacks The Statutory Authority To Commence Adversary Proceedings Aimed   At Policing Alleged Past Bankruptcy Code Violations.

 Lacking any statutory authority to prosecute this case, the UST will cite an isolated
comment from the legislative history of the statute creating the UST program as justification for launching an extensive and costly national investigation of Countrywide’s business practices and policies. See In re A-1 Trash Pickup, Inc., 802 F.2d 774, 775 (4th Cir. 1986) (citing H.R Rep. No. 95-595, at 88 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6049). The UST asserts that a statement in the legislative history describing his office as a “watchdog” exponentially expands his statutory duties. However, “courts have no authority to enforce [a] principl[e] gleaned solely from legislative history that has no statutory reference point.”  ...

The UST, however, does not believe he is constrained by the statutory powers and duties  granted by Congress, and instead believes section 307 of the Bankruptcy Code invests him with  unlimited powers of investigation and enforcement by providing that the UST “may raise and  may appear and be heard on any issue in any case or proceeding under this title but may not file a  plan under section 1121(c) of this title.” 11 U.S.C. § 307. ...

Absent from the list of duties that Congress gave to the UST is the suggestion of the power to initiate adversary proceedings seeking sanctions, injunctive relief or any other form of relief. The UST is wholly without authority to unilaterally challenge any secured creditor for its past conduct or initiate adversary proceedings seeking contempt sanctions

 4.     The Bankruptcy Court Lacks Subject Matter Jurisdiction Over the Proceeding.

Plaintiff has failed to establish jurisdiction in this case and cannot use section 105 in an attempt to create bankruptcy jurisdiction. ..The Plaintiff fails to establish jurisdiction under either 28 U.S.C. § 1334(a) because Plaintiff does not invoke any substantive rights under the Bankruptcy Code or assert claims involving the handling of any administrative matters. ... Neither the money damages sought by Plaintiff nor the injunction involve rights given to the Plaintiff under title 11, so the claim for “arising under” or “arising in” jurisdiction fails. Plaintiff cannot establish “related to” jurisdiction under § 1334(b) either. The cause of  action would have to involve the administration of the estate or the allocation of assets among creditors, and the Complaint fails to seek any money damages for the benefit of the estate and certainly fails to adjust allocation of assets under the Plan. ....

Bankruptcy court jurisdiction over non-core proceedings is limited to proceedings that are “otherwise related to a case under title 11”; however, any final order or judgment in a noncore  proceeding must be entered by a district court. 28 U.S.C. § 157(c)(1). Even the “related to”  requirement for non-core jurisdiction requires a connection to the estate, for “if the action does not involve property of the estate, then not only is it a noncore (sic) proceeding, it is an unrelated matter completely beyond the bankruptcy court’s subject matter jurisdiction.”.... Regardless of the outcome of this proceeding, there will be no effect on the bankruptcy estate whatsoever, and Plaintiff fails to allege any facts that would “involve” estate property or the administration of any estate. ..Thus, the Court lacks jurisdiction

 5.    The Court Lacks Jurisdiction to Enter the Relief Requested.

Bankruptcy courts lack the power to hold parties in criminal contempt. ... If a plaintiff seeks “money damages in the form of  a fixed, non-compensatory fine, then the court may not order such monetary damages, as they are punitive and not coercive.” ...

Thus, the sanctions sought by the Plaintiff are undoubtedly punitive in nature and aimed at vindicating the authority of the Court and addressing an alleged “pattern of conduct” by a “national lender and servicer of secured loans.” .. The Court should dismiss the Complaint because this relief could only be awarded, if at all, by a district court. ...

Plaintiff has failed to show an imminent threat of future injury or any continuing, current injury warranting any sort of injunction.... Rather, Plaintiff alleges that “Countrywide’s practices and conduct are likely to continue to prejudice parties in interest.” (Compl. at ¶ 49).  The allegation fails to suggest an imminent threat of future harm but is merely a speculative, conclusory assertion. The allegedly offending conduct occurred in the past and was resolved, leaving no current conduct warranting restraint. Thus, the claim for relief resembles the claim in  Elend as Plaintiff alleges past harm to the debtors and then speculates that Countrywide will repeat this conduct in proceedings in the future. See Elend, 471 F.3d at 1207-08. ... Plaintiff’s failure to adequately demonstrate future injury spills into the next gap in  Plaintiff’s argument for injunctive relief, for Plaintiff requests an injunction that Countrywide obey the bankruptcy laws by not “engaging in bad faith and abusive practices”—practices already prohibited by, inter alia, Federal Rule of Bankruptcy Procedure 9011. See Elend, 471  F.3d at 1209 (calling injunctions to obey the law “impermissible” in the Eleventh Circuit). Any hypothetical future injury requiring injunctive restraint is already addressed by existing rules and  procedures, and the injunction Plaintiff seeks would be an unnecessarily duplicative decree. Moreover, the claim for injunctive relief lacks any degree of specificity and fails to provide any  real guidance for Countrywide’s future conduct. ... The injunctive relief Plaintiff seeks cannot be awarded by the Court. The Court’s inability to redress Plaintiff’s perceived, but non-existent, “injuries” requires dismissal.

6.      The Complaint Fails To State A Valid Cause of Action.

Plaintiff’s complaint contains four causes of action: Count I -- Materially Inaccurate
And/Or Misleading Representations of Fact; Count II -- Improper Acceptance of Property of the Estate; Count III -- Failure to Reconcile the Proof of Claim with the Payoff Amount; and Count  IV -- Repeated Failure to Ensure the Accuracy of Pleadings and Accounts. None of these  separate counts is a valid cause of action.

7.       Plaintiff has Failed to State a Claim for Civil Contempt.

As established in Section D, supra, civil contempt and criminal contempt accomplish distinct goals, with civil contempt aimed at compensating an aggrieved party or coercing compliance with an order while criminal contempt punishes violations or vindicates the authority  of the court. ... While the distinction remains significant in the context  of the subject matter jurisdiction of bankruptcy courts, it also reveals that Plaintiff has failed to  assert a cause of action for civil contempt. ... Plaintiff’s desired sanctions are not designed to compensate any party. The only parties with an alleged injury would be the debtors; but the debtors are not parties to this proceeding,  and the Plaintiff did not purport to seek damages as compensation to the debtors or the debtors’  estate. (Compl. at 16). Additionally, Plaintiff has not alleged that Countrywide is currently violating an order of the Court or any part of the Bankruptcy Code; thus, Plaintiff has not alleged  civil contempt to coerce Countrywide’s compliance with an order. Instead, any monetary  sanction awarded under the Complaint would be purely punitive, which is outside the realm of  civil contempt.

8.      Plaintiff has Failed to State a Claim for Injunctive Relief.

A claim for injunctive relief has several requirements. First, the claimant must allege a real threat of imminent injury. ... Second, the claimant must pursue more than a mere injunction to obey the law. ... Third, the claimant must allege  with specificity the terms of the injunction. Id. Plaintiff’s allegations fall short. Plaintiff suggests that, absent an injunction,  “Countrywide’s practices and conduct are likely to continue to prejudice parties in interest.”  (Compl. at ¶ 49). Plaintiff fails to plead a “real and immediate threat” of future injury accompanied by “continuing, present adverse effects” and instead offers only a conclusory assertion.  .. Additionally, Plaintiff’s requested injunction adds nothing to the existing body of law to prevent the alleged conduct and, as such, is unnecessary and impermissible. ... Finally, the terms of the injunction are little more than vague assertions offering no specific guidance and thus fail to satisfy the specificity requirement.

 The Motion, on its face, appears to make compelling arguments as to the United States Trustee's standing and authority to bring the claims and the Bankruptcy Court's (and perhaps any court's) authority to rule on the claims in the form in which they have been alleged.  Although this and similar cases have become  bandwagon issues to some extent, with several courts jumping in, we can certainly expect multiple Circuit Court's getting involved, if not the United States Supreme Court and Congress.

Should these matter be left to the Office of the United States Trustee?

Kirk Wright, recently convicted of a massive fraud, and head of Chapter 11 Debtor International Management Associates (discussed in previous posts here, here and here) committed suicide on Saturday, prior to being sentenced.  From the AJC - 

Wright, 37, was found dead Saturday in the cell, where he was being held for federal authorities while awaiting sentencing. A jury convicted him Wednesday of all 47 counts of mail fraud, securities fraud and money laundering stemming from a scam he ran through his firm, International Management Associates...

But prosecutors convinced jurors that Wright had concocted an elaborate scam to have investors fund his lavish lifestyle, which included spending $50,000 on a Rolex watch, $200,000 on a Lamborghini and $500,000 on a wedding.

Wright's firm attracted deep-pocketed clients, many of them family friends and NFL players, who sank more than $155 million into International Management between 2001 and 2005. But in 2006, his clients learned their money was gone and Wright had been lying to them ...

Former Denver Broncos player Steve Atwater grew suspicious in 2005, and he and other NFL player-clients called in their investments. Wright fled after his checks to them bounced.

Authorities arrested Wright in May 2006 as he sipped cocktails at poolside of the Ritz-Carlton Hotel in Miami. In his room, they found fake identification and credit cards as well as I.D.-making equipment. While a fugitive, Wright had bought a $40,000 Mercedes and a seaside condominium in Florida.

He had been held without bond since his arrest. Meanwhile, authorities auctioned his belongings for $1.9 million. His assets included luxury homes in Marietta and in downtown Atlanta near the Georgia Aquarium, a 2005 $115,000 Bentley Continental and $110,000 2003 Aston Martin Vanguard.

It looks like the real estate slide continues, as these related entities filed Chapter 11 petitions in the Northern District -

It was not a very busy pre-foreclosure week in the Northern District, as far as new Chapter 11 petitions, but a few cases were filed in the last several days --

In re Allen, Ch. 7 Case No. 01-82408-MHM, 2008 Bankr LEXIS 366 (Bankr. N.D. Ga. February 14, 2008).

Debtor’s pre-petition state law cause of action was property of the Chapter 7 Estate, with a value that likely exceeded the liabilities of the Estate. The Trustee sought to conditionally abandon the cause of action as follows:

Trustee proposes to abandon the Claim on the following conditions: Debtor will pay to the estate $ 10,000, non refundable; Debtor will be substituted as Plaintiff in the lawsuit…the proceeds of any recovery on the Claim will be disbursed 40% plus litigation expenses to' Debtor's attorney; $ 25,000 to Trustee; the remainder divided equally between Debtor and Trustee up to the amount of accrued administrative expenses and filed claims; Debtor offers to waive his discharge if Debtor's share of the recovery is more than the aggregate amount of unsecured debt for which no proof of claim is filed, thereby implying that such creditors may seek and obtain payment from Debtor.

The Court denied the motion. Section 544 allows abandonment only when the trustee or the court concludes that the asset is burdensome to the estate or of inconsequential value and benefit. No such finding was possible in the case.

Abandonment" is not defined in the Bankruptcy Code. Black's Law Dictionary defines "abandonment":

The relinquishing of a right or interest with the intention of never again claiming it.
BLACK'S LAW DICTIONARY, Seventh Edition, West Publishing Co. (1999). Abandonment is an absolute term. One cannot slightly abandon, partially abandon, or conditionally abandon an asset of the estate.

No case law has been found or cited by the parties to support a proposal to "conditionally abandon" an asset, i.e., abandon the asset while retaining an interest in its proceeds. Just as Trustee could not abandon the estate's interest in a tangible asset of the estate while retaining the right to share in the proceeds from a sale, Trustee cannot abandon the Claim while retaining the right to share in the proceeds of the recovery. …

Any proposed settlement of Claim would require approval by the bankruptcy court, which, recognizing Debtor's interest in maximizing the claim, would protect Debtor from any proposal that failed to sufficiently acknowledge Debtor's interests. Therefore, the only disposition of Trustee's Motion for Conditional Abandonment is denial and direction that Trustee be substituted as Plaintiff in the state court proceeding. In that proceeding, the Trustee may consult with Debtor as respects Debtor's interest in the outcome.

The Court also noted that a Motion to Sell the cause of action previously filed by the Trustee was inappropriate -

At the hearing on the Second Motion to Sell, the court concluded that it contravened Georgia law and could not be approved. In the case of United Technologies Corp. v. Gaines, 225 Ga. App. 191, 483 S.E. 2d 357 (1997), the Georgia court concluded that when, under the Bankruptcy Code, a Chapter 7 Trustee acquires a debtor's tort claim, the Trustee becomes the real party in interest and alone possesses the right to pursue the claim. Assignment by the Trustee of the claim to the debtor would violate O.C.G.A. §44-12-24, which prohibits the assignment of such tort claims. Another Georgia case concluded that although the assignment of such claim by the Trustee to a debtor violates O.C.G.A. §44-12-24, the Trustee's abandonment of the claim, even following payment by the debtor to the estate, does not violate O.C.G.A. §44-12-24. Denis v. Delta Air Lines, Inc., 248 Ga. App. 377, 546 S.E. 2d 805 (2001).

Two recent opinions from the Northern District  (in the same Bankruptcy case) concern debtor's counsel's right to attorneys fees where, first, a Chapter 11 Trustee is appointed and then the case is converted from a Chapter 11 to a Chapter 7:

In re Patterson,  Case No. 07-61961-MHM, 2008 Bankr. LEXIS 704 (Bankr. N.D. Ga. January 15, 2008).  After conversion of case from Chapter 11 to Chapter 7, debtor's counsel filed an application for compensation and sought to apply pre-petition retainer to fees and expenses.  However, the Chapter 7 Trustee and United States Trustee objected because the case might be administratively insolvent.  Counsel argued that the retainer was a security retainer, not subject to disgorgement pursuant to 11 U.S.C. §726(b).

The Court disagreed, and ordered counsel to turn over the retainer to the Chapter 7 Trustee. Counsel  would have an administrative claims for fees in the Chapter 7 case, according to the priorities in the Code.

In re Patterson,  Case No. 07-61961-MHM, 2007 Bankr. LEXIS 4513 (Bankr. N.D. Ga. December 11, 2007).  After the withdrawal of Chapter 11 debtor's first counsel, and the appointment of a Chapter 11 Trustee, a second attorney appeared on behalf of the debtor

On July 29, 2007, Debtor filed an application (the "Application") to employ K. A. Foreman as attorney for debtor. By order entered August 8, 2007, that Application  was denied as unnecessary because, upon conversion, the Trustee's attorney displaced the debtor's attorney. In re NRG Resources, Inc., 64 B.R. 643 (W.D.La. 1986). An attorney employed by a Chapter 11 debtor who continues to perform services after conversion and appointment of a Chapter 7 Trustee may be compensated from property of the estate only if the attorney is either retained by Trustee for a specific and limited special purpose with prior court approval or performs services that are beneficial to the administration of the estate. ...

....As set forth above, however, a debtor's attorney is entitled to compensation from the estate following conversion only under extremely limited circumstances, which are not present here. All the services  by Mr. Foreman were rendered after the Chapter 11 Trustee was appointed, and most of the services were rendered after the case was converted. Mr... Accordingly, it is hereby ORDERED that the application ... for compensation is denied.

After a slow three weeks for Chapter 11 filings, Atlanta-based technology company Verso Technologies, Inc. (yahoo! Finance, Google Finance), and four related entities, filed Chapter 11 petitions in the Northern District of Georgia on April 25, 2008. The cases are --  

The Verso Tech petition lists assets of $34 million and liabilities of $36.67 million. 

According to its website -

Atlanta-based Verso Technologies, Inc. (NASDAQ:VRSO) is a global provider of leading edge IP telephony products and solutions. We enable profitable end to end IP Communications over wireline, wireless, terrestrial and satellite links. Across six continents and 38 nations, from tier 1 carriers to emerging providers and enterprises, Verso products and globally deployed resources meet challenging requirements for VoIP migration, access, transport and application delivery.

Click here for the latest Annual Report, Form 10-K.  The summary, particularly starting at pp. 17, lists many of the apparent reasons for the filings, including a default in its $3.6 million obligation to Clarent Corporation.  Verso purchased substantially all of the assets of Clarent in late 2002 for $9.8 million.

The purchase of the assets of Clarent (as opposed to a purchase of the stock, or a merger) was in conjunction with a Chapter 11 filing by Clarent. On December 13, 2002, Clarent filed a Chapter 11 petition in the United States Bankruptcy Court for the Northern District of California, Case No. 02-33504.

For unsecured creditors that have delivered goods to any of these debtor companies within 45 days prior to the bankruptcy filing date, see this post on reclamation and administrative claims.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

Recent cases filed in the Northern District over last two weeks --

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

On December 1, 2007, amended Federal Rule of Bankruptcy Procedure 6003 became effective. It states the following:

Except to the extent that relief is necessary to avoid immediate and irreparable harm, the  court shall not, within 20 days after the filing of the petition, grant relief regarding the following:

(a) an application under Rule 2014;
(b) a motion to use, sell, lease, or otherwise incur an obligation regarding property
of the estate, including a motion to pay all or part of a claim that arose before the
filing of the petition, but not a motion under Rule 4001; and
(c) a motion to assume or assign an executory contract or unexpired lease in
accordance with § 365.

Because of this new Rule, the U.S. Trustee has been objecting to employment applications in Chapter 11 cases to the extent they request that an order be granted immediately.  In the past, it was common for Courts in the Northern District to authorize employment after the motion was filed, subject to any objections that may be filed within twenty days of the order.  The US Trustee has also filed motions for reconsideration when the Court has entered these orders.

Judge Massey recently entered an Order clarifying the Rule, in In re Smith, Ch. 11 Case No. 08-63990 (click here for Order).  The Court granted the US Trustee's Motion for Reconsideration of the original order approving debtor's counsel.

These motions raise a few questions. The first one is whether section 327(a) and
Bankruptcy Rule 6003 mean that in the absence of Court approval, an attorney for a trustee or DIP not yet approved by the Court is disabled from appearing in court, giving legal advice or otherwise representing the estate until after the Court enters an order authorizing the employment. 

A related question is whether a court may retroactively bless the choice of counsel. The short  answers are “no” to the first question and “yes” to the second question. A third question is what to do about the Order entered on March 4. The short answer to that question is to vacate it, even though it will not likely make the slightest bit of difference in this case to Debtor or to his counsel or to any creditor or the U.S. Trustee. ...

This Court has not been able to find a single case that states that even though the trustee filed a timely application to employ, such work  undertaken prior to the entry of the order granting the application is without legal effect or  otherwise improper or may not be compensated. Rather, it has been generally accepted for many  years that bankruptcy courts have the authority to retroactively authorize employment of  professionals. See, e.g., Matter of Arkansas Co., Inc., 798 F.2d 645, 648 (3rd Cir. 1986) (“bankruptcy courts have the power to authorize retroactive employment of counsel and other  professionals under their broad equity power.”). Thus, a delay in entering an order granting such  an application should not concern either the trustee or DIP or counsel, so long as services  rendered in the interim “were reasonably necessary for the due performance of the trustee's duties,
that the professional is licensed or otherwise qualified to render such services, and that the disinterestedness requirements of section 327(a) are not at risk.”

Cornerstone Ministries Investments, Inc. (google finance) filed a Chapter 11 Petition in the Northern District of Georgia on February 10, 2008, Case No. 08-20355.  From the organization's website --

Cornerstone was founded in 1985 to finance church growth and building programs. Often, church plants and start-ups cannot secure financing from conventional sources. That's where Cornerstone helps. Since our founding, we have financed more than 170 churches and assisted hundreds of others with advice and counsel. In that time, none of the churches we have financed have experienced bankruptcy.

We provide short-term (1-3 years) funding so that the churches can get established and begin to grow in their own facilities. It has been shown that churches grow 15-20% faster in the right facilities.

The filing reflects total assets of $159 million, and liabilities of about $154 million, as of September 2007. The largest unsecured creditor is Trinity Trust Company, of Reno, NV, with a claim of $141 million.  CEDE & Co., of New York, a company that often holds stock for other companies, is listed as holding  debt of over $4 million. Other creditors (over 3,000) are listed here.

Update March 17, 2008 -  The debtor has filed the following documents -

• Statement of Financial Affairs and Schedules.
• Schedule of Bondholders
• Schedule of Vendors
• Equity Security Holders

Scott Riddle's practice focuses on bankruptcy and litigation. Scott has represented Chapter 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

The Cradle Company v. Matos (In re Matos), 2008 WL 596744, No. 07-12628 (11th Cir. March 6, 2008).  The creditor sought an order denying the debtors' discharge for failure to comply with a Court Order.  The Bankruptcy Court found that the creditor did not establish the requirements of denial of discharge, and the District Court affirmed.  The creditor appealed to the Eleventh Circuit -

Sections 727(d)(3) and (a)(6)(A) provide for revocation of a discharge where “the debtor has refused, in the case-(A) to obey any lawful order of the court, other than an order to respond to a material question or to testify....” 11 U.S.C. §§ (a)(6)(A), (d)(3). To obtain revocation on this ground, Cadle was required to show that the Debtors willfully and intentionally refused to obey a court order. See Farouki v. Emirates Bank Intern., Ltd., 14 F.3d 244, 249 (4th Cir.1994) (citation omitted). Thus, a mere failure to obey the order, resulting from inadvertence, mistake, or inability to comply, is insufficient; the party seeking revocation must demonstrate some degree of volition or willfulness on the part of the debtor. Id. In considering whether to grant revocation of a discharge, a bankruptcy court should consider these factors: “[1] the detriment to the proceedings and the dignity of the court against the potential harm to the debtor if the discharge is denied ... [;][2] the intent behind the bankrupt's acts-were they wilful or was there a justifiable excuse; [3] was there injury to the creditors; and [4] is there some way the bankrupt could make amends for his conduct.” In re Jones, 490 F.2d 452, 456 (5th Cir.1974) (citation omitted)

… However, the bankruptcy court found that the late production of documents, alone, was insufficient to show a wilful or intentional refusal to follow the August 8th order because Cadle had not shown that the Debtors refused to obey, or simply ignored, the August 8th order. … , Cadle pointed to no action by the Debtors evincing an attempt to avoid production entirely, or to conceal assets, relating to the belated document production. Indeed, the bankruptcy court found that Cadle had not shown some of the late-produced documents were in the Debtors' possession, or control for that matter, when the deadline elapsed. Finally, the bankruptcy court noted that the late production of documents resulted in no injury to creditors or detriment to the bankruptcy proceedings. Simply put, on this record, we cannot say the bankruptcy court's factual findings leave us with “the definite and firm conviction that a mistake has been made” and thus they do not constitute clear error.

Several related entities, owners of shopping centers, filed Chapter 11 petitions in the Northern District on March 3, 2008.  They include the following -

08-64027-crm	11	Airport North Business Center, LLC	Filed: 03/03/2008 Entered: 03/03/2008
08-64031-mgd	11	Griffin Land Development, LLC	Filed: 03/03/2008 Entered: 03/03/2008
08-64038-crm	11	Pointe South Shopping Center, LLC	Filed: 03/03/2008 Entered: 03/03/2008
08-64053-crm	11	Red Oak Shopping Center, LLC	Filed: 03/03/2008 Entered: 03/03/2008
08-64061-crm	11	Tri-County Station Shopping Center, LLC	Filed: 03/03/2008 Entered: 03/03/2008
08-64068-crm	11	Virginia Station Shopping Center, LLC	Filed: 03/03/2008 Entered: 03/03/2008

On February 28, 2008, in an unusual filing, the United States Trustee for the Region that includes Georgia filed a lawsuit against Countrywide for a multitude of alleged offenses in a Chapter 13 case pending in the Northern District. See Walton, United States Trustee v. Countrywide Home Loans, Inc., Adv No. 08-6092, filed in the Chapter 13 case of  In re Atchley, Ch. 13 Case No. 05-79232.  The Complaint seeks injunctive relief and sanctions for, inter alia, the following alleged conduct  (with paragraph numbers) -

42. Countrywide is a national lender and servicer of secured loans. Countrywide regularly appears before this and other United States bankruptcy courts around the country, asserting claims seeking the payment of money from bankruptcy estates and/or prosecuting motions seeking relief from the automatic stay to foreclose on consumer mortgages.

43. In this case, Countrywide failed to ensure the accuracy of two motions for relief from the automatic stay that contained allegations that were inaccurate and/or misleading concerning the existence and amount of the Atchleys’ postpetition default.

44. Countrywide failed to properly account for moneys paid by the debtors. As a consequence, Countrywide accepted payments from the chapter 13 trustee after the Atchleys paid Countrywide’s claim in full. By executing the “Satisfaction of Mortgage,” Countrywide had previously acknowledged that there was no longer any legal basis for it to receive such payments.

45. Countrywide failed to return the estate funds to which it knew it was not entitled and withdraw its Proof of Claim until three months after the Atchleys commenced a contested matter before this Court with respect to the Proof of Claim.

46. Countrywide failed to provide information sufficient to determine whether the various fees and escrow charges assessed by Countrywide and collected from the Atchleys were properly recoverable under applicable state law and the Bankruptcy Code.

47. Countrywide’s failure to ensure the accuracy of its pleadings and accounts in this case is not an isolated incident. In recent years, Countrywide and its representatives have been sanctioned for filing inaccurate pleadings and other similar abuses within the bankruptcy system.

Perhaps more importantly, the Complaint alleges that the above-referenced conduct may be part of a larger pattern of conduct with Countrywide -

48. Cases in which bankruptcy courts sanctioned Countrywide and/or its representatives include: In re Robert and Kathleen Ennis, Case No. 05-11985 (Bankr. W.D. Pa. July 31, 2006) (sanctioning Countrywide and its counsel for failing to make reasonable inquiry prior to filing factually inaccurate motion for relief from the automatic stay); In re James Allen, Case No. 06-60121 (Bankr. S.D. Tex. Jan. 9, 2007) (sanctioning Countrywide’s attorneys based upon finding that Countrywide’s objection to a chapter 13 plan “had no basis in fact or law and was materially disruptive to the efficient and effective operation of this Court”); In re Paul Mann, Case No. 03- 82973 (Bankr. M.D.N.C. March 8, 2004) (awarding punitive damages against Countrywide for repeated violations of the automatic stay and finding that Countrywide’s conduct was “aggravated and egregious”).

 

49. Countrywide’s failure to ensure the accuracy of its claims and pleadings has resulted in an abuse of the bankruptcy process and has prejudiced, and will continue to prejudice, parties in interest in the bankruptcy cases in which Countrywide participates. Absent injunctive relief by this Court, Countrywide’s practices and conduct are likely to continue to prejudice parties in interest and result in additional abuses of the bankruptcy process.

50. United States Trustees have simultaneously brought complaints, including the instant action, against Countrywide in Ohio and Florida to address Countrywide’s sustained bad faith conduct in failing to ensure the accuracy of its claims and pleadings in attempting to obtain money or property from debtors and/or the bankruptcy estates.

The auction of Pike's assets was held, and based upon this pleading filed today, the results are the following (subject to Court approval) -

(a) The Debtor accepted a bid for its "retail" assets by Armstrong Garden Centers, Inc. ("Armstrong") for a sale price of approximately $5,184,000 (the "Armstrong Sale "). The purported allocation of that price is $2,000,000 for real property in Charlotte, $800,000 for the "Pike Nursery" name  and other personal property non-inventory assets at the retail locations and $2,384,000 for inventory assets  at the retail locations. Of the assets sold, PNC has a first priority lien $3,184,000 of the assets. Upon information and belief, the anticipated book value of the inventory at the retail locations is $2,860,000 and  the value of the "Pike Nursery" name and non-inventory assets is substantially in excess of $800,000. 

(b) The Debtor accepted a bid by Geo. Schofield Co., Inc. ("Schofield") for all of the assets at Store 28 and the "hardscape inventory" at Stores 52 and 55 for a purchase price of $1,200,000  (the "Schofield Sale"). PNC has a first lien on all assets being sold in the Schofield Sale. Upon information and belief, the value of the inventory alone subject to the Schofield Sale is $1,535,684.

(c) The Debtor accepted a bid by Skinner Nurseries, Inc. ("Skinner") for all of the assets at Stores 44 and 46 for a purchase price of $1,000,000, which price is subject to certain holdbacks  pending resolution of cure claims and lease issues (the "Skinner Sale"). PNC has a first lien on all assets  being sold in the Skinner Sale. Upon information and belief, the value of the inventory alone subject to the Skinner sale is $1,358,323.

(d) The Debtor accepted a bid from Gary Pike ("Gary Pike") to purchase certain of the ssets of Store 52 and 55, which are not subject to the Schofield Sale, for a purchase price of $490,000 (the "Gary Pike Sale "). PNC has a first lien on all of the assets being sold in the Gary Pike Sale. Upon information and belief, the value of the inventory alone subject to the Gary Pike Sale is $863,221.

The gross proceeds of the Armstrong Sale, Schofield Sale, Skinner Sale and Gary Pike Sale (collectively the "Auction Sales"), appear to be approximately $5,874,000, an amount more than $1,000,000 in excess of PNC's anticipated debt on such assets at closing. After consummation of the Auction Sales, if they were to occur, the Debtor will have accounts receivable with a book value in excess  of $2,000,000 and will have assets at its Birmingham facility with a book value in excess of $700,000.