M.C. Pipe, Inc.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
M.C. PIPE, INC.,
DEBTOR.
CASE NO. 11-05256-8-JRL
CHAPTER 11
ORDER
This matter came before the court on RBC Bank’s (“RBC”) motion for relief from the
automatic stay or in the alternative to convert the case to chapter 7, and on M.C. Pipe, Inc.’s
(“debtor”) application to employ and compensate officers. A hearing was held on September 13,
2011 and September 30, 2011 in Raleigh, North Carolina.
JURISDICTION
The court has jurisdiction over the subject matter of this proceeding pursuant to 28
U.S.C. §§ 151, 157 and 1334, and the General Order of Reference entered by the United States
District Court for the Eastern District of North Carolina on August 3, 1984. This is a core
proceeding within the meaning of 28 U.S.C. § 157(b)(2) which this court may hear and
determine.
SO ORDERED.
SIGNED this 07 day of October, 2011.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1 RBC later argued that the realtor’s fee and real estate taxes should be deducted from the
expert’s opinion of value. In addition the real estate appraiser and personal property appraiser
each included the value of the debtor’s cranes in their respective appraisals. RBC contends that
the true value of the real estate is $5,603,620.22, which is equal to the expert’s opinion of value
less the amounts for fees, taxes, and cranes.
2
FACTS
The debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code
on July 7, 2011, and continues to operate as a debtor-in-possession. The debtor is a North
Carolina corporation engaged in the precast concrete business. The debtor is also the surviving
entity of a pre-petition merger with the following related entities: Duchaine Properties, LLC,
M.C. Equipment, Inc., and M.C. Precast Concrete, Inc. As a result of the merger, the debtor is
now obligated on several promissory notes and guaranties in favor of RBC. As security for these
obligations, RBC has a lien on the debtor’s real property, equipment, inventory, and accounts
receivable.
At the hearing, RBC presented testimony from two expert appraisers. RBC’s first expert
appraiser testified as to the value of the debtor’s real property. In his opinion, the value of the
debtor’s real estate is $6,300,000.00. 1 RBC asked the second appraiser to provide an opinion of
value on the debtor’s equipment. At the hearing, he testified that there are three ways this
equipment could be sold. Thus the proper value for the equipment would depend on how the
property would be disposed. He stated that the average fair market value of the equipment is
approximately $4,200,000.00. In this situation all of the equipment would be sold together to a
willing buyer. Next, he stated that the orderly liquidation value of the property is approximately
$868,870.00. Finally, he stated that the equipment’s auction value is approximately
$1,300,000.00. The appraiser explained that due to the nature of the debtor’s business, the fair
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market value approach would yield the highest value because the equipment is worth more if it is
sold all together. Under the fair market value scenario the equipment would be sold as a single
unit, unlike the liquidation and auction approach where the equipment would be sold piece-meal.
The debtor entered into evidence several exhibits outlining its proposed plan projections.
The debtor’s proposals forecast that the debtor is receiving sufficient cash flow from its business
operations to fund its plan and will not need a cash infusion or a § 363 sale. The debtor also
presented evidence that the debtor has seen an increase in sales from the previous year, has cut
expenses, and fixed several accounting problems.
DISCUSSION
MOTION FOR RELIEF FROM THE AUTOMATIC STAY
RBC contends it is entitled to relief from the automatic stay pursuant to § 362(1) and (2)
of the Bankruptcy Code. Section 362 of the Bankruptcy Code provides that a debtor’s
bankruptcy petition automatically stays “any act to obtain possession of . . . or to exercise control
over property of the estate,” as well as “any act to collect . . . or recover a claim against the
debtor that arose before the commencement of the case . . . .” 11 U.S.C. § 362(a). However, the
court may lift the automatic stay (1) for cause, including a lack of adequate protection; or (2) if
the debtor has no equity in the property and the property is not necessary for an effective
reorganization. Id. § 362(d)(1)–(2). RBC maintains that the value of the collateral is less than
the amount owed under the notes. As a result, the debtor has not adequately protected RBC’s
interest, the debtor lacks equity in the property at issue, and the property is not necessary for an
effective reorganization.
Establishing the value of collateral is essential to a determination of whether a creditor is
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entitled to relief pursuant to § 362(d)(1) and (2). Specifically, the value of collateral is critical to
(a) whether the debtor has equity in the property and (b) whether that equity is sufficient to
adequately protect the creditor. 11 U.S.C. § 362(d)(1)–(2). Sections 362(d)(1) and (2) do not
establish a specific method of valuation. Id. In In re Deep River, 2005 WL 1287987, at *7
(Bankr. M.D.N.C. Mar. 14, 2005), the court stated that “[s]ection 506(a) provides some guidance
on valuation issues.” Pursuant to § 506(a) the value of a secured claim against property of the
estate, for purposes of determining the creditor’s secured status, “shall be determined in light of
the purpose of the valuation and of the proposed disposition or use of such property[.]” 11
U.S.C. § 506(a). By analogy the value of the property for purposes of § 363 of the Bankruptcy
Code should be determined in light of the debtor’s “proposed disposition and use” of the
property. “In a reorganization proceeding under Chapter 11 of the Bankruptcy Code, the
‘proposed disposition and use’ of the property is ascertainable from the debtor’s Chapter 11
plan.” In re Deep River, 2005 WL 1287987, at *7 (citing 11 U.S.C. § 506(c)).
At the hearing, RBC presented evidence on the fair market value, auction value, and
orderly liquidation value of the debtor’s equipment. RBC argues that the court should use the
equipment’s auction value for purposes of the relief from stay motion because it is unlikely that
the debtor would find a buyer willing to purchase the equipment as a single unit. The debtor
contends that the fair market value is correct because under its proposed reorganization plan the
debtor will continue its operations. In In re Cohn, 16 B.R. 140, 144 (Bankr. D. Mass. 1981), the
court stated,
fair-market value is the predominant standard of valuation. This is so because
generally the property subject to inquiry is either occupied, used in the debtor's
business, or otherwise capable of being sold on a “going-concern” basis. On the
other hand, forced-sale value is usually only used when the property is vacant,
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inoperative, or must otherwise be disposed of quickly and cheaply. Every attempt is
made to give the debtor the full benefit of his equity in the property, so that he may
retain it if necessary or dispose of it in a commercially reasonable manner and at a
price that will benefit creditors as well as the debtor.
See also In re Savannah Gardens-Oaktree, 146 B.R. 306, 309 (Bankr. S.D. Ga. 1992) (“[I]n the
context of reorganization with prospects for success, the fair market value is the appropriate
standard of valuation.”); In re Helionetics, Inc., 70 B.R. 433, 439 (Bankr. C.D. Cal. 1987)
(“[W]here a reorganization is in process and there is every reason to believe that it will be
successful, assets of the debtor should be valued on a going concern basis.”). In Deep River the
debtor’s chapter 11 plan proposed to retain real property as a going concern. In re Deep River,
2005 WL 1287987, at *8. Based on the debtor’s proposal to retain the property, the court held
that “the proper standard of valuation . . . is a value that reflects the fair market value of the
Property marketed as a going concern.” Id.
In this case, the debtor plans to continue its operations and propose a reorganization plan
that will allow it to retain the real estate and equipment. Since filing for bankruptcy, the debtor
has increased its sales, cut expenses, and addressed accounting problems. Based on these
changes, the debtor believes it will be able to successfully reorganize. Similar to the collateral
valuation in Deep River, the value of the equipment in this case is the fair market value because
the debtor has shown prospective signs that it will be able to have a successful reorganization.
Therefore the court finds that RBC’s expert appraiser’s fair market value approach is proper.
The fair market value of the equipment is $4,200,000.00. RBC presented evidence that the value
of the real estate is $5,603,620.22. At the hearing, the debtor did not present any evidence to
contradict this value. For purposes of the relief from stay motion, the court finds that the value
of the real property is $5,603,620.22. Therefore the total value of the real property and
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2 The debtor may be liable to RBC for the debt of the Barnes Group, an entity no longer
in existence. The court does not need to address this issue for purposes of RBC’s motion for
relief from the automatic stay.
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equipment is $9,803,620.22.
In addition, RBC has a security interest in the debtor’s inventory and accounts receivable.
RBC contends that the value of the inventory is essentially zero because the majority of the
debtor’s inventory is built to satisfy purchase orders and thus there is no available inventory to
satisfy RBC’s security interest. The debtor presented evidence that the total value of the
inventory and accounts receivable is $2,485,306.74. The court finds that even if the inventory is
built to satisfy purchase orders, the inventory and accounts receivable have some monetary
value. RBC has a security interest in the debtor’s inventory and once that inventory is sold RBC
has a security interest in the accounts receivable. Thus, the total value of RBC’s collateral,
including the real property and equipment, is approximately $12,288,926.96.
The next issue is whether the debtor lacks equity in the property. Equity, under §
362(d)(2)(A), “refers to the difference between the property value and the total amount of liens
against it.” In re 6200 Ridge, Inc., 69 B.R. 837, 842 (Bankr. E.D. Pa 1987) (citing, In re Liona
Corp., 68 B.R. 761, 766 (Bankr. E.D. Pa 1987)). Here, the debtor does have equity in the
property. RBC contends that amount of its secured claim is either $9,252,009.06 or
$9,841,631.42.2 As stated previously the value of RBC’s collateral is $12,288,926.96. Thus the
total value of RBC’s collateral exceeds the value of its claim. The court does not need to address
the second requirement under § 362(d)(2) because RBC has not proven the debtor lacks equity in
the property. Therefore, RBC is not entitled to relief from the automatic stay pursuant to §
362(d)(2).
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RBC also asserts that the automatic stay should be lifted “for cause” pursuant to §
362(d)(1) because the debtor has not adequately protected RBC’s interest. As stated previously,
the value of RBC’s collateral exceeds the value of its claim. Therefore the court finds that the
equity cushion suffices to adequately protect RBC’s interest in the collateral, and that RBC is not
entitled to relief from the automatic stay pursuant to § 362(d)(1).
Based on the foregoing, the motion for relief from stay or in the alternative conversion to
chapter 7 is DENIED.
APPLICATION FOR EMPLOYMENT AND COMPENSATION OF OFFICERS
The debtor filed an application to employ and compensate officers. Specifically, the
debtor requested that it be able to employ Chantale Duchaine as secretary with a yearly salary in
the amount of $104,000.00, and Raymond Duchaine as president and chief executive officer with
a yearly salary of $156,000.00. Both Mr. and Mrs. Duchaine would also continue to receive a
benefits package from the debtor.
At the hearing, Mrs. Duchaine testified that she manages the office and office staff, and
Mr. Duchaine supervises the manufacturing process and sales. The debtor argues that the
compensation requested is similar to the compensation the Duchaines were receiving pre-
petition. Based on national averages in similar industries, the debtor argues the compensations
would be objectively reasonable because the Duchaines’ combined compensation does not
exceed $250,000.00. The debtor maintains that the compensation is also subjectively reasonable
because the officers would not be receiving unnecessary raises. Both RBC and the bankruptcy
administer objected to the Duchaines’ compensation has being unreasonably high.
Based on the national standards for similar industries, the court finds that the
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compensation requested by Mr. and Mrs. Duchaine is too high. While in chapter 11, Mr. and
Mrs. Duchaine will be required to take a 20% reduction in their base pay, but each will be
permitted to retain their benefits package. The reduction puts the Duchaines’ combined income
in line with the national average.
END OF DOCUMENT
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