In-Possession. Magnolia Portfolio, LLC v. Dye (In re Dye)

• Decision Date: 22 November 2013
• Docket Number: No. 1:12–bk–00609MDF.,1:12–bk–00609MDF.
• Citation: 502 B.R. 47
• Parties: In re Stanley N. DYE and Susan E. Dye, d/b/a D & D Septic, d/b/a Buggy Bath Car Wash, d/b/a/ Six Links Mobile Home Park, d/b/a Holly Manor Mobile Home Park, d/b/a Salem Acres Mobile Home Park, Debtors–in–Possession. Magnolia Portfolio, LLC, Movant v. Stanley N. Dye and Susan E. Dye, d/b/a D & D Septic, d/b/a Buggy Bath Car Wash, d/b/a/ Six Links Mobile Home Park, d/b/a Holly Manor Mobile Home Park, d/b/a Salem Acres Mobile Home Park, Respondents.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

502 B.R. 47

In re Stanley N. DYE and Susan E. Dye, d/b/a D & D Septic, d/b/a Buggy Bath Car Wash, d/b/a/ Six Links Mobile Home Park, d/b/a Holly Manor Mobile Home Park, d/b/a Salem Acres Mobile Home Park, Debtors–in–Possession.Magnolia Portfolio, LLC, Movant

v.Stanley N. Dye and Susan E. Dye, d/b/a D & D Septic, d/b/a Buggy Bath Car Wash, d/b/a/ Six Links Mobile Home Park, d/b/a Holly Manor Mobile Home Park, d/b/a Salem Acres Mobile Home Park, Respondents.

No. 1:12–bk–00609MDF.

United States Bankruptcy Court, M.D. Pennsylvania.

Nov. 22, 2013.

Lawrence G. Frank, Dillsburg, PA, for Debtor and Joint Debtor.

OPINION

MARY D. FRANCE, Bankruptcy Judge.

Magnolia Portfolio, LLC (“Magnolia”) filed a motion for relief from the automatic stay (the “Relief Motion”) to exercise its state law rights against real and personal property owned by Stanley and Susan Dye (“Debtors”). Magnolia also requested the Court to appoint a Chapter 11 trustee, but only as to the operation of Debtors' businesses and commercial properties. At the hearing on the appointment of a Chapter 11 trustee, the Court declined to appoint a trustee with limited jurisdiction, but agreed to consider whether cause existed under 11 U.S.C. § 1112(b)(1) to convert the case to Chapter 7 (the “Conversion Motion”). For the reasons set forth below, relief from the stay will be granted in part. The case will not be converted to Chapter 7 pending Debtors' filing of an amended disclosure statement and plan of reorganization on or before January 1, 2014, which addresses the current status of Debtors' assets and liabilities. If Debtors fail to file an amended disclosure statement and plan by January 1, 2014 or are unable to confirm a plan on or before April 1, 2014, the case will be converted to Chapter 7.

I. Procedural History

Debtors filed a voluntary petition under Chapter 11 on February 2, 2012. In their schedules, Debtors listed the following assets that are relevant to Magnolia's Relief Motion:

810 North Hanover Street, Carlisle, PA 17013 ¹;

1107 Petersburg Road, Boiling Springs,

PA 17007 ²;

33–37 W. North Street, Carlisle, PA 17013;

801 Sand Bank Road, Mt. Holly Springs, PA 17065;

269 Red Tank Road, Boiling Springs, PA 17007;

29 W. North Street, Carlisle, PA 17013;

90 Salem Church Road, Mechanicsburg, PA 17056;

155 Salem Church Road, Mechanicsburg, PA 17056 ³;

1998 International (VIN 1HTSCAAM9WH566338);

1991 International (VIN 1HTSDZ7N2MH317100); and

1998 Peterbilt (VIN 3BPNHD7X4WF467604).

On July 5, 2013, Magnolia filed the motion now before me asserting that prior to filing their Chapter 11 petition, Debtors had defaulted on seven loans originated by Orrstown Bank (“Orrstown”) and transferred to Magnolia after the petition was filed. Magnolia asserts that each loan is secured by specific property and that all loans are cross collateralized by the above-listed assets (the “Collateral”). Magnolia alleges that after the petition was filed Debtors failed to make loan payments when they were due, failed to pay property taxes, and failed to maintain casualty insurance on the properties. Magnolia also asserts that relief should be granted because Debtors have allowed the Collateral to deteriorate and have no equity in the properties. Further, Magnolia argues that Debtors' business projections demonstrate that they are unable to generate sufficient income to cover debt service. Therefore, Magnolia argues, the properties are unnecessary for an effective reorganization. Accordingly, Magnolia seeks relief from the stay as to the remaining Collateral subject to the automatic stay.

Alternatively, Magnolia argues that cause exists to convert the case to Chapter 7. In support of its request for conversion, Magnolia asserts that the Collateral has decreased in value since the filing of the petition, that Debtors have grossly mismanaged estate assets, and that there is inadequate net income from operations to fund a plan. Magnolia also cites Debtors' failure to comply with the Court's May 28, 2013 order directing Debtors to cease operation of the drag strip on the Petersburg Road property.⁴

Debtors filed an Answer to Magnolia's Relief Motion on July 19, 2013 averring that they have proposed a confirmable plan of reorganization through which Magnolia's claims will be satisfied in full.⁵They dispute that cause exists to convert the case, citing to their compliance with reporting requirements and the sale of the Salem Church Road properties which enabled their largest secured creditor—Mid Penn Bank—to be paid in full. Debtors argue that they are making “regular monthly payments” to Magnolia and that Debtors' septic business is generating sufficient profits to fund payments to Magnolia. A hearing was held on both the Relief Motion and the Conversion Motion on August 6 and 27, 2013. The parties have filed briefs, and the matter is ready for decision.⁶

II. Factual Findings

Debtors are a married couple who, at the time of the filing of their bankruptcy petition, managed various residential and commercial properties, including three trailer parks, a drag strip, a car wash, and several apartments. Debtor Stanley Dye also operates a septic service, and Debtor Susan Dye is employed in her father's business.

Between July 2007 and March 2011, Debtors entered into a series of commercial loans with Orrstown secured by the Collateral. The balance due on these loans as of the petition date was $1,738,497.88. Four of the properties comprising the Collateral were sold or are in the process of being sold. None of the sales produced sufficient proceeds to satisfy, even in part, the loans now held by Magnolia.

A. The Collateral

In the motion now before me, Magnolia seeks relief from the stay to pursue its state law remedies against the following real properties:

33–37 W. North Street, Carlisle, PA 17013 (“33–37 W. North Street”);

801 Sand Bank Road, Mt. Holly Springs, PA 17065 (“Sand Bank Road”);

269 Red Tank Road, Boiling Springs, PA 17007 (“Red Tank Road”); and

29 W. North Street, Carlisle, PA 17013 (“29 W. North Street”).⁷

These properties serve as collateral for one or more of the seven loans now held by Magnolia. The loan documents require Debtors to make timely monthly payments, to maintain appropriate insurance on the properties, and to pay timely all real estate taxes. The mortgage securing each loan, except one, includes a cross-collateralization provision, which states as follows: “[i]n addition to the Note, this Mortgage secures all obligations, debts and liabilities, plus interest thereon, of either Grantor or Borrower to Lender, or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, [and] whether due or not due....” See, e.g., Exhibit M–13.⁸

The first of the four properties that remain subject to the automatic stay is actually two adjacent properties on W. North Street in Carlisle—33 W. North Street and 35–37 W. North Street. The property at 33 W. North Street is a 2.5 story two-family dwelling consisting of a single two-bedroom unit and a one-bedroom unit. Both units were occupied at the time the property was appraised in November 2011. The property at 35 W. North Street is a three-story brick row house attached to a furniture refinishing shop at 37 W. North Street. The row house has been converted into two apartments, with both units occupied as of August 2013. The furniture refinishing shop is no longer in operation, but empty drums, canisters, and other containers have been abandoned in the shop along with other refuse. As of November 2011, 33–37 W. North Street was valued at $210,000.

Sand Bank Road is a manufactured home park with 26 rented pads. The property was appraised at $540,000 in November 2011 and serves as collateral for three loans held by Magnolia.

Red Tank Road is a single manufactured home on a 1.23 acre parcel with an appraised value of $65,000 as of November 2011. The loan secured by Red Tank Road is also secured by 29 W. North Street, a single-family dwelling that was not habitable at the time of the hearing. Debtors were in the process of demolishing the interior of the property and converting it into two apartments, but they failed to obtain the required local permits before commencing demolition. In their schedules, Debtors report the value of this property to be $83,000, which was not disputed by Magnolia.

Subsequent to the hearings in this matter, Debtors submitted proof of payment of all post-petition taxes assessed against Sand Bank Road, Red Tank Road, 33–37 W. North Street, and 29 W. North Street. They also provided proof of insurance for all properties except Red Tank Road.

B. The Loans

Magnolia holds seven claims against Debtors derived from the seven loans originated by Orrstown. On April 4, 2012, Orrstown filed a proof of claim for each of the seven loans, which were transferred to Magnolia in February 2013. At the hearing, each party put on evidence regarding the status of post petition payments on each of the obligations. Debtors claimed to be substantially current on all loans while Magnolia argued that Debtors were delinquent on most loans and that all obligations were cross collateralized. The Court's review of the testimony and exhibits, as well as the claims filed of record, revealed a more complex situation than advanced by either party.

Both parties referred to each loan in the trial exhibits by the last four digits of the number assigned by Magnolia when it acquired the loans from Orrstown. Therefore, the same point of reference will be used when examining the status of each loan as set forth below.

• Loan 4231, in the amount of $485,000, was originated on August 20, 2007 Exhibit M–31 provides that the balance due on the loan as of July 31, 2013 was $372,966.88. This loan is secured by liens on Sand Bank Road and 810 N. Hanover Street.

• Loan 4232, in the amount of $400,000, was originated on October 8, 2009. Exhibit...