In Re Crutcher Resources Corp.
MEMORANDUM OF OPINION
Crutcher Resources Corporation (Crutch-er), the parent corporation, and its subsidiaries (Debtors) brought an 11 U.S.C. § 363(b)(1) 1 Motion to Sell Free and Clear *630 of Liens. The testimony at the hearing indicated that all assets of the Debtors are pledged and that the Debtors have projected operating losses for the next three months. The Motion to Sell is limited tо the assets of two subsidiary Debtors, CRC Teton, Inc. (Teton) and CRC Colorado Well, Inc. (Colorado). The proposed purchasers are two corporations formed by the Presidents of the two subsidiaries. The evidence presented at the hearing showed that these two subsidiaries are not operating at a loss at the present time and, in fact, have positive cash flows. Along with the other Debtor subsidiaries, Teton and Colorado guaranteed Crutcher’s prepetition debt in the approximate amount of $97 million. In addition, they participated in guaranteeing approximately $3 million in postpetition debt. The Debtors’ Motiоn is supported by the Lenders. 2
The Indenture Trustee, the J. Henry Schroder Bank & Trust Company (Schro-der) filed an objection to the sale on behalf of the holders of approximately $30 million of subordinated debentures issued by Crutcher Finance, N.Y., an affiliated Chapter 11 Debtor. Neither Teton nor Colorado extended guarantees on the Crutcher Finance, N.V. debentures.
The Debtors assert that § 363(b)(1) permits a Chapter 11 corporate debtor to sell all of its assets outside a Plan of Reorganization without resort to conversion to Chapter 7 where circumstances warrant, citing
The Institutional Creditors of Continental Air Lines, Inc. v. Continental Air Lines, Inc. (In re Continental Air Lines, Inc.),
In
Continental,
the company was clearly attempting to reorganize. To do so, it proposed to lease two aircraft for ten years at a cost of $70 million financed postpetition. The
Continental
Court held the lease and financing аrrangement could be approved if the Debtor established a business justification for the transaction, citing
In re Lionel Corp.,
In the instant case, the Debtors presented evidence that: the parent and its subsidiaries are losing money at approximately $50,000-$70,000 per week; there are no unencumbered assets; they are oрerating postpetition on accounts receivable collected; and there is substantial risk as to the saleability or lease of the assets of the subsidiaries (principally, oil rigs) in light of the depressed energy industry. The Debtors presented the transaction to sell the two subsidiaries as a chance to savе employees’ jobs and to salvage something of the companies. Further, they stated that it was a real advantage to sell the subsidiaries now as going concerns, both to Crutcher and the employees.
Crutcher cited
In re Rausch Manufacturing Co., Inc.,
A Bankruptcy Judge has considerable discrеtion in approving a § 363(b) sale of property of the estate other than in the ordinary course of business, but the mov-ant must articulate some business justification for the sale (other than the appeasement of major creditors) before the Bankruptcy Judge orders a § 363(b) sale. Lionel, supra at 1066, 1070. The rule adopted by the Fifth Circuit requires that a Judge determining a § 363(b) application expressly find from the evidence presented at hearing a good business reason to grant the application. Continental supra at 1226.
The Lionel Court found that the creditors committee’s insistence on a sale was insufficient as a matter of fact because it was not a sound business reason, and insufficient as a matter of law because it ignored the equity interests to be weighed under Chapter 11. The Court listed guidelines for the Bankruptcy Judge in his duty to act to further the diverse interests of the debtor, creditors and equity holders:
1. The proportionate value of the asset to the estate as a whole;
2. The amount of elapsed time since the filing;
3. The likеlihood that a reorganization plan would be proposed and confirmed in the near future;
4. The effect of the proposed disposition on future plans of reorganization;
5. The proceeds to be obtained from the disposition vis-a-vis any appraisals of the property;
6. Whether the disposition is by sale, use, or lease; and finally and, perhaps, most important,
' 7. Whether the asset is increasing or decreasing in value.
A helpful analysis is presented in
Continental :
Step 1. The assets must be the property of the estate under § 541 of the Bankruptcy Code, and there must be some articulated business justification for the sale, use or lease of the property. The Court cited
Lionel, supra,
and the factors to be weighed heretofore mentioned. If the above requiremеnts are met, the Court proceeds to Step 2. Section 363(d) authorizes the transaction under § 363(b) “only to the extent not inconsistent with any relief granted under § 362(c), (d), (e) or (f)....” Section 363(e) provides that on the request of an entity having an interest in the property to be used, “the Court, with or without a hearing shall prohibit or condition such use ... as is necessary to provide adequate protection of such interest.” Step 3 deals with a Chapter 11 Plan. A Chapter 11 Plan may not be circumvented by establishing its terms
sub rosa.
Thus, where a transaction specifies terms for adopting a reorganization plan, the Debtor may not bypass 11 U.S.C. § 1125, disclosure requirements; § 1126, voting requirements; § 1129(a)(7) “best interest of the creditors test;” or § 1129(b)(2)(B) absolute priority requirements.
Id.
at 1226.
See also Pension Benefit Guaranty Corporation vs. Braniff Airways, Inc. (In re Braniff Airways, Inc.),
The Continental Court found that the assets in question were property of the estate, that there was sufficient business justification for their proposed use and that no adequate protection was requested under § 363(e). The Court recognized that fundamental reorganization “piecemeal” under § 363 made creditors’ rights under the Code’s protections meaningless. Id. at 1227. On the other hand, the Court stated that § 363(b) transactions postpetition and preconfirmation may be required by business cоnsiderations. Therefore, the Court held that where an objector to a § 363(b) transaction claims denial of the protection of a plan, disclosure statement and balloting, because approval is being sought pursuant to § 363(b) instead of as part of a reorganization plan, the Court is to consider the matter and if there has been such a denial, fashion appropriate protective mea *632 sures. Therefore, the Court vacated the District Court’s decision and remanded. 3
Conclusions
These cases were filed on October 21,1986. There has scarcely been time for the formation of creditors committees and fоr a thorough evaluation by those committees of the assets and financial circumstances of each of the eight Debtors involved. The proceedings have been administratively consolidated under the heading of the parent, Crutcher.
The Court is of the opinion that these consolidated cases аre being operated by the Debtors in close harmony with the Lenders for the benefit of the parent corporation (and presumably for the benefit of the principals of the parent corporation, who may have personal guarantees to the Lenders) and without regard for the creditors of the various subsidiaries. It also appears that the parent and the Lenders are attempting to rush this case so that there will not be appropriate time for an examination of each of the subsidiaries. A number of factors have led the Court to this conclusion, including:
1. These cases were filed on October 21, 1986 and the stock in one of the subsidiaries has already been sold.
2. The hearing on the sale of all of the assets of the two subsidiaries under consideration was held on December 15, 1986, less than two months after the case was filed. When the Court announced at the conclusion of the hearing that the Court wished to review thе files and cases which had been cited by the parties, the attorney for the Debtors pointed out that the contracts involved contained a provision that if the sale were not closed by December 15, 1986 (the very day of the hearing!) that the purchasers would have an opportunity to withdraw. Undoubtedly, the attorney for the Debtors had input into the drawing of those contracts and knows that the Bankruptcy Courts need time to appropriately consider the matters which are presented to them. The placing of the short deadline in this contract only indicates an attempt to limit the review of the contract by the Cоurt and the creditors.
3. The testimony presented at this hearing was by the Presidents of the two subsidiaries who are also the purchasers of the assets of those subsidiaries. This is obviously an insider transaction, which the Court must review with great care. The two officers of the parent who testified spent their time talking about the financiаl problems of the parent, and very little about the condition of these two subsidiaries.
4. At a subsequent hearing to extend the postpetition financing which had been previously approved in the consolidated proceedings, the attorney for the Lenders stated that if this Court denied the sale of the assets of thе two subsidiaries, that the Lenders would immediately withdraw financing with respect to those subsidiaries. This blatant attempt to place pressure on the Court only serves to raise additional suspicions concerning the “cosy” relationship between the parent and the Lenders and to suggest that this case is being orchestrаted not for the benefit of the unsecured creditors in these cases, but rather for the benefit of the Lenders and the principals of the parent corporation.
At the hearing, testimony was elicited that indicated both of these subsidiaries were operating at a positive cash flow. When the prospective purchasers were questioned by the Court as to why they felt they could operate these businesses more *633 profitably than the Debtor, they both listed among their reasons the fact that payments would not have to be made to the parent corporation. It thus appears that the principal benefit of these sales would be the savings in payments to the parent. Such savings would also be available if the subsidiary were separately reorganized. These sales would benefit only the Lenders and, indirectly, the parent. On the other hand, the sale of these assets effectively prevents reorganization of thе subsidiaries and destroys any possibility whatsoever of payments to the unsecured creditors of the subsidiaries.
No evidence was presented at the hearing on the value of the assets being sold, except for the self-serving statements of the purchasers. It may well be that the sales proposed represеnt the best possible price for the assets involved, but without other testimony, the Court is not in a position to approve the sales.
There was no evidence of any business justification for these sales from the standpoint of the parent. In fact, the party who negotiated these sales on behalf of the pаrent was not called as a witness and did not appear to be present at the hearing.
A part of the justification for the sales was that each subsidiary had guaranteed obligations of the parent to the Lenders and had pledged its assets to secure those obligations. The question was properly raisеd by Schroder that the propriety of these guarantees had not been properly examined, and there is a possibility that they were given without consideration. It is the conclusion of the Court that the administrative consolidation of these cases is not working to the benefit of the individual Debtors, and that steps should bе taken to preserve the assets and business of the individual Debtors rather than concentrating on preserving the parent. The testimony of the officers of the parent was that there was no possibility of reorganization of the consolidated Debtors.
This Court relies heavily on the review and information suppliеd by a creditors committee. It appears that a creditors committee has been appointed in the consolidated case, but no appearance was made at the hearing by the creditors committee. It is possible that the committee had not had time to organize. The Court is disapрointed that it was not furnished with the views of the creditors committee at this hearing.
The Debtors raised the issue of Schroder’s standing to object to the sale. The Debtors point out that Schroder is the Indenture Trustee for the debentures issued by only one of the Debtors. These proceedings have been consolidated аnd it is the feeling of the Court that Schroder was a proper party to raise these issues. Additionally, the Court’s file does not reflect a Certificate of Service by the Debtors showing the parties to whom notice of this hearing was given. It is quite possible that neither the Creditors Committee nor the creditors of either Tetоn or Colorado were given notice of the hearing. Under these circumstances, Schroder performed a valuable service by bringing these matters to the attention of the Court. Significantly, the Memorandum of Law submitted by the Lenders in support of the Debtors’ Motion was sent to only 13 parties. If those were the only parties who received notice of the hearing on the Debtors’ Motion, then the notice was inadequate.
For the foregoing reasons, the Court finds that the Debtors’ Motion should be denied.
Order accordingly. 4
Notes
. "(b)(1) The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of thе estate.” 11 U.S.C. § 363(b)(1). A Debtor-in-Possession in a Chapter 11 proceeding has the powers of a Trustee, 11 U.S.C. § 1107.
. Citibank, N.A., First City National Bank of Houston, the Chase Manhattan Bank (National Association), the Toronto-Dominion Bank Atlanta Agency, Texas Commerce Bank National Association, MBank Dallas National Association (as assignee of MBank Houston National Association) and the Prudential Insurance Company of America under the Amended and Restated Term Loan Agreement, dated as of May 29, 1985. The purchaser of each subsidiary stated that he had arranged to finance his purchase from an undisclosed source.
. The "property of the estate” involved was the cash which would be used to make the lease payments. It has been suggested that this novel use of § 363(b) (see Continental supra at 1225) could better have been handled as an authorization to obtain credit under 11 U.S.C. § 364(b). Pronske, Fifth Circuit Survey of Bankruptcy Law to be published by the Texas Tech Law Review in January, 1987.
. This Memorandum shall constitute Findings of Fact and Conclusions of Law pursuant to Bankruptcy Rule 7052 which is made applicable to Contested Matters by Bankruptcy Rule 9014.