Opinion
6:22-bk-00910-TPG
06-06-2022
In re EJ Legacy, LLC, Debtor.
ORDER DENYING DEBTOR'S MOTION TO VACATE ORDER DISMISSING CASE AND SUSTAINING CREDITOR'S OBJECTION TO REINSTATEMENT
TIFFANY P. GEYER, UNITED STATES BANKRUPTCY JUDGE
This case came on for hearing on June 1, 2022 (Doc. No. 33) upon the "Motion to Vacate Order of Dismissal and to Reinstate Case," (the "Reinstatement Motion") filed by the Debtor, EJ Legacy, LLC pursuant to Federal Bankruptcy Rules 9013 and 9024 and Federal Rule of Civil Procedure 60(b)(1) and (b)(6) (Doc. No. 24). The Debtor filed the Reinstatement Motion fourteen days after the Court entered an order dismissing the Debtor's case for failure to comply with its duties pursuant to 11 U.S.C. § 1116, the Court's orders and Local Rules. (Doc. Nos. 22, 24.) U.S. Bank Trust National Association, not in its individual capacity but solely as trustee of Taenite Asset Trust (the "Secured Creditor") filed an Objection (the "Objection") to the Reinstatement Motion. (Doc. No. 26.) The hearing was attended telephonically by counsel for the Debtor, Christopher Hixson with the law firm of Consumer Law Attorneys ("CLA"); Todd Budgen as Subchapter V Trustee; Jill Kelso, a trial attorney with the office of the United States Trustee ("UST"); and Matthew Klein on behalf of the Secured Creditor. (Doc. No. 33.) Upon consideration of the arguments of counsel, the law, the case docket and taking judicial notice of the record in this case and being otherwise fully advised in the premises, the Court denies the Reinstatement Motion and sustains the Secured Creditor's Objection.
As promulgated in accordance with Fed.R.Bankr.P. 9029.
A court may take judicial notice of its own records. ITT Rayonier Inc. v. United States, 651 F.2d 343, 345 n.2 (5th Cir. Unit B July 20, 1981). The decisions of the United States Court of Appeals for the Fifth Circuit issued on or before September 30, 1981, are binding precedent in the Eleventh Circuit. Bonner v. City of Prichard, Ala., 661 F.2d 1206, 1207 (11th Cir. 1981).
I. PROCEDURAL HISTORY
On March 14, 2022 ("Petition Date"), the Debtor filed a voluntary petition under Chapter 11, Subchapter V. (Doc. No. 1.) The Debtor scheduled no unsecured claims, no leases or executory contracts, no inventory, and no accounts receivable. (Id. at 9-15.) The Debtor's assets consist only of two real properties and two bank accounts. (Id. at 8, 13.)
Three days after the Petition Date, on March 17, 2022, the Court issued its Procedures Order in Chapter 11 Subchapter V Case, Setting Deadline for Filing Plan, and Setting Status Conference (the "Procedures Order"). (Doc. No. 7.) The Procedures Order directed compliance with Local Rule 2081-1 which requires the Debtor to file a Case Management Summary within three days of the Petition Date. (Id. at ¶ 1.) The Case Management Summary was due on March 17, 2022. (Id.) However, the Debtor never filed this important document, which serves, among other things, to educate the Court and interested parties as to the nature of the Debtor's business activities, debt structure, the reasons the case was filed and what the Debtor hopes to accomplish by the filing.
In addition, the Procedures Order directs that a status report be filed and served pursuant to 11 U.S.C. § 1188(c) not later than fourteen days prior to the date of the initial status conference. (Doc. No. 7 at ¶ 4.) Such reports must detail the Debtor's efforts in communicating with the Subchapter V Trustee and with creditors and whether the Debtor anticipates a consensual plan confirmation. (Id.) The Debtor's status report was due no later than April 6, 2022. (Id.) The Debtor did not file its status report by the deadline or at any time thereafter.
The Court conducted the required status conference on April 20, 2022. The hearing was attended by Mr. Budgen, Ms. Kelso, and Mr. Peter Kelly on behalf of the Secured Creditor. (Doc. No. 21.) Mr. Hixson did not attend the status conference, nor did any other attorney from CLA. (Doc. No. 21.) The individual signing the Debtor's petition also did not appear at the status conference, nor did any other representative of the Debtor. (Id.; Doc. No. 1 at 4.) In addition, although Ms. Kelso advised that an attorney from CLA did appear at the 341 meeting of creditors scheduled on April 18, 2022, no representative of the Debtor appeared, so the UST had to continue the meeting to May 3, 2022. Further, Mr. Hixson apparently cancelled the scheduled Initial Debtor Interview (IDI) (which interviews occur prior to the 341 meeting of creditors in Chapter 11 cases, 28 U.S.C. § 586(a)(7)), and made no effort to reschedule the IDI.
As the Procedures Order directs, if a Debtor is represented by counsel, as here, the Debtor is required to contact the Subchapter V Trustee within five days from the date of the Procedures Order to discuss the Trustee's facilitation of a consensual plan. (Doc. No. 7 at ¶ 2.) Further, regular communications with the Subchapter V Trustee are expected as appropriate to the case facts. (Id.) Mr. Budgen reported that there had been no communications from the Debtor or its counsel. Ms. Kelso reported that the Debtor failed to produce proof of insurance for its real properties, and that the Debtor generally failed to comply with any of the duties set forth in 11 U.S.C. § 1116.
After the status conference, on April 20, 2022, the Court directed the Debtor (the "April 20 Order") to comply with the Procedures Order (Doc. No. 19), which, of course, is not something the Court should have to do. Nevertheless, the Court gave the Debtor a second chance to remedy its many deficiencies. The Court's April 20 Order discussed the Debtor's failure to abide by the Procedures Order and explained that the Debtor generally failed to comply with its duties as set forth in 11 U.S.C. § 1116. (Doc. No. 19 at 2.) The April 20 Order directed the Debtor to file its Case Management Summary, its status report, and to supply proof of insurance for any real property identified in the Debtor's schedules on or before April 27, 2022, warning that, if the Debtor failed to comply, the case may be dismissed without further notice or hearing. (Id. at 3.) The Debtor failed to comply, and on April 28, 2022, the Court entered an order dismissing the case (the "Dismissal Order") (Doc. No. 22) before the rescheduled 341 meeting date.
II. THE REINSTATEMENT MOTION AND THE SECURED CREDITOR'S OBJECTION
In the Reinstatement Motion, the Debtor argues the Court's Dismissal Order should be set aside and the case reinstated because the dismissal was due to "administrative issues" in Mr. Hixson's office which resulted in the Debtor's failure to comply with 11 U.S.C. § 1116 and the Court's deadlines and Local Rules. (Doc. No. 24 at ¶ 2.) The Debtor promised to cure all deficiencies prior to a hearing on the Reinstatement Motion, to be available for a 341 meeting, and to timely file a plan. (Id. at 3.) A hearing on the Reinstatement Motion was set for May 25, 2022. (Doc. No. 25.)
The Secured Creditor objected to the Reinstatement Motion (the "Objection"). (Doc. No. 26.) The Secured Creditor has a security interest in one of the two real properties on the Debtor's schedules: 1512 Tranquil Avenue, Clermont, Florida 34714 (the "Property"). (Id. at ¶ 1; Doc. No. 1 at 13.) Due to the Debtor's payment default, the Secured Creditor initiated a foreclosure action on March 5, 2021. (Doc. No. 26 at ¶ 4.) On December 21, 2021, a Final Judgment was entered and a foreclosure sale was set for March 15, 2022, but the sale was cancelled due to the Debtor's bankruptcy filing. (Id. at ¶ 4). After this Court dismissed the Debtor's case, the Secured Creditor obtained a rescheduled sale date for June 14, 2022. (Doc. No. 29 at ¶ 9.) In the Objection, the Secured Creditor argues the Debtor merely seeks to reinstate its case for the sole reason of preventing the rescheduled foreclosure sale. (Doc. No. 26 at ¶ 10.)
On May 25, 2022, the date the initial hearing was scheduled on the Reinstatement Motion, the Debtor made a tiny effort to cure two of the many outstanding deficiencies and filed a "Notice of Filing Proof of Insurance" and "Corporate Ownership Statement (Rule 7007.1))." (Doc. Nos. 27, 28.) At 8:14 a.m. on that same date, Mr. Hixson filed an emergency motion (despite his having previously noticed the May 25 hearing on the Reinstatement Motion) seeking to continue the hearing (the "Emergency Motion") (Doc. No. 29) on the grounds that he was scheduled to be in trial on another matter at the same time and had incorrectly predicted the other matter would settle. (Id. at ¶¶ 3-5.) The Debtor requested a hearing on any date prior to the rescheduled sale date of June 14, 2022. (Id. at ¶ 9.) To give Mr. Hixson and the Debtor the chance to explain the many deficiencies in this case, the Court granted the Emergency Motion and set the hearing for June 1, 2022. (Doc. No. 31.)
However, no representative of the Debtor attended the hearing on the Reinstatement Motion. Mr. Hixson attended by telephone (Doc. No. 33) and argued that the case should be reinstated because the lack of compliance was his office's fault and not the Debtor's, and that the situation at his office had been rectified. Mr. Hixson explained that the Debtor rents both properties it owns through Airbnb, and that the Debtor could still proceed timely toward meeting its obligations, but presented no evidence. Because the Debtor failed to file its Case Management Summary in accordance with Local Rule 2080-1(b) and because none of the typical "First Day" motions were filed as of the time of the hearing on the Reinstatement Motion- seventy-nine days after the Petition Date-the Court had no information as to whether the Debtor operated any business or had any employees.
By choosing to appear telephonically, Mr. Hixson was precluded from offering evidence at the hearing. The "Procedures Governing Court Appearances Before Judges Vaughan, Robson and Geyer Effective May 1, 2022," permit appearances in non-evidentiary hearings by telephone. The procedures state, "Telephonic appearances are NOT allowed for trials or evidentiary hearings." (Emphasis in original.) The Court's Local Rule 5072-1(b)(13) states, "Counsel and parties attending hearings by telephone shall comply with the Court's Policies and Procedures on Telephonic Appearances available on the Court's website, www.flmb.uscourts.gov."
The UST, the Subchapter V Trustee, and the Secured Creditor opposed the Reinstatement Motion. Neither Ms. Kelso nor Mr. Budgen had any confidence that the numerous deficiencies could be remedied in time to permit the Debtor to file its Subchapter V plan by the deadline. Moreover, the Court would have to overlook or excuse the timing elements of 11 U.S.C. § 1116 if the case was to be reinstated. Communication efforts from Mr. Budgen and the UST went unanswered. Although Mr. Hixson claimed all deficiencies would be cured before the hearing on the Reinstatement Motion, that did not happen; other than the belatedly filed proof of insurance and Corporate Ownership Statement, no other requirements were met. The Debtor did not supply proof that it closed its pre-petition accounts or proof that it opened debtor in possession accounts, nor did it file its Case Management Summary, status report, any Monthly Operating Reports, or make any attempt to reschedule the IDI. In addition, the Debtor was $3,000 in arrears on administrative payments to Mr. Budgen.
For example, not later than seven days after the order for relief, a debtor is required to file its most recent balance sheet, statement of operations, cash-flow statement, and federal income tax return or to verify under the penalty of perjury that no such documents have been prepared or filed. 11 U.S.C. § 1116(1)(A) and (B).
Mr. Klein voiced the Secured Creditor's opposition to the Reinstatement Motion. The mortgage on the Property is a one-year commercial investment mortgage with a maturity date of December 1, 2020. When the Debtor defaulted in payment, the Secured Creditor obtained a foreclosure judgment of $195,835.79 on December 7, 2021, and a foreclosure sale was scheduled, but thwarted, when the Debtor filed its petition the day before the sale. Mr. Klein argued that the many problems in this case far transcended excusable neglect, and, like the UST and Mr. Budgen, also relayed that Mr. Hixson was generally not responsive to communications.
III. LEGAL STANDARD
The Debtor seeks relief pursuant to Federal Bankruptcy Rules 9013 and 9024 and Federal Rule of Civil Procedure 60(b)(1) and (b)(6). (Doc. No. 24 at 1.)
Rule 60(b)(1) provides that a court may relieve a party from an order due to "mistake, inadvertence, surprise, or excusable neglect . . . ." "Excusable neglect is generally an 'equitable inquiry' based upon the particular circumstances of the case." Conn. State Dental Ass'n v. Anthem Health Plans, Inc., 591 F.3d 1337, 1355 (11th Cir. 2009) (quoting Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 395, 113 S.Ct. 1489, 1495 (1993)). The Court in Pioneer held that excusable neglect can be found when an attorney inadvertently failed to timely file a proof of claim under Bankruptcy Rule 9006(b)(1). Pioneer, 507 U.S. at 398-99, 113 S.Ct. at 1500. The Court reviewed "other rules for guidance on the meaning of 'excusable neglect,' . . . considered Rule 60(b)(1) and observed that 'for purposes of Rule 60(b), "excusable neglect" is understood to encompass situations in which the failure to comply with a filing deadline is attributable to negligence.'" Conn. State Dental Ass'n, 591 F.3d at 1355 (quoting Pioneer, 507 U.S. at 394, 113 S.Ct. at 1497). Here, the Debtor argues that the Dismissal Order should be set aside under Rule 60(b)(1) because it was unable to comply with the rules due to excusable neglect resulting from "administrative issues in its counsel's office." (Doc. No. 24 at ¶ 2.)
In determining whether relief is warranted under Rule 60(b)(1), the Court considers the following factors: "the danger of prejudice to the [opposing party], the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith." Pioneer, 507 U.S. at 385, 394, 113 S.Ct. at 1493, 1497; Conn. State Dental Ass'n, 591 F.3d at 1356.
In the Reinstatement Motion, the Debtor argues that it would be prejudiced if its case is not reinstated (Doc. No. 24 at ¶ 15), but the more appropriate analysis is the danger of prejudice to the Secured Creditor if the case is reinstated. Here, the prejudice to the Secured Creditor is the delay in the foreclosure sale of the Property. The foreclosure sale was previously delayed due to the Debtor filing this petition the day before its scheduled date. (Doc. No. 26 at ¶ 4; Doc. No. 1.) This first factor weighs against granting the Reinstatement Motion which serves to reward the Debtor with further delay.
The second factor is the length of the delay and its potential impact on judicial proceedings. Pioneer, 507 U.S. at 385, 394, 113 S.Ct. at 1493, 1497. In considering this factor, the Court notes that although there was only a two-week delay between entry of the Dismissal Order and the Reinstatement Motion being filed (Doc. Nos. 22, 24), this case was dismissed because of the Debtor's wholesale failure to timely comply with 11 U.S.C. § 1116, the Court's orders and Local Rules. The Debtor made zero effort to comply until after the case was dismissed and after it filed the Reinstatement Motion, and even then, not until after the Debtor filed an Emergency Motion to reschedule the hearing on the Reinstatement Motion, at which point the Debtor made the tiniest of efforts in filing proof of insurance and its Corporate Ownership Statement. (Doc. Nos. 27, 28.)
In Chege v. Georgia Department of Juvenile Justice, 815 Fed.Appx. 425, 426 (11th Cir. 2020), the Eleventh Circuit affirmed the district court's denial of a motion to vacate the dismissal of the appellant's case under Rule 60(b)(1). This was the appellant's second, identical case against the opposing party, and her counsel failed in both cases to comply with the court's orders directing responses to motions to dismiss. Id. at 426. The appellant then filed a pro se motion to vacate the dismissal order in the second case because her attorney had not been admitted pro hac vice. Id. at 426-27. The Eleventh Circuit stated that the appellant's "ongoing delays and failure to comply with court orders also impose an undue burden on the district court: a consideration that weighs against [the appellant] and in favor of the court's interest in the finality of judgments and judicial efficiency." Id. at 428.
In the Eleventh Circuit, "Unpublished opinions are not considered binding precedent, but they may be cited as persuasive authority." 11th Cir. R. 36-2.
In this case, the Debtor caused ongoing delays by failing to timely comply with the Procedures Order or even the April 20 Order, only making a bare minimum effort after the case was dismissed and the Debtor sought reinstatement. Even then, the Debtor waited until the original hearing date on the Reinstatement Motion to file just two of the many missing documents. (Doc. Nos. 27, 28.) Moreover, at the hearing on the Reinstatement Motion, Mr. Budgen stated that the Debtor has not paid the Subchapter V Trustee fees of $1,000 per month for April, May or June, resulting in the Debtor being $3,000 behind in these payments. The Debtor failed to produce evidence of closing pre-petition bank accounts and opening debtor in possession accounts as required and generally abdicated its statutory duties under 11 U.S.C. § 1116.
Chapter 11 Subchapter V cases generally progress more quickly than Chapter 11 cases "[b]ecause a Subchapter V case is intended to provide for an expedited process, [and therefore] some of the requirements that are involved with a typical Chapter 11 case, which can add layers of expense and complexity, have been eliminated." In re Wildwood Villages, LLC, No. 3:20-BK-02569-RCT, 2021 WL 1784408, at *3 (Bankr. M.D. Fla. May 4, 2021). "The statute is designed and focused on reorganizing small businesses quickly and efficiently." Id. "Strict timelines [under Subchapter V] require parties to quickly move the case forward." In re Ellingsworth Residential Cmty. Ass'n, Inc., 619 B.R. 519, 520 (Bankr. M.D. Fla. 2020). Here, the goals of proceeding under Subchapter V were thwarted by the delay in the proceedings caused by the Debtor's sluggishness in complying with any of the Court's orders or the Local Rules. The second factor therefore weighs against granting the Reinstatement Motion.
The third factor is the reason for the delay. Pioneer, 507 U.S. at 385, 394, 113 S.Ct. at 1493, 1497. The Debtor provides no facts supporting the reason for the delay other than what Mr. Hixson described as an "administrative nightmare" in his office due to failures on the part of Mr. Hixson's support staff. And, "[w]ith respect to the third factor, overlooking deadlines . . . are within the movant's control and do not constitute excusable neglect.” Zurich Am. Ins. Co. v. Eur. Tile & Floors, Inc., No. 8:16-CV-729-T-33AAS, 2017 WL 638640, at *3 (M.D. Fla. Feb. 16, 2017). This third factor weighs strongly against the Debtor.
At the hearing on the Reinstatement Motion, Mr. Hixson did accept full responsibility for these failures. Clients, however, are "held accountable for the acts and omissions of their attorneys." Pioneer, 507 U.S. at 396, 113 S.Ct. at 1499. The Debtor voluntarily chose Mr. Hixson, and it cannot avoid the consequences of that selection. Id. "'Any other notion would be wholly inconsistent with our system of representative litigation, in which each party is deemed bound by the acts of his lawyer-agent and is considered to have 'notice of all facts, notice of which can be charged upon the attorney.'" Id. (quoting Link v. Wabash R. Co., 370 U.S. 626, 82 S.Ct. 1386 (1962)).
The final factor is whether the movant acted in good faith. Pioneer, 507 U.S. at 385, 394, 113 S.Ct. at 1493, 1497. A Chapter 11 case can be dismissed for bad faith if "the petition was filed 'to delay or frustrate the legitimate efforts of secured creditors to enforce their rights.'" In re Phoenix Piccadilly, Ltd., 849 F.2d 1393, 1394 (11th Cir. 1988) (quoting Albany Partners, Ltd. v. Westbrook (In re Albany Partners, Ltd.), 749 F.2d 670, 674 (11th Cir. 1984)). In Phoenix Piccadilly, the court concluded that a bankruptcy case was filed in bad faith because it was done mainly to forestall a foreclosure action by evaluating the following factors:
(i) The debtor's only asset was the property subject to foreclosure, in which it did not hold legal title;
(ii) The debtor had few unsecured creditors whose claims were small in relation to the secured creditors' claims;
(iii) The debtor had few employees;
(iv) The property is the subject of a foreclosure action because of arrearages on the debt;
(v) The debtor's financial problems involve essentially a dispute between the debtor and the secured creditors that could be resolved in the pending state court action; and
(vi) The timing of the debtor's filing evidences an intent to delay or frustrate the legitimate efforts of the secured creditors to enforce their rights. Id. at 1394-95.
Applying these factors here demonstrates an appearance of bad faith. The Debtor owns only two properties. (Doc. No. 1 at 13.) The Debtor lists three secured creditors and no unsecured creditors. (Id. at 16-20.) It does not appear that the Debtor has any employees. (Doc. No. 1.) The petition was filed the day before the scheduled foreclosure sale of the Property (Doc. No. 26 at ¶ 4; Doc. No. 1), and then the Debtor completely failed to pursue the case. The timing of the Petition Date and the sluggardly effort to pursue a reorganization strongly indicate that it was filed solely to prevent or delay the sale of the Property. Thus, the final factor of the Debtor's good faith weighs against setting aside the Dismissal Order.
For unknown reasons, the Debtor lists CLA as an unsecured creditor holding a $0 claim. (Doc. No. 1 at 20.)
Although the Court is not unsympathetic to whatever "administrative nightmare" existed at CLA, such cannot serve to excuse a three-month abdication of duties in this case. "It is among the most basic of a lawyer's duties to prosecute his or her clients' cases." Bynes v. Vilos Navigation Co., No. 18-CV-61840-UU, 2018 WL 9372459, at *1 (S.D. Fla. Sept. 21, 2018). But here, Mr. Hixson "remained passive" for months when action was required. Id. (declining to vacate order of dismissal where the plaintiff's counsel failed to prosecute the case even after counsel corrected the abdication of his duties "nearly a month after the Court dismissed the complaint."). This Court gave the Debtor a second chance in the April 20 Order, but the Debtor made no effort. As such, because all four factors supplied by Pioneer weigh against granting relief from the Dismissal Order, it will not be set aside pursuant to Rule 60(b)(1).
Excusable neglect can be a difficult standard to meet and is more likely to be demonstrated when there is a single missed deadline or error rather than a series of problems lasting several months that remain uncorrected. In at least one case involving an extended abdication of duties or series of errors, not even the debtor's counsel's hospitalization constituted excusable neglect. In re LaClair, 360 B.R. 388, 397-98 (Bankr. D. Mass. 2006) (stating that the most critical factor under Pioneer is the reason for the mistake, but when counsel's illness results in repeated errors over an extended time that threaten the client's economic wellbeing, counsel should withdraw from the representation, and that inattention or carelessness such as failing to abide by a procedural rule is not excusable neglect).
The Debtor also relies on Rule 60(b)(6), which allows an order to be set aside for any other reason that justifies relief. Extraordinary circumstances are required to relieve a party from an order under subsection (b)(6). Pioneer, 507 U.S. at 393, 113 S.Ct. at 1497 ("To justify relief under subsection (6), a party must show 'extraordinary circumstances' suggesting that the party is faultless in the delay."). The only circumstances the Debtor alleges here are "that the circumstances that resulted in the nonresponse to the required deadlines [were] excusable and that those circumstances have since been resolved." (Doc. No. 24 at ¶ 11.) The Debtor offered only Mr. Hixson's representations that the purportedly extraordinary circumstances resulted from administrative problems which are now resolved. Administrative problems happen. They are not extraordinary. The Debtor has not demonstrated a right to relief under Rule 60(b)(6).
IV. CONCLUSION
The Debtor failed to demonstrate a basis for vacating the Dismissal Order under Federal Rule of Civil Procedure 60(b)(1) and (b)(6). Accordingly, the Reinstatement Motion (Doc. No. 24) is DENIED and the Objection (Doc. No. 26) is SUSTAINED.
The Clerk is directed to serve a copy of this order on all interested parties.