In re Hardrock HDD, Inc.

569 B.R. 443

IN RE: HARDROCK HDD, INC., et al.,¹ Debtors.

Case No. 17–46425 Jointly Administered

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed June 26, 2017

Karin F. Avery, Silverman & Morris, P.L.L.C., West Bloomfield, MI, Thomas R. Morris, Silverman & Morris, P.L.L.C., Farmington Hills, MI, for Debtors.

Ronna G. Jackson, United States Trustee, Detroit, MI, for U.S. Trustee.

OPINION GRANTING IN PART MOTION FOR RELIEF FROM THE AUTOMATIC STAY AND/OR FOR ADEQUATE PROTECTION

Phillip J. Shefferly, United States Bankruptcy Judge

Introduction

Three related companies filed Chapter 11 cases. A creditor filed a motion for relief from the automatic stay in two of the cases to recover equipment that secures a debt owed to it. Because the motion raises issues of fact, the Court scheduled an evidentiary hearing. Based on the record made at the evidentiary hearing, and for the reasons explained in this opinion, the Court will grant the motion in part by lifting the automatic stay as to some of the equipment and leaving the automatic stay in place as to the other equipment, conditioned on adequate protection payments.

Jurisdiction

This is a core proceeding under 28 U.S.C. § 157(b)(2)(G), over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a).

Procedural History

HardRock HDD, Inc. ("HardRock"), Patrick Horizontal Drilling, L.L.C. ("Patrick Horizontal"), and Patrick Leasing, L.L.C. ("Patrick Leasing") (collectively, "Debtors") are three related companies involved in underground drilling and utility construction. On April 28, 2017, the Debtors each filed a Chapter 11 petition. The three cases are jointly administered.

On May 10, 2017, People's United Equipment Finance Corp. ("People's United") filed a Motion for Relief From the Automatic Stay and/or Adequate Protection ("Motion") (ECF No. 10). The Motion alleges that People's United holds a secured claim against two of the Debtors, HardRock and Patrick Leasing. The Motion requests the Court to lift the automatic stay so that People's United may enforce its security interest in certain equipment owned by HardRock and Patrick Leasing. In the alternative, the Motion requests that if the Court does not lift the automatic stay, the Court order HardRock and Patrick Leasing to provide People's United with adequate protection for its interest in the equipment.

HardRock and Patrick Leasing filed a response to the Motion. People's United filed a reply.

On June 7, 2017, the Court held a hearing on the Motion. The Court found that there were factual issues that required an evidentiary hearing. On June 21, 2017, the Court held the evidentiary hearing.

People's United called one witness, Joseph Cannici ("Cannici"), a vice president and manager of People's United. Cannici is very knowledgeable about the financing of equipment, having handled thousands of transactions for People's United during the many years that he has worked for it. Cannici testified about the HardRock and Patrick Leasing account with People's United. Cannici testified credibly. People's United also introduced into evidence exhibits 1–10.

HardRock and Patrick Leasing called one witness, Jeffery Patrick ("Jeffery"), one of the founders and a 50% owner of each of the Debtors. Jeffery testified about the Debtors' pre- and post-petition business operations. Jeffery testified credibly. HardRock and Patrick Leasing introduced into evidence exhibits A–D, F, and G.

Findings of Fact

The Court makes the following findings of fact from the evidence adduced at the evidentiary hearing.

Jeffery and his father have operated the Debtors for approximately 20 years. Although Jeffery and his father view the three Debtors as basically one enterprise, they are legally separate business entities. HardRock is a corporation while the other two Debtors are limited liability companies. HardRock was originally formed as an operating company doing drilling and utility construction, Patrick Leasing was originally formed as an equipment leasing company, and Patrick Horizontal was originally formed as a real estate holding company.

The three companies have historically generated combined annual revenues of $2.5 million. Over time, the functions of the three companies have been blurred, and it is not uncommon for them to make payments to or for each other.

The Debtors were forced to file Chapter 11 because they ran out of cash due to the failure of one of HardRock's customers to pay HardRock on a very large job.

Prior to the bankruptcy petitions, People's United, an equipment financing company, made two loans to HardRock and Patrick Leasing, one on February 3, 2016 for $148,944.00, and one on October 31, 2016 for $213,936.00, both of which are secured by a first priority security interest in the following equipment ("Equipment"):

International Chassis with attached Vactor Hydro Excavator ("Vactor");

MAC Smooth Side Dump Trailer ("Trailer");

MAC Half Round Dump Trailer ("Trailer"); and

Freightliner Tractor Truck ("Freightliner").

HardRock and Patrick Leasing defaulted on those loans pre-petition because of missed monthly payments. People's United was owed a total of $311,582.50 as of the petition date.

HardRock owns the Vactor and Patrick Leasing owns the rest of the Equipment. The Debtors also own other equipment and Patrick Horizontal owns the real property where the Debtors are located. The Vactor is in need of repairs and has been in a repair shop since November, 2016, but the Debtors are "anticipating" using the Vactor for a new job to begin next week. The Trailers and the Freightliner are not presently being used, but the Debtors have a job beginning next week that will require the use of the Freightliner and the Trailers.

The Debtors have some post-petition business operations, but most of it is done by Patrick Horizontal—which is not one of the Debtors that borrowed money from People's United and does not own any of the Equipment. The two Debtors that own the Equipment and are the subject of the Motion have conducted little post-petition business. HardRock's post-petition business consists of two items of income totaling $15,600.00, shown on HardRock's profit and loss statement (exhibit A) for the period of April 29, 2017 through June 20, 2017. Patrick Leasing has not conducted any post-petition business and its post-petition profit and loss statement (exhibit C) for the same period shows no income. The profit and loss statement (exhibit B) for Patrick Horizontal for the same period shows income of $84,550.00. Altogether, the three Debtors have a combined positive net income post-petition, but the two Debtors that owe People's United, HardRock and Patrick Leasing, both show a negative net income post-petition.

Going forward, Jeffery testified very generally that the "Debtors are bidding on new work that will increase the Debtors' revenue and profitability." More specifically, Jeffery identified two projects. First, Patrick Horizontal is working on a Flint water services reconstruction lead abatement program, which "will go on for years." Jeffery testified that he signed a written contract for Patrick Horizontal to do the Flint water services work, but he did not have a copy of it available at the hearing. The reason the Flint water services construction work is not being performed by HardRock—historically the Debtors' operating company—but is instead being performed by Patrick Horizontal—historically the Debtors' real estate holding company—is because HardRock is not a union approved company. Patrick Horizontal is a union approved company, and the Flint work must be performed by a union company. To do the work on this contract, Patrick Horizontal is using equipment owned by HardRock and Patrick Leasing. Second, Patrick Horizontal is "picking up" work from Miller Pipeline in Grand Rapids, Detroit and other locations, although the evidence is silent as to whether there is a contract or an estimate of the amount of this work.

HardRock has one other source of income going forward. On June 20, 2017, one day before the evidentiary hearing, HardRock signed an Equipment Rental Agreement (exhibit D) ("Miller Agreement") with Miller Pipeline. The Miller Agreement calls for HardRock to lease the Vactor to Miller Pipeline, a pipeline company located in Indiana but working in Michigan, for $11,500.00 per month, with the first month's rent to be paid to a repair shop to complete the cost of repairs on the Vactor. HardRock signed the Miller Agreement even though the Security Agreement (exhibit 3) that HardRock signed with People's United expressly states in paragraph 2(g) that HardRock shall not "rent, lease, lend, destroy or otherwise transfer or dispose of" the Equipment "without the prior written consent" of People's United. Although HardRock did not obtain People's United's consent before signing the Miller Agreement, HardRock is "comfortable" that Miller Pipeline will make payments on the Miller Agreement because Jeffery, in addition to his positions with the Debtors, is also the general manager of Miller Pipeline, and he "knows" that Miller Pipeline "has the depth of resources to make the payments."

The total value of the Equipment is approximately $295,000.00. That value is based on the testimony of both Jeffery and Cannici. Jeffery testified that he believes the total value of the Equipment to be approximately $295,000.00, consisting of $200,000.00 for the Vactor, $30,000.00 each for the Trailers, and $35,000.00 for the Freightliner. Cannici basically agreed with Jeffery's estimates of value.

The evidence on the useful life of the Equipment is conflicting. Jeffery estimated the remaining useful life of the Vactor to be between 10 to 15 years, and the remaining useful life for the rest of the Equipment to be approximately 15 years. Cannici estimated the remaining useful life of the Vactor to be approximately 4 to 5 years, and the remaining useful life of the rest of the Equipment to be about 3 years. Although both witnesses...