Quail Lake Estates Associates

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 08-41296 T
Chapter 11
QUAIL LAKE ESTATES ASSOCIATES,
L.P., etc.,
Debtor.
___________________________/
MEMORANDUM OF DECISION RE OSM’S
MOTION TO DISMISS CHAPTER 11 CASE
The motion to dismiss the above-captioned chapter 11 case filed
by 	Outsource 	Services 	Management 	LLC 	(“OSM”) 	came 	on 	for 	hearing
before the above-captioned Court on December 14, 2009. 	Appearances
were 	stated 	on 	the 	record. 	At 	the 	conclusion 	of 	the 	hearing, 	the
Court 	took 	the 	motion 	under 	submission. 	Having 	considered 	the
evidence presented and the argument made, both written and oral, the
Court now concludes that OSM’s motion to dismiss the chapter 11 case
should 	be 	granted. 	The 	reasons 	for 	the 	Court’s 	decision 	are 	set
forth below.
BACKGROUND
The above-captioned bankruptcy case was filed on March 19, 2008.
At that time, the above-captioned debtor (the “Debtor”) was the owner
Signed: December 23, 2009
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
December 23, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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of 	certain 	unimproved 	real 	property 	located 	in 	Nevada 	County,
California 	(the 	“Development 	Property”). 	The 	Development 	Property
was 	encumbered 	by 	a 	first 	deed 	of 	trust 	in 	favor 	of 	BankFirst. 	A
foreclosure sale had already been scheduled prior to the commencement
of 	the 	bankruptcy 	case. 	BankFirst 	continued 	the 	sale 	from 	time 	to
time during the pendency of the case.
An 	order 	confirming 	the 	Debtor’s 	reorganization 	plan 	(the
“Plan”) was entered on December 18, 2008. 	The Plan provided that the
Debtor would receive a discharge on the effective date. 	Article XI,
paragraph 	G. 	The 	effective 	date 	of 	the 	Plan 	was 	defined 	as 	the
twentieth 	business 	day 	after 	entry 	of 	the 	confirmation 	order.
Article II, paragraph A-22. 	Thus, the Plan became effective and the
Debtor received a discharge on January 20, 2009.
The Plan required the Debtor to meet certain benchmarks in the
development 	process 	by 	certain 	dates. 	One 	of 	the 	requirements 	was
that the Debtor pay all pre-confirmation delinquent property taxes,
penalties, and interest encumbering the Development Property within
30 	business 	days 	of 	the 	effective 	date 	of 	the 	Plan. 	The 	Plan
provided 	that, 	when 	the 	Debtor 	had 	obtained 	sufficient 	funding 	to
make the payments required to be paid within the first 30 days of the
effective 	date, 	the 	Plan 	would 	be 	deemed 	to 	be 	substantially
consummated. 	At 	that 	point, 	all 	remaining 	property 	of 	the 	estate
would 	revest 	in 	the 	Debtor, 	which 	would 	continue 	in 	existence 	as 	a
Reorganized Debtor. 	Article VIII, paragraph C.
The Plan provided that, if the Debtor failed to make any payment
contemplated 	by 	the 	Plan, 	BankFirst 	would 	be 	“entitled 	to 	exercise
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all 	remedies 	available 	under 	non-bankruptcy 	law 	to 	enforce 	its
claim....” 	The deadline for the Debtor to pay the pre-confirmation
delinquent 	property 	taxes 	was 	March 	4, 	2009. 	The 	Debtor 	failed 	to
make 	this 	payment. 	On 	March 	23, 	2009, 	BankFirst 	conducted 	a
foreclosure sale with respect to the Development Property, obtaining
title 	to 	the 	Development 	Property 	by 	virtue 	of 	a 	credit 	bid.
BankFirst did not record a new notice of sale before doing so.
Although 	BankFirst 	advised 	the 	Debtor 	of 	the 	default 	and 	of
pendency of the sale, it did not expressly advise the Debtor that it
intended 	to 	proceed 	with 	the 	sale 	on 	March 	23, 	2009. 	The 	Debtor
advised 	BankFirst 	that 	it 	had 	been 	unable 	to 	raise 	the 	funds
necessary to make the tax payment due to questions recently raised by
the Nevada County planning authorities concerning the Debtor’s plans
for dealing with wastewater. 	The Debtor stated that it expected to
be able to resolve these questions within ten days and to be able to
cure the default promptly thereafter. 	There does not appear to have
been 	any 	further 	communication 	between 	the 	parties 	prior 	to 	the
foreclosure 	sale. 	In 	or 	before 	October 	2009, 	BankFirst’ 	claim 	was
transferred to OSM.
For the reasons stated in the Memorandum of Decision Re Motion
to Dismiss by the FDIC, filed in Adversary Proceeding No. 09-4292 AT
(the “Adversary Proceeding”), the Court has concluded that, although
the 	foreclosure 	sale 	did 	not 	violate 	the 	automatic 	stay, 	it 	was
invalid under state law.
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1Alternatively, if cause is established but the Court
concludes that dismissal or conversion is not in the best interests
of creditors and the estate, the Court may order the appointment of
a chapter 11 trustee. 	11 U.S.C. § 1104(a)(3).
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DISCUSSION
A. 	ARGUMENT
OSM 	moves 	to 	dismiss 	the 	above-captioned 	bankruptcy 	case
pursuant 	to 	11 	U.S.C. 	§ 	1112(b). 	It 	asserts 	that 	dismissal 	rather
than conversion is in the best interests of creditors and the estate,
because 	the 	case 	is 	essentially 	a 	two 	party 	dispute 	between 	the
Debtor and OSM.
Section 	1112(b)(1) 	provides 	that, 	on 	request 	of 	a 	party 	in
interest, 	if 	the 	party 	establishes 	cause, 	absent 	unusual
circumstances indicating that it would not be in the best interest of
the creditors and estate to do so, the Court is required to convert
the case to chapter 11 or dismiss it. 	The unusual circumstances must
be 	specifically 	identified 	by 	the 	Court. 	11 	U.S.C. 	§ 	1112(b)(1). 1
Section 1112(b)(4) provides that cause includes: (1) “failure timely
to pay taxes owed after the date of the order for relief”, 11 U.S.C.
§ 1112(b)(4)(I); (2) “failure to maintain appropriate insurance that
poses 	a 	risk 	to 	the 	estate”, 	11 	U.S.C. 	§ 	1112(b)(4)(C); 	(3)
“inability 	to 	effectuate 	substantial 	consummation 	of 	a 	confirmed
plan”; 11 U.S.C. § 1112(b)(4)(M); and (4) “termination of a confirmed
plan 	by 	reason 	of 	the 	occurrence 	of 	a 	condition 	specified 	in 	the
plan”, 11 U.S.C. § 1112(b)(4)(O).
Conversion or dismissal is not mandatory if the debtor or other
objecting 	party 	in 	interest 	establishes 	that: 	(1) 	“there 	is 	a
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reasonable 	likelihood 	that 	a 	plan 	will 	be 	confirmed 	within...a
reasonable 	period 	of 	time” 	and 	(2) 	“the 	grounds 	for 	granting 	such
relief 	include 	an 	act 	or 	omission 	of 	the 	debtor 	other
than...[substantial 	or 	continuing 	loss 	to...the 	estate 	and 	the
absence 	of 	a 	reasonable 	likelihood 	of 	rehabilitation”] 	for 	which
there is a “reasonable justification” and “that will be cured within
a 	reasonable 	period 	of 	time 	fixed 	by 	the 	court.” 	11 	U.S.C. 	§
1112(b)(2).
OSM 	contends 	that, 	as 	of 	the 	filing 	of 	the 	motion 	to 	dismiss,
the 	Debtor 	owed 	$305,002.77 	in 	delinquent 	real 	property 	taxes 	on
which $3,977.22 in interest continued to accrue each month. 	It notes
that 	the 	Debtor 	conceded 	this 	default 	in 	the 	Adversary 	Proceeding.
Therefore, OSM asserts, there is cause to dismiss the case pursuant
to 11 U.S.C. § 1112(b)(4)(I). 	With respect to the alleged insurance
default, OSM contends that the last evidence of insurance provided by
the Debtor to Bankfirst stated that the insurance would expire on May
14, 	2009. 	Accordingly, 	OSM 	contends 	that 	there 	is 	also 	cause 	to
dismiss the case pursuant to 11 U.S.C. § 1112(b)(4)(C).
OSM 	notes 	that, 	in 	the 	complaint 	filed 	by 	the 	Debtor 	in 	the
Adversary 	Proceeding, 	the 	Debtor 	conceded 	that 	it 	has 	not
substantially consummated the Plan. 	Therefore, OSM contends, there
is 	also 	cause 	to 	dismiss 	the 	case 	pursuant 	to 	11 	U.S.C. 	§
1112(b)(4)(M). 	Finally, 	OSM 	contends 	that, 	due 	to 	the 	Debtor’s
defaults under the Plan, in particular, its failure to pay the pre-
confirmation delinquent property taxes by March 4, 2009, the Plan has
terminated. 	Therefore, 	there 	is 	also 	cause 	to 	dismiss 	the 	case
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pursuant 	to 	11 	U.S.C. 	§ 	1112(b)(4)(O). 	The 	motion 	is 	supported 	by
the 	Declaration 	of 	Paul 	Ekholm 	(“Ekholm” 	and 	the 	“Ekholm
Declaration”), a Senior Vice President of BankFirst responsible for
monitoring and collecting BankFirst’s claim against the Debtor.
The 	Debtor 	filed 	a 	memorandum 	in 	opposition 	to 	the 	motion 	to
dismiss the chapter 11 case. 	In the memorandum, the Debtor asserts
that the foreclosure sale on March 23, 2009 was improper. 	It further
asserts 	that, 	as 	a 	result 	of 	the 	foreclosure 	sale, 	the 	Debtor 	was
unable to perform the various benchmarks required by the Plan. 	For
that 	reason, 	it 	contends, 	the 	Court 	should 	not 	consider 	these
defaults 	as 	cause 	for 	dismissal 	under 	§ 	1112(b). 	The 	Debtor
acknowledges 	that 	this 	excuse 	does 	not 	apply 	to 	the 	failure 	to 	pay
the pre-confirmation delinquent property taxes which were due prior
to the foreclosure sale.
The Debtor cites language from Article X of the Plan providing
that the Court will retain jurisdiction to resolve disputes related
to 	the 	Plan 	and 	to 	enforce 	the 	Plan 	provisions. 	It 	contends 	that
this gives the Court the power to construe the Plan so as to excuse
the Debtor from performing obligations rendered impossible to perform
by 	the 	secured 	creditor’s 	misconduct. 	Moreover, 	the 	Debtor 	notes
that, because the Plan has not been substantially consummated, it is
capable 	of 	being 	modified. 	See 	11 	U.S.C. 	§ 	1127(b). 	The 	Plan 	can
still be performed, albeit along a somewhat later timeline, because
the 	California 	legislature 	has 	further 	extended 	the 	deadline 	for
obtaining 	the 	requisite 	approvals 	for 	recordation 	of 	final
subdivision maps under these circumstances.
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The 	Debtor 	disputes 	OSM’s 	contention 	that 	this 	is 	a 	two 	party
dispute. 	It asserts that there are numerous other creditors, secured
and unsecured, which the Plan proposed to pay in full. 	Finally, it
contends that OSM lacks standing to bring the motion to dismiss for
two 	reasons. 	First, 	it 	lacks 	standing 	because, 	as 	a 	result 	of 	the
foreclosure 	sale, 	it 	does 	not 	hold 	a 	claim 	against 	the 	estate.
Second, it lacks standing because it has not coherently explained or
provided evidence of what rights it holds against the estate.
In support of its opposition, the Debtor filed the declarations
of 	Thomas 	Dashiell, 	the 	CEO 	of 	the 	Debtor, 	and 	John 	Ham 	(“Ham” 	and
“Ham Declaration”), a principal of IMC, whose responsibility it was
to 	raise 	the 	funding 	for 	the 	development 	project. 	In 	the 	Ham
Declaration, Ham states that, “as of early March 2009 after speaking
with 	various 	investors, 	I 	was 	confident 	that 	IMC’s 	investors 	were
prepared 	to 	promptly 	fund 	not 	only 	the 	unpaid 	property 	taxes, 	but
also the additional amounts the Plan required...[the Debtor] to fund
to 	prevent 	BankFirst 	from 	foreclosing 	its 	deed 	of 	trust” 	[Emphasis
added.] 	Ham Declaration, page 2, lines 20-24.
In reply, OSM limits its recitation of cause to the tax payment
default and the resulting “termination” of the Plan. 	It notes that
the Debtor admits that its failure to satisfy this crucial benchmark
was not caused by BankFirst’s foreclosure sale. 	It points out that
each 	ground 	of 	cause 	enumerated 	in 	11 	U.S.C. 	§ 	1112(b)(4) 	stands
independently 	and 	is 	itself 	sufficient 	to 	compel 	dismissal 	or
conversion. 	It states that the Debtor has admitted the existence of
one of these grounds: i.e., the failure to pay the pre-confirmation
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2OSM also contends that the Plan terminated as result of the
March 4, 2009 tax payment default, giving rise to an additional
undisputed instance of cause under 11 U.S.C. § 1112(b)(4). 	The
Court finds this assertion unpersuasive. 	OSM fails to identify any
language in the Plan stating that the Plan terminates in the event
of a default. 	OSM also contends that the Debtor is guilty of
laches by having waited four months after the foreclosure sale to
challenge its validity. 	This argument is also unpersuasive. 	OSM
fails to identify any significant prejudice as a result of the four
month delay.
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delinquent 	property 	taxes. 	Thus, 	conversion 	or 	dismissal 	is
presumptively required by the statute.
Finally, OSM contends that the Debtor’s attack on its standing
is 	an 	attempt 	to 	sidetrack 	the 	Court 	from 	the 	heart 	of 	the 	issues.
It 	notes 	that 	the 	FDIC 	was 	appointed 	as 	receiver 	of 	BankFirst.
Thereafter, 	the 	FDIC, 	as 	receiver 	for 	BankFirst, 	transferred 	its
rights 	and 	obligations 	to 	service 	the 	loans 	to 	Ralron 	Capital
Corporation 	(“Ralron”), 	and 	Ralron 	susequently 	transferred 	these
rights 	to 	OSM. 	It 	refers 	to 	the 	Ekholm 	Declaration 	as 	evidentiary
support for these allegations. 2
B. 	DECISION
As OSM points out, the Debtor has conceded that it failed to pay
the 	pre-confirmation 	delinquent 	property 	taxes 	by 	March 	4, 	2009.
This constituted a default under the Plan. 	Pursuant to 11 U.S.C. §
1112(b)(2), 	absent 	unusual 	circumstances, 	which 	the 	Court 	must
specifically identify, the Court is required to convert the case to
chapter 	7 	or 	dismiss 	it. 	Moreover, 	to 	avoid 	one 	of 	these
consequences, 	the 	Debtor 	must 	establish 	that 	there 	is 	a 	reasonable
likelihood that a plan can be confirmed within a reasonable time and
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that the act or omission was substantially justified and can be cured
within a reasonable time.
The 	Court 	will 	accept 	the 	Debtor’s 	representation 	that 	its
inability to raise approximately $300,000 by March 4, 2009 in order
to 	pay 	the 	pre-confirmation 	delinquent 	property 	taxes 	was 	due 	to
questions recently raised by the Nevada County planning authorities
and that, but for those questions, the taxes would have been timely
paid. 	However, 	the 	Court 	does 	not 	consider 	this 	a 	sufficiently
unusual circumstance in the world of development projects to meet the
standard 	set 	by 	§ 	1112(b). 	The 	Debtor 	has 	not 	made 	a 	payment 	on
OSM’s secured claim since 2007.
This 	is 	a 	single 	asset 	case 	which 	is 	required 	by 	11 	U.S.C. 	§
362(d)(3) to move promptly. 	The reason the Court declined to confirm
prior 	versions 	of 	the 	Plan 	was 	that 	it 	failed 	to 	establish 	firm
deadlines for the Debtor to accomplish certain things. 	To excuse the
Debtor from meeting the very first important benchmark would make a
mockery of the version of the Plan the Court confirmed.
Therefore, 	the 	Court 	believes 	that 	conversion 	or 	dismissal 	is
appropriate. 	Under the circumstances, regardless of whether or not
this is a two party dispute, the Court believes conversion to chapter
7 would accomplish nothing for creditors. 	Therefore, the case will
be dismissed.
The 	Court 	is 	satisfied 	that 	OSM 	has 	standing 	to 	bring 	the
motion. 	The 	Court 	notes 	that, 	on 	October 	22, 	2009, 	OSM 	filed 	and
served 	on 	BankFirst’s 	attorney 	of 	record 	a 	notice 	that 	BankFirst’s
claim 	had 	been 	transferred 	to 	it 	other 	than 	for 	security. 	No
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objection to the notice was been filed by BankFirst.
CONCLUSION
OSM’s 	motion 	to 	dismiss 	the 	Debtor’s 	chapter 	11 	case 	will 	be
granted. 	The 	Debtor 	has 	conceded 	that 	it 	failed 	to 	pay 	the 	pre-
confirmation delinquent property taxes which the Plan required it to
pay 	by 	March 	4, 	2009. 	This 	constitutes 	“cause” 	to 	dismiss 	the
chapter 11 case or to convert it to chapter 7 pursuant to 	11 U.S.C.
§ 	1112(b)(2). 	The 	Court 	is 	unable 	to 	find 	that 	the 	default
constituting 	“cause” 	resulted 	from 	“unusual 	circumstances” 	so 	that
dismissal 	or 	conversion 	would 	not 	be 	presumptively 	required. 	In
addition, the Debtor has failed to persuade the Court that the Court
would 	be 	reasonably 	likely 	to 	confirm 	a 	modified 	plan 	within 	a
reasonable time. 	The Court concludes that, given the nature of the
Debtor’s assets, no purpose would be served by converting the case to
chapter 	7 	or 	ordering 	the 	appointment 	of 	a 	chapter 	11 	trustee.
Therefore, the case will be dismissed. 	The Court is also satisfied
that OSM has standing to bring the motion.
Counsel for OSM is directed to submit a proposed form of order
in accordance with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
James D. Wood
Law Offices of James D. Wood
3675 Mt. Diablo Blvd. #250
Lafayette, CA 94549-3775
Thomas Greco
Turner, Reynolds, Greco and O'Hara
16485 Laguna Canyon Rd., #250
Irvine, CA 92618
Joshua D. Wayser
Katten Muchin Rosenman
2029 Century Park E #2600
Los Angeles, CA 90067
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