Bankruptcy – Automatic Stay – Motion for Relief – Value of Collateral – Equity — Officers’ Salaries

In re M.C. Pipe, Inc. (Lawyers Weekly No. 11-05-1098, 8 pp.) (J. Rich Leonard, J.) E.B.N.C.

Holding: The creditor has a security interest in the debtor-in-possession’s real property, equipment, inventory and accounts receivable. When these assets are assigned their fair market value, the assets’ value exceeds the creditor’s secured claim; therefore, the debtor has equity in the collateral, and the creditor is not entitled to relief from the automatic stay.

The creditor’s motion for relief is denied. The debtor’s motion to employ and compensate officers is granted in part.

Although the auction and orderly liquidation values of the debtor’s real property and equipment are significantly lower than the fair market value, the value of property for purposes of 11 U.S.C. § 363 should be determined in light of the debtor‘s proposed disposition and use of the property.

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.

The value of the equipment is the fair market value because the debtor has shown prospective signs that it will be able to have a successful reorganization.

Therefore the fair market value of the equipment is $4,200,000. The creditor presented evidence that the value of the real estate is $5,603,620.22. Thus, the total value of the real property and equipment is $9,803,620.22.

The debtor presented evidence that the total value of its inventory and accounts receivable is $2,485,306.74. Even if the inventory is built to satisfy purchase orders, the inventory and accounts receivable have some monetary value. The creditor has a security interest in the debtor’s inventory and once that inventory is sold the creditor has a security interest in the accounts receivable. Thus, the total value of the creditor’s collateral, including the real property and equipment, is approximately $12,288,926.96.

The creditor contends that the amount of its secured claim is either $9,252,009.06 or $9,841,631.42. The creditor has not proven the debtor lacks equity in the property. Therefore, the creditor is not entitled to relief from the automatic stay.

The debtor seeks to employ and compensate Chantale Duchaine as its corporate secretary and the manager of its office and office staff at an annual salary of $104,000. The debtor also seeks to employ and compensate Raymond Duchaine as president, CEO, and the supervisor of its manufacturing process and sales at an annual salary of $156,000. The compensation sought is similar to what the Duchaines were receiving pre-petition.

Based on national standards for similar industries, the court finds that the compensation requested by the Duchaines is too high. While in Chapter 11, the Duchaines will be required to take a 20% reduction in their base pay, but they will be permitted to retain their benefits packages. The reduction puts the Duchaines’ combined income in line with the national average.

The debtor’s motion is granted in part. The creditor’s motion is denied.