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IN RE LISANTI FOODS

August 9, 2005.

In re: LISANTI FOODS, INC., et al. Debtors. JOSEPH M. LISANTI, JR., et al., Appellants,
v.
JAY LUBETKIN, Chapter 11 Trustee of Lisanti Foods, Inc., et al., and THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF LISANTI FOODS, INC., et al. Appellees.



The opinion of the court was delivered by: JOHN LIFLAND, Senior District Judge

MEMORANDUM AND ORDER

Appellants Joseph M. Lisanti, Jr., Rosemarie Lisanti, Lisanti Realty of Arizona, Inc., Lisanti Realty Corp., Lisanti Enterprises, LLC, Texas Trucking Corp., JL Trucking, LLC, New Jersey Trucking Corp., and Arizona Freight Haulers, Inc. (collectively, the "Non-Debtor Entities") appeal from the May 17, 2004 Order Confirming Second Amended Joint Plan of Liquidation (the "Plan") entered by the Honorable Novalyn Winfield, U.S.B.J. This appeal disputes certain evidentiary determinations of the bankruptcy judge as well as the legal sufficiency of the Plan under the applicable provisions of the Bankruptcy Code ("Code"). For the reasons set forth below, the Order of the Bankruptcy Court will be affirmed.

BACKGROUND

  A. Procedural History and General Facts

  This appeal arises in connection with the Debtors' Chapter 11 liquidation proceeding pending in the Bankruptcy Court. Debtors filed voluntary petitions for relief under Chapter 11 of the Code on November 20, 2002. These cases were subsequently consolidated for joint administration. On November 29, 2002, the United States Trustee for the District of New Jersey ("Trustee") appointed an Official Committee of Unsecured Creditors pursuant to §§ 1102(a) and (b) of the Bankruptcy Code.

  The Debtors were wholesale distributors of Italian specialty foods and food-related products to, among others, food retailers and restaurants. The Non-Debtor Entities operated the distribution centers and delivered the specialty foods and related products to the Debtors' customers.

  Joseph M. Lisanti, Jr. is the former President of Lisanti Foods, Inc. Mr. Lisanti and his sister, Rosemarie Lisanti ("Lisantis"), are the sole officers, shareholders, and/or members of each of the Non-Debtor Entities. Lisanti Realty of Arizona, Inc., Lisanti Realty Corp., and Lisanti Enterprises, LLC, own or had owned certain warehouse facilities and offices located in Arizona, Texas, and Totowa, New Jersey.

  By Order dated January 21, 2003, the Bankruptcy Court, inter alia, (1) approved the sale of substantially all of the assets of Lisanti Foods, Inc. to Ferraro Foods, Inc. and further approved the auction sale of any remaining assets of Lisanti Foods, Inc. in Totowa, and (2) approved the sale at auction of all of the remaining assets of Lisanti Foods of Arizona, Inc. and Lisanti Foods of Texas, Inc. to the highest bidder. On January 30, 2003, upon the Trustee's motion, Jay L. Lubetkin was appointed as Chapter 11 Trustee with regard to the liquidation and distribution of the Debtors' consolidated estate.

  B. Second Amended Joint Plan of Liquidation

  The Official Committee of Unsecured Creditors and the Chapter 11 Trustee filed the Plan and related Disclosure Statement in the Bankruptcy Court on October 14, 2003. On December 17 and 18, 2003, Judge Winfield heard argument on whether the proposed Plan satisfied the requirements of the Code. On April 13, 2004, the Bankruptcy Court conducted further hearings on confirmation of the Plan, during which it detailed reasons for finding that the Plan should be confirmed. This decision was memorialized in the May 17, 2004 Order appealed from in the present matter.

  Bankruptcy Court Order Confirming the Plan

  This Court has reviewed Judge Winfield's April 13, 2004 oral decision confirming the Plan. It is evident from the transcript that the bankruptcy court considered Appellants' objections to confirmation. The Bankruptcy Court acknowledged that the burden is on the plan proponents to prove that all the applicable provisions of 11 U.S.C. § 1129 have been satisfied. (Appendix to Brief of Appellees, Exh. 1, at 4 ll. 5-10) (citing In re Greate Bay Hotel & Casino, Inc., 251 B.R. 213 (D.N.J. 2000)). In reaching her decision, Judge Winfield relied on the testimony of the Chapter 11 Trustee, accountant Bernard Katz (who testified as to how consolidation of the estates would inure to the economic benefit of creditors), and the documentary evidence. (Appellees' Appx, Exh. 1, at 4 ll. 111-5).

  STANDARD OF REVIEW

  The standard of review to be applied by a district court reviewing a ruling of a Bankruptcy Judge is determined by the nature of the issues presented on appeal. Legal conclusions of the Bankruptcy Court are subject to de novo or plenary review. Donaldson v. Bernstein, 104 F.3d 547, 551 (3d Cir. 1997); Chemetron Corp. v. Jones, 72 F.3d 341, 345 (3d Cir. 1995); In re Carretta, 220 B.R. 203, 210 (D.N.J. 1998). However, the factual determinations of the bankruptcy court are not to be set aside unless "clearly erroneous." Fed.R.Bankr.P. 8013 (stating that "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous"); Chemetron Corp., 72 F.3d at 345; In re Indian Plans Assocs., Ltd., 61 F.3d 197, 203 (3d Cir. 1995). This standard requires the district court to "give due regard to the opportunity of that court to judge, first-hand, the credibility of the witnesses." Fellheimer, Eichen, & Braverman, P.C. v. Charter Techs., Inc., 57 F.3d 1215, 1223 (3d Cir. 1995); Fed.R.Bankr.P. 8013. Where a matter presents mixed questions of law and fact, the reviewing court will apply the relevant standard to each component of the issue. Chemetron, 72 F.3d at 345.

  The Bankruptcy Court's exercise of discretion is reviewed "for abuse thereof." In re Prof'l Ins. Mgmt., 285 F.3d 268, 283-84 (3d Cir. 2002); In re Trans World Airlines, Inc., 145 F.3d 124, 132 (3d Cir. 1998).

  DISCUSSION

  Appellants present the following issues in this appeal:

  1. Whether the Bankruptcy Court erred in admitting into evidence documents and testimony of Appellees' expert witness in connection with the proposed confirmation of Appellees' Second Amended Joint Plan of Liquidation. 2. Whether confirmation of the Plan was in error because of defects in the solicitation of ballots for acceptance or rejection of the Plan and further defects in the computation and certification of the ballots received.

  3. Whether Plan confirmation was in error because the Plan did not meet the prerequisites for substantive consolidation of the Debtors. Alternatively, whether the Plan provides adequate means for its implementation through substantive consolidation.

  4. Whether confirmation of the Plan was in error because the Disclosure Statement contained inadequate information.

  5. Whether confirmation of the Plan was in error because Appellees failed to comply with the required elements for plan confirmation found in 11 U.S.C. § 1129(a).

  6. Whether confirmation of the Plan was in error because the Plan failed to provide for payment of all administrative claims on the Effective Date.

  7. Whether confirmation of the Plan was in error because the Plan vested the liquidating trustee and the oversight committee with broad powers not subject to the supervision of the Bankruptcy Court.

  I. Overview of 11 U.S.C. § 1129

  According to a leading bankruptcy treatise:
Confirmation of a plan of reorganization is the statutory goal of every chapter 11 case. Section 1129 of the Bankruptcy Code provides the requirements for such confirmation, containing Congress's minimum requirements for allowing an entity to discharge its unpaid debts and continue its operations. [Section 1129(a)] contains thirteen paragraphs, each of which contains a separate requirement that must be met in order to confirm the plan.
COLLIER ON BANKRUPTCY ¶ 1129.01. Therefore, the Code's statutory framework governs the Bankruptcy Court's decision to confirm a plan. In some places, § 1129 provides its own substantive requirements while in other places § 1129 more generally requires plan compliance "with the applicable provisions of [title 11]." Consequently, review of a proposed plan for compliance requires consideration of both § 1129 and other relevant sections of the Code. The following review of the Bankruptcy Court's Order distinguishes between Appellants' objections based on purported non-compliance with § 1129 and objections based on non-compliance with other applicable title 11 provisions.

  A. Substantive Consolidation: Background and Prerequisites

  Substantive consolidation results in the pooling of the assets of, and claims against, two or more entities, thereby satisfying liabilities from the resultant common fund, eliminating duplicate claims, and combining the creditors of the two entities for purposes of voting on reorganization plans. In re Morfesis, 270 B.R. 28, 31 (D.N.J. 2001). The power to order substantive consolidation of bankruptcy estates is within the Bankruptcy Court's equitable powers under § 105 of the Code. See Fed. Deposit Ins. Corp. v. Colonial Realty Co., 966 F.2d 57, 59 (2d Cir. 1992); see also In re Stone & Webster, Inc., 286 B.R. 532, 539 (D. Del. 2002); 2 COLLIER ON BANKRUPTCY ¶ 105.09[1][6] ("the authority of a bankruptcy court to order substantive consolidation derives from its general discretionary equitable powers."). "As an equitable remedy, substantive consolidation is to be used to afford creditors equitable treatment and thus may be ordered when the benefits to creditors exceed the harm suffered." In re Worldcom Inc., No. 021-3533, 2003 WL 23861928, at *35 (Bankr. S.D.N.Y. Oct. 31, 2003) (citing In re Augie/Restivo Baking Co., Ltd., 860 F.2d 515, 518-19 (2d Cir. 1988)).

  The party requesting substantive consolidation must show: (1) a substantial identity between the entities to be consolidated; (2) that consolidation is necessary to avoid harm or to achieve some benefit; and (3) in the event that the creditor shows harm, that the benefits of consolidation "heavily" outweigh the harm. In re Morfesis, 270 B.R. at 31 (citing In re Auto-Train Corp., 810 F.2d 270, 276 (D.C. Cir. 1987)).

  With respect to whether the Bankruptcy Court properly considered these factors, there is ample evidence in the record to uphold the Bankruptcy Court.

  Judge Winfield found that the proponents had proved a substantial identity between the parties to be consolidated, based on the testimony of the Trustee and Mr. Katz. As the court summarized the Trustee's testimony:
Mr. Lubetkin testified that without contradiction that all three debtors have the same officers, same directors and shareholders. They conducted the same general business operations under very similar names. His review of inter-company transactions revealed that inter-company dealings were done without the usual corporate formalities . . . no promissory notes were prepared, and no corporate resolutions reflected either the borrowing or the lending.
(Id., at 15 ll. 8-17.).

  In further support of the identity of interest among the three debtors, Mr. Katz testified, for example, that the debtors did not charge each other for services rendered and all accounts receivable were billed from the New Jersey debtor's facility. (Id., ll. 18-21.). After reviewing further testimony from the Trustee and Mr. Katz, the court found that "members of the Creditors' Committee and other vendors . . . viewed the debtors as a single entity when extending credit terms." (Id., at 16-17.). The ...


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