Brasswood Apartments, LLC

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UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
BRASSWOODS APARTMENTS, LLC, 	Case No. 08-01608-8-JRL
and
BRASSWOODS APARTMENTS II, LLC 	Case No. 08-01609-8-JRL
Debtors.
____________________________________________________________________________
ORDER
This case is before the court on the motions of lenders JPMCC 2002-CIBC4 Greenville
Apartments and MSCI 2006-IQ11 Highway 264, LLC (collectively “the lenders”) (1) to set aside
the orders authorizing appointment of real estate broker Ed Hoel, and (2) for contempt against
Rebecca Farish. On July 7, 2008, the court conducted a hearing on these matters in New Bern,
North Carolina.
1. Motion to Set Aside Order
On May 22, 2008, the debtors, Brasswoods Apartments, LLC and Brasswoods Apartments
II, LLC, filed motions to employ Ed Hoel, of Triangle Commercial Real Estate Inc., to act as real
SO ORDERED.
SIGNED this 10 day of July, 2008.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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estate broker to market and sell the debtors’ apartment properties. 	The apartment properties
constitute most of the lenders’ collateral. An order authorizing the appointment of Hoel was entered
on June 3, 2008 without a hearing. The lenders assert that they were not given the opportunity to
object to the motions and that, had they had the opportunity to object, they would have done so on
the following grounds. First, the proposed contract is not a contract at all and does not detail the
services that Hoel would provide to the estates. 	Rather, it is a copy of a pre-petition listing
agreement between Hoel as broker and the debtors that expired on April 13, 2008. Second, the
lenders contend that the expired pre-petition listing price of $13,000,000.00, which the motions to
employ propose to continue, is too high and may explain why Hoel failed to produce a sale. Third,
the motions to employ and expired pre-petition listing agreement fail to set forth the terms of
engagement appropriate for a broker working to effect a bankruptcy sale under 11 U.S.C. § 363 or
as part of a confirmed Chapter 11 plan. Fourth, the motions to employ fail to explain what rights,
if any, Hoel might have against the debtors, the lenders, or the properties if the properties are sold
in bankruptcy or at foreclosure sale. Finally, the lenders assert that the estates should hire as its
broker Hal Kerns of Brown Investment Properties, Inc., who has had success in marketing and
selling other residential apartment properties in North Carolina and who is willing to sign a listing
agreement for a two percent commission.
At the hearing, the lenders stated that Hoel does not wish to continue under a long-term
agreement to act as broker for the properties. However, Hoel has located at least one potential buyer
for the property and is willing to accept a two percent commission for the sale of the property if that
potential buyer goes through with the purchase of the property. The debtors do not dispute this
contention. Therefore, the court allows the motion to set aside the order authorizing appointment
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of broker and Hoel’s approval to market the property is vacated. However, the motion is allowed
with the proviso that, if Hoel is successful in bringing the sale to fruition with the buyer with whom
he has already begun negotiations, he is allowed a two percent commission for completing that sale.
The debtors have ten days from the date of the hearing to provide the court with a proposal that gives
Brown Investment Properties, Inc. authority to broker the properties or to suggest an alternate
broker.
2. Motion for Civil Contempt
The lenders also move the court pursuant to Rule 9020 of the Federal Rules of Bankruptcy
Procedure for entry of an order of civil contempt against Rebecca Farish, individually and as
member-manager of the debtors, for her violations of the court’s Order Authorizing Debtor’s Use
of Cash Collateral Upon Conditions Providing Adequate Protection (the “adequate protection
order”), which was issued on April 17, 2008. The adequate protection order permits the debtors’
use of the lenders’ cash collateral, but only on the condition that the lenders be provided adequate
protection consisting of: (1) the appointment of Peter Placentino of Brown Investment Properties,
Inc. as property manager with control over the debtors’ cash receipts and disbursements, (2) the
obligations of Mrs. Farish to identify, segregate, and turn over to the property manager all of the
debtors’ cash that was received or collected after the petition date and prior to the property
manager’s appointment, (3) the property manager’s creation and use of a cash collateral account for
all of the debtors’ post-petition receipts, including those that Mrs. Farish is obligated to turn over,
and (4) monthly adequate protection payments by the property manager to the lenders from available
funds in the cash collateral account.
Mrs. Farish received and was in control of the debtors’ post-petition rents, other income, and
cash collateral from the petition date of March 7, 2008 until the property manager took over on April
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18, 2008. After entry of the adequate protection order, Mrs. Farish set up debtor in possession bank
accounts (DIP accounts) for tenant security deposits and cash collateral for each of the two debtors.
However, the lenders contend that a substantial but unknown amount of the debtors’ post-petition
rent and other income was never deposited into the DIP accounts. According to the lenders, Farish
has not identified, segregated, and turned over those funds to the property manager. In addition, the
lenders have reason to believe that some of the post-petition income was deposited into another
account that is used for Farish, Inc., another of Mrs. Farish’s companies. The lenders contend that
the court should hold Farish in civil contempt for failure to comply with the adequate protection
order. The lenders seek an order of civil contempt requiring Farish to immediately account for and
turn over to the lenders, as additional adequate protection payments, (1) all of the March and April
rent and other income of the debtors that she received but did not deposit in the DIP accounts, (2)
to provide the lenders with her Microsoft Money computer files showing all of her bank account
deposits and disbursements through May 31, 2008 and (3) full copies of all of her bank records from
the petition date through May 31, 2008. The lenders also seek damages from Mrs. Farish in the
amount of legal fees and expenses it incurs in connection with the contempt proceeding.
At the hearing, Mrs. Farish was questioned by counsel for the lenders regarding the missing
funds that should have been deposited in the DIP accounts and transferred to the property manager.
Her responses were evasive, as she repeatedly stated that she did not know what happened to the
money and that she would have to consult her accountant to determine the status of the funds. Mrs.
Farish admitted that she has primary control over the debtors’ accounts and the accounts of Farish,
Inc., but stated that she is unable to explain numerous withdrawals from those accounts. In addition,
the lenders questioned Mrs. Farish regarding her failure to produce the required documents for
March and April 2008. Mrs. Farish repeatedly stated that she did not want to be responsible for
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producing the documents and expected the lenders to issue a subpoena in order to get the documents,
despite the court order requiring their production.
It is clear to the court that Mrs. Farish has willfully and intentionally chosen to violate the
adequate protection order. Mrs. Farish has had more than two months to comply and has ignored
the lenders’ direct requests to comply with the conditions of the order. Moreover, it is abundantly
clear to the court that thousands of dollars that were required to go into DIP accounts for the two
debtors went elsewhere. The integrity of the Chapter 11 process turns on every penny that comes
into the bankruptcy estate being closely accounted for, monitored, and tracked. 	Although Mrs.
Farish’s vague testimony provided the court no insight into where the funds ultimately went, the
court is convinced that funds that were required to be deposited into the DIP accounts by orders of
this court and federal bankruptcy law actually went elsewhere. Accordingly, the court determines
that Mrs. Farish is in contempt.
To purge the contempt, Mrs. Farish has seven days from the date of the hearing to produce
to counsel for the lenders all of her Microsoft Money files and the bank statement for every account,
corporate or individual, over which she has direct or indirect control from January 1, 2008 until June
1, 2008. If Mrs. Farish does not fully comply with this order and produce all required documents,
the court will take further action. Specifically, if counsel for the lenders certifies to the court that
Mrs. Farish has not produced all of the required documents within seven days of the date of the
hearing, the court will order the U.S. Marshal to hold Mrs. Farish in custody until the documents are
produced. In addition, within ten days of receipt of all the required documents, lenders’ counsel is
directed to certify to the court the amount he believes has been inappropriately taken from the
debtors’ accounts. Within the same period, lenders’ counsel is also directed to provide the court
with an itemized statement of his fees associated with this motion. Within ten days of receiving that
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certification, Mrs. Farish is required to both return the funds to the DIP accounts and defray the costs
to the lenders’ counsel for pursuing the motion for contempt. Again, if this provision is not met, the
court will direct that Mrs. Farish be taken into custody. This is a serious matter. Diversion of estate
funds that constitute cash collateral violates not only the court’s order but also 11 U.S.C. §
363(c)(2), and may constitute a criminal offense under 18 U.S.C. § 153. The court trusts that strict
compliance will be forthcoming.
Based on the foregoing, the motions to set aside the order authorizing appointment of broker
and motions for contempt against Rebecca Farish are ALLOWED, pursuant to the provisions listed
above.
“END OF DOCUMENT”
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