Crown Ohio Investments, LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
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In re: 	Case No.: 1-09-46767-dem
CROWN OHIO INVESTMENTS LLC, 	Chapter 11
Debtor.
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Appearances:
Thomas J. Schell, Esq.
Bryan Cave, LLP
Attorneys for Creditor Wells Fargo Bank, N.A., as Trustee
1290 Avenue of the Americas
New York, New York, 10104
John C. Leininger, Esq.
Bryan Cave, LLP
Attorneys for Creditor Wells Fargo Bank, N.A., as Trustee
JP Morgan Chase Tower, Suite 3300
2200 Ross Avenue
Dallas, Texas 75201
Kevin J. Nash, Esq.
Goldberg Weprin Finkel Goldstein LLP
Attorneys for Debtor
1501 Broadway
New York, New York, 10036
DECISION AND ORDER ON MOTION TO VACATE THE AUTOMATIC STAY
DENNIS E. MILTON
United States Bankruptcy Judge
On August 7, 2009, a principal of Crown Ohio Investments, LLC (the “debtor”)
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. 	The matter is
before the Court on a Motion for Relief From the Stay (the “Motion”) and Supplemental Motion
of That Certain Trust For Relief From the Automatic Stay (the “Supplemental Motion”) of
creditor Wells Fargo Bank, N.A. as Trustee for the Registered Holders of LaSalle Commercial
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Mortgage Securities, Inc., Commercial Pass-Through Certificates, Series 2005-MF1 ("Wells
Fargo").
The Court finds that the debtor is a single asset real estate, subject to Section
362(d)(3)of the Bankruptcy Code, and directs that the Reserve Fund may be used to satisfy all
accrued post-petition payments and all future post-petition payments as Code Section
362(d)(3)(B) requires. The Court finds that a monthly payment under Section 362(d)(3)(B)
should be in the amount of $9,474.95. The Motion for relief from the automatic stay is granted
and will take effect (a) upon the debtor’s default on the monthly payments under Section
362(d)(3)(B), unless the debtor files and seeks confirmation of a plan of reorganization or (b)
upon the debtor's failure to file on or before April 27, 2010 a plan of reorganization that has a
reasonable possibility of being confirmed within a reasonable time.
JURISDICTION
The Court has jurisdiction over this core proceeding under 28 U.S.C. §§ 1334 and
157(b)(2) and the Eastern District of New York standing order of reference dated August 28,
1986. This Decision and Order constitutes the Court's findings of facts and conclusions of law
required by Fed. R. Bankr. P. 7052.
BACKGROUND
The debtor is an owner of a 90-unit multi-family residential apartment complex,
located at 17500 Euclid Avenue, Cleveland, Ohio (the “Property”). The debtor purchased the
Property in 2007. On December 31, 2007, the debtor entered in an Assumption and Release
Agreement with Wells Fargo (“Assumption Agreement”). Pursuant to the Assumption
Agreement, the debtor assumed the original loan in the amount of $1,960,000.00, secured by the
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Property, and deposited a cash collateral reserve of $70,810.00 (the “Reserve Fund”).
Assumption Agreement at ¶ 1 and ¶ 2(k).
On September 21, 2009, forty-five (45) days after the order for relief and a day
before the scheduled initial status conference in this case, Wells Fargo filed the Motion for relief
from the automatic stay pursuant to Code Sections 362(d)(1) and (2), (e) and (g). Wells Fargo
alleged that the debtor failed to provide adequate protection and that the debtor was without a
prospect of feasible reorganization because Wells Fargo assessed value of the Property was
$900,000.00.
On October 6, 2009, counsel for the debtor filed its Opposition to Motion for
Relief From the Automatic Stay (“Opposition to Motion”). The debtor disputed Wells Fargo’s
assessment of the Property’s value. The debtor further argued that Code Section 362(d)(3)
provides the debtor with a ninety day period to start with adequate protection payments or to file
a plan. The debtor proposed to make debt service payments from the Reserve Fund. 	Opposition
to Motion at p.2 ¶ 3 and p. 3 ¶ 10. 	The debtor argued that there was equity in the Property and
the property was necessary for an effective reorganization.
On October 8, 2009, the Court held a hearing, at which time the debtor renewed
its offer to Wells Fargo to utilize the Reserve Fund. However, Wells Fargo determined to
proceed with its motion and requested an evidentiary hearing. The Court adjourned the hearing,
ultimately to November 24, 2009. On November 11, 2009, Wells Fargo filed an application for a
Proposed Order to Shorten the Notice Period with Respect to the Request for Document
Production. On November 13, 2009, the Court entered a Decision and Order on the application
for expedited discovery.
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On November 24, 2009, Wells Fargo submitted the Supplemental Motion. Wells
Fargo alleged that the debtor was a single assets real estate which had failed to comply with
Code Section 362(d)(3). Wells Fargo stated that the ninety day period for filing a plan had
expired and the debtor had failed to extend the 90 day period and to file a plan or to commence
monthly payments, as Section 362(d)(3) required.
On December 18, 2009, the debtor filed its Opposition to Supplemental Motion
for Relief From the Automatic Stay (“Supplemental Opposition”). The debtor stated that the
debtor accumulated more than $25,000 as a debtor in possession, and contended that the Reserve
Fund was sufficient to cover the interest due to Wells Fargo pursuant to Section 362(d)(3)(B)(ii).
The debtor asserted its prospects for successful reorganization while adequately protecting Wells
Fargo’s interest. The debtor requested that the Court permit the debtor to utilize the interest
reserve, and to condition or modify the stay accordingly.
On December 22, 2009, the Court held a hearing and requested the parties to file
supplemental memoranda of law. The Court adjourned the testimonial hearing to January 20,
2010.
On January 7, 2010, the debtor filed a Supplemental Memorandum of Law
(“Debtor’s Memorandum”), and Wells Fargo filed a Reply to the Debtor’s Opposition to
Supplemental Motion for Relief From the Automatic Stay (“Wells Fargo’s Memorandum”). The
debtor argued that the Reserve Fund should be used for servicing the on-going post-petition
interest. The debtor proposed that the order on the motion be conditioned on use of the Reserve
Fund for the post-petition interest until the Reserve Fund was exhausted or until the debtor filed
a plan, while the debtor operated the property and maintained the property so as not to diminish
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in value.
Wells Fargo alleged that while the bank had discretion to apply the Reserve Fund
as it saw fit upon an event of default, the Reserve Fund was not an interest reserve within the
exception of Section 362(d)(3)(B)(i). In the alternative, Wells Fargo argued that even if the
Reserve Fund were an interest reserve, the automatic stay prevented the bank from using the
Reserve Fund.
The hearing scheduled for January 20, 2010, was adjourned to February 17, 2010.
At the February 17, 2010 hearing, Wells Fargo withdrew the portions of the Motion seeking
relief from the stay under Sections 362(d)(1) and (2) and requested the Court to grant the Motion
based on Section 362(d)(3). The debtor informed the Court of the latest developments and the
prospect of formulating and filing a plan. The debtor described its expectation of an increase in
the occupancy of the building and an increase of the debtor’s income, because it had only
recently qualified to rent the apartments to subsidized tenants. The Court granted Wells Fargo’s
application for withdrawal, took the portion of the Motion seeking relief on the ground of
Section 362(d)(3) under advisement and decided as discussed below.
DISCUSSION
Section 362(d) of the Bankruptcy Code provides that on request of a party in
interest and after notice and a hearing, the court shall grant relief from the automatic stay, such
as by terminating, annulling, modifying, or conditioning the stay. 11 U.S.C. §362(d). Since
Wells Fargo has withdraw those portions of the Motion seeking relief from the automatic stay
under Code Section 362(d)(1) and (2), the matter for review before the Court is narrowed to
Section 362(d)(3)(B) of the Bankruptcy Code. Subsection 362(d)(3) applies only to a stay of an
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act against single asset real estate. In order to obtain relief from the automatic stay under this
section, the movant must establish that the debtor: (a) is a single asset real estate; (b) which
failed to commence monthly payments during the time determined pursuant to Subsection
362(d)(3)(B)(i); (c) in an amount determined pursuant to Subsection 362(d)(3)(B)(ii). Id.
Single Assets Real Estate
The term “single asset real estate” is defined in Section 101(51B) of the
Bankruptcy Code. Section 101(51B) provides in pertinent part:
The term “single asset real estate” means real property constituting
a single property or project, other than residential real property with
fewer than 4 residential units, which generates substantially all of the
gross income of a debtor... and on which no substantial business is
being conducted by a debtor other than the business of operating the
real property and activities incidental.
11 U.S.C. § 101(51B). In this case, the debtor generates substantially all of the gross income
from the Property. Furthermore, in its petition, the debtor selected the status of a single asset real
estate. Pursuant to Section 362(d)(3), the Court determines that the debtor is a single asset real
estate and that Section 362(d)(3) applies to the debtor.
Commencement of Payments
Section 362(d)(3) provides in substance that a secured creditor shall obtain relief
from the automatic stay with respect to a single asset real estate unless not later than the 90th day
after the petition date or 30 days after the Court has determined the debtor is subject to Section
362(d)(3)(B), the debtor has filed a plan of reorganization reasonably likely to be confirmed or
commenced making monthly payments.1 The Court has discretion to determine whether the
1 The legislative history of Section 362(d)(3) reflects that one of the goals of Section 362(d)(3) was to
expedite the proposal of a plan of reorganization. In re Hope Plantation Group, LLC., 393 B.R. 98, 101 (Bankr.
D.S.C. 2007) [“...and that, where the case does not early kick forward toward confirmation, a debtor must
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debtor complied with Section 362(d)(3) and to determine the extent of the relief sought. 	In re
Hope Plantation Group, LLC., 393 B.R. at 104; Determination of the debtor’s compliance with
Section 362(d)(3)(B) depends on whether the debtor communicated with the creditor and
proffered a payment. In re Heather Apartments Limited Partnership, 366 B.R. 45, 50
(Bankr.D.Minn. 2007) [“...any proffer of cause for excusing a debtor’s compliance must include
a concrete substitute for the creditor’s statutorily-fixed expectation o f payment, if the debtor is
to be excused.” so the court should “...feel assured that the protected mortgagee would receive a
substantial equivalent of its expectancy under Section 362(d)(3)... ”]; In re Kaplan Breslaw Ash,
LLC, 264 B.R. 309, 333 (Bankr.S.D.N.Y., 2001) [The court found that the debtor failed to
comply with Section 362(d)(3) because the debtor failed to “... make any post-petition payments,
or to proffer them.”]; But see also In re 652 West 160th LLC, 330 B.R. 455, 462
(Bankr.S.D.N.Y., 2005).
In this case, within the first 90 days from the petition date, the debtor offered to
use the Reserve Fund in order to comply with Section 362(d). Wells Fargo refused to accept the
debtor’s offer. Wells Fargo argued that, while for the purposes of utilizing the Reserve Fund, the
Reserve Fund was a cash collateral reserve, nonetheless it could be utilized absent a court
approval. Wells Fargo’s Memorandum ¶5. 	Wells Fargo further stated that the Reserve Fund
was not a cash collateral reserve, created pursuant to Section 362(d)(3)(B)(i), and the exception
of 363(c)(2) may not be applied. Id. However, the parties concur that the Reserve Fund was
established pursuant to the Assumption Agreement. Assumption Agreement at ¶ 2(k). Based on
the submitted documents and the hearings, the Court finds that the debtor proffered satisfaction
compensate its mortgagee for the time-value of the mortgagee’s debt investment[,]...”].
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of payments in compliance with the requirements of Section 362(d)(3)(B), although the debtor’s
tender was not accepted.
With regard to the source for the payment, the language of Section
362(d)(3)(B)(i) of the Bankruptcy Code is not exclusive. That Section provides that the
payments “[m]ay ... be made from rents or other income...”. The language is descriptive and
covers a wide area of financial sources and does not exclude any particular source. 	In re
Heather Apartments Limited Partnership, 366 B.R. at 50, [“If a debtor is to be excused from
having to surrender that cash right away, it must demonstrate a very substantial likelihood that
the creditor would receive an equivalent value from another source, quickly enough to minimize
its risks of recovering the time value of money”].
Section 362(d)(3)(B) excludes the application of Section 363(c)(2) when the cash
collateral is utilized only for payments under Section 362(d)(3)(B). Section 363(a)2 of the
Bankruptcy Code provides the definition of a cash collateral that is excluded from the
application of Section 363(c)(2) under Section 362(d)(3)(B). Therefore, based on Section
363(a), the Court finds that the Reserve Fund is a cash collateral, that can be used by the debtor
and utilized for the purpose of Section 362(d)(3)(B), subject to exclusion of Section 363(c)(2).
Determination of the Payments
The application of Section 362(d)(3)(B)(ii) requires determination of the
2 11 U.S.C. §363 in pertinent part states:
“(a) In this section, “cash collateral” means cash, negotiable instruments, documents of title,
securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than
the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees,
charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels,
or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing
before or after the commencement of a case under this title.”
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payments based on two variables. 11 U.S.C. §362(d)(3)(B)(ii). The first variable is the interest
rate of the then applicable non-default contract rate of interest. The second variable is the value
of the creditor’s interest in the real estate based on the value of the real estate. In re Abdulla,
2009 WL 348365, FN2 (Bankr.D.Mass. 2009). The determination of these two variables
constitutes the amount of the debtor’s monthly payments.
Here, the Court does not need to calculate either the interest rate of the applicable
non-default contract rate of interest or the value of Wells Fargo’s interest in the Property,
because the parties concur that the monthly interest payment pursuant to Section 362(d)(3)(B)(ii)
should be $9,474.95. Supplemental Motion ¶11. Debtor’s Opposition ¶3;
Modification of the Automatic Stay or Conditioning the Relief from the Stay
Section 362(d) empowers bankruptcy courts not only to terminate or annul the
automatic stay, but also to modify and condition the automatic stay. 11 U.S.C. §362(d). Eastern
Refractories Co. v. Forty Eight Insulations, 157 F.3d 169, 172 (2d Cir. 1998) [“Bankruptcy
courts have the plastic powers to modify or condition an automatic stay so as to fashion the
appropriate scope of relief.”]; In re Shared Technologies Cellular Inc., 293 B.R. 89, 93 (D.Conn.,
2003); In re Planet 10, L.C., 213 B.R. 478 (Bankr. E.D.Va. 1997) [“Under Section 362(d)(3), the
unconditional lifting of the stay is not mandatory”].
Bankruptcy courts have modified the stay or conditioned the lifting of the
automatic stay in an effort to grant the appropriate relief or to adjust the application of the relief
in the case. In the East-West Associates (Carteret Savings Bank, F.A. v. Nastasi-White, Inc.),
106 B.R. 767, 772 (S.D.N.Y. 1989) [The court conditioned the automatic stay on the payment of
a lump sum followed by monthly payments.]; In re Matter of Global One LLC, 411 B.R. 524
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(Bankr. M.D.GA. 2009); In re View West Condominium Association, Inc., 2008 WL 6742576, 2
(Bankr. S.D.Fla. 2008). In re The Terraces Subdivision, LLC, 2007 WL 2220448 (Bankr.
D.Alaska 2007) [The court conditioned the stay upon confirmation of a plan and failure to do so
would result in termination of the stay without any further action.]; In re Archway Apartments,
Ltd., 206 B.R. 463 (Bankr. M.D.Tenn. 1997) [The court conditioned the stay upon a drop dead
date for the confirmation of a plan providing that a failure to confirm a plan would result in
termination of the stay without further action required.]; In re Planet 10, L.C., 213 B.R. 478.
In this case, the debtor proposed that the Court should condition the order on the
Motion to allow an application of the Reserve Fund, until the Reserve Fund is exhausted, and if
the debtor fails to file and seek confirmation of a plan. Debtor’s Memorandum at p.4. The debtor
argued that its qualification to rent the apartments to subsidized tenants would result in an
increase of the debtor’s income and the debtor indicated a prospect of filing a plan. In applying
the law and to fashion appropriate scope of the relief, the Court has an authority to condition the
stay. Eastern Refractories Co. v. Forty Eight Insulations, 157 F.3d at 172. Therefore, the Court
grants the Motion to the extent set forth immediately below. The automatic stay shall be lifted
and the termination of the automatic stay will take effect (a) upon the debtor’s default on the
monthly payments under Section 362(d)(3)(B), unless the debtor files and seeks confirmation of
a plan of reorganization or (b) upon the debtor's failure to file on or before April 27, 2010 a plan
of reorganization that has a reasonable possibility of being confirmed within a reasonable time.
CONCLUSION
The Court finds that the debtor is a single asset real estate, subject to Code
Section 362(d)(3), and directs that the Reserve Fund may be used to satisfy all accrued post-
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petition payments and all future post-petition payments as Code Section 362(d)(3)(B) requires.
The Court finds that a monthly payment under Section 362(d)(3)(B) should be in the amount of
$9,474.95. The Motion for relief from the automatic stay is granted and will take effect (a) upon
the debtor’s default on the monthly payments under Section 362(d)(3)(B), unless the debtor files
and seeks confirmation of a plan of reorganization or (b) upon the debtor's failure to file on or
before April 27, 2010 a plan of reorganization that has a reasonable possibility of being
confirmed within a reasonable time.
IT IS SO ORDERED.
Dated: Brooklyn, New York
March 12, 2010
s/ Dennis E. Milton
DENNIS E. MILTON
United States Bankruptcy Judge
To: 	Thomas J. Schell, Esq.
Bryan Cave, LLP
Attorneys for Creditor Wells Fargo Bank, N.A., as Trustee
1290 Avenue of the Americas
New York, New York, 10104
John C. Leininger, Esq.
Bryan Cave, LLP
Attorneys for Creditor Wells Fargo Bank, N.A., as Trustee
JP Morgan Chase Tower, Suite 3300
2200 Ross Avenue
Dallas, Texas 75201
Kevin J. Nash, Esq.
Goldberg Weprin Finkel Goldstein LLP
Attorneys for Debtor
1501 Broadway
New York, New York, 10036
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Valerie Millman, Esq.
Office of the United States Trustee
271 Cadman Plaza East, Suite 4529
Brooklyn, New York, 11201
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