In re Ford Steel, LLC

629 B.R. 871

IN RE: FORD STEEL, LLC, Debtor.

Case No: 20-34405

United States Bankruptcy Court, S.D. Texas, Houston Division, HOUSTON DIVISION.

Signed July 20, 2021

Julie Mitchell Koenig, Cooper & Scully, PC, Houston, TX, for Debtor.

MEMORANDUM OPINION

Eduardo Rodriguez, United States Bankruptcy Judge

Ford Steel, LLC, an American Institute of Steel Construction certified steel fabricator that utilizes state-of-the-art computer numerical control machinery to fabricate platforms, skids, ladders, communication/broadcast towers, and custom fabrication for oil, petrochemical, broadcast industries, and other customers worldwide has been operating as a debtor-in-possession throughout this chapter 11 proceeding during an unprecedented time of shut downs, work interruptions, and sheltering in place due to the COVID-19 pandemic. Throughout the pandemic, Ford Steel, LLC, retained and paid approximately 60 employees without the assistance of the federal government. Nevertheless, the United States of America contends that this case should be dismissed or converted for "cause"—whatever is in the best interest of the creditors and the estate—pursuant to 11 U.S.C. § 1112(b)(4)(A) because the estate is suffering substantial or continuing loss, and there is no reasonable likelihood of rehabilitation. In the alternative, the United States of America requests appointment a chapter 11 trustee for cause. For the reasons stated herein, the motion is denied.

I. Findings of Fact

This Court makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052, incorporating Federal Rules of Civil Procedure 52 and 9014. To the extent that any finding of fact constitutes a conclusion of law, it is adopted as such. To the extent that any conclusion of law constitutes a finding of fact, it is adopted as such. This Court made certain oral findings and conclusions on the record. This Memorandum Opinion supplements those findings and conclusions. If there is an inconsistency, this Memorandum Opinion controls.

1. On September 1, 2020, Ford Steel, LLC ("Debtor ") filed a petition under chapter 11 of the United States Bankruptcy Code.¹

2. On September 29, 2020, United States of America ("USA ") filed its proof of claim alleging $4,589,610.98 as secured, $333,517.64 as priority, and $144,647.33 as general unsecured for a total of $5,067,775.95 ("Proof of Claim ").²

3. On October 5, 2020, the Court held its initial status conference and ordered that a disclosure statement and plan be filed no later than December 31, 2020.³

4. On December 31, 2020, Debtor filed its disclosure statement and plan of reorganization ("Plan ").⁴

5. On February 9, 2021, the Court, after a hearing, approved the disclosure statement.⁵

6. On May 27, 2021, USA filed the instant "Expedited Motion by the United States to Either (a) Appoint Chapter 11 Trustee or (b) Convert Case to Chapter 7" ("Motion ").⁶

7. On May 28, 2021, Debtor filed a motion to employ James M. Pratt of Colliers International Houston, Inc. ("Colliers ") as Debtor's real estate broker to market and find a buyer for 6.0025 acres of land being Tracts 4-A and 7-B in the M.H. Short Survey, Abstract 535, Montgomery County, Texas, ("Property ").⁷

8. On June 4, 2021, Debtor filed its response ("Response ") to the Motion.⁸

9. On June 8, 2021, the Court held a preliminary hearing on the Motion and scheduled an evidentiary hearing for June 28, 2021.⁹

10. On June 25, 2021, Debtor filed its first modification to the Plan.¹⁰

11. As of June 22, 2021, Debtor is current on the filing of its Monthly Operating Reports. Debtor is not current on the payment of quarterly United States Trustee's fees, owing approximately $40,000.¹¹

12. On June 28, 2021, the Court held an evidentiary hearing on the Motion. That hearing was continued to and concluded on July 8, 2021 ("Hearing ").

II. Conclusions of Law

A. Jurisdiction, Venue, and this Court's Constitutional Authority to Enter Orders

This Court holds jurisdiction pursuant to 28 U.S.C. § 1334, which provides "the district courts shall have original and exclusive jurisdiction of all cases under title 11." Section 157 allows a district court to "refer" all bankruptcy and related cases to the bankruptcy court, wherein the latter court will appropriately preside over the matter.¹² This court determines that pursuant to 28 U.S.C. § 157(b)(2)(A) and (O), the instant matter contains core matters because the Motion seeks relief under the United States Bankruptcy Code.

Furthermore, this Court may only hear a case in which venue is proper.¹³ Pursuant to 28 U.S.C. § 1409(a), "a proceeding arising under title 11 or arising in or related to a case under title 11 may be commenced in the district court in which such case is pending." Debtor's principal place of business is Houston, Texas, which is where the underlying bankruptcy case was filed. Therefore, venue is proper.

This Court has an independent duty to evaluate whether it has the constitutional authority to sign a final order.¹⁴ In Stern, which involved a core proceeding brought by the debtor under 28 § 157(b)(2)(C), the Supreme Court held that a bankruptcy court "lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim."¹⁵ As indicated above, the pending dispute before this Court is a core proceeding. The ruling in Stern was limited to the one specific type of core proceeding involved in that dispute, which is not implicated here. Accordingly, this Court concludes that the narrow limitation imposed by Stern does not prohibit this Court from entering a final order.¹⁶

Alternatively, even if Stern applies to all of the categories of core proceedings brought under § 157(b)(2),¹⁷ this Court still concludes that the limitation imposed by Stern does not prohibit this Court from entering a final order in the dispute at bar. In Stern, the debtor filed a counterclaim based solely on state law; whereas, here, the Motion is based on express provisions of the Bankruptcy Code— 11 U.S.C. §§ 1104 and 1112 —and judicially-created bankruptcy law interpreting these provisions. This Court is therefore constitutionally authorized to enter a final order on the Motion. Additionally, this Court has constitutional authority to enter a final order on the Motion because Debtor and USA have consented, impliedly if not explicitly, to adjudication of this dispute by this Court.¹⁸ The parties have engaged in litigation in front of this Court, including numerous hearings and motions practice. Neither party has objected to this Court's constitutional authority to enter a final order or judgment. These circumstances unquestionably constitute implied consent. Thus, this Court wields the constitutional authority to enter a final order here.

B. Whether cause exists to convert under § 1112(b)(4)(A)

USA requests that this Court convert Debtor's chapter 11 case to a chapter 7 case because Debtor allegedly suffers from a "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation[,]" constituting cause under § 1112(b)(4)(A) to convert Debtor's case.¹⁹ Section 1112(b)(1) provides:

... on request of a party in interest, and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.

Section 1112(b)(4) contains a non-exhaustive list of examples of cause meriting conversion or dismissal. If the USA can establish cause under § 1112(b)(4)(A), conversion or dismissal becomes mandatory because § 1112(b)(2) does not provide an exception to conversion or dismissal for cause found under § 1112(b)(4)(A).²⁰

"The inquiry under § 1112 is case-specific, focusing on the circumstances of each debtor."²¹ While most chapter 11 debtors can effectuate a plan of reorganization in a matter of months, certain debtors with more complex debt structures or business difficulties may require more time.²² Each debtor's viability and prospects must be evaluated "in light of the best interest of creditors and the estate."²³ The party seeking dismissal or conversion bears the burden of proving cause by a preponderance of the evidence.²⁴ To demonstrate cause pursuant to § 1112(b)(4)(A), the moving party must show there is both (1) a substantial or continuing loss to or diminution of the estate and (2) the absence of a reasonable likelihood of rehabilitation.²⁵ The loss may be substantial or continuing; it need not be both.²⁶ If the loss is sufficiently large given the financial circumstances of the debtor as to materially negatively impact the bankruptcy estate and interest of creditors, the loss is substantial.²⁷ Cause can be shown by demonstrating that the debtor suffered or continues to experience a negative cash flow or declining asset values following the order for relief.²⁸ "Negative cash flow alone can be sufficient cause to dismiss or convert under § 1112(b)."²⁹

1. Substantial or continuing loss to or diminution of the estate

USA asserts that Debtor has acknowledged the substantial loss on its April monthly operating report, having lost more than $1.2 million since this case started.³⁰ As explained above, USA need not demonstrate a substantial and continuing loss to the estate to establish cause under § 1112(b)(4)(A) ; rather, USA must demonstrate a "substantial or continuing loss to or diminution of the estate."³¹ By providing evidence that Debtor lost in excess of $1.2 million since filing its petition, USA demonstrated a substantial loss to the estate and has satisfied the first prong of § 1112(b)(4)(A).

2. Reasonable likelihood of rehabilitation

To satisfy the second prong of § 1112(b)(4)...