Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 1 of 29 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS MCALLEN DIVISION ENTERED 08/24/2015 IN RE: § STAR AMBULANCE SERVICE, LLC § CASE NO: 15-70041-M-11 Debtor § § CHAPTER 11 IN RE: § CASE NO. 15-70042-M-11 RODOLFO E. MARTINEZ JR. & § SILVIA MARTINEZ § DEBTORS § CHAPTER 11 MEMORANDUM OPINION DENYING CONFIRMATION OF DEBTORS’JOINTLY ADMINISTRERED AMENDED PLAN OF REORGANIZATION [Resolving Doc. # 73] I. INTRODUCTION The Court held a hearing on August 17, 2015 on the Jointly Administered Amended Plan of Reorganization filed by Star Ambulance Service, LLC & Rodolfo E. Martinez, Jr. & Silvia Martinez, Debtors, having previously entered an order approving the Amended Disclosure Statement, [ECF No. 50], for a Small Business Case pursuant to 11 U.S.C. §§ 101(51C) and (51D). [ECF Nos. 40, 44, 46, 50, 51, 61, 63, 71 and 73]. For the reasons stated below, this Court finds that the confirmation of the Debtors’ Jointly Administered Amended Plan of Reorganization should be DENIED. A. Findings & Conclusions The findings and conclusions set forth herein and in the record of the Confirmation Hearing constitute this Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052, made applicable to this proceeding pursuant to Fed. R. Bankr. P. 9014. To the extent any of the following findings of fact constitute conclusions of law, they are adopted as such. To the extent any of the following conclusions of law constitute findings of fact, they are adopted as Page 1 of 29 Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 2 of 29 such. B. Jurisdiction, Venue, and Constitutional Authority This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(b)(2) and 1334(b). This particular hearing arises under 28 U.S.C. § 157(b)(2)(L). See In Re Southmark Corp., 163 F.3d 925, 930 (5th Cir. 1999) (“[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”). This Court also has an independent duty to evaluate whether it has the constitutional authority to sign a final order regarding the confirmation hearing. Stern v. Marshall, 131 S. Ct. 2594 (2011). The Supreme Court held that a statute authorizing bankruptcy judges to issue final judgments violated Article III to the extent that it authorized such final judgments on certain matters. Stern, 131 S. Ct. at 2616. The Court found that the particular bankruptcy ruling in dispute did not stem from bankruptcy itself, nor would it necessarily be resolved in the claims allowance process, and it only rested in a state law counterclaim by the estate. Id. at 2618. The Court reasoned that bankruptcy judges are not protected by the lifetime tenure attribute of Article III judges, but they were performing Article III judgments by judging on “all matters of fact and law” with finality. Id. at 2618-19. Hence, the Court held that Article III imposes some restrictions against a bankruptcy judge’s power to rule with finality. The Court found that a solely state law based counterclaim, while statutorily within the bankruptcy judge’s purview, escaped a bankruptcy court’s constitutional power. Id. at 2620. This Court reads Stern to authorize final judgments only where the issue is rooted in a right created by federal bankruptcy or the resolution of which relies on the claims allowance process. In other words, this Court may issue final judgments and orders where the issue “arises in” or “arises under” bankruptcy, but not where the issue is merely “related to” bankruptcy. See Page 2 of 29 Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 3 of 29 28 U.S.C. § 157. However, even where the case does create a “Stern problem,” Article III will be satisfied where the parties to the case knowingly and voluntarily consent to the bankruptcy court’s power to issue final judgments. Wellness Int’l Network v. Sharif, 135 S. Ct. 1932, 1938- 39 (2015). The matter at bar arises from the confirmation of Debtors’ Combined & Jointly Administered Plan of Reorganization, which is a matter that can only arise in bankruptcy. See In re Prescription Home Health Care, 316 F.3d 542, 547 (5th Cir. 2002) (“Under 28 U.S.C. § 157 (b)(2)(L)1, jurisdiction is granted bankruptcy courts to confirm Chapter 11 reorganization plans…”). Thus, this Court finds that it has the constitutional authority to grant or deny confirmation of the Jointly Administered Plan of Reorganization. II. PROCEDURAL HISTORY AND FINDINGS OF FACT A. Star Ambulance Service, LLC’s Bankruptcy Filing 1. Pursuant to Debtors’ Amended Plan of Reorganization, the bankruptcy was precipitated by an I.R.S. levy and seizure of assets. The I.R.S. debt stemmed from a now defunct business operated by Rodolfo E. Martinez, Jr. and Rodolfo Martinez, III (father & son respectfully) called Star EMS which itself previously filed two chapter 11 bankruptcy cases, to wit: (1) Case No. 12-70427 filed on July 26, 2012 and dismissed for failure to abide by an agreed cash collateral order between the Debtor and the I.R.S.; and (2) Case No. 13-70072 filed on February 8, 2013 and dismissed on July 1, 2013. Star Ambulance Service, LLC began operating in 2013 and immediately fell behind with its I.R.S. obligations due to its poor cash position. In 2014 the I.R.S. began issuing levies on the Star Ambulance and Martinez bank accounts. 2. On January 22, 2015 Star Ambulance Service, LLC, a Texas Limited Liability 1 28 U.S.C. § 157(b)(2)(L) states that “[c]ore proceedings include, but are not limited to confirmation of plans.” Page 3 of 29 Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 4 of 29 Company, (“Star Ambulance”) filed its voluntary petition under Title 11, Chapter 11 under the United States Bankruptcy Code and checked the designation of Small Business Case pursuant to the provisions of 11 U.S.C. § 1121(e) commencing Case No.15-70041-M-11. [ECF No. 1]. Silvia Martinez and Rodolfo Martinez III are the sole members of Star Ambulance. Id. 3. On January 22, 2015, Star Ambulance filed its First Amended Petition. [ECF No. 2] 4. On February 23, 2015, Star Ambulance filed its Second Amended Petition. [ECF No. 25] B. Rodolfo E. Martinez, Jr. and Silvia Estella Martinez’s Bankruptcy Filings 1. On January 22, 2015, Rodolfo E. Martinez, Jr. & Silvia Estella Martinez (husband and wife respectively, collectively “Martinez”) filed their voluntary petition under Title 11, Chapter 13 of the United States Bankruptcy Code commencing Case No. 15-70042-M-13. [ECF No. 1] 2. On January 22, 2015, Martinez filed their Chapter 13 Plan. [ECF No. 2] 3. On January 29, 2015 Martinez filed their First Amended Chapter 13 Plan. [ECF No. 14] 4. On February 27, 2015, Martinez filed a Motion to Convert their case from Chapter 13 to 11. [ECF No. 19] 5. On March 23, 2015 this Court entered an order converting the Martinez case to a proceeding under Title 11, Chapter 11 of the United States Bankruptcy Code. [ECF No. 23] 6. On March 24, 2015, Martinez filed their First Amended Petition, wherein they elected to NOT check the designation of Small Business Case pursuant to the provisions of 11 Page 4 of 29 Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 5 of 29 U.S.C. § 1121(e) . [ECF No. 24] 7. On March 24, 2015 Martinez also filed their First Amended Schedules. [ECF No. 25] 8. On March 26, 2015, Martinez filed their Second Amended Petition, this time electing to check the designation of Small Business Case pursuant to the provisions of 11 U.S.C. § 1121(e). [ECF No. 33] C. Star Ambulance Service, LLC & Rodolfo E. Martinez Jr. and Silvia Estella Martinez’s Jointly Administered Combined Disclosure & Plan of Reorganization 1. On May 13, 2015, Star Ambulance & Martinez (“Debtors”) filed a Motion for Expedited Consideration to have the respective Chapter 11 cases Jointly Administered. [15- 70041; ECF No. 35] 2. On May 18, 2015, this Court entered an order granting the Debtors’ Motion for Expedited Consideration to Jointly Administer the respective Chapter 11 cases. [ECF No. 38] 3. On May 27, 2015, Debtors filed their Jointly Administered Combined Disclosure Statement and Plan of Reorganization (“Plan”). [ECF No. 40] 4. Debtors subsequently amended their Plan on June 9, 2015. [ECF No. 44] 5. This Court entered an order approving the Jointly Administered Disclosure Statement on June 17, 2015 and set a hearing on the confirmation of the Plan for July 22, 2015. The hearing was continued to August 17, 2015. [ECF No. 50] 6. Debtors latest amended Plan of Reorganization, that is the subject of the August 17, 2015 hearing, was filed on August 17, 2015. [ECF No 73] 7. Significantly, since the filing of the Disclosure Statement and Plan of Reorganization, [ECF No. 40], and as of the date of the hearing on the Confirmation of the Plan, Page 5 of 29 Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 6 of 29 eighty-three (83) calendar days have elapsed. III. EVIDENCE At the hearing before this Court on August 18, 2015, the Debtors put forth the following evidence in support of the confirmation of their plan: 1. Affidavit on Confirmation of Amended Plan dated August 17, 2015 by Rodolfo E. Martinez, Jr., dated August 18, 2015. 2. Affidavit on Confirmation of Amended Plan dated August 17, 2015 by Silvia Martinez, dated August 18, 2015. 3. Affidavit on Confirmation of Amended Plan dated August 17, 2015 by Silvia Martinez in her capacity as the President of Star Ambulance, LLC, dated August 18, 2015. For each of the foregoing Affidavits presented by the Debtors, the affidavits merely read as recitations of 11 U.S.C. § 1129(a) without providing any further evidence to substantiate the statements sworn to by the affiants. 4. Ballot Summary with Attached Ballots, dated August 18, 2015. The Ballot Summary provided the acceptance votes by Hidalgo County, an impaired secured creditor; Admin Recovery, an unimpaired secured creditor; Discover Bank, an impaired unsecured creditor; Billing Partners, an impaired unsecured creditor; and Mobile Relays, an impaired secured creditor. However, the Ballot Summary neglects to include the rejection by Knight Capital Funding II, LLC, [ECF No. 60], filed on July 21, 2015. Furthermore, there was no evidence presented as to whether or not the ballots submitted for each class was sufficient to accept the plan pursuant to 11 U.S.C. §1126(c). 5. Testimony by Delina Martinez, Administration for Star Ambulance Service, LLC, who testified to the following: a. Star Ambulance has been acquiring new contracts, which should help Page 6 of 29 Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 7 of 29 improve cash flow for their operations. b. Star Ambulance’s improved cash flow since January 2015 has permitted them to become profitable and that the level of profitability should increase going forward. c. Winter months are typically more profitable for Star Ambulance, as there is an increase in the use of their services. d. Star Ambulance currently operates six (6) ambulances, two (2) of which are owned by Star Ambulance. The remaining four (4) ambulances are being used pursuant to a verbal lease with Star EMS, which is owned by Rodolfo Martinez, Sr. Star Ambulance has been making the payments for those units on behalf of Star EMS. e. Star Ambulance expects to recognize a minimum of fifty (50) percent of their accounts receivables, and the reduction is due to insurance company payments being less than payment in full. They are working to secure payment on the receivables, as many are 90 to 120 days old and many insurance companies do not pay on 60 day terms. f. Star Ambulance experienced higher than average expenses during the month of July 2015, due to needed repairs on their ambulance units. Ms. Martinez testified that there was not an expectation of the expenses to be reoccurring. 6. Clarifications on the Plan provided by Star Ambulance’s Counsel. a. The Combined Plan contains no evidence of feasibility or projections of future cash flow under the plan. Page 7 of 29 Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 8 of 29 b. The Liquidation Analysis is representative of the belief that the Debtors’ debts are greater than their assets, contrary to what is presented in their Schedules. c. The Ballot Summary is intended to provide information about the Creditors that voted on the Plan, and Debtors are assuming that all non-voters have accepted the Plan. d. Star Ambulances’ members intend to retain ownership of the entity post- bankruptcy, but this was not documented in the Disclosure or the Plan. IV. CONCLUSIONS OF LAW A. Effect of 11 U.S.C. § 1129(e) Time Limit Debtors filed their respective Chapter 11 cases and elected the “small business” provisions of 11 U.S.C. §101(51C). Congress intended the updated provisions of the Bankruptcy Code to reduce the time and expense required for small businesses to find relief while requiring that such businesses move at an expedited pace to the confirmation of their reorganization plans. In re Barnes, 308 B.R. 77, 79 (Bankr. D. Colo. 2004)2. In small business cases, § 1129(e) provides that “[i]n a small business case, the court shall confirm a plan that complies with the applicable provisions of this title and that is filed in accordance with section 1121 (e) not later than 45 days after the plan is filed unless the time for confirmation is extended in accordance with section 1121 (e)(3).” 11 U.S.C. § 1129(e). 2 “The Bankruptcy Reform Act of 1994, Pub.L. No. 103–394, amended several aspects of Chapter 11 to apply in cases where a debtor is a “small business.” These amendments were created “to expedite the process by which small businesses may reorganize under chapter 11.” Floor Statements on the Bankruptcy Reform Act of 1994, 140 Cong. Rec. H10752, H10768 (daily ed. October 4, 1994) (analysis of Act's provisions appended to remarks of Rep. Brooks) (1994 WL 545773). Upon making the election, a debtor can take advantage of a more abbreviated confirmation process, including more liberal provisions for disclosure and solicitation. See H.R. Rep. 103–834, 103rd Cong., 2nd Sess. 30 (October 4, 1994), U.S. Code Cong. & Admin. News 1994, p. 3323; 140 Cong. Rec. H10768 (October 4, 1994). To reap the benefits of this expedited process, a debtor must meet certain abbreviated time deadlines. Included in these deadlines is the time restriction for filing a plan contained in 11 U.S.C. § 1121(e) ...” (footnotes omitted). Page 8 of 29 Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 9 of 29 § 1121(e) provides that: (e) In a small business case— (1) only the debtor may file a plan until after 180 days after the date of the order for relief, unless that period is— (A) extended as provided by this subsection, after notice and a hearing; or (B) the court, for cause, orders otherwise; (2) the plan and a disclosure statement (if any) shall be filed not later than 300 days after the date of the order for relief; and (3) the time periods specified in paragraphs (1) and (2), and the time fixed in section 1129 (e) within which the plan shall be confirmed, may be extended only if— (A) the debtor, after providing notice to parties in interest (including the United States trustee), demonstrates by a preponderance of the evidence that it is more likely than not that the court will confirm a plan within a reasonable period of time; (B) a new deadline is imposed at the time the extension is granted; and (C) the order extending time is signed before the existing deadline has expired. Id. § 1121(e). Thus, the plain language of the statute provides a scheme whereby small business cases should move expeditiously from filing to confirmation, a timeframe lasting no longer than 300 days for a plan to be filed and confirmation to occur within 45 days of the small business debtor’s filing of the plan. The statute places a burden upon small business debtors to act prudently, to file their plans in a relatively expedient fashion, and to ensure confirmation hearings occur on their plans within the prescribed 45-day timeframe. Failing to do so violates the directives of §§ 1121(e)(1-2) and 1129(e), absent a timely request for an extension of time that meets the requirements provided under § 1121(e)(3). There is limited case law addressing when the 45-day timeframe begins: on the date of the original filing or the date of the amended filing. However, several cases are instructive on how the § 1129(e) requirement interacts with plans filed by the debtor. In In re Florida Coastal Airlines, Inc., the bankruptcy court reviewed a debtor’s amended plan to determine if it related back to the date of the original filing. See In re Florida Coastal Airlines, Inc., 361 B.R. 286 Page 9 of 29 Case 15-70041 Document 76 Filed in TXSB on 08/24/2015 Page 10 of 29 (Bankr. S.D. Fla. 2007). The court held that the filing did in fact relate back. Id. The court reached this conclusion by analogizing the filing of an amended plan to the filing of an amended complaint in an adversary proceeding. Id. Fed. R. Bankr. P. 7015 states that an amended complaint relates back to an original pleading in certain situations.3 See In re Florida Coastal Airlines, Inc., 361 B.R. 286 (Bankr. S.D. Fla. 2007). The Court held the amended plan filed by the debtor after the 300-day deadline had expired related back to the filing of the original plan— and was thus timely—because it was “fundamentally a cleaned up version of its original plan.” Importantly, the question before the Court in Florida Coastal Airlines involved the determination of issues under § 1121(e)(2), whereas the question before this Court focuses on the application of § 1129(e) to determine if the proscribed 45-day deadline for confirmation should be measured from the original plan or the amended plan(s). Thus, Florida Coastal Airlines, while instructive on matters regarding the ordering and timing of plans submitted by debtors and other parties in interest, is not directly applicable in the matter before the court. Our sister bankruptcy court addressed a materially similar issue to the issue before this Court in In re Save Our Springs (S.O.S.) Alliance, Inc., 388 B.R. 202 (Bankr. W.D. Tex. 2008), aff’d, 2009 WL 8637183 (W.D. Tex. Sept. 29, 2009), aff’d, 632 F.3d 168 (5th Cir. 2011). The Court reviewed, among other issues, whether the 45-day deadline for the confirmation of a small debtor’s plan under § 1129(e) is measured from the original filing of the plan or the filing of any subsequent amended plans. The Court held that the 45-day deadline, as required by § 1129(e), 3 “An amendment to a pleading relates back to the date of the original pleasing when: (A) the law that provides the applicable statute of limitations allows relation back; (B) the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out—or attempted to be set out—in the original pleading; or (C) the amendment changes the party or the naming of the party against whom a claim is asserted, is Rule 15(c)(1)(B) is satisfied and if, within the period provided by Rule 4(m) for serving the summons and complaint, the party to be brought in by amendment: (i) received such notice of the action that it will not be prejudiced in defending on the merits; and (ii) knew or should known that that the action would have been brought against it, but for a mistake concerning the proper party’s identity.” Page 10 of 29