521 B.R. 116
Bankr. D.S.C.2014Background
- Debtor Edgefield Inn, LLC (small business chapter 11) filed March 24, 2014; property encumbered by Scarlet Portfolio loan (~$853,120) and tax claims by IRS and Edgefield County.
- Debtor proposed a chapter 11 plan classifying creditors into five classes; Scarlet Portfolio (secured creditor) objected and moved to dismiss on August 19, 2014, arguing (1) no conceivable plan can obtain an impaired, non‑insider consenting class and (2) bad‑faith filing warranting dismissal with prejudice.
- Debtor filed a plan (and an amended plan the day before hearing) that included two late, unsecured proofs of claim: Patricia Berry (executive compensation) and an Employees claim (small accrued bonuses).
- Berry and Employees filed claims after the claims bar date (July 28, 2014) and did not move for leave or show excusable neglect at the October 8, 2014 hearing.
- Hearing evidence: creditor’s witness raised concerns about transfers and Inn’s operations; owner and manager testified business was viable and filing was an attempt to restructure, not to abuse the Code.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a confirmable plan can be proposed because an impaired, non‑insider consenting class is required (§§1123,1129) | Scarlet: No; Scarlet controls the impaired secured classes and will not consent, and insiders cannot be counted, so no impaired non‑insider consenting class can exist | Debtor: Can create an impaired consenting class (Berry/Employees) to meet §1129(a)(10) | Held: No. Berry and Employees claims were filed late and cannot vote; tax and insider claims cannot provide a consenting impaired non‑insider class; plan not confirmable -> dismissal warranted |
| Whether Berry and Employees late claims may participate in voting and confirmation | Scarlet: Late claims cannot be treated as creditors for voting/distribution per Rule 3003(c)(2) and §502(b)(9) | Debtor/Berry: Late filings should be allowed (oral request) and can be counted | Held: Denied. No motion or excusable‑neglect showing; late claims cannot vote or be treated as creditors for confirmation purposes |
| Whether the tax claim of Edgefield County or IRS classification prevents creation of an impaired consenting class | Scarlet: Tax claims are impaired but Scarlet focuses on secured creditor control | Debtor: Proposed treatment of tax claims in plan | Held: Tax claim cannot be part of a voting impaired class under §1129(a)(9)(D) as interpreted in Bryson; thus it cannot supply an impaired consenting non‑insider class |
| Whether dismissal should be with prejudice (bar re‑filing) for bad faith | Scarlet: Filing was on eve of foreclosure, objectively futile and motivated in bad faith; prepetition transfers to insiders support barring refiling | Debtor: Filing was an honest attempt to reorganize; business is viable; transfers were to keep businesses afloat | Held: No bad faith warranting prejudice. Case dismissed without prejudice; no evidence of egregious conduct or motive to abuse bankruptcy process |
Key Cases Cited
- Premier Automotive Sys., Inc. v. Speno, 492 F.3d 274 (4th Cir.) (defines two‑part bad‑faith test: objective futility and subjective bad faith)
- Colonial Auto Ctr. v. Tomlin (In re Tomlin), 105 F.3d 933 (4th Cir.) (permitting dismissal with prejudice for egregious bad‑faith filings that prejudice creditors)
- Travelers Ins. Co. v. Bryson Props. (In re Bryson Props.), 961 F.2d 496 (4th Cir.) (treatment of tax claims under §1129(a)(9) and limits on classification/voting)
- Pioneer Inv. Servs. Co. v. Brunswick Assocs. L.P., 507 U.S. 380 (U.S.) (standards for excusable neglect under Rule 9006(b))