Ice Oasis, LLC

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MEMORANDUM RE MOTION TO
DISMISS CHAPTER 11 CASE
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UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
ICE OASIS, LLC, a Nevada limited
liability company,
Debtor.
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Case No. 08-31522 TEC
Chapter 11
MEMORANDUM RE MOTION TO DISMISS CHAPTER 11 CASE
On November 3, 2008, the court held a hearing on the motion of
Borel Private Bank and Trust Company (Borel) to dismiss this
chapter 11 case. 	Todd C. Toral appeared for Borel. 	M. David
Minnick appeared for Wells Fargo Bank, N.A. (Wells Fargo), which
joined in Borel’s motion. 	Terrell S. Root appeared for Debtor.
Minnie Loo appeared for the United States Trustee. 	Upon due
consideration, and for the reasons stated below, the court grants
the motion to dismiss.
Signed and Filed: November 07, 2008
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 10, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 08-31522 Doc# 28 Filed: 11/07/08 Entered: 11/10/08 16:12:00 Page 1 of 9

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1 The Operating Agreement is internally inconsistent. 	It
provides that a member’s percentage interest in Debtor is computed
as the total of a member’s capital account divided by the total of
all capital accounts of all members. 	Although each member
contributed an equal amount of capital, the Operating Agreement
provides that Mr. Baldwin owns a 57% interest in the LLC, and that
Mr. Yackel owns a 43% interest. 	(Decl. of John Baldwin In Support
of Motion to Dismiss (“Baldwin Decl.”), Exh. A (Operating
Agreement), ¶¶ II(4), IV(1). 	The court need not resolve this
inconsistency because it is immaterial to the issue of whether
Debtor had authority to file the chapter 11 petition.
MEMORANDUM RE MOTION TO
DISMISS CHAPTER 11 CASE
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FACTS
Debtor’s sole asset is a parcel of improved property in
Redwood City, California. 	Debtor leased the property to a related
entity, Ice Oasis, Inc. (Lessee). 	Lessee operates an ice rink on
the premises. 	The Property is encumbered by a first deed of trust
in favor of Wells Fargo and a second deed of trust in favor of
Borel.
After Debtor fell behind in payments to Wells Fargo and Borel,
Borel scheduled a foreclosure sale for August 20, 2008. 	Debtor
filed a petition under chapter 11 on August 18, 2008 to stop that
foreclosure sale.
Debtor is a Nevada limited liability company in which Kenneth
Yackel and John Baldwin each own a 50-percent interest. 1 	The
Operating Agreement for Debtor provides that the LLC “shall be
managed exclusively by all of its members” and that
each member shall vote on any matter submitted to the
membership for approval in proportion to the member’s
percentage interest in [the] LLC
(Baldwin Decl., ¶¶ II(3), (5)). 	The Operating Agreement does not
say what matters need to be submitted to the membership for
approval. 	The Operating Agreement provides that it is governed by
Nevada state law. (Id., ¶IX).
Case: 08-31522 Doc# 28 Filed: 11/07/08 Entered: 11/10/08 16:12:00 Page 2 of 9

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MEMORANDUM RE MOTION TO
DISMISS CHAPTER 11 CASE
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Debtor’s voluntary petition was signed on Debtor’s behalf by
Mr. Yackel, who states under penalty of perjury on the signature
page of the petition that he has been authorized to file the
petition on Debtor’s behalf. 	There is no document attached to the
voluntary petition evidencing this authority. 	Mr. Baldwin states
that Mr. Yackel did not consult with him before filing the
petition, and that Mr. Baldwin did not consent to the filing
(Baldwin Decl., ¶ 3). 	On September 9, 2008, Mr. Yackel e-mailed
Mr. Baldwin asking him whether he concurred with the Ice Oasis
bankruptcy (Exh. 1 to Debtor’s Opp. to Motion to Dismiss). 	Mr.
Baldwin responded that Mr. Yackel became solely responsible for
running the company since the time Mr. Baldwin left in 2006. 	Id.
DISCUSSION
A. 	DISMISSAL FOR CAUSE UNDER SECTION 1112(b)
Under section 1112 of the Bankruptcy Code, a case may be
dismissed for “cause.” 	Section 1112(b)(4) provides that “cause”
includes:
(E) failure to comply with an order of the court;
(F) unexcused failure to satisfy timely any filing or
reporting requirement established by this title or by
any rule applicable to a case under this chapter.
Once cause is established, the case should be converted or
dismissed unless the Debtor shows either: (1) “a reasonable
justification” for the act or omission that constitutes cause and a
likelihood that it will confirm a plan within a reasonable period
of time; or (2) that conversion or dismissal is not in the best
interest of both creditors and the estate. 	§§ 1112(b)(1), (2).
In the present case, Debtor failed to file the monthly
operating reports required under Bankruptcy Local Rule 2015-2.
Debtor also failed to file a status conference report that the
Case: 08-31522 Doc# 28 Filed: 11/07/08 Entered: 11/10/08 16:12:00 Page 3 of 9

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2 Without monthly operating reports, the court can only
estimate real property taxes. 	At one percent of the appraised
value of $4.5 million (the limit under California Proposition 13),
taxes would be approximately $4,000 per month.
MEMORANDUM RE MOTION TO
DISMISS CHAPTER 11 CASE
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court ordered Debtor to file by October 14, 2008. 	(See Amended
Chapter 11 Status Conference Order, filed on September 30, 2008).
At the hearing, the court asked Debtor’s counsel why the monthly
operating reports had not been filed, and Debtor offered no excuse
or explanation.
These derelictions could be characterized as merely technical,
and this court would not dismiss on the basis of such failures, if
Debtor was able to show it could likely confirm a plan in a
reasonable period of time, or that dismissal was not in the best
interest of both creditors and the estate. 	The following
circumstances suggest that Debtor has not met that burden, and that
the balance of equities weighs in favor of dismissal.
First, it appears that Debtor does not have sufficient income
to confirm a plan under which it retains the Property. 	Debtor
asserts that the first and second deeds of trust are fully secured.
Thus, Debtor can confirm a plan under which it retains the Property
only by paying those claims in full. 	11 U.S.C. § 1129(b)(2)(A).
Because Debtor had not filed monthly operating reports, the court
inquired at the hearing as to the amount of income that Debtor
received from Lessee. 	Debtor responded that it was entitled to
receive rent of $20,000 per month. 	In the Statement of Financial
Affairs, Debtor listed no income for 2008. 	The combined monthly
payments on the two deeds of trust are approximately $37,000. 	Real
property taxes are approximately $4,000 per month. 2
Case: 08-31522 Doc# 28 Filed: 11/07/08 Entered: 11/10/08 16:12:00 Page 4 of 9

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MEMORANDUM RE MOTION TO
DISMISS CHAPTER 11 CASE
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Debtor has not made any post-petition payments on the first or
second deeds of trust. 	Thus, to the extent that Debtor has
received rental income from Lessee, it has not paid that income to
the secured creditors. 	Both the first and second deeds of trust
contain clauses that provide the lenders a lien on rents from the
Property.
Debtor suggested at the hearing that it would attempt to
refinance the Property to lower its debt service. 	It does not
appear that refinancing on any terms realistically available would
lower debt service sufficiently to render a plan feasible. 	If
Debtor were able to obtain a six-percent 15-year loan, very
favorable terms for a borrower in Debtor’s circumstances, monthly
debt service would be approximately $38,000 per month.
Debtor also stated at the hearing that the Lessee hoped to
increase its operating income to exceed $40,000 per month within
the next six to nine months. 	Presumably, Lessee, which is also
owned by Yackel and Baldwin, would increase rental payments to
Debtor. 	This projected increase is entirely speculative and, even
if attained, offers little cushion over debt service and taxes.
Second, it appears that Debtor does not have any significant
equity in the Property. 	Borel submitted the declaration of an
appraiser stating that as of March 10, 2008 the as-is going-concern
value of the Property was $4.76 million, and the as-is value was
$4.5 million. 	Each of these valuations assumed a marketing period
of twelve months. 	The current balance of secured debt against the
Property is $4.53 million. 	In the current economic climate, it is
not likely that the value of the Property has increased since the
date of the appraisal. 	Debtor did not offer any evidence to rebut
Case: 08-31522 Doc# 28 Filed: 11/07/08 Entered: 11/10/08 16:12:00 Page 5 of 9

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MEMORANDUM RE MOTION TO
DISMISS CHAPTER 11 CASE
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this valuation, nor did it seek additional time to obtain such
evidence. 	Debtor and Yackel have offered wildly varying estimates
of the value of the Property. 	In its schedules, Debtor listed the
value as $8.7 million. 	At the hearing, Debtor’s counsel stated the
value was more than five million. 	In his personal chapter 7 case
filed in July 2008, Yackel listed his interest in Debtor as having
no value, indicating that Debtor has no equity in the Property.
Third, dismissal of the case would have little effect on
third-party unsecured creditors. 	Debtor’s schedules list unsecured
claims totaling $84,727. 	Debtor’s counsel stated at the hearing,
however, that almost all of these debts are not owed by the Debtor,
but are instead owed by the Lessee. 	The schedules list unpaid real
property taxes totaling $68,695. 	Such taxes will be paid in full
even if the case is dismissed, as they constitute a lien with
priority over the deeds of trust.
In light of the above, the equities weigh in favor of
creditors and dismissal of the case. 	Debtor is not playing by the
rules of the chapter 11 process in failing to file monthly
operating reports and a status conference statement. 	The economic
information that Debtor provided at the hearing suggests that
successful reorganization is highly questionable. 	The evidence
before the court suggests that Debtor has no equity to lose, and
that there are no third-party unsecured creditors who might be
harmed by dismissal.
B. 	AUTHORITY TO FILE PETITION
Whether a business entity is authorized to file a bankruptcy
petition is a matter of state law. 	In re Avalon Hotel Partners,
LLC, 302 B.R. 377, 380 (Bankr. D. Ore. 2003). 	Debtor is a Nevada
Case: 08-31522 Doc# 28 Filed: 11/07/08 Entered: 11/10/08 16:12:00 Page 6 of 9

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3 The e-mail from Yackel to Baldwin written on September 9,
2008 provides: “John, we need to get together on the bankruptcy.
Do you concur with the Ice Oasis bankruptcy filing? 	If you have
any questions please call Jim S. at 408-206-2908.” 	Mr. Baldwin e-
mailed the following reply on September 10, 2008:
This is to confirm our past conversation–-that when
I left the company over 2 1/2 years ago, you would solely
run the company and that I have no input or knowledge as
to what direction and changes you have made with the
business. 	The understanding was that you would look out
for the best interest of Ice Oasis along with the
reorganization of the company in which you would remove
me [sic] for the any and all guarantees for my shares of
the company.
MEMORANDUM RE MOTION TO
DISMISS CHAPTER 11 CASE
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limited liability company, and its decision to file bankruptcy is
governed by Nevada state law. 	See id.
The Operating Agreement provides that Debtor shall be managed
exclusively by all of its members, and that “all decisions” must be
approved by members holding a majority of the outstanding
interests. 	The Operating Agreement and the Nevada state statute
governing LLCs are silent as to whether the filing of a bankruptcy
is a “decision” that must be approved by a majority vote. 	Nev.
Rev. Stat. § 86 et. seq. 	Because the decision to place a business
in bankruptcy is a decision that is not in the ordinary course of
business, it appears that such a decision is one that would require
a majority vote of the members under the Operating Agreement.
There having been only fifty percent of the members in favor of
filing the bankruptcy, it appears that the filing was not
authorized. 	Avalon Hotel Partners, 302 B.R. at 381.
Mr. Yackel introduces the postpetition e-mail as evidence that
he had authority to file the petition on behalf of Debtor because,
since 2006, he had permission from Mr. Baldwin to run the LLC all
by himself. 3 	It is doubtful that this e-mail constitutes the
unanimous vote or the unanimous written consent of the persons who
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MEMORANDUM RE MOTION TO
DISMISS CHAPTER 11 CASE
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are members at the time of the amendment required to amend the
Operating Agreement under Nev. Rev. Stat. § 86.286 (1).
Nor does the e-mail exchange evidence a majority vote in favor
of the bankruptcy. 	First, the e-mail exchange occurred
postpetition, and therefore cannot serve as a prepetition informal
vote by Mr. Baldwin in favor of placing Debtor in bankruptcy.
Second, interpreting the e-mail exchange as ratification of the
bankruptcy filing would directly contract Mr. Baldwin’s sworn
declaration stating that he did not consent to the bankruptcy.
Whether or not the petition was authorized, however, the case
should be dismissed for cause for the reasons set forth in Part A,
above.
**END OF MEMORANDUM**
Case: 08-31522 Doc# 28 Filed: 11/07/08 Entered: 11/10/08 16:12:00 Page 8 of 9

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MEMORANDUM RE MOTION TO
DISMISS CHAPTER 11 CASE
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Court Service List
Terrell S. Root, Esq.
James M. Sullivan, Esq.
Law Offices of James M. Sullivan
225 North Santa Cruz Avenue
Los Gatos, CA 95030
Todd C. Toral, Esq.
Nixon Peabody LLP
One Embarcadero Center, 18th Floor
San Francisco, CA 	94111-3600
M. David Minnick, Esq.
Pillsbury Winthrop Shaw Pittman
50 Fremont Street
San Francisco, CA 94105-2228
Minnie Loo, Esq.
Office of the U.S. Trustee
235 Pine Street, 7th Floor
San Francisco, CA 	94104-3484
Case: 08-31522 Doc# 28 Filed: 11/07/08 Entered: 11/10/08 16:12:00 Page 9 of 9