Brad Rinehart v. Hoffinger Industries ( 2003 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
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No. 02-6065/6066EA
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In re: *
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Hoffinger Industries, Inc. *
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Debtor. *
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Leesa Bunch and Brad Rinehart, *
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Creditors-Appellants, * Appeal from the United States
* Bankruptcy Court for the
v. * Eastern District of Arkansas
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Hoffinger Industries, Inc. *
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Debtor-Appellee *
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Submitted: April 29, 2003
Filed: May 12, 2003
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Before KRESSEL, Chief Judge, SCHERMER and FEDERMAN, Bankruptcy Judges.
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KRESSEL, Chief Judge.
Leesa Bunch and Brad Rinehart appeal from the order of the bankruptcy court1
which extended the debtor’s plan exclusivity periods through May 1, 2003 and
1
The Honorable James G. Mixon, United States Bankruptcy Judge for the
Eastern and Western Districts of Arkansas.
October 1, 2003. Because we believe the bankruptcy court did not abuse its
discretion, we affirm.
BACKGROUND
Appellee, Hoffinger Industries, Inc., is a manufacturer of above ground
swimming pools, vinyl liners, filters and pool accessories. The debtor’s principal
manufacturing facility is located in West Helena, Arkansas. Hoffinger filed a
voluntary petition seeking relief under Chapter 11 on September 13, 2001. Hoffinger
filed its petition after entry of a judgment against it on August 23, 2001 in the
Superior Court of the State of California in favor of Leesa Bunch in the amount of
$12,526,890.70 plus costs.
On December 7, 2001, Hoffinger filed its first Motion for Extension of
Debtor’s Exclusivity Periods to File a Plan of Reorganization and to Obtain
Acceptances Thereof, requesting a 90 day extension of the 120 day and 180 day
exclusivity periods. The motion was granted on March 6, 2002. On April 18, 2002,
Hoffinger filed its Motion for Second Extension of Debtor’s Exclusivity Periods to
File Plan of Reorganization and to Obtain Acceptances Thereof requesting an
additional 120 day extension of the exclusivity periods. The second motion was
granted on May 29, 2002.
On August 8, 2002, Hoffinger filed its Motion for Third Extension of Debtor’s
Exclusivity Periods to File Plan of Reorganization and to Obtain Acceptances
Thereof. In its motion, Hoffinger set forth a number of matters that would need to be
resolved prior to formulation of a plan of reorganization including completion of the
Unsecured Creditor Committee investigation of various transactions between
Hoffinger and related parties. Furthermore, because of the substantial size and
complexity of its bankruptcy, its appeal of the Bunch judgment and issues related to
developing a plan of reorganization, Hoffinger requested that the debtor’s exclusivity
periods to file its plan of reorganization and to obtain acceptances be extended until
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60 and 120 days after final adjudication or resolution of the Bunch Judgment, or
alternatively, that each period be extended for an additional 120 days or other period
of time as the bankruptcy court might deem cause to exist.
Bunch and Rinehart filed objections to Hoffinger’s third Motion for Extension.
The Unsecured Creditors Committee and the U.S. Trustee also objected to an
unlimited extension of the exclusivity periods. After an evidentiary hearing on the
motion the bankruptcy court extended the plan exclusivity period until May 1, 2003
and the confirmation period until October 1, 20032. Bunch and Rinehart filed a timely
appeal.
JURISDICTION
The order appealed from is interlocutory. However, Congress has made orders
increasing or reducing plan exclusivity periods appealable as of right to either the
district court, 28 U.S.C. § 158 (a)(2), or the bankruptcy appellate panel, 28 U.S.C. §
158 (c)(1).
STANDARD OF REVIEW
We review the bankruptcy court’s factual findings for clear error and its
conclusions of law de novo. Blackwell v. Lurie (In re Popkin & Stern), 223 F.3d 764,
765 (8th Cir. 2000); Wendover Fin. Servs. v. Hervey (In re Hervey), 252 B.R. 763,
765 (B.A.P. 8th Cir. 2000). We review the bankruptcy court’s decision to extend the
debtor’s exclusivity periods for abuse of discretion. An abuse of discretion may only
be found if the lower court’s judgment was based upon clearly erroneous factual
findings or erroneous legal conclusions. Mathenia v. Deleo, 99 F.3d 1476, 1480 (8th
Cir. 1996), cert. denied, 521 U.S. 1123, 117 S.Ct. 2518, 138 L.Ed.2d 1020 (1997).
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Technically, the second, longer period provided in the statute is to solicit
acceptances, not to obtain confirmation of a plan. Neither appellant makes an issue
of the distinction.
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“Under an abuse of discretion standard, this court cannot reverse the bankruptcy
court’s ruling unless it ‘has a definite and firm conviction that the bankruptcy court
committed a clear error of judgment in the conclusion it reached upon a weighing of
relevant factors.’” Nelson v. Siouxland Fed. Credit Union (In re Nelson), 223 B.R.
349, 352 (B.A.P. 8th Cir. 1998) (quoting Beguelin v. Volcano Vision, Inc. (In re
Beguelin), 220 B.R. 94, 97 (B.A.P. 9th Cir. 1998)).
THE MERITS
11 U.S.C. § 1121 establishes the time lines for filing plans of reorganization.
Section 1121(a) permits the debtor to file a plan of reorganization at any time.
However, § 1121(b) gives the debtor in possession3 the exclusive right to file a plan
during the 120 day period after the date of the order of relief under Chapter 11. If the
debtor in possession files a plan during this 120 day period, § 1121(c)(3) grants the
debtor in possession 180 days from the date of the order of relief to solicit
acceptances of the plan.
While the exclusivity periods in § 1121(b) and (c) may be sufficient for most
debtors to file a plan, there are some situations where longer exclusivity periods are
appropriate. Section 1121(d) states:
On request of a party in interest made within the respective
periods specified in subsections (b) and (c) of this section
and after notice and a hearing, the court may for cause
reduce or increase the 120 day period or the 180 day period
referred to in this section.
3
The appointment of a trustee terminates the exclusivity periods. 11 U.S.C. §
1121(c)(1).
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The factors that must be established to constitute “cause” to reduce or increase the
exclusivity periods are not described within § 1121(d), yet the legislative history of
this section reveals what may establish cause.
First, the legislative history reveals the intent to facilitate the rehabilitation of
debtors in Chapter 11, and therefore the party requesting an extension of the
exclusivity period has the burden of establishing good cause. See, e.g., Matter of
Newark Airport/Hotel, Ltd., 156 B.R. 444, 451 (Bankr.D.N.J. 1993); In re Texaco,
Inc., 76 B.R. 322, 326 (Bankr.S.D.N.Y. 1987); In re Pine Run Trust, Inc., 67 B.R.
432, 434 (Bankr.E.D.Pa. 1986); In re Tony Downs Foods Co., 34 B.R. 405(Bankr.D.Minn. 1983). The legislative history also reveals that Congress intended
that the granting of an extension would be based “on a showing of some promise of
probable success [for reorganization].” Matter of Newark Airport/Hotel, Ltd., 156
B.R. at 451 (quoting 11 U.S.C.A. 1121(d) (Historical and Revision Notes, S.Rept.
No. 95-989)). Furthermore, “[a]n extension should not be employed as a tactical
measure to put pressure on parties in interest to yield to a plan they consider
unsatisfactory.” Id.In deciding whether or not to extend or shorten the exclusivity periods, courts
have relied on such factors as: (1) the large size of the debtor and the consequent
difficulty in formulating a plan of reorganization for a huge debtor with a complex
financial structure, In re Texaco, Inc., 76 B.R. at 326; Gaines v. Perkins, (In re
Perkins), 71 B.R. 294, 298 (W.D.Tenn. 1987); In re Pine Trust, Inc., 67 B.R. at 435;
In re United Press International, Inc., 60 B.R.. 265, 270 (Bankr.D.C.1986); (2) the
need of the creditors’ committee to negotiate with the debtor and the ability to prepare
adequate information, In re McLean Industries, Inc., 87 B.R. 830, 834
(Bankr.S.D.N.Y. 1987); (3) the existence of good faith progress towards
reorganization, In re Pine Trust, Inc., 67 B.R. at 435; (4) the existence of an
unresolved contingency, In re Swatara Coal Co., 49 B.R. 898, 899-900 (Bankr.Pa.
1985); (5) the fact that the debtor is paying bills as they become due, In re Trainer’s
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Inc., 17 B.R. 246, 247 (Bankr.E.D.Pa. 1982); (6) the length of previous extensions of
exclusivity, In re McLean Industries, Inc. 87 B.R. at 834 (citing Teacher’s Insurance
and Annuity Asso. of America v. Lake in the Woods (In re Lake in the Woods), 10
B.R. 338, 345 (E.D.Mich. 1981) (noting that an exclusivity period extended to one
and one-half years with stated intent to continue the extension indefinitely is not
within the ambit of “cause”); In re Ravenna Industries, Inc., 20 B.R. 886, 890
(Bankr.Ohio 1982) (stating that the debtor had been granted eight extensions bringing
the total exclusivity period to 435 days and such a period of exclusivity was not
envisioned by Congress); (7) breakdowns in plan negotiations, such that the
continuation of the debtor’s exclusivity period would result in the debtor having an
unfair bargaining position over creditors, Matter of Lake in the Woods, 10 B.R. at
344; (8) the debtor’s failure to resolve fundamental reorganization matters essential
to its survival, In re Sharon Steel Corp., 78 B.R. 762, 766 (Bankr.W.D.Pa. 1987); (9)
the gross mismanagement of the debtor, In re Crescent Beach Inn, Inc., 22 B.R. 155,
160 (Bankr.D.Me. 1982).
As always, we emphasize that these are only factors, not all of which are
relevant in every case. Nor is it simply a question of adding up the number of factors
which weigh for and against an extension. It is within the discretion of the bankruptcy
court to decide which factors are relevant and give the appropriate weight to each. As
long as the bankruptcy court does not abuse its discretion, its decision will be
affirmed.
In this case, evidence in the record reveals that the debtor met its burden of
establishing good cause, and that the bankruptcy court did not abuse its discretion in
granting extensions under § 1121(d). Hoffinger’s president, Wayne Hollowell, Jr.,
testified that early reports regarding the fiscal year ending July 31, 2003 were
encouraging, and that the company’s sales were at an all time high from 1999.
Moreover, Hollowell testified that the debtor, in an effort to further the reorganization
process, has hired expert appraisers approved by the court to appraise equipment as
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well as real estate, has hired insurance experts to study the adequacy of their products
liability insurance which is an ongoing process. He also testified that Hoffinger is
paying its post petition expenses as they become due and adequate cash and lines of
credit are in place to pay administrative claims in the future. Thus, it was not clearly
erroneous for the bankruptcy court to conclude that reorganization is feasible for
Hoffinger.
Finally, based on testimony from Hollowell, the court reasonably concluded
that this is a complex case. The debtor has annual gross sales of approximately $36
million dollars, it has unresolved issues regarding completion of the Unsecured
Creditor’s Committee investigation of various transactions between the debtor and
related parties, it is in the process of securing financing, finishing audits and
appraisals. The Bunch appeal was but one of the issues the court considered as being
a contributing factor to the complexity of the debtor’s case. Thus it was not an abuse
of the court’s discretion to give the debtor an extension of its exclusivity period.
The appellants also complain that the length of the period granted to the debtor
to obtain confirmation of its plan for five months, from May 1 to October 2, 2003, is
too long. Rule 2002(a) requires twenty five days notice of the time fixed for filing
objections and the hearing to consider approval of the disclosure statement and
confirmation of the plan. If the objection deadline is five days before the hearing, then
notice would have to be mailed at least thirty days before the hearing. Allowing a
week from the filing of the disclosure statement to prepare notices and copies and
mail them, thirty seven days would elapse from filing a plan and disclosure statement
until a hearing on the adequacy of the disclosure statement.
The time periods from the time a disclosure statement is approved and a
hearing on confirmation of the plan are similar. Thus, under ideal conditions, it would
take seventy four days to get from plan filing to confirmation. We think the
bankruptcy court’s allowance of another eighty days to allow for contingencies like
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attorneys’ and clients’ schedules, the clerk’s workload, and the court’s calendar, not
to mention time for the parties to negotiate and the court to make its decisions, is not
an abuse of discretion.
CONCLUSION
Since the bankruptcy court did not abuse its discretion, its order extending the
debtor’s exclusivity periods is affirmed.
A true copy.
Attest:
CLERK, U.S. BANKRUPTCY APPELLATE
PANEL, EIGHTH CIRCUIT.
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