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UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLORADO
IN RE: )
) Case No. 06-18117-ABC
SPARTA SURGICAL CORPORATION; ) Chapter 11
EIN: 22-2870438 )
)
Debtor. )
PLAN OF REORGANIZATION
DATED NOVEMBER 6, 2006
Sparta Surgical Corp. , Debtor and Debtor-in-Possession pursuant to
Chapter 11, Title 11 of the United States Code, proposes the following Plan of
Reorganization.
ARTICLE I
INTRODUCTION
Sparta Surgical Corp. ("Sparta","Debtor", or "Company") is a Delaware
corporation. Sparta is a public company that was incorporated on March 23, 1984.
Sparta was previously engaged in the research, development, manufacturing and
marketing of surgical and electrotherapy products for the worldwide healthcare
industry. In May 2002 Sparta divested substantially all of its assets and ceased
ongoing business operations. Subsequently, Sparta retained no business assets
and performed administrative duties as a shell corporation. In October 2006
Sparta entered into an agreement with Spectra Group, Inc. ("Spectra") under
which Sparta would become an exclusive independent sales representative for
certain Spectra products and reestablish itself in the medical products industry
along with its affiliate BJCR Electro-Therapy Inc. The Chapter 11 case will
provide Sparta with the ability to restructure itself in order to facilitate the
further development of Sparta's business. Sparta filed for relief under Chapter
11 of the Bankruptcy Code on November 6, 2006.
This Plan provides for the reorganization of the Debtor under Chapter
11 of the Bankruptcy Code. A more complete history of the Debtor, its
operations, an explanation of this Plan and a description of the Debtor's
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financial condition and future business activity is contained in the Disclosure
Statement which accompanies this Plan. Reference should be made to the
Disclosure Statement by all creditors and parties who intend to cast a ballot
for or against this Plan.
ARTICLE II
DEFINITIONS
2.01 - Administrative Claim shall mean a Claim for payment of an
administrative expense of a kind specified in ss503(b) or 1114(e)(2) of the
Bankruptcy Code and entitled to priority pursuant to ss 507(a)(1) of the
Bankruptcy Code, including, but not limited to: (a) the actual, necessary costs
and expenses, incurred after the Petition Date, of preserving the estate and
operating the business of the Debtor, including wages, salaries, or commissions
for services rendered after the commencement of the Chapter 11 Case; (b)
Professional Fee Claims; (c) all fees and charges assessed against the estate
under 28 U.S.C. ss1930; and (d) all Allowed Claims that are entitled to be
treated as Administrative Claims pursuant to a Final Order of the Bankruptcy
Court under ss546(c)(2)(A) of the Bankruptcy Code.
2.02 - Allowed Claim shall mean a claim in respect of which a Proof of
Claim has been filed with the Court within the applicable time period of
limitation fixed by Court Order in this case or scheduled in the list of
creditors prepared and filed with the Court pursuant to Bankruptcy Rule 1007(b)
and not listed as disputed, contingent or unliquidated as to amount, in this
case as to which no timely objection to the allowance thereof has been filed
pursuant to Bankruptcy Rules 3001 and 3007 or as to which any such objection has
been determined by a Final order.
2.03 - Allowed Secured Claim shall mean an allowed claim secured by a
lien, security interest or other charge against or interest in property in which
the Debtor has an interest, or which is subject to setoff under Section 553 of
the Code, to the extent the value (determined in accordance with Section 506(a)
of the Code) of the interest of the holder of any such allowed claim and the
Debtor's interests in such property or to the extent of the amount subject to
such setoff as the case may be.
2.04 - Avoidance Actions means the Debtor's estate's interest in any
and all Claims, rights and causes of action which have been or may be commenced
by or on behalf of the Debtor to avoid and recover any transfers of property
determined to be preferential, fraudulent or otherwise avoidable pursuant to ss
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ss 544, 545, 547, 548, 549, 550 or 553 of the Bankruptcy Code, or under any
other applicable law, or otherwise subject to equitable subordination under ss
510 of the Bankruptcy Code, regardless of whether or not such actions have been
commenced prior to the Effective Date.
2.05 - BJCR shall mean BJCR Electro-Therapy, Inc., a Delaware
corporation which, is an Affiliate of the Debtor and will be the exclusive sales
representative for Spectra Group, Inc. d/b/a Spectra Electro-Therapy with
respect to its Electrotherapy Devices and which company will provide the Debtor
with 30,000 shares of its common stock (the "BJCR Shares") which will be
provided to Sparta creditors and interest holders who receive New Common Stock
under this Plan.
2.06 - Claim shall mean any right to payment, or right to any equitable
remedy for breach of performance if such breach gives rise to the right to
payment, against the Debtor in existence on or as of the Petition Date, whether
or not such right to payment or right to an equitable remedy is reduced to
judgment, liquidated, unliquidated, fixed, contingent, natured, unmatured,
disputed, undisputed, legal, secured or unsecured.
2.07 - Class shall mean any Class into which Allowed Claims are
classified pursuant to Article III. 2.08 - Class 1,2,3,4,5 and 6 Claims and
Interests shall mean the Allowed Claims and Interests so classified in Article
III.
2.09 - Code shall mean the Bankruptcy Code, 11 U.S.C. ss 101 et seq.
and any amendments thereof.
2.10 - Confirmation Date shall mean the date upon which the Order of
Confirmation is entered by the Court.
2.11 - Court shall mean the United States Bankruptcy Court for the
District of Colorado in which the Debtor's Chapter 11 case, pursuant to which
this Plan is proposed, is pending and any Court having competent jurisdiction to
hear appeal or certiorari proceedings therefrom.
2.12 - Debtor shall mean the Debtor who is proposing this Chapter 11
Plan.
2.13 - Disclosure Statement shall mean the Disclosure Statement which
is approved or conditionally approved by the Court according to 11 U.S.C. ss
1125 to be utilized to solicit votes for this Plan.
2.14 - Disputed Claim means any Claim which is not an Allowed Claim,
including, without limitation, any Claim designated as disputed, contingent or
unliquidated in Debtors' schedules filed in connection with this case, or any
Claim against which an objection to the allowance thereof has been interposed,
and as to which no Final Order has been entered.
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2.15 - Effective Date of the Plan shall mean the date on which the
Order of Confirmation is entered or if a stay is entered pending appeal of the
Order of Confirmation, the date on which the stay is no longer in effect.
2.16 - Final Order shall mean an order or judgment of the Bankruptcy
Court which shall not have been reversed, stayed, modified or amended and as to
which (a) at the time to appeal from or to seek review, rehearing or certiorari
shall have expired and (b) no appeal or petition for review, rehearing or
certiorari is pending or if appealed shall have been affirmed, or the appeal
dismissed by the highest court to which such order was appealed, or if review,
rehearing or certiorari was sought, such review, rehearing or certiorari has
been denied and no further hearing, appeal or petition for review, rehearing or
certiorari can be taken or granted or as to which any right to appeal or to seek
a review, rehearing or certiorari has been waived.
2.17 - Interest means any ownership interest in the Debtor, including
but not limited to preferred or common stock and any option, warrant or right of
any nature, contractual or otherwise, to acquire a stock or other ownership
interest in the Debtor.
2.18 - New Common Stock shall mean newly issued common shares in Sparta
issued to creditors, interest holders or otherwise issued pursuant to this Plan
following the entry of an Order of Confirmation by the Court.
2.19 - Order of Confirmation shall mean the Order entered by the Court
confirming the Plan in accordance with the provisions of Chapter 11 of the Code.
2.20 - Petition Date shall mean the date on which the Debtor's order
for relief entered.
2.21 - Plan shall mean this Chapter 11 Plan, as amended in accordance
with the terms hereof or modified in accordance with the Code, including all
exhibits and schedules attached hereto or referenced.
2.22 - Priority Claim means any pre-petition Claim entitled to a
priority in payment under ss 507(a) of the Bankruptcy Code, but shall not
include any Administrative Claim or Tax Claims.
2.23 - Pro Rata shall mean the ratio of an Allowed Claim or Interest in
a particular Class to the aggregate amount of all Allowed Claims or Interests in
that Class.
2.24 - Professional Fees means the Administrative Claims for
compensation and reimbursement submitted pursuant to Sections 330, 331 and
503(b) of the Bankruptcy Code by a Professional Person.
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2.25 - Rules shall mean the Federal Rules of Bankruptcy Procedure and
Local Bankruptcy Rules for the District of Colorado as adopted by the Court.
2.26 - Tax Claims means any Claim of a governmental unit for taxes
entitled to priority pursuant to 11 U.S.C. ss 507(a)(8).
2.27 - Unclassified Priority Claims shall mean Claims pursuant to
Section 507(a)(1) which are Administrative Claims Allowed under Section 503(b)
of the Code and any fees and charges against the estates under Chapter 123 of
Title 28 of the United States Code and shall further mean Allowed unsecured
Claims of governmental units to the extent provided for in Section 507(a)(8) of
the Code.
2.28 - Other Definitions. Unless the context otherwise requires, any
capitalized term used and not defined herein or elsewhere in the Plan but that
is defined in the Bankruptcy Code or Bankruptcy Rules shall have the meaning set
forth therein. Further, any terms defined in the Agreement and not defined
herein shall have the meanings set forth in the Agreement.
ARTICLE III
DESIGNATION OF CLAIMS AND INTERESTS
The following is a designation of all classes of Claims and Interests
other than those Claims of a kind specified in Sections 507(a)(1), 507(a)(2) or
507(a)(8) of the Code.
Class 1 - All Allowed unsecured Claims specified in Section 507(a)(3),
507(a)(4) or 507(a)(5) of the Code as having priority.
Class 2 - The Allowed Secured Claim held by LKDTBJP Living Trust.
Class 3 - The Allowed Claims of unsecured creditors.
Class 4 - The Allowed Interests held by 1992 Non-Cumulative Convertible
Preferred Shareholders.
Class 5 - The Allowed Interests held by Series A Cumulative Convertible
Preferred Shareholders.
Class 6 - The Allowed Interests held by pre-petition common
shareholders.
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ARTICLE IV
SPECIFICATION AND TREATMENT OF UNCLASSIFIED
PRIORITY CLAIMS
Pursuant to Section 1123(a)(1) of the Code, the Claims against the
Debtor covered in this Article IV are not classified. The holders of such
Allowed Claims are not entitled to vote on the Plan.
4.1 - The holders of Allowed Claims of the type specified in Section
507(a)(1) of the Code, Administrative Claims, shall receive cash equal to the
Allowed amount of such Claim or a lesser amount or different treatment as may be
acceptable and agreed to by particular holders of such Claims. Such Claims shall
be paid in full on the Effective Date of the Plan, or treated as otherwise
agreed to by the particular holders of such Claims. Section 507(a)(1)
Administrative Claims that are Allowed by the Court after the Effective Date of
the Plan shall be paid upon Allowance.
4.2 - The Allowed Claims of a type specified in Section 507(a)(8) of
the Code, Tax Claims of governmental taxing authorities, shall be paid monthly,
on an amortized basis extending over a period not greater than five years from
the Petition Date. Interest shall accrue on the unpaid balance of such claims at
the rate of 6% per annum.
4.3 - The Debtor will make all payments required to be paid to the U.S.
Trustee pursuant to 28 U.S.C. ss 1930(a)(6) until the case is closed, converted,
or dismissed. All payments due to the U.S. Trustee pursuant to 28 U.S.C. ss
1930(a)(6) shall be paid on the Effective Date of the Plan, and the U.S. Trustee
shall thereafter be paid fees due on a quarterly basis until the case is closed,
converted, or dismissed.
ARTICLE V
SPECIFICATION AND TREATMENT OF CLASS 1 CLAIMS
5.1 - The Allowed Class 1 Priority Claims shall be paid in full on the
Effective Date. The Class 1 Claims for certain pre-petition wages and employee
Claims ar e more particularly described in Sections 507(a)(3), 507(a)(4), and
507(a)(5) of the Code. No Class 1 claims are believed to exist.
ARTICLE VI
SPECIFICATION AND TREATMENT OF SECURED CREDITOR CLAIMS
6.1 - LKDTBJP Living Trust. Class 2 consists of the allowed secured
claim of LKDT BJP Living Trust. Class 2 is impaired by this Plan. Class 2 shall
be treated as set forth below:
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a. The Class 2 claim shall be allowed at zero pursuant to 11
U.S.C.ss.506. The assets which serve as collateral for the Class 2 claim have a
negligible net worth. Therefore the claim will not be allowed as a secured claim
and the claims held by the LKDTBJP Living Trust shall all be allowed and treated
as Class 3 unsecured claims.
ARTICLE VII
SPECIFICATION AND TREATMENT OF UNSECURED CREDITOR CLAIMS
7.1 - Class 3 consists of the Allowed Claims of unsecured creditors of
Sparta. Class 3 shall be treated as set forth in this paragraph. Class 3
claimants shall receive a pro-rata distribution of 158,000 shares of New Common
Stock in Sparta and a pro-rata distribution of 15,000 BJCR Shares on account of
their Allowed Claims within 30 days of the Effective Date of the Plan.
ARTICLE VIII
SPECIFICATION AND TREATMENT OF INTERESTS
8.1 - Classes 4, 5, and 6 include the Interests in Sparta held by the
pre-confirmation preferred and common shareholders. Classes 4, 5, and 6 are
impaired under the Plan and will receive the distributions set forth below in
exchange of their interests:
a. Class 4 interest holders will receive a pro-rata distribution of
10,000 shares of New Common Stock and a pro-rata distribution of 5,000 BJCR
Shares;
b. Class 5 interest holders will receive a pro-rata distribution of
20,000 shares of New Common Stock and a pro-rata distribution of 5,000 BJCR
Shares; and
c. Class 6 interest holders will receive a pro-rata distribution of
20,000 shares of New Common Stock and a pro-rata distribution of 5,000 BJCR
Shares.
ARTICLE IX
MEANS FOR THE PLAN'S EXECUTION
9.0 - Operation of Business. The Debtor will continue to develop its
business activities following confirmation of the Plan. The Debtor will continue
to operate as a reorganized Debtor following confirmation of the Plan.
9.1 - Additional Authorized Shares. On the Effective Date of the Plan,
the Debtor's authorized common shares, par value $.002 shall be increased from
25,000,000 to 50,000,000.
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9.2 - Effectuating the Plan. On the Effective Date of the Plan, Allan
J. Korn shall be appointed as the agent of Sparta pursuant to 11 U.S.C.ss
1142(b) for the purpose of carrying out the terms of the Plan, and taking all
actions deemed necessary or convenient to consummating the terms of the Plan,
including but not limited to execution of documents. Mr. Korn may resign such
position at any time.
9.3 - Agreement with Spectra Group, Inc. ("Spectra"). On the Effective
Date of the Plan, Sparta will assume its Exclusive Sales Representative
Agreement with Spectra. This Agreement provides Sparta with an exclusive sales
representative agreement with Spectra for certain products known as surgical
devices throughout the United States. In addition, Spectra has provided to a
Sparta affiliate, BJCR, an exclusive sales representative agreement for its
separate line of Electrotherapy Devices and accessories. In addition to the New
Common Stock that will be issued to the Sparta creditors and shareholders with
Allowed Claims and Interests under this Plan, all such recipients shall also
receive on a pro rata basis specifically allocated shares of BJCR common stock
in the total amount of 30,000.
9.4 - Disputed Claim Procedure. Distributions of cash, New Common Stock
or BJCR shares to any class of creditor will only be made on account of Allowed
Claims. In the event that distributions are made at a time that a claim
objection is pending before the Court or a judgment has entered to establish a
Claim and the judgment is not subject to a Final Order, the portion of the
distribution that would be paid or issued to the disputed claimant will be held
by the Debtor until the Claim is Allowed or disallowed. If Allowed, the Claim
will be paid its appropriate share of the withheld payment with interest or
issued the appropriate amount of New Common Stock and BJCR stock. If disallowed,
the withheld distribution will not be paid or issued.
9.5 - Claims and Litigation Bar Date. All Claim objections and
Avoidance Actions in the case must be filed no later than 45 days following the
Effective Date of the Plan.
9.6 - Administrative Expense Bar Date. All applications for allowance
and payment of Administrative Claims, including Professional Fees, must be filed
within 30 days following the Effective Date of the Plan.
9.7 - Monthly Installments. Whenever the Plan provides for payment in
monthly installments or a payment due in a certain month, the payment shall be
due on the last day of the calendar month in which the payment is due, unless
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otherwise specified in the Plan. The Debtor shall then have a five day grace
period within which the monthly payment must be received by the payee before the
Debtor shall be in default.
9.8 - Final Decree. The Debtor will request entry of a final decree
closing the case on or before the later of the date all Claim objections and any
pending litigation is concluded or 180 days after the Effective Date of the
Plan.
9.9 - Quarterly Fees. Prior to the entry of the final decree, the
Debtor shall continue to remit quarterly fees and post-confirmation reports to
the United States Trustee, as required by statute.
ARTICLE X
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
10.1 - On the Effective Date of the Plan, the Debtor hereby assume
those executory contracts and unexpired leases listed in Exhibit A attached
hereto and incorporated herein by reference, which have not been assumed by
prior Order of the Court prior to the Confirmation Date. On the date of the
entry of an Order confirming the Plan, the Debtor shall be the holder of all
right, title and interest to the assumed leases and contracts and such assumed
leases and contracts shall be in full effect and binding upon the Debtor and the
respective lessees. Confirmation of the Plan shall constitute a determination
that the payments to be made to said creditors pursuant to the Plan satisfy all
conditions precedent to assumption set forth in 11 U.S.C. ss 365(b).
10.2 - On the Effective Date of the Plan, the Debtor will reject all
executory contracts and unexpired leases to which it is a party which are listed
in Exhibit B, attached hereto and incorporated herein by reference which have
not been rejected by prior Order of the Bankruptcy Court prior to the date of
confirmation. Executory contracts and unexpired leases will be rejected pursuant
to the provisions of 11 U.S.C.ss 365. Any executory contract not assumed in
accordance with the Plan shall be rejected.
10.3 - An Order confirming this Plan constitutes approval by the Court
of the assumption or rejection of the executory contracts and unexpired leases
described herein in accordance with the provisions of 11 U.S.C. ss 365 and the
Rules.
10.4 - Claims Arising from Rejection. All proofs of claim with respect
to claims arising from the rejection of any executory contract or unexpired
lease shall be filed with the Bankruptcy Court within twenty (20) days after the
earlier of (i) the date of the Bankruptcy Court order approving the Debtor's
rejection of such executory contract or unexpired lease or (ii) the Confirmation
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Date. Any claims not filed within such time shall be forever barred against the
Debtor, its estate and property and any such Claims shall be disallowed in full.
Claims arising from such rejection, to the extent Allowed, shall be treated as
Class D unsecured Claims.
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1 Revestment. The entry of an Order confirming this Plan shall
revest in the Debtor all property of the estate free and clear of all liens
except those specifically set forth in the Plan.
11.2 Retention of Jurisdiction. Notwithstanding confirmation of the
Plan, the Court shall retain jurisdiction for the following purposes:
1. Determination of the allowability of claims upon objection to such
claims by the Debtor-in-Possession or by any other party in
interest;
2. Determination of the request for payment of claims entitled to
priority under 11 U.S.C. Section 507(a)(1), including compensation
of the parties entitled thereto;
3. Resolution of any disputes regarding interpretation of the Plan;
4. Implementation of the provisions of the Plan and entry of orders
in aid of consummation of the Plan, including without limitation,
appropriate orders to protect the revested Debtor from action by
creditors;
5. Modification of the Plan pursuant to 11 U.S.C.ss 1127;
6. Adjudication of any causes of action, including avoiding powers
actions, brought by the Debtor-in-Possession, by the
representative of the estate or the Debtor post-confirmation;
7. Adjudication of any cause of action brought by the
Debtor-in-Possession, by the representative of the estate, or by a
Trustee appointed pursuant to the Code, or the revested Debtor
exercising rights and powers as provided in 11 U.S.C. ss 542-549.
This section shall not be construed to limit any other power or
right which the Debtor may possess under any section of the Code;
and
8. Entry of a final decree.
11.3 Satisfaction of Claims. The confirmation of this Plan shall
constitute a discharge of Sparta from all dischargeable debts in accordance with
11 U.S.C. ss 1141(d). Confirmation of the Plan shall constitute a modification
of any note or obligation for which specification and treatment is provided
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under the Plan as set forth in the Plan. Any obligation or note, previously in
default, so modified, shall be cured as modified as of the Confirmation Date.
This provision shall be operable regardless of whether the Plan provides for any
obligation to be evidenced by a rewritten loan or security document following
confirmation of the Plan.
11.4 Headings. The headings used in the Plan are for convenience of
reference only and shall not limit or in any manner affect the meaning or
interpretation of the Plan
11.5 Notices. All notices, requests, demands, or other communications
required or permitted in this Plan must be given in writing to the party(ies) to
be notified. All communications will be deemed delivered when received at the
following addresses:
a. To Sparta: Allan J. Korn, President 5445 DTC Parkway,
Suite 520 Greenwood Village, CO 80111
With a copy to:
Lee M. Kutner, Esq.
Kutner Miller, P.C.
303 East 17th Avenue, Suite 500
Denver, CO 80203
Fax: 303-832-1510
Email:lmk@kutnerlaw.com
b. To an allowed claimant, at the addresses set forth in
the allowed Proof of Claim, if filed, other, at the
address set forth for the claimant in the Debtors'
Schedules filed with the Court.
11.6 Successors and Assigns. The Plan will be binding upon the Debtor,
any creditor and interest holder affected by the Plan and their heirs,
successors, assigns and legal representatives.
11.7 Unclaimed Payments. If a person or entity entitled to receive a
payment or distribution pursuant to this Plan fails to negotiate a check, accept
a distribution or leave a forwarding address in the event notice cannot be
provided as set forth in paragraph 11.3, within one (1) year of the Effective
Date of the Plan, the person or entity is deemed to have released and abandoned
any right to payment or distribution under the Plan.
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ARTICLE XII
CONFIRMATION REQUEST
12.1 - The Debtor, as proponent of the Plan, requests confirmation of
the Plan pursuant to 11 U.S.C. ss 1129. The Debtor will solicit acceptance of
the Plan after its Disclosure Statement has been approved by the Court and is
transmitted to the creditors, interest holders and parties in interest. In the
event the Debtor does not obtain the necessary acceptances of its Plan, it may
make application to the Court for confirmation of the Plan pursuant to 11 U.S.C.
ss 1129(b). The Court may confirm the Plan if it does not discriminate unfairly
and is fair and equitable with respect to each class of Claims or Interests that
is impaired and has not voted to accept the Plan.
DATED: November 6, 2006 SPARTA SURGICAL CORPORATION
By:
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Allan J. Korn, President
Lee M. Kutner, Esq.
KUTNER MILLER, P.C.
303 East 17th Avenue, Suite 500
Denver, CO 80203
Telephone: 303- 832-2400
Fax: 303-832-1510
Email: lmk@kutnerlaw.com
ATTORNEYS FOR
SPARTA SURGICAL CORPORATION
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Appellant Sparta Surgical Corporation ("Sparta" or "Debtor"), by and
through its attorneys, Kutner Miller Brinen, P.C., for its Brief in Support of
Appeal, respectfully states:
I. STATEMENT OF APPELLATE JURISDICTION
The United States District Court has appellate jurisdiction pursuant to
28 U.S.C. ss. 158(a).
II. STATEMENT OF ISSUES ON APPEAL AND STANDARD OF APPELLATE REVIEW
A. STATEMENT OF ISSUES
1. Whether the Bankruptcy Court's findings of fact were clearly
erroneous.
2. Whether the Bankruptcy Court's findings of fact are based on an
abuse of discretion.
3. Whether the Bankruptcy Court erred as a matter of law in holding
that the Debtor's Disclosure Statement was not adequate.
4. Whether the Bankruptcy Court erred as a matter of law in not
confirming the Debtor's Chapter 11 Plan of Reorganization.
5. Whether the Bankruptcy Court erred in holding that the Debtor's
Disclosure Statement was inadequate in a small business case where the Court had
previously conditionally approved the Disclosure Statement and after notice and
hearing no party in interest contested the adequacy of the Disclosure Statement
and creditors had accepted the Debtor's Plan.
B. STANDARD OF REVIEW
The Bankruptcy Court's findings of fact are reviewed under a clearly
erroneous standard. Federal Rule of Bankruptcy Procedure 8013. The Bankruptcy
Court's findings are clearly erroneous when, even though there exists supporting
evidence, the reviewing Court looking at the entire evidence is left with
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definite and firm conviction that a mistake has been made. TMA Associates, 160
B.R. 172 (D. Colo. 1993). The Court's legal conclusions are subject to de novo
review. In re RFI Transport, Inc., 122 B.R. 124 (D. Colo. 1990).
III. STATEMENT OF THE CASE AND RELEVANT FACTS
The Debtor
The Debtor was originally incorporated in the State of Delaware on
March 23, 1984. The Debtor was engaged in the research, development,
manufacturing and marketing of surgical and electrotherapy products for the
worldwide healthcare industry. In May 2002, the Debtor divested substantially
all of its assets and ceased operations. Since that time, the Debtor has
performed administrative duties as a "shell" corporation and has continued
reporting as a public company.
In September, 2006, pre-petition, the Debtor negotiated a contract with
Spectra Group, Inc. d/b/a Spectra Instruments ("Spectra") under which it became
an exclusive independent sales representative for Spectra. The Spectra products
generally consist of medical surgical instruments and critical care disposable
products. The Debtor intends to reorganize around this new relationship with
Spectra, which forms the basis for its future business activities and income.
Debt and Equity
In order to operate profitably under its new business relationship with
Spectra and to obtain financing for its new business operations, the Debtor had
to restructure its existing debt obligations. The Debtor's secured debt consists
of various convertible secured promissory notes ("Convertible Notes") in the
aggregate amount of $380,286.00 issued to the LKDTBJF Living Trust ("Trust").
The Convertible Notes and all accrued interest were due in December, 2006.
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In addition, in September 2005, the Debtor entered into a secured
Revolving Credit Facility Agreement ("Agreement") with Gary A. Agron and the
Trust (collectively "Lender"). In consideration for the loans pursuant to the
Agreement, the Debtor agreed that the Lender would be provided a junior security
interest in the Debtor's assets. Subject to certain conditions, the Agreement
allows the Debtor to borrow up to $100,000 with interest charged at 6% per
annum, and all principal and interest are due on February 7, 2007. This date has
since been extended to April 1, 2007.
The total amount due on the secured claims was approximately $573,711
as of the Petition Date. Of this amount, $16,786 is due Mr. Agron and the
balance is due to the Trust. This entire amount was to be converted to equity
under the Debtor's proposed plan
The unsecured debt owing to creditors was scheduled at approximately
$710,000.
The Debtor is a public company. On the petition date it had two classes
of preferred shareholders with different rights and preferences. The Debtor also
had a class of common shareholders.
Small Business Case
On November 6, 2006 (the "Petition Date"), the Debtor filed its
Voluntary Petition for Relief under Chapter 11 of Title 11 of the United States
Code (the "Bankruptcy Code"). The Debtor is a "small business debtor" as the
term is defined in Bankruptcy Code ss. 101(51D). The Debtor's bankruptcy case is
therefore a small business case. 11 U.S.C. ss. 101(51C). In a small business
case, the Debtor must file the plan and a disclosure statement, if any, within
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300 days of the order for relief.(1) 11 ss U.S.C. ss. 1121(e)(2). If a
disclosure statement is filed, Bankruptcy Code ss. 1124(f)(3) provides that the
Court may conditionally approve the disclosure statement for solicitation
purposes, "if the debtor provides adequate information to each holder of a claim
or interest that is solicited." Once the plan is filed, the Court must consider
confirmation of the plan within 45 days.(2) 11 U.S.C. ss. 1129(e).
On the Petition Date, the Debtor filed its proposed Plan of
Reorganization (the "Plan") and accompanying Disclosure Statement (as
subsequently amended, the "Disclosure Statement"). Given the short time frame of
45 days within which the Court can confirm the Plan, the Debtor also filed its
Motion for Expedited Hearing (the "Expedite Motion"), requesting that the
Bankruptcy Court set a hearing to consider conditional approval of the
Disclosure Statement pursuant to Bankruptcy Code ss. 1124(f)(3) and set a
hearing for confirmation of the Plan and final approval of the Disclosure
Statement.
On November 8, 2006, the Bankruptcy Court entered its Order granting
the relief requested in the Expedite Motion, setting November 13, 2006 as the
date to conduct a status conference on the case. At the hearing, the Bankruptcy
Court considered the adequacy of the Disclosure Statement on a conditional basis
under Bankruptcy Code ss. 1124(f)(3), commented on the Disclosure Statement and
required the Debtor to make certain changes to the Disclosure Statement before
granting conditional approval of the Disclosure Statement. On November 14, 2006,
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1 In a small business case, a disclosure statement need not be filed and used
for plan solicitation purposes if the Court determines that the plan provides
adequate information and a disclosure statement is not necessary.
2 The 45 day period may be extended pursuant to Bankruptcy Code ss. 1121(e)(3),
which provides that an extension may be granted, upon notice to creditors, only
"if the debtor establishes by a preponderance of the evidence that it is more
likely than not that the court will confirm a plan within a reasonable period of
time."
4
the Debtor filed its amendments to the Disclosure Statement to address the
comments of the Court. On November 15, 2006, the Bankruptcy Court entered an
Order conditionally approving the Disclosure Statement and setting December 19,
2006 as the date to consider confirmation of the Plan. The Court further ordered
that ballots accepting or rejecting the Plan had to be submitted by December 15,
2006. Objections to confirmation of the Plan were due the same date.
On November 15, 2006, the Debtor commenced the solicitation process by
serving the Plan, Disclosure Statement, and Ballots upon parties-in-interest.
This included serving a copy of the Plan and extensive Disclosure Statement on
approximately 430 creditors and shareholders. A copy of the Plan and Disclosure
Statement was also served on the U.S. Securities and Exchange Commission ("SEC")
and the State of Colorado.
The Plan
The Plan divides creditors into 6 classes: (1) Class 1 is comprised of
creditors holding allowed unsecured claims specified in Bankruptcy Code ss.ss.
507(a)(3), 507(a)(4) or 507(a)(5) as having priority; (2) Class 2 is comprised
of the allowed secured claim of the Trust; (3) Class 3 is comprised of the
allowed claims of general unsecured creditors; (4) Class 4 is comprised of the
allowed interests held by 1992 non-cumulative convertible preferred shareholders
of Sparta; (5) Class 5 is comprised of the allowed interests held by series A
cumulative convertible preferred shareholders of Sparta; and (6) Class 6 is
comprised of the allowed interests held by pre-petition common shareholders.
5
The Plan calls for unclassified administrative expense claimants to
received payment on the effective date of the Plan(3) or as otherwise agreed to
by the parties. The only anticipated administrative expense claimant is Debtor's
bankruptcy counsel, Kutner Miller Brinen P.C.
The Plan as filed proposed to pay taxing authorities holding
unclassified priority claims monthly payments amortized over 5 years with
interest accruing at 6% per annum. The two taxing authority claimants are: (a)
the Internal Revenue Service (the "IRS"), with a claim of approximately
$85,580.00 and (b) the State of California, with a claim of approximately
$6,452.00.
No Class 1 claims exist, though, if any were to exist, such claims
would be paid upon the effective date of the Plan.
As of the Petition Date, the Debtor had no material assets other than
its new contractual relationship with Spectra. Accordingly, the Plan calls for
the Class 2 secured claim to be allowed at zero pursuant to Bankruptcy Code ss.
506 and to be allowed and treated as a Class 3 general unsecured claim.
Class 3 is receiving under the Plan a pro-rata distribution of 158,000
shares of new common stock in Sparta and a pro-rata distribution of 15,000
shares of BJCR Electro-Therapy, Inc. ("BJCR")(4) common stock within 30 days of
the effective date of the Plan.
Classes 4, 5, and 6 consist of the pre-confirmation equity holders of
the Debtor who, under the Plan, will receive the distributions as follows in
exchange for their interests: (a) Class 4 shareholders will receive a pro-rata
distribution of 10,000 shares of new common stock in Sparta and a pro-rata
distribution of 5,000 shares of BJCR common stock; (b) Class 5 shareholders will
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3 The effective date is the date upon which an order confirming the Plan becomes
final.
4 BJCR Electro-Therapy, Inc. was established as an affiliate of Sparta and will
be the exclusive sales representative for Spectra with respect to its
electrotherapy devices.
6
receive a pro-rata distribution of 20,000 shares of new common stock in Sparta
and a pro-rata distribution of 5,000 shares of BJCR common stock; and (c) Class
6 shareholders will receive a pro-rata distribution of 20,000 shares of new
common stock in Sparta and a pro-rata distribution of 5,000 shares of BJCR
common stock.
The Plan solicitation process was concluded on December 15, 2006. On
December 18, 2006, the Debtor filed its Summary of Voting Results showing that
all classes and an overwhelming majority of the creditors, over 96%, voted to
accept the Plan. No class member of Class 1 voted and Class 1 is deemed to have
accepted the Plan. In re Ruti-Sweetwater, 836 F.2d 1263 (10th Cir. 1988). Class
2, the Trust, voted to accept the Plan. Class 3 unsecured creditors voted to
accept the Plan. Classes 4 and 5 preferred shareholders voted to accept the
Plan. Class 6 common shareholders voted and 96% of those voting cast ballots in
favor of the Plan. Only one small shareholder in Class 6, voted to reject the
Plan.
The IRS was the only creditor to file an objection to confirmation of
the Plan asserting that the Plan did not properly classify a portion of its
claim as secured. The Debtor and the IRS entered into a stipulation filed with
the Bankruptcy Court which provides that the IRS' claim shall be allowed and
treated as follows: (a) the IRS shall hold a priority tax claim in the amount of
$30,172.34 (the "Priority Claim"); and (b) a general unsecured claim in the
amount of $47,287.33 (the "General Unsecured Claim"). The stipulation further
provides that language of the Plan is modified only with respect to the IRS to
provide that the Priority Claim shall be paid monthly, on an amortized basis
extending over a period not greater than five years from the Petition Date with
interest accruing on the unpaid balance at the rate of 8% compounded daily.
During discussions, the IRS informed the Debtor that it is not authorized to
7
receive stock in satisfaction of its General Unsecured Claim. To address the
IRS' issue, the Debtor's officers and/or directors agreed that one of the
Debtor's officers and/or directors, within 30 days of confirmation of the Plan,
will pay to the IRS $5,400 in full satisfaction of the General Unsecured Claim.
The payment would not involve the Debtor. Upon execution of the stipulation, the
IRS withdrew its objection to confirmation of the Plan.
The Debtor also received an informal objection to confirmation of the
Plan from the State of California, stating that the interest on its claim
proposed under the Plan was insufficient under applicable California law. The
Debtor and the state of California entered into a stipulation filed with the
Court providing that interest will accrue on the unpaid balance of the State of
California's claim at the rate of 7% per annum.
On December 19, 2006, the Bankruptcy Court commenced and concluded the
hearing to consider confirmation of the Plan and final approval of the
Disclosure Statement. The Debtor proceeded on an uncontested basis. The Debtor
put on evidence establishing that the Plan satisfied all the requirements of
Bankruptcy Code ss. 1129(a) and therefore is confirmable. A copy of the
transcript from the confirmation hearing is attached hereto as Exhibit A (the
"Transcript"). In a manner consistent with the Court's normal practice for an
uncontested plan confirmation hearing, the Debtor proffered evidence in support
of confirmation of the Plan and the elements of ss. 1129(a), including (a) the
Debtor complied with all aspects of its obligations under Chapter 11;(5) (b) the
Debtor timely filed its Plan and Disclosure Statement; (c) the Disclosure
Statement was conditionally approved and votes were solicited; (d) all classes
under the Plan voted to accept the Plan; (e) the Plan was proposed in good faith
in an effort to reorganize and provide a recovery for creditors and
shareholders; (f) the Plan provides that all costs and expenses of
administration of the estate are subject to Court approval as to reasonableness;
and (g) there is no governmental regulatory commission with jurisdiction over
setting rates for the Debtor. Transcript at pages 10 - 11. The Debtor furt
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5 Including, the Debtor satisfied all of its reporting obligations and attended
the Bankruptcy Code ss. 341 meeting of creditors and the initial debtor
interview.
8
her
proffered testimony establishing that unsecured creditors were receiving more
under the Plan than the creditors would receive if the case were converted to a
case under Chapter 7. The proffered testimony established that the Debtor has a
minimal amount of assets that can be liquidated, whose value does not exceed
$30,000. Because the IRS holds a priority claim greater than $30,000, under the
Bankruptcy Code's absolute priority rule, there would be no distribution to
unsecured creditors in a Chapter 7 case. Under the Plan, unsecured creditors are
receiving stock in the reorganized Debtor that will be marketable and will
provide a recovery for unsecured creditors. Transcript at pages 11 - 12.
Therefore, the best interest of the creditors test is met. ss. 1129(a)(7).
To establish feasibility of the Plan, the Debtor called as a witness
Thomas Reiner, Chairman of the Board for Sparta. Mr. Reiner's testimony is
provided on pages 13 - 31 of the Transcript. The most significant portions of
the testimony are summarized below. Mr. Reiner testified that Sparta has current
and ongoing business operations. He explained that in October, 2006, Sparta and
Spectra entered into a strategic partnership whereby the Debtor will be an
exclusive independent sales representative for the Spectra products. The
business relationship provides Sparta with marketable inventory and Spectra with
the name recognition associated with Sparta. Sparta has been in the medical
device industry since the 1970s, has excellent name recognition and an excellent
reputation with doctors and hospitals. In fact, many doctors are and were
trained using Sparta products. Transcript at pages 14, 19, 27.
9
Sparta, in connection with Spectra, is marketing and selling
electrotherapy equipment and specialty surgical equipment and products.
Transcript at pages 18-19. The first month after Sparta entered into the
partnership with Spectra, Sparta obtained a $15,000 contract with the Naval
Medical Center in Virginia. There were also a number of smaller contracts.
Sparta receives a 20% commission for generating each sale. Transcript at page
27. Other significant contracts Sparta has obtained since entering into the
partnership include a $23,000 contract with LSU Medical Center. In addition,
Sparta has entered into negotiation, solicitation and agreement with the Defense
Personnel Center in Philadelphia to bid on a contract with a minimum price of
$1.2 million and a three year renewal option of $3.6 million. Transcript at
pages 14-15. Sparta is also receiving weekly sales contracts beginning at $2,000
and as high as $1 million. Transcript at page 24. Sparta's sales have remained
constant through the months of October through December. Transcript at pages
26-27.
To provide funding for the Debtor's ongoing business operations,
including marketing, the Debtor has obtained a $100,000 line of credit. Lending
under the line of credit is conditioned upon confirmation of the Plan. The line
of credit will be used to develop sales and promotional materials, to develop
the internal structure of the company, and to redevelop partnerships with key
medical equipment and supply distributors to enhance Sparta's sales and profits.
Transcript at pages 22-23. The Debtor is being managed and operated by Mr.
Reiner and Allan Korn, both of whom have significant experience in the medical
device sales field. Transcript at pages 20-22. The feasibility test was
therefore met. ss. 1129(a)(11).
Clearly, the Debtor's creditors and shareholders had absolutely no
chance of any recovery on account of their claims and stock interests on the
date the Chapter 11 case was filed. The Plan and its confirmation would have
allowed priority tax claims to be paid, unsecured creditors to recover through
10
the new shares of stock they would be receiving, and common shareholders to
similarly recover through their restructured equity interests. Notably, all
shareholder and creditor classes accepted the Plan and neither the SEC, the
I.R.S., the States of California and Colorado, nor the United States Trustee
objected to Plan confirmation.
Notwithstanding the uncontraverted evidence submitted in support of the
Plan, the Bankruptcy Court's prior conditional approval of the Disclosure
Statement, and the uncontested nature of the confirmation hearing, the
Bankruptcy Court denied final approval of the Disclosure Statement and refused
to confirm the Plan. Transcript at page 37.
IV. ARGUMENT
THE BANKRUPTCY COURT ERRED IN DENYING FINAL
APPROVAL OF THE DISCLOSURE STATEMENT
The structure of the disclosure statement approval and plan
confirmation process in a small business case is designed to "streamline the
small business chapter 11 procedures." 7 Allan N. Resnick, Collier on Bankruptcy
P. 1125.04 (15th Ed. 2006) (citing Footnote 5. Pub L. No. 109-8 ss. 431(2)
(2005). One purpose of this streamlined procedure is to provide a more
expeditious, less complex and less costly confirmation process for the small
business debtor. In re Aspen Limousine Service, 187 B.R. 989, 994 (Bankr. D.
Colo. 1995). 6 See also In re: Coleman Enterprises, Inc., 266 B.R. 423, 431
(Bankr. Minn. 2001) (the "small business fast track" confirmation process is
- ----------------------------
6 Prior to the amendments made to the Bankruptcy Code in October, 2005, the
small business case was an election a business debtor could make if certain
criteria were met. After October, 2005, the small business case became mandatory
if the criteria were met. There were certain additional changes made to the
small business case in the October, 2005 amendments that are not material to the
issues before this Court, nor did the amendments change the concept of putting
the small business confirmation process on the fast track.
11
designed to reduce cost and delay) (citing In the Defense of Debtor Exclusivity:
Assessing Four of the 1994 Amendments to the Bankruptcy Code, 69 AM. BANKR. L.J.
287, 298 (1995)). The intended beneficiary of this streamlined process is
principally, but not exclusively, the small business debtor. In re Aspen
Limousine Service, 187 B.R. at 994. See also In re: Coleman Enterprises, Inc.,
266 B.R. at 438 (in the small business case, the debtor is "primacy in the
Court's considerations.").
On the same date that the Debtor filed its Voluntary Petition, the
Debtor filed its Plan and Disclosure Statement. The Debtor also filed the
Expedite Motion. Pursuant to the relief requested in the Expedite Motion, the
Bankruptcy Court conducted a hearing whereat it considered whether to grant
conditional approval of the Disclosure Statement. The United States Trustee
attended the hearing. No party in interest raised objection to conditional
approval of the Disclosure Statement. The Bankruptcy Court raised issue with
specific aspects of the Disclosure Statement and directed the Debtor to amend
the Disclosure Statement before conditional approval could be granted. The
Debtor promptly filed an amended Disclosure Statement that was subsequently
approved, conditionally, by the Bankruptcy Court. While the Court raised an
issue with the Disclosure Statement that it wanted changed before approval, none
of the issues mentioned by the Court at the confirmation hearing as a basis for
its finding of inadequate disclosure were mentioned at all at the Disclosure
Statement hearing. The Plan and Disclosure Statement were mailed to parties in
interest for solicitation purposes. On December 19, 1006, the Bankruptcy Court
conducted the hearing to consider final approval of the Disclosure Statement and
confirmation of the Plan. No party objected to confirmation of the Plan or the
adequacy of the Disclosure Statement. All Classes under the Plan and the
overwhelming majority of creditors and shareholders voted to accept the Plan.
Notwithstanding the creditor support for the Plan and the Bankruptcy Court's
prior approval of the Disclosure Statement, the Bankruptcy Court denied final
approval of the Disclosure Statement and therefore denied confirmation of the
Plan.
12
The actions of the Bankruptcy Court are in direct contravention of the
established bankruptcy principles and the intention of Congress that the small
business confirmation proceed is to be streamlined, expeditious, less costly,
less complex, and primarily for the benefit of the Debtor. It was an abuse of
the Bankruptcy Court's discretion to, after having held a hearing and
conditionally approved the Disclosure Statement and after notice and hearing no
party in interest contested the adequacy of the Disclosure Statement and
creditors had accepted the Debtor's Plan, to deny final approval of the
Disclosure Statement. A small business debtor can do no more to comply with its
obligations under the Bankruptcy Code than, as the Debtor did, seek conditional
approval of its disclosure statement and address all the Bankruptcy Court's
issues to obtain that conditional approval prior to commencing the solicitation
process. The Debtor must then recognize that a party in interest may object as
to the adequacy of the disclosure statement at the final hearing. See In re:
Coleman Enterprises, Inc., 266 B.R. at 438 n.8 (the expedited nature of the
small business confirmation process breaks down if a meritorious objection is
presented at the final hearing). The streamlined process is not served when a
Bankruptcy Court conditionally approves the disclosure statement as adequate and
then, sua sponte, based on no new or additional information revokes that
approval at a final hearing. This is particularly true when, as here, no
sustainable objection by a party in interest including the SEC, has been filed.
Contrary to the finding by the Bankruptcy Court that the conditionally
approved Disclosure Statement was inadequate, it did provide adequate
information as contemplated by Bankruptcy Code ss. 1125(a)(1). It should be
noted that Section 1125(a)(1) provides that the Court, in determining whether a
disclosure statement is adequate, "shall consider the complexity of the case,
the benefit of additional information to creditors and other parties in
interest, and the cost of providing additional information." None of these
issues were addressed by the Bankruptcy Court. The creditors and shareholders
13
already had substantial information on all of the points mentioned by the
Bankruptcy Court. It is inconceivable that they would vote any way other than to
accept the Plan even if they had volumes of added information. They had the most
relevant information, namely, without the Plan their claims and interests would
continue to be worth zero.
The Bankruptcy Court found without any articulated basis that the
Disclosure Statement provides inadequate information about (1) the entities that
are behind the restructuring effort; (2) the individuals who will be controlling
the Debtor; (3) tax consequences for investors; (4) the Debtor's future products
and operations; (5) the settlement with the IRS; (6) the $100,000 line of
credit; and (7) the fact that the insiders will receive the majority of the
shares of the reorganized Debtor. Transcript at pages 38-39. All of these points
are addressed in the Disclosure Statement or are simply incorrect statements.
Given this is a small business case with a Debtor of limited resources,
the Debtor did adequately address each of the seven issues which the Bankruptcy
Court listed as providing a basis for concluding the Disclosure Statement was
inadequate. The Disclosure Statement discusses in detail in the "Background,
Events Leading to Chapter 11 Filing, and Future Prospects" section at pages
4-12, the Debtor's pre-Petition Date business operations, its debt and equity
structure, the factors that caused the Debtor to seek relief under Chapter 11 of
the Bankruptcy Code, and its future business arising from its partnership with
Spectra. The Debtor provided in the "Description of Liabilities" section at
pages 8-9 a detailed description of all claims, secured, priority and general
unsecured, existing against the Debtor, and the holders of the claims. The
"Description of the Plan" section, immediately following the "Description of
Liabilities" section, at pages 9-11, reiterates information about the claims and
details the distributions claimants are receiving under the Plan. The
"Feasibility of the Plan" section at pages 13-14 provides detail about the
14
$100,000 line of credit, including its ability to be converted to equity, and
attached as an exhibit the Debtor's 2005 and 2006 financial statement with a
reference to the S.E.C.'s website for additional information about the Debtor.
The "Post-Confirmation Management" section, at pages 16-17 details who will be
managing the Debtor and the shareholder structure post-confirmation. The "Tax
Consequences" section at page 18 provides basic tax information about the
potential tax consequences to creditors receiving a distribution under the Plan.
There were no other material tax issues known. The settlement with the IRS was
reached after the filing of the Disclosure Statement and solicitation of the
Plan. The settlement was filed with the Court. The settlement has no negative
impact upon creditors, is consistent with the Plan and Bankruptcy Code, and
actually benefits creditors as the IRS general Unsecured Claim is being paid
outside the Plan by a non-Debtor entity. The IRS general Unsecured Claim is
therefore not diluting the distribution to other general unsecured creditors.
Accordingly, the Debtor's Disclosure Statement did provide adequate information
in accordance with the standard espoused by Bankruptcy Code ss. 1125(a). The
Bankruptcy Court's fact finding to the contrary is clearly erroneous.
The Bankruptcy Court's claim that more disclosure is required on the
"fact that insiders will receive the majority of the shares of the reorganized
Debtor" is simply wrong and unsupported by the record. Exhibit D to the
Disclosure Statement contains a chart depicting the distribution of
post-confirmation shares of the Debtor. It is clear that the vast majority of
the shares were to be issued to creditors and the new lender. To the extent the
15
Bankruptcy Judge believed either the Trust or Mr. Agron were insiders he was
very mistaken. The Trust and Mr. Agron are identified as lenders and creditors
throughout the Disclosure Statement and Plan. The only insider receiving shares
of stock is Mr. Korn who will receive 5%, hardly a majority. The term insider is
defined in the Bankruptcy Code at ss. 101(31) while the term includes officers,
directors and persons in control, it doesn't include creditors or shareholders.
The Bankruptcy Court completely ignored the recent amendments to the
Bankruptcy Code, ss. 1125(f) that address the "small business case". ss. 1125(f)
in addition to providing for the conditional approval of a disclosure statement,
provides that the "court may determine that the plan itself provides adequate
information and that a separate disclosure statement is not necessary. ss.
1125(f)(1). This lends further support to the position that disclosure is a
fluid and relative concept to be tailored to the particulars of each case.
16
THE PLAN SHOULD BE CONFIRMED
The standard for confirmation of a plan is set forth in Bankruptcy Code
ss. 1129(a). The evidence in this case established that each of the elements of
Section 1129(a) is satisfied, including that the Debtor has complied with its
obligations under Chapter 11 and the Debtor has proposed the Plan in good faith.
The Plan is feasible, as the Debtor did restart operations in October, 2006, has
prospects with existing business, and the individuals operating the Debtor have
over 65 years of combined experience with sales and marketing, finance and
operations in the medical device field. The Debtor has a line of credit in place
to fund ongoing operations. The Debtor has a current business around which to
reorganize. Creditors are receiving value under the Plan. Without the
reorganization, unsecured creditors will receive nothing.
The Bankruptcy Court also raises issue, in dictum, that the Plan may
not be confirmable if the Plan seeks to avoid the securities laws. Transcript at
page 39. As explained by the United States Trustee at the confirmation hearing,
the securities agencies of the federal government are charged with objecting to
plans of reorganization that seek to avoid the securities laws. Transcript at
page 8. The Debtor served all applicable pleadings, including the Plan and
Disclosure Statement, upon the State Attorney General, the Securities Divisions,
and the SEC. Transcript at page 6. No governmental agency filed an objection to
confirmation of the Plan. To the extent the Court was concerned about adequate
disclosure for the purposes of securities laws, the SEC or a governmental unit
is the only party with the statutory ability to challenge the adequacy of
disclosure. 11 U.S.C. ss. 1129(d). The lack of such an objection demonstrates
that the Plan and disclosure do not violate the securities laws and there is no
basis for the Court to deny confirmation on this basis.
17
Since the Debtor's Plan complies with the provisions of Chapter 11 and
was filed in accordance with 11 U.S.C. ss. 1121(e), it was mandatory that the
Court confirm the Plan within 45 days of the date it was filed. 11 U.S.C. ss.
1129(e). This provision of the Bankruptcy Code requires that in a "small
business case, the court shall confirm a Plan that complies with the applicable
provisions of this title". ss. 1129(e).
V. CONCLUSION
The Bankruptcy Court's Order denying final approval of the Disclosure
Statement and denying confirmation of the Plan was based on clearly erroneous
fact findings, unsupported by the record and erroneous legal conclusions. This
Court should reverse the Bankruptcy court and enter an Order approving the
Disclosure Statement on a final basis and confirming the Plan.
DATED: February 14, 2007
Respectfully submitted,
/s/Lee M. Kutner
---------------------------
Lee M. Kutner, #10966
Aaron A. Garber, #36099
KUTNER MILLER BRINEN, P.C.
303 East 17th Avenue, Suite 500
Denver, CO 80203
Telephone: (303) 832-2400
Telecopy: (303) 832-1510
Email: lmk@kutnerlaw.com
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18
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================================================================================
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLORADO
IN RE: )
) Case No. 06-18117-ABC
SPARTA SURGICAL CORPORATION )
) Chapter 11
Debtor. )
NOTICE OF APPEAL
Sparta Surgical Corporation, appeals under 28 U.S.C. ss 158(a)(1) or
(a)(3) from the Order denying Final Approval under 11 U.S.C. Section 1125 of the
Debtor's Disclosure Statement and denying confirmation of the Debtor's Chapter
11 Plan of Reorganization entered on the 19th day of December, 2006. The names
of the parties attending the hearing at which the Order appealed from was
entered and the names, addresses, and telephone numbers of their respective
attorneys are as follows:
Debtor/Appellant: Sparta Surgical Corporation
Attorneys: Lee M. Kutner #10966
Kutner Miller, P.C.
303 East 17th Avenue, Suite 500
Denver, CO 80203
Parties-in-Interest: Internal Revenue Service United States Trustee
Attorneys: Michael Lloyd #20233 Leo Weiss #15294
1244 Speer Blvd. 999 - 18th Street
Suite 500 Suite 1551
Denver, CO 80204 Denver, CO 80202
DATED: December 27, 2006 Respectfully submitted,
By:
------------------------------------
Lee M. Kutner #10966
KUTNER MILLER, P.C.
303 East 17th Avenue, Suite 500
Denver, CO 80203
Telephone: (303) 832-2400
Telecopy: (303) 832-1510
CERTIFICATE OF MAILING
I do hereby certify that on this _____ day of December, 2006, a true
and correct copy of the foregoing NOTICE OF APPEAL was deposited in the United
States mail, postage prepaid, addressed to the following:
Leo Weiss, Esq.
United States Trustee
999 - 18th Street
Suite 1551
Denver, CO 80202
Michael Lloyd, Esq.
Internal Revenue Service
1244 Speer Blvd.
Suite 500
Denver, CO 80204
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Vicky L. Martina
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