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confirming a subchapter V plan where debtor's CEO made an equity contribution equal to the three-year disposable income projection to pay unsecured creditors in cash on the effective date of the plan
Summary of this case from In re Packet Constr.Opinion
Case No. 21-12072-JGR (Jointly Administered) Case No. 21-12076-JGR
11-05-2021
IN RE: The LOST CAJUN ENTERPRISES, LLC, Debtor. EIN: 46-1473503 In re: The Lost Cajun Spice Company, LLC, Debtor. EIN: 21-2416773
Amy M. Leitch, Akerman LLP, Jacksonville, FL, David W. Parham, Akerman LLP, Dallas, TX, for Debtor. Robert Samuel Boughner, Byron G. Rogers Federal Building, Denver, CO, for U.S. Trustee.
Amy M. Leitch, Akerman LLP, Jacksonville, FL, David W. Parham, Akerman LLP, Dallas, TX, for Debtor.
Robert Samuel Boughner, Byron G. Rogers Federal Building, Denver, CO, for U.S. Trustee.
MEMORANDUM OPINION CONFIRMING CHAPTER 11 PLAN
Joseph G. Rosania, Jr., United States Bankruptcy Judge
THIS MATTER comes before the Court on the Amended Chapter 11 Plan ("Plan") (Debtors’ Ex. 6) filed by Debtors The Lost Cajun Enterprises, LLC and The Lost Cajun Spice Company, LLC (collectively, "Debtors") on August 20, 2021 (Doc. 114), and the objection thereto filed by creditor Jonathan Espey ("Espey") on September 2, 2021 (Doc. 117).
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The Small Business Reorganization Act ("SBRA"), commonly known as Subchapter V of Chapter 11, was passed by Congress in 2019. The legislation's central purposes are to streamline and reduce the costs of small Chapter 11 cases thereby allowing small businesses to survive. It created significant changes to Chapter 11, including the elimination of the absolute priority rule, and the ability of creditors to file competing plans. The COVID-19 pandemic has had a calamitous effect on our country, the financial consequences of which have hit the restaurant industry especially hard. The questions presented here are whether Debtors have proposed their Plan in good faith, whether the Plan is in the best interest of creditors, and whether the Plan is fair and equitable.
At an evidentiary hearing on September 22, 2021, the Court admitted eight exhibits and heard the testimony of three witnesses: Raymond A. Griffin, an officer and the sole member of Debtors ("Griffin"); Michael M. Elliot, an expert business consultant employed by Debtors ("Elliot"); and the objecting creditor, Espey. The Court finds that Debtors have proposed the Plan in good faith, that the Plan is in the best interest of all creditors and parties in interest, and that the Plan is fair and equitable. Accordingly, the Court confirms the nonconsensual Plan under 11 U.S.C. 1191(b).
I. BACKGROUND
A. The Business
Many years ago, Griffin moved from Louisiana to Summit County, Colorado. He is the founder of Lost Cajun Enterprises, LLC ("Lost Cajun"), a nationwide franchisor of the Lost Cajun Restaurants. Lost Cajun was formed in 2013 after Griffin had opened two restaurants in Summit County; Frisco in 2010 and Breckenridge in 2012. Griffin owned Frisco and Espey owned Breckenridge. The restaurants are casual dining restaurants featuring southern style cooking and have a distinctive menu and decorations.
Lost Cajun Spice Company, LLC ("Spice") was formed in 2016 to sell and distribute proprietary spices required for the recipes. Before the global pandemic, Debtors had approximately 30 franchise restaurants, with more restaurants slated to be opened. A list of the restaurants is attached to the Plan as Exhibit B. Lost Cajun receives income from franchise fees when franchisees execute franchise agreements, and royalties of 6% of gross sales from operation of the franchise restaurants. Spice receives revenue from the sale of a proprietary blend of spices.
B. Effect of the Pandemic
As a result of the worldwide COVID-19 pandemic, over 100,000 restaurants have closed nationwide. Six of the Lost Cajun franchises have failed, and five more have given notice they are closing. The restaurants that remain open have suffered significant losses, forced to contend with restrictions and bans on indoor dining, and the future of the franchisees is in serious doubt. There are two restaurants about to open, with franchise agreements that were executed into prior to COVID. But both have delayed their openings and it is unlikely there will be additional new restaurants in the future. One of the flagship restaurants, located in Breckenridge, recently gave notice it intends to close.
Debtors were forced to adopt certain cost saving measures including closing the corporate office, reducing salary for employees, reducing travel to the franchise locations for support and training, reducing or ceasing franchise fees and royalty fees from financially distressed franchisees, and ceasing paying an unsecured debt owed to Espey.
Debtors obtained two loans to stay afloat: one loan, in the amount of $150,000, from the Small Business Administration under the Economic Injury Disaster Program, secured by all assets of Cajun, and a second loan, in the amount of $89,000, from FirstBank under the Paycheck Protection Program.
Debtors did not collect any royalties when the dining rooms were closed and then offered royalty relief based on revenues when the restaurants reopened. Also, Debtors experienced an un-planned expense when their general liability insurance premium was increased by $21,000 in September 2021 as a result of the bankruptcy filing. Debtors currently have five full time team member employees. They all work from home after the closing of the corporate office.
C. Espey's debt
Espey entered the picture in 2012 and became a founding member in Lost Cajun, acquiring a 49% membership interest. Griffin developed the food and the brand and coordinated training of franchisees. Espey operated the office. Griffin travelled to the restaurants with trained employees who, in turn, trained franchisees.
In 2018, Griffin and Espey decided to part ways. They entered into a Buy-Sell Agreement of Membership Interests dated July 2, 2018 (Debtors’ Ex. 5). Under the Agreement, Lost Cajun and Spice purchased Espey's 49% membership interests in Lost Cajun and Spice, for a total of $800,000 plus 5% of the gross proceeds from the sale of either or both Debtors. The parties agreed the purchase price would be paid by Lost Cajun and Spice making a total $50,000 down payment and monthly installments of a minimum of $7,000 per month and a minimum of $100,000 per year to be paid in full within 8 years. Griffin did not personally guarantee the Espey debt. When the agreement was executed, 15 franchise restaurants were open, there were 8 restaurants to be opened in 2018, and 11 franchises were in the pipeline with the expectation that there would be 10 new franchise restaurants opened in the following years.
After the default in the payments under the agreement due to the pandemic in March 2020, the parties attempted to negotiate a settlement for several months. Debtors claim they negotiated in good faith and reached an oral agreement with Espey in March 2021, but he refused to execute a written settlement agreement. The effect of the pandemic on the restaurant industry and the standstill with Espey led to the Chapter 11 filings.
II. BANKRUPTCY CASES
The insolvent Debtors filed their Chapter 11 bankruptcy cases on April 21, 2021, obtaining an automatic stay and the opportunity to reorganize. Mark D. Dennis was appointed Subchapter V Trustee in both cases. The Lost Cajun and Spice cases are being jointly administered pursuant to an Order dated April 22, 2021. Espey filed a Proofs of Claim in the bankruptcy cases on June 28, 2021, (Claim No. 6 in Lost Cajun, and Claim No. 3 in Spice) in the amount of $651,000, as an unsecured claim. Debtors do not dispute Espey's claim.
A. Chapter 11 Case
1. Assets and Liabilities
Debtors list total assets in the amount of $338,120 as of the petition date, which primarily consists of money in the bank. Debtors list total liabilities in the amount of $1,446,860 on the petition date, which consists of a Small Business Administration loan in the amount of $150,000, secured by all assets of Cajun; a Paycheck Protection Loan Program loan in favor of FirstBank in the amount of $88,340; a franchise fee development claim in favor of the franchisees the amount of $459,625; miscellaneous unsecured debt totaling approximately $29,000 (Ex. 1); and Espey's debt of $651,000. Griffin owns 100% of the membership interests in Cajun and Spice.
2. Income and Expenses
Debtors introduced a three-year projection of income and expenses into evidence as Exhibit 3, and the underlying assumptions for the projections as Exhibit 2. The projections were developed by Elliott and his company, Peak Franchise Capital ("Peak"), the financial advisor to Debtors. Debtors and Peak state the projections are based on historical and current operations combined with reasonable assumptions outlined in Exhibit 2. They claim the projected disposable income (total income not reasonably necessary to be expended for the payment of expenditures necessary for the continuation, preservation, or operation of the business of the debtor) over three years will be $72,089 for Lost Cajun and $16,514 for Spice.
3. Plans
Debtors have proposed two plans, the latest dated August 20, 2021 (previously defined as "Plan"). The first plan was filed on June 17, 2021 (Doc. 90) and drew objections from the United States Trustee and Espey. Espey was the only party to object to the second plan.
The general terms of the Plan are that the secured creditor will be paid in full, from current cash on hand, and the unsecured creditors will receive their pro-rata share of their allowed claim. Specifically, Griffin will make an equity contribution of $89,000, equal to the three-year disposable income projections, to be paid to allowed unsecured creditors on a pro-rata basis in cash on the effective date of the Plan. Debtors estimate this is a 12.75% distribution to unsecured creditors. Debtors propose to assume certain executory contracts and unexpired leases, identified in Exhibit D attached to the Plan, and continue their business operations. The executory contracts include the franchise agreements. Not a single franchisee objected to the assumption of any franchise agreement. Griffin will continue to serve as Chief Executive Officer at a salary of $126,000 per year and Richard Berns will continue to serve as Chief Operating Officer at a salary of $118,000 per year.
B. Confirmation Objections
Espey objects to confirmation on the bases that the Plan has not been proposed in good faith, is not fair and equitable, and is not in the best interest of the creditors. Moreover, Espey generally disputes the accuracy of the Projections and Liquidation Analysis and has proffered a competing plan.
Debtors respond that that neither the United States Trustee nor any other creditor objected to confirmation, and that creditors, other than Espey, voted to accept the Plan (Debtors’ Ex. 1), that the Plan was filed in good faith, that the Plan is fair and equitable pursuant to its projections introduced into evidence as Exhibits 2 and 3, and that the Plan is in the best interest of the creditors pursuant to the Liquidation Analysis introduced into evidence as Exhibit 4.
III. WITNESS TESTIMONY
Michael M. Elliot testified credibly on direct examination in support of confirmation. Although he was not offered as an expert witness, he has 25 years of experience the in the restaurant franchise business, including working for Pizza Hut and Burger King. He formed Peak in 2006 as an advisory consulting firm in restaurant franchising, mergers and acquisitions, capital arrangements, and debt restructure. He stated he has experience with franchise projections when he worked for Pizza Hut. His curriculum vitae was introduced as Exhibit 7.
He was retained by Debtors in February 2019. He testified he was unable to attract additional investors due to the small size of the franchisor and because sales were "softening" in 2019.
He explained the effect of COVID-19 on restaurants in the country and on Lost Cajun. Dining rooms closed in March 2020, which had a deleterious effect upon the revenue of franchisees since the Lost Cajun business model is casual dining in the restaurant. When the revenue of the franchisees decreased, the royalty payments based on revenues decreased. The labor market was impacted, and it became difficult to retain or hire restaurant employees. There were also significant disruptions in the supply chain and food distribution centers were impacted. Thus, the Lost Cajun restaurants were closed, and when they re-opened, they were unable to hire employees or provide the same variety of food offerings. As a result, Debtors engaged in the cost-cutting and forgiveness of royalties described above.
Elliot testified the projections are fair and reasonable and were developed with the input of the management group based on existing restaurants and royalty projections from such restaurants. The royalty projections are based on previous years. The royalty income in 2019 for Lost Cajun pre-COVID was $1,082,000. Due to the reduction in sales, the royalty income in 2020 declined to $700,000. The projections are for total gross income of $1,062,288 for year 1, $1,076,969 for year 2 and $1,193,621 for year 3, with Lost Cajun becoming profitable in year 3.
He described the cyclical nature of the revenues for this business, which has its best months in February, March, April and May and during the holiday season and its worst months in the fall, when students return to school. He stated the Plan is feasible; Debtors have the money in the bank to pay the secured creditor in full and the equity infusion of $89,000 provides an immediate return to the unsecured creditors.
He also testified in support of the Liquidation Analysis, which estimates zero return to unsecured creditors. He described the franchisee development fee claim in the amount of $459,000 as an additional liability for services to be performed by the franchisor if Lost Cajun is no longer operating. Lost Cajun received a franchise fee of $35,000 to $50,000 upon execution of the franchise agreements and has ongoing future obligations to provide consulting services regarding construction, training, and operations to the franchisees.
He stated the only liquid asset in the Liquidation Analysis is cash on hand because if Lost Cajun is not operating, it has no goodwill and cannot service the franchisees. When asked about efforts to sell the business as a going concern, he stated the franchisor "runs lean" and there is not "a lot to sell". He said the casual dining market is not strong, the business is relatively small for a restaurant franchisor and a buyer would have to invest significant sums in the business.
Finally, he testified the Plan is proposed in good faith, is feasible, pays all disposable income over three years to the creditors, and is in the best interest of the creditors.
On cross-examination, he admitted revenues were higher and expenses lower than the current projections. Elliot also testified that he handled the Espey settlement negotiations for Debtors and had several settlement discussions with Espey. He made a lump sum cash settlement offer which was declined because Espey told him he believed in the Lost Cajun brand and that the business would come back. He stated Espey did not threaten to sue to recover the entire amount due him.
He further testified the bankruptcy was filed to protect Debtors, their employees, and the franchisees. He attributed no value to goodwill or the franchise agreements because there would be no value in those assets if Debtors closed operations.
Raymond A. Griffin is the founder of Debtors. He and his wife moved to Colorado and opened the Frisco location in 2010. The Lost Cajun concept of the menu and decorations was created by the Griffins. Espey and Griffin opened the Breckenridge location in 2012. The idea to create a franchise model of the Lost Cajun concept arose in 2013.
Griffin stated his strengths were the food, the atmosphere, and the brand. Since he had no background in management or accounting, Espey was to run the company and be responsible for the legal and financial aspects of the business. They each contributed $3,500 and Griffin received 51% and Espey 49% of the membership interests in Lost Cajun and Spice.
Things took off when Lost Cajun was featured in Entrepreneur Magazine. Griffin said the business grew so fast they needed a manager to run the company on a day to day basis, so they made a joint decision to hire Richard Berns ("Berns") to be the chief operating officer, who had previous experience with the Schlotzsky franchisor. Berns remains with Lost Cajun today.
Griffin described the one-and-one-half to two-year process of opening a new franchise restaurant. The franchise agreement is executed with the payment of a franchise fee in the amount of $35,000 to $50,000. The franchisee, with the assistance of the franchisor, needs to find a location, build out the location, and hire and train staff. The franchisor then runs the location for two weeks.
Griffin stated the split with Espey occurred because Espey was not committed to put the requisite time and effort into the business. He said Espey told him he, "did not sign up to work 26 hours per day, 9 days a week". Griffin said he poured his life into the company during the last 11 years. Thus, they negotiated the Buy-Sell Agreement on an arms-length basis and, according to Griffin, separated amicably.
He said that Elliot was unsuccessful in searching for additional investors in 2019 prior to COVID-19. Once the pandemic hit, Lost Cajun closed the corporate office, saving $4,000 per month in rent, stopped paying vendors, stopped collecting royalties, stopped paying Espey, and stopped travelling to the restaurants for hands on training of the franchisees. Lost Cajun also incurred additional debt when it borrowed money under the Paycheck Protection Program. He said the franchisees are operating on thin margins, their labor and food costs have escalated, more restaurants will probably close, there are no new franchises in the pipeline, and the long-term effects of the pandemic on the business are "unknown".
He testified he filed the Chapter 11 case because he was "scared" of the economic climate and concerned about a lawsuit from Espey. According to Griffin, the goals of the bankruptcy are to protect the franchisees, protect the employees, and ultimately protect the company. Finally, he testified he has the $89,000 in cash on hand to fund the Plan.
Jonathan Espey testified in support of his confirmation objection. He agreed with Griffin's narrative of the history of Debtors. The business consisted of two small restaurants being operated successfully and profitably. He and Griffin were approached by customers and others to explore the franchising opportunity. In the beginning, they were "working hard" in selling and supporting the franchises and realized they needed help from someone who had experience in the restaurant franchise business, which led to the joint hiring of Berns.
He did not agree with Griffin on the genesis and evolution of the buy-out. Griffin testified Espey no longer wanted to work long hours for Debtors, the process was amicable, that Espey was happy to "go back to Alabama with his million dollars", and that Griffin never heard from Espey again.
Espey, on the other hand, complained he was forced out and "shocked and hurt" when Griffin raised the subject. Espey said he ultimately signed the agreement for the good of the brand and did not want to be a partner with someone who did not want him. He indicated he was willing to be patient for his payments and never threatened to sue.
He generally disagrees with the financial projections and the conclusion of the Liquidation Analysis due to the guaranteed contractual revenue streams from the franchisees. He continues to have faith in the brand and believes the restaurants "would make it through" the pandemic and overcome the challenges, in part, because he knows the franchisees. He proposed a competing plan under which he would pay the unsecured debt, other than his debt, in full and become the sole member of Debtors. He testified he has the funds to implement his plan and invest in Debtors and introduced a letter from Servis 1st Bank into evidence to prove he has the money to fund his competing plan.
IV. ANALYSIS
The Court has subject matter jurisdiction over this core proceeding under 28 U.S.C. §§ 1334(b), 157(b)(2)(A), and 157(b)(2)(L) as the matter involves the administration of the bankruptcy estate and confirmation of a plan.
The burden of proof is on Debtors to show they have satisfied the confirmation standards set forth in 11 U.S.C. §§ 1129 and 1191 by a preponderance of the evidence.
A. Good Faith
Under 11 U.S.C. § 1129(a)(3), the Court can only confirm a Chapter 11 plan if the plan has been proposed in good faith. The Tenth Circuit standard for evaluating good faith, set forth in the Pikes Peak Water Co. case is whether, "there is a reasonable likelihood that the plan will achieve its intended results which are consistent with the purpose of the Bankruptcy Code, that is, the plan is feasible, practical, and would enable the company to continue and pay its debts in accordance with the plan provisions." Travelers Ins. Co. v. Pikes Peak Water Co. (In re Pikes Peak Water Co.), 779 F.2d 1456, 1459 (10th Cir. 1985) ; e.g., Search Mkt. Direct, Inc. v. Jubber (In re Paige), 685 F.3d 1160, 1178-1179 (10th Cir. 2012).
The Tenth Circuit also requires the courts to consider whether the debtor intended to abuse the judicial process and the purposes of the reorganization provision and to focus on the debtor's post-petition conduct and the plan itself. 779 F.2d at 1460 ; 685 F.3d at 1179.
Finally, pertinent here is the principle that there can be no bad faith in a plan that proposes to modify a claim in the way the Bankruptcy Code allows. In re Valley View Shopping Ctr., L.P., 260 B.R. 10, 29 (Bankr. D. Kan. 2001). At bottom, the Court is required to examine the totality of the circumstances presented in each case.
This is not a two-party dispute. The Debtor has 20 franchisees, 5 employees, and Espey is not the only creditor. The Chapter 11 case was filed for valid reasons when Debtors were unable to pay their debts due to the pandemic. The Bankruptcy Code allows for restructuring of unsecured debt, such as Espey's unsecured debt, so long as Debtors pay an amount greater than their disposable income over three years to the creditors, which the Plan provides. 11 U.S.C. § 1191(c)(2)(B). Although Espey protests that he was forced out and the buy-out agreement was foisted upon him, the agreement states that he either had counsel or the opportunity to consult counsel in the process. Plus, Espey was accepting the benefits of the agreement and not complaining when the payments were being made.
Debtors have been forthright with the Court and creditors and not abused the reorganization process. They timely filed their first plan and filed an amended plan to satisfy the objection of the United States Trustee. They have timely filed accurate bankruptcy schedules, statement of financial affairs, monthly operating reports, financial projections and liquidation analysis. The Court finds, based on the totality of the circumstances, that there is a reasonable likelihood the Plan will achieve its intended results which are consistent with the purposes of the Bankruptcy Code, meeting the good faith requirement of 11 U.S.C. § 1129(a)(3). In re Experient Corp., 535 B.R. 386, 411 (Bankr. D. Colo. 2015).
In fact, the creditors have voted to accept the Plan in two-thirds in amount and more than one-half in number, and at least two impaired classes have voted to accept the Plan. The Small Business Administration, Class 1, did not vote and is presumed to accept the Plan under the Ruti-Sweetwater case from the Tenth Circuit. Heins v. Ruti-Sweetwater, Inc. (In re Ruti-Sweetwater, Inc.), 836 F.2d 1263 (10th Cir. 1988). FirstBank, Class 3, voted to accept the Plan (Ex. 1). Regardless, a court may confirm a Subchapter V without the approval of a class of impaired creditors.
Subchapter V does not allow for competing plans because Subchapter V was designed to be a cost-effective tool for small business debtors to retain ownership and obtain a fast-track reorganization, so the Court cannot consider Espey's competing plan. 11 U.S.C. § 1189(a).
B. Best Interest of Creditors
Section 1129(a)(7) requires that under the plan creditors receive property that has a value, as of the effective date of the plan, that is not less than the amount the creditor would receive if the debtor's assets were liquidated under Chapter 7 of the Bankruptcy Court. This is known as the best interest of creditors confirmation standard. The Liquidation Analysis reflects that the unsecured creditors would receive a 4.43% distribution if Debtors were liquidated and a 12.87% distribution under the Plan. While Espey disputes the asset valuations in the Liquidation Analysis and the financial projections, he did not present any contradictory evidence. The Liquidation Analysis and financial projections were created by an expert in the field with the input of management.
The creation of a liquidation analysis and financial projections is not an exact science, so the Courts typically defer to the debtors’ projections, subject to cross examination and/or a competing set of projections. In re Western Real Estate Fund, Inc., 75 B.R. 580, 583 (Bankr. W.D. Okla. 1987). Espey did not submit a competing set of projections or effectively cross examine the projections or Liquidation Analysis of Debtors.
C. Fair and Equitable
Subchapter V streamlined the confirmation of Chapter 11 plans for small business debtors. It eliminated the "absolute priority rule," creditor committees, the requirement for approval of disclosure statements, and the requirement of at least one accepting class of impaired creditors. Effectively, it lowered the bar for confirmation. In re Ikalowych, 629 B.R. 261, 267 (Bankr. D. Colo. 2021).
The Plan complies with 11 U.S.C. § 1190 because it includes a brief history of operations of Debtors, a liquidation analysis, projections, and provides for the payment of funds in excess of required future income necessary for the execution of the Plan.
The Plan also complies with 11 U.S.C. §§ 1129(a) and 1191. Specifically, the Plan satisfies the fair and equitable condition set forth in 11 U.S.C. § 1191(c) with respect to Espey, who is impaired and did not accept the Plan. Debtors are paying creditors an amount in excess of all their projected disposable income within the next three years. The Plan is feasible; Debtors have the cash to pay the secured creditor in full and Griffin has the $89,000 equity contribution to pay the three-year disposable income to the unsecured creditors in cash on the effective date of the Plan, so reference to default provisions is inapplicable. The Plan does, however, contain a default provision if Debtors fail to make the payments required by the Plan in section J-7 at page 11 of the Plan.
D. Conversion or Dismissal
Based upon the above recitation of the facts and law, there is no reason to convert or dismiss this case because the Plan satisfies the Bankruptcy Code requirements for confirmation of a Subchapter V plan in all respects. Conversion or dismissal is sought by a single disgruntled creditor. Debtors did not create the pandemic to avoid paying Espey. The pandemic caused Debtors to be unable to pay their debts and the Plan gives Debtors the chance to survive in the difficult restaurant business.
V. CONCLUSION
The Court finds, by a preponderance of the evidence, that the Plan is proposed in good faith, the Plan is in the best interest of creditors, and the Plan is fair and equitable. Therefore, the Plan is confirmed. This case is emblematic of how the Subchapter V statute was intended to operate with a one-step plan confirmation process.
The Court orders Debtors to file a proposed confirmation order no later than seven days from the date of this Order. Debtors shall also mail a copy of this Order to all creditors and file a certificate of service reflecting such mailing no later than seven days from the date of this Order.