Myles M. Mattenson
ATTORNEY AT LAW
5550 Topanga Canyon Blvd.
Suite 200
Woodland Hills, California 91367
Telephone (818) 313-9060
Facsimile (818) 313-9260
Email: MMM@MattensonLaw.com
Web: http://www.MattensonLaw.com
Chapter 13 Bankruptcy:
How Secure Is An Equipment Distributor As A Secured Creditor

      Myles M. Mattenson engages in a general civil and trial practice including litigation and transactional services relating to the coin laundry and dry cleaning industries, franchising, business, purchase and sale of real estate, easements, landlord-tenant, partnership, corporate, insurance bad faith, personal injury, and probate legal matters.

      In providing services to the coin laundry and dry cleaning industries, Mr. Mattenson has represented equipment distributors, coin laundry and dry cleaning business owners confronted with landlord-tenant issues, lease negotiations, sale documentation including agreements, escrow instructions, and security instruments, as well as fraud or misrepresentation controversies between buyers and sellers of such businesses.

      Mr. Mattenson serves as an Arbitrator for the Los Angeles County Superior Court. He is also past chair of the Law Office Management Section of the Los Angeles County Bar Association. Mr. Mattenson received his Bachelor of Science degree (Accounting) in 1964 and his Juris Doctorate degree from Loyola University School of Law in 1967.

      Bi-monthly articles by Mr. Mattenson on legal matters of interest to the business community appear in alternate months in The Journal, a leading coin laundry industry publication of the Coin Laundry Association, and Fabricare, a leading dry cleaning industry publication of the International Fabricare Institute. During the period of May 1995 through September 2002, Mr. Mattenson contributed similar articles to New Era Magazine, a coin laundry and dry cleaning industry publication which ceased publication with the September 2002 issue.

      This website contains copies of Mr. Mattenson's New Era Magazine articles which can be retrieved through a subject or chronological index. The website also contains copies of Mr. Mattenson's Journal and Fabricare articles, which can be retrieved through a chronological index.

      In addition to Mr. Mattenson's trial practice, he has successfully prosecuted and defended appeals on behalf of his clients in various areas of the law. Some of these appellate decisions are contained within his website.


CHAPTER 13 BANKRUPTCY:HOW SECURE IS AN EQUIPMENT DISTRIBUTOR AS A SECURED CREDITOR

In these days of rising costs and lower profit margins, some operators of coin laundries and dry cleaners consider seeking relief in bankruptcy.If the operator intends to continue the operation of the business and seek the Bankruptcy Court's assistance in reorganization, protection is frequently sought under Chapter 13 of the Bankruptcy Code.

Under a Chapter 13 plan of reorganization, secured creditors are fully paid to the extent of the value of their collateral and unsecured creditors receive a pro rata share of the balance of monies available.If the value of a secured creditor's collateral is less than the amount due the creditor, the difference becomes an unsecured debt.

The period of time during which the payments are made by a debtor to secured and unsecured creditors in Chapter 13 bankruptcy is governed by the Bankruptcy Code.Under the Code, the plan "may not provide for payments over a period that is longer than three years, unless the court, for cause, approves a longer period, but the court may not approve it if it is longer than five years."

A Chapter 13 reorganization is similar to that provided in Chapter 11; however, Chapter 13 is designed to allow the small sole proprietor, for whom the reorganization process under Chapter 11 may be too cumbersome or inappropriate, to obtain relief under the Bankruptcy Code.There are limitations, however, to those who may make use of the Chapter 13 provisions.Under the Bankruptcy Code, "the availability of Chapter 13 is generally limited to an individual "with regular income that owes, on the date of filing of the petition, noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000 . . . ."

In the published decision of Ardmor Vending Co. vs. Kim, 130 F.3d 863 (9th Cir. 1997), the Kims, operators of a drycleaning business, filed a Chapter 13 bankruptcy petition.At the time of filing the Chapter 13 bankruptcy, the Kims owed Ardmor Vending Co., an equipment distributor, about $98,000 which was secured by both the business equipment and the lease of the premises.Ardmor Vending Co. had filed a Uniform Commercial Code Financing Statement with regard to the drycleaning equipment and also held an Assignment of Lease as Collateral Security executed by the Kims and their lessor.


In the bankruptcy proceeding, the Kims initially proposed to treat the company as secured only in the amount of $34,000, the value of the business equipment if sold "off location."The Kims thus proposed to treat the balance of the indebtedness as an unsecured debt.Under the reorganization plan of the Kims submitted to the Bankruptcy Court, however, the Kims planned to assume their lease and continue to operate the business.

Ardmor objected to the plan, contending that the company was fully secured and asserted that the Kims had failed to take into account the company's security interest in their lease.The Kims claimed that the lease had no value because it provided for rent which was above market value.

During the course of bankruptcy hearings, Ardmor "argued that the Kims had undervalued the collateral by valuing the equipment and the lease separately, rather than as a so-called `turn-key' package."The Bankruptcy Court accepted the "Kims' `off location' value of the equipment, that is, its value `on the street, not income producing, rather than `on location,' as part of an income-producing going concern."

Ardmor appealed the decision of the Bankruptcy Court to the Bankruptcy Appellate Panel which provides review of Bankruptcy Court decisions by a panel of three bankruptcy judges.The Bankruptcy Appellate Panel, however, affirmed the decision of the Bankruptcy Court, with one judge dissenting.

Ardmor then appealed to the United States Court of Appeals for the Ninth Circuit.The Court of Appeals reversed the Bankruptcy Court's decision, without dissent, and remanded [returned] the case to the Bankruptcy Court for a determination of the on location, turn-key valuation of the collateral.The Court held that when a debtor intends to retain the property, rather than liquidate, "the proper valuation is fair market value, not foreclosure value."The court stated:

"The Kims are continuing to operate the business, not removing the equipment and selling it.Consequently, the valuation should have been based on the equipment's worth on location, not off location, taking into account the fact that [the company holds] security interests in both equipment and the lease."

The Ninth Circuit Court of Appeals further concluded:

"Holding both the lease and equipment gave [the company] a package that was worth more than if the two were valued separately.Selling the equipment alone (as an off location valuation implies), and then selling the lease, as vacant premises with no improvements and no equipment, is impractical and would not maximize the value of the collateral."


The moral of the story?For operators, Chapter 13 bankruptcy may not substantially lessen your debt.For equipment distributors, it may be time to review the documents under which you obtain a security interest in collateral.

The moral of the story for Ardmor and this writer, who represented Ardmor in these proceedings?There is a reason why we have appellate courts!

[Any reader desirous of a copy of the opinion of the Ninth Circuit Court of Appeals decision in Ardmor vs. Kim 130 F.3d 863 (9th Cir. 1997) may visit the authorís website, www.coinlaundrylaw.com.


[This column is intended to provide general information only  and
is  not intended to provide specific legal advice; if you have  a
specific  question  regarding the  law,  you  should  contact  an
attorney  of your choice.  Suggestions for topics to be discussed
in this column are welcome.]


Reprinted from The Journal
Myles M. Mattenson © 2008