IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION ) ) ) ) )

Transcription

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION IN RE: KARSONS INTERNATIONAL, INC., Debtor. Chapter 11 Case No DEBTOR'S MOTION PURSUANT TO BANKRUPTCY CODE 366 AND 105(a FOR ORDER DEEMING UTILITY COMPANIES ADEQUATELY ASSURED OF FUTURE PERFORMANCE AND ESTABLISHING PROCEDURE FOR DETERMINING REQUESTS FOR ADDITIONAL ADEQUATE ASSURANCES COMES NOW, Karsons International, Inc. ("Karsons" or "Debtor" as debtor and debtor-in-possession, and pursuant to 105 and 366 of Title 11 of the United States Code, 11 U.S.C. 101 et seq. (the "Bankruptcy Code", moves this Court (the "Motion" to enter an order (i deeming utility companies adequately assured of future performance, and (ii establishing procedure for determining requests for additional adequate assurances pursuant to Bankruptcy Code 366. In support of this Motion, Debtor relies on the Affidavit of Nouman A. Malik in Support of Chapter 11 Petitions and First Day Motions, filed contemporaneously herewith, and states as follows: JURISDICTION AND VENUE 1. On December 10, 2010 (the "Petition Date", Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code with the Clerk of this Court. Debtor continues to operate its business and manage its properties as a debtor in possession pursuant to 1107(a and 1108.

2 2. This Court has jurisdiction over this Motion pursuant to 28 U.S.C. 157 and This is a core proceeding pursuant to 28 U.S.C. 157(b. Venue of Debtor's chapter 11 case and this Motion in this district is proper pursuant to 28 U.S.C and The statutory predicates for the relief requested herein are Bankruptcy Code 105(a and Debtor's business is the operation of one hotel located in Calera, Alabama. These business operations do not constitute "single asset real estate" as that term is defined in Bankruptcy Code 101(51B. FACTUAL BACKGROUND 4. Karsons is an Alabama corporation in Clanton, Alabama which owns and operates a Quality Inn hotel there. Karsons was formed in 1992 by Nouman Malik. Karsons employs, throughout the year, approximately employees, some of which are part-time employees. 5. Karsons began experiencing financial trouble in 1998 when constructing the hotel. Various problems arose in the construction which resulted in a much higher cost than initially expected. Due to cash flow problems, in April of 1999, Karsons was forced to file for protection under Chapter 11 of the Bankruptcy Code. That Chapter 11 case was closed without confirmation in August of 2001, but with the payment of administrative expenses. 6. Soon thereafter, the terrorist attacks of September 11, 2001 occurred, which led to reduced profits. Karsons was again faced with cash flow problems and was forced to refinance the existing mortgage on its properties to avoid foreclosure in September, However, the refinancing agreement only contributed to further cash flow problems and reduced profits. Due to severe liquidity problems, Karsons again filed for Chapter 11 bankruptcy protection in November This time, Karsons emerged from bankruptcy in 2003 with a consensually 2

3 confirmed plan, successfully reorganized its business, and completed all payments under its plan in Karsons, like many other businesses, has suffered from the recent global economic downturn, which has been felt particularly acutely in the travel and tourism industries. Karsons was without a "flag" from March 10, 2010 until June 9, 2010, during which time Karsons was transitioning from operating as a Holiday Inn Express to a Quality Inn. Karsons' inability to operate under a nationally recognized name resulted in decreased business during that time frame. 8. Additionally, the hotel operated by Karsons is located in a good location on Interstate 65. Karsons typically sees a substantial increase in business in the summer months as northern travelers en route to the Gulf of Mexico traditionally keep Karsons' summer vacancy rates quite low. But the effects of the BP oil spill severely impacted Karsons business during the summer of 2010, as vacationers avoided the Gulf region. The combination of a depressed economy and an unprecedented environmental disaster greatly injured Karsons' business. Karsons is filing a claim with the BP claims administration. 9. For the period of January through October, 2010, Karsons expenses exceeded its revenue by nearly $100,000, which has created a severe cash flow situation. 10. On or about August 19, 2008, Metro City Bank (the "Bank" extended funding to Karsons in the amount of $2,640,000.00, secured by the real property on which Karsons hotel sits and perhaps Karsons' personal property. The real property secured by the Bank's note is valued by the Bank in a recent appraisal at approximately $3,500, Karsons generally owes its other creditors for typically one month of products or services. 3

4 11. Karsons has fallen behind on payments to the Bank. Throughout 2009, Karsons and the Bank attempted to negotiate in an attempt to restructure Karsons indebtedness, but were unable to agree on a payment plan under which Karsons could perform. The Bank scheduled foreclosure on the hotel for Tuesday, December 14, After further negotiations with the Bank failed, Karsons has been forced to file for Chapter 11 bankruptcy protection. RELIEF REQUESTED 12. By this Motion, Debtor requests entry of an order (i prohibiting the Utility Companies (as defined below from altering, refusing or discontinuing service on account of prepetition invoices; (ii deeming the Utility Companies adequately assured of payment, but establishing procedures for Utility Companies to request additional adequate assurance of payment; and (iii providing that, in the event that a Determination Motion (as defined below is filed, any objecting Utility Company shall be deemed to have adequate assurance of payment under 366 without the need for payment of additional deposits or other securities until an order of the Court is entered resolving such Determination Motion. BASIS FOR RELIEF 13. In connection with the operation of its business and management of its properties, Debtor obtains water, electricity, telephone, cable, pest control, waste removal, and other similar services (collectively, the "Utility Services" from approximately 5 different utility companies (the "Utility Companies". 1 Attached hereto as Exhibit "A" is a list of all, or substantially all, the Utility Companies providing services to Debtor as of the Petition Date. 2 1 The Bankruptcy Code does not define the term "utility." While it is unclear whether all the Utility Companies fall within such definition, Debtor has included all the Utility Companies in this motion out of an abundance of caution. 2 The relief requested herein, however, is requested with respect to all Utility Companies and is not limited to those listed on Exhibit "A". Moreover, some of the entities listed on Exhibit "A" may 4

5 14. Through these bankruptcy proceedings, Debtor seeks to reorganize its business and emerge from bankruptcy able to continue operating. Should one or more of the Utility Companies refuse or discontinue service even for a brief period, operations of Debtor would be severely disrupted. Such an interruption would damage customer relationships, revenue, and profits and would ultimately adversely affect Debtor's efforts to reorganize. Moreover, such an interruption would result in a diminution in value of Debtor's assets and cause irreparable harm to Debtor's estate. For example, if a provider of electricity were to terminate or disrupt service to Debtor, customers would be unable to have a comfortable stay at the hotel. In addition, if Debtor's waste is not removed from the premises of its hotel, unsanitary and unpleasant conditions would become manifest. As a result of the foregoing, customer confidence in the quality of Debtor's hotel would likely be lost which, in turn, would affect Debtor's ability to generate revenue. Clearly, maintaining uninterrupted Utility Services is essential to Debtor's ability to maintain its business operations and to preserve the value of its assets. 15. Pursuant to Bankruptcy Code 366, in the thirty (30 day period beginning on the petition date in a chapter 11 case, a utility may not alter, refuse, or discontinue service to, or discriminate against, a debtor solely on the basis of the commencement of the case or the failure of the debtor to pay a prepetition debt. Following the 30-day period, however, the Utility Companies arguably may discontinue service if Debtor does not provide adequate assurance of its future performance of postpetition obligations to them. Section 366 provides in relevant part as follows: provide services to Debtor in a capacity other than as a utility. Non-utilities are not entitled to adequate assurance of payment under Bankruptcy Code 366. Debtor reserves all rights, claims and defenses with respect to whether the entities listed on Exhibit "A" are "Utilities" within the meaning of 366. Further, Debtor reserves all rights, claims and defenses under 365 of the Bankruptcy Code; without limitation, nothing in this Motion shall be deemed a request for approval to assume, or an expression of intent to assume, any lease or contract with the Utility Companies. 5

6 (a Except as provided in subsections (b and (c of this section, a utility may not alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due. (c(1(a For purposes of this subsection, the term "assurance" of payment means (i (ii (iii (iv (v (vi a cash deposit; a letter of credit; a certificate of deposit; a surety bond; a prepayment of utility consumption; or another form of security that is mutually agreed on between the utility and the debtor or the trustee. 11 U.S.C (2 Subject to paragraphs (3 and (4, with respect to a case filed under chapter 11, a utility referred to in subsection (a may alter, refuse, or discontinue utility service, if during the 30-day period beginning on the date of the filing of the petition, the utility does not receive from the debtor or the trustee adequate assurance of payment for utility service that is satisfactory to the utility. (3(A On the request of a party in interest and after notice and a hearing, the court may order modification of the amount of an assurance of payment under paragraph ( Accordingly, by this Motion, Debtor seeks authority to provide to the Utility Companies "adequate assurance" within the meaning of 366(c(1(A in the following ways: (a Simultaneously with the filing of this motion, Debtor has filed a motion seeking Bankruptcy Court approval for the use of cash collateral to, among other things, pay all utility bills as expenses of administration; (b as further described below, in the event of a postpetition default, any Utility Company may petition the Court for relief consistent with section 366 of the Bankruptcy Code. 17. Prior to the Petition Date, Debtor received utility services from the Utility Companies. All accounts with the Utility Companies are current. Debtor estimates its cost for 6

7 utility services during next thirty (30 days will be as set forth in the budget attached to Debtor's Motion to Use Cash Collateral, filed contemporaneously herewith. 18. In addition, the attached proposed order provides that upon not less than fifteen (15 days notice to the Court and Debtor, any Utility Company may petition this Court for relief consistent with section 366 of the Bankruptcy Code (a "Determination Motion", based on the facts and circumstances arising after the Petition Date, and request that Debtor provide additional adequate assurance of payment. Thus, if Debtor fails to pay any postpetition charges to any Utility Company in accordance with existing agreements and policies, or other circumstances arise that result in a Utility Company having less than adequate assurance of payment, such Utility Company would then have the right to seek relief from this Court on an expedited basis; provided, however, that any such Utility Company would not be entitled to alter, refuse, or discontinue service without first obtaining an order of this Court, obtained by motion on notice in accordance with the Federal Rules of Bankruptcy Procedure. Moreover, if a Utility Company files a Determination Motion, then the relief sought herein would not shift any burden of proof imposed on either Debtor or the Utility Company. APPLICABLE AUTHORITY 19. The wide latitude to be afforded in determining those entities that constitute utilities under Bankruptcy Code section 366 is recognized in the legislative history: This section [366] is intended to cover utilities that have some special position with respect to the debtor, such as an electric company, gas supplier, or telephone company that is a monopoly in the area so that the debtor cannot easily obtain comparable service from another utility. Rep. No. 595, 95 th Cong., 1 st Sess. 350 (1977; S. Rep. No. 989, 95 th Cong., 2 nd Sess. 60 ( Section 366 of the Bankruptcy Code contemplates that a utility must receive assurance of payment that is sufficient given the debtor's financial situation. See In re Penn 7

8 Jersey Corp., 72 B.R. 981, 982 (Bankr. E.D. Pa Whether a utility is subject to an unreasonable risk of nonpayment must be determined from the facts and circumstances of each case. See In re Keydata Corp., 12 B.R. 156 (Bankr. 1 st Cir The United States Court of Appeals for the Second Circuit has held that, in determining whether a utility has adequate assurance of payment, the court is "afforded significant discretion" and must look at the facts of the case. Virginia Elec. & Power Co. v. Caldor, Inc., 117 F.3d 646, 650 (2d Cir Under Section 366(c of the Bankruptcy Code, this Court may determine the standards for adequate assurance of future payments for Utility Services. Bankruptcy courts have the exclusive responsibility for determining what constitutes adequate assurance for payment of post-petition utility charges, and are not bound by local or state regulations. See In re Begley, 41 B.R. 402, (Bankr. E.D. Pa, 1984, aff'd, 760 F.2d 46 (3d Cir Determinations of adequate assurance under Section 366 of the Bankruptcy Code are fully within the Court's discretion. See In re Marion Steel Co., 35 B.R. 188, 195 (Bankr. D. Ohio "Adequate assurance" under Section 366 is not synonymous with "adequate protection." In determining adequate assurance, the Court is not required to give utility companies the equivalent of a guaranty of payment, but must only determine that utility companies are not subject to an unreasonable risk of nonpayment for postpetition services. See In re Caldor, Inc.-NY, 199 B.R. 1 (S.D.N.Y. 1996; In re Santa Clara Circuits West, Inc., 27 B.R. 680, 685 (Bankr. D. Utah 1982; In re George C. Frye Co., 7 B.R. at 858. Further, in making its decision as to the need for any additional postpetition deposit, the Court should ensure that the utility is treating the debtor the same as it would treat a similarly situated, nonbankruptcy debtor. See In re Whitaker, 84 B.R. 934, 937 (Bankr. E.D. Pa. 1988, aff'd 882 F.2d 791 (3d Cir

9 23. In addition, the Utility Companies will have an opportunity to petition the Court on an expedited basis in the event of a default by Debtor. Debtor proposes that the Utility Companies have, under such circumstances, the ability to request additional adequate assurances on fifteen (15 days notice. Accordingly, Debtor believes that the utilities are sufficiently assured of payment. 24. Debtor's proposed adequate assurance is in keeping with the spirit and intent of Bankruptcy Code 366, is not prejudicial to the rights of any Utility Company, and is in the best interest of Debtor and its estates and creditors. To the extent that any Utility Company is not satisfied with the adequate assurance provided for herein, Debtor has proposed detailed Procedures for the Utility Company to seek additional adequate assurance. PROCEDURE 25. Debtor has provided notice of this Motion to (1 the Office of the Bankruptcy Administrator for the United States Bankruptcy Court for the Northern District of Alabama, Southern Division; (2 the Bank; (3 Debtor's twenty (20 largest unsecured creditors; (4 the Internal Revenue Service; and (5 the Utilities Companies. Debtor submits that given the circumstances and the notice of the relief requested herein, no other or further notice is required. Debtor intends to provide notice of entry of an order to all Utility Companies identified on Exhibit "A" hereto within three (3 business days of the entry of an order. 26. No prior motion for the relief requested herein has been made to this or any other court. CONCLUSION WHEREFORE, Debtor respectfully requests that the Court enter an order, substantially in the form annexed hereto as Exhibit "B", granting the relief requested hereby and such other and further relief as to which it is entitled. 9

10 Dated this the 10th day of December, /s/ Heather A. Lee Michael Leo Hall Heather A. Lee George D. Gaskin, III OF COUNSEL: BURR & FORMAN LLP 420 North 20th Street, Suite 3400 Birmingham, Alabama Telephone: ( Facsimile: ( Attorneys for Debtor Karsons International, Inc. 10

11 EXHIBIT "A" 1. Water - City of Calera, AL 2. Electricity - Alabama Power 3. Telephone - Cavalier Telephone LLC 4. Cell Phone - T-Mobile 5. Cable - Charter Communications 11

12 EXHIBIT "B" 12

13 IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION IN RE: KARSONS INTERNATIONAL, INC., Debtor. Chapter 11 Case No ORDER PURSUANT TO BANKRUPTCY CODE 366 AND 105(a DEEMING UTILITY COMPANIES ADEQUATELY ASSURED OF FUTURE PERFORMANCE AND ESTABLISHING PROCEDURE FOR DETERMINING REQUESTS FOR ADDITIONAL ADEQUATE ASSURANCES PURSUANT TO 366 This matter came to be heard upon the motion (the "Motion" 1 of Karsons International, Inc., pursuant to 105 and 366 of Title 11 of the United States Code, 11 U.S.C. 101 et seq. (the "Bankruptcy Code" (i prohibiting the Utility Companies (as defined in the Motion from altering, refusing or discontinuing service on account of pre-petition invoices; (ii deeming the Utility Companies adequately assured of payment, but establishing procedures for Utility Companies to request additional adequate assurance of payment; and (iii providing that, in the event that a Determination Motion (defined below is filed, any objecting Utility Company shall be deemed to have adequate assurance of payment under 366 without the need for payment of additional deposits or other securities until an order of the Court is entered resolving such Determination Motion. Upon consideration of the Affidavit of Nouman A. Malik in Support of Chapter 11 Petitions and First Day Motions filed on the Petition Date; the Court having jurisdiction to consider the Motions and the relief requested therein in accordance with 28 U.S.C. 157 and 1334; due notice of this Motion has been provided to (1 the Office of the Bankruptcy 1 Any capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Motion. 13

14 Administrator for the United States Bankruptcy Court for the Northern District of Alabama, Southern Division; (2 Metro City Bank; (3 Debtor's twenty (20 largest unsecured creditors; and (4 the Internal Revenue Service; and it appearing that no other or further notice need be provided; the Court having determined that the relief sought in the Motion is in the best interests of Debtor, its creditors, and all parties in interest; upon the Motion and all of the proceedings before this Court; and after due deliberation and sufficient cause appearing therefore, it is hereby ORDERED that the Motion is GRANTED; and it is further ORDERED that the Utility Companies are prohibited from altering, refusing, or discontinuing service on account of pre-petition invoices; and it is further ORDERED that the Utility Companies are deemed to be adequately assured of payment; and it is further ORDERED that, upon not less than fifteen (15 days notice to the Court and the Debtor, any Utility Company may petition this Court for relief consistent with section 366 of the Bankruptcy Code (a "Determination Motion", based on the facts and circumstances arising after the Petition Date, and request that Debtor provide additional adequate assurance of payment; provided, however, that any such Utility Company will not be entitled to alter, refuse, or discontinue service without first obtaining an order of this Court, obtained by motion on notice in accordance with the Federal Rules of Bankruptcy Procedure. Moreover, if a Utility Company files a Determination Motion, then the relief sought herein will not shift any burden of proof imposed on either Debtor or the Utility Company. Dated this the of December, UNITED STATES BANKRUPTCY JUDGE 14