Case Doc 22 Filed 12/04/13 Entered 12/04/13 13:49:01 Desc Main Document Page 1 of 8

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1 Document Page 1 of 8 UNITED STATES BANKRUPTCY COURT DISTRICT OF MAINE ) In re: ) ) Chapter 11 Preval Group, LLC, ) Case No.: ) Debtor. ) ) JOINT MOTION OF THE UNITED STATES TRUSTEE AND THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO CONVERT THE DEBTOR S CHAPTER 11 CASE TO A CHAPTER 7 CASE PURSUANT TO 11 U.S.C. 1112(B) The United States Trustee (the UST ), by and through his undersigned counsel, and the Official Committee of Unsecured Creditors of Preval Group, LLC (the Committee and together with the UST, the Movants ), through undersigned counsel, jointly file this motion to convert the Debtor s chapter 11 case to a chapter 7 case pursuant to 11 U.S.C. 1112(b). In support thereof, the Movants state as follows: I. Jurisdiction, Venue & Statutory Predicate 1. This Court has jurisdiction to hear this matter and enter a final order granting the relief requested herein pursuant to 28 U.S.C and 157(b)(2). Venue is proper pursuant to 28 U.S.C and The statutory predicates for the relief requested herein are Sections 105(a), 1103, and 1109 of the Bankruptcy Code. 2. This matter is a core proceeding 28 U.S.C. 157(b)(2) upon which this Court has the Constitutional authority to enter final order. 3. The statutory predicates for this Motion are 11 U.S.C. 105 and 1112(b) and in the alternative, 1104(a).

2 Document Page 2 of 8 II. Background 4. On September 20, 2013 (the Petition Date ), Preval Group, LLC (the Debtor ) filed a voluntary petition for relief under chapter 11 of the Code. Docket Entry No. 01. Since the Petition Date, the Debtor has remained in possession of its assets and continues to operate its business as a debtor-in-possession in accordance with 11 U.S.C and On October 11, 2013, the United States Trustee appointed the Committee pursuant to 11 U.S.C. 1102(a) to serve in this case. Docket Entry No. 09. The Committee consists of News America Marketing, whose delegate Joseph Borrow serves as Chair of the Committee; Concept Laboratories, Inc., whose delegate is C. Stephan Sands; and The National Rifle Association, whose delegate is Sarah Gervase. All members of the Committee are listed as creditors on the schedules of the Debtor. 6. As authorized by 11 U.S.C. 1103(a), the Committee retained the law firm of Verrill Dana LLP ( Verrill Dana ) as counsel, which retention was approved by the Court on November 22, Docket Entry No. 19. III. Background Relevant to the Relief Requested 7. Prior to the Petition Date, the Debtor conducted two primary business lines: (1) a direct-to-consumer sales operation (the DR Line ), wherein the Debtor s products were sold by the Debtor directly to consumers; and (2) a retail sales operation (the Retail Line ), wherein the Debtor s products were sold by certain national retailers (e.g., Walmart, CVS, and Walgreens) as well as on-line drugstores. 2

3 Document Page 3 of 8 Assets: A. The DR Line 8. Post-petition, according to the Debtor s monthly operating reports 1 and supplemental information supplied to the Movants, the Debtor continues to receive limited revenues from the operation of the DR Line, primarily by virtue of its continuing sales of a product called Quietus. According to the October monthly operating report filed in this case, however, the Debtor only had $27,334 in total receipts with the majority of those receipts simply being paid to the Debtor s captive management company, PureWire Publishing ( PureWire ), which is owned by the two members of the Debtor (the Insiders ). See, e.g., Docket Entry No. 17 reflecting $17,500 paid to PureWire. B. The Retail Line 9. With respect to the Retail Line, upon information and belief, the Emerson Group ( Emerson ) serves as the Debtor s broker, for which it receives a commission as considerarion for acting as an intermediary between the Debtor and the retailers selling the Debtor s products. The Movants understand: (1) the Debtor has no direct relationship with the retailers; (2) the retailers have informed Emerson that all the Debtor s products will be de-listed from the retailers shelves by the middle of 2014; and, at the time of the filing of this Motion, (3) Emerson is refusing to broker any additional product for the Debtor. 10. With the souring of the Debtor s relationship with Emerson, and the certain confusion surrounding ownership of the remaining inventory, the Movants do not believe the Debtor can reorganize around this aspect of its pre-petition business. 1 See Docket Entry Nos. 10, 17. 3

4 Document Page 4 of 8 C. Potential Avoidance Actions against Insiders 11. Along with the Petition, the Debtor filed its Statement of Financial Affairs (the SOFA ). See Docket Entry No. 1. According to response to Question 3(c) of the SOFA, in the 12 months prior to the Petition Date, the Debtor paid $440 to Insiders. Subsequent to the Debtor s Section 341 meeting of creditors, upon demand by the UST and the Committee, the Debtor delivered supplemental information indicating that the Debtor had, in fact, paid approximately $1,164,379 to Insiders in the year prior to the Petition Date. 12. Additionally, the testimony from the representatives of the Debtor at the meeting of creditors was that vehicle lease payments for certain luxury vehicles were being made by the Debtor for the benefit of the Insider s wives and families. Administration Liabilities 13. On December 3, 2013, pursuant to the Court s order on interim billing for the Committee s counsel, undersigned counsel transmitted an invoice for the period of October 11, 2013 to November 30, 2013 to Debtor s counsel. On December 4, 2013, Debtor s counsel responded that the Debtor does not have funds to pay this claim and that it would be filing a motion to convert. As the Movants had prepared this Motion prior to receiving notice from Debtor s counsel, they file this Motion for the sake of efficiency. IV. The Motion to Convert 14. Under the present circumstances, it is in the best interests of the Debtor s creditors to convert this chapter 11 case to a case under chapter 7 of the Bankruptcy Code, as it appears there is no meaningful operating business to reorganize and the only apparent potential value remaining is the liquidation of the Debtor s assets (primarily IP, accounts receivable, and, some depreciating inventory) and the value of potential avoidance actions which the Debtor currently 4

5 Document Page 5 of 8 controls. 15. Section 1112(b)(1) of the Bankruptcy Code provides that the court shall convert or dismiss the case if the movant establishes cause, unless the court determines that unusual circumstances exist such that conversion or dismissal would not be in the best interests of creditors and the estate. 11 U.S.C. 1112(b)(1) Section 1112(b)(4) provides a non-exhaustive list of sixteen factors from which the Court may find a showing of cause for purposes of paragraph (b)(1). See 11 U.S.C. 1112(b)(4); see also In re Gilroy, 2008 WL at , * 4 ( Section 1112(b)(4) provides a nonexclusive list of what constitutes cause. ); 7 Collier [5]. Cause for conversion exists when a moving party can demonstrate the substantial or continuing loss to or diminution of the debtor s estate and an absence of a reasonable likelihood of rehabilitation. 11 U.S.C. 1112(b)(4)(A); see also In re Timbers of Inwood Forest Assocs., Ltd., 808 F.2d 363, (5th Cir. 1987); In re ABEPP Acquisition Corp., 191 B.R. 365 (Bankr. N.D. Ohio 1996). 17. Once cause is established by the moving party, dismissal or conversion is mandatory (unless it is established that appointment of a trustee or examiner is warranted, which is not the case here). In re Gilroy, 2008 WL , at * 4 (B.A.P. 1st Cir. Aug. 4, 2008). A. Conversion Stops the Diminution of Value 18. The test in determining whether there has been a continuing loss to or diminution of the estate is whether there is a negative cash flow by the debtor after entry of the Order for Relief in the Chapter 11 case, [or] depreciation in value of the debtors assets notwithstanding a 2 Section 1112(b)(2) provides an exception to the rule in (b)(1), and requires that the motion to convert or dismiss not be granted, absent unusual circumstances in favor of the requested relief, where there is a reasonable likelihood that a plan will be confirmed within a reasonable time. However, pursuant to 1112(b)(2)(B), where the movant demonstrates cause by showing a substantial or continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation, under 1112(b)(4)(A), 1112(b)(2) does not apply. 5

6 Document Page 6 of 8 possible positive cash flow, either condition sufficing to satisfy the first element set forth in 1112(b)(1). Faden v. Faden, Civ. No (CSF), 1990 WL , at *3 (D.N.J. Nov. 5, 1990). For purposes of a liquidating chapter 11 case (such as this one), a negative cash flow exists so long as the estate continues to incur post-petition debt. See Loop Corp. v. U.S. Trustee, 379 F.3d 511, (8th Cir. 2004); Under the interpretation of 1112(b)(1) consistently used in bankruptcy courts, this negative cash flow situation alone is sufficient to establish continuing loss to or diminution of the estate. Id. at Likewise, conversion from a chapter 11 case to a chapter 7 case is appropriate where the debtor is continuing to lose money and intends to liquidate. See ABEPP Acquisition, 191 B.R. at 367. B. There is No Rehabilitation for this Debtor 20. A liquidation does not equate to the rehabilitation of the debtor. See, e.g., ABEPP Acquisition, at 368 (debtor s intention to liquidate was one of the reasons the court converted the bankruptcy case); thus, the standard under section 1112(b)(1) is not the technical one of whether the Debtor can confirm a plan but, rather, whether the Debtor s business prospects justify [the] continuance of [a] reorganization effort, 7 Collier [5] [a][ii], or, as here, serve no reorganization purpose whatsoever. 21. A chapter 7 trustee is very capable of winding down the Debtor s remaining estate by establishing a bar date and addressing the remaining open issues. See In re ABEPP Acquisition Corp., 191 B.R. 365, 369 (Bankr. N.D. Ohio 1996) ( [a]s the trustee s powers to recover property are generally greater than would be available outside of bankruptcy, this factor tends to favor conversion where there is not continuing revenue-generating activity. ). Because, upon information and belief, no rehabilitation is contemplated or even possible in this case and 6

7 Document Page 7 of 8 the Insider litigation targets should not be the only beneficiary of the chapter 11 process. Wherefore, conversion is appropriate under the present circumstances. V. Certification Pursuant to D. Me. LBR (b) 22. Pursuant to D. Me. LBR (b), the Movants have not been able to determine whether the Debtor objects to the Motion, but believe the Debtor supports conversion. VI. Conclusion 23. Cause exists for conversion of this chapter 11 case to one under chapter 7. Additionally, the Movants are unaware of any circumstances that would constitute unusual circumstances that would operate as an exception to the standard set forth in section 1112(b)(1). Accordingly, it is appropriate and in the best interest of creditors and this estate for the Court to convert this chapter 11 case to a case under chapter 7 of the Bankruptcy Code. WHEREFORE, the Movants respectfully requests that this Court enter an order converting the Debtor s case from chapter 11 to chapter 7 and grant such other and further relief as is just. Dated: December 4, 2013 /s/ Nathaniel R. Hull Nathaniel R. Hull, Esq. Counsel to The Committee of Unsecured Creditors of Preval Group, LLC. VERRILL DANA LLP One Portland Square P.O. Box 586 Portland, ME Phone Fax nhull@verrilldana.com bankr@verrilldana.com 7

8 Document Page 8 of 8 WILLIAM K. HARRINGTON, United States Trustee By: /s/ Jennifer H. Pincus Jennifer H. Pincus, Esq. Trial Attorney United States Department of Justice Office of the United States Trustee 537 Congress Street, Suite 303 Portland, ME (207) Jennifer.H.Pincus@usdoj.gov CERTIFICATE OF SERVICE I, Jennifer H. Pincus, being over the age of eighteen and an employee of the United States Department of Justice, U.S. Trustee Program, hereby certify that on December 4, 2013, I caused to be electronically filed the above Motion to Convert the Debtor s Chapter 11 Case to a Chapter 7 Case Pursuant to 11 U.S.C. 1112(b), a Notice of Hearing, a Proposed Order, and this Certificate of Service, which were served upon each of the parties set forth on this Service List via U.S. mail, postage prepaid, on December 4, All other parties listed on the Notice of Electronic Filing have been served electronically. THE UNITED STATES TRUSTEE REQUESTS THAT THE CLERK OF THE COURT PROVIDE NOTICE TO ALL CREDITORS AND ANY OTHER PARTIES-IN-INTEREST ENTITILED TO NOTICE, OF THE PENDENCY OF THIS MOTION AND THE HEARING RELATED TO THE SAME PURSUANT TO FED. R. BANKR. P. 2002(a)(4) D. ME. LBR (a)(4). Dated at Portland, Maine this 4 th day of December, /s/ Jennifer H. Pincus Service List (via U.S. Mail): N/A 8