D&E Leasing

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
In re:
D & E LEASING CO.,
Debtor.
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Case No. 09-18421
Chapter 11
Judge Arthur I. Harris
MEMORANDUM OF OPINION 1
This Chapter 11 case is currently before the Court on the United States
Trustee’s motion to dismiss or convert pursuant to 11 U.S.C. § 1112(b). For the
reasons that follow, the motion is granted, and this Chapter 11 case is dismissed.
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.
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 February 24, 2010, which
may be different from its entry on the record.
IT IS SO ORDERED.
Dated: February 24, 2010
_____________________________
Arthur I. Harris
United States Bankruptcy Judge
__________________________________________________________________________________________
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§ 157(b)(2)(A).
BACKGROUND AND PROCEDURAL HISTORY
The debtor in this case is an Ohio partnership, D & E Leasing Co. (“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 D & E Leasing’s general partner, William
D. Hall (“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
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
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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),
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
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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. In its memorandum of opinion and orders dated January 21,
2010, the Court denied the motions for reconsideration and to reopen the
evidentiary hearing. As the Court explained in its memorandum of opinion:
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 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.
Memorandum of Opinion (Jan. 21, 2010) at 7-8. On Feb. 1, 2010, D & E Leasing
and Hall both filed notices of appeal from the orders granting relief from stay and
denying reconsideration. Neither debtor has moved this court for a stay pending
appeal pursuant to Rule 8005 of the Federal Rules of Bankruptcy Procedure.
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On February 3, 2010, the U.S. Trustee filed a motion to convert or dismiss
this case pursuant to 11 U.S.C. § 1112(b). The U.S. Trustee identified various
grounds in support of dismissal or conversion, including: failure to file complete
operating reports, failure to pay quarterly fees due to the U.S. Trustee, and the
absence of a reasonable likelihood of rehabilitation. On February 23, 2010, the
Court heard oral argument on the U.S. Trustee’s motion. Although counsel for the
debtor requested an evidentiary hearing, the Court instead requested that counsel
make a proffer of any new evidence which would alter the Court’s prior conclusion
that there is essentially no likelihood of a successful reorganization. Debtor’s
counsel indicated that a new appraisal valued the apartment property at about
$767,000, as opposed to the $600,000 appraisal submitted by Huntington Bank.
Otherwise, the debtor proffered no evidence that, if accepted as true, would cause
the Court to reconsider its earlier decision granting relief from stay on account of
no likelihood of a successful reorganization. Rather, debtor’s counsel simply
asserted that the Court’s prior conclusions were incorrect and the subject of an
ongoing appeal. After hearing further argument, the Court indicated that it would
grant the U.S. Trustee’s motion in a written opinion and issue an order dismissing
the case.
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DISCUSSION
Section 1112 of the Bankruptcy Code provides in pertinent part:
(b)(1) Except as provided in paragraph (2) of this subsection,
subsection (c) of this section, and section 1104(a)(3), on request of a party in
interest, and after notice and a hearing, absent unusual circumstances
specifically identified by the court that establish that the requested
conversion or dismissal is not in the best interests of creditors and the estate,
the court shall convert a case under this chapter to a case under chapter 7 or
dismiss a case under this chapter, whichever is in the best interests of
creditors and the estate, if the movant establishes cause.
(2) The relief provided in paragraph (1) shall not be granted absent
unusual circumstances specifically identified by the court that establish that
such relief is not in the best interests of creditors and the estate, if the debtor
or another party in interest objects and establishes that--
(A) there is a reasonable likelihood that a plan will be
confirmed within the timeframes established in sections 1121(e) and
1129(e) of this title, or if such sections do not apply, within a
reasonable period of time; and
(B) the grounds for granting such relief include an act or
omission of the debtor other than under paragraph (4)(A)--
(i) for which there exists a reasonable justification for the
act or omission; and
(ii) that will be cured within a reasonable period of time
fixed by the court.
(3) The court shall commence the hearing on a motion under this
subsection not later than 30 days after filing of the motion, and shall decide
the motion not later than 15 days after commencement of such hearing,
unless the movant expressly consents to a continuance for a specific period
of time or compelling circumstances prevent the court from meeting the time
limits established by this paragraph.
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(4) For purposes of this subsection, the term ‘cause’ includes--
(A) substantial or continuing loss to or diminution of the estate
and the absence of a reasonable likelihood of rehabilitation;
(B) gross mismanagement of the estate;
(C) failure to maintain appropriate insurance that poses a risk to
the estate or to the public;
. . . .
(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;
. . . .
(H) failure timely to provide information or attend meetings
reasonably requested by the United States trustee (or the bankruptcy
administrator, if any);
. . . .
(J) failure to file a disclosure statement, or to file or confirm a
plan, within the time fixed by this title or by order of the court;
(K) failure to pay any fees or charges required under chapter
123 of title 28;
. . . .
Pursuant to Fed. R. Bankr. P. 1017(f)(1), a motion to dismiss or convert under
section 1112(b) is a contested matter governed by Rule 9014.
“The decision to dismiss or convert a Chapter 11 case falls within the sound
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discretion of the Bankruptcy Court.” In re Mitan, 573 F.3d 237, 247 (6th Cir.
2009) (internal quotations omitted); accord In re AMC Mortgage Co., 213 F.3d
917, 920 (6th Cir. 2000). In determining a motion to dismiss or convert, “the
bankruptcy court is afforded wide discretion to determine if cause exists and how
to ultimately dispose of the case.” Fishell v. U.S. Trustee, 19 F.3d 18,
1994 WL 64718, No. 93-1182 at *1 (6th Cir. 1994) (per curiam) (unpublished
table decision) (citing Matter of Koerner, 800 F.2d 1358, 1367 (5th Cir. 1986)).
“Cause for dismissal is not limited to the specifically enumerated examples set out
in section 1112 but is rather within the sound discretion of the bankruptcy court.”
1994 WL 64718 at *3 (internal quotations omitted). The party seeking dismissal
or conversion under section 1112 bears the burden of proving, by a preponderance
of the evidence, that “cause” exists. See, e.g., In re Woodbrook Assocs., 19 F.3d
312, 317 (7th Cir. 1994); In re Wahlie, 417 B.R. 8, 11 (Bankr. N.D. Ohio 2009).
In the present case, the U.S. Trustee has raised a number of grounds in
support of conversion or dismissal; however, the Court finds that one issue is
dispositive – “substantial or continuing loss to or diminution of the estate and the
absence of a reasonable likelihood of rehabilitation” under section 1112(b)(4)(A).
When the Court granted Huntington Bank’s motion for relief from stay on
December 15, 2009, it essentially removed the only significant income-generating
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asset of the debtors – the apartments located at 4820 Lee Road and, unless the
order were overturned, also eliminated any likelihood of rehabilitation for the
debtor D & E Leasing. See Fishell v. U.S. Trustee, 1994 WL 64718 at *2
(affirming conversion of case from Chapter 11 to Chapter 7 where debtors lost the
primary asset on which they had relied for rehabilitation and reorganization).
While counsel for the debtor requested an evidentiary hearing and sought an
extension of time until March 8, 2010, to file a plan and disclosure statement, no
purpose would be served by hearing the proffered testimony or by granting an
extension of time, absent the reversal of the order granting relief from stay or a stay
of that order pending appeal. Nor is there anything in the evidence proffered by
debtor’s counsel that would cause this Court to change its earlier conclusion that
cause exists for granting relief from stay, which the Court reaffirmed on January
21, 2010, when it denied the debtor’s motion for reconsideration and to reopen the
evidentiary hearing on the issue of relief from stay. For example, a proffered
appraisal of approximately $767,000 for the apartment properties (as opposed to
the $600,000 appraisal submitted by Huntington Bank) would still leave
Huntington Bank significantly undersecured, given its secured claim in excess of
$1,200,000. In fact, the higher appraisal would actually increase the amount
needed to pay Huntington Bank to the extent that Huntington Bank were secured in
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fact by the higher appraisal.
In short, the same reasons that constituted “cause” for granting Huntington
Bank’s motion for relief from stay constitute “cause” for granting the
U.S. Trustee’s motion to convert or dismiss. The Court incorporates by reference
the findings in its oral ruling on December 15, 2009, as well as pages 7-12 of its
memorandum of opinion dated January 21, 2010, as to why there was essentially
no reasonable likelihood of a successful reorganization even before the Court
issued its order granting Huntington Bank’s motion for relief from stay. Because
the debtor, the U.S. Trustee, and Huntington Bank are in agreement that dismissal,
as opposed to conversion, is in the best interest of creditors and the estate, see
11 U.S.C. § 1112(b)(1), the Court will enter a separate order dismissing this case.
CONCLUSION
For the foregoing reasons, the U.S. Trustee’s motion to convert or dismiss is
granted, and this Chapter 11 case is dismissed.
IT IS SO ORDERED.
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