Diamond Executive Office Suites & Virtual Offices,

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Cas¢ 6:08-bk-15577-PC Doc 152 Filed 03/13/09 Entered 03/16/09 14:17:33 Desc

FILED. _——*| Main Document Page 1 of 8 a
| fect ENTERED
NOT FOR PUBLICATION |. .
| WAR 16 208 |
UNITED STATES BANKRUPTCY COURT | ~~ a
a TE enon ia
CENTRAL DISTRICT OF CALIFORNIA .
4
RIVERSIDE DIVISION
5
In re: ) Case No. 6:08-bk-15577-PC
6 ) Case No. 6:08-bk-15578-PC
)
7 | DIAMOND EXECUTIVE OFFICE ) Jointly Administered under
SUITES & VIRTUAL OFFICES, LLC, ) Case No. 6:08-bk-15577-PC
8 | etal., )
) Chapter 11
9 Debtor. )
) MEMORANDUM DECISION
10 )
In re )
1] ) Date: March 13, 2009
DIAMONDCARD INTERNATIONAL ) Time: 9:30 a.m.
12 | CORP., } Place: United States Bankruptcy Court
») Courtroom # 304
13 Debtor. ) 3420 Twelfth Street
_) Riverside, CA 92501
14
15 General Electric Capital Corporation (“GE”) seeks relief from the automatic stay for

16 |“cause”pursuant to 11 U.S.C. § 362(d)(1). Debtors, Diamondcard International Corp.

17 | (‘Diamondcard”) and Diamond Executive Office Suites & Virtual Offices, LLC (“Diamond

18 | Executive”) oppose the motion. At the hearing, Daniel Alberstone (““Alberstone”) appeared for
19 | GE and Dennis G. Bezanson appeared for Diamondcard and Diamond Executive. The court,
20 | having considered the pleadings, evidentiary record, and arguments of counsel, makes the

21 | following findings of fact and conclusions of law’ pursuant to F.R.Civ.P. 52(a)(1), as

22 | incorporated into FRBP 7052 and made applicable to contested matters by FRBP 9014(c).

23 I. STATEMENT OF FACTS

24 On May 14, 2008, Diamond Executive filed a voluntary petition under chapter 11 of the
25

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’ To the extent that any finding of fact is construed to be a conclusion of law, it is hereby
27 | adopted as such. To the extent that any conclusion of law is construed to be a finding of fact, it is
hereby adopted as such.

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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Bankruptcy Code.? On September 4, 2008, Diamond Executive and GE executed a Stipulation
Re Interim Use of Cash Collateral and Grant of Adequate Protection (“Stipulation”) pursuant to §
363(c)(2) to permit Diamond Executive to use certain rents and profits derived from the real
property at 3175 Sedona Court, Ontario, California, constituting the “cash collateral” of GE
subject to the terms and conditions of the Stipulation. The Stipulation was approved by the court
by order entered on October 17, 2008. Paragraph 1(b) of the Stipulation states:

“Diamond Executive agrees that GE’s and CDC’s reasonable attorneys’ fees and costs

incurred after the date of execution of this Stipulation shall be paid by Diamond

Executive monthly within 10 days of invoice without further order of the court.”

Paragraph 15 of the Stipulation further states:

a. In the event of any default by Diamond Executive with respect to any term,
condition, or provision of this Agreement, which default is uncured as set forth
below, all rights granted Diamond Executive under this Agreement, including
without limitation, any rights that Diamond Executive may otherwise have to use

Cash Collateral during the Authorized Period, shall terminate without further
notice as hereinafter provided and GE shall be granted relief from the automatic

stay.

b. With respect to any default by Diamond Executive in any term, covenant, or
condition set forth in this Agreement, a default occurs on the fifth (5") business
dav following written notice by GE or CDC to Diamond Executive of such
default.

(emphasis added).

By e-mail from Alberstone to Diamond Executive’s counsel, Franklin C. Adams
(“Adams”) dated December 24, 2008, GE sent invoices to Diamond Executive for reasonable
attorneys’s fees and costs incurred by GE for the period of September 5, 2008 through November

30, 2008, totaling $20,926.10, and requested that the invoices be paid not later than January 5,

2” Unless otherwise indicated, all “Code,” “chapter” and “section” references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1330 after its amendment by the Bankruptcy Abuse and
Consumer Prevention Act of 2005, Pub. L. 109-8, 119 Stat. 23 (2005). “Rule” references are to
the Federal Rules of Bankruptcy Procedure (“F.R.Civ.P.”), which make applicable certain
Federal Rules of Civil Procedure (““FRBP”).

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2009.2 The invoices were supported by time records identifying each of the services performed,
the date each service was performed, the person performing the task, and the time spent
discharging the task in increments of 1/10th of an hour. Costs were itemized separately in each
invoice. When GE had not received payment for the invoices by January 5, 2009, Alberstone
sent Adams a notice of default by e-mail dated January 7, 2009, pursuant to paragraph 15(b) of
the Stipulation and demanded that the default be cured not later than January 12, 2009. The
default was not cured by Diamond Executive.

On February 10, 2009, GE filed its motion alleging that Diamond Executive’s failure to
pay its reasonable attorneys’s fees of $20,926.10 incurred after September 5, 2008, constituted an
event of default under the Stipulation which terminated its right to use GE’s cash collateral and
constituted “cause” under paragraph 15(a) of the Stipulation for immediate relief from the
automatic stay pursuant to § 362(d)(1). Diamond Executive filed a response stating, in pertinent
part, that: (1) Diamond Executive did not breach the Stipulation because GE did not provide
Diamond Executive with monthly invoices of its reasonable attorneys fees and costs; (2)
Diamond Executive filed a motion on January 28, 2009, seeking authority to borrow the sum of
$8,485.10 from Diamondeard to pay GE’s legal fees through October 2008; and (3) Diamond
Executive plans “to file a joint chapter 11 disclosure statement and plan to provide for all of
GE’s secured claims before the hearing on [the] Motion.” On March 4, 2009, GE filed a reply
acknowledging that the Stipulation requires payment of GE’s legal fees on a monthly basis, but
points out that nothing in the Stipulation requires GE to send monthly invoices to Diamond
Executive for such fees and costs. Once an invoice is sent for its monthly attorneys’ fees and
costs, however, payment must be made according to the Stipulation. GE further argues that
Diamond Executive has waived any claim that GE’s attorneys’ fees and costs are not reasonable

because it failed to object to the reasonableness of the fees before notice of default. Finally, GE

¥ Alberstone’s e-mail incorrectly refers to “Section | c.” of the Stipulation and demands payment
on or before “January 5, 2008.”

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contends that Diamond Executive has no further right to cure under the terms of the Stipulation.
After a hearing on March 4, 2009, the matter was taken under submission.
II. DISCUSSION

The court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(b) and
1334(b). GE’s motion is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (G) and (QO). Venue
is appropriate in this court. 28 U.S.C. § 1409(a).

Section 362(d)(1) states that the court shall grant relief from the automatic stay, on
request of a party in interest and after notice and a hearing, “for cause, including the Jack of
adequate protection of an interest in property of such party in interest.” 11 U.S.C. § 362(d(1).
Ata hearing on a motion for relief from the automatic stay, the moving party bears “the burden
of proof on the issue of the debtor’s equity in property.” 11 U.S.C. § 362(g)(1). The debtor “has
the burden of proof on all other issues.” 11 U.S.C. § 362(g)(2).

In this case, GE has established a prima facie case that cause exists for relief from the
automatic stay under § 362(d)(1). Diamond Executive agreed to the terms and conditions of the
Stipulation in exchange for GE’s consent to the use of GE’s cash collateral. Diamond Executive
has used GE’s cash collateral since the inception of the case. Pursuant to paragraph 15(a) of the
Stipulation, Diamond Executive agreed that GE’s reasonable attorneys’ fees and costs incurred
after September 4, 2008, would “be paid by Diamond Executive monthly within 10 days of
invoice without further order of the court.” On December 24, 2008, GE’ counse! sent Diamond
Executive’s counsel GE’s invoices to Diamond Executive for reasonable attorneys’s fees and
costs incurred by GE for the period of September 5, 2008 through November 30, 2008, totaling
$20,926.10, together with a demand that the invoices be paid not later than January 5, 2009.
There is no evidence that Diamond Executive paid any portion of GE’s attorneys’ fees and costs
by January 5, 2009; objected to the reasonableness of amounts requested prior to January 5,
2009; or attempted to cure its default by January 12, 2009. Nor is there evidence that GE delayed

and accumulated its legal fees to force a default, as alleged by Diamond Executive. The evidence

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indicates that GE had requested payment of its fees and expenses by e-mail from Alberstone to
Adams as early as November 24, 2008.4 After expiration of the deadline to cure, Diamond
Executive filed a motion seeking to borrow the sum of $8,485.10 from Diamondcard pursuant to
§ 364(c) to pay GE’s fees and expenses, The motion was filed on January 28, 2009, but not set
for hearing until March 24, 2009. Even if Diamond Executive’s motion was granted, the amount
sought to be borrowed from Diamondcard is insufficient to cure the default.

At the hearing on March 12, 2009, Diamond Executive’s counsel argued that the court
should disregard the terms of the Stipulation pursuant to § 105(a) and permit Diamond Executive
to pay GE’s accrued attorneys fees and costs pursuant to its proposed joint plan of reorganization,

citing Florida Partners Corp. v. Southeast Co. (In re Southeast Co.), 868 F.2d 335 (9" Cir. 1989)

and Atalanta Corp. v. Allen (In re Allen), 300 F.3d 1055 (9" Cir. 2002). Neither of the cases was

cited in Diamond Executive’s response in opposition to GE’s motion. Nor are either controlling
with respect to the issues before the court.

In Southeast Co., the Ninth Circuit held that the bankruptcy court did not abuse its
discretion in confirming a plan that added $65,000 in postpetition attorneys fees to the principal
amount of a note forming the basis of a secured creditor’s oversecured claim, noting that
“Injothing in section 506(b) requires current payment of fee awards.” 868 F.2d at 340. Unlike
the facts in Southeast Co., Diamond Executive agreed to a specific deadline under the Stipulation
in this case for the payment of accrued postpetition attorneys fees and costs to GE in
consideration for its continued use of GE’s cash collateral. In Allen, the Ninth Circuit

distinguished its earlier ruling in Meyer v. Lenox (In re Lenox), 902 F.2d 737 (9" Cir. 1990) and

¥ Alberstone and Adams exchanged e-mails from November 24, 2008 through December 22,
2008, concerning the attorneys fees and costs due by Diamond Executive to GE pursuant to
paragraph I(b) of the Stipulation. By e-mail dated December 22, 2008, Adams objected to
payment the invoices previously sent by Alberstone as including attorneys fees and costs incurred
prior to September 5, 2008. By e-mail dated December 24, 2008, Alberstone resubmitted GE’s
invoices to Adams, as counsel for Diamond Executive, for payment of attorneys’ fees and costs
incurred from September 5, 2008 through November 30, 2008.

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held that “the bankruptcy court did not err in confirming without a finding of ‘special
circumstances’ a reorganization plan that did not incorporate the terms of’ a Stipulation for
Relief from Automatic Stay and Order on Motion for Relief from Automatic Stay approving the
stipulation, noting that “neither document clearly indicated that it would bind either the parties or
the court in any subsequent reorganization plan.” 300 F.3d. At 1060. This issue before this court
is relief from the automatic stay under § 362(d)(1), not plan confirmation under § 1129. In that

regard, “stipulations are not to be lightly set aside.” Lenox, 902 F.2d at 739; see, e.g., Lindsey v.

Department of Labor (In re Harris Mgmt Co.), 791 F.2d 1412, 141 5-16 (9" Cir. 1986) (holding

that the equities did not justify the bankruptcy court’s revocation of a stipulation that effected an
assumption of an executory contract under § 365).

The court takes judicial notice that Diamond Executive filed its voluntary chapter !1
petition over 10 months ago. Diamond Executive's exclusive periods under § 1121 have
expired. Diamond Executive and Diamondeard filed their proposed joint plan of reorganization
on March 5, 2009, but the court has yet to consider the disclosure statement and Diamond
Executive has not provided evidence in support of its opposition that there is a “reasonable

possibility of a reorganization within a reasonable period of time.” United Sav. Ass’n v. Timbers

of Inwood Forest Assoc. Ltd., 484 U.S. 365, 376 (1988).

Ill. CONCLUSION
Based upon the foregoing, the court finds that Diamond Executive has failed to rebut
GE’s prima facie case for relief from the automatic stay. An order will be entered granting GE’s
motion and terminating the automatic stay as to GE pursuant to § 362(d)(1). GE may not pursue
any deficiency claim against the debtor or property of the estate except by filing a proof of claim
pursuant to § 501. The 10-day stay under FRBP 4001(a)(3) will be waived.

The court will enter a separate order consiste inion.

Dated: March 13, 2009

PETER H. CARROLL
United States Bankruptcy Judge

Case 6:08-bk-15577-PC Doc 152 Filed 03/13/09 Entered 03/16/09 14:17:33 Desc
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In re:
CHAPTER:

Debtor(s). CASE NUMBER:

NOTE TO USERS OF THIS FORM:
1) Attach this form to the last page of a proposed Order or Judgment. Do not file as a separate document.
2) The title of the judgment or order and all service information must be filled in by the party lodging the order.
3) Category I. below: The United States trustee and case trustee (if any) will always be in this category.
4) Category Il. below: List ONLY addresses for debtor (and attorney), movant (or attorney) and person/entity (or attorney) who filed
an opposition to the requested relief. DO NOT list an address if person/entity is listed in category I.

NOTICE OF ENTERED ORDER AND SERVICE LIST

Notice is given by the court that a judgment or order entitled (specify) MEMORANDUM DECISION
_was entered on the date indicated as “Entered” on the first page of this judgment or order and will be served in the manner
indicated below:

|. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (“NEF”) - Pursuant to controlling General Order(s) and
Local Bankruptcy Rule(s), the foregoing document was served on the following person(s) by the court via NEF and hyperlink to
the judgment or order. As of__3/16/09 _ the following person(s) are currently on the Electronic Mail Notice List for this
bankruptcy case or adversary proceeding to receive NEF transmission at the email address(es) indicated below.

& Service information continued on attached page

il. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or order was sent by
United States Mail, first class, postage prepaid, to the following person(s) and/or entity(ies) at the address(es) indicated below.

& Service information continued on attached page

Ili. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or order which bears
an “Entered” stamp, the party lodging the judgment or order will serve a complete copy bearing an “Entered” stamp by U.S.
Mail, overnight mail, facsimile transmission or email and file a proof of service of the entered order on the following person(s)
and/or entity(ies) at the address(es), facsimile transmission number(s), and/or email address(es) indicated below:

[] Service information continued on attached page

This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.

January 2009 F 9021 -1 |

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Desc

In re:

CHAPTER:

Debtor(s). CASE NUMBER:

ADDITIONAL SERVICE INFORMATION (if needed):

ELECTRONIC

Franklin C Adams — franklin.adams@bbklaw.com,
arthur johnston@bbklaw.com;lisa.spencer@bbklaw.com;bknotices@bbklaw.com

Dennis G Bezanson
arthur.) ohnston@bbklaw.com; kenneth. burgess@bbklaw.com;bknotices@bbklaw.com

David W Brody dbrody@brody-law.com, knorris@brody-law.com
Drew A Callahan ecfcach@piteduncan.com

Timothy J Farris _ timothy.j.farris@usdoj.gov

Elizabeth A Lossing _ elizabeth.lossing@usdoj.gov

Jeffrey N Pomerantz jpomerantz@pszjlaw.com

Casper J Rankin ecfcacb@piteduncan.com

Martha E Romero Romero@mromerolawfirm.com

Gary A Starre gastarre@gmail.com

United States Trustee (RS) ustpregion16.rs.ecf@usdoj.gov

Joseph M Welch

kenneth. burgess@bbklaw.com;bknotices@bbklaw.com:joseph.welch@bbklaw.com;arthur, johnston@bb

klaw.com

U.S. MAIL

Daniel Alberstone

Bingham McCutchen, LLP
1620 26th Street

Fourth Floor, North Tower
Santa Monica, CA 90404-4060

January 2009

This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.

F 9021-1.1