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Full title: Objection to Confirmation of Plan Filed by US Trustee. (Related document(s):205 Amended Chapter 11 Plan) (Nguyen, Ha) (Entered: 05/20/2021)
Document posted on May 19, 2021 in the bankruptcy, 7 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
To date, the Debtors have not filed any monthly operating reports or paid corresponding quarterly fees.In this regard, the missing reports are necessary to calculate the quarterly fees owed and to evaluate whether the Debtors have enough cash in hand to meet their Effective Date obligations, including payment of quarterly fees. To date, the Debtors have not filed any monthly operating reports or paid quarterly fees pursuant to Section 1930 of Title 28 (the “Quarterly Fees”).In turn, Section 704(a)(8) provides that th e trustee shall “if the business of the debtor is authorized to be operated, file with the court, with the United States Trustee…periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information was the United States Trustee or the court requires.”See Amended Plan, XI.B. However, the Amended Plan does not identify which entity is responsible for filing quarterly financial reports that will contain disbursement information to determine the corresponding fee.
List of Tables
Document ContentsIN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION In re: § Case No. 21-30710 § CASTEX ENERGY 2005 § Chapter 11 HOLDCO, LLC et al. 1 § § (Jointly Administered) Debtors UNITED STATES TRUSTEE’S LIMITED OBJECTION TO CONFIRMATION OF THE DEBTORS’ SECOND AMENDED JOINT CHAPTER 11 PLAN DATED APRIL 22, 2021 TO: THE HONORABLE MARVIN ISGUR UNITED STATES BANKRUPTCY JUDGE: Kevin M. Epstein, the United States Trustee for Region 7 (the “U.S. Trustee”) hereby submits this limited objection (the “Objection”) to the Debtors’ Second Amended Joint Chapter 11 Plan (the “Amended Plan”) [Docket No. 205]. In support of the Objection, the U.S. Trustee states as follows: I. SUMMARY OF ARGUMENTS Confirmation of the Amended Plan should be denied or postponed until the Debtors satisfy the requirements of Sections 1129(a)(2), (a)(9) and (a)(12). In these cases, reporting requirements do not appear to be a priority. To date, the Debtors have not filed any monthly operating reports or paid corresponding quarterly fees. Similarly, the Amended Plan ignores post confirmation reporting by failing to disclose which entity is responsible for those duties. The Liquidating Trustee2 should be assigned those duties. The U.S Trustee expects to be paid its quarterly fees on 1 The Debtors in these Chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number are: Castex Energy 2005 H oldco, LLC (6832); Castex Energy 2005, LLC (6832); Castex Energy Partners, LLC (6832); and Castex Offshore, Inc. (8432). 2 All capitalized terms not defined herein shall having the meaning set forth in the Amended Plan.
1the Effective Date and objects to treatment other than as provided under the Bankruptcy Code. In this regard, the missing reports are necessary to calculate the quarterly fees owed and to evaluate whether the Debtors have enough cash in hand to meet their Effective Date obligations, including payment of quarterly fees. Lastly, the U.S. Trustee objects to the Debtors’ releases and third-party releases and requests that they be modified to carve out the release of any claims based on gross negligence, actual fraud, or willful conduct. II. JURISDICTION 1. The matter before the Court is a core proceeding which concerns the confirmation of a Chapter 11 plan under 28 U.S.C. § 157(b)(2)(L). The Court may hear and determine this matter pursuant to General Order 2012-6 of the United States District Court for the Southern District of Texas. 2. The U.S. Trustee is charged with supervising the administration of bankruptcy cases under 28 U.S.C. § 586(a)(3)(B) and has standing to bring this Objection under 11 U.S.C. § 307. 3. Pursuant to 28 U.S.C. § 586(a)(3)(B), the U.S. Trustee has the duty to monitor and comment on plans and disclosure statements filed in Chapter 11 cases as may be appropriate. III. RELEVANT FACTUAL BACKGROUND 4. On February 26, 2021, the Debtors initiated these bankruptcy cases by filing voluntary petitions under Chapter 11 of Title 11. 5. On March 8, 2021, the Debtors filed a Joint Chapter 11 Plan [Docket No. 65]. 6. On March 31, 2021, the U.S. Trustee’s office conducted an Initial Debtor Interview in which the Debtors were informed of their obligations to file monthly operating reports. 7. The first monthly operating report was due on March 21, 2021. On April 20, 2021, the U.S. Trustee’s office contacted the Debtors’ attorney via e-mail regarding the delinquent monthly
2operating reports. 8. Confirmation of the Amended Plan is set for May 27, 2021. See Scheduling Order dated April 26, 2021 [Docket No. 214]. 9. To date, the Debtors have not filed any monthly operating reports or paid quarterly fees pursuant to Section 1930 of Title 28 (the “Quarterly Fees”). 10. On April 22, 2021, the Debtors filed the Amended Plan [Docket No. 205]. IV. OBJECTION 11. The U.S. Trustee objects to confirmation of the Amended Plan because it does not meet the requirements of Sections 1129(a)(2), (a)(9) and (a)(12). 12. First, the Amended Plan does not meet the requirements under Section 1129(a)(2)3 because the Debtors have not filed any monthly operating reports.4 As several bankruptcy courts have noted “[t]imely and accurate financial disclosure is the life blood of the Chapter 11 process. Monthly operating reports are much more than busy work imposed upon a Chapter 11 debtor for no reason other than to require it to do something. They are the means by which creditors can monitor a debtor’s post-petition operations.” Matter of Berryhill, 127 B.R. 427, 433 (Bankr. N.D. Ind. 1991); see also Eldorado Canyon Properties, LLC, 505 B.R. 601, 604 (B.A.P. 1st Cir. 2014)(“[n]either the court nor creditors should have to coerce or implore a debtor into fulfilling the obligations imposed upon it”). “If a debtor does not fulfill this basic obligation during the 3 Section 1129(a)(2) provides that a plan cannot be confirmed unless “the proponent of the plan complies with the applicable provisions of this title.” Section 1106(a)(1) provides that a “trustee shall perform the duties of the trustee, as specified in paragraphs (2), (5), 4(7), (8), (9), (10), (11), and (12) of section 704(a).” 11 U.S.C. § 1106(a)(1). In turn, Section 704(a)(8) provides that th e trustee shall “if the business of the debtor is authorized to be operated, file with the court, with the United States Trustee…periodic reports and summaries of the operation of such business, including a statement of receipts and disbursements, and such other information was the United States Trustee or the court requires.” 11 U.S.C. § 704(a)(8). The statement of receipts and disbursements referenced in Section 704(a)(8) is commonly known as the monthly operating report. See Rule 2015. The monthly operating report is based on a calendar month (e.g. January 1 – January 31), and all reports must be filed by the 21st day of the month following the reporting period.
3Chapter 11 case…how can the creditors have any confidence that the debtor will timely and accurate report its income and make the required distributions under its plan, when the court and the UST are no longer monitoring the case? Consequently, the importance of filing monthly reports cannot be over-emphasized.” In re Whetten, 473 B.R. 380, 384 (Bankr. D. Colo. 2012) (internal quotations omitted). 13. As of the date of the Objection, the Debtors’ monthly operating reports for February 2021 and March 2021 and the corresponding Quarterly Fees due and payable as of April 30, 2021 are delinquent.5 The monthly operating report for April 2021 will be due May 21, 2021. The Debtors have chosen to ignore their reporting requirements despite several reminders. As such, “a debtor ignores this basic duty at its own peril” and confirmation of the Amended Plan should be denied. See Whetten at 384. 14. Second, the Amended Plan is defective because it does not identify what entity has the obligation to file post-confirmation reports. Section 1106(a)(7) and Rule 2015(a)(5) require a debtor to file with the Court and to serve the U.S. Trustee, quarterly financial reports to enable the Court and parties to monitor compliance with the plan of reorganization. See 11 U.S.C. § 1106(a)(7) and Rule 2015(a)(5). Information on quarterly financial reports is necessary to calculate Quarterly Fees until a case is closed, converted, or dismissed. See 28 U.S.C. § 1930. Although the Amended Plan and Liquidating Trust Agreement assigned certain duties and responsibilities to the Liquidating Trustee, they do not address the filing of post-confirmation reports.6 The Amended 5 Due to the lack of information concerning disbursements and receipts, the Debtors were assessed the minimum fee for the first quarter of 2021. The esti mated total of $1,300 will likely increase when actual disbursement information is received. 6 The Amended Plan provides that the Liquidating Trustee shall pay all Quarterly Fees until the Chapter 11 cases are converted, dismissed, or closed. See Amended Plan, XI.B. However, the Amended Plan does not identify which entity is responsible for filing quarterly financial reports that will contain disbursement information to determine the corresponding fee.
4Plan, the Liquidating Trust Agreement and any related document should be amended to provide that the Liquidating Trustee has the obligation to file the post-confirmation quarterly reports. 15. Third, the Amended Plan does not meet the requirements of Sections 1129(a)(9) and 1129(a)(12) because it does not provide for payment of Quarterly Fees on the Effective Date. Section 1129(a)(9) states that unless the holder of a particular claim has agreed to a different treatment, the plan must provide that “with respect to a claim of a kind specific in section 507(a)(2) … cash equal to the allowed amount of such claim” on the Effective Date. 11 U.S.C. § 1129(a)(9)(A). Section 1129(a)(12) in turn provides that “[a]ll fees payable under section 1930 of title 28, as determined by the court at the hearing on confirmation of the plan, have been paid or the plan provides for payment of all such fees on the effective date of the plan.” 11 U.S.C. § 1129(a)(12). 16. The Amended Plan provides that holders of Allowed Administrative Claims are to be paid on or before the Effective Date or within 10 business days after an order allowing such Administrative Claim becomes a Final Order. See Amended Plan, II.A. However, this provision expressly carved out the “…Claims for fees and expenses pursuant to section 1930 of Chapter 123 of title 28 of the United States Code.” Id. As written, the Amended Plan impermissibly attempts to alter the U.S. Trustee’s rights to be paid on or before the Effective D ate. The U.S. Trustee objects to treatment other than as provided under the Bankruptcy Code which is full payment of all Quarterly Fees on or before the effective date. See 11 U.S.C. § 1129(a)(12). 17. Confirmation of the Amended Plan should be denied unless the Debtors provide full and accurate disbursement information for the U.S. Trustee to determine the amount of all Quarterly Fees owed, and said fees are paid on or before the Effective Date. Furthermore, at confirmation, the Debtors should be required to show that they have sufficient cash on hand to pay the Quarter
5Fees on the Effective Date or, in the alternative, establish a cash reserve in an amount acceptable to the U.S. Trustee. 18. Lastly, the Debtors’ releases and third-party releases are objectionable because they do not contain a carveout for gross negligence, willful misconduct, or actual fraud. See Amended Plan, VII.E and F. Some courts have recognized that under certain circumstances, the bankruptcy court may approve a release of claims against non-debtors. See In re CJ Holding Co, 597 B.R. 597, 607 (S.D. Tex. 2019). However, consensual non-debtor releases must be specific in language, integral to the plan, a condition of the settlement, and given for consideration. See In re Wool Growers Cent. Storage Co., 371 B.R. 768, 776 (Bankr. N.D. Tex. 2007). In the present case, the Debtors have not demonstrated why a grant of immunity for scienter-based behaviors, such as fraud, willful misconduct, or gross negligence, is necessary and integral to the Amended Plan. Moreover, allowing non-debtor parties to use the Debtors’ bankruptcy cases to insulate themselves from liability from wrongdoings undermines the purpose of the Bankruptcy Code and sound public policy. See Stowell v. Finkel Inv. Servs., Inc., 641 F. 2d 325, 325 (5th Cir. 1981) (in a securities context, “indemnification tends to frustrate the policy of securities legislation”). Indeed, debtors in their own bankruptcy cases often may not obtain the same broad releases since fraud claims are excepted from discharge. See 11 U.S.C. § 523(a)(2). As such, the Court should require the Debtors to amend the Debtors’ releases and third-party releases to carveout gross negligence, willful misconduct, and actual fraud.
6V. CONCLUSION For the reasons stated above, the Amended Plan should be denied. Alternatively, the confirmation hearing should be postponed until the Debtors address and cure the objections raised herein. Dated: May 20, 2021 KEVIN M. EPSTEIN UNITED STATES TRUSTEE /s/ HA M NGUYEN Ha Nguyen, Trial Attorney CA Bar #305411 | FED ID NO. 3623593 United States Department of Justice Office of the United States Trustee 515 Rusk Street, Suite 3516 Houston, Texas 77002 E-mail: Ha.Nguyen@usdoj.gov Cell: 202-590-7962 CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing United States Trustee’s Limited Objection to Confirmation of the Debtors’ Second Amended Joint Chapter 11 Plan Dated April 22, 2021 has been served by electronic means on all PACER participants on May 20, 2021. /s/ Ha M Nguyen Ha M Nguyen Trial Attorney