1 NOT FOR PUBLICATION 2 UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF CALIFORNIA

3 4 In re: ) Case No. 20-21548-C-11 ) 5 FALL LINE TREE SERVICE, INC., ) Chapter 11, Subchapter V ) 6 Debtor. ) Dkt. Control No.: HP-009 ) 7 ________________________________) 8

MEMORANDUM DECISION

9 10 Before: Christopher M. Klein, Bankruptcy Judge _________________ 11 _______________ 12 CHRISTOPHER M. KLEIN, Bankruptcy Judge: 13 14 The question is whether to confirm a Chapter 11 Subchapter V 15 Plan of Reorganization over the objection of the holder of a 16 disputed unsecured claim. The plan satisfies Subchapter V 17 confirmation standards and will be CONFIRMED. 18 19 I 20 Despite the name Fall Line Tree Service, Inc., the Debtor 21 corporation sells retail outdoor sporting goods under the trade 22 name “The Village Board Shop” in South Lake Tahoe, California, 23 and no longer provides arborist services. The sole shareholders 24 of the Debtor, and its operators, are Steve Nichols and Ashley 25 Nichols. 26 The business was purchased by Fall Line Tree Service in May 27 2018 from Dick Yost Yaghlegian and Lauren Yaghlegian as trustees 28 of the DLSK Family Trust (“DLSK”) dated June 2, 2008. 1 II 2 The Subchapter V Chapter 11 case was filed March 13, 2020. 3 Lisa A. Holder was appointed Subchapter V Trustee. 4 DLSK filed proof of claim #4 as a secured claim for 5 $246,246.25 based on “purchase of Village Board Shop inventory.” 6 DLSK also filed proof of claim #5 as an unsecured claim, 7 initially for $115,000.00 and later amended to $125,750.00, 8 initially said to be based on “cash loan for operating funds” and 9 later amended to be based on “purchase of Village Board Shop.” 10 The Debtor objected to both DLSK proofs of claim in a nine- 11 count adversary proceeding against the Yaghlegians individually 12 and as trustees of DLSK. In addition to objecting to claims 4 13 and 5, the complaint asserts counts for: Avoidance of 14 Unperfected Security Interest; Declaratory Relief - Invalidity of 15 Contract; Avoidance and Recovery of Preferential Transfers; 16 Fraud; Fraudulent, Unlawful and Unfair Business Practices; and 17 Breach of Contract. 18 By order entered June 6, 2020, this court granted the 19 Debtor’s unopposed motion to pay certain critical vendors. 20 The Plan of Reorganization filed September 11, 2020, has 21 four classes. Classes 1 and 2 are secured claims. Classes 3 and 22 4 are unsecured claims. 23 Class 1 is the secured claim of Blue Vine Capital for about 24 $25,837.30, for which the lien is retained and the debt is 25 reamortized over five years with monthly payments of $475.83 and 26 interest at 4 percent. 27 Class 2 is the secured claim of Amer Sports for about 28 $22,872.00, for which the lien is retained and the debt is paid 1 in a lump sum of $20,957.03 coupled with return of certain 2 inventory. 3 Class 3 consists of the disputed unsecured DSLK claims in 4 the approximate amount of $361,246.25, for which payment will be 5 in seasonable variable amounts totaling no more than 59 percent 6 ($213,135.29). Monthly payments of $4,736.34 (January, February, 7 March, July, August, and December) or $2,368.17 (April, May, 8 June, September, October, and November) will be made into a 9 “Disputed Claim Reserve Account” to be held pending final claim 10 allowance or other subsequent agreement of the parties. 11 Class 4 consists of general unsecured claims estimated to be 12 approximately $49,989.30, for which payments will be no more than 13 59 percent ($29,493.69) over five years at $487.38 per month. 14 All monthly payments to classes 1, 3, and 4 are subject to 15 payment holidays for shutdown of business operations due to the 16 COVID-19 pandemic or other disaster. 17 Class 2 filed a ballot accepting the plan. There were no 18 votes from classes 1 and 4. 19 DKLS, as Class 3, filed an objection to confirmation, 20 raising accounting issues, asserting assets are undervalued and 21 revenues understated, and contending that the Debtor has capacity 22 to pay creditors in full. 23 Despite DKLS not having § 1126(a) status as the holder of an 24 allowed claim due to the unresolved claim objections and without 25 having obtained Rule 3018(a) temporary allowance for the purpose 26 of accepting or rejecting, DKLS also filed a ballot purporting to 27 reject the plan. 11 U.S.C. § 1126(a); Fed. R. Bankr. P. 3018(a). 28 1 The DKLS ballot is disregarded because DKLS is not eligible to 2 accept or reject the Plan. 3 4 III 5 The Debtor-in-Possession proposed the Plan. The Subchapter 6 V Trustee supports plan confirmation and asserted on the record 7 that it meets all confirmation standards. 8 In plan confirmation proceedings, the plan proponent has the 9 burden of proof by a preponderance of evidence. 10 The evidence in support of confirmation consists of the 11 Debtor-in-Possession monthly operating reports and the 12 Declaration of Ashley E. Nichols in support of confirmation and 13 in response to the objection by the Yaghlegians. 14 Ms. Nichols testified in her Declaration that the Plan will 15 be funded entirely from sale and rental of outdoor sporting 16 goods, which is presently the Debtor’s sole line of business. 17 She testified that she prepared the income and expense 18 projections from a combination of historical financial 19 performance and current financial performance. Revenue 20 generation depends on weather trends and seasonal conditions in 21 the Lake Tahoe recreation market. Revenues in Summer 2020 were 22 higher than usual because outdoor recreation was one of the few 23 activities permitted in Northern California in light of COVID-19 24 shutdowns. 25 Payroll expenses include the varying pay rates for employees 26 during different seasons, as well as seasonably variable hours of 27 operation. 28 1 The financials also reflect fixed costs, utilities, 2 advertising, supplies, maintenance, insurance, licensing, 3 professional fees, and cost of inventory. 4 The resulting projected disposable income formed the basis 5 for calculating the payments for creditors over the five-year 6 term of the plan. 7 The Subchapter V Trustee has supported the accuracy of the 8 projections. 9 No admissible evidence was proffered by the Yaghelians as 10 objecting creditors. 11 12 IV 13 The essential elements for Chapter 11 Subchapter V plan 14 confirmation are set forth at 11 U.S.C. § 1191, which 15 incorporates with modifications 11 U.S.C. § 1129(a)-(b). 16 17 A 18 The plan must comply with the applicable provisions of title 19 11. A review of the plan reveals no deviation from the 20 applicable provisions of title 11. 11 U.S.C. § 1129(a)(1). 21 22 B 23 The proponent of the plan must comply with the applicable 24 provisions of title 11. A review of the record reveals that the 25 Debtor, as plan proponent, has complied with the applicable 26 provisions of title 11. No view to the contrary has been 27 asserted. 11 U.S.C. § 1129(a)(2). 28 1 C 2 The plan must have been proposed in good faith and not by 3 any means forbidden by law. The pending objection to 4 confirmation requires this court to evaluate the evidence 5 probative of these questions. Fed. R. Bankr. P. 3015(f). The 6 declaration testimony of Ashley Nichols is credible and refutes 7 the assertion that funds of the estate were used for purchase of 8 personal “toys” for the Nichols family. The objectors relied on 9 unauthenticated social media sources to complain about the 10 purchase of a vehicle, travel trailer, 2 motorcycles and 2 quads 11 for the kids, and a puppy. Ms. Nichols admits the acquisitions 12 of personal property for the family and explains that the source 13 of funds for those purchases was separate property derived from 14 income generated from rental property that the Nichols own, 15 combined with their personal credit. The Subchapter V Trustee 16 confirms that funds of the Debtor corporation have not been 17 squandered. The objectors have proffered no evidence to the 18 contrary and incorrectly ignore limited liability principles by 19 conflating the finances of the Debtor corporation with the 20 personal finances of the individual owners without any evidence 21 to suggest improper commingling or other failure to observe 22 corporate formalities. This court believes the Ashley Nichols 23 declaration testimony and finds that the plan has been proposed 24 in good faith and not by any means forbidden by law. 11 U.S.C. 25 § 1129(a)(3). 26 27 28 1 D 2 As relevant to this case in which securities are not being 3 issued and property is not being transferred, any payment made or 4 to be made by the debtor for services or for costs and expenses 5 in or in connection with the case and incident to the case is 6 subject to approval by this court as reasonable. 11 U.S.C. 7 § 1129(a)(4). 8 9 E 10 The plan proponent has disclosed the identity and 11 affiliations of the individuals who will serve after confirmation 12 as directors and officers of the Debtor corporation – to wit, Mr. 13 and Mrs. Nichols. No other provision of § 1129(a)(5) is 14 relevant. 11 U.S.C. § 1129(a)(5). 15 16 F 17 No governmental regulatory commission has jurisdiction over 18 the rates of the debtor. 11 U.S.C. § 1129(a)(6). 19 20 G 21 Classes 1, 2, 3, and 4 are impaired under the terms of the 22 plan. 23 24 1 25 The holder to the claim in the single-member Class 2 has 26 accepted the plan. 11 U.S.C. § 1129(a)(7)(A)(i). 27 28 1 2 2 Each holder of a claim under Classes 1, 3, and 4 will 3 receive or retain under the plan on account of such claims 4 property of a value as of the effective date of the plan, that is 5 not less than the amount that such holder would receive or retain 6 if the debtor were liquidated under chapter 7 on such date. 11 7 U.S.C. § 1129(a)(7)(A)(ii). 8 9 a 10 The effective date of the plan prescribed at Plan Article 8, 11 paragraph 19, is the first business day following the date that 12 is 14 days after the entry of the confirmation order. However, 13 if there is a stay of the confirmation order on such date, then 14 the effective date is the first business day after the date on 15 which the stay expires or is otherwise terminated. For purposes 16 of the hypothetical liquidation analysis, it is assumed there 17 will be no stay. 18 The Debtor’s hypothetical liquidation analysis is set forth 19 at Plan Exhibit A. The asset estimates total $419,997.00: cash 20 on hand, $75,691.00; inventory, $316,806.00; office furniture and 21 equipment, $16,000.00; machinery and equipment, $4,500.00; 22 building security deposit, $7,000.00. 23 24 b 25 The Objection to plan confirmation asserts that the 26 liquidation analysis fails to account for the $300,000.00 27 purchased goodwill asset that was part of the original sale by 28 the Yaghlegians and that it understates inventory value. 1 i 2 Addressing goodwill, the objector’s counsel, during oral 3 argument, asserted that he is a Certified Public Accountant who 4 has taught accounting at a local junior college and is expert in 5 matters of accounting and stated his opinion that Generally 6 Accepted Accounting Principles (GAAP) requires taking goodwill 7 into account. There are two problems with this. 8 9 ii 10 The first problem is a fundamental proposition of evidence 11 regarding attorney testimony. Statements by counsel about 12 substantive matters made during argument to the court are not 13 evidence. Such statements are not based on personal knowledge. 14 Fed. R. Evid. 602; In re Gire, 107 B.R. 739, 746 (Bankr. E.D. 15 Cal. 1989). Nor is the attorney under oath. Fed. R. Evid. 603. 16 The attorney makes the attorney’s personal credibility an issue 17 in the case. Gire, 107 B.R. at 746. Attorney testimony also 18 risks offending ethical rules. See CAL. RULE OF PROFESSIONAL CONDUCT 19 3.7 (2018). 20 Anything that the attorney asserts in favor of the client is 21 worthless as a matter of evidence, but anything that the attorney 22 says that does not help the client may become admissible in 23 evidence as an evidentiary admission by a party opponent. Fed. 24 R. Evid. 801(d)(2); In re Applin, 108 B.R. 253, 259 (Bankr. E.D. 25 Cal. 1989). 26 27 28 1 iii 2 The second problem is that the court has not ruled that the 3 Objectors’ counsel is an expert whose specialized knowledge will 4 help the court, as trier of fact, to understand the evidence or 5 to determine a fact in issue. Fed. R. Evid. 702. 6 The fact in issue is liquidation in a hypothetical chapter 7 7 case. Experience teaches that business goodwill evaporates in 8 liquidation following closure of the business and sale at 9 auction; no going concern is being sold. Hence, testimony about 10 the value of goodwill under GAAP is irrelevant to forced sale 11 analysis of chapter 7 hypothetical liquidation value. 12 In short, purchased goodwill in the original sale of the 13 going concern that has since devolved into this chapter 11 case 14 is not an asset for purposes of hypothetical chapter 7 15 liquidation analysis. 16 17 iv 18 The Yaghlegian objection that inventory value is understated 19 is a naked assertion not supported by evidence. The monthly 20 operating reports invoked in the objection are not probative of 21 inventory value. 22 The admissible evidence pertaining to inventory that is 23 valued in the liquidation analysis at $316,806.00 is the Ashley 24 Nichols Declaration. Book value at actual wholesale cost was 25 used in the liquidation analysis for the Debtor’s retail 26 inventory and for rental inventory. Some of the inventory is 27 more than three years old and is of doubtful value. Overall, the 28 retail inventory likely would sell for less than 70 percent of 1 wholesale cost. The rental inventory likely would sell as “used” 2 gear for not more than 50 percent of wholesale cost. 3 Although the plan proponent’s liquidation analysis is 4 premised on $233,742.85 being available for unsecured creditors, 5 yielding a 57 percent dividend for $410,810.25 of claims, this 6 trier of fact concludes that less than $233,742.85, perhaps as 7 little as $140,000 would be available in a liquidation based on 8 the likely difference between the inventory valued at full 9 wholesale cost and the discounted yields from a forced sale 10 auction. Hence, unsecured creditors will receive more under the 11 plan than from a chapter 7 liquidation. 12 It follows that the preponderance of evidence belies the 13 Objection. 14 15 c 16 The Class 1 claim is secured in the amount of approximately 17 $25,837.30. The single member of the class retains its first 18 priority lien on the Debtor’s personal property assets unaffected 19 by the plan. The claim is reamortized over five years with 20 interest accruing at the rate of 4 percent/year. Monthly 21 principal and interest payments are $475.83 and will total 22 $28,549.80. The present value of the monthly payments is 23 $25,837.30. If there were to be a liquidation, the Class 1 24 creditor would receive $25,837.30 without interest. Hence, the 25 Class 1 creditor is receiving not less than what would be 26 received in a hypothetical chapter 7 liquidation on the effective 27 date of the plan. 28 1 d 2 Classes 3 and 4 are promised not more than 57 percent of 3 their claims. As noted above this court concludes that a 4 liquidation value that would yield a 57 percent dividend is 5 optimistic. In an actual liquidation the dividend to unsecured 6 creditors likely would be less than 57 percent. It follows that 7 the holders of Classes 3 and 4 claims will receive property of a 8 value, as of the effective date of the plan, that is not less 9 than the amount they would receive if the debtor were liquidated 10 under chapter 7. 11 U.S.C. § 1129(a)(7)(A)(ii). 11 12 H 13 Each class is impaired and the respective treatments are 14 specified. 11 U.S.C. § 1123(a)(3). 15 The holder of the single-creditor Class 2 secured claim has 16 accepted the plan. 11 U.S.C. § 1129(a)(8)(A). 17 No holder of a Class 1, 3, or 4 claim, all of which are 18 impaired, has accepted the plan. 19 Hence, § 1129(a)(8) has not been satisfied. 20 21 I 22 The only priority claims consist of administrative expense 23 claims and $12,971.28 in priority tax claims. 24 The administrative claims are to be paid in equal monthly 25 installments until paid and over a period not to exceed five 26 years after the effective date. It is permissible to finance 27 Subchapter V § 507(a)(2) administrative expense claims in the 28 1 manner proposed at Plan Article 3, Paragraph 3.02. 11 U.S.C. 2 § 1191(e). 3 Priority tax claims may, as proposed in Plan Article 3, 4 Paragraph 3.03, be paid over a period ending not later than five 5 years after the date of the order for relief, i.e., March 13, 6 2020. 11 U.S.C. § 1129(a)(9)(C). 7 There are no other priority claims that appear of record. 8 Hence, the Plan complies with the priority claim confirmation 9 provisions. 11 U.S.C. § 1129(a)(9). 10 11 J 12 Class 2, which does not include any insider, has accepted 13 the plan. 11 U.S.C. § 1129(a)(10). 14 15 K 16 This court is persuaded by preponderance of the evidence 17 that confirmation is not likely to be followed by the 18 liquidation, or the further financial reorganization of the 19 debtor. 20 The pattern of profitable business operations achieved under 21 the conditions of the COVID-19 pandemic are persuasive on this 22 point. 11 U.S.C. § 1129(a)(11). 23 24 L 25 All fees required to be paid pursuant to 28 U.S.C. § 1930 26 that are owed on or before the effective date of the plan have 27 been paid or will be paid on the effective date. Prospective 28 1 quarterly fees under § 1930(a)(6) or (a)(7) will be able to be 2 timely paid as they accrue. 3 The United States trustee appeared at the confirmation 4 hearing and took no exception to confirmation. 11 U.S.C. 5 § 1129(a)(12). 6 7 M 8 There are no retiree benefits, as that term is defined in 9 § 1114, in this case. Hence, 11 U.S.C. § 1129(a)(13) is not an 10 impediment to confirmation. 11 12 N 13 There are no domestic support obligations applicable to this 14 case. Hence, 11 U.S.C. § 1129(a)(14) is not an impediment to 15 confirmation. 16 17 O 18 The debtor is not an individual. Hence, 11 U.S.C. 19 § 1129(a)(15) is not an impediment to confirmation. 20 21 P 22 Any transfer of property is made in accordance with 23 applicable provisions of nonbankruptcy law that governs the 24 transfer of property by a corporation. 11 U.S.C. 25 § 1129(a)(16). 26 27 28 1 Q 2 All requirements of § 1129(a) have been satisfied in this 3 case except § 1129(a)(8), with respect to Classes 1, 3, and 4. 4 The plan may nevertheless be confirmed if the plan does not 5 discriminate unfairly and is fair and equitable with respect to 6 classes 1, 3, and 4. 11 U.S.C. § 1191(b). 7 8 1 9 Class 1 is a secured class with an allowed secured claim of 10 $25,837.30. Under the plan, the holder of the claim in this 11 single-member class retains its lien and receives a stream of 12 monthly payments of $475.83 for five years. The total payments 13 of $28,549.80 exceed the amount of the allowed secured claim and 14 reflect interest at 4 percent/year. This court is persuaded that 15 4 percent/year provides the Class 1 creditor with value, as of 16 the effective date of the plan that is at least the value of such 17 holder’s interest in the estate’s interest in such property. 18 Accordingly, treatment of Class 1 is fair and equitable and 19 does not discriminate unfairly. 11 U.S.C. §§ 1129(b)(2)(A) & 20 1191(c)(1). 21 22 2 23 Classes 3 and 4 are classes of unsecured claims, neither of 24 which has accepted the plan. Confirmation requires focus on all 25 projected disposable income. 26 27 28 1 a 2 Projected disposable income appears as Plan Exhibit B. The 3 total projected disposable income is $366,350.00. Priority tax 4 claims are $12,971.28. Projected administrative expenses are 5 $75,000, which could be higher if the pending adversary 6 proceeding against the Yeghlegians and DLSK requires more 7 professional services than presently projected. 8 9 b 10 Class 4 consists of allowed unsecured claims of 11 approximately $49,989.30 that would be paid “no more than” 59 12 percent, or “no more than” $29,493.69, over five years from the 13 effective dated of the plan in a stream of monthly payments of 14 $487.38. That stream of payments totals $29,242.80, or 58.49812 15 percent of the Class 4 allowed unsecured claims. 16 17 c 18 Class 3 consists of the Yaghlegian creditors and DLSK, whose 19 disputed unsecured claims are approximately $361,246.25 to which 20 objection has been made. Hence, the claims have not yet been 21 allowed. Nor was there a request for temporary allowance for the 22 purpose of accepting or rejecting the plan. Fed. R. Bankr. 23 P. 3018(a). 24 The Plan provides that the Class 3 creditors will be paid no 25 more than 59 percent, of $213,135.29 of the total asserted 26 claims. This is the same treatment as Class 4. 27 The payments, however, differ from Class 4 in two respects. 28 First, payments shall be paid into a Disputed Claim Reserve 1 Account to be held and maintained by the Debtor pending 2 resolution of the proceedings objecting to the Yaghlegian and 3 DLSK claims. Second, payments are adjusted seasonally to reflect 4 the nature of business revenues: $4,736.34/month for January, 5 February, March, July, August, and December; and $2,368.17/ month 6 for April, May, June, September, October, and November. 7 8 3 9 The differences in treatment between secured Class 1 and 10 Classes 3 and 4 are rationally related to the rights of the 11 parties and to seasonal cash flow realities of the Lake Tahoe 12 recreation market. The plan provides that all projected 13 disposable income of the Debtor for a period of five years, i.e., 14 $366,350.00, will be applied to make payments under the plan. 11 15 U.S.C. § 1191(c)(2)(A). 16 The value of all property to be distributed under the plan 17 is not less than the $366,350.00 projected disposable income. 11 18 U.S.C. § 1191(c)(2)(B). 19 The Debtor will be able to make all payments under the plan. 20 11 U.S.C. § 1191(c)(3)(A)(i). 21 In sum, the plan does not discriminate unfairly, and is fair 22 and equitable within the meaning of 11 U.S.C. § 1191(b). 23 24 *** 25 This Memorandum Decision contains findings of fact and 26 conclusions of law under Federal Rule of Civil Procedure 27 52(a)(1), as incorporated by Federal Rules of Bankruptcy 28 Procedure 7052 and 9014. 1 An appropriate order confirming the plan will be entered. 2 3 Datea: December 03, 2020 4 i \Na\ |, Ni

6 United States Bankruptcy Judge , }

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18

1 INSTRUCTIONS TO CLERK OF COURT

SERVICE LIST

2 The Clerk of Court is instructed to send the attached 3 document, via the BNC, to the following parties: 4 Fall Line Tree Service, Inc. 3552 Lake Tahoe Blvd. 5 South Lake Tahoe, CA 96150 6 Galen M. Gentry 520 9th Street, Suite 230 7 Sacramento, CA 95814 8 Lisa A. Holder 3710 Earnhardt Dr 9 Bakersfield, CA 93306 10 Robert Huckaby 3330 Lake Tahoe Blvd., #10 11 South Lake Tahoe, CA 96150 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28