[00:00:00] Speaker 00:
NRA ACAB Series LLC, Leon Greenberg, appearing for the appellants. Matthew C. Zirzo, appearing for the appellate. All right, good morning, Mr. Greenberg.

[00:00:13] Speaker 03:
May I begin?

[00:00:14] Speaker 00:
Yes.

[00:00:16] Speaker 03:
Good morning.

[00:00:18] Speaker 00:
First, tell me how much time, if you want to reserve any time for rebuttal.

[00:00:21] Speaker 03:
I would like to reserve five minutes of my time. All right, very good. All right, please go forward.

[00:00:27] Speaker 03:
May it please the court, I'm Leon Greenberg, and I'm arguing today on behalf of the appellants.

[00:00:32] Speaker 03:
The court should be guided in making its decision in this case by its prior decision in the KRSM properties or Gillian case. That is actually the leading case from any court dealing with the entire issue of how a disregarded tax entity who is a debtor can pay from its bankruptcy estate income tax liabilities that are not actually its income tax liabilities, but of its pass-through owner. The court in that case rejected allowing any such payments from a tax pass-through entity debtor.

[00:01:08] Speaker 03:
And it correctly reasoned in our view that income tax status under the code, the bankruptcy code and the income tax law should be consistent and it should be treated the same. And I would quote from that case. Was it a subchapter five case? That was not a subchapter five case, Your Honor. And in fact, we really don't have a subchapter five case that has addressed this precise issue.

[00:01:34] Speaker 03:
But I would submit that the reasoning of the court here, which I was going to quote, is that the owners elected to have the LLC ignored as a separately taxed entity so they could enjoy limited liability while avoiding double corporate and individual taxation. That choice comes with benefits, and as this appeal demonstrates, burdens. The bankruptcy court did not discuss the Gilliam precedent in its decision. It simply adopted the findings proposed by the debtor and found that the payment of Mr. Nady's income taxes was a reasonably necessary expense.

[00:02:08] Speaker 03:
of a subchapter five debtor. On appeal, they're now arguing it's, Gilliam is just simply not applicable because it wasn't a subchapter five case and bankruptcy court had the discretion to determine whether that payment was reasonably necessary.

[00:02:23] Speaker 04:
Is there anything in the bankruptcy code that requires the court to exclude as an expense, and as expense that's necessary for the continuation, preservation, or operation of debtor's business, an expense that the debtor's not legally liable to pay?

[00:02:40] Speaker 03:
Well, Your Honor... If we want to go beyond the fact as to whether the expense is liable and analyze this under some different standards, such as... That's one of the arguments that you made was that the debtor's not liable for this payment, so it shouldn't be an operational expense of the business. Well, Your Honor, I would submit that the examination doesn't have to go any further than that. We're looking at the entity. The entity is the debtor. The debtor is the one who has the protections under the code.

[00:03:10] Speaker 04:
But the definition that Congress used was any necessary expense for the operation and continuation of the business.

[00:03:18] Speaker 03:
That is correct.

[00:03:21] Speaker 03:
However, if we're going to look at a broader definition, analysis here.

[00:03:27] Speaker 03:
The question is, is this expense in fact necessary? And what does the debtor gain from this expense? And the debtor gains nothing from this expense. There is nothing in the record.

[00:03:40] Speaker 00:
Do they have to gain it like something tangible. I mean, the intangible gain is that the debtor can continue in their business, right? They can continue because Mr. Nady is able to participate. If he is too high of a burden to pay taxes, then wouldn't he just shut down the business? What's the benefit to the estate and the debtor then?

[00:04:02] Speaker 03:
If that is the standard that the court would adopt, then the question is, What proof is there of that standard? Mr. Nady is not the debtor. We have no information on his actual financial position. The limited information in the record indicates that.

[00:04:16] Speaker 04:
But you didn't cross examine him or put on any contrary evidence, did you? You made a legal argument and said that it's a matter of law. You can't apply this. And you didn't actually challenge anything that he put in. You put in a declaration.

[00:04:30] Speaker 03:
Well, Your Honor, it is the debtor's burden to establish that it's a reasonably necessary expense, not mine.

[00:04:37] Speaker 04:
Is there anything in the code that says that only gross income or only pre-tax income would be considered by the court as a projected disposable income under 1191D2?

[00:04:53] Speaker 03:
Your Honor, you're familiar with the code. I am not going to point and tell you the code contains language that it does not contain.

[00:05:00] Speaker 03:
The issue, so the answer to that question is no. I can point to the court to nothing of that sort. But the issue then, assuming that the debtor was to be examine for this allowance based upon the standard we're discussing right now. Why is the debtor allowed to deduct the tax rate for Mr. Nady personally rather than the 21% corporate tax rate it could elect to pay and continue its business? The focus of the code is on the debtor's protections and the debtor's reorganization as an ongoing entity and a fiduciary capacity to also pay the creditors under the structure set forth in the code.

[00:05:41] Speaker 02:
Let's get to the point here about the purpose of paying creditors. I mean, isn't it true that Judge Cox found that the plan was feasible?

[00:05:50] Speaker 03:
Yes, that is correct.

[00:05:53] Speaker 03:
You didn't tell him it was feasible.

[00:05:54] Speaker 02:
Okay. As a result, since the plan provides 100% payment plus interest, Isn't the pass-through largely irrelevant?

[00:06:03] Speaker 03:
No, it is not. I have 600 taxi driver class members who are owed unpaid minimum wages. A significant number of these people are already dead. They've been waiting since 2018 to get paid. This petition was filed in 2022. They've been paid almost nothing.

[00:06:22] Speaker 03:
On their claims. So there is a real reason for them to want to get paid sooner and not wait five years.

[00:06:29] Speaker 02:
Isn't that that's a that's a good faith argument that the plan is not in good faith. But was that argued before Judge Cox?

[00:06:36] Speaker 03:
What was argued, again, was the issue of the inappropriateness of allowing the tax deduction to be taken by the debtor for Mr. Nady's income tax responsibility.

[00:06:49] Speaker 04:
But the answer to the question that he just posed to you is, no, you did not challenge this plan on the basis that it unfairly delayed payment to your clients.

[00:06:58] Speaker 03:
We did not. The issue, but we did challenge it based upon the fact that it was allowing these payments to be made and it was allowing to be made at that heightened rate and not at the 21% available rate, which would delay payment to the creditors. So we, in fact, did make that argument as a result of our objections to the tax treatment that was ongoing here. And there is nothing in the court's decision or in Appelli's arguments that address why the entity here, the debtor entity, should be allowed to make that heightened level of tax payments, not the 21% that was available to it.

[00:07:36] Speaker 04:
Wasn't the bankruptcy court's decision to include the payment of the debtor's principal's tax liability as an expense necessary for continuation, preservation, or operation of the debtor's business supported by Mr. Nady's declaration filed in support of confirmation of the plan?

[00:07:51] Speaker 03:
It was not. If you look, and this is discussed in my reply brief at page eight, I would direct you to footnote one, where I do reproduce the entirety of Mr. Nady's assertion. All he says, it would be grossly unfair and inequitable to require the debtor to have to pay the creditors because it would impose an undue hardship on me.

[00:08:12] Speaker 04:
Without payment of the tax liability.

[00:08:14] Speaker 03:
Right, but there is nothing to support this. This is not like a Chapter 13 situation where the debtor is explaining his ability to support his family or to maintain his lifestyle is going to be impaired if he's forced to pay this. There is nothing in the record as discussed in footnote two in that page We have evidence in the record that Mr. Nady is quite wealthy. He had over one point seven million dollars from the cross examination.

[00:08:37] Speaker 04:
You cross examined him and established we did not.

[00:08:40] Speaker 03:
I'm relying on what is on the record. I think I should reserve the rest of my time for rebuttal if that is OK. Sure. Thank you. Thank you.

[00:08:58] Speaker 01:
May it please the court. My name is Matt Zirzo. I'm counsel for the Appellee Debtor ACAB Series LLC.

[00:09:05] Speaker 01:
Your Honors, every creditor under this debtor's plan gets paid 100 cents on the dollar plus interest. The appellant's claim is one of timing, how quickly payments are proposed.

[00:09:18] Speaker 01:
Appellants would prefer that they get paid in full a little faster. On those facts, the bankruptcy court committed no clear error, and its decision to confirm is not an abuse of discretion. Candidly, Your Honors, this appeal is about appellants running up attorney's fees because they believe it's recoverable under the Minimum Wage Act amendment. And so they are pulling out all the stops, raising every potential argument because they are going to go back to state court and claim that this appeal is a recoverable fee award.

[00:09:50] Speaker 01:
Independent ground number one to confirm this is that the debtor's full payment plan itself necessarily satisfies 1191C2. Before you even get to the very interesting, candidly from my perspective as a debtor's counsel, the reimbursement tax issue, 1191C2 sets a floor, an irreducible minimum of what a plan must pay.

[00:10:15] Speaker 01:
at a minimum level of required distributions to creditors. It simply requires the devotion of PDI or its value. It says nothing about how quickly payments must be made. It says, in other words, the court does not even need to read this very interesting tax issue. 1191 says nothing about timing of payments. It just sets the distribution floor.

[00:10:39] Speaker 01:
a 100% payment plan per se satisfies that legal requirement.

[00:10:44] Speaker 02:
Is it possible that a 100% plan with interest would not satisfy it if the court concluded that it was not presented in good faith?

[00:10:54] Speaker 01:
Certainly, Your Honors, and that is obviously a separate legal requirement. As we indicated in our brief, satisfaction of the fair and equitable standard is not limited to the enumerated factors in 1191C1, C1, 2, and 3, or the other plan confirmation requirements.

[00:11:10] Speaker 02:
And here Judge Cox found that the plan was... was feasible and in good faith.

[00:11:15] Speaker 01:
Correct, Your Honors. And those determinations were completely, the appellants did not argue either of those factors. In fact, if you read appellant's briefing, it is devoid of any citations to 1129 or 1191. They just argue facts and issues like this tax reimbursement issue. So independent ground number one, and as interesting as the tax reimbursement issue is, as a debtor's counsel who files a lot of subchapter five cases, I don't even think you necessarily need to reach that issue because a full payment plan satisfies 1191C2.

[00:11:53] Speaker 01:
I think at best, what that means is the appellant has no support for its argument under 1191C1 because that applies to secured claims. C2, C3 doesn't apply. That's really feasibility. So what is the basis for their argument? Well, We all know fair and equitable can mean other things other than the enumerated requirements, but even that they really don't address in their briefing. We did our best to address what courts have considered the various and codified elements of the fair and equitable rule.

[00:12:27] Speaker 01:
Of course, we're borrowing from chapter 11 and chapter 13 because of the lack of authority in the sub chapter five arena, but I don't know why it would be any different in this case.

[00:12:39] Speaker 01:
Your Honors, even if you do reach the tax reimbursement issue under 1191D2, it is a factual finding that is amply supported by the record.

[00:12:50] Speaker 01:
There was no attempt to cross-examine, no attempt to put in contrary evidence in that regard. This was a very short confirmation hearing in all candor.

[00:13:04] Speaker 01:
And again, PDI just sets a floor, a minimum of best efforts test that a plan must pay at least that much, and the relevance of a specific line item and expense, like in this case tax reimbursements or really any other element of a specific expense, its relevance really evaporates when you have a full payment plan.

[00:13:29] Speaker 01:
You can't do better than full payment. That's the no premium rule we discussed in our briefing that is inherent in the fair and equitable requirement as well. This is not a partial payment plan. This is not a pot payment plan, which is probably what you're used to seeing in most subchapter five cases where a debtor attempts to not pay in full. It attempts to only pay in part and only pay its PDI over the life of the plan.

[00:13:52] Speaker 01:
So even if you do reach this issue, the PDI floor under 1191 D2 is honored when a plan pays in full.

[00:14:02] Speaker 01:
Your Honor, Mr. Greenberg read with the KRSM case. I think that's well distinguishable. We did so in our brief, but since he led with that, that is a Chapter 7 case. That is significant. It really dealt with property of the estate concepts under 541. And really what the result was mandated by the priority distribution scheme under 726 of the bankruptcy code. That, of course, as we all know, was very much changed under subchapter five. Subchapter five really threw out the book, especially the absolute priority rule, and was a significant change in the law.

[00:14:39] Speaker 01:
And the inquiry before your honors today, if you do reach the tax issue, is reasonable necessity to the continuation, operation, or preservation of the business.

[00:14:49] Speaker 01:
I would submit that a tax reimbursement is not necessarily a liability of this debtor, and that's true. But that isn't the test. Mr. Greenberg is trying to read into the statute a liability test that appears nowhere in 1191. What it does draw from is Your Honor's reasonable discretion in deciding what is reasonably necessary to keep the ship afloat. And that may involve payment of non-debtor expenses.

[00:15:20] Speaker 01:
That may involve charitable contributions, reserves, a variety of contexts you will see this issue arise. And courts must, and there's a long line of authority establishing that you must be granted a reasonable amount of discretion in each particular case to make necessary factual findings and determinations whether something is reasonably necessary. And the court did that here. And I think did so with the benefit of an uncontested record where you had a full payment plan and a debtor in that situation. I think especially the court's findings should be entitled to a substantial amount of deference here.

[00:15:56] Speaker 01:
Do you think that it's the abuse of discretion standard that's applicable here? I do, Your Honors. Confirmation, decision to confirm is obviously reviewed for abuse of discretion. Whether a plan is fair and equitable and whether an expense is reasonably necessary or clear error. I think the first issue, independent ground, I raise what is required under 1191C2 is probably more of a legal issue. But again, I'm not relying solely upon that issue to the extent you reach.

[00:16:28] Speaker 01:
And candidly, I really would like you to reach the tax issue because I encounter it in a lot of my subchapter five cases.

[00:16:36] Speaker 01:
Given how novel subchapter five is, we only have the premier glass case that even touches on it. And even in that case, you didn't have a clean ruling because it was a failure of proof. Even though the judge said, I think this is appropriate, but you hadn't proven it. Getting clarity on this issue would certainly help, I think, in practice. I think too often you won't see these kinds of issues on appeal, a question regarding a specific line item of expense or And I think that's also a factor of the substantial deference of factual finding like that should be entitled to.

[00:17:07] Speaker 04:
And in this case, you believe that the declaration of Mr. Nady supported the allegation contrary to what Mr. Greenberg just argued?

[00:17:16] Speaker 01:
Certainly so, Your Honors. And I'm not relying solely on the declaration. If you look at the very structure of the plan and the means for plan implementation, it contemplates that Mr. Nady could, in fact, infuse additional capital. If you look at some of the effectuation provisions of the plan, Mr. Nady, his continued operation of the business is included. He's been the operator for decades. His provision of the privilege licensure through the Nevada Department of Taxation.

[00:17:46] Speaker 01:
There are various provisions. In fact, Mr. Nady personally, as you may see, signed the plan because he is personally bound by certain provisions of the plan, including a preservation of avoidance actions, an injunction against a third-party entity of property where the debtor was intending to move to, and certain payments to that entity. So Mr. Nady is personally, frankly, heavily involved, if not inextricably intertwined, with the proper effectuation of this business.

[00:18:16] Speaker 01:
And that is really the linchpin, in addition to the hardship evidence in his declaration that underpins, I think, the court's factual determination as to the reasonable necessity of the tax reimbursement. Your Honors, with that, I don't have anything further to add. I'm happy to address any further questions.

[00:18:35] Speaker 00:
Any further questions? All right, thank you.

[00:18:43] Speaker 03:
Your Honors, we have heard nothing from Appelli, just as we heard nothing from the bankruptcy court rationalizing the allowance for the 30% tax liability by the debtor as opposed to the 21% available corporate tax rate. Now, I know there's discussion of Mr. Nitti's importance to the business, but he's compensated under the plan handsomely $240,000 a year. And the fact that he personally could...

[00:19:11] Speaker 03:
get a windfall essentially or an additional benefit from profit treatment of the business by allowing the pass through and forcing those tax payments onto the plan has nothing to do with it being reasonably necessary for the payment and continuation of the business. If the court is going to look at it as a business operation and not on an entity tax liability analysis as we have urged, I understand that. But how can the corporation Step away from minimizing the debt or step away from minimizing significantly its tax liability for no benefit to it only to Mr. Nady's benefit and Mr. Nady's participation in the business and is being compensated.

[00:19:53] Speaker 03:
There's nothing in the record indicating that he would seize. Working in the business or the business would cease functioning if it limited that tax liability, as we told the bankruptcy court, it should so do. So I would submit that is a question of law, of a clear error of law here by the bankruptcy court in allowing that. There is no rationalization for that.

[00:20:15] Speaker 02:
In short, aren't you saying basically he's getting $240,000 of compensation and he's getting the benefit of this pass through and that this is not fair? But didn't the court conclude ultimately that it was a fair plan? And those specific arguments that you're raising now, You didn't raise them below.

[00:20:36] Speaker 03:
Well, we did raise that this was inappropriate. We specifically argued that it was inappropriate for the plan to provide. This is discussed at page four of my opening brief, the citations to the record. We said that because the plan can secure a lower tax rate, it should do so. This is not a reasonably necessary expense to pay at the 30% rate. It is not properly appropriate. calculating its PDI as it is required to do so.

[00:21:03] Speaker 03:
And there's no dispute that that 21% tax rate was available. Also, at page four of my brief, I cite to the parts of the record where their accountant testified at confirmation that that could be done. The election of this higher tax rate benefits no one except Mr. Nadey. There is no evidence or proof in the record. Mr. Nadey's declaration does not address whether Paying that in some fashion, having to foot the advantage to him personally of the pass-through status would impair anything.

[00:21:33] Speaker 03:
All he talks about is it would be unfair to make me pay all the taxes from the net income without the corporation having to shoulder the burden. And if the court finds that it's appropriate for the debtor to shoulder the burden here, okay. But the debtor's priority is for its business. That's the whole focus, right? Reasonable expenses necessary for the business, the continuation of the debtor's operations. There is no rationalization for that expense to exceed the 21% tax rate. None was given by the debtor in seeking confirmation and opposing our objection on that one point.

[00:22:09] Speaker 03:
So I do not understand how that could not be an error by the bankruptcy court, assuming the bankruptcy court otherwise was correct, as your panel may well rule, that it was proper to consider those income taxes generated by the business as a PDI expense.

[00:22:26] Speaker 03:
And I want to also just stress to the court that there's been much discussion by the appellate argument today that, well, this is a full payment plan, so therefore, you know, these requirements don't apply.

[00:22:36] Speaker 03:
Yes, it is a full payment plan, but the future is always uncertain. The taxi industry here in Nevada is far from certain. The Uber and so forth has been competing greatly. We don't know if they're going to be able to actually make these payments. I mean, we hope they will.

[00:22:51] Speaker 00:
Oh, is that different from any other case?

[00:22:54] Speaker 03:
In that sense, Your Honor, it isn't. I'm just explaining that I think the court's focus should be on not what the debtor has promised, but what the law requires the debtor to do and the obligations it imposes upon the debtor, which I don't believe are being honored in this situation.

[00:23:16] Speaker 04:
You can't get more than full payment with interest, can you?

[00:23:20] Speaker 03:
That is correct.

[00:23:21] Speaker 04:
But the question that you're raising is how much quicker could you get paid? Not will you be paid? Well, they found that it was reasonable. They found that it was that the plan was feasible. So it's this question for you of now urging us to decide. Well, you should have gotten paid faster.

[00:23:39] Speaker 03:
That is, Your Honor, assuming the plan is successful, and again, we don't know, there is always risk and uncertainty. That is the result of the ruling we're asking from the court. But it's not a question of the material result here. It's a question of what the law requires.

[00:23:53] Speaker 04:
But he's satisfied the statute. The law doesn't require more than full payment to you, and it doesn't require him to do more than pay projected disposable income. You've decided... That it's a legal issue because it's a tax question that the debtors not liable for. And so do you want to reduce it to either the corporate tax liability or no, not pay it at all. But that's not what the court found. The court found that to be a factual question that it could resolve against you, and you're trying to make it into a legal issue.

[00:24:23] Speaker 03:
Your Honor, what facts would justify the use of the higher tax rate? The bankruptcy court cited none. We pointed out to the bankruptcy court there were none. Appelli has cited none. They explained none to the bankruptcy court when the bankruptcy court considered this. The bankruptcy court did not address that issue.

[00:24:41] Speaker 04:
The bankruptcy judge determined as a matter of fact that the continuation of the business was necessary expense of the business was that that tax liability for its principal be included in the normal expenses of its operation. And that would be so that he would continue to be the head of the organization, continue to operate it, follow the other terms of the plan, contribute monies that were required. Whatever those facts were, that's what she based the decision on.

[00:25:13] Speaker 04:
That's all in the record and you didn't challenge any of that.

[00:25:17] Speaker 03:
Well, Your Honor, I take difference with that. We did when we explained to the court that this was not necessary for the – assuming the business tax liability had to be paid, it was not necessary to continue the business to pay it at Mr. Nadey's preferred rate because he was being compensated under the plan.

[00:25:36] Speaker 04:
So if they had increased his salary to include the full payment of the tax and not listed it as a tax liability – Then you would have had to challenge it on the basis that it was an excessive salary.

[00:25:50] Speaker 04:
and you didn't challenge anything about that factual situation.

[00:25:55] Speaker 03:
Your Honor, we did. We challenged that it was a benefit to him that he wasn't entitled to because of the way the PDI needs to be calculated. We did not challenge his $240,000 salary. We said, okay, fine. That's appropriate compensation for him. We're not going to dispute it. But when you're calculating the PDI, assuming you want to adopt the approach that Your Honor is discussing, which is that we look at the business levels operations and the tax liability generated by the business.

[00:26:21] Speaker 04:
No, I'm suggesting you look at what the court found, and the court found as a matter of fact that this was a necessary expense for the operation and continuation of the business. You disagree with that and think it's a legal issue. That's where I'm having my problem.

[00:26:37] Speaker 03:
Well, Your Honor, perhaps we don't disagree completely, and I just want to clarify our position. Assuming that the law is, as we've been discussing, and that the tax liability of the business has to be dealt with by the debtor regardless of its tax status as a disregarded entity, assuming that tax liability is properly paid by the debtor. The question then, though, is in what amount and why? Why is it a necessary expense for the debtor to elect a higher tax rate than the tax rate available to it?

[00:27:11] Speaker 03:
There was no reason for that. It is not something that the court explained, and it's not explained in the record.

[00:27:17] Speaker 00:
We're at time. thank you thank you very much thank you this matter is submitted