In re Aerospace Eng'g & Support, Inc.

662 B.R. 168

IN RE: AEROSPACE ENGINEERING & SUPPORT, INC., Debtor.

Bankruptcy Case No. 23-22868

United States Bankruptcy Court, D. Utah

Signed May 9, 2024

M. Darin Hammond, Smith Knowles, P.C., Ogden, UT, for Debtor.

Matthew James Burne, Office of the United States Trustee, Salt Lake City, UT, for U.S. Trustee.

Brian M. Rothschild tr, Parsons Behle & Latimer, Salt Lake City, UT, for Trustee.

Jason A. McNeill, McNeill/Von Maack, Salt Lake City, UT, for Systems Implementers, Inc.

Chapter 11 (under Subchapter V)

MEMORANDUM OF OPINION

PEGGY HUNT, United States Bankruptcy Judge

The Court is presented with issues involving the burdens of proof applicable to the allowance of a proof of claim that does not establish a claim against the Debtor, and whether the automatic stay applies to a state court action against persons who received potentially avoidable transfers from the Debtor. These issues arise out of two matters: (1) an Objection to Proof of Claim No. 6 of Systems Implementors, Inc. (the "Claim Objection"),¹ filed by the Debtor seeking to disallow the Proof of Claim (the "POC")² of Systems Implementors, Inc. ("SI"); and (2) SI's Motion for Relief From Stay (the "Stay Relief Motion"),³ seeking (i) relief from the automatic stay pursuant to Section 362(d)(1) of title 11 of the United States Code (the "Bankruptcy Code")⁴ to continue a lawsuit against the Debtor in state court, and (ii) authority to continue the state court action against non-debtors on the basis that Section 362(a) does not apply or, alternatively, because there is cause to lift the stay under Section 362(d)(1). Notice of both matters was properly served and no further notice is required.⁵ Both matters are contested.⁶

The Court hereby enters this Memorandum of Opinion to memorialize a ruling made on the record at a hearing on April 25, 2024.⁷ For the reasons set forth below, the Debtor's Claim Objection is overruled because although SI's POC is flawed, SI has met its ultimate burden of establishing an allowable general unsecured claim against the Debtor under Section 502(b) of the Bankruptcy Code in the amount of $1,427,620.47. Allowance of SI's POC means it need not return to state court to liquidate its claim against the Debtor and therefore the portion of its Stay Relief Motion applicable to the Debtor is moot. The portion of the Stay Relief Motion applicable to the non-debtors is denied in part and granted in part subject to the conditions set forth herein.

I. JURISDICTION AND VENUE

The Debtor filed a petition seeking relief under Subchapter V of Chapter 11 of the Bankruptcy Code on July 7, 2023 (the "Petition Date"). The Court has jurisdiction of the Debtor's case and over the present contested matters under 28 U.S.C. §§ 157(a)(1) and 1334, and the District Court's Order of Reference at DUCiv R 83-7.1. These matters "arise under" the Bankruptcy Code and "arise in" the Debtor's case and, thus, are core proceedings in which the Court has authority to enter final orders and judgments.⁸ These matters are also core proceedings under 28 U.S.C. § 157(b)(2)(A), (B), (G) and (O). Venue of the Debtor's case is not contested and is proper under 28 U.S.C. § 1408.

II. FINDINGS OF FACT

The relevant facts are undisputed.

Corporate Structure of Relevant Entities

The Debtor, a Utah corporation,⁹ states that prior to the Petition Date it was involved in a business venture with Aerospace Engineering Spectrum (AES), Ltd. ("Spectrum").¹⁰ Spectrum is a Utah limited partnership.¹¹ The Debtor admits that it is a general partner of Spectrum.¹²

The Spectrum Judgment

Spectrum was awarded a contract by the United States Air Force (the "AF Contract"), and it subcontracted with SI to perform some of the services required under the AF Contract (the "Subcontract").¹³ In August 2018, SI commenced a lawsuit against Spectrum in Utah state court alleging Spectrum breached the Subcontract (the "Breach Action").¹⁴ SI and Spectrum thereafter executed a Confidential Forbearance and Settlement Agreement (the "SI/Spectrum Settlement Agreement") in June 2019 under which Spectrum agreed to pay SI over $1.7 million in installments.¹⁵ Spectrum also executed a Verified Confession of Judgment that SI could file if Spectrum failed to make the required payments.¹⁶

Spectrum defaulted on its payment obligations under the SI/Spectrum Settlement Agreement,¹⁷ and in December 2019, SI filed the Verified Confession of Judgment in the Breach Action. The state court entered an Order and Entry of Judgment in favor of SI and against Spectrum in the principal amount of $788,640.37 in February 2020 (the "Spectrum Judgment").¹⁸

Transfers of AF Contract Funds

According to SI, Spectrum transferred funds it received under the AF Contract to the Debtor between 2017 and August 2018—when the Breach Action was filed—and after the filing of the Breach Action through December 4, 2019 (the "Transfers").¹⁹ The Debtor does not contest that Spectrum made some or all of the Transfers, stating that it managed Spectrum's finances and that Spectrum "transferred the money to Debtor" when it was paid under the AF Contract.²⁰

SI's Collection Action

SI was unable to collect the Spectrum Judgment from Spectrum. In August 2020, after engaging in post-judgment discovery, SI commenced a lawsuit in Utah state court (the "Collection Action")²¹ against Spectrum, the Debtor and, among others, Daniel Florence, Rusty Oram and entities allegedly owned or controlled by Mr. Florence and/or Mr. Oram (collectively, the "Non-Debtor Defendants").²²

SI alleges as part of the Collection Action that the Debtor and the Non-Debtor Defendants are liable to SI for amounts owed under the Spectrum Judgment based on four sets of claims (collectively, the "Collection Claims") as follows:

UVTA Claims. As a creditor of Spectrum, SI asserts that it may recover amounts owed to it under the Spectrum Judgment by avoiding the Transfers that Spectrum made to the Debtor under the Utah Uniform Voidable Transactions Act (the "UVTA")²³ and recovering the Transfers from the Debtor as the first transferee and/or the Non-Debtor Defendants as immediate or mediate transferees.²⁴

LPA Claim. SI seeks a declaratory judgment that the Debtor, as Spectrum's general partner, is jointly and severally liable for the Spectrum Judgment under the Utah Uniform Limited Partnership Act (the "LPA").²⁵

Alter Ego Claim. SI seeks a judgment declaring the Debtor and Spectrum are alter egos, making the Debtor liable for the Spectrum Judgment.²⁶

Assumption of Liability Claim. SI asserts that the Debtor assumed Spectrum's debts to SI.²⁷

The Debtor's Bankruptcy Case

SI's Collection Action was stayed pursuant to Section 362(a) of the Bankruptcy Code on July 7, 2023, when the Debtor filed a petition seeking relief under Subchapter V of Chapter 11, thus commencing the present case. A trial date had not been set by the state court in the Collection Action as of the Petition Date, but approximately one month prior, fact discovery had concluded, and expert discovery had commenced.²⁸

SI is one of the Debtor's largest unsecured creditors.²⁹ Schedule E/F lists SI as a creditor holding a disputed, general unsecured claim in the amount of $591,000.³⁰ The Debtor represents this listing was the amount the Debtor was carrying on its books for Spectrum's debt to SI, but that the debt is disputed.³¹

The Debtor has proposed a plan under Subchapter V of Chapter 11. At the request of the United States Trustee, the proposed plan has been or will be amended to include provisions vesting Chapter 5 avoidance claims in a post-confirmation trust to be administered by a trustee.³²

SI's Proof of Claim

SI timely filed a Proof of Claim against the Debtor using Official Form 410, asserting a general unsecured claim in the amount of $1,427,620.47.³³ The face of the POC states that the basis for SI's claim is "Utah Code Ann. Section 48-2e-404(1); UCA 25-6-202, 203; & other."³⁴ Attached to the POC are 463 pages of documents that are not tabbed, summarized, or described (the "Claim Attachment").³⁵

There is nothing on the face of the POC or in the Claim Attachment showing an unliquidated, noncontingent claim against the Debtor. Rather, the first page of the Claim Attachment is designated as a "Claim Amount Breakdown" outlining SI's claim against Spectrum as of the Petition Date. Copies of the Spectrum Judgment, the SI/Spectrum Settlement Agreement and a calculation of SI's claim against Spectrum are included in the early pages of the Claim Attachment.³⁶ The remaining documents that comprise the Claim Attachment are a hodgepodge of documents that appear to be related to the Collection Action, with no context of why they are attached.

The Stay Relief Motion and the Claim Objection

SI filed the Stay Relief Motion seeking relief to allow it to continue litigating the Collection Action in state court against the Debtor and Non-Debtor Defendants which was opposed by the Debtor.³⁷ A preliminary hearing on the Stay Relief Motion was held on October 3, 2023. Counsel made argument and representations on the record. The hearing was continued to November 7, 2023, and thereafter the parties filed Supplemental Briefs as requested by the Court.³⁸

Concurrent with the filing of its Supplemental Brief, the Debtor filed the Claim Objection, objecting to SI's POC because, among other things, the Claim demonstrates that SI has a claim against Spectrum, but not the Debtor.³⁹ SI filed a Response to the Claim Objection (the "Claim Objection Response"),⁴⁰ setting forth for the first time that its claim against the Debtor is based on the Collection Claims in the Collection Action and providing citations to the 463-page Claim Attachment alleged to support each of the Collection Claims.⁴¹ The supporting references are to documents scattered throughout the Claim Attachment in no particular order.⁴² The Debtor did not file a reply to SI's Claim Objection Response.

A hearing on the Claim Objection was held on February 6, 2024. Counsel made argument and representations on...