In re Farwest Pump Company

Findings of fact to show satisfaction of the best interests test ordinarily should be numerical comparisons, Ninth Circuit BAP Says

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Case Type:
Case Status:
Affirmed in part and Reversed in part
BAP No. AZ-19-1274-LBT (9th Circuit, Sep 18,2020) Not Published
While the bankruptcy court did not abuse its discretion in denying confirmation of the debtor’s plan, the bankruptcy court's failure to make specific findings that the creditors' committee plan met the best interest of creditors test (11 U.S.C. § 1129(a)(7)) was erroneous and required the case be remanded for further proceedings.
Procedural context:
The chapter 11 debtor appealed the bankruptcy court’s order confirming the plan of liquidation proposed by appellee Official Committee of Unsecured Creditors and denying confirmation of Debtor’s plan of reorganization.
Chapter 11 debtor Farwest Pump Company is owned by Clark Vaught and his spouse, Channa Crews-Vaught. Ms. Crews-Vaught is debtor’s president, and Mr. Vaught is the manager; they are debtor’s only employees. Debtor’s original business was well drilling and pump installation. In 2013, the Vaughts discovered that debtor’s vice president, Joel Rodriguez, was embezzling money from the debtor. Because of the criminal investigation that followed, Debtor fell behind on its accounting and had to spend significant time, pre- and post-petition, reconciling its books. Debtor filed a civil lawsuit against Mr. Rodriguez and others and pursued crime insurance claims. Before the bankruptcy filing, the debtor could not obtain liability insurance necessary to continue to operate as a well drilling contractor. Further, a judgment in the approximate amount of $900,000 was entered against the debtor in California Superior Court. Debtor cancelled several of its licenses, and began consulting for well drilling, pump design, and electrical design and leasing equipment to a related entity, Vaught Equipment. Vaught Equipment is owned by the Vaughts and Ms. Crews-Vaught’s daughter’s trust. Vaught Equipment has no employees. Vaught Equipment’s only business is holding and leasing equipment from the debtor, and subleasing that equipment to related entities Reliant Well Drilling and Pump Corporation (“Reliant”) and FARCO Perforaciones y Bombeo, S.A. De C.V. (“FARCO”). Reliant is a well drilling and pump company. Reliant is owned by Mr. Vaught. Although it was formed in 2013, Reliant did not do business until April 2017, performing the work that the debtor used to perform, using the debtor’s equipment. FARCO is a Mexican entity formed in 2010 and that is owned by the Vaughts. FARCO does drilling, pump installation, test pumping, and related work. FARCO has acquired and leased equipment from Debtor, and FARCO leases equipment from Vaught Equipment. Under the debtor’s plan the Vaughts would continue to own and manage Debtor in exchange for an equity contribution, and they would be compensated for rendering professional services to Debtor post-confirmation. The debtor’s plan provides for the payment of priority and secured claims in full over time. General unsecured creditors would be paid a pro rata share of annual distributions over six years and would recover approximately 40.75 on their allowed claims. The debtor proposes to fund its plan through the Vaughts’ new value contribution of $140,000, cash flow from continued operations as a leasing and consulting business, asset sales, and litigation proceeds One impaired class voted for the debtor’s plan, the “Leonard Class,” the allowed claim of attorney David Leonard, who formerly represented the debtor in connection with its crime insurance claims and whose claim was partially secured. The Committee’s plan is a liquidating plan under which all estate property would vest in a liquidating plan trust to be administered by the Committee’s counsel, who would serve as liquidating plan trustee. The Committee’s plan would be funded through the liquidation of estate property, the collection of accounts receivable, the collection of lease payments, and the pursuit of other litigation claims. The Committee’s plan includes a purchase option that would allow the Vaughts to purchase the liquidating trust’s interest in all estate property. All voting classes except allowed priority tax claims and the Leonard Class voted to accept the Committee’s plan. The Committee modified its plan to treat the Leonard Class as the debtor’s plan provided. The Committee objected to the debtor’s plan on numerous grounds, including that the proposed new value contribution was inadequate and failed to satisfy the absolute priority rule in § 1129(b).
LAFFERTY, BRAND, and TAYLOR, Bankruptcy Judges

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