El Cerrito Land Partners, LLC

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 09-41370 T
Chapter 11
EL CERRITO LAND PARTNERS, LLC,
Debtor-in-Possession.
_______________________________/
MEMORANDUM OF DECISION
The 	above-captioned 	case 	came 	before 	the 	Court 	on 	October 	5,
2009 	on 	the 	Court’s 	Order 	to 	Show 	Cause 	why 	the 	case 	should 	not 	be
converted or dismissed, secured creditor Preferred Bank’s motion for
relief 	from 	the 	automatic 	stay, 	and 	the 	debtor’s 	application 	to
employ 	David 	Lonich 	(“Lonich”) 	as 	bankruptcy 	counsel. 	Appearances
were 	stated 	on 	the 	record. 	At 	the 	conclusion 	of 	the 	hearing, 	the
Court took the matters under submission. 	Having now fully considered
the 	facts 	of 	the 	case 	and 	the 	applicable 	law, 	the 	Court 	concludes
that Preferred Bank should be granted relief from the automatic stay,
that the debtor’s application to employ Lonich should be denied, and
that 	the 	case 	should 	be 	dismissed 	as 	a 	bad 	faith 	filing 	with 	a 	120
day 	bar 	on 	refiling. 	The 	reasons 	for 	the 	Court’s 	decision 	are 	set
forth below.
Signed: October 06, 2009
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
October 06, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 09-41370 Doc# 47 Filed: 10/06/09 Entered: 10/06/09 15:58:53 Page 1 of 8

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SUMMARY OF FACTS AND PROCEDURAL HISTORY
The 	above-captioned 	case 	was 	filed 	on 	February 	24, 	2009. 	The
petition 	was 	signed 	by 	William 	Garlock 	(“Garlock”) 	as 	President 	of
the debtor. 	Schedule A schedules as the debtor’s sole real property
asset 	fee 	title 	to 	real 	property 	located 	in 	El 	Cerrito, 	California
(the “Property”). 	Schedule D listed three secured creditors: (1) the
Contra 	Costa 	tax 	collector 	with 	a 	claim 	of 	approximately 	$455,000,
(2) 	a 	first 	deed 	of 	trust 	held 	by 	Preferred 	Bank 	with 	a 	claim 	of
approximately 	$6,500,000, 	and 	(3) 	a 	second 	deed 	of 	trust 	held 	by
Garlock Loan Fund LLC with a claim of approximately $2,800,000.
On April 15, 2009, some amended Schedules were filed. 	Schedule
A was amended to indicate that, rather than owning fee title to the
Property, 	the 	debtor 	held 	only 	an 	option 	to 	purchase 	the 	property.
Schedule D was amended to list an additional secured creditor, MCD-RC
CA-El Cerrito LLC (“Landlord”), with a claim of $18,000.
A 	status 	conference 	was 	conducted 	on 	April 	28, 	2009 	at 	which
Lonich appeared on behalf of the debtor. 	At that time, the Court set
a 	deadline 	of 	August 	26, 	2009 	for 	the 	debtor 	to 	file 	a 	plan 	and
disclosure 	statement. 	An 	order 	to 	that 	effect 	was 	issued 	on 	April
29, 	2009 	(the 	“Scheduling 	Order”). 	At 	the 	status 	conference, 	the
Court admonished Lonich concerning the debtor’s failure to apply for
approval 	of 	his 	employment. 	Lonich 	assured 	the 	Court 	that 	the
application would be filed promptly. 	It was not.
On 	June 	11, 	2009, 	Preferred 	Bank 	filed 	a 	motion 	to 	deem 	the
debtor a single asset real estate entity in accordance with 11 U.S.C.
§ 101(51B). 	The motion was served on the debtor with notice of the
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opportunity 	to 	object 	and 	request 	a 	hearing. 	The 	debtor 	did 	not
respond 	to 	the 	motion, 	and 	the 	motion 	was 	granted 	pursuant 	to 	an
order entered on July 30, 2009.
On 	August 	26, 	2009, 	the 	debtor 	filed 	a 	plan 	and 	disclosure
statement, 	requesting 	conditional 	approval 	of 	the 	disclosure
statement in accordance with the Court’s Scheduling Order. 	On August
31, 	2009, 	having 	noted 	the 	debtor’s 	failure 	to 	file 	an 	employment
application as promised, the Court issued an order to show cause why
the 	case 	should 	not 	be 	converted 	to 	chapter 	7 	or 	dismissed. 	The
order 	to 	show 	cause 	was 	noticed 	for 	hearing 	on 	September 	16, 	2009.
In 	the 	order, 	the 	Court 	noted 	that, 	as 	an 	entity, 	without 	counsel,
the 	debtor 	was 	not 	qualified 	to 	appear 	in 	court. 	Thus, 	the 	case
would have to be dismissed unless counsel’s employment was approved.
On 	September 	2, 	2009, 	the 	Court 	issued 	a 	memorandum 	after
reviewing 	the 	plan 	and 	disclosure 	statement. 	The 	Court 	found 	that
the 	plan 	was 	fundamentally 	flawed 	and 	appeared 	to 	be 	filed 	in 	bad
faith. 	The case was purportedly a single asset real estate case. 	In
the 	plan, 	the 	debtor 	took 	the 	position 	that 	the 	bankruptcy 	filing
stayed 	Preferred 	Bank’s 	foreclosure. 	Yet, 	in 	the 	disclosure
statement, 	the 	debtor 	admitted 	holding 	only 	an 	option 	to 	purchase
title 	to 	the 	Property. 	The 	Court 	noted 	that 	the 	debtor’s
misrepresentations 	in 	the 	plan 	and 	disclosure 	statement 	would 	be
taken into account at the hearing on the Court’s order to show cause.
In 	response 	to 	the 	order 	to 	show 	cause, 	the 	debtor 	filed 	a
declaration by Lonich that the debtor actually held a 2% interest in
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1The amended application continues to represent that the
Property (not a 2% interest in the Property or an option to
purchase the Property) is the sole tangible asset of the debtor.
The application represented that Lonich’s only connection with the
debtor was that he represented-–i.e., had in the past--Garlock &
Company on an unrelated matter.
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the Property as a tenant-in-common as well as an option to repurchase
the interests of the other tenants-in-common.
In 	the 	mean 	time, 	on 	September 	2, 	2009, 	the 	debtor 	filed 	an
application 	to 	employ 	Lonich 	as 	bankruptcy 	counsel. 	Lonich’s
declaration 	in 	support 	of 	the 	application 	stated 	that 	he 	had 	no
connections with the debtor or with any party in interest except that
he 	was–-i.e., 	currently--providing 	legal 	services 	for 	Garlock 	&
Company. 	The Office of the United States Trustee (the “UST”) filed
an 	objection 	to 	the 	employment 	application 	on 	various 	grounds,
including 	that 	the 	relationship 	of 	Garlock 	& 	Company 	to 	the 	debtor
was not adequately explained. 	At the hearing, the Landlord raised an
oral objection on this ground which was later filed in written form.
At 	the 	conclusion 	of 	the 	hearing, 	the 	Court 	continued 	the
hearing 	on 	the 	order 	to 	show 	cause 	and 	employment 	application 	to
October 	5, 	2009. 	It 	directed 	the 	debtor 	to 	make 	one 	payment 	to
Preferred 	Bank, 	to 	file 	an 	amended 	Schedule 	A, 	to 	file 	an 	amended
employment 	application, 	and 	to 	provide 	evidence 	to 	the 	UST 	of 	the
ownership of a 2% interest in the Property. 	Preferred Bank filed a
motion for relief from stay which was set for a preliminary hearing
on October 5, 2009, to be heard with the other two continued matters.
An 	amended 	employment 	application, 	together 	with 	an 	amended
declaration by Lonich, was filed on September 18, 2009. 1 	The amended
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26 2The Court notes that the plan also lists a creditor entitled
Garlock Loan Fund as holding a deed of trust on the Property. 	This
secured creditor has not even been scheduled.
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Lonich 	declaration 	stated 	that 	Lonich 	had-–i.e, 	in 	the 	past--
represented 	Garlock 	& 	Company 	in 	November 	2008 	by 	preparing 	a
tenancy-in-common agreement and tenant lease for an office building
in San Francisco, California. 	It asserted that Garlock & Company was
managed by Garlock who was the president of the debtor. 	However, he
asserted 	that 	Garlock 	& 	Company 	had 	no 	“membership, 	management 	or
creditor interest” in the debtor.
At the October 5, 2009 hearing, the UST and Landlord continued
to object to the employment application, most seriously on the ground
of 	an 	apparent 	conflict. 	The 	Court 	noted 	that 	the 	plan 	listed
Garlock & Company as holding the junior deed of trust on the Property
which 	was 	clearly 	inconsistent 	with 	Lonich’s 	representation 	in 	the
amended declaration. 2
In 	support 	of 	its 	motion 	for 	relief, 	Preferred 	Bank 	asserted
that 	the 	plan 	was 	clearly 	in 	bad 	faith. 	It 	noted 	that 	the 	plan
proposed 	to 	pay 	Preferred 	Bank 	nothing 	for 	a 	period 	of 	up 	to 	two
years while it attempted to sell or refinance the Property. 	At the
same time, the plan purported to give the debtor all the protections
of a debtor-in-possession with none of its burdens.
DISCUSSION
Based 	on 	the 	foregoing, 	the 	Court 	concludes 	that 	the 	above-
captioned 	case 	is 	a 	bad 	faith 	filing, 	that 	Preferred 	Bank’s 	motion
for 	relief 	from 	the 	automatic 	stay 	should 	be 	granted, 	and 	that 	the
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case 	should 	be 	dismissed 	with 	a 	120 	day 	bar 	on 	refiling. 	The 	plan
proposed would be unlikely to pass muster in any chapter 11 filing.
However, in a single asset real estate case, it is clearly untenable.
Section 362(d)(3) provides that, in a single asset real estate
case, 	the 	secured 	creditor 	is 	entitled 	to 	relief 	unless 	not 	later
than 	90 	days 	after 	the 	entry 	of 	the 	order 	for 	relief 	or 	within 	30
days 	of 	the 	court’s 	determination 	that 	the 	case 	is 	a 	single 	asset
real estate case, whichever occurs later, the debtor does one of two
things. 	The 	debtor 	may 	prevent 	relief 	being 	granted 	by 	commencing
payments equal to the nondefault contract interest rate on the claim
up to the value of the real property. 	Alternatively, the debtor may
prevent relief being granted by filing a plan that has a reasonable
possibility of being confirmed within a reasonable time. 	The Court
concludes that the plan filed by the debtor on August 26, 2009 does
not 	have 	a 	reasonable 	possibility 	of 	being 	confirmed 	within 	a
reasonable time.
As 	noted 	above, 	the 	case 	was 	established 	to 	be 	a 	single 	asset
real estate case by the Court’s July 30, 2009 order. 	The debtor did
not commence making the required interest payment to Preferred Bank
thereafter 	although 	it 	did 	make 	the 	one 	payment 	to 	Preferred 	Bank
ordered by the Court on September 16, 2009. 	Instead, the debtor did
file 	a 	plan. 	However, 	as 	noted 	by 	Preferred 	Bank, 	the 	plan 	was 	a
plan 	in 	name 	only. 	In 	essence, 	it 	proposed 	that 	the 	debtor 	would
have another two years to attempt to sell or refinance the Property
without 	making 	any 	payments 	to 	Preferred 	Bank. 	This 	is 	clearly
contrary 	to 	the 	spirit 	of 	§ 	362(d)(3) 	which 	was 	enacted 	to 	prevent
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single 	asset 	real 	estate 	debtors 	from 	using 	chapter 	11 	for 	the
purpose 	of 	delay 	in 	the 	hopes 	that 	the 	real 	estate 	market 	would
improve.
Although the disposition of the case renders the issue Lonich’s
employment 	moot, 	the 	Court 	would 	be 	unwilling 	to 	approve 	his
employment 	in 	any 	event 	based 	on 	the 	inconsistent 	and 	incomplete
representations concerning Lonich’s past and current representations
of Garlock and his various entities and based on the connections of
Garlock and those entities to the debtor.
CONCLUSION
The motion of Preferred Bank for relief from the automatic stay
will be granted. 	Counsel for Preferred Bank is directed to submit a
proposed form of order to that effect. 	The Court will issue an order
dismissing the case, effective immediately after entry of the order
granting relief, with a 120 day bar on refiling.
END OF DOCUMENT
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COURT SERVICE LIST
David J. Lonich
Law Offices of David J. Lonich
1600 Los Gamos Dr. #345
San Rafael, CA 94903
Kenneth N. Russak
Frandzel Robins Bloom & Csato, L.C.
6500 Wilshire Blvd., 17 th Floor
Los Angeles, CA 90048-4920
Emily Charley
Hanson Bridgett
425 Market St., 26 th Floor
San Francisco, CA 94105
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