Somerset Trust Co. v. Mostoller (In re Somerset Reg'l Water Res., LLC)

592 B.R. 38

IN RE: SOMERSET REGIONAL WATER RESOURCES, LLC, Debtor.

Somerset Trust Company, Movant,

v.Larry L. Mostoller, Connie J. Mostoller, Respondents.

Bankruptcy No. 15-70766-JAD

United States Bankruptcy Court, W.D. Pennsylvania.

Signed September 24, 2018

Michael A Boomsma, Post & Schell, P.C., Lancaster, PA, Mark E. Freedlander, McGuire Woods LLP, Robert O. Lampl, Robert O. Lampl Law Office, Pittsburgh, PA, for Debtor.

David K. Rudov, Rudov Law, Pittsburgh, PA, Charles O. Zebley, Jr., Uniontown, PA, for Trustee.

John M. Steiner, Crystal H. Thornton-Illar, LEECH TISHMAN FUSCALDO & LAMPL LLC, Pittsburgh, PA, for Creditor Committee.

MEMORANDUM OPINION

JEFFERY A. DELLER, United States Bankruptcy Judge

The matter before the Court concerns the interpretation of a post-petition financing order previously entered by the Court. This order was entered with the consent of the Debtor (Somerset Regional Water Resources, LLC), the Debtor's sole member (Mr. Larry Mostoller), and the Debtor's post-petition lender (Somerset Trust Company).

This Court has jurisdiction to interpret and enforce its prior orders. See Travelers Indem. Co. v. Bailey, 557 U.S. 137, 149, 129 S.Ct. 2195, 2205, 174 L.Ed.2d 99 (2009). This matter is a core proceeding over which the Court has both subject-matter jurisdiction and the requisite statutory authority to enter a final order. See 28 U.S.C. §§ 157(b)(2)(A), 157(b)(2)(D), 157(b)(2)(K), 157(b)(2)(M), 157(b)(2)(O), and 1334(b).

Somerset Trust Company ("STC") is the Debtor's largest creditor and was the Debtor's pre-existing secured lender. Following the commencement of this bankruptcy case, the Debtor needed liquidity to support its current operations and approached STC regarding the Debtor's continued use of STC's cash-collateral. The Debtor also requested further working capital from STC in the form of post-petition financing to fund the Debtor's business affairs during the early parts of this bankruptcy case. By all accounts, the Debtor's continued use of cash-collateral and the acquisition of post-petition financing were viewed by the Debtor as being immediately necessary to avoid irreparable harm to its business and assets.

Working on a short timeframe, the Debtor, Mr. Mostoller, and STC (collectively referred to herein as the "Parties") negotiated a post-petition financing package. An important component of the financing package was Mr. Mostoller's pledge to STC of Mr. Mostoller's right to a federal income tax refund attributable to losses incurred by the Debtor in year 2015, and imputed to Mr. Mostoller by virtue of the Debtor's taxation as an S-Corporation. This element of collateral was important to STC because (a) the long-term viability of the Debtor's business was uncertain in light of the recent downturn of the energy markets, (b) the Debtor was already highly leveraged, and (c) the Debtor did not own any other significant unencumbered assets which could be pledged to support new lending by STC.

The Parties memorialized their agreement in a consent order submitted and approved by this Court, which was titled: Final Order Pursuant to Sections 11 U.S.C. § 546 of the Bankruptcy Code and Bankruptcy Rule 4001(c) Authorizing Postpetition Financing, Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363, Granting Adequate Protection Pursuant to 11 U.S.C. §§ 363 and 364 ("Final DIP Order", ECF No. 138).

Ultimately, the losses sustained by the Debtor in 2015 generated a refund of federal income taxes paid in 2015. Through the carry-back of the unused portion of those 2015 losses, it also generated a tax refund of federal income taxes paid in 2013 and 2014. The refunds referenced herein were processed by the IRS in 2016, as set forth more fully below.

Specifically, the refund of taxes paid on account of tax years 2015 and 2013 were completely offset by the Internal Revenue Service against outstanding federal tax obligations owed thereby leaving only a tax refund of taxes paid with respect to the 2014 amended tax return of Mr. and Mrs. Mostoller (the "Respondents").

For purposes of clarity it is noted that the amended 2014 tax return was filed by the Respondents in 2016 based upon the operating losses attributable to the Debtor in 2015. This amended tax return was also filed at the same time the Respondents filed other tax returns, including their 2015 tax return. As such, by the instant contested matter, STC seeks payment of this refund set forth in the amended 2014 tax return contending it constitutes STC's collateral.

The operative issue presented by these proceedings is therefore whether the Final DIP Order mandates the payment of the remaining tax refund to STC. In this regard, a question has arisen as to whether ¶ 6 of the Final DIP Order contains an ambiguity which would bring the refund of taxes (paid by the Respondents in 2014) within the ambit of the tax refund pledged to STC (when such refund was obtained by the Respondents on account of the Debtor's 2015 operating losses).

STC contends that the refund of taxes paid in 2014 falls within the scope of the collateral pledged to STC. Towards this end, STC argues that (a) Mr. Mostoller's course of conduct and participation in negotiations of the Final DIP Order supports STC's position and mandates a finding that the refund at issue should be paid to STC, and (b) interpreting the Final DIP Order to exclude the refund of taxes paid in 2014 from the pledge of collateral to STC would lead to an "absurd and unreasonable" result because all the parties intended STC to receive the tax refund attributable to the Debtor's year 2015 operating losses.

The Respondents disagree and argue that the Final DIP Order does not contain any ambiguity, and they further contend that the refund of the 2014 taxes is free and clear of any collateral pledged to STC. The Respondents also argue that reading the Final DIP Order to exclude the refund of taxes paid in 2014 does not lead to an "absurd and unreasonable" result under the circumstances of this case. In this regard, the Respondents argue that STC got exactly what it bargained for. That is, no right to a refund for the 2014 taxes paid even though the refund is on account of the carryback of the Debtor's 2015 losses.

I.BACKGROUND

The Debtor is a limited liability company taxed as an S-Corporation. Stipulation ¶ 2, ECF No. 1082. Prior to the Debtor's bankruptcy filing, Mr. Mostoller was the sole owner or member of the Debtor. See Tr. of Jan. 26, 2017 Hr'g 45:8-18, ECF No. 1055; Stipulation ¶¶ 2, 5. Being taxed as an S-Corporation, the Debtor's profits and losses were imputed to the Respondents, which were then reported on the Respondents' joint tax returns. Stipulation ¶ 6.

Prior to 2015, the Debtor was a profitable enterprise. However a downturn in the oil and gas industry caused the Debtor to experience significant losses, resulting in a deductible tax loss of $6,356,642 for 2015. Stipulation ¶ 32.

Given the downturn in business and the significant operating losses it had incurred, the Debtor commenced this bankruptcy case by filing a voluntary petition under Chapter 11 of the Bankruptcy Code on November 9, 2015. See Voluntary Petition , ECF No. 1.

As part of its turnaround efforts, the Debtor retained Compass Advisory Partners LLC and its managing director, John W. "Jack" Teitz ("Teitz"), to serve as the Debtor's Chief Restructuring Officer. Stipulation ¶ 14.

Upon commencement of the case, the Debtor recognized an immediate need for continued access to the cash collateral (i.e., collected accounts receivable) pledged to STC and a need for further working capital in the form of post-petition financing. As a result, the Debtor (through Teitz) approached STC¹ regarding the Debtor's working capital needs. Discussions ensued and those discussions resulted in an agreement between the Parties.

Thereafter, on December 2, 2015, the Debtor filed its Motion for an Interim Order Allowing Use of Cash Collateral and Debtor in Possession Financing and Request for an Expedited Hearing in Regard to Same ("Expedited Motion for DIP Financing," ECF No. 48). Stipulation ¶ 15.

In the Expedited Motion for DIP Financing, the Debtor explained the importance of the financing it obtained from STC. In this regard, the Debtor stated as follows:

Without the use of cash collateral and the approval of the financing, the Debtor will be seriously and irreparably harmed, resulting in significant losses to the Debtor's estate and its creditors.... It goes without saying that the Debtor's inability to use Cash Collateral and obtain the financing proposed would cause immediate and irreparable harm to the estate. If the Debtor cannot pay its ongoing operating expenses, the Debtor simply will have no business to reorganize.

See Expedited Motion for DIP Financing 4, ¶¶ 16-17, ECF No. 48.

Following a hearing held December 4, 2015, the Expedited Motion for DIP Financing was granted on an interim basis. See Interim Order Granting Expedited Motion for DIP Financing ("Interim DIP Order"), ECF No. 68. The Interim DIP Order was executed by Counsel for the Debtor, Counsel for STC, and Mr. Mostoller, individually. See Interim DIP Order 20, ECF No. 68.

A final hearing on the Expedited Motion for DIP Financing was held on January 5, 2016. At the hearing, Mr. Mostoller was represented by Steven Shreve, Esq. See Tr. of Jan. 5, 2016 Hr'g 4:20-21, ECF No. 1073. He was also represented from time to time by attorney Salene Mazur Kraemer, Esq.

During the course of the January 5^th hearing, Counsel for the Debtor iterated the importance of the post-petition financing provided by STC, and described the entry of the final order as "imperative" for the continuation of the case. Tr. of Jan. 5, 2016 Hr'g 8:22-9:8, ECF No. 1073.

Counsel for the Debtor also explained that in the effort to obtain financing from STC, a tax refund due to Mr. Mostoller in the approximate range of $2 million to $2.5 million, subject to offsets for certain tax obligations, had been pledged to STC as a security...