Case 20-14451-nmc Doc 198 Entered 11/06/20 15:17:19 Page 1 of 17

1 Lindsay P.S. Kolba, Assistant United States Trustee E-Filed: November 6, 2020
State Bar No. GA 541621
2 Edward M. McDonald Jr., Trial Attorney
3 State Bar No. NY 4126009
edward.m.mcdonald@usdoj.gov
4 UNITED STATES DEPARTMENT OF JUSTICE
Office of the United States Trustee
5 300 Las Vegas Boulevard, So., Ste. 4300, Las Vegas, NV 89101
6 Tel.: (702) 388-6600, Ext. 234
Fax: (702) 388-6658
7 Attorneys for the U.S. Trustee for Region 17
TRACY HOPE DAVIS
8
UNITED STATES BANKRUPTCY COURT
9
DISTRICT OF NEVADA
10
In re Case No: BK-S-20-14451-NMC
11 Chapter 11
LAS VEGAS MONORAIL COMPANY,
12 Date: November 10, 2020
Debtor. Time: 9:30 a.m.
13 Location: Foley Courtroom 3/Remote
14
THE UNITED STATES TRUSTEE’S OBJECTION AND RESRVATION OF RIGHTS TO
15 DEBTOR’S MOTION PURSUANT TO SECTIONS 105(a), 363, 365, 503(b), AND 507(a)(2)
OF THE BANKRUPTCY CODE: (I) APPROVING BIDDING PROCEDURES FOR THE
16 SALE OF SUBSTANTIALLY ALL ASSETS OF DEBTOR, SCHEDULING AN AUCTION
AND SALE HEARING, AND APPROVING THE FORM AND MANNER OF NOTICE
17 THEREOF; (II) APPROVING THE SALE OF ASSETS FREE AND CLEAR OF LIENS,
CLAIMS, INTERESTS, AND ENCUMBRANCES, (III) APPROVING THE ASSUMPTION
18 AND ASSIGNMENT OF CERTAIN RELATED EXECUTORY CONTRACTS; (IV)
WAIVING THE REQUIREMENTS OF BANKRUPTCY RULES 6004(h) AND 6006(d),
19 AND (V) GRANTING RELATED RELIEF

20 To the Honorable NATALIE M. COX, United States Bankruptcy Judge:

21 Tracy Hope Davis, United States Trustee for Region 17 (the “United States Trustee”),
22
by and through her undersigned counsel, files this objection (the “Objection”) and reservation of
23
rights to the Debtor’s Motion Pursuant to Sections 105(a), 363, 365, 503(b), and 507(a)(2) of the
24
25 Bankruptcy Code: (I) Approving Bidding Procedures for the Sale of Substantially all Assets of

26 Debtor, Scheduling an Auction and Sale Hearing, and Approving the Form and Manner of Notice

27 Thereof; (II) Approving the Sale of Assets Free and Clear of Liens, Claims, Interests, and
28
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1 Encumbrances, (III) Approving the Assumption and Assignment of Certain Related Executory
2 Contracts; (IV) Waiving the Requirements of Bankruptcy Rules 6004(h) and 6006(d), and (V)
3
Granting Related Relief [ECF No. 12] (“Sale Motion”) filed by Las Vegas Monorail Company
4
(“Debtor”). 1
5
6 The Objection is supported by the following memorandum of points and authorities and

7 any argument the Court may permit on the Omnibus Objection.

8 I. INTRODUCTION
9
1. The United States Trustee objects to the Motion because it constitutes a sub rosa
10
plan that essentially reorganizes this case outside of the protections and requirements of the plan
11
12 confirmation process. The proposed sale will generate substantial priority claims for quarterly fees

13 which must be paid to comply with the plan confirmation requirements, but the terms of the
14 proposed sale do not appear to leave the Debtor with liquid assets sufficient to pay the quarterly
15
fee obligations and to satisfy the requirements of Section 1129(a)(12). The United States Trustee
16
reserves her right to object to any amended Sale Motion, and to take any other appropriate action.
17
18
19
20
21
22
1
The United States Trustee requests that the Court take judicial notice of the pleadings and
23 documents filed in the Debtors’ cases, pursuant to Federal Rule of Bankruptcy Procedure 9017 and Federal
Rule of Evidence 201. To the extent that the objection contains factual assertions predicated upon
24
statements made by Debtor, any of its current or former affiliates, agents, attorneys, professionals, officers,
25 directors or employees, the United States Trustee submits that such factual assertions are supported by
admissible evidence in the form of admissions of a party opponent under Federal Rule of Bankruptcy
26 Procedure 9017 and Federal Rule of Evidence 801(d)(2).

27 Unless otherwise noted: “Section” refers to a section of title 11 of the United States Code, 11 U.S.C. §§
101-1532 (as amended, the “Bankruptcy Code”); “FRBP” refers to the Federal Rules of Bankruptcy
28 Procedure; and, “ECF No.” refers to the bankruptcy docket for case number 20-14451.
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1 II. MEMORANDUM OF POINTS AND AUTHORITIES

2 A. Background Facts and Procedural Posture.
3
2. On September 7, 2020, the Debtor filed a voluntary petition under Chapter 11 of the
4
Bankruptcy Code commencing this case. [See ECF No 1].
5
6 3. Debtor filed schedules and a statement of financial affairs (“SOFA”) on September

7 21, 2020, and subsequently amended them several times. [See ECF No. 82, 122 & 154].
8 4. Debtor’s schedules originally listed $182,761,531.72 in current value for the
9
Debtor’s “[o]ther machinery, fixtures, and equipment,” [see ECF No. 82, pp. 7-9 of 59; item 50;
10
see also ECF No. 122, pp. 7-9 of 57; item 50], although the Debtor has changed this to net book
11
12 value as of Debtor’s amended schedules filed on October 19, 2020 [see ECF No. 154, pp. 7-9 of

13 48; item 50].

14 5. The Section 341 meeting was held and concluded. [See ECF No. 26 & 132].
15
6. On September 17, 2020, the United States Trustee appointed an official committee
16
of unsecured creditors (“OCUC”) in this case. [See ECF No. 61].
17
18 7. On September 18, 2020, at the request of the Court, the Debtor filed a budget that

19 showed that Debtor’s cash was expected to be $1,022,764 at the end of September 2020, would be
20 $755,387 at the end of October 2020, and would be $479,551 at the end of November 2020,
21
however the end of November 2020 amount would decline to $35,551 after certain Bankruptcy
22
Professional and Court Costs were paid. [See ECF No. 67-1 p. 2 of 2]. The United States Trustee
23
24 fees set forth in this budget are only $10,000. [Id.]

25 8. On October 20, 2020, Debtor filed its monthly operating report (“MOR”) for
26 September 2020, which indicates that at the end of September 2020 Debtor had a cash balance of
27
$893,783 (instead of the anticipated $1,022,764) and disbursements of $334,926. [See ECF No.
28
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1 158, p. 1 of 101; line 3e; compare ECF No. 67-1 p. 2 of 2; see also ECF No. 158, p. 1 of 101; line
2 3b].
3
9. Based on this disbursement amount, the United States Trustee assessed quarterly
4
fees of $4,875 for the third quarter of 2020, of which the Debtor paid $325, leaving an unpaid
5
6 balance of $4,550. [See Declaration of J. Michelle Forrest (“Forrest Declaration”)].

7 10. On September 7, 2020, the Debtor filed the Sale Motion, which seeks to sell the
8 majority of Debtor’s assets. [See ECF No. 12]. The Court granted the Bid Procedures portion of
9
the Sale Motion and set an objection deadline to the sale of November 6, 2020 at 5:00 p.m. [See
10
ECF No. 98, p. 10 of 12; ¶ 24].
11
12 11. The United States Trustee objected to the Bid Procedures and Sale Motion as part

13 of its Omnibus Objection to the Debtor’s first day motions and the Debtor filed an omnibus Reply
14 in response. [See ECF No. 35 & 181].
15
12. On October 23, 2020, the Debtor filed a status report that stated that no party had
16
successfully overbid the Stalking Horse and that the Stalking Horse bid would be considered at the
17
18 Sale Hearing on November 20, 2020. [See ECF No. 163].

19 The Proposed Sale

20 13. The Stalking Horse Bidder is the Las Vegas Convention and Visitors Authority
21
(“LVCVA” or “Buyer”).
22
14. Per the proposed sale, LVCVA will purchase the monorail, its equipment, certain
23
24 Assumed Contracts, the Debtor’s name, certain Monorail rider information, warranties, computer

25 hardware, insurance policies (other than the D&O policy), a franchise agreement, a Removal Cost
26 Fund, the County Support Amount, and easements. [See ECF No. 12, pp. 14-16 of 32; ¶(v)(d)].
27
28
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1 15. LVCVA will not purchase whatever cash the Debtor has on hand or in non-
2 restricted accounts, tax claims, D&O insurance, lease interests, obligations related to the Robert
3
Manzo/LVM Project contract, and avoidance actions. [See ECF No. 12, pp. 16-17 of 32; ¶(v)(e)].
4
16. LVCVA will assume and pay the non-insider claims listed on the original Schedule
5
6 E/F filed by the Debtor [compare ECF No. 82, pp. 19-39 of 59 with ECF No. 13-1, pp. 49-52 of

7 186], liabilities incurred for Assumed Contracts that occur after the sale, cure amounts for
8 Assumed Contracts that are listed as $ 55,543.70 [see ECF No. 13-1, p. 53 of 186], and post-sale
9
liabilities related to the purchased assets [see ECF No. 13-1, p. 8 of 186; Stalking Horse
10
Agreement section 3.1(c)].
11
12 17. Debtor will retain liabilities for creditors not listed on Stalking Horse Agreement

13 Schedule 3.1(a), liabilities related to Excluded Contracts, bond obligations, WARN Act
14 obligations, obligations related to employees and independent contractors, certain pre-sale
15
obligations and unpaid taxes, sales and use taxes, liabilities related to government and/or
16
environmental actions, and other liabilities not explicitly assumed by LVCVA. [See ECF No. 13-
17
18 1, pp. 8-9 of 186; Stalking Horse Agreement section 3.2].

19 18. The Purchase Price is:

20 [T]he sum of Twenty-Four Million One Hundred and Forty-Six Thousand Ninety-
21 Four Dollars ($24,146,094.00) (“Purchase Price”) as consideration for the Sale
Assets. This includes the non-refundable earnest money deposit of One Million
22 Nine Hundred Forty-Six Thousand Seven Hundred Thirty Dollars ($1,946,730.00)
(the “Stalking Horse Deposit”), payment of the redemption price of Twenty Million
23 Two Hundred and Seven Thousand and Fifty-Seven Dollars ($20,207,057.00) for
24 the Conduit Loan, One Hundred Fifty Thousand Dollars ($150,000.00) for the
EIDL Loan and One Million Eight Hundred Forty-Two Thousand Three Hundred
25 Seven Dollars ($1,842,307.00) of assumed trade and contractual liabilities of
Debtor (the “Assumed Liabilities”). In addition, the Stalking Horse Bidder shall
26 pay all Cure Amounts for Assumed Executory Contracts. See Stalking Horse
27 Agreement, §§ 4.2 and 5.2.

28
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1 [See ECF No. 12, p. 14 of 32; ¶ (v)(a) (emphasis added)].2

2 19. In addition, “[a]t the Closing, the Deposit shall be applied towards the Purchase
3
Price, and Buyer shall pay the Bondholder directly in immediately available funds to redeem the
4
Bonds and satisfy the Bond Obligations.” [See ECF No. 13-1, p. 10 of 186; ¶ (v)(c) (emphasis
5
6 added)].

7 20. As part of the proposed sale and the associated Redemption Agreement, the secured
8 bondholder is authorized to apply $2,500,000 of the funds held in the UMB Indenture Fund
9
Accounts and to withdraw up to $50,000 in attorney’s fees. The balance of the moneys held in the
10
trust fund accounts will then be released to the Debtor. [See ECF No. 12, p. 14 of 32; Stalking
11
12 Horse Agreement section 4.2(b)].

13 21. As of October 31, 2020, the funds in these UMB accounts total $2,581,732.82. [See
14 ECF No. 195, p. 1 of 4]. Accordingly, after the proposed withdrawals, assuming the entire amount
15
authorized for attorneys’ fees is withdrawn, the Debtor will receive $31,732.82. [See Forrest
16
Declaration].
17
18 22. The proposed sale must close by November 30, 2020. [See ECF No. 12, p. 18 of

19 32; ¶ (v)(x)].
20 23. At the closing of the proposed sale LVCVA “shall deliver, or cause to be delivered,
21
to Seller each and every payment, agreement, certificate, instrument and other document that is to
22
be executed, delivered and/or performed by Buyer pursuant hereto including the following (herein
23
24 referred to collectively as “Buyer’s Closing Deliverables”):

25 (a) payment of the Purchase Price;

26
27 2
The non-refundable earnest money deposit of $1,946,730.00 was apparently received by the
Debtor on September 2, 2020 and has been used to pay expenses such as part of the retainer of Debtor’s
28 counsel. [See, e.g., ECF No. 31, p. 4 of 19; ¶14].
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1 (b) the duly executed Bill(s) of Sale;

2 (c) the duly executed Assignment and Assumption Agreement(s); and
3
(d) the duly executed Intellectual Property Assignment Agreement.
4
[See ECF No. 13-1, p. 14 of 186; Stalking Horse Agreement section 6.3].
5
6 III. ARGUMENT

7 24. While the Sale Motion indicates that the secured creditors’ liens will simply attach
8 to the sale proceeds, the “Agreement to Alternate Redemption Price for 2019A and 2019B Bonds”
9
indicates that creditors will be paid millions of dollars upon the anticipated close of the Sale on
10
November 30, 2020. [See ECF No. 12, p. 26 of 32; lines 4-8; see also ECF No. 20-1, p. 3 of 6;
11
12 ¶2(a)].

13 25. In addition, the closing requirements of the sale involve satisfying the secured bond
14 debt through payments by LVCVA and payments from the UMB accounts, the payment of the
15
small business loan amount, and the payment of the assumed liabilities on the Stalking Horse
16
Agreement schedule 3.1(a), plus the payment of cure amounts for Assumed Contracts. [See ECF
17
18 No. 12, p. 19 of 32; ¶ (xii)(b)].

19 26. Leaving aside the Earnest Money Deposit, the proposed sale will involve the
20 payment on behalf of the Debtor of at least $24,804,907.70. [See Forrest Declaration].
21
27. After the transactions contemplated by the Sales Motion have been consummated,
22
Debtor will be left with few if any liquid assets.
23
24 28. Debtor argues that there will be no need for a Plan because the proposed sale will

25 essentially render a Plan unnecessary. [See ECF No. 181, p. 10 of 25; lines 20-22; see also ECF
26 No. 182, p. 3 of 7; ¶8].
27
28
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1 29. The proposed sale will retire all the scheduled secured debt and non-priority
2 unsecured debt and it will resolve the cure amounts for assumed contracts. [See ECF No. 12, pp.
3
13-19 of 32].
4
30. “[T]he general rule is that a distribution on pre-petition debt in a Chapter 11 case
5
6 should not take place except pursuant to a confirmed plan of reorganization, absent extraordinary

7 circumstances.” Rosenberg Real Estate Equity Fund III v. Air Beds, Inc. et al, (In re Air Beds,
8 Inc.), 92 B.R. 419, 422 (B.A.P. 9th Cir. 1988) (citations omitted). Chapter 11 provides only one
9
method of distributing estate assets and that is through a chapter 11 plan which has been filed with
10
the Court, sent out to creditors for voting purposes, tallying of the creditor votes, and ultimately
11
12 confirming the plan that adheres to the priority scheme set forth in Section 507.

13 31. The “Agreement to Alternate Redemption Price for 2019A and 2019B Bonds”
14 provides for the distribution of the proceeds of the sale of estate assets to certain secured claimants.
15
The proposed distribution is without the benefit of a plan being filed and the creditor protections
16
provided by confirmation pursuant to 11 U.S.C. §1129.
17
18 32. “The Code provides that it is up to creditors—and not the courts—to accept or

19 reject a reorganization plan.” Northwest Bank Worthington v. Ahlers, 485 U.S. 197, 207 (1988).
20 Even if a “Court…believes[s] that…unsecured creditors would be better off…” with the proposed
21
deal, that “determination is for the creditors to make in the manner specified by the Code.” Id.
22
And if this is true when a plan is proposed and creditors are afforded the procedural safeguards
23
24 attendant to plan confirmation and voting, it must be “doubly” true when creditors are denied

25 them. These safeguards include disclosure requirements (11 U.S.C. §1125); voting for or against a
26 plan (11 U.S.C. §1126); the best interests of creditors test (11 U.S.C. §1129(a)(7); and the absolute
27
priority rule (11 U.S.C. §1129(b)(2)(B)).
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1 33. The Sale Motion seeks approval of a series of transactions that will distribute the
2 proceeds of the sale of estate assets to certain creditors and will include the assumption of debt on
3
Schedule E/F, while skipping statutory fees with an administrative priority that have not been
4
chosen for favored treatment under the Sale Motion. 3
5
6 34. In Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), the Supreme Court

7 rejected a non-plan priority-skipping distribution of estate assets in a chapter 11 case that the three
8 lower courts had approved. Although Jevic presented the Supreme Court with an end- of-case,
9
“structured dismissal” scenario, the Supreme Court’s reasoning is not limited to either structured
10
dismissals or case-ending distributions. Rather, the Jevic reasoning applies whenever a bankruptcy
11
12 court is presented with distributions of estate assets in a chapter 11 case “that would be flatly

13 impermissible” even if they were proposed in a plan “because they violate priority without the
14 impaired creditors’ consent.” Id. at 985. 4
15
35. The Supreme Court’s Jevic decision was premised upon the bedrock principle that
16
“[t]he Code’s priority system constitutes a basic underpinning of business bankruptcy law,” which
17
18 is “fundamental to the Bankruptcy Code’s operation.” Jevic, 137 S. Ct. at 983, 984.

19 36. The statutory priorities are established by 11 U.S.C. § 507, which is made
20 applicable to chapter 11 cases by 11 U.S.C. § 103(a).
21
37. Thus, when analyzing a request to make non-plan priority-skipping distributions in
22
a chapter 11 case, this Court must examine the Bankruptcy Code for “some affirmative
23
24 3
According to the docket, the deadline to file claims in this case is January 6, 2021. As a result, it
25 is not possible to know whether the proposed distributions will prejudice other creditors or cause their
claims to be paid outside the priority scheme of the Bankruptcy Code.
26
4
Not only did the Court in Jevic cite Ahlers with approval, Jevic, 137 S. Ct. at 987, it reiterated the
27 importance of the Code’s procedural safeguards. Id. at 986 (explaining distributions looked like transactions
disallowed by lower courts because they “circumvent the Code’s procedural safeguards”).
28
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1 indication of intent [that] Congress actually meant to make [the proposed disbursement] a
2 backdoor means to” circumvent the statutory priority system established by section 507. Id. at 984.
3
“The importance of the priority system leads us to expect more than simple statutory silence if, and
4
when, Congress were to intend a major departure.” Id.5
5
6 38. No Bankruptcy Code provision provides for the priority-skipping distribution

7 proposed in the Sale Motion. As a result, it is not allowed.

8 39. Although the Supreme Court acknowledged in Jevic that some courts have
9
approved interim, as opposed to final, distributions outside of the usual priority such as “first day”
10
wage orders, “critical vendor” orders, and “roll-ups,” it noted that “these courts have usually found
11
12 that the distributions at issue would enable a successful reorganization and make even the

13 disfavored creditors better off.” Id. at 985. Such is not the case here – no “reorganization” will be
14 possible once the Debtors’ assets have been sold and once the proceeds of the sale have been
15
disbursed.
16
40. In addition, the Supreme Court held in Jevic that even “critical vendor” orders and
17
18 similar “violation[s] of ordinary priority rules” must have “a[ ] significant offsetting bankruptcy-

19 related justification.” Id. at 986. No significant offsetting bankruptcy-related justification is

20 suggested by the Sale Motion.
21
22
23
5
The United States Supreme Court left unresolved whether structured dismissals that do not violate
24
priority are permissible. Czyewski v. Jevic Holding Corp., 137 S. Ct. 973, 985 (2017)(“We express no view
25 about the legality of structured dismissals in general.”) But it did acknowledge that final distributions of
estate assets “normally take place through a Chapter 7 liquidation or a Chapter 11 plan….” Id. at 983.
26 Because the transactions contemplated here will undoubtedly result in the inability of the Debtor to pay
priority claims for quarterly fees, this unresolved issue need not be resolved here. The sales scheme and the
27 proposed distributions suffer from the same infirmity found by the Jevic court to violate the Bankruptcy
Code.
28
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1 41. Indeed, the distribution proposed by the Sale Motion is more comparable to the
2 examples of “proposed transactions that lower courts have refused to allow on the grounds that
3
they circumvent the Code’s procedural safeguards” to which the Supreme Court referred in Jevic
4
with disfavor. Id. The Sale Motion must be similarly denied because it is nothing but an attempt to
5
6 circumvent both the Bankruptcy Code’s priority distribution system and its procedural safeguards,

7 which protect creditors from exactly the kind of treatment the Sale Motion proposes for disfavored
8 priority claimant.
9
42. In reiterating the importance of complying with chapter 11’s procedural safeguards,
10
Jevic is entirely consistent with the Supreme Court’s long history of protecting the substantive and
11
12 procedural rights of creditors, not courts, to determine whether to accept a proposal that does not

13 follow the priorities of distribution. Cf. Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 207
14 (1988) (“the Code provides that it is up to the creditors – and not the courts –to accept or reject a
15
reorganization plan which fails to . . . honor the absolute priority rule”). Even if a “Court . . .
16
believe[s] that petitioners or other unsecured creditors would be better off” with the proposed deal,
17
18 that “determination is for the creditors to make in the manner specified by the Code.” Id.

19 43. Further, 11 U.S.C. § 105(a) does not authorize the approval of a non-plan priority-
20 skipping distribution, as this Court cannot “alter the balance struck by the statute.” Id. at 987
21
(quoting Law v. Siegel, 134 S. Ct. 1188, 1198 (2014)).
22
44. The Supreme Court in Jevic also rejected the idea that bankruptcy courts can
23
24 disregard the statutory priority system in “rare cases” in which they find “sufficient reasons.”

25 Jevic, 137 S. Ct. at 986. The Supreme Court determined that, because “it is difficult to give precise
26 content to the concept ‘sufficient reasons,’” the exception would likely swallow the rule, and every
27
case would be presented to the bankruptcy court as the “rare case.” Id. The Supreme Court further
28
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1 found the consequences of accepting a “rare case” exception to be “potentially serious,” including:
2 (i) “departure from the protections Congress granted particular classes of creditors”; (ii) “changes
3
in bargaining power of different classes of creditors even in bankruptcies that do not end in
4
structured dismissals”; and (iii) “risks of collusion, i.e., senior secured creditors and general
5
6 unsecured creditors teaming up to squeeze out priority unsecured creditors.” Id.

7 45. All of the evils identified by the Supreme Court are present here. The Sale Motion
8 departs from the Bankruptcy Code’s creditor protections, it changes the bargaining power of
9
creditors left out of the money even if this case does not end in structured dismissal, and it evinces
10
collusion or a determination by the debtor and others to “squeeze out” the United States as the
11
12 holder of a statutory claim with administrative priority.

13 46. At best, the Supreme Court perhaps left room for early-in-the-case distributions
14 outside of priority under the “doctrine of necessity.” But the Debtor does not and cannot argue that
15
the distributions proposed in the Sale Motion could satisfy such a test. The proposed payments are
16
not to critical vendors, taxing authorities, or rank-and-file employees.
17
18 47. In light of the foregoing, even if the Sale Motion is not viewed as proposing an end-

19 of-case distribution, under the Jevic reasoning the Sale Motion must be denied because it proposes
20 a non-plan priority-skipping distribution in circumvention of the Bankruptcy Code’s priority
21
system and procedural safeguards, without any offsetting bankruptcy-related justification.
22
48. Even before Jevic was decided, it was well-established that a debtor “should not be
23
24 able to short circuit the requirements of Chapter 11 for confirmation of a reorganization plan by

25 establishing the terms of the plan sub rosa in connection with a sale of assets.” In re Braniff
26 Airways, Inc., 700 F.2d 935, 940 (5th Cir. 1983). This is because “if a debtor were allowed to
27
reorganize the estate in some fundamental fashion pursuant to §363(b), creditors’ rights under, for
28
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1 example, 11 U.S.C. §§ 1125, 1126, 1129(a)(7) and 1129(b)(2) might become meaningless.” In re
2 Cont’l Air Lines, Inc., 780 F.2d 1223, 1227 (5th Cir. 1986). See also In re Air Beds, Inc., 92 B.R.
3
419, 422 (B.A.P. 9th Cir. 1988) (finding that “[w]hen a sale of all or substantial assets of the estate
4
is proposed in a Chapter 11 case under the aegis of § 363(b)(1), there is the potential for
5
6 circumventing the requirements attendant to the confirmation of a Chapter 11 plan”); In re Wilde

7 Horse Enterprises, Inc., 136 B.R. 830, 841 Bankr. C.D. Cal. 1991)(“A sale of substantially all of
8 debtor's property outside the ordinary course of business, and without a Chapter 11 disclosure
9
statement and plan, must be closely scrutinized.” (citations omitted)). In addition, 11 U.S.C.
10
§105(a) cannot be used to create authority for this result. See Resorts Int’l v. Lowenschuss (In re
11
12 Lowenschuss), 67 F.3d 1394, 1402 (9th Cir. 1995).6

13 49. The Debtor cites In re Branford Partners, LLC, 2008 WL 8448329, at *17-18 (9th
14 Cir. B.A.P. Oct. 24, 2008) for the proposition that distributions to secured creditors outside of plan
15
should be allowed only if they would not render reorganization impractical or infeasible. [See
16
ECF No. 181, p. 12 of 25]. Debtor points out that liquidation is an acceptable means of
17
18 reorganizing in Chapter 11. [See ECF No. 181, p. 14 of 25; lines 7-8]. Debtor argues that the

19 proposed sale “will not render reorganization impractical or infeasible.” [See ECF No. 181, p. 10
20 of 25].
21
50. However, it appears that it will do just that. A chapter 11 liquidation must be
22
accomplished through the confirmation of a plan, which must satisfy all applicable subsections of
23
24 11 U.S.C. § 1129(a), including the requirement that all non-consenting holders of administrative

25 6
It is well-established that § 105 may not be invoked to provide relief that contradicts the express
26 requirements of the Code. See In re Combustion Eng'g, Inc., 391 F.3d 190, 236 (3d Cir. 2004) ("The general
grant of equitable power contained in §105(a) cannot trump specific provisions of the Bankruptcy Code,
27 and must be exercised within the parameters of the Code itself."). See generally Law v. Siegel, 134 S.Ct.
1188 (2014).
28
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1 priority claims be paid in full on the effective date of the plan. The Debtor cannot propose such a
2 plan, and accordingly cannot liquidate under chapter 11.
3
51. The transfers under the proposed sale, leaving aside the Earnest Money Deposit and
4
assumed liabilities, aggregate to at least $22,907,057. [See Forrest Declaration].
5
6 52. These disbursements will generate a quarterly fee of $229,070.57. [See Forrest

7 Declaration]. See also 28 U.S.C. 1930(a)(6)(B).

8 53. Indirect payments made on behalf of a debtor also constitute disbursements for the
9
calculation of quarterly fees. See St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525, 1533 (9th Cir.
10
1994). In the St. Angelo case, the Ninth Circuit Court of Appeals noted that the District Court held
11
12 “that the ordinary, plain meaning of the statutory language is that payments made by the debtor

13 attributable to property of the debtor whether directly or by a third party acting on the debtor’s
14 behalf are to be included in calculating the fees due to the United States trustee pursuant to Section
15
1930(a)(6),” but the Ninth Circuit overturned the lower court’s holding that excluded payments
16
from sale proceeds to secured creditors. Id. at 1533 and note 9. The Ninth Circuit held that the
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18 “plain language reading of the statute shows that Congress clearly intended ‘disbursements’ to

19 include all payments from the bankruptcy estate.” Id. at 1534. See also Cranberry Growers Coop.
20 v. Layng, 930 F.3d 844, 850 (7th Cir. 2019) (“Moreover, disbursements include "[p]ayments made
21
on behalf of a debtor, whether made directly or indirectly," Genesis Health Ventures, Inc. v.
22
Stapleton (In re Genesis Health Ventures, Inc.), 402 F.3d 416, 422 (3d Cir. 2005); see also St.
23
24 Angelo, 38 F.3d at 1534-35….”).

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1 54. Here, the proposed sale does not account for quarterly fee payments. [See ECF No.
2 12, pp. 13-19 of 32].7
3
55. The Budget filed by Debtor only includes $10,000 for quarterly fees and indicates
4
that $35,551 will be available to the Debtor at the end of the period covered by the Budget. [See
5
6 ECF No. 67-1, p. 2 of 2; “total” column at line for “UST Fees”]. The Debtor has already paid

7 $325 in quarterly fees and has remaining past due quarterly fees for the third quarter of 2020 of
8 $4,550. [See Forrest Declaration]. The $10,000 allocated for the United States Trustee fees must
9
be reduced by $4,875 to account for paid and unpaid quarterly fees for the third quarter of 2020,
10
leaving $5,125 of the allocated amount for quarterly fees. [See Forrest Declaration].
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12 56. The Debtor will only receive approximately $31,732.82 from the UMB accounts as

13 part of the sale and will have the money remaining in its budget [see Forrest Declaration], and
14 Debtor will be left with little else--lease deposits and prepayments of questionable value [see ECF
15
No. 154, pp. 4-5 of 48; ¶7], accounts receivable of $11,512.40 [see ECF No. 154, p. 5 of 48; ¶10],
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and monies owed by certain insiders that will have to be netted with their claims and damages
17
18 resulting from the termination of their employment. [See ECF No. 154, pp. 14-15 of 48; ¶77; see

19 also ECF No. 154, pp. 20, 23, 27, 32 & 35 of 48; see also ECF No. 122, pp. 42-45 of 57]. In
20 addition, the Debtor will be left with the retained liabilities that it will have to satisfy. [See ECF
21
No. 13-1, pp. 8-9 of 186; Stalking Horse Agreement section 3.2].
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24
25 7
Normally, “100 percent” of the quarterly fees paid under section 1930(a)(6) are deposited into the
26 U.S. Trustee System Fund. 28 U.S.C. § 589a(b)(5). In the 2017 legislation, however, Congress provided
that between FY 2018 and FY 2022, 98% of quarterly fees would go to the Fund, while the remaining 2%
27 would be “deposited in the general fund of the Treasury.” Pub. L. No. 115-72, div. B, § 1004(b)(1)-(2), 131
Stat. at 1232. This temporary 2% set-aside is intended to offset the cost to taxpayers of 18 temporary
28 bankruptcy judgeships authorized in the same legislation. See 2017 House Report 8.
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1 57. These amounts do not appear to be sufficient to pay almost a quarter million dollars
2 in quarterly fees. Even if some value could be recovered from these items, they do not appear to
3
be liquid, in other words money on hand or that will soon be turned over to the Debtor.
4
58. As provided for in the Bankruptcy Code, to confirm a Plan the Court must find that
5
6 the quarterly fees have been paid. See 11 U.S.C. § 1129(a)(12). These fees must have been paid at

7 the time of the confirmation hearing or, pursuant to the plan, must be paid on the effective date of
8 the plan. Id. Therefore, satisfaction of Section 1129(a)(12) does not allow for payment of these
9
fees over the life of a plan or after the successful conclusion of avoidance actions.
10
59. Here, the Debtor would have to pay quarterly fees of over $220,000, with less than
11
12 $75,000 from cash remaining in its budget or received from UMB.

13 60. The proposed sale includes substantially all the Debtor’s assets and resolves
14 substantially all of its liabilities. Debtor admits that after the sale there will be no need for a Plan.
15
[See ECF No. 181, p. 10 of 25; lines 20-22; see also ECF No. 182, p. 3 of 7; ¶8]. The sale will
16
render any plan infeasible because the Debtor will not be able to satisfy Section 1129(a)(12),
17
18 resulting in harm to the United States Trustee’s ability to recover her statutory fees.

19 61. The Court should consider all relevant factors, including ones that weigh against
20 approving the proposed sale, including the fact that the proposed sale is for substantially all of the
21
Debtor’s assets, the fact that this case was only filed two months ago, the fact that the Debtor
22
admits that given the proposed sale Debtor is unlikely to propose or seek to confirm a plan, the fact
23
24 that the proposed sale would make a plan unconfirmable because Debtor would be unable to

25 satisfy Section 1129(a)(12), and the fact that the proposed sale entails a purchase price of
26 $24,146,094.00 for the disposition of, among other assets to be sold, $182,761,531.72 (net book
27
value) machinery and equipment. See In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983).
28
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1 62. The United States Trustee also expressly reserves her rights to object to any
2 amendments made to the Sale Motion, or any other additional relief requested in any subsequently-
3
filed motion.
4
WHEREFORE, the United States Trustee requests the Court to sustain her Objection,
5
6 deny the Sale Motion, and grant such other relief as is just under the circumstances.

7 Dated: November 6, 2020 Respectfully Submitted,

8 TRACY HOPE DAVIS
9 UNITED STATES TRUSTEE

10 By: /s/ Edward M. McDonald Jr.

Edward M. McDonald Jr.,
11 Trial Attorney
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