Essay Example on Truman Bank's Motion to Dismiss: In Re Lawns & Snow, Inc.

In re Lawns and Snow, Inc., Memorandum of Law in Support of Truman Bank's Motion to Dismiss and Request for a Declaratory Ruling.

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Formal Opening

"COMES NOW Truman Bank (Truman), by and through the undersigned attorney, and for its In re Lawns and Snow, Inc., Memorandum of Law in Support of Truman Bank's Motion to Dismiss and Request for a Declaratory Ruling, respectfully states as follows;

Preliminary Statement

This case presents several points that need to be considered in the judgment. The new Chapter 11 filing should not be permitted as no law, agreement, or clause between Lawns and Snow, Inc. and Truman Bank foresaw it. Secondly, the court should make a declaratory ruling for Truman to have a $1 million priority unsecured claim in the new bankruptcy plus a $1.98 million general unsecured claim. Truman's loan was classified under a priority unsecured claim, and thus, it would according to the law to dismiss and request a declaratory ruling. It is also essential to note that Truman Bank accounted for two-fifths of the general unsecured claims. This places it above any other creditor and thus, its terms of reference need to be respected. Truman is also acting in good faith as it waived its section 112 (a) (9) which mandated it to receive immediate cash upon plan confirmation. Instead, it accepted to receive a lump-sum payment of $1.2 million from the reorganized Lawns and Snow, Inc.

Statement of Facts

Both Lawns and Snow, Inc. and Truman Bank presents facts which need to be analyzed in this case. One of the facts is that Lawns and Snow, Inc. experienced bankruptcy in 2019, and this is what has culminated in all these issues. Based on this, it is essential to note that any case that is filed under Chapter 11 is usually referred to as a "reorganization" bankruptcy. According to US law, it is not possible to file under chapter 11 if 180 days have elapsed since the dismissal of a petition. Based on this, Lawns and Snow, Inc. is legally permissible to present its case. Upon the confirmation of its Chapter 11 case, Lawns and Snow, Inc. received unanimous votes of acceptance from all impaired creditors.

The other fact based on this case is that LAS seeks to introduce a new Chapter 11 filing that will affect the payment of claims. There were two classes of claims, secured claims, and general secured claims and both parties had agreed on how they would be paid. Thus, LAS' request should not be accepted.

Secured creditors who were owed amounts totaling to $2 million were allowed to retain their liens on Lawns and Snow, Inc. equipment. The initial Chapter 11 plan also provided that the secured creditors would receive 60 equal monthly installments. Lawns and Snow, Inc. defaulted its November plan payments despite there being an existing agreement into how it was supposed to pay its unsecured creditors.

The other issue under contention is Truman's Clause. This was signed as a side-deal and LAS argues that it should be revoked. However, this is misguided as both parties signed and executed the side-deal willingly. Changing or revoking it would mean that LAS is not willing to continue with the repayment program. Both Truman Bank and Lawns and Snow, Inc. signed and executed a side-deal connection with Lawns and Snow, Inc.'s issuance of promissory notes.

The clause stated that "The debtor agrees that in consideration for Truman deferring payment of its administrative priority claim, none of Truman's unsecured claims, either general or priority, will be considered discharged until Truman receives full distribution of these claims as provided for by the plan; and further, that Truman's priority claim will retain its priority status in any later bankruptcy of the debtor."

Argument Section

The position of Truman Bank needs to be taken into consideration since the filing of the new Chapter 11 by LAS is not in line with the prior agreement between the two parties. The new Chapter 11 introduces concepts and contents that are not in the initial one. It is to be noted that LAS files this new Chapter 11 after having failed to honor the agreement where it has now missed four months' worth of plan payments to unsecured creditors. This failure by LAS shows that it is not committed to continuing paying the creditors. Thus, if the proposal by LAS is allowed, it may cripple the creditors.

Truman's argument to be awarded a $1 million priority claim and the $1.98 million general unsecured claims are valid. The request for $1 million unsecured claims by Truman is in good faith as it does not include any interest that had been accrued up to this time since the post-petition loan was made. Judging on this, it is evident that Truman is legally bound to be paid more than the requested amount but is, nonetheless, not requesting it. As such, the court should be human enough to award the requested principal to Truman. An attempt to deny to grant Truman the stated amount or any attempt to delay it can be considered a violation of the right and a breach of contract.

Additionally, the request for $1.98 million for the unsecured claim is in line with the Truman Clause, which is present in the original confirmed plan. The judge needs to realize that LAS seeks to introduce a new Chapter 11 plan in order to weaken the initial confirmed plan thus rendering it meaningless.

It is to be noted that LAS planned to file a new Chapter 11 case as a retaliatory measure for being unable to pay the secured and unsecured creditors has it had been agreed in the initial Chapter 11. The signing of the initial Chapter 11 by all parties was a show of commitment that all the involved parties promised to uphold. During the agreement, there was no room for any party to default or refuse to obey the conditions agreed on. However, LAS went ahead and defaulted on the November payment plans. Despite this, Truman did not compel LAS to pay the damages caused by its inability to honor the agreement.

Cognizant of this, LAS needs to realize the act of goodwill from Truman and honor the initial Chapter 11 agreement instead of seeking to introduce a new Chapter 11 agreement. The new Chapter 11 case intends to reduce the size of the creditor payments that were promised in the original plan. Such a plan is not only harmful but also precarious to justice. It also raises questions as to whether LAS is really serious about the settlement of the claims. If LAS was not able to settle the payments as agreed for the first months, then a fortiori will not afford to pay for the consequent months.

Larry Litigator for LAS argues that if the new Chapter 11 filing is not allowed, the "going-concern value would be lost either in a bankruptcy liquidation of LAS or in an unavoidable rush by creditors under state law to dismantle and liquidate the debtor's operations." However, this is not only misleading but also fallacious. LAS needs to understand that with the signing of the side-deal in connection with LAS' issuance of promissory notes, it was evident that Truman would not be affected by any future bankruptcy of LAS. The side-deal stated thus, "...that Truman's priority claim will retain its priority status in any later bankruptcy of the debtor." This means that Truman is shielded from future LAS' bankruptcy. Therefore, the argument by LAS that the going-concern value would be lost does not apply in the case of Truman.

The other important point is that with the new Chapter 11 filing, LAS seeks to reduce the size of creditor payments that were promised in the original payments. What this is going to do is to lengthen the period of repayment of the creditors, and this is going to affect the operations of Truman to a great extent. It is to be understood that Truman Bank is a business entity and it has to deal with competition from its competitors. Besides, Truman has a promise of offering the best services to its customers. However, this is only possible when the bank has enough funds to run its operations. LAS needs to develop a repayment mechanism a priori. Currently, the bank is struggling to operate due to the large amount of money that LAS and other debtors owe it. Reducing the amount paid by LAS is likely to affect the operations of the bank even further. Therefore, to ensure that the bank continues operating effectively, LAS should stick to the agreed original repayment plan.

LAS argues for the revocation of the special Truman Clause side-agreement as it is invalid as against public policy. A keener look at the agreement shows a creditor who has the goodwill to continue working with the debtor. The side-agreement does not contain anything new or anything that does not touch on both parties (Bob, 2009). What the side-agreement does, is that it stipulates the payment plan by the debtor and does not introduce any new charges or funds (Bienenstock, 2011). The purpose of the agreement was to stipulate how LAS was going to pay the money and the procedures to follow. As such, the agreement does not go against any public policy.

Also important to note is that the side-agreement was not signed only by Truman. It was an agreement between Truman and LAS, and none of the parties was under any form of coercion to sign the agreement. If the agreement went against any public policy and were malicious in any way, LAS would have been wise enough to observe this and decline to sign it. However, as it stands now, the agreement is in force and LAS has to comply with it.

What complying with the agreement means is that LAS is determined to settle the claims. As stated, the agreement is just a claim to show how the debtor wishes to repay the claims. One would wonder why a good debtor would not want to disclose how she intends to repay the claims. By LAS calling for the revocation of the side agreement, one could argue that she does not have the intention of settling the claims. If this agreement is withdrawn, it might be a way of LAS refusing to pay the claims.

A major question that this court should seek to answer is whether a side-deal is permissible in law. The obvious answer to this question is that a side-deal is legally permissible. Under the law of contracts, a side-deal such as the one, in this case, carries the same force as the underlying contract (Crowe, 2012). Therefore, the power carried by the Chapter 11 that was agreed upon by both parties is the same power and weight that the side-deal carries. This means that it might not be possible to revoke the side-deal and leave the contract standing.

Both the initial Chapter 11 agreement and Truman's Clause (side-deal) are interrelated and it is not possible to have one in the absence of the other. The purpose of the side-deal is to clarify whatever is agreed upon in the Chapter 11 filing. Therefore, the argument that the side-deal should be revoked is an attempt to invalidate the side-agreement and the initial Chapter 11 filing.

Side deals are not sideshows prima facie. In business transactions, they are considered the main events. The reason or this is that they clarify any unclear details in contracts, thus avoiding cases of ambiguity.

For side-agreements to be valid, they need to be made at the same time as the main agreement and under similar conditions. Besides, they ought to cover the same subject but in a modified manner (Crowe, 2012). Thus, the interests of side agreements cannot be understood in the absence of the main contract. This is a similar case that is presented here. Both LAS and Truman signed the side-deal immediately after agreeing on the initial Chapter 11 filing. As such, there is no substantial reason why this side-deal can be considered as going against public policy.

It is also imperative to state that while making agreements, a party should be prepared for any future happenings. The future happenings do not affect the legality of an agreement. In this case, LAS is only determined t...