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Judge rules against SOS in bankruptcy case

Monday, April 14, 2008 by Mark Richardson

More than four months after the end of hearings in federal Bankruptcy Court late last year, the Save Our Springs Alliance received word last week that the court has denied the group’s proposed reorganization plan. The ruling by U.S. Bankruptcy Judge Craig Gargotta puts the future of SOS in jeopardy, though it is not the end of legal options for the environmental organization.


SOS filed for Chapter 11 bankruptcy in April 2007 after the Texas Supreme Court refused to hear an appeal of a lower court ruling in a lawsuit against the Lazy 9 Municipal Utility District. The state court, which originally heard the Lazy 9 case, ordered that SOS pay $294,000 in attorneys’ fees to Lazy 9, and $200,000 to other groups. SOS settled with the other groups but went to a bankruptcy hearing last fall over the Lazy 9 fees.


In an item posted late last week on the SOS web site, the group called the rejection of its reorganization plan “a significant setback,” but said that the organization is confident that it will eventually have a plan confirmed. It said that as SOS continues its court battle, it would be allowed to continue its regular course of business.


“The road will be a bit longer, but I believe SOS will be successfully reorganized,” said SOS Executive Director Bill Bunch.


SOS said Judge Gargotta’s opinion said that its plan was proposed in good faith and provided for a larger payment to creditors than they would receive if the assets of SOS were liquidated.  However, he concluded that, at time of trial, SOS failed to demonstrate it could raise sufficient donations to fund the proposed “creditor settlement fund.” 

“We worked hard to come up with a plan that is fair to our creditors and that the Court could approve, and we are disappointed that the Court did not see it that way.” said SOS’ outside counsel Weldon Ponder, who handled the case. “We will evaluate our options, including a motion for reconsideration on the feasibility issue and the potential for proposing a new plan. For now, SOS Alliance may, with the support of its donors, continue its conservation work in the community.”

In its posting, SOS said non-profit organizations, unlike for-profit corporations, cannot be forced into Chapter 7 liquidation.  However, if the court ultimately forces SOS to pay the $294,000 judgement, it could drain the group’s finances and cripple its ability to raise funds, its only means of support.


At the hearing in November, Ponder told the judge that such a ruling would have the same effect as a liquidation. “People who support the environmental causes the SOS is involved in are not going to donate money to them if they believe that SOS will have to turn that money over to a developer.”


In 2004, SOS Alliance sued developer Bill Gunn’s special development district, the Lazy 9 Municipal Utility District. A visiting judge ruled in favor of the developer’s MUD and awarded the MUD attorney fees.  The Third Court of Appeals reversed some of the trial judge’s ruling, but the attorney fee award remained. In March 2007, the Texas Supreme Court refused to hear the matter. 


In the months before the bankruptcy case was filed, the MUD transferred its judgment to Sweetwater Austin.  Sweetwater’s attorneys were poised to enforce the judgment and seize the assets of SOS at the time the bankruptcy case was filed.

“While Gunn currently holds a court award of attorney fees against us from the 2004 lawsuit against his MUD, we believe that the judgment is void because the visiting judge from Seguin assigned to the case was without authority to hear the case,” said Bunch SOS. He said the group plans to seek a reversal based on the judge’s lack of jurisdiction.

SOS said the bankruptcy court recently allowed SOS to employ an attorney to bring an action in state court, challenging the underlying Lazy 9 judgment, and said it plans to file that case in the near future.

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