D&E Leasing

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
In re:
D & E LEASING CO.,
Debtor.
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In re:
WILLIAM D. HALL,
Debtor.
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Case No. 09-18421
Chapter 11
Case No. 09-18448
Chapter 11
Judge Arthur I. Harris
MEMORANDUM OF OPINION 1
These two Chapter 11 cases are currently before the Court on the debtors’
motions seeking reconsideration of the Court’s December 15, 2009, orders
granting motions for relief from stay and abandonment with respect to real
property located at 4820 Lee Road, Cleveland, Ohio, 44128, filed by Huntington
National Bank (“Huntington Bank”). The debtors also seek to reopen the
1 This memorandum of opinion is not intended for official publication.
The court incorporates by reference in this paragraph and adopts as
the findings and orders of this court the document set forth below.
This document was signed electronically on January 21, 2010, which
may be different from its entry on the record.
IT IS SO ORDERED.
Dated: January 21, 2010
_____________________________
Arthur I. Harris
United States Bankruptcy Judge
__________________________________________________________________________________________
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evidentiary hearing held on December 9, 2009, in order to provide further evidence
in opposition to Huntington Bank’s motions for relief from stay. For the reasons
that follow, the debtors’ motions are denied.
JURISDICTION
The Court has jurisdiction pursuant to 28 U.S.C. § 1334(b) and Local
General Order No. 84, entered on July 16, 1984, by the United States District Court
for the Northern District of Ohio. This is a core proceeding pursuant to 28 U.S.C.
§ 157(b)(2)(G).
BACKGROUND AND PROCEDURAL HISTORY
The debtors in these two related cases are an Ohio partnership, D & E
Leasing Co. (“D & E Leasing”), and William D. Hall (“Hall”), general partner of D
& E Leasing. D & E Leasing operates a series of apartment buildings known as
Cameron Garden Apartments located at 4820 Lee Road. Two of the five buildings
have been vacant and boarded up since Hall purchased the property in June of
2000. The other three buildings include approximately 44 apartment units, with
roughly 23 units currently occupied.
In October of 2002, Hall executed a note (“Note 1”) and open-end mortgage
with Metropolitan Bank, as well as an assignment of rents. In June of 2005, Hall
executed a note with Sky Bank, in the sum of $800,000 (“Note 2”). Hall also
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signed a quitclaim deed conveying his interest in the property to D & E Leasing,
which was recorded on June 20, 2005. In addition, D & E Leasing executed a
mortgage securing Note 2, which was recorded on June 20, 2005. Huntington
Bank is the successor in interest to both Metropolitan Bank and Sky Bank. On
August 11, 2009, Huntington Bank obtained a judgment in state court in the
amount of $459,365.00 plus interest on Note 1, and $796,485.15 plus interest on
Note 2. The judgment against Hall was for both notes, while the judgment against
D & E Leasing was for Note 2 only.
In response to Huntington Bank’s efforts to initiate foreclosure proceedings
and have a receiver appointed to collect rent payments, D & E Leasing and Hall
filed petitions under Chapter 11 on September 7, 2009. Huntington Bank filed
motions for relief from stay and abandonment in both cases, and the Court held an
evidentiary hearing on both motions on December 9, 2009. The Court heard
testimony from six witnesses, including Hall, received a number of exhibits, and
accepted stipulations from the parties. Much of the testimony focused on whether
the quitclaim deed recorded on June 20, 2005, effectively transferred ownership of
the apartments from Hall to D & E Leasing.
On December 15, 2009, the Court stated its findings of fact and conclusions
of law on the record pursuant to Bankruptcy Rule 7052 and Fed. R. Civ. P. 52(a),
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and issued written orders in both cases granting Huntington Bank’s motions for
relief from stay and abandonment with respect to real property located at 4820 Lee
Road, Cleveland, Ohio, 44128.
The debtors D & E Leasing and Hall both moved for reconsideration of the
Court’s December 15, 2009, orders granting Huntington Bank’s motions for relief
from stay and abandonment. They also moved to reopen the evidentiary hearing
held on December 9, 2009, in order to provide further evidence in opposition to
Huntington Bank’s motions for relief from stay. On January 12, 2010, the Court
heard oral argument on the debtors’ motions and the briefs in opposition filed by
Huntington Bank. The Court then took the matters under advisement.
DISCUSSION
Although the debtors’ motions are captioned as motions for reconsideration
and motions to reopen evidentiary hearings, the Court will treat them as motions
under Bankruptcy Rules 7052, 9023, and 9024, which respectively incorporate
Rules 52, 59, and 60 of the Federal Rules of Civil Procedure. “Motions to alter or
amend judgment may be granted if there is a clear error of law, . . . newly
discovered evidence, . . . an intervening change in controlling law, . . . or to prevent
manifest injustice.” Gencorp, Inc., v American Int’l Underwriters, 178 F.3d 804,
834 (6th Cir. 1999) (citations omitted). “To constitute ‘newly discovered
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evidence,’ the evidence must have been previously unavailable.”
178 F.3d at 834. A motion to alter or amend judgment under Rule 59(e) “is not a
substitute for appeal and does not allow the unhappy litigant to reargue the case.”
Bollenbacher v. Commissioner of Social Security, 621 F. Supp.2d 497, 500-01
(N.D. Ohio 2008) (citations omitted). See also Exxon Shipping Co. v. Baker,
__ U.S. __, __ n.5, 128 S. Ct. 2605, 2617 n.5 (2008) (“Rule 59(e) . . . ‘may not be
used to relitigate old matters, or to raise arguments or present evidence that could
have been raised prior to the entry of judgment.’ ”) (quoting 11 C. Wright &
A. Miller, Federal Practice and Procedure § 2810.1 pp. 127-28 (2d ed. 1995)).
“The standard for granting a Rule 60 motion is significantly higher than the
standard applicable to a Rule 59 motion.” 	Feathers v. Chevron U.S.A., Inc.,
141 F.3d 264, 268 (6th Cir. 1998). A Rule 60(b) motion may be granted only for
certain specified reasons:
(1) mistake, inadvertence, surprise, or excusable neglect; (2) newly
discovered evidence which by due diligence could not have been discovered
in time to move for a new trial under Rule 59(b); (3) fraud (whether
heretofore denominated intrinsic or extrinsic), misrepresentation, or other
misconduct of an adverse party; (4) the judgment is void; (5) the judgment
has been satisfied, released, or discharged, or a prior judgment upon which it
is based has been reversed or otherwise vacated, or it is no longer equitable
that the judgment should have prospective application; or (6) any other
reason justifying relief from the operation of the judgment.
See 141 F.3d at 268.
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Section 362 of the Bankruptcy Code provides in pertinent part:
(d) On request of a party in interest and after notice and a hearing, the court
shall grant relief from the stay provided under subsection (a) of this section,
such as by terminating, annulling, modifying, or conditioning such stay--
(1) for cause, including the lack of adequate protection of an interest
in property of such party in interest;
(2) with respect to a stay of an act against property under
subsection (a) of this section, if--
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective
reorganization.
A bankruptcy court may lift the automatic stay “for cause.” 11 U.S.C. § 362(d)(1).
Because the Code provides no definition of what constitutes “cause” under
§ 362(d), courts must determine whether discretionary relief is appropriate on a
case-by-case basis. See Trident Ass’n Ltd. P’ship v. Metropolitan Life Ins. Co.( In
re Trident Associates Limited P’ship), 52 F.3d 127, 131 (6th Cir. 1995)) (holding
that a bankruptcy court must consider the totality of the circumstances” when
deciding to lift the automatic stay for cause); Laguna Ass’n Ltd. P’ship v. Aetna
Cas. & Sur. Co. (In re Laguna Associates Limited Partnership), 30 F.3d 734, 737-
38 (6th Cir. 1994)).
One of the factors to consider is whether there is a possibility of
reorganization. As the United States Supreme Court noted in United Savings
Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365,
375-76 (1988), the phrase “necessary for an effective reorganization” in
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section 362
is not merely a showing that if there is conceivably to be an effective
reorganization, this property will be needed for it; but that the property is
essential for an effective reorganization that is in prospect. This means, as
many lower courts . . . have properly said, that there must be “a reasonable
possibility of a successful reorganization within a reasonable time.”
(citations omitted). Thus, a creditor may be entitled to relief from stay as soon as it
becomes evident that there is no “reasonable possibility of a successful
reorganization within a reasonable time.” For example, even within the first four
months of a Chapter 11 case, “lack of any realistic prospect of effective
reorganization will require § 362(d)(2) relief.” 484 U.S. at 376.
In its ruling granting Huntington Bank’s motions for relief from stay, this
Court concluded that there is essentially no likelihood of a successful
reorganization that would include the apartments located at 4820 Lee Road. In
reaching this conclusion, the Court found that Huntington Bank had a valid first
lien on the premises, that given a secured debt in excess of $1.2 million and a
current appraised value of about $600,000, there was no equity in the property for
the debtors, and that there was no indication that anyone had the interest and ability
to invest new money in the property necessary to fund a successful reorganization.
The Court then cited to the Supreme Court’s statement in Timbers of Inwood
Forest that, even immediately after the bankruptcy filings, “lack of any realistic
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prospect of effective reorganization will require § 362(d)(2) relief.” See 484 U.S. at
376 & n.2 (citing In re Anderson Oaks (Phase I ) Limited Partnership, 77 B.R.
108, 109 110-13 (Bankr. W.D. Tex. 1987)).
In their motions for reconsideration and to reopen the evidentiary hearing,
the debtors make a number of arguments; however, these arguments, whether taken
individually or cumulatively, do not warrant the Court granting the relief
requested. The Court will address the debtors’ major arguments below. The court
rejects all of the debtors’ arguments, even if not specifically addressed in this
memorandum of opinion.
Ownership of 4820 Lee Road
First, the debtors place great emphasis on their argument that the 2005
quitclaim deed from Hall to D & E Leasing did not effectively transfer all of the
real property, thereby making D & E Leasing’s 2005 mortgage to Huntington Bank
ineffective, leaving Huntington Bank an unsecured creditor with respect to the
money owed under Note 2. The Court rejects these arguments for several reasons.
Ultimately, whether the quitclaim deed was sufficient to transfer all of Hall’s
interest in the property is a question of law, and the opinions of experts and
employees of the county recorder, county auditor, and county engineer are of
limited assistance. Rather, it is for this Court to determine, based upon the deed
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that was recorded and applicable Ohio law, whether all six tax parcels of the
property were transferred from Hall to D & E Leasing. See United States v. Zipkin,
729 F.2d 384, 387 (6th Cir. 1984) (“Expert testimony on the law is excluded
because the trial judge does not need the judgment of witnesses.”). Based upon the
second page of the deed, which specifically listed all six of the permanent parcel
numbers, the Court finds that all of the property at issue was effectively transferred
from Hall to D & E Leasing under Ohio law. See generally Argent Mortgage Co.,
v. Drown (In re Bunn), 578 F.3d 487 (6th Cir. 2009) (mortgage with correct street
address but missing legal description could not be set aside by bankruptcy trustee
under Ohio law).
In addition, even if the deed were insufficient to transfer all of the property
from Hall to D & E Leasing, such a result would not increase the likelihood of a
successful reorganization. If the apartments were property of Hall’s bankruptcy
estate, D & E Leasing would have no significant assets with which to reorganize,
and the open-end first mortgage, the validity of which is unquestioned, would
presumably encompass Hall’s guarantee on Note 2, leaving the apartments owned
by Hall subject to an open-end mortgage with a balance due in excess of
$1.2 million. See Ohio Rev. Code § 5301.232; Colonial Mortgage Service v.
Southard, 56 Ohio St. 2d 347, 349, 384 N.E.2d 250, 252 (1978) (“an advance made
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by the holder of an open-end mortgage has priority over other liens unless the
mortgagee (1) has notice of the other liens and (2) is not obliged to make the
advance.”). And if Hall were to transfer the property to D & E Leasing now, under
the doctrine of estoppel by deed, D & E Leasing’s mortgage to Huntington Bank
would encompass all of the property transferred, since D & E represented in the
mortgage recorded on June 20, 2005, that it was the owner of the entire premises
described in the mortgage. See Gatts v. E.G.T.G., GMBH,
14 Ohio App. 3d 243, 470 N.E.2d 425, 429 (1983). See also Ohio Rev. Code
§ 5302.13 (words “mortgage covenants” mean that mortgagor covenants with
mortgagee that he is lawfully seized in fee simple of the granted premises).
Interest and Ability to Fund a Plan of Reorganization
The debtors have also sought reconsideration and/or to reopen the record to
demonstrate that debtor Hall has the wherewithal and interest to fund a successful
reorganization that includes the apartments located at 4820 Lee Road. In its
findings, this Court noted that Hall was extremely reluctant to answer the Court’s
own questions about his interest in and ability to invest his own assets to fund a
reorganization of the Lee Road apartments. While counsel for the debtors
acknowledge that the Court’s conclusion was reasonable, they insist that Hall was
simply confused by the questions posed by the Court and counsel for Huntington
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Bank. The Court notes, however, that it gave counsel an opportunity to follow up
on Hall’s responses during the debtors’ case in chief, but the debtors chose not to
do so. And while the debtors assert that significant equity exists in assets
controlled by Hall, Hall himself is a debtor in Chapter 11, which presumably limits
his ability to invest his own assets in the Lee Road apartments.
In addition, the debtors have been unable to timely and successfully
prosecute these two Chapter 11 cases. Among the problems which the Court has
identified are: (1) failure to file a disclosure statement and plan by Jan. 5, 2010, as
established in prior scheduling orders; (2) late and/or unfiled operating reports –
the October and November reports, which were due on Nov. 20, 2009, and
Dec. 20, 2009, were not filed until three days after the Court raised the issue of
their absence on Jan. 12, 2010, and the December reports, which were due on
January 20, 2010, remain unfiled; (3) failure to give the proper 20-days notice of
the Dec. 22, 2009, bar date for filing claims under Bankruptcy Rule 2002.
In addition, although the Court found it unnecessary to determine on
December 15, 2009, that D & E Leasing is now subject to the provisions of
11 U.S.C. § 362(d)(3), it is worth noting that, more than 30 days later and more
than 120 days after filing for bankruptcy, D & E Leasing has neither (1) filed a
plan of reorganization that has a reasonable possibility of being confirmed within a
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reasonable time, nor (2) commenced payments to Huntington Bank in an amount
equal to interest at the then applicable nondefault contract rate of interest on the
value of the creditor’s interest in the real estate. See 11 U.S.C. § 362(d)(3). For
example, assuming a nondefault contract rate of interest of 5.77 percent and a
secured-in-fact value of $600,000, Huntington Bank would theoretically be entitled
to payments under 11 U.S.C. § 362(d)(3)(B) of $2,885 per month.
In short, while it may still be possible for Hall to successfully reorganize
without retaining an interest in the Lee Road apartments, the Court remains
convinced that there is no reasonable possibility of a successful reorganization
within a reasonable time for either debtor with respect to the Lee Road apartments.
CONCLUSION
For the foregoing reasons, the debtors’ motions seeking reconsideration of
the Court’s December 15, 2009, orders granting Huntington National Bank’s
motions for relief from stay and abandonment with respect to real property located
at 4820 Lee Road, Cleveland, Ohio, 44128, and to reopen the evidentiary hearing
held on December 9, 2009, are denied.
IT IS SO ORDERED.
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