In re Richard & Stephanie Lucarelli Lucarelli's Exec. Answering Serv., LLC

IN RE: RICHARD AND STEPHANIE LUCARELLI LUCARELLI'S EXECUTIVE ANSWERING SERVICE, LLC DEBTORS.

CASE NO. 13-30350 (JAM)

CASE NO. 13-30443 (JAM) (Jointly Administered)

UNITED STATES BANKRUPTCY COURT DISTRICT OF CONNECTICUT

February 5, 2015

CHAPTER 11

ECF NOS. 145, 168

APPEARANCES

Kenneth Lenz, Esq.

Lenz Law Firm, LLC

236 Boston Post Road

Orange, CT 06477

Attorney tor Richard and Stephanie

Lucarelli

Carl T. Gulliver, Esq.

Coan, Lewendon, Gulliver & Miltenberger, LLC

495 Orange Street

New Haven, CT 06511

Attorney for Lucarelli's Executive

Answering Service, LLC

Michael A. Carbone, Esq.

Zeldes, Needle & Cooper, P.C.

1000 Lafayette Boulevard

Bridgeport, CT 06604

Attorney for unsecured creditor

Sweet Delights, LLC

RULING ON CONFIRMATION OF SECOND AMENDED JOINT PLAN OF REORGANIZATION

Before the court is the Second Amended Joint Plan of Reorganization (the "Joint Plan"), of Richard and Stephanie Lucarelli (the "Lucarellis"), and Lucarelli's Executive Answering Service, LLC ("LEAS"). On September 4, 2014, in connection with the objection to confirmation of the Joint Plan filed by the unsecured creditor, Sweet Delights, LLC ("Sweet Delights"), a Memorandum of Decision was issued regarding the applicability of the absolutepriority rule in individual Chapter 11 cases. In re Lucarelli, 517 B.R. 42 (Bankr. D. Conn. 2014). The facts and circumstances surrounding confirmation of the Joint Plan are set forth in the reported decision and are incorporated herein by reference.

On September 24, 2014, a status conference was held to identify the remaining issues to be decided in connection with confirmation of the Joint Plan. The Lucarellis, LEAS, and Sweet Delights agreed that the final confirmation issues to be addressed were: (i) whether the Lucarellis acted in good faith by reducing the amount of their salaries earned from LEAS; (ii) whether the Lucarellis acted in good faith by proposing to liquidate an exempt asset in their Chapter 11 case and using the proceeds to fund payments under the Joint Plan; (iii) whether the new value exception to the absolute priority rule exists; and (iv) whether the proposed new value is adequate to allow confirmation of the Joint Plan. After review of the supplemental briefs and consideration of the arguments at the continued confirmation hearing held on December 15, 2014, the court ruled that: (i) the Joint Plan was filed in good faith; (ii) the Lucarellis acted in good faith by proposing to liquidate an exempt asset and use the proceeds to fund the Joint Plan; and (iii) the new value exception to the absolute priority rule exists. The only remaining issue is whether the proposed new value to be contributed is adequate to overcome the absolute priority rule and allow for confirmation of the Joint Plan.

The Joint Plan provides that the Class 8 impaired unsecured creditors of the Lucarellis, including Sweet Delights, will receive a distribution of approximately 3% on their unsecured claims. The Joint Plan further provides that upon confirmation, the Lucarellis will retain their 100% ownership in LEAS. Furthermore, the Joint Plan provides that the new value the Lucarellis propose to contribute —the proceeds from the liquidation of their 401(k) accounts—will only be contributed if the Joint Plan is confirmed.

Under applicable law, the Lucarellis' 401(k) accounts are exempt assets and therefore beyond the reach of their creditors, including Sweet Delights. However, if the Joint Plan is confirmed, the Lucarellis will liquidate their 401(k) accounts and use the proceeds to pay at least some of the administrative expenses of both the LEAS and Lucarelli estates, pay the priority claims of the Lucarelli estate, and fund a small distribution to the Class 8 unsecured creditors of the Lucarellis, including Sweet Delights. Sweet Delights argues that the proceeds to be contributed are not reasonably equivalent to the value of LEAS, which the Lucarellis will retain if the Joint Plan is confirmed, and therefore confirmation should be denied. The Lucarellis argue that despite Sweet Delights' objections, the Joint Plan can be confirmed under the cram down provisions of 11 U.S.C. § 1129 (b).

At the continued confirmation hearing, the Lucarellis presented evidence that liquidating their 401(k) accounts will produce proceeds of approximately $128,000.00.¹ The Lucarellis also introduced evidence of the value of LEAS. The valuation report, prepared by an expert witness, found the going concern value of LEAS to be $153,700.00. The Lucarellis, LEAS, and Sweet Delights all stipulated to the expert's valuation of LEAS for purposes of confirmation of the Joint Plan. Although Sweet Delights stipulated to the value of LEAS, it argues that because the proceeds from the liquidation of the 401(k) accounts do not equal the value of the LEAS, the new value is not reasonably equivalent value and therefore the Joint Plan should not be confirmed.

It appears that there are no reported decisions in this district or the Second Circuit addressing the adequacy of a new value contribution in an individual Chapter 11 case. However,the Second Circuit discussed the new value exception in the corporate case of Coltex Loop Cent. Three Partners, L.P. v. BT/SAP Pool C Assoc, L.P., 138 F.3d 39, 41 (2d Cir. 1998). In Coltex, the Court noted that if it were to rely on the traditional framework for evaluating new value exceptions to the absolute priority rule, a five-part test must be met—the new value contribution must be: (1) new, (2) substantial, (3) money or money's worth, (4) necessary for a successful reorganization and (5) reasonably equivalent to the value of the property to be retained by old equity. Id. at 45.

In Coltex, the Second Circuit explained the fourth prong of the new value exception—necessity—as follows:

under the [new value exception's] necessary requirement old equity must be willing to contribute more money than any other source for the interest it would receive or it must be the lender of 'last resort'. Old equity must do more than demonstrate that new capital is necessary for a successful reorganization. The old owners must also show that the reorganized entity needs funds from the prior owner-managers because no other source of capital is available.

Id. at 45 (original italics, brackets, internal quotes and ellipsis omitted). One year after Coltex, the United States Supreme Court, in Bank of Am. Nat'l Tr. and Savings Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 458, 119 S.Ct. 1411 (1999), held that "assuming a new value corollary . . . plans providing junior interest holders with exclusive opportunities free from competition and without benefit of market valuation fall within the prohibition of §1129(b)(2)(B)(ii)."

Bankruptcy courts in this circuit have read LaSalle and Coltex to require that "the debtor . . . show[] that funds are necessary for the reorganization, that it was necessary for the old equity to be the one who contributes those funds and that equity in the reorganized debtor must be determined in accordance with the market[,]" in order to satisfy the fourth prong of the new value exception test. In re RAMZ Real Estate Co., LLC, 510 B.R. 712, 719 ...