Bankruptcy Case Nos. 698-64024-fra11, 698-64025-fra11, 698-64026-fra11, 698-64027-fra11.United States Bankruptcy Court, D. Oregon.
April 27, 1999
AMENDED MEMORANDUM OPINION
FRANK ALLEY, Bankruptcy Judge
A plan of reorganization has been proposed by debtors-inpossession, acting jointly with several non-debtor parties in
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interest. The Court finds that, with some conditions and modification, the plan should be confirmed.[1]
I. FACTS
The Debtors are in the mortuary and cemetery businesses. In June, 1996, Kern Family Services, Inc. acquired various related businesses in Medford, including Perl Funeral Homes and Siskiyou Memorial Park. Less than a year later members of the Kern family acquired Debtors Hull Hull Funeral Home, Inc., Southern Oregon Cremation Services, Inc., and Hawthorne Memorial Gardens, Inc., all three of which are located in Grants Pass.
The acquisition of the Grants Pass properties was made with funds held in trust by the Medford businesses in a statutory trust created for the benefit of parties to “pre-need” arrangements with the funeral home. This use of trust funds was unlawful, and the beginning of the collapse of the Kern family’s enterprise in Oregon.
Payment in advance for funeral services is a commonplace transaction. In a typical month the “calls” made by a mortuary will be evenly divided between families who contact the mortuary when the need arises, and those who have paid for the funeral services in advance by acquisition of a “pre-need contract.”
Pre-need contracts are closely regulated by Oregon law. ORS 128.423 requires that, when a pre-need contract is sold, 90% of the proceeds be paid into a trust. The funds held in trust guarantee that money will be available for the funerary services when finally
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needed. With few exceptions, the trust arrangement is revocable, and the revoking customer is entitled to a refund of the entire amount paid, together with interest on the 90% held in trust.
When a funeral business is sold, the trust holding the preneed funds is, for all intents and purposes, dissolved, and the funds turned over to the purchaser. The purchaser is then required to establish a new trust. When Kern Family Services acquired the Medford businesses it placed the trust funds in an appropriate depository. However, the funds were thereafter withdrawn and used for impermissible purposes, including the acquisition of the Grants Pass businesses and the acquisition and remodeling of an expensive residence in Medford.[2] These transactions were discovered by the State of Oregon, which initiated civil proceedings against the Debtors and others under the Oregon Unfair Trade Practices Act. The Debtors and Charles A. Kern entered into an Assurance of Voluntary Compliance (“AVC”) requiring that the Kern family interests be divested of the businesses and that appropriate assurance be made that all pre-need sales contract holders will be protected by replenishment of the statutory trust. Shortly after the AVC was signed, the Debtors filed bankruptcy petitions under Chapter 11, and the cases were consolidated. This Court entered an order finding
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that the AVC could be presented to the State Circuit Court for approval.[3]
Since the time the consolidated cases were initiated, the business have been run by a professional management firm engaged by the Debtors-in-Possession. Under this management, a sale of the Grants Pass businesses has been negotiated. The Medford businesses have run at a slight loss, at least when viewed on a cash basis. This is attributable to the DIP’s continued service to pre-need contract holders, even thought the trust funds which would pay for these services are unavailable pending reorganization.
II. THE PLAN
The plan is an effort by the Debtors and the Kern family to comply with the AVC, and reorganize their obligations with respect to the pre-need claimants and the companies’ other creditors. The proponents are the debtor-in-possession, Siskiyou Memorial Park (“SMP”), Shirlee Kern, and Charles Kern, individually and as trustee of the Kern Family Trust.
The plan provides for creation of a “Buffer Trust” which will collect assets from all of the proponents, Debtors and non-debtor alike. In addition, the trustee would receive funds from a settlement between the debtors-in-possession and Uniservice, which
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sold the Medford properties to them. A settlement is expected to be reached providing for a sum sufficient to help fund the plan; however, Uniservice and the proponents agree that the discussions are still open, and that there is no basis for the Court to make any finding regarding any duty of Uniservice to make any payment.
These assets, plus the assets of the corporate debtors, will be transferred unconditionally to the Buffer Trust. The Medford businesses, or their assets, will be used to capitalize a new corporation, Ocwen, Inc. It is contemplated that the trustee will hold the new business for a reasonable period of time, in order to ride out a relatively depressed market in funeral businesses, and then sell it at a better price. (There was uncontradicted testimony that the market’s present low condition is temporary, it should take no more than two years to liquidate the Medford business.)
The terms of the sale of the Grants Pass business provide that $800,000 be held in escrow to cover claims for a period of two years. Thereafter, the escrowed funds would be available to the Buffer Trustee.
The plan calls for complete satisfaction of all pre-need contracts as the needs arise. It is estimated that this will require $5,100,000. According to the testimony at trial, the assets contributed to the Buffer Trust will be adequate for this purpose. Moreover, there is testimony from which the Court can find that the Buffer Trust will receive sufficient funds to provide to a purchaser of the Medford businesses all the funds required by state law to be held in trust to cover pre-need contracts.
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III. ACCEPTANCE AND REJECTION
A disclosure statement was approved by the Court and ballots delivered to creditors. Throughout the case the Court and the parties wrestled with how to treat the holders of pre-need contracts. At the outset the Debtors argued that these holders had claims against the statutory trust, but not the Debtors themselves. At first the Court accepted this view. As the case progressed, this view evolved, and eventually the parties and the Court came to the conclusion that the pre-need contract holders were, at very least, contingent creditors. This gave rise to some difficulty, given the large number of such claimants, and the chaotic records of the Debtor and its predecessors regarding these contracts. With Court approval, a condensed version of the disclosure statement was circulated to holders of these contracts, who are deemed to be members of an unimpaired class under the plan.
Ballots were duly issued and returned. Since their class is unimpaired under the plan, no ballots were sent to the holders of pre-need contracts. 11 U.S.C. § 1126(f). (A class that is not impaired under a plan, and each holder of a claim in that class, is conclusively presumed to have accepted the plan.)
All the voting classes cast ballots accepting the plan, with the exception of the State of Oregon. Desert Community Bank did not cast a ballot, but advised at the hearing that it accepted the plan. A secured creditor, Copelco Capital, did not vote. As will be seen,
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the plan can be confirmed notwithstanding the dissenting and nonvoting classes.
IV. CONFIRMATION
The Court may confirm the plan of reorganization only if it finds that all of the requirements of 11 U.S.C. § 1129 have been satisfied. Substantial evidence has been presented to the Court supporting a finding that each of the elements of § 1129 have been satisfied. In light of the legal complexities involved, and objections raised by interested parties, the following elements deserve more detailed discussion:
1. Good Faith
Section 1129(a)(3) requires that “the plan has been proposed in good faith and not by any means forbidden by law.” Transnation Title Insurance Company has objected to confirmation asserting, among other things, that the plan was not proposed in good faith.
Transnation is in a peculiar position in this case. Siskiyou Memorial Park is an Oregon nonprofit corporation, and not a debtor. The parties dispute whether when Uniservice sold the Medford businesses to Kern Family Services, Siskiyou Memorial Park, a cemetery situated in the City of Medford, was one of the assets being transferred. Strictly speaking, however, the cemetery is owned by SMP, which remained a separate entity. What was conveyed, if that is the correct term, was not the property, but control of the nonprofit corporation’s board of directors. Sometime thereafter the Trust borrowed $1,200,000 against the property from Desert Community Bank, which obtained title insurance from Transnation to
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protect its security interest. It is now asserted in an adversary proceeding by Siskiyou Memorial Park, Inc., that the real property belongs to it, and not the Kern Family Trust, or anyone else. It follows, according to the complaint, that the security interest did not attach, and that title should be quieted in SMP’s favor.
Transnation has $1,200,000 at risk here, and has stated its concern that it is being abused in litigation in which the Kerns control “both ends” of the litigation. Transnation also suggests that the Kerns, who are shareholders in Desert Community Bank, are controlling the Bank’s actions as well.
It appears from testimony provided at the hearing that the Kerns’ interest in the Bank is not sufficient to control the Bank’s actions. Moreover, the court takes judicial notice that the Bank has filed an answer and counterclaim in the adversary proceeding seeking reformation of the title instruments to reflect that its borrower took title to the property at the time the businesses were sold.
Transnation’s concerns about the litigation are understandable — any $1.2 Million claim should be cause for concern. However, these concerns do not provide any reason to deny confirmation of the plan. First, success of the plan is not premised on the outcome of the litigation. The value of the Siskiyou Memorial Park property, which will be contributed to the Buffer Trust, is presumed to be net of the Bank’s secured claim. Second, the objection presumes that the adversary proceeding will necessarily have an unjust outcome. Since the adversary proceeding
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is before this Court, the notion is not one that the Court is inclined to accept. If the SMP claim is inappropriate as a matter of law or equity it should be presumed, at least for purposes of this matter, that the Court’s judgment will reflect as much. On the other hand, if SMP is entitled to prevail, even if ultimately at Transnation’s expense, then beneficiaries of the plan should benefit as well. In short, the plan should not be denied confirmation because of the unusual nature of what is purely collateral litigation. Since the plan can work either way, the litigation does not bear on this Court’s findings either of good faith or of feasibility.
2. Feasibility
The Court must find that confirmation is not likely to be followed by the need for further reorganization. 11 U.S.C. § 1129(a)(11). In addition, trustees appointed pursuant to the plan must comply with applicable state law. 28 U.S.C. § 959.
The State of Oregon has objected in part because it believes that the plan unlawfully provides for operation of cemetery businesses by an individual not qualified under ORS Chapter 692:
692.025 License required for funeral service practitioner . . . (1) An individual may not practice as a funeral service practitioner unless the individual is licensed as a funeral service practitioner under ORS 692.045. An individual practices as a funeral service practitioner if the individual for payment is engaged directly or indirectly in supervising or otherwise controlling the transportation, care, preparation, processing and handling of dead human bodies before the bodies undergo cremation, entombment, or burial. . . .
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The plan, as noted, contemplates collection of the assets by the Buffer Trust, and creation of a new funeral business which can then be sold as a going concern. The business itself will immediately seek to become qualified to operate a funeral business. Under the plan the buffer trust will simply function as owner and, ultimately, seller, of the newly constituted funeral business. Neither the trust nor the trustee will, directly or indirectly, supervise or control the business’ operations, and will not be involved in supervising or controlling the activities described in the statute. The new business, and its management, must themselves comply with Oregon law by obtaining appropriate licenses. However, the trustee of the buffer trust is not subject to the licensing statute.[4]
Interested parties have raised concerns about the plan’s feasibility if the proposed contribution of assets does not occur when required. This concern is met in part by the fact that each of the proponents, by having joined in presentation of a plan to the Court, has submitted him or herself to the Court’s jurisdiction. It follows that the Court may order compliance, and exercise control over the assets to be contributed. Concerns about feasibility can further be allayed by provision that the plan not be deemed substantially consummated until all the property proposed to be
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contributed is in fact transferred to the trustee of the Buffer Trust.
3. Cramdown
The State of Oregon is the only dissenting creditor. The plan proposes to pay it in full, and further provides that, until and unless payment in full is made, no junior class will receive any payment. Moreover, the plan provides for payment in full of the pre-need claims by a complete replenishment of the trust, as required by the AVC. Finally, the Kern family is willing to accept a requirement that the State and Buffer trustee be notified if any other family asset[5] is to be encumbered or transferred. I find that the plan should be confirmed notwithstanding the State’s objection. 11 U.S.C. § 1129(b)(2)(B)(ii).
The secured claim of Copelco Capital is satisfied by return of its collateral, qualifying the class for cramdown under 11 U.S.C. § 1129(b)(2)(A)(iii).
V. CONCLUSION
The proposed plan complies with Code § 1129, and may be confirmed. The order confirming the plan shall provide that the effective date, and substantial consummation, shall be such time as all assets to be transferred to the buffer trust have in fact been transferred.
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The order shall include a provision specifically and directly enjoining the proponents, and each of them, to effect the transfer of property to the buffer trust contemplated by the plan, as soon as is practicable. Transfers of real property shall be by statutory warranty deed. The order shall further provide that B.R. 7070 and FRCP 70 are made applicable to the order pursuant to B.R. 9014.
Finally, the order confirming the plan should provide that the proponents shall advise interested parties in the event they propose to encumber or transfer any asset other than those transferred to the buffer trust under the plan.
The foregoing constitutes the Court’s findings of fact and conclusion of law. Counsel for the Debtors-in-Possession shall tender a form of confirmation order consistent with this Memorandum. Alternatively, the Debtors-in-Possession may submit a fourth modified amended plan incorporating the requirements set out in this memorandum, and a form of order confirming the modified plan.
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