US v. Villalobos (In re Villalobos)

Citation:
BAP No. NV-13-1179-JuKiTa; Bk Nos. 10-52248, 10-52249, 10-52251, 10-52252; (not appropriate for publication)
Tag(s):
Ruling:
Though the Ninth Circuit BAP found that a confirmed chapter 11 plan had been substantially consummated, the BAP nevertheless reversed the Bankruptcy Court's confirmation order.
Procedural context:
The Bankruptcy Court confirmed a jointly-administered Debtors’ liquidation plan (“Plan”) over the objection of the IRS. The Court overruled the IRS’ objections that the Plan did not satisfy §1129(a)(9)(C), (11) and (15), among other objections. The IRS filed an appeal. The BAP determined that there was insufficient evidence in the record to support the Court’s finding that the Debtors would be able to pay the IRS’ claim in full within the five-year period prescribed by §1129(a)(9)(C), and concluded that the Plan was not feasible as required under §1129(a)(11). Further, the BAP determined that the Plan did not satisfy §1129(a)(15). Accordingly, the BAP reversed the Bankruptcy Court’s order confirming the Plan.
Facts:
One of the Debtors, an individual (Villalobos), filed a chapter 11 petition on behalf of himself and three related business entities. Villalobos scheduled assets with a combined value of $63 million, secured debt of $7.2 million and unsecured debt of $6.5 million. The IRS filed an unsecured priority tax claim of approximately $2.65 million and an unsecured general tax claim of $112,392. The Debtors filed a liquidation plan (“Plan”) that included the substantive consolidation of the estates, an assignment of certain consolidated assets and liabilities of the estates to a liquidation trust, from which all creditor claims would be paid in full. The Plan did not commit Villalobos’ future income to fund the Plan. In addressing the IRS’ priority claim, the Plan required quarterly payments of $25,000 from the liquidating trust with a balloon payment within 5 years after the Effective Date. If the trust did not have sufficient funds to pay the balloon payment, the Plan required Villalobos to contribute his 50% retained interest in pending litigation. The IRS filed objections to the Plan, asserting that (i) the IRS would not receive full payment on its priority claim as required under §1129(a)(9)(C), and (ii) therefore the Plan was not feasible under §1129(a)(11), and (iii) the Plan did not satisfy §1129(a)(15) since Villalobos did not commit future income to fund the Plan. Based on declarations of counsel for the creditors’ committee and the proposed liquidation trustee, the Bankruptcy Court found the Plan feasible as required under §1129(a)(9)(C) and (11). The Bankruptcy Court further found that Villalobos did not have any disposable income. The Bankruptcy Court confirmed the Plan. The IRS filed an appeal and sought a stay from the Bankruptcy Court and the BAP, both of which requests were denied. On appeal, the BAP determined that the Plan had been substantially consummated, with certain properties being transferred and funds disbursed to creditors by the liquidating trust. Considering whether the appeal was equitably moot, the BAP analyzed this issue under the Ninth Circuit’s 4-part “comprehensive test” and under §1127(e). The BAP determined that it could afford appropriate relief without affecting prior actions of the liquidating trust, and thus the appeal was not moot. Addressing the merits of the appeal, the BAP found the supporting declarations of committee counsel and the liquidating trust’s trustee to be unsupported by any other evidence, such as appraisals of the real properties, independent analysis of litigation recoveries, or collectability of receivables. The BAP ruled that the Bankruptcy Court’s account of the evidence on feasibility and whether the Debtors could pay the IRS within the 5-year period under §1129(a)(9)(C) “was not plausible in light of the record viewed in its entirety.” Further, based on Villalobos’ declarations filed in the case, the BAP found that the Debtor indeed had “disposable income” derived from post-petition proceeds distributed from retirement funds and his defined benefit plan. Thus, the Bankruptcy Court’s finding that §1129(a)(15) was satisfied was clear error. Accordingly, the BAP reversed the confirmation order and remanded the case back to the Bankruptcy Court for further proceedings.
Judge(s):
JURY, KIRSCHER and TAYLOR, Bankruptcy Judges

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