Court: United States Bankruptcy Court, D. South Carolina; October 31, 2014; Us Bankruptcy; United States Bankruptcy Court
Scarlet Portfolio, LLC's motion to dismiss the bankruptcy case of Debtor Edgefield Inn, LLC is granted, but the dismissal is without prejudice. Edgefield Inn filed for Chapter 11 protection on March 24, 2014, as a small business owning a 46-room inn in Edgefield, SC, with a significant loan of $853,120.59 from Scarlet Portfolio. The Debtor has two tax creditors, the IRS and Edgefield County, with secured claims totaling $45,521.82. Edgefield Inn's property is valued at $910,605.71, indicating that all secured creditors were oversecured at the time of filing.
Scarlet Portfolio argues for dismissal, citing failure to propose a confirmable plan and bad faith in the filing process, including improper pre-petition payments to insiders. The Debtor contends that it can rehabilitate its business and has filed a plan with five classes of claims, addressing both secured and unsecured creditors, including an insider claim from Bettis Rainsford. The plan incorporates payments to secured creditors based on collateral value and proposes full payment to unsecured claims over extended periods.
On October 7, 2014, the Debtor amended its plan by redefining Class 3 to remove maintenance company claims and include new claims for executive compensation and employee bonuses. A hearing on the dismissal motion was held on October 8, 2014.
Scarlet Portfolio presented testimony from an asset manager at Sabal Financial Group, highlighting the Debtor's financial issues, including unexplained transfers to businesses owned by Rainsford, an excessive workforce at Edgefield Inn, overspending on breakfast, and insufficient maintenance funds. The manager concluded that these factors would hinder Edgefield Inn's reorganization efforts. In contrast, Debtor's owner, Bettis Rainsford, testified to making consistent debt payments since 1997 and cited recent cash flow problems as the reason for bankruptcy, claiming the Inn was well-maintained and nearly fully occupied. Rainsford expressed optimism about the Inn's future due to a new recreation development nearby.
Patricia Berry, the general manager since May 2012, recounted her initial salary dissatisfaction and subsequent raise negotiations amidst financial struggles. Despite being aware of the bankruptcy status, she did not probe further when told the business was doing well. Berry also mentioned employee concerns about Christmas bonuses for 2014 and her role in filing a proof of claim on their behalf shortly before the hearing.
The excerpt also outlines the Bankruptcy Code's requirements on claims classification and impairment for plan confirmation. Section 1123(a)(1) mandates that debtors classify creditor claims, which can be grouped if substantially similar. All claims are deemed impaired unless the plan maintains their rights unchanged, allowing classified claimants to vote on plan acceptance. A class accepts the plan if two-thirds in amount and over half in number of non-insider creditors agree to it.
The rule outlined pertains exclusively to impaired classes in a reorganization plan under the U.S. Bankruptcy Code. Unimpaired classes are deemed to have accepted the plan and do not participate in voting. For a plan to be confirmed, it must be accepted by at least one impaired class, as per 11 U.S.C. § 1129(a)(8). If an impaired class rejects the plan, the debtor must meet the "cram down" requirements, which include satisfying all conditions of § 1129(a) except subsection (8) and having at least one accepting impaired class that is not an insider, per § 1129(a)(10).
Scarlet Portfolio contends that the debtor cannot propose a confirmable plan due to the absence of an impaired consenting class. The court must assess permissible claim classifications, identify impaired classes, and determine if the debtor can obtain a favorable vote from any of these classes. The claims involved include those from the secured and unsecured segments of Scarlet Portfolio, IRS claims, Rainsford's unsecured insider claim, Edgefield County's secured claim, and late-filed claims from Berry and Employees.
Classes 1 and 2, comprising the IRS and Scarlet Portfolio claims, are recognized as impaired, but Scarlet Portfolio will not consent, holding a significant portion of Class 1. Rainsford’s insider claim also cannot be a consenting class. Edgefield County's secured tax claim cannot participate in voting due to its preferential treatment under § 1129(a)(9)(D), regardless of being secured. This leaves only the claims from Berry and Employees as potentially impaired and consenting; however, these claims were not scheduled or filed by the claims bar date of July 28, 2014. In Chapter 11, claims are considered filed if scheduled, and unscheduled claims must be filed by the bar date unless extensions are granted or excusable neglect is shown for late filing.
Claims filed after the claims bar date are disallowed under 11 U.S.C. 502(b)(9), and late filers, such as Berry and the Employees, cannot be treated as creditors for voting or distribution purposes per Fed. R. Bankr. P. 3003(c)(2). The Court noted that claims were submitted two and a half months late, with Berry being aware of the Debtor's bankruptcy, which did not meet the excusable neglect standard. As a result, their claims were not allowed, and they forfeited their right to participate in the reorganization plan. The Rainsford insider class and the unclassified Edgefield County claim also cannot vote. Scarlet Portfolio, holding controlling votes for both Classes 1 and 2, intends to reject the plan, which renders the Debtor unable to propose a confirmable plan, leading to case dismissal.
Scarlet Portfolio sought dismissal with prejudice, alleging the Debtor acted in bad faith, citing three reasons: the timing of the filing before foreclosure, inability to propose a confirmable plan, and alleged improper pre-petition transfers to insiders. Typically, dismissals are without prejudice under 11 U.S.C. 349(a), but the Fourth Circuit allows for dismissal with prejudice in cases of bad faith. The Court applies two tests for bad faith: objective futility (assessing the likelihood of effective reorganization) and subjective bad faith (examining the debtor's motives). The Court found no evidence of bad faith or egregious behavior harming creditors. The Debtor's intention to restructure its debt, supported by credible testimony about the business's improvement prospects, led the Court to conclude that dismissal with prejudice was unwarranted.
Strategic errors regarding the timing of filings and the necessity for creditor votes were noted, but no evidence suggests the Debtor attempted to evade obligations or misuse the Bankruptcy Code. Payments to insiders were determined to be aimed at sustaining the business rather than shirking responsibilities. The Debtor's initial petition showed some equity in the property, leading the Court to find no bad faith and deny Scarlet Portfolio's request to bar refiling. The case is dismissed without prejudice.
Despite procedural shortcomings, including late filings without permission, the Court will consider the merits of the Debtor's arguments. The Debtor timely filed a plan, although it faced a deficiency notice that was corrected by a refiled plan. Berry's affidavit claims entitlement to additional compensation from May 2013, but Rainsford's testimony does not confirm retroactive approval for a raise given in July 2014. The Court concluded that, since neither claim class can consent, it need not address the votes' compliance with the numerosity requirement or the appropriateness of claim classifications. The treatment of Class 5, the equity class, is not discussed, and the Court refrains from determining the enforceability of untimely claims or the standing of Berry to represent other employees. The analysis of previously classified Class 3 claims is also not addressed due to a lack of relevant facts.
