USBC - SD - Decisions - 1992 - #03 Lake Region Development, Inc. and Marshall Manor, Inc.

1992 #03, Lake Region Development, Inc. and Marshal Manor, Inc., 3-20-92

In re: LAKE REGION Development, Inc., Case No. 91-10111 and MARSHALL MANOR, INC., Jointly Administered, Case NO. 91-10112, Chapter 11

MEMORANDUM OF DECISION RE: DEBTOR'S OBJECTIONS TO RESOLUTION TRUST CORPORATION'S FIRST AMENDED DISCLOSURE STATEMENTS

The matter before the Court is the approval of the First Amended Disclosure Statements filed by creditor Resolution Trust Corporation in each of the above-named cases. This is a core proceeding under 28 U.S.C. § 157(b)(2). This ruling shall constitute Findings and Conclusions as required by F.R.Bankr.P. 7052.

Resolution Trust Corporation (Resolution) filed separate disclosure statements and plans for Debtor Lake Region Development, Inc., and Debtor Marshall Manor, Inc., on December 17, 1991. The plans proposed to liquidate the assets of each estate while continuing to operate a nursing home that is the primary asset of both estates.

The last date for filing objections to Resolutions's proposed disclosure statements was January 15, 1992. Creditor American Centennial Insurance Company filed objections on January 15, 1992. The Debtors filed objections on January 17, 1992. The hearings on the disclosure statements scheduled for January 22, 1992 were rescheduled to February 19, 1992 upon Debtors' motions.

On the day of the hearing, Resolution filed responses to American's and Debtors' objections. Resolution also filed that day and reviewed for the Court at the hearing an amended disclosure statement that addressed the objections of American and Debtors. Debtors were allowed five days to file objections to Resolution's newly filed amended disclosure statement and Resolution was given five days to respond to the objections.

Debtors filed objections to the amended disclosure statements on February 26, 1992. Resolution filed a response to Debtors' objections on March 3, 1992. A telephonic hearing was scheduled for March 17, 1992 while the Court was in session in Aberdeen. Debtors filed a supplement to their objections that day in Pierre but the Court did not receive it in Aberdeen in sufficient time to review prior to the hearing. The Court rescheduled the telephonic hearing to the next day. Resolution provided the Court with a copy of Holywell Corp. v. Smith, 112 S.Ct. 1021 (February 25, 1992), but did not otherwise address Debtor's supplemental objection in writing.

At the telephonic hearing held March 18, 1992, Resolution argued Debtors' objections to the amended disclosure statements did not comport with F.R.Civ.P. 10(b) and that Debtors exceeded the scope of their objections to the original disclosure statements. The Court ruled that Debtors' original objections were broad enough to cover the objections to the amended disclosure statement and recognized them. The Court also concluded that Resolution had failed to show any prejudice to Resolution that arose from Debtor's cumbersome objections since Resolution was able to provide a detailed response to Debtors' objections. Upon those rulings, Resolution, Debtors, and American relied on their pleadings and the matter was taken under advisement.

II.

Under 11 U.S.C. § 1125(b) a plan proponent must circulate with any proposed plan a disclosure statement that has been approved by the court after notice and hearing. The disclosure statement must contain "adequate information."

"[A]dequate information" means information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor's books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan, but adequate information need not include such information about any other possible or proposed plan; and

..."investor typical of holders of claims or interests of the relevant class" means investor having--

(A) a claim or interest of the relevant class;

(B) such a relationship with the debtor as the holders of other claims or interests of such class generally have; and

(C) such ability to obtain such information from sources other than the disclosure required by this section as holders of claims or interests in such class generally have.

11 U.S.C. § 1125(a)(in pertinent part).

The primary purpose of a disclosure statement is to give creditors sufficient information to decide whether to accept the proposed plan. In re Monnier Brothers, 755 F.2d 1336, 1342 (8th Cir.1985). Whether a disclosure statement contains adequate information is determined by the court on a case by case basis. 11 U.S.C. § 1125(b); In re Microwave Products of America, Inc., 100 B.R. 376, 377 (Bankr. W.D. Tenn. 1989).

Precisely what constitutes adequate information in any particular instance will develop on a case by case basis. Courts will take a practical approach as to what is necessary under the circumstances of each case, such as the costs of preparation of the statements, the need for relative speed in solicitation and confirmation, and of course, the need for investor protection .... In reorganization cases, there is frequently great uncertainty. Therefore the need for flexibility is greatest.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 409, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6465 (cited in Monnier Brothers, 755 F.2d at 1342).

Several courts have developed lists of the types of information that should be included in a disclosure statement. See, e.g., In re Cardinal Congregate I, 121 B.R. 760, 765 (Bankr. S.D. Ohio 1990)(citing inter alia In re Scioto Valley Mortgage Co., 88 B.R. 168, 170-71 (Bankr. S.D. Ohio 1988)); In re Dakota Rail, Inc., 104 B.R. 138, 142-43 (Bankr. D. Minn. 1989); and Microwave Products, 100 B.R. at 378. The types of information included in these lists are virtually identical and include:

1. The circumstances that gave rise to the filing of the bankruptcy petition;

2. A complete description of the available assets and their value;

3. The anticipated future of the debtor;

4. The source of the information provided in the disclosure statement;

5. A disclaimer, which typically indicates that no statements of information concerning the debtor or its assets or securities are authorized, other than those set out in the disclosure statement;

6. The condition and performance of the debtor while in Chapter 11;

7. Information regarding allowed or estimated claims against the estate;

8. A liquidation analysis setting forth the estimated return that creditors would receive under chapter 7;

9. The accounting and valuation methods used to produce the financial information in the disclosure statement;

10. Information regarding the future management of the debtor, including their qualifications, and the compensation to be paid to management, including insiders, directors, and/or officers of the debtors;

11. A summary of the plan of reorganization;

12. An estimate of all administrative expenses, including attorneys' and accountants' fees and priority claims;

13. The collectibility of any accounts receivable and counter claims;

14. Any financial information, valuations, or projections that would be relevant to creditors' decisions whether to accept or reject the plan;

15. Information relevant to the risks under the plan posed to creditors and interest holders;

16. The actual or projected value that can be obtained from avoidable transfers;

17. The existence and possible success of non bankruptcy litigation;

18. The tax consequences of the plan; and

19. The relationship of the debtor with its affiliates and the plan proponents. See generally Dakota Rail, 104 B.R. at 142-43, and Microwave Products, 100 B.R. at 378.

III.

Each Debtor has only a few scheduled creditors.⁽¹⁾ There is limited commonality among these creditors and their claims. Some secured creditors, such as American and of course Resolution, have participated in the disclosure statement approval process. Other secured creditors and all of the unsecured creditors have not participated in the disclosure process so their level of knowledge about the Debtors and their financial sophistication is unknown. Consequently, it is difficult for the Court to fashion an "investor typical of holders of claims or interests of the relevant class" in these cases to whom the disclosure statements should be addressed. Not having been provided with information to the contrary, the Court must assume, therefore, that Debtors' creditors, other than American and Resolution, are financially unsophisticated and not well informed about Debtors' affairs. Thus, the disclosure statements must contain information adequate for such an uninformed, unsophisticated creditor.

American's objections to the original disclosure statement were apparently cured by Resolution's First Amended Disclosure Statement and will not be addressed further.

A. Objections of Debtor Lake Region

Resolution conceded at the hearing that in light of the Supreme Court's decision in Holywell Corp. v. Smith, 112 S.Ct. 1021 (February 25, 1992), Resolution's disclosure statement should address the potential tax liability of Resolution's proposed liquidating plan. Resolution should be mindful, however, that a mere statement that there may be tax consequences of the liquidation is insufficient. Resolution must make a reasonable inquiry into applicable tax law, forecast the outcome of the proposed sales, and assess the potential tax liability for the liquidating agent and estates based on those sale projections and Debtors' tax bases in the property to be sold.

Each of Debtor Lake Region's remaining objections to Resolution's amended disclosure statement will be addressed separately:

1. Description of nursing home's license. In reviewing Debtor's objections to the First Amended Disclosure Statement and Resolution's responses to those objections, the only concession to Debtors' objection, other than providing the tax information, is that Resolution has agreed that the nursing home shall be described as a "skilled care" facility, not "intermediate."

2. Adequate information about reasons for Chapter 11 petition. The reasons why Debtor filed bankruptcy have limited relevance since Resolution does not intend to reorganize Debtor. However, Debtor's current financial status and the reasons why Resolution is proposing a liquidation rather than a reorganization are relevant should be set forth so that creditors can weigh whether liquidation is in their best interests.

3. Details about the adequate protection agreement between Resolution, American, and Debtor. The disclosure statement should accurately reflect what the parties agreed to in the adequate protection stipulation approved by Order entered September 26, 1991. The total amount of adequate protection payments to be paid and the remainder of Resolution's and American's claims that will remain unpaid when the adequate protection payments cease should be set forth. The stipulation's contingency for when payments will cease should be acknowledged.

4. Status of Marshall Manor's vendor's lien. Resolution's disclosure statement should recognize that Marshall Manor has an enforceable vendor's lien on Lake Region's real property, as agreed by the parties in the stipulation filed November 22, 1991. Further, the disclosure statement should not confuse the application of 11 U.S.C. § 365 on Marshall Manor's non residential lease of the real property with Lake Region's executory contract for deed. Under § 365(d)(2), Lake Region's executory contract may be assumed or rejected any time before confirmation. Resolution's disclosure statement and plan propose to reject this executory contract; it has not been rejected by operation of law. Moreover, the disclosure statement should clearly recognize that under §365(d)(4), Marshall Manor's lease of the nursing home -- nonresidential real property -- was not timely accepted and is deemed rejected.

5. Description and valuation of assets and liabilities.

Debtor seeks consistency within the plan on the description and valuation of assets. Resolution's references to Debtor's assets and liabilities based on Debtor's schedules were specific while References to Resolution's appraisal were very general. Although Debtor may have access to more detailed information about Resolution's appraisal, other creditors do not. Accordingly, that information should be provided in as much detail as was gleaned from Debtor's schedules.

6. Basis of Resolution's appraisal. Debtor argues that the basis of Resolution's appraisal should be included. The point is well taken. The disclosure statement should set forth who did Resolution's appraisal, when the appraisal was done, and the methods relied upon to determine the values. The information is needed so that creditors can make an informed judgment about the efficacy of Resolution's liquidating plan.

7. Information about Robert Marx's conviction. Since Robert Marx was a well-compensated officer and director for both Debtors, his criminal convictions likely raised creditors' questions about his business interests. Consequently, information about his incarceration is relevant and may be included in the disclosure state. However, it is unlikely that his convictions and resultant incarceration will have an impact on Resolution's liquidating plan so the disclosure statement should not imply that it does.

8. Description and amount of liquidating expenses. Debtor correctly points out that Resolution's disclosure statement does not fully describe all reasonably expected expenses associated with the liquidating plan. Those expenses that are known or reasonably expected should be set forth. The Court is satisfied that the term "extraordinary" expenses can be better defined so that ambiguity for the liquidating agent, as well as for the balloting creditors, is avoided. Those expenses that shall be included in the liquidating agent's commission should be clearly stated. Specific costs he will be allowed in addition to his commission should be set forth. Further, Resolution should clearly delineate ongoing expenses from liquidating expenses.

9. Expenses of liquidating. This objection would be cured by the edification set forth in "8" above.

10. Joint sale of estates' assets. Part B of Section III should acknowledge that Resolution's proposed plans for Lake Region and Marshall Manor both need to be confirmed before the liquidating agent may sell the nursing home. Creditors need to understand that Resolution's proposed liquidation of the nursing home is feasible only if both plans are confirmed.

11. Status of executory contracts for officers. Resolution's amended disclosure statement says no officers, directors, or shareholders will receive compensation post-confirmation. It also states all executory contracts are rejected at confirmation. When read as a whole, the amended disclosure statement provides sufficient information to withstand Debtor's objection on this issue.

12. Joint sale of estates' assets and compliance of buyer with state law. This objection has been addressed partially at "10" above. The information concerning the nursing home buyer's needs to comply with certain state and federal laws is sufficient for the disclosure statement. That information would be more appropriately included in a sale prospectus.

13. Type of sale. This objection has limited merit. Resolution's amended disclosure statement provides that the sale of the nursing home will be private to the highest bidder from a pool of those who bid at least $700,000.00 at an initial offering. Resolution should, however, clarify on page nine whether the initial solicitation of bids "among interested parties" means the initial offering will be public or private.

14. Conveyor of title. The second paragraph of part B, Section III says the liquidating agent will take possession of the estates' assets. Therefore, this agent will be the person to pass title. To the extent that Debtor questions the soundness of the title to be passed, it is an objection Resolution's plan, not the disclosure statement.

15. Compliance with state and federal laws and regulations. Resolution's amended disclosure statement sufficiently addresses the purchaser's need to comply with certain state and federal mandates. Debtor has not disclosed or identified any unresolved Medicaid claims that need to be addressed in a disclosure statement.

16. Bidding of allowed secured claims. Resolution's response to this objection is correct. The amount of secured creditors' allowed claims can be determined before the sale of the estates' assets.

17. Non binding timetable. This objection is without merit.

18. Abandonment of assets. Debtor is correct that assets are generally abandoned by a trustee to the debtor. However, under 11 U.S.C. § 1123(a)(5), a plan of reorganization may provide for the transfer or distribution of estate property without compliance with 11 U.S.C. § 554.

19. Adequate protection payments. A portion of this objection is cured upon Resolution's compliance with "3" above. As to Debtor's objection that there is ambiguity in the Stipulation about when adequate protection payments cease, the confirmation order will resolve that question: Resolution's plan and disclosure statement provides adequate protection payments will cease upon confirmation; thus, the confirmation order would constitute the type of order described in the Stipulation which establishes the time when adequate protection payments will cease.

20. Undisclosed contingencies. Resolution has set forth its characterization of the claims against the estate. It has also said that disputed claims will be resolved before a final distribution of all assets. The information is a sufficient acknowledgement within Resolution's disclosure statement that some claims may not be allowed in the amount scheduled or stated in the disclosure statement.

21. Administrative and priority claims. In addition to information about the potential tax liability associated with Resolution's liquidating plan, the disclosure statement also should identify and value all reasonably anticipated administrative expenses. Also see "8" above.

22. Status of contract for deed and executory lease. This objection has been addressed in "4" above.

23. Status of claims. This objection has been addressed in "20" above.

24. Adequacy of the liquidation analysis. Resolution's liquidation analysis is not sufficiently detailed and is not clearly geared to show Resolution's plan complies with 11 U.S.C.

§ 1129(a)(7)(A)(ii). Liquidation expenses and assets of the estate should be itemized and separately valued.

B. Objections of Debtor Marshall Manor

The objections raised by Debtor Marshall Manor to the amended disclosure statement proposed by Resolution in its case mirror those objections raised by Debtor Lake Region. The Court concludes that its disposition of Lake Region's objections similarly resolves Marshall Manor's objections. Therefore, Resolution needs to make the same changes in its disclosure statement in Marshall Manor's case as it must make in its disclosure statement for Lake Region's case.

In addition to the objections raised by Debtor, the Court also finds that part J of Section III needs to be amended to reflect the Court's Order on March 2, 1992 that the cases may be jointly administered but not substantively consolidated.

An order will be entered directing Resolution to prepare second amended disclosure statements to be submitted to the Court for its approval.

Dated this 20thday of March, 1992.

1. Lake Region did not schedule any priority claimants. It scheduled five secured claim holders: Resolution, a fully secured claimant for $884,735.19; Marshall Manor, a fully secured claimant under a contract for deed for $308,039.39; American, a fully secured claimant on a note for $239,189.52; George Schott, a fully secured claimant on a note for $27,608.30; and Prairie States Bank, a fully secured claimant on a trailer home for $9,620.60. Lake Region scheduled three unsecured creditors: City National Bank for $27,459.85 (disputed); Prairie State Bank for $19,326.50; and Browns Valley Community Nursing Home, Inc., for a 1987 setoff of $128,528.65.

Marshall Manor scheduled two priority creditors: employees who are owed Christmas fund and profit sharing accruals totaling $1,370.00 and the Internal Revenue Service for payroll taxes for May, 1991 for $12,267.28. Marshall Manor scheduled two secured claimants: Resolution, a fully secured claimant for $884,735.19, and American, a fully secured claimant for $239,289.52. Marshall Manor did not schedule any unsecured claim holders.