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Repurchase Corp. v. Bodenstein

March 24, 2008


The opinion of the court was delivered by: Honorable David H. Coar

Chapter 11 Proceeding

Bankruptcy Case No. 04 B 32933

Appeal From the Honorable Judge Jack B. Schmetterer


This matter comes before this Court on Appellant Repurchase Corporation's appeal from the United States Bankruptcy Court, where final orders were entered denying confirmation of a Plan of Reorganization, ordering dismissal the bankruptcy case and denying reconsideration of the two previous orders. This Court has jurisdiction over this appeal pursuant to 28 U.S.C. §158(a).


On September 3, 2004, Repurchases Corporation (the "Debtor") filed a voluntary petition under Chapter 11 of the Bankruptcy Code. At the time of its filing, the Debtor was not an operating business. Its only assets were net operating loss carry-overs ("NOLs") for federal income tax purposes. These NOLs cannot be sold by themselves to third parties but nonetheless may be valuable to an entity contemplating Chapter 11 reorganization. On December 30, 2004, the Debtor filed a Disclosure Statement for Repurchases Corporation's Plan of Reorganization (the "Initial Disclosure Statement") and a Plan of Reorganization (the "Initial Plan"). Under the Initial Plan, Leon Greenblatt ("Greenblatt"), the Debtor's President and current owner and/or controller of all outstanding shares of the Debtor, was to pay to the estate $100,000 and receive in consideration a minimum of 20% of the equity of the post-confirmation Debtor. The Debtor's unsecured creditors were to receive a pro-rata distribution of the $100,000, as well as the option to purchase a pro-rata share of 800 shares of new stock. The Initial Disclosure Statement provided that the issuance and distribution of the new stock was exempt from the securities laws pursuant to 11 U.S.C. §1145. The U.S. Trustee and the Securities and Exchange Commission ("SEC") filed objections to the Initial Plan arguing that the Initial Plan contemplated issuing the new stock in violation of 11 U.S.C. §1145, and, that it discharged the Debtor in violation of 11 U.S.C. §1141(d)(3). The Bankruptcy Court found as a matter of law that the Debtor could not rely on 11 U.S.C. §1145 to exempt the issuance of the new stock from the securities laws and it granted leave to amend the Initial Disclosure Statement and the Initial Plan.

On April 28, 2005, the Debtor filed the First Amended Disclosure Statement (the "Disclosure Statement") and the First Amended Chapter 11 Plan of Reorganization (the "Plan"). The Debtor also filed a Report of Balloting on the Debtor's First Amended Plan of Reorganization which showed that the Amended Plan was accepted by the two creditors who voted, Robinson Curley & Clayton, PC, a law firm that holds a claim against the Debtor, and Loop Properties, an affiliate of the Debtor's. Once reorganized, the Debtor intended to use the NOLs to offset future income or alternatively, to merge with another entity that had income to offset against the NOLs. Under the Plan, the reorganized Debtor proposed to again make pro-rata payment to its unsecured creditors from $100,000 to be contributed by one of the owners of the Debtor. In exchange for that contribution, the contributing owner would receive 20% equity in the reorganized Repurchases entity. The Debtor again gave its unsecured creditors the option, under the Plan, of purchasing shares in the reorganized Repurchases entity at a set price.

The Bankruptcy Court held an evidentiary hearing on confirmation of the Plan on July 12, 2005. Greenblatt testified in support of confirmation. He explained that the Debtor's business was investing in securities and in the oil industry, but that the business had not purchased any securities since 2001 and had not operated prior to the bankruptcy filing because it could not obtain any investment income due to its unsecured debt. He further stated that as of the date of the hearing, he had no source of employment income; no cash or demand deposit accounts; and that he had not filed any tax returns for the years 2001, 2002, 2003 or 2004, because he had no taxable income, amongst other reasons. He stated that shareholder contributions by his wife in the amount of $500,000 would provide the source of capital to restart the investment business, but he had no written commitment by his wife to contribute that amount or a current balance sheet showing her assets and liabilities. He also testified that the newly reorganized Debtor would enter into a tax-type sharing agreement in which cash would be exchanged for use of the NOLs through some mechanism, possibly a leasing arrangement. However, Greenblatt conceded that no such agreements were in effect yet.

The Bankruptcy Court denied confirmation of the Plan. In reaching its decision, the Court noted that the Debtor had the burden of demonstrating feasibility and legality. The U.S. Trustee then filed the Motion to Dismiss Pursuant to 11 U.S.C. §1112(b) on the grounds that the Debtor had been in bankruptcy for almost a year, and had twice attempted unsuccessfully to confirm a plan and that continuation of the case would only serve to further delay and prejudice the creditors. After notice and a hearing on July 25, 2005, the bankruptcy court dismissed the case pursuant to the Debtor's inability to effectuate a plan under 11 U.S.C. §1112(b). The Debtor then filed two separate motions to reconsider under Rule 59 of the Federal Rules of Civil Procedure, made applicable to this case under Rule 9023 of the Federal Rules of Bankruptcy Procedure. Counter to what was stated in the brief, the Debtor did not tender a second amended plan and second amended disclosure statement at or prior to the hearing. In the first motion, the Debtor alleged that there was clear error of law in denying confirmation. Further, in the second motion, the Debtor claimed that it had reached an agreement for funding of the plan and would have evidence of available funds. The Debtor also claimed it reached in principle an agreement with another entity that would allow the Debtor to engage in business and utilize the NOLs post-confirmation. At the dismissal hearing, the Debtor did not state that the evidence of funding existed but was unavailable when confirmation was denied. Nor did the Debtor offer any reason, cause or justification for the absence of such evidence at the confirmation hearing.

A hearing on the two motions to reconsider was held on August 23, 2005 during which the Debtor attempted to offer into evidence a copy of a merger agreement to fund the capital requirements of the reorganized Debtor. At the conclusion of the hearing, the Bankruptcy Court stated that it disagreed with the Debtor that it made a legal error and that it would decline to exercise its discretion "to reopen the proofs." On October 31, 2005, the bankruptcy court issued a formal Opinion denying the motions to reconsider and a third oral motion made by the Debtor during the hearing. Thereafter, the Debtor appealed to this Court.


On appeal in the United States District Court, a bankruptcy court's findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. Monarch Air Serv. v. Solow (In re Midway Airlines, Inc.), 383 F.3d 663, 668 (7th Cir. 2004). A bankruptcy court's decision to dismiss a case pursuant to 11 U.S.C. § 1112(b) is reviewed for an abuse of discretion. In re Woodbrook Associates, 19 F.3d 312, 322 (7th Cir. 1994). A bankruptcy court's decision to deny motions for reconsideration made pursuant to Fed. R. Bankr. Pro. 9023, adopting Fed. R. Civ. Pro. 59, is also reviewed for an abuse of discretion. Han v. Linstrom, 2002 WL 31049846 at *3 (N.D.Ill.) (citing Figgie Int'l, Inc. v. Miller, 966 F.2d 1178, 1179 (7th Cir. 1982)).


The Debtor brings three issues on this appeal. The first issue is whether the Bankruptcy Court erred when it denied confirmation of the Debtor's Plan. The second issue is whether the Bankruptcy Court erred when it dismissed the Chapter 11 bankruptcy case. The third and final issue is whether the Bankruptcy Court erred when it refused to consider, upon reconsideration of its motions denying confirmation and dismissing the case, new evidence offered by the ...

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