In re 2218 Bluebird Ltd. Partnership
| Decision Date | 13 June 1984 |
| Docket Number | Bankruptcy No. 84-00814-P11. |
| Citation | 41 BR 540 |
| Parties | In re 2218 BLUEBIRD LIMITED PARTNERSHIP, Debtor. SUNDSTROM MORTGAGE CO., INC., Petitioner, v. 2218 BLUEBIRD LIMITED PARTNERSHIP, Debtor, Respondent. |
| Court | U.S. Bankruptcy Court — Southern District of California |
Gary E. Slater, Hinchy, Witte, Wood, Anderson & Hodges, San Diego, Cal., for petitioner.
2218 Bluebird Limited Partnership, pro. per.
MEMORANDUM AND ORDER AWARDING SANCTIONS AGAINST LESLIE BEAUMONT AND CARL W. HAYS
This matter is before the Court on the Application of Sundstrom Mortgage Co., Inc., for sanctions against the Debtor herein and its principals, Leslie Beaumont and Carl W. Hays, for the allegedly frivolous and bad faith filing of the within Chapter 11 bankruptcy petition.
This Opinion is filed to explain this Court's decision, concluding that the filing of this bankruptcy case by these individuals was an abuse and an imposition on the Bankruptcy Court, warranting appropriate sanctions.
Sundstrom Mortgage Co., Inc., ("Sundstrom") is the beneficiary of a note, having a principal balance of $24,000, secured by a deed of trust on property located at 2218 Bluebird Street, San Diego, California (the "property"). Gary E. Hill ("Hill") was the owner of the property and the trustor under the deed of trust. Pursuant to the terms of the note, all sums became due and payable on April 15, 1983. Hill failed to make payment and Sundstrom initiated a non-judicial foreclosure proceeding. Hill averted the actual sale by filing a bankruptcy petition under Chapter 13 of the United States Bankruptcy Code ("Code") on September 2, 1983.
On November 4, 1983, Hill and Sundstrom entered into a stipulation providing that Hill would have until April 1, 1984, to sell the property and pay Sundstrom. Hill failed to make certain payments provided in the stipulation and Sundstrom sought and obtained an ex parte order terminating the automatic stay on January 25, 1984.
Sundstrom rescheduled its foreclosure sale for February 27, 1984. On February 24, 1984, without prior approval of the Bankruptcy Court and without consideration, Hill quitclaimed the Property to Leslie Beaumont ("Beaumont"). The property was transferred subject to an oral "trust agreement" providing that ". . . as soon as we completed the loan on the property then we would return back to him all his equity in the property, less all the fees and costs." Reporter's Transcript, p. 18, line. 14-16. As part of this transaction, Hill also entered into an agreement with American Consolidated Group ("ACG").1 In return for securing an investor, putting a loan package together and doing all the advertising concerning Hill's property, ACG could retain $6,500 directly out of any refinancing escrow. Of those funds, Beaumont was to receive approximately $1,000 for his consultation services.
On February 27, 1984, Beaumont conveyed title to the property to another entity named "2218 Bluebird Limited Partnership" (the "Debtor" herein). On the same day, the Debtor filed this Chapter 11 petition through Beaumont, its "general partner in pro per", thus forestalling yet another of Sundstrom's foreclosure sales.
The Debtor's statement of affairs lists the Debtor's business as "financial restructuring." Beaumont is listed as the general partner and Hays is listed as the sole limited partner. The only asset of the partnership is the subject real property with secured encumbrances totaling $72,500 held by Great American Federal, Sundstrom Mortgage and Hays.2 No unsecured creditors are listed.
On March 13, 1984, Sundstrom filed an ex parte application with this Court seeking termination of the automatic stay and monetary sanctions. After reviewing the ex parte application and the documentation in support thereof, this Court ordered the stay annulled, leaving Sundstrom free to exercise its rights as provided under its note and deed of trust. On March 16, 1984, the property was sold at Sundstrom's foreclosure.
Whether the filing of this Chapter 11 case constituted conduct tantamount to bad faith, warranting sanctions against either this Debtor, Beaumont or Hays, in either their representative or individual capacities.
In order for this Court to impose sanctions against these parties, there must first be a finding that their conduct with respect to this bankruptcy case constituted or was tantamount to bad faith.
Section 1112(b) does not expressly require a petition for relief under Chapter 11 to be filed in good faith. However, as recently noted by the Appellate Panel in In Re Thirtieth Place, Inc., 30 B.R. 503, 505 (BAP 9th Cir.1983), there is an implied requirement of good faith when filing any bankruptcy petition.
There is no precise definition as to what good faith entails. However, evidence of an intent to cause hardship or delay to creditors by resorting to the Chapter 11 device, merely for the purpose of invoking the automatic stay without an intent or ability to reorganize financial activities, is an abuse of the reorganization process. Such conduct is sufficient "cause" upon which a case may be dismissed, and where appropriate, subject to sanctions. See, In re Trust Deed Center, 36 B.R. 846, 848-49 (C.D.Cal.1984).
The so-called "new debtor syndrome" is commonly raised by secured creditors who find that their foreclosure sale is stayed by the transfer of the property to a new entity which immediately files bankruptcy. See, generally, In Re Trust Deed Center, supra; In Re Thirtieth Place, Inc., supra; In Re Wong, 30 B.R. 87 (C.D.Cal.1983); In Re Sacramento Metropolitan Real Estate Investors, 28 B.R. 228 (E.D.Cal.1983); In Re Jack-Hemp Associates, 20 B.R. 412 (S.D.N.Y.1982); In Re Avan, Inc., 25 B.R. 121 (D.Ore.1982); In Re FJD, Inc., 24 B.R. 138 (D.Nev.1982); In Re Alison Corp., 9 B.R. 827 (S.D.Cal.1981); In Re Dutch Flat Investment Co., 6 B.R. 470 (N.D.Cal.1980).
However, the transfer of assets to a new entity on the eve of a Chapter 11 filing is merely evidence of an improper state of mind. Such transfers are subject to careful scrutiny by the Court. See, In re Levinsky, 23 B.R. 210, 218 (E.D.N.Y. 1982). The Court must look to the substance of what has been done to determine whether the transfer to the new entity has detrimentally altered the substantive or procedural rights of any creditor regarding assets which were available prior to the transfer. See, In Re Beach Club, 22 B.R. 597, 599 (N.D.Cal.1982). A filing may be in good faith despite the recent creation of the debtor if the debtor was organized and the case was filed for a legitimate business reason with an eye towards legitimate reorganization. See, In Re Spenard Ventures, 18 B.R. 164, 167 (D.Alaska 1982); see also, In Re I-5 Investors, Inc., 25 B.R. 346, 353 (D.Ore.1982).
Like the transfer of the property on the eve of filing, the absence of scheduled unsecured creditors by itself does not indicate bad faith per se; it is merely another factor to be considered when examining the debtor's motive for the filing. See, Matter of Gagel & Gagel, 24 B.R. 671, 672 (S.D. Ohio 1982).
The situation before this Court is neither the standard "multiple filing" situation by the same debtor, nor the classic "new debtor syndrome" situation outlined above. Rather, this filing represents a combination of the two.
Hill initially filed his Chapter 13 to avoid the pending foreclosure by Sundstrom. Having defaulted under the terms of the stipulation, Hill faced the inevitable foreclosure by Sundstrom on February 27, 1984. Beaumont convinced Hill to frustrate Sundstrom's foreclosure sale by transferring the property. Despite Beaumont's actual knowledge of the pending foreclosure by Sundstrom and the fact that this Court exercised jurisdiction over this property, Beaumont transferred the property to a newly-created entity which became the debtor herein.
This Debtor has no unsecured creditors; the admitted business of the debtor is merely "financial restructuring." At both the 341(a) first meeting of creditors as well as the hearing regarding this matter, Beaumont admitted to being the general partner of at least nine similar "limited partnership" debtors.3 Beaumont further noted that the only reason for the creation of the debtor was "to secure new financing on this property and to restore that back to the original parties and sic through an oral trust agreement." (Transcript of proceedings —Section 341(a) hearing, p. 7, line 9).
It is clear from these facts that there is no bona fide economic basis for the creation of the debtor, the transfer to it of the property and the filing of the petition. The property is heavily encumbered, making refinancing both impractical and unlikely. Beaumont and Hays created an entity solely for the purpose of filing bankruptcy.4 Their only intent was to buy additional time to refinance and obtain their $6,500 fee at Sundstrom's expense.
The final consideration in determining whether this case was filed in bad faith is the actual harm to the creditors as a result of the transfer. As noted by the Panel in In Re Thirtieth Place, Inc., supra, at p. 506, mere delay to creditors, in and of itself, will not constitute bad faith or give rise to dismissal. However, when added to the other patently abusive factors which are present here, the resulting injury is sufficient to support a finding of bad faith. In that case, as in this case, a new debtor entity was created to receive property from an existing debtor for the sole purpose of delay. This petition was filed to subvert the legitimate rights of Sundstrom. There was no reasonable expectation that the Debtor could successfully reorganize. Under these circumstances, there can be no other conclusion than the filing...
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