In re Trinity Family Practice & Urgent Care, PLLC

661 B.R. 793

IN RE: TRINITY FAMILY PRACTICE & URGENT CARE PLLC, Debtor.

Case No. 23-70068-smr

United States Bankruptcy Court, W.D. Texas, Midland Division

Signed May 24, 2024

Robert Chamless Lane, The Lane Law Firm, PLLC, Houston, TX, for Debtor.

Brad W. Odell, Mullin Hoard & Brown, LLP, Lubbock, TX, for Trustee.

John C. Roy, Ross, Smith & Binford, PC, Austin, TX, Gary W. Wright, DOJ-UST, Austin, TX, for U.S. Trustee.

MEMORANDUM OPINION AND FINAL ORDER DENYING CONFIRMATION OF DEBTOR'S SUBCHAPTER V PLAN AND SETTING DEADLINE FOR DEBTOR TO FILE AN AMENDED PLAN

SHAD M. ROBINSON, UNITED STATES BANKRUPTCY JUDGE

This subchapter V bankruptcy case regarding a relatively small medical clinic in Odessa, Texas, requires the Court to decide an important issue regarding the time period for plan payments in a nonconsensual subchapter V plan under 11 U.S.C. § 1191(c)(2)(A)¹: how does a bankruptcy court determine whether a proposed three-year period of plan payments is "fair and equitable," or if it should "fix" a longer period not to exceed five years?²

Trinity Family Practice & Urgent Care, PLLC (the "Debtor") seeks confirmation of its First Amended Chapter 11 Subchapter V Plan (the "Plan" or "Debtor's Plan" at ECF No. 73). The Plan is nonconsensual and the Debtor seeks confirmation under § 1191(b). The Plan provides that the Debtor will make payments of its projected disposable income over a three-year period pursuant to § 1191(c)(2)(A).

American Momentum Bank (the "Bank") voted against the Plan and also filed an objection to the proposed three-year period of plan payments. First, the Bank asserts that the three-year period of plan payments is not proposed by the Debtor in good faith under § 1129(a)(3).³ Second, the Bank asserts that the Court should deny confirmation because a distribution to the unsecured creditor class in the amount of $38,761.29 (or 8.2% of their claims) over the Plan's three-year payment period is not fair and equitable under § 1191(b) and (c).⁴ The Bank argues that, given the minimal nature of the payment to unsecured creditors, the Court should fix a longer plan payment period.

The Debtor contends that the three-year period of payments set forth in the Plan is (1) proposed in good faith, (2) "fair and equitable," and (3) consistent with the intent of Congress to create a quick, efficient reorganization process that would allow the Debtor to obtain a discharge as soon as possible. The Debtor further argues that the proposed three-year period of plan payments properly balances the interests of the Debtor as well as the Debtor's employees, customers, and creditors. In support of its argument, the Debtor relies primarily on the bankruptcy court's opinion in In re Urgent Care Physicians.⁵

I. ISSUES PRESENTED

The first issue is whether the Debtor's three-year period of plan payments is proposed in good faith and not by any means forbidden by law as required by § 1129(a)(3).

The second issue is whether a subchapter V plan that provides for payment of all of the Debtor's projected disposable income to creditors for a period of three years is fair and equitable under § 1191(b) and (c)(2)(A), or if the Court should fix a longer plan payment period.

II. HOLDING

After considering the evidence presented and legal arguments of the parties, and for the reasons discussed below, the Bank's objection that the Plan is not proposed in good faith under § 1129(a)(3) is OVERRULED. However, the Bank's objection to confirmation of the Plan on the grounds that the three-year period of plan payments is not fair and equitable under § 1191(b) and (c)(2)(A) is SUSTAINED because the Court finds, based on the facts of this case, the evidence presented, and a consideration of the factors set forth below, that the Debtor has not satisfied its burden to show by a preponderance of the evidence that the proposed three-year period for plan payments is "fair and equitable" under § 1191(b) and (c)(2)(A).

Finally, the Court finds that the Debtor should be granted leave to file an amended plan on or before June 10, 2024. If the Debtor decides not to file an amended plan on or before June 10, 2024, then the case will be sua sponte dismissed by the Court without prejudice.⁶

III. JURISDICTION AND VENUE

The Court finds that it has jurisdiction over this matter under 28 U.S.C. §§ 157 and 1334(a) and (b), 11 U.S.C. §§ 1190, 1191, and 1129, and Federal Rule of Bankruptcy Procedure 3020. This matter constitutes a core proceeding under 28 U.S.C. § 157(b)(1), (b)(2)(A), and (b)(2)(L) because it involves matters concerning administration of the estate and confirmation of a chapter 11, subchapter V plan of reorganization. Venue is proper under 28 U.S.C. §§ 1408 and 1409. The Court has authority to adjudicate this matter pursuant to the District Court's Standing Order of Reference.

IV. PROCEDURAL HISTORY AND FACTUAL FINDINGS⁷

The Debtor is a health care related business that started operations in May 2018 and operates a small family health urgent care clinic business in Odessa, Texas.⁸ Jason Payne and Laura Payne own and operate the Debtor as its managing members. Jason Payne owns 51% of the Debtor, and Laura Payne owns 49% of the Debtor.⁹ Both Jason Payne and Laura Payne will remain managing members and retain their ownership interests post-confirmation.¹⁰

The Debtor filed its voluntary petition under chapter 11, subchapter V of the Bankruptcy Code¹¹ in the United States Bankruptcy Court for the Western District of Texas, Midland Division on June 23, 2023 (the "Petition" at ECF No. 1).

Concurrent with the filing of the Petition, the Debtor filed several financial statements and pleadings including a Statement of Operations,¹² Cash Flow Statement,¹³ Balance Sheet,¹⁴ Motion to Use Cash Collateral,¹⁵ and Motion for Entry of an Order Authorizing Payment of Pre-Petition Wages in the Ordinary Course of Business.¹⁶ On July 20, 2023, the Court entered orders (1) authorizing the Debtor to pay pre-petition wages,¹⁷ (2) approving the Debtor's budget,¹⁸ and (3) authorizing the Debtor's use of cash collateral.¹⁹

The Debtor has several W-2 employees, as well as separate independent contractors, that provide services.²⁰ The Debtor's principal, Jason Payne, is a licensed nurse practitioner and a W-2 employee of the Debtor.²¹ Prior to bankruptcy and during the post-petition, pre-confirmation period, Jason Payne received bi-weekly wages of approximately $1,923.00.²² Jason Payne testified at the confirmation hearing that he became a licensed nurse practitioner after the filing of the Petition.

The Debtor requested that the Court confirm its Plan as a nonconsensual plan under § 1191(b). The Plan proposes to pay creditors from its projected disposable income by continuing operations and reorganizing its debt. The Plan proposes to pay the Debtor's projected disposable income over a three-year period beginning on the date that the first payment is due under the Plan.²³ The evidence presented at the confirmation hearing shows that the Debtor anticipates having enough business and cash available to fund the Plan and pay its creditors over the three-year period proposed in the Plan.

The Debtor's Plan included projections of gross income, expenses, and operating income for the next three years which the Court considered in support of the Plan.²⁴ The Plan projections show total revenue as follows:

Total Revenue in Year One of Plan Payments:

$1,055,360.00

Total Revenue in Year Two of Plan Payments:

$1,065,913.60

Total Revenue in Year Three of Plan Payments:

$1,076,572.74

The Plan projections further show total expenses over the three-year term of payments as follows:

Total Expenses in Year One of Plan Payments:

$1,020,114.84

Total Expenses in Year Two of Plan Payments:

$1,030,589.59

Total Expenses in Year Three of Plan Payments:

$1,041,166.0825

[Editor's Note: The preceding image contains the reference for footnote²⁵].

Based on the revenue and expenses listed above, the projected net operating income ("NOI"), annual Plan payment (including payments to both the secured and unsecured claims), and remaining cash are as follows:

NOI

Annual

Plan Payment

Remaining Cash

Year One of Plan

$35,245.16

$34,435.36

$809.80

Year Two of Plan

$35,324.01

$33,490.44

$1,833.57

Year Three of Plan

$35,406.65

$33,490.44

$1,916.2126

[Editor's Note: The preceding image contains the reference for footnote²⁶].

At the confirmation hearing on December 11, 2023, the Debtor offered no evidence of the basis or methodology that it utilized in calculating projected income and expenses during the three-year period of plan payments. The Debtor offered no evidence of the Debtor's historical revenue or expenses even though the Debtor has been in operation since May 2018.²⁷ The Debtor's schedules, which were signed by Jason Payne under oath, show gross revenue in 2021 of $1,407,787.00, gross revenue in 2022 of $1,203,604.01, and gross revenue as of June 23, 2023 (the petition date) in the amount of $408,513.67.²⁸ No evidence was offered to explain why gross revenue was higher in 2021 and 2022 or why gross revenue appeared to be trending down through June 2023. There was also no evidence or explanation offered to compare the historical revenues and expenses to the Plan projections.

The monthly operating reports for June 2023 through October 2023²⁹ were used as confirmation exhibits but no evidence or explanation was offered to show how the monthly operating reports support the Plan projections and the proposed three-year period of plan payments. The Debtor's principal, Jason Payne, testified that expenses increased in the Plan projections compared to the Debtor's post-petition, pre-confirmation budget largely because the Debtor has been operating on an "extremely lean budget" since the Petition date. Mr. Payne also testified that the increase in expenses in the Plan projections is attributable to (1) an increase in advertising, (2) the Debtor's intent to expand services, (3) marketing to the local...