Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 1 of 17 1 2 3 4 Entered on Docket ____M_a_y_ 1_0,_ 2_01_8________________________________________________________ 5 6 UNITED STATES BANKRUPTCY COURT 7 DISTRICT OF NEVADA 8 * * * * * * 9 In re: ) Case No.: 16-10025-MKN ) Chapter 11 10 MOHAVE AGRARIAN GROUP, LLC, ) ) Date: April 4, 2018 11 Debtor. ) Time: 9:30 a.m. ____________________________________) 12 MEMORANDUM DECISION ON REORGANIZED DEBTOR’S 13 MOTION FOR ORDER: (I) REOPENING CHAPTER 11 CASE; AND (II) ENFORCING CONFIRMED CHAPTER 11 PLAN1 14 15 The humorist Douglas Adams was fond of saying, “I love deadlines. I love the whooshing sound they make as they fly by.” But the law more often follows 16 Benjamin Franklin’s stern admonition: “You may delay, but time will not.” To paraphrase Emile Zola, deadlines are often the terrible anvil on which a legal 17 result is forged. 18 Anwar v. Johnson (In re Johnson), 720 F.3d 1183, 1184 (9th Cir. 2013) (Thomas, C.J.) 19 The best defense is a good offense. 20 Vince Lombardi, former Green Bay Packers head coach2 21 22 1 In this Memorandum Decision, any reference to “ECF No.” is to the number assigned to 23 the documents filed in the case as they appear on the docket maintained by the clerk of the court. All references to “Section” are to the provisions of the Bankruptcy Code, 11 U.S.C. § 101, et 24 seq., unless otherwise indicated. All references to “FRBP” are to provisions of the Federal Rules 25 of Bankruptcy Procedure. All references to “FRCP” are to the Federal Rules of Civil Procedure. 26 2 There is some debate as to whether the oft-quoted phrase should be attributed to the iconic football coach or to other historical figures. See https://www.fluther.com/29471/famous- 27 quote-or-misquote/. In law, the phrase has been used by some authors to describe the strategy of 28 responding to a claim by aggressively asserting a right that does not exist. See Edward C. Greenberg & Jack Reznicki, The Copyright Zone: A Legal Guide for Photographers and Artists 1 Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 2 of 17 1 This is a case where a reorganized debtor missed a deadline set forth in its confirmed 2 Chapter 11 plan and then seeks to “enforce” the confirmed plan to avoid the very consequence it 3 agreed to bear. 4 BACKGROUND 5 On January 5, 2016, Mohave Agrarian Group, LLC (“Debtor”) filed a voluntary Chapter 6 11 petition for reorganization. (ECF No. 1). 7 On January 19, 2016, Debtor filed its schedules of assets and liabilities (“Schedules”). 8 (ECF No. 17). On its property Schedule “A/B,” Debtor listed an interest in approximately 8,888 9 acres of real property located in Arizona (“Arizona Property”) valued at $16,510,000. On its 10 creditor Schedule “D,” Debtor listed Contrail Holdings, LLC (“Contrail”) as having a claim 11 secured by the Arizona Property with a balance owing of $7,700,172. On its Schedule “E/F,” 12 Debtor listed the Assessor of Mohave County (“Mohave County Assessor”) as having various 13 priority unsecured claims for unpaid real estate taxes. 14 On May 3, 2016, Contrail filed a proof of claim in the amount of $8,177,909.05, secured 15 by a promissory note and deed of trust against the Arizona Property. 16 On June 27, 2016, Debtor filed a motion to value the Arizona Property (“Valuation 17 Motion”) and scheduled it for a hearing to be held on August 10, 2016. (ECF Nos. 94 and 98). 18 Contrail submitted appraisal testimony valuing the Arizona Property at $9,625,000, see 19 Declaration of Robert E. Dietrich (ECF No. 110), while the Debtor submitted appraisal 20 testimony valuing the Arizona Property “as is” at $31,400,000. See Supplemental Declaration of 21 Evan Ranes. (ECF No. 122). 22 On August 25, 2016, a stipulation was filed to coordinate discovery in connection with 23 the Valuation Motion, as well as the Debtor’s anticipated Chapter 11 plan, in addition to 24 Contrail’s anticipated motion for relief from stay. (ECF No. 130). 25 On September 2, 2016, Debtor filed its “First Amended Chapter 11 Plan of 26 Reorganization Dated September 2, 2016” (“First Amended Plan”), along with a proposed 27 28 in the Digital Age, at 238-239 (CRC Press 2nd ed. 2015). 2 Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 3 of 17 1 disclosure statement. (ECF Nos. 136 and 137).3 2 On September 2, 2016, Contrail filed its motion for relief from stay (“Stay Relief 3 Motion”). (ECF No. 140). 4 On October 5, 2016, an objection to the disclosure statement was filed on behalf of 5 Contrail (ECF No. 176), to which a reply was filed by Debtor on October 12, 2016 (ECF No. 6 180). 7 On October 26, 2016, Debtor filed its first amended disclosure statement, along with a 8 redlined version. (ECF Nos. 187 and 188). 9 On November 2, 2016, a hearing was held on approval of the proposed amended 10 disclosure statement. 11 On November 9, 2016, an order was entered approving the adequacy of the amended 12 disclosure statement and setting a plan confirmation hearing for January 23, 2017. (ECF No. 13 195). 14 On November 18, 2016, the Stay Relief Motion was noticed to be heard on the same date 15 as the plan confirmation hearing. (ECF No. 204). On January 9, 2017, an opposition to the Stay 16 Relief Motion was filed by Debtor (ECF No. 239), and on January 20, 2017, a reply was filed by 17 Contrail (ECF No. 310). 18 On November 23, 2016, Debtor filed a motion for order authorizing the private sale of 19 Debtor’s real property to Encore Investments, LLC (“Encore Sale Motion”), free and clear of 20 liens, which was noticed to be heard on January 23, 2017. (ECF Nos. 208 and 211). On January 21 12, 2017, an omnibus opposition was filed by Contrail (ECF No. 263), and on January 20, 2017, 22 a reply was filed by Debtor (ECF No. 317). 23 On December 1, 2016, Debtor filed a motion for order authorizing the private sale of 24 25 3 Debtor sought a determination that the Arizona Property far exceeded the amount of Contrail’s claim in order to cramdown a “dirt for debt” treatment of Contrail’s allowed secured 26 claim under Section 1129(b)(2)(A)(iii). See Valuation Motion at ¶ 46; First Amended Plan, Art. II, § 2.3(b), 18:4 to 20:2. See, e.g., Arnold & Baker Farms v. United States (In re Arnold & 27 Baker Farms), 85 F.3d 1415 (9th Cir. 1996), cert. denied, 519 U.S. 1054 (1997) (denying 28 confirmation of plan where evidence did not support finding that replacement real property collateral provided indubitable equivalent of allowed secured claim). 3 Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 4 of 17 1 Debtor’s real property to James D. Hammer (“Hammer Sale Motion”), which also was noticed to 2 be heard on January 23, 2017. (ECF Nos. 219 and 222). On January 12, 2017, an omnibus 3 opposition was filed by Contrail (ECF No. 263), and on January 20, 2017, a reply was filed by 4 Debtor (ECF No. 317). 5 On January 13, 2017, a stipulation was filed to move the trial date regarding the 6 following contested matters: First Amended Plan, Valuation Motion, Stay Relief Motion, Encore 7 Sale Motion, and Hammer Sale Motion. (ECF No. 272). The trial was rescheduled to be held on 8 January 26, 30 and 31, 2017. On January 17, 2017, an order was entered approving the 9 stipulation. (ECF No. 283). On January 19, 2017, Debtor filed its redlined version of a 10 proposed second amended plan. (ECF No. 300). 11 On January 26, 2017, the trial commenced. 12 On January 31, 2017, the trial was continued to March 13, 2017, in order to permit 13 discovery to be conducted concerning a matter raised in the trial testimony of the Debtor’s 14 principal. (ECF No. 359). 15 On March 13, 2017, the parties informed the court that between January 31 and March 16 12, 2017 (“Trial Hiatus”), a compromise had been reached. Under the compromise, Contrail 17 would purchase the Arizona Property from the Debtor, subject to an option allowing the Debtor 18 to repurchase the Arizona Property in the future (“Option”). The Debtor and Contrail agreed to 19 file no later than March 16, 2017, a motion to approve a settlement agreement and mutual 20 releases. They also agreed that the Debtor would file a further amended plan incorporating the 21 settlement, as well as a further amended disclosure statement. (ECF No. 407). 22 On March 16, 2017, Debtor’s Motion for Approval of Settlement, Pursuant to Fed. R. 23 Bankr. P. 9019, By and Among Mohave Agrarian Group, LLC, and Contrail Holdings, LLC 24 (“Settlement Motion”) was filed.4 On March 17, 2018, Debtor filed a Third Amended Chapter 25 11 Plan of Reorganization (“Third Amended Plan”) and a proposed Second Amended Disclosure 26 4 Along with the Settlement Motion, Debtor submitted the supporting Declaration of 27 James M. Rhodes (“First Rhodes Declaration”). (ECF No. 409). A copy of a Settlement 28 Agreement and Mutual Release dated March 12, 2017 (“Settlement Agreement”) was attached as Exhibit “1” to the First Rhodes Declaration. 4 Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 5 of 17 1 Statement Prepared in Connection with Debtor’s Third Amended Chapter 11 Plan of 2 Reorganization (“Second Disclosure Statement”). (ECF Nos. 408, 412, and 413). 3 On March 20, 2017, an order was entered granting Debtor’s request to shorten time so 4 that the Settlement Motion could be heard on an expedited basis. (ECF No. 418). 5 On March 22, 2017, Debtor filed a “Plan Supplement” that included various documents 6 that were not attached to the Third Amended Plan, but which apparently were submitted for the 7 purpose of “supplementing and giving effect to the terms of the plan.” (ECF No. 423). One of 8 those documents consisted of a “Memorandum of Option and Purchase and Sale Agreement” to 9 be recorded in Mohave County (“Option Memorandum”). 10 On March 23, 2017, an order was entered granting Debtor’s request for conditional 11 approval of the Second Disclosure Statement, as well as scheduling a combined hearing on 12 confirmation of the Third Amended Plan and final approval of the Second Disclosure Statement. 13 (ECF No. 425).5 14 On March 30, 2017, a hearing was held on the Settlement Motion and on April 4, 2017, 15 an order was entered approving the settlement (“Settlement Approval Order”). (ECF No. 436). 16 On April 13, 2017, a Declaration of James Rhodes in support of confirmation of the 17 Third Amended Plan (“Rhodes Confirmation Declaration”) was filed. (ECF No. 443). 18 On April 18, 2017, a combined hearing was held on confirmation of the Third Amended 19 Plan and final approval of the Second Disclosure Statement. At the hearing, the proposed plan 20 was confirmed and the disclosure statement was approved. 21 On May 2, 2017, findings of fact and conclusions of law were entered in support of plan 22 confirmation and disclosure statement approval (“Confirmation Findings”). (ECF No. 445). 23 On May 8, 2017, an order was entered confirming the Third Amended Plan (“Plan 24 Confirmation Order”). (ECF No. 446). A copy of the Third Amended Plan (“Confirmed Plan”) 25 26 5 Debtor’s request for conditional approval of the Second Disclosure Statement and a combined hearing was accompanied by another Declaration of James M. Rhodes. (ECF No. 27 415). Debtor’s principal attested that an extensive hearing to confirm the plan would not be 28 necessary because, inter alia, there “is nothing complex or obscure in the Plan and supporting documents.” Id. at 6:26. 5 Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 6 of 17 1 is attached as Exhibit “1” to the Confirmation Order.6 2 On November 14, 2017, an Order Entering Final Decree was filed (“Final Decree”). 3 (ECF No. 480). As a result, the Chapter 11 case was closed without prejudice to being reopened 4 for further administration. 5 On March 14, 2018, the Reorganized Debtor’s Motion for Order: (I) Reopening Chapter 6 11 Case; and (II) Enforcing Confirmed Chapter 11 Plan (“Motion”) was filed by the Debtor, 7 accompanied by another Declaration of James M. Rhodes (“Second Rhodes Declaration”)7. 8 (ECF Nos. 482 and 483). 9 On March 16, 2018, an order was entered granting Debtor’s request to shorten time so 10 that the instant Motion could be heard on an expedited basis. (ECF No. 487). 11 On March 29, 2018, Contrail filed an opposition to the Motion (“Opposition”), along 12 with declarations from William M. Noall (“Noall Declaration”), Ryan H. Esplin (“Esplin 13 Declaration”), and Allen Barbarich (“Barbarich Declaration”). (ECF Nos. 489, 490, 491, and 14 492). 15 On April 2, 2018, Debtor filed a reply (“Reply”). (ECF No. 493). 16 On April 4, 2018, the court heard the instant Motion and the appearances of counsel were 17 noted on the record. After oral arguments were presented, the matter was taken under 18 submission. 19 6 The Confirmed Plan consists of six classes of claims or interests, five of which are 20 impaired. See Confirmed Plan, Art. II, § 2.3, 19:1 to 25:18. Contrail’s Class “2” claim is treated in accordance with the Settlement Agreement. Mohave County Assessor’s Class “3” claim is 21 treated through the Assessor Note secured by the Arizona Property. The Class “4” unsecured 22 claim of John Garrett receives no distribution. The Class “5(a)” claims of non-insider general unsecured creditors, as well as the Class “5(b)” of insider unsecured creditors Avery Land 23 Group, f/k/a Kingman Farms, LLC, and Shumway Well Waters Systems, also receive no distribution. The Class “6” interests of former equity holders have their equity interests 24 cancelled and receive no distribution. 25 7 A copy of the “Assessor Refinanced Secured Tax Promissory Note dated May 17, 26 2017” (“Assessor Note”) was attached as Exhibit “3” to the Second Rhodes Declaration. Under the Assessor Note, in the principal amount of $86,331.72, Debtor is the payor and the Mohave 27 County Treasurer is the payee. The note is secured by the Arizona Property. It is signed by the 28 Debtor through its manager, Truckee Springs Holdings, Inc. Because it is neither an obligor nor an obligee, Contrail is not a party to the Assessor Note. 6 Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 7 of 17 1 On April 18, 2018, as instructed by the court at the hearing, the Supplemental 2 Declaration of William M. Noall (“Supplemental Noall Declaration”) was filed. (ECF No. 498). 3 THE REQUESTED RELIEF 4 By the instant Motion, Debtor seeks to reopen this Chapter 11 proceeding as permitted by 5 the Final Decree. Debtor’s purpose in reopening the case is to obtain a “ruling that the Option 6 remains in full force and effect under the terms of the Confirmed Plan and Confirmation Order . . 7 . ” Motion at 10:7-8. The Motion is brought under Section 105(a) and FRBP 9019(a). Id. at 8 2:21-22. As the moving party, Debtor bears the burden of persuasion by a preponderance of the 9 evidence. See generally Wright & Graham, FEDERALPRACTICE AND PROCEDURE: EVIDENCE 2d, 10 ¶ 5122 (2005 and 2017 Supp.); see also In re Tallerico, 532 B.R. 774 (Bankr. E.D. Cal. 2015) 11 (discussing burdens of production, proof and persuasion). 12 Contrail maintains that the requested ruling cannot be granted by motion, but must be 13 sought through an adversary proceeding for declaratory relief. See Opposition at 4:3-5.8 14 Moreover, Contrail argues that the Option terminated under the terms of the Settlement 15 Agreement, Option Agreement, Assessor Note, Confirmed Plan, and Plan Confirmation Order, 16 because the Debtor failed to comply with the applicable deadline for the Mohave County 17 Assessor to receive monthly payments on the Assessor Note. Id. at 4:8 to 8:17 and 13:15 to 18 14:9. 19 Debtor replies that Mohave County has not declared that the Assessor Note is in default 20 and maintains that Contrail has not been prejudiced by a technical default. See Reply at 2:5 to 21 3:9. It maintains that Contrail “has manufactured a dispute in order to nullify the Option,” id. at 22 3:11, and that Contrail has engaged in “bad faith attempts to capitalize on a de minimis, 23 technical, administrative error for which [Debtor] was expressly excused by the County . . . ” Id. 24 at 4:4-6. 25 DISCUSSION 26 8 At the hearing on the Motion, however, Contrail requested that the court rule on the 27 merits of the Debtor’s request and did not object to the reopening of the Chapter 11 proceeding. 28 The parties having fully briefed the merits, the court concludes that both the Debtor and Contrail have consented to resolution of this matter without necessity of an adversary proceeding. 7 Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 8 of 17 1 The Motion to reopen the Chapter 11 case will be granted inasmuch as Contrail does not 2 oppose and good cause otherwise exists. The Motion to enforce will be denied for the reasons 3 discussed below. 4 1. The Documentary Record. 5 Under the Settlement Agreement, Contrail was permitted to purchase the Arizona 6 Property by credit bidding the amount of its claim.9 See Settlement Agreement, § 4.1.1. The 7 purchase would be effectuated through a Purchase and Sale Agreement (“Sale Agreement”), a 8 copy of which was attached as Exhibit “A” to the Settlement Agreement. Upon completion of 9 the sale to Contrail for the credit bid amount, all of the indebtedness would be satisfied, and the 10 Debtor’s principal would be released of his personal guaranty. Id., § 4.1.3. 11 Under the Settlement Agreement, Contrail also granted to the Debtor a non-assignable 12 option (“Option”) to purchase the Arizona Property back from Contrail after the Sale Agreement 13 was completed. See Settlement Agreement, § 4.2.1. The Option would be effectuated through 14 an Option and Purchase and Sale Agreement (“Option Agreement”), a copy of which was 15 attached as Exhibit “B” to the Settlement Agreement. Debtor was responsible to pay all taxes, 16 interest and penalties owed to Mohave County (“Mohave Tax Obligations”) pursuant to the 17 Assessor Note. See Settlement Agreement, § 4.2.2. That provision of the Settlement Agreement 18 specifically states, in pertinent part, that “if any payment with respect to any Taxable Parcel is 19 not received from [Debtor] by the Mohave County Assessor on or before the due date pursuant 20 to such Assessor Note, the Option and Sale Agreement and Option thereunder shall immediately 21 and automatically terminate without further notice and be of no force and effect.” Id. (emphasis 22 added).10 23 9 The parties agreed that the amount of Contrail’s claim as of March 10, 2017, was no 24 less than $9,611,696.19, and that interest, legal fees and costs would continue to accrue until 25 completion of the sale. See Settlement Agreement, Recital C, 2. 26 10 The Settlement Agreement was negotiated during the Trial Hiatus among sophisticated parties represented by highly qualified legal counsel. To emphasize the point, the following 27 language appears: “[Debtor] has been represented by legal counsel in connection with the 28 drafting, negotiation and execution of this Agreement and is fully aware of and clearly understands all of the terms and provisions contained in this Agreement and the effect thereof...” 8 Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 9 of 17 1 Under the Settlement Agreement, Debtor was required to amend its proposed Chapter 11 2 plan to include the settlement terms between the parties. See Settlement Agreement, § 5. The 3 parties agreed that in the event of any dispute or conflict between the Settlement Agreement and 4 the proposed Chapter 11 plan, the terms of the Settlement Agreement would control. Id. 5 Moreover, the parties specifically agreed that in the event an order confirming the proposed 6 Chapter 11 plan was not timely entered, an ex parte order terminating the automatic stay would 7 be entered permitting Contrail to foreclose on the Arizona Property. See Settlement Agreement, 8 § 6. Copies of a stipulation for relief from stay along with a proposed order were attached as 9 Exhibits “C” and “D” to the Settlement Agreement. 10 Under the Sale Agreement, Debtor was specifically permitted to pay delinquent taxes and 11 assessments over time pursuant to the Assessor Note. See Sale Agreement, § 11.1. 12 Under the Option Agreement, a list of purchase prices was set forth in a table (“Take 13 Down Schedule”) attached as Exhibit “A” thereto, and the initial plus two additional option 14 periods were set forth. See Option Agreement, at 4(a) and (b). It specifies in pertinent part that 15 the Debtor may exercise the option “[p]rovided that (i) [Debtor] has not defaulted under this 16 [Option] Agreement or the Settlement Agreement, and (ii) the Option and this [Option] 17 Agreement have not been terminated pursuant to its terms . . . ” Id. at 4(c) (emphasis added).11 18 Under the Assessor Note, Debtor agreed to pay Mohave County the principal amount of 19 $86,331.72. See Assessor Note, § 1. Interest accrued at 3.5 percent per annum. Id., § 2. 20 Payments commencing May 17, 2017, were to be made in 24 equal monthly installments of 21 $3,597.16, plus interest, until the note matured on April 30, 2019. Id., § 3. Payments were to be 22 made to the Mohave County Treasurer at its mailing address, c/o Mohave County Attorney’s 23 Office, in Kingman, Arizona. Id., § 4. A failure to make any payment when due constitutes an 24 25 Settlement Agreement, § 7.5. Identical language with respect to the Debtor’s principal also appears in the document. Id., § 8.7. 26 11 The Option Memorandum contains similar language: “Solely upon satisfaction of the 27 terms and conditions set forth in the Option Agreement, including without limitation no default 28 by [Debtor] thereunder or the Settlement Agreement, the Initial Option Period may be extended...” Option Memorandum, ¶ 3(a) (emphasis added). 9 Case 16-10025-mkn Doc 500 Entered 05/10/18 16:14:34 Page 10 of 17 1 event of default. Id., § 6. The Assessor Note cannot be amended or modified without a written 2 instrument signed by the Mohave County Treasurer. Id., § 15. 3 Under the Second Disclosure Statement, the Debtor’s obligation to pay the Mohave Tax 4 Obligations under the Settlement Agreement is disclosed. See Second Disclosure Statement, 5 Art. V, § 5.5(b), 34:3-18. Consistent with the language of the Settlement Agreement, the 6 language in the Second Disclosure Statement specifically states that “if any payment with 7 respect to any Taxable Parcel is not received from Debtor by the Mohave County Assessor on or 8 before the due date pursuant to the Assessor Note, the Option/Sale Agreement and Option 9 thereunder shall immediately and automatically terminate without further notice and be of no 10 force and effect.” Id. at 34:6-10 (emphasis added). 11 Under the Confirmed Plan, the terms of the Settlement Agreement and description in the 12 Second Disclosure Statement were incorporated as the treatment of Contrail’s claim under Class 13 2. See Confirmed Plan, Art. II, § 2.3(b), 19:14 to 24:2.12 Consistent with the language in the 14 Settlement Agreement, the language in the Confirmed Plan specifically states that “if any 15 payment with respect to any Taxable Parcel is not received from the Reorganized Debtor by the 16 Mohave County Assessor on or before the due date pursuant to such Assessor Note, the 17 Option/Sale Agreement and Option thereunder shall immediately and automatically terminate 18 without further notice and be of no force and effect.” Id. at 22:10-14 (emphasis added). 19 Additionally, the Confirmed Plan provides for the claims of the Mohave County Assessor to be 20 paid by the Debtor through the Assessor Note, secured by the Arizona Property. Id. at § 2.3(c). 21 Under the Plan Confirmation Order, the terms of the Settlement Agreement, the Sale 22 Agreement, and the Option Agreement, among others, are ordered to be “legal, valid, binding, 23 and authorized obligations of the Reorganized Debtor, enforceable in accordance to their terms.” 24 25 26 12 The Settlement Agreement is categorized as a “Key Transaction Document” under the Confirmed Plan, which also includes the Sale Agreement, the Option Agreement, the Option 27 Memorandum, the Plan Confirmation Order, the Confirmed Plan, and other reasonably necessary 28 documents. See Confirmed Plan, § 1.61. Each of the Key Transaction Documents is an “Operative Document” under the Confirmed Plan. Id., § 1.69. 10