JOINT MOTION TO APPROVE INTER-ESTATE COMPROMISE WITH DBI ESTATE DENIED AND A HEARING SET FOR AN ORDER TO SHOW CAUSE REGARDING CONVERSION TO CHAPTER 7
On February 27, 2008 the Court denied the Creditors' Committee's request for authorization to settle the disputes between the Richard L. Bruhn bankruptcy estate and the DBI bankruptcy estate. The Court stated that it did not have enough facts before it to make a decision.
In its opinion the Court articulated the following concerns:
(1) was the trade debt in the DBI estate receiving fair treatment;
(2) are the guaranties valid;
(3) are the promissory notes equity rather than debt (equity is repaid only after all other debts were paid in full with interest which would result is almost no repayment to noteholders in this case); and
(4) should the estates be substantive consolidated (this would result in combining the claims of both estates and the DBI trade debt would share equally in all Richard L. Bruhn's assets as the creditors in the Richard L. Bruhn estate).
The Court then issued an oral Order to Show Cause as to why both the Richard L. Bruhn case and the DBI case should not be converted to Chapter 7 liquidation proceedings. The hearing was set for March 26, 2008 at 2:30 p.m.
COMMITTEE'S OPPOSITION TO THE COURT'S ORAL ORDER TO SHOW CAUSE RE: CONVERSION
After discussion, the Committee agreed that conversion was not in the best interests of the creditors in the Richard L. Bruhn estate. In a Chapter 7 liquidation case, a trustee is appointed to liquidate all the assets of the estate and distribute the proceeds to the creditors. While this is a quick approach, the Committee did not believe it was in the creditors best interest for two primary reasons:
(1) A Chapter 7 trustee would not be able to hold the real property as long as the plan would allow before selling it. This results in the plan being able to anticipate and weather market changes and fluctuations. The Committee believes this will allow it to realize a higher sales price for the properties, resulting in a higher distribution to creditors.
(2) If the property is sold in a Chapter 7 case, it is subject to capital gains tax (which the Committee understood was estimated at approximately $2,350,000). This tax is a priority claim and would be paid ahead of all unsecured creditors. However, the Committee believes that through a plan of reorganization in Chapter 11, the structure of the plan would result in a different tax treatment that is more favorable to the general unsecured creditors.
The Committee decided to oppose the order to show cause and laid out a course of action to move the Richard L. Bruhn estate forward. First, the Committee drafted and filed an opposition to the order to show cause regarding conversion. Next, the Committee began revising a plan of reorganization and accompanying disclosure statement now that a potential settlement was off the table. The plan and disclosure statement was filed on March 25, 2008. There is no hearing date scheduled for this matter.
The Committee then requested from Debtor's counsel for permission to file documents on behalf of the Debtor. Debtor's counsel agreed and the Committee filed a stipulation with the Court on this agreement.
Afterwards, the Committee filed a motion for relief from the automatic stay in the DBI case, which would allow the Debtor's estate to recover the approximate $500,000 it loaned DBI on a secured basis prior to DBI's bankruptcy. Then, the Committee filed an application for administrative rent against the DBI estate in the amount of $156,175 for DBI's use of the Debtor's properties for its stores.
Finally, the Committee filed applications to take oral examinations of Leslie Bruhn, Donna Bruhn and Bertha Alicia Ramos. The Committee hopes to question these individuals about the DBI Investment Note Program and Mr. Bruhn's assets and business transactions.
At a hearing on March 26, 2008, the Court ruled that it would not convert either the Richard L. Bruhn estate or the DBI estate to a Chapter 7 proceedings. The Court did, however, order that a Chapter 11 trustee be appointed in the Richard L. Bruhn case. The Court noted that the Committee is very active in this case, but that Donna Bruhn as conservator for her father, the Debtor, is in an obvious conflict in having to choose between the interests of her father and the best interests of the Estate. The Court stated that it hopes a Chapter 11 trustee will relieve Donna Bruhn of this burden.
The Committee is pleased with the outcome and believes that a Chapter 11 trustee will further help move the case forward. The Court held off ruling on the Committee's various other motions until a trustee is appointed and is able to get up to speed on the case.
