EPR Marine Welding Construction Services, Inc. v. Naval Services of Puerto Rico, Inc.

EPR Marine Welding Construction Services, Inc. v. Naval Services of Puerto Rico, Inc., BAP No. PR 13-055 (1st Cir. B.A.P. July 31, 2014
The Bankruptcy Appellate Panel for the First Circuit (the “B.A.P.”) reversed the Bankruptcy Court’s dismissal of the Chapter 11 case of debtor, EPR Marine Welding Construction Services, Inc. (“EPR”) and remanded the matter back to the Bankruptcy Court. The Bankruptcy Court entered dismissal pursuant to Section 1112(b) on an alleged unopposed motion to dismiss filed by Naval Services of Puerto Rico, Inc. (“Naval Services”), who claimed that post-confirmation dismissal was appropriate as EPR materially defaulted with respect to the confirmed plan as 8 years have elapsed since confirmation and EPR had not distributed any payment to unsecured creditors as proposed under the Plan. The BAP determined that dismissal under Section 1112(b)(1) is a two step analysis: (1) the court must determine whether cause exists to dismiss the chapter 11 proceeding; and (2) if cause exists, the court must consider which option (dismissal or conversion) is in the best interest of the creditors and the estate. In this instance, the BAP determined that dismissal was clearly erroneous. The Plan, as confirmed, provided for non-contingent payments of 10% to general unsecured creditors to be paid from the sale of the assets, and contingent payments to be made based upon the results of certain litigations. Based upon the record, and the unopposed motions and schedules filed by EPR with respect to its payments under the plan and its motion for a final decree, EPR informed the Court it made $258,965.97 in payments, leaving a balance of $71,528.26 to be paid. The BAP found that the plan was substantially consummated, no parties objected to the motion for a final decree and a year later, EPR informed the court that it completed the remaining $71,528.26 in payments. According to the BAP, EPR had made all of the non-contingent payments under the Plan. The remainder of the payments were contingent payments based upon events that had not yet occurred. The BAP determined that the failure to make these contingent plan payments was not a material default as EPR was actively engaged in the state court actions, made numerous requests to have additional funds turned over to the Bankruptcy Court for the estate and brought in an additional $50,000 into the estate based upon a settlement of part of the state court action. The BAP ruled that EPR’s failure to make any contingent payments to unsecured creditors does not constitute default under the plan, let alone material default for which cause would exist to dismiss or convert.
Procedural context:
EPR was a chapter 11 debtor who listed Naval Services as an unsecured creditor with a disputed claim of $1.00. Naval Services did not file a proof of claim until after the Plan was already confirmed by the Bankruptcy Court. EPR’s plan called for 2 phases of payment to unsecured creditors: (1) an initial 10% payment and (2) subsequent contingent payments for the remaining 90% based upon recovery in the state court action with Naval Services. Naval Services did not file any objection to EPR’s Plan. EPR moved for a final decree following substantial consummation of its plan, to which no objections were filed and were allowed by the Court. Years later, EPR moved to reopen the case to administer assets and approve a settlement with a co-defendant for $50,000. Naval Services objected to the settlement and eventually objected to EPR’s right to the funds. The Bankruptcy Court denied Naval Services objection because it was not a “creditor” as it filed its proof of claim after confirmation. Following approval of the settlement, a dispute arose between the Bankruptcy Court and the state court as to who should hold the $62,000 payment made to the state court as a result of the litigation as monies owed to EPR. Thereafter, Naval Services filed a motion to dismiss the bankruptcy case pursuant to Section 1112(b)(4) on the basis that there was a material default with respect to the confirmed plan. The Bankruptcy Court granted the motion to dismiss on the grounds that no opposition had been filed, though EPR claimed it had an additional 3 days to file its opposition and dismissal was premature. EPR filed a motion to vacate, which Naval Services did not respond to. EPR also filed a request for entry of findings of fact, motion for extension of time to respond and its opposition to the motion to dismiss. The Court without hearing denied reconsideration and never ruled on the remaining motions filed by EPR. EPR then timely appealed from the order dismissing the case and the order denying reconsideration.
EPR was a party to a state court litigation commenced by Naval Services. Prior to EPR’s filing for bankruptcy, one of the defendants in the state court action deposited $62,000 with the Court as payment of the balance owed under its contract with EPR. Naval Services was listed as an unsecured creditor with a $1.00 disputed claim. Naval Services did not file a timely proof of claim. Post-confirmation, it filed a claim in the amount of $1,270,148.00.
Hillman, Hoffman, Finkle

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