Business Law

In re Innerline Engineering, Inc., 6:21-bk-11349-WJ (Bankr. C.D. Cal. Mar. 31, 2021)

The following is a case update written by Roksana D. Moradi-Brovia, Resnik Hayes Moradi LLP, analyzing a recent decision of interest:

Summary

The United States Bankruptcy Court for the Central District of California denied the motion of Chapter 11 debtor and debtor-in-possession Innerline Engineering, Inc. to extend the time to file its case initiation documents, notwithstanding that the motion was filed timely and submitted on the court’s approved local bankruptcy form. In re Innerline Engineering, Inc., 6:21-bk-11349-WJ (Bankr. C.D. Cal. Mar. 31, 2021). The court issued a lengthy order regarding the debtor’s motion, enforcing the existing deadline to submit the remaining schedules, statements, and other required forms, and finding that the debtor failed to describe any emergency or urgent development that prompted the filing.  The court, however, “encourag[ed] the Debtor to immediately re-file when ready to do so.” Entry of this order resulted in the dismissal of the case on the same date.

A copy of the court’s order can be found here. PACER charges will apply. 

Fact

The motion was supported by a declaration from counsel which outlined the debtor’s business operations as a utility maintenance service provider with 24 employees and explained that the case was filed because of the collection efforts of several judgment creditors and cash flow interruptions due to a dispute with an equipment lender. The declaration further outlined the debtor’s efforts to comply with the rules and requirements of the U.S. Trustee as well as the Subchapter V trustee appointed in the case.

Counsel explained that COVID-19 pandemic protocols employed by the debtor impacted its office/bookkeeping staff and therefore collecting/preparing the information needed to complete the remaining schedules and statements was delayed. Some of the information had been provided to counsel on the filing deadline and had therefore not yet been reviewed. Counsel further explained that the Easter holiday would prevent him from meeting with the debtor’s management to complete the remaining paperwork over the weekend and concluded with a request for a 7-day extension of the deadline.

Reasoning

The court emphasized that, because the automatic stay provided in section 362 of the Bankruptcy Code affords a generous benefit to debtors in bankruptcy, there are responsibilities on the part of debtors that come with this “comprehensive, immediate, self-executing, and worldwide injunction” that “in most instances . . . immediately stops nearly all collection activities by creditors.” Or., pg. 2.

One such responsibility is the need to provide information:

When a borrower files a bankruptcy case and demands that a lender immediately stop a foreclosure sale or cease efforts to repossess collateral, diligent creditors will want to promptly verify that the borrower has (1) listed the collateral as an asset in that specific bankruptcy case and (2) listed the creditor on Schedule D in that case. When debtors fail to file their case initiation documents, however, verification is not possible.

Similarly, some debtors file bankruptcy cases to immediately stop wage garnishment or an eviction or a bank levy or other asset seizures. Creditors who are subject to the automatic stay under these circumstances will understandably want to know if the debtor listed the creditor on Schedules D, E or F … However, when debtors fail to file case initiation documents timely, this process is stymied.

Or., pg. 3.

Another responsibility is to provide this information timely. The court lists several important deadlines imposed on creditors, such as the 30-day deadline to object to exemptions after the meeting of creditors ends (FRBP 4003(b)(1)); the 60-day deadlines to object to the discharge of a debtor (FRBP 4004(a)) and the dischargeability of a debt (FRBP 4007(c)) ; and the 60-day deadline for a creditor to pursue a reaffirmation agreement (FRBP 4008(a)).

Creditors inevitably need to review a debtor’s schedules and statements to be able to evaluate their position on these matters (and others), and “a few weeks is not much time for a creditor to receive notice of the filing of a bankruptcy case in the mail, hire an attorney, and investigate the case.”  The court noted that, “[t]his short time period is significantly reduced when debtors fail to file schedules and other case initiation documents with the petition and then, again, do not do so during the subsequent and fourteen-day period.” Or., pg. 4.

The court highlighted the refusal of higher courts to excuse untimeliness by creditors—even by just a few minutes—under virtually every conceivable set of facts and concluded that, “Courts need to avoid taking steps or other actions that would give debtors better treatment when missing deadlines than creditors or trustees.”  Or., pg. 6.

With regard to lack of service of the motion on all creditors, that court identified the issue as two-fold: the debtor clearly did not serve the motion as required by the relevant local bankruptcy rule; however, the court’s analysis equally focused on the “almost always” ex parte nature of such motions brought by debtors.

The court concentrated on the typical procedure surrounding such motions to extend the deadline to file schedules and other case initiation documents, which typically results in creditors not having any “meaningful opportunity to respond” and concluded that the “process seems designed to prevent creditors from weighing in on the request.” Or., pg. 7. While the United States Bankruptcy Court for the Central District of California has a local rule which allows this type of motion to be determined without a hearing after notice is provided (LBR 9013-1(p)), in its order, the court did not reference this rule or if the motion would have been granted had notice been provided.

The court further found a lack of sufficient cause to grant the motion. The Court queried:

[T]he Motion references “several judgment creditor collection actions” and “cash flow interruptions” but it does not indicate whether these occurred gradually over time or suddenly.

. . .

The Motion also does not explain why the Debtor needs to be in bankruptcy at this time. The Motion does not identify any urgent problem. The Motion does not explain why the case should not be dismissed and then re-filed in another week or two or some later date whenever the Debtor has finished preparing the necessary documents. The Motion does not articulate any harm or problem that would arise if the Court simply enforced the fourteen-day deadline, dismissed the case and then the Debtor refiled another case whenever the Debtor finished preparing all necessary documents. Therefore, good cause for an extension has not been demonstrated.

Or., pg. 8.

The court similarly questioned why the debtor never filed a motion to pay prepetition payroll postpetition.

The court concluded with acknowledging that

[C]omments in the Motion tend to suggest that counsel has tried to press the Debtor to proceed with greater speed. Counsel who is diligently trying to prosecute a chapter 11 case cannot be faulted if the Debtor does not fully grasp the need for quick work and providing information quickly.

Or. pg., 10.

Nonetheless, the court found that “[d]enial of the Motion will assist counsel in helping the Debtor focus in the next case.”

Author’s Commentary

The court here emphasizes the importance for debtors to file complete schedules with their petition or within fourteen days thereafter “to avoid prejudice to other parties,” but does not mention how FRBP 1007(c) must be weighed in this analysis. The Bankruptcy Rules specifically allow for an extension of time, and it therefore seems reasonable for debtors to expect that continuances will be granted if cause exists.

The Small Business Reorganization Act of 2019 (the “SBRA”) enacted

subchapter V of chapter 11 to streamline the process by which small business debtors reorganize and rehabilitate their financial affairs.” H.R. REP. NO. 116-171, at 1 (2019). A sponsor of the SBRA legislation stated that the new law will allow small business debtors “to file bankruptcy in a timely, cost-effective manner, and hopefully allows them to remain in business,” which “not only benefits the owners, but employees, suppliers, customers, and others who rely on that business.”  H.R. REP. NO. 116-171, at 4. It seems here that a short extension of the deadline to file the remaining schedules and statements would have allowed the debtor’s management to conclude their efforts to complete these documents—only additional 7 days were requested—and then refocus on the debtor’s business operations with an aim to reorganize. Likely dismissal and refiling resulted in additional costs for the debtor, such as paying another Chapter 11 filing fee of $1,738, and certainly took time away from the debtor’s business operations.

These materials were written by Roksana D. Moradi-Brovia of Resnik Hayes Moradi LLP. Editorial contributions were provided by Meredith King of Higgs Fletcher & Mack LLP.

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