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1 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 1 of 13 UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS EASTERN DIVISION IN RE U.S. EDGE, INC. Chapter 11 Debtor Case No.: HJB OFFER OF PROOF IN SUPPORT OF CONFIRMATION OF THE DEBTOR S PLAN OF REORGANIZATION NOW COMES the debtor, U.S. Edge, Inc. (the Debtor ) and makes the following offer of proof in support of confirmation of its Plan of Reorganization. The Debtor herein submits the affidavits of the Debtor s President, Michael Baker, its bankruptcy Counsel Marques Lipton and states as follows: Introduction 1. On March 2, 2016, the Debtor filed its Disclosure Statement and Plan of Reorganization (the Plan ). See Docket at #95 and On April 13, 2016, the Debtor filed an Amended Disclosure Statement. See Docket at # Following a hearing on April 14, 2016, the Court approved the Amended Disclosure Statement and entered an order permitting solicitation of votes for acceptance or rejection of the Plan. See Docket at # On April 22, 2016, the Debtor served copies of the Amended Disclosure Statement, Plan, Order Approving Amended Disclosure Statement and Ballot for Accepting or Rejecting Plan of Reorganization upon all creditors and parties in interest by United States Mail. See Docket # Generally, the Court shall confirm a plan if all of the requirements of Section

2 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 2 of (a) of the Bankruptcy Code are satisfied. However, if all of the requirements of Section 1129(a), other than subsection 1129(a)(8), are satisfied, the Court may confirm a plan pursuant to Section 1129(b) if certain additional requirements are met. 6. As noted below, the Plan has not been accepted by all classes of impaired creditors, as required by subsection (a)(8). However as discussed further, because the requirements of subsection 1129(a)(2)(B) have been satisfied, the Plan may be confirmed, not withstanding the rejection of the Plan by Class IV. The Plan Complies with the Applicable Provisions of the Bankruptcy Code 7. Section 1129(a)(1) requires that a plan complies with the applicable provisions of the Bankruptcy Code. Courts have interpreted the term applicable provisions to refer to the form and content of reorganization plans, such as sections 1122 and 1223 governing classifications of claims and contents of plans. In re Trenton Ridge Investors, LLC, 461 B.R. 440, 464 (Bankr. S.D. Ohio. 2011); Kane v. Johns-Manville Corp (In re Johns-Manville Corp.) 843 F. 2d 636, (2d Cir. 1998). 8. Section 1122 of the Bankruptcy Code governs classification of claims and interests. A plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. 11 U.S. C. 1122(a). 9. The Plan classifies four types of claims. Class I consists of the impaired, secured claim of Santander Bank, N.A. which holds a security interest in substantially all of the Debtor s assets. Class II consists of the unimpaired claim of Bank of 2

3 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 3 of 13 America, which is secured by the Debtor s 2012 Chevrolet Suburban. Class III consists of the unimpaired secured claim of Ally Financial which is secured by the Debtor s 2011 Ford Transit. Class IV consists of the impaired claims of general unsecured creditors. The Debtor believes that claims have been appropriately classified and there have been no objections raised as to the Plan s classification of claims. 10. Section 1123(a)(1) governs the contents of a plan. Section 1123(a)(1) requires, among other things, that a plan a) designate classes of claims; b) specify the treatment of any class of claims that is impaired under the plan; c) provide for the same treatment of each creditor within a particular class and; d) and provide for adequate means for the implementation of the Plan. 11. The Plan has specifically designated four classes of claims, of which only Classes I and IV are impaired. The Plan adequately specifies the treatment of each impaired class. 12. Class IV is the only class that is impaired under the Plan containing more than one creditor. Each creditor within Class IV will be treated the same under the Plan. 13. The Plan provides adequate means for the implementation of the Plan. The Plan is a bootstrap plan and is to be funded by the revenue generated by the Debtor s ongoing operations. The Plan will be implemented on the Effective Date at which time, the Debtor, serving as distribution agent, will execute payments to creditors in accordance with the terms of the Plan. The Debtor has Complied with the Applicable Provisions of the Bankruptcy Code 3

4 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 4 of The Debtor, as the proponent of the Plan, has complied with the applicable provisions of the Bankruptcy Code as required by Section 1129(a)(2). The principal purpose of section 1129(a)(2) is to assure that the Plan proponents have complied with the disclosure requirements of Section 1125 in connection with the solicitation of acceptances of the plan. In re Texaco, inc., 84 B.R. 893, (Bankr. S.D.N.Y. 1988). 15. On April 22, 2016, the Debtor served all creditors and parties in interest with copies of the Plan, Amended Disclosure Statement, Order Approving the Amended Disclosure Statement and a Ballot for Acceptance or Rejection of the Debtor s Plan. See Lipton Aff. at 3; Docket at #105. The Plan is Proposed in Good Faith 16. Section 1129(a)(3) requires that a plan be proposed in good faith and not by any means forbidden by law. Although the Bankruptcy Code does not define the term good faith courts have generally interpreted it to mean that there is exists a reasonable likelihood that the plan will achieve a result consistent with the objections and purposes of the Bankruptcy Code. Connell v Coastal Cable T.V., Inc. (In re Coastal Cable T.V., Inc.) 709 F. 2d 762, 764 (1 st Cir. 1983); Koelble v. Glessing (In re Koelble), 751 F. 2d 137, 139 (2d Cir. 1984). There are two primary purposes for relief under Chapter 11: 1) preservation of businesses as going concerns and; 2) the maximum recovery of assets to satisfy unsecured claims. Fields Station, LLC v. Capitol Food Corp. of Fields Corner (In re Capitol Food Corp of Fields Corner), 490 F. 3d 21, 25 (1 st Cir. 2007). Although the protection of creditor interests is an important objective of Chapter 11, the 4

5 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 5 of 13 Supreme Court has made clear that successful debtor reorganization and maximization of the value of the estate are the primary purposes. Bonner Mall Partnership v. U.S. Bancorp Mortgage (In re Bonner Mall Partnership) 2 F. 3d 899, 916 (9th Cir. 1993)(citing NLRB v. Bildisco & Bildisco, 465 U.S. 513, 527, (1984) and Toibb v. Radloff, 501 U.S. 157, 164 (1991). 17. At the time of filing, the Debtor was having difficulty paying its expenses as and when they came due and would not have been able to continue operating without further accessing secured line of credit. Baker Aff. at 19. The Debtor s goal in these proceedings was to continue operating a going concern. Id at 20. The Plan achieves this objective by providing for the Debtor to pay its secured, priority and administrative debts in full and to pay 50% dividend to general unsecured creditors over five years. 18. By allowing the Debtor to continue its operations, the Plan also achieves the second Chapter 11 objective of maximizing estate assets. The Debtor is worth far more as an ongoing operation that if it were liquidated. Compare Baker Aff. Ex. A with Ex. B. The Debtor s projected future revenues will enable it to pay a far greater dividend than a liquidation of the Debtor would provide. See Baker Aff. at Ex. A, B. The Plan Discloses All Proposed Payments of Bankruptcy Related Fees and Expenses 19. Section 1129(a)(4) requires that any payment made or to be made by the debtor, for services or costs and expenses in connection with the case be approved by the Court or be subject to approval of the Court as reasonable. 20. The only payments proposed to be made by the Debtor for services, costs or 5

6 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 6 of 13 expenses incurred in connection with the case are the administrative expenses of the Debtor s bankruptcy counsel, the Law Office of Nicholas F. Ortiz, P.C, and counsel to the Official Committee of Unsecured Creditors, Jager Smith, P.C. The Plan provides that the Debtor will pay these administrative claims on the latter of the date they are allowed by an order of the Court or the effective date of the Plan. See Plan at p. 3. Both the Law Office of Nicholas F. Ortiz, P.C. and Jager Smith, P.C. have submitted applications for compensation in accordance with 11 U.S.C. 330(a), Fed. R. Bankr. P. 2016(a) and M.L.B.R. 2016(a) and (d) and both applications have been scheduled to be considered by the Court at a hearing scheduled for June 8, The Plan Disclosures of the Identity of Insiders to be Retained by the Debtor 21. Section 1129(a)(5) of the Bankruptcy Code requires that the proponent of the Plan disclose the identity and affiliations of any individual proposed to serve as an office, director or trustee, to demonstrate that the appointment to, or continuance of such office by such individual is consistent with the interests of creditors, equity security holders and policy, and to disclose the identity of any insider that will be employed or retainer by the reorganized debtor and the nature of any compensation of any insider. 22. The Plan discloses that Michael Baker, the debtor s current president, sole director and majority shareholder will serve as the president and director of the reorganized Debtor. The Plan discloses that Mr. Baker will continue to receive his annual salary of $150,000 but that he will be entitled to no increases in compensation until such time that all payments under the Plan have been 6

7 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 7 of 13 completed and shall not take any profit distributions during such time. Mr. Baker s proposed $75,000 capital contribution is necessary to the successful administration of the Plan and the Debtor s continued operations. Without the proposed contribution from Mr. Baker, the Debtor would not have sufficient capital to consummate the Plan on the effective date. Baker Aff. at Ex. A. The Plan Satisfies the Best Interests of Creditors Test 23. Section 1129(a)(7) requires that, with respect to each impaired class of claims or interests, each holder of a claim or interest has accepted the Plan, or will receive under the plan on account of such claim, property of a value, as of the effective date of the plan that is not less than the amount such holder would receive if the Debtor were liquidated under Chapter 7 of the Bankruptcy Code. This requirement is commonly referred to as the Best Interest of Creditors Test. 24. Based on the Liquidation Analysis submitted with the Disclosure Statement and sworn to by the Debtor s President, Michael Baker (see Baker Aff. at Ex B.), it is clear that the Plan provides a far greater dividend to unsecured creditors than they would stand to receive if the Debtor s assets were liquidated under Chapter 7 of the Bankruptcy Code. 25. Section 1129(a)(8) requires that with respect to each class of claims that is impaired, such class has accepted the Plan. A class of claims is deemed to have accepted a plan if it has been accepted by creditors holding at least two thirds in amount and more than one half in number of the allowed claims held in that class. 26. The sole creditor comprising Class I, Santander Bank, has voted to accept the Plan. Lipton Aff at 6. 7

8 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 8 of Class IV has voted to reject the Plan. Class IV creditors have submitted a total of 32 votes representing a total of $252, Lipton Aff. at 7. Of that total, 29 Class IV creditors, representing claims totaling $124, have voted to accept the Plan. Id. Three Class IV creditors, representing $127, have voted to reject the Plan. Id. Therefore, because less than two-thirds of the voting dollars have voted to accept the Plan, Section 1129(a)(8) has not been satisfied. The Plan Provides for the Proper Treatment of Priority Claims 28. Section 1129(a)(9) requires specific treatment of certain claims entitled to priority under Section 507 of the Bankruptcy Code. 29. Claims of a kind specified in section 507(a)(2) and (a)(3) must be paid in full on the effective date of the Plan, unless the creditor has agreed to a different treatment. 30. The Plan provides that all such claims shall be paid in full on the latter of the Effective Date of the Plan or the date they are allowed by the Court. Plan at p Claims of the kind specified in Sections 507(a)(4)-(7) must be paid in full on the effective date of the Plan. The Debtor is not liable for any claims arising under Sections 507(a)(4)-(7). 32. Claims of the kind specified in Section 507(a)(8) must be paid in full over a period ending not later than five years after the date of the order for relief and in a manner not less favorable than the most favored non-priority claim provided for by the Plan. 33. The Plan provides for all claims arising under Section 507(a)(8) to be paid in full on the Effective Date of the Plan. Plan at p

9 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 9 of 13 The Plan has Been Accepted by at Least One Impaired Class 34. Section 1129(a)(10) requires that if a class of claims is impaired under the plan, at least one impaired class has accepted the Plan, determined without consideration of acceptance by any insiders. 35. The Plan has been accepted by Class I which is impaired and does not consist of any insiders. Lipton Aff. at 6. The Plan is Feasible 36. Section 1129(a)(11) requires the Court to find that confirmation is not likely to be followed by liquidation or the need for further financial reorganization. 37. In order to satisfy this requirement, the Court must find that the Debtor s financial projections are consistent with the Debtor s reorganization and are derived from realistic and reasonable assumptions which are capable of being met. In re Leominster Materials Corp WL (Bankr. D. Mass. 2006) citing In re Ridgewood Apartments of DeKalb County, Ltd., 183 B.R. 784, 790 (Bankr. S.D. Ohio 1985). This test does not require proof that the financial projections are certain to be met, but rather it serves to prevent confirmation of visionary schemes. In re Leominster Materials Corp, 2006 WL at * The Debtor s financial projections are consistent with the Debtor s recent financial operations. Baker Aff. at 38. The Debtor s current cash on hand, Mr. Baker s proposed capital contribution and the Debtor s future revenues will be adequate to sustain the Debtor s operations and obligations under the Plan. Id. The Plan Provides for the Payment of the United States Trustee s Fees 39. Section 1129(a)(12) of the Bankruptcy Code requires that all fees payable under 9

10 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 10 of U.S.C have been paid or that the plan provides for their payment in full on or before the Effective Date. 40. The Plan provides that all fees payable under 28 U.S. C will be paid on or before the Effective Date, if not earlier. Plan at p Notwithstanding the rejection of the Plan by Class IV and the failure to satisfy the requirement of Section 1129(a)(8), the Court may still confirm the Plan pursuant to Section 1129(b). 42. Section 1129(b) allows confirmation of a plan that has satisfied all of the requirements of Section 1129(a), other than subsection eight, if the plan is fair and equitable and does not discriminate unfairly with respect to the class of claims that is impaired and has not accepted the plan. 43. Clearly the Plan does not discriminate unfairly, as all of the claims within Class IV are to be treated the same. Absolute Priority Rule and New Value Contribution 44. With respect to unsecured creditors, the fair and equitable standard is met if unsecured creditors receive payment in the full amount of their claim or, in the event that they receive less than the full amount of their claim, no junior class receives or retains any interest in property of the Debtor. The standard, as applicable to unsecured creditors, is also known as the absolute priority rule. 45. An exception to the absolute priority rule known as the new value exception permits the retention of property by a junior interest holder if such person makes a fresh capital contribution in money or money s worth. In re Bjolmes Realty Trust, 134 B.R (Bankr. D. Mass. 1991). As Judge Hillman noted in In re 10

11 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 11 of 13 Shepcaro the contribution of new capital in money or money s worth, in return for future participation in an enterprise which is reasonably equivalent to the contribution simply does not violate the absolute priority rule. 144 B.R. 3, 4 (Bankr. D. Mass. 1992) quoting In re Woodscape, L.P. 134 B.R. 165, 173 Bankr. D. Md Under the Plan, Mr. Baker is proposing to make a new value contribution of $75,000 cash on the effective date in exchange for a 100% equity interest in the reorganized Debtor. Plan at p Mr. Baker s new value contribution is reasonably equivalent to the value of the interest he is to receive under the Plan. 48. According to the Debtor s liquidation analysis, the Debtor s outstanding liabilities, as of March 1, 2016 total $1,256, and its assets are valued at no more than $671,956. Therefore, from a balance sheet perspective, the Debtor is presently insolvent and its equity is essentially $ Once the Plan has been consummated, and the Debtor has made its initial payments, its assets will consist of $80,000- $100,000 (inclusive of M. Baker s cash contribution) in cash, receivables of $200,000-$250,000, used vehicles, office furniture and computers with minimal value. However, the Debtor will still have $456,769 in secured debt to Santander and approximately $261,000 in general unsecured debt. See Baker Aff. at Ex. A and B. As such, the Debtor will remain insolvent even after the consummation of the Plan. 50. Mr. Baker s new value contribution is also roughly equivalent to the Debtor s average annual net operating income for 2013 and See Baker Aff. at

12 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 12 of Based on the Debtor s financial projections, the Debtor is not anticipating a net cash profit until at least See Baker Aff. at Ex. B. 52. Based on the present value of the Debtor s assets and the sum of its liabilities, the Debtor s recent historical profits and the Debtor s projected net income, it is clear that Mr. Baker s new value contribution is roughly equivalent to the value of the interest he stands to receive in exchange. 53. The Committee of Unsecured Creditors has challenged the sufficiency of Mr. Baker s capital contribution. See Docket #113 at p. 7. Where a creditor challenges the adequacy of a proposed new value contribution and the Debtor s shares are not publicly traded, the only way to measure the proposed contribution against market value is to offer the stock for sale. In re Ropt, Ltd. Partnership, 152, B.R. 406, 412 (Bankr. D. Mass (quoting Bjolmes Realty Trust, 134 B.R. at 1006). 54. The Plan afforded creditors or interest parties an opportunity to purchase an interest in the Debtor. See Plan at p. 6. No offers to purchase an interest in the Debtor have been made. 55. Based on the negative balance of the Debtor s assets and liabilities, the Debtor s recent and anticipated earnings and the lack of any higher offers, the Court should find that Mr. Baker s proposed new value contribution is reasonably equivalent to the value of the interest he will receive. WHEREFORE in light of the Offer of Proof and the sworn affidavits of Michael Baker and Marques Lipton, the Debtor respectfully requests the Court enter an order confirming the Debtor s Plan of Reorganization pursuant to 11 U.S.C. 1129(b). 12

13 Case Doc 117 Filed 06/07/16 Entered 06/07/16 16:16:35 Desc Main Document Page 13 of 13 Respectfully submitted U.S. Edge, Inc. By its attorney Dated: June 7, 2016 /s/ Marques C. Lipton Marques C. Lipton (BBO #676087) Law Office of Nicholas F. Ortiz, P.C. 99 High Street, Suite 304 Boston, MA (617) (617) (fax) 13

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