Blackjewel L.L.C. – U.S. Trustee Supports Liquidation Plan Over Case Conversion, But Files Objection Tied to Priority Claim Treatment

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December 10, 2020 – The United States Trustee (the “UST”) objected to the Debtor's First Amended Disclosure Statement and First Amended Plan of Liquidation [Docket No. 2635], although the UST did state that the Debtor's current management is in a better position to resolve litigation that has plagued the cases than a Chapter 7 trustee would be.

As a result, the UST does not support a requested conversion of the Debtor's cases to Chapter 7. Instead, the UST threw support behind a Plan "that is broadly consistent with the Plan before the Court," with some suggested revisions.

The objection reads: “This case was filed on an emergency basis on July 1, 2020. From the outset of the case, the Debtor’s financial condition has created significant challenges. As the case stands today, the solvency of the estate is dependent on the successful prosecution of several lawsuits, most of which involve the former CEO and controlling owner of the Debtor, Jeff Hoops, and related parties (the ‘Hoops Parties’). The issue of administrative insolvency is not only an issue in the confirmation of the Plan but is the primary thrust of a motion to convert the case to one under Chapter 7 filed by the Hoops Parties.

After much consideration regarding the administrative insolvency issue, the United States Trustee has chosen not to join in the motion to convert.  The United States Trustee has concluded that the professionals currently in control of the case (i.e., acting CEO and Debtor’s Counsel) are likely in the best position to maximize recovery of the various lawsuits for the benefit of the estate based on their credentials and the deep knowledge of the Debtor, its history and operations that they have acquired over the course of the case. Further, the controlling professionals have developed a strategy to deal with the significant environmental reclamation issues that, while not perfect due to factors outside of their control, is likely superior to one that could be achieved in a Chapter 7. Thus, the United States Trustee supports a Plan of Liquidation that is broadly consistent with the Plan before the Court.

However, the United States Trustee does have objections to specific provisions of the Plan that are inconsistent with the Bankruptcy Code. Prior to the filing of this objection, the United States Trustee engaged in communications with Debtor’s Counsel in which a number of objections were informally raised. Debtor’s Counsel has satisfactorily responded to most of those objections, but there are two provisions on which the United States Trustee and the Debtor could not reach agreement. Those provisions are:

  • 1.) The Disclosure Statement and Plan contemplate a process whereby holders of certain priority claims and administrative claimants are deemed to consent to treatment of their claim simply by abstaining from returning an election ballot or failing to object to the Amended Plan and
  • 2.) The Plan contemplates the payment of certain professionals before other administrative claimants. Accordingly, these discrete provisions are the subject of this objection.

The United States Trustee asserts that these provisions could be modified to be consistent with the Bankruptcy Code which would allow the United States Trustee to support confirmation of the Plan and Disclosure Statement.”

Specifically, the UST said "The Bankruptcy Code clearly provides for [administrative and priority] claims to be paid in full unless they specifically agree to different terms. In the present case, the Plan should not be confirmed until consent is granted by those claimants." In addition, the UST stated "With respect to distribution, the Bankruptcy Code does not distinguish between claims that qualify equally under the various subsections of 11 U.S.C. § 507, and the Plan in this case should not either. Professionals should get paid under the Plan pari passu with other administrative claimants as classified by the Bankruptcy Code."

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