In re 401 Props. Ltd., Bankr. No. 14-44983

• Decision Date: 04 August 2016
• Docket Number: Bankr. No. 14-44983
• Parties: In re 401 Properties Limited Partnership, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

In re 401 Properties Limited Partnership, Debtor.

Bankr. No. 14-44983

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

August 4, 2016

Chapter 11

Judge Jacqueline P. Cox

Memorandum Opinion

I. Jurisdiction

Bankruptcy courts have authority by statute to "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) . . . and may enter appropriate orders and judgments, subject to review under section 158 of this title." 28 U.S.C. § 157(b)(1). Core proceedings include motions to terminate, annul, or modify the automatic stay, the issue presented by the matter at Docket No. 206: Legacy Re and Rock Solid Gelt's Motion for an Order Dismissing the Bankruptcy Case, or, in the Alternative, Granting Relief from Automatic Stay. 28 U.S.C. § 157(b)(2)(G).

II. Facts and Legal Analysis

This matter involves the efforts of the Debtor, 401 Properties Limited Partnership ("Debtor"), to reorganize under Chapter 11 of the Bankruptcy Code. The Debtor is a single asset real estate entity which owns commercial real estate, a building located at 401 S. LaSalle Street, Chicago, Illinois (the "Property"). The property is a multi-tenant office building with retail space on the ground floor. Ferenc Affidavit, ¶ 4, Docket. No. 16, Ex. E. The Debtor's amended petition alleges that its assets are worth between $1 million and $10 million. Docket No. 14. The claims herein are in excess of $15 million.

The United States Trustee asks that this Chapter 11 case be dismissed because the Debtor did not file all due Monthly Operating Reports ("MOR"); review of the docket discloses that the MOR for April 2016 was filed on May 20, 2016 and that the May 2016 and June 2016 MORs were filed late on August 3, 2016. The U.S. Trustee also complains that the Debtor has no attorney when it can not proceed in court without counsel; that U.S. Trustee fees are past due and that the Debtor's principals are using the bankruptcy system in a struggle for control of the Debtor.

After the Motion to Dismiss, Motion for Relief from Automatic Stay and Motion to Appoint Chapter 11 Trustee were taken under advisement on May 18, 2016 the Court heard a Motion to Use Cash Collateral (Docket No. 272) on June 28, 2016. The court allowed the continued use of cash collateral and required 401 Properties, Inc. to file a plan and disclosure statement on or before July 20, 2016. See Order at Docket No. 283. A plan and disclosure statement have been filed. Review of the plan reveals that the Debtor has not filed it in good faith and that this case was not filed in good faith.

The main issue is whether the Debtor's principals are using the Bankruptcy Code to effectuate a hostile takeover of the Debtor by purchasing claims to squeeze out Legacy Re, Ltd. ("Legacy Re") and Rock Solid Gelt Limited ("Rock Solid") who hold rights as participants or co-owners of some of the Debtor's obligations.

The Bankruptcy Code provides:

that on request of a party in interest and after notice and a hearing, the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case, whichever is in the best interests of creditors and the estate, for cause unless the court determines that the appointment under section 1104(a) of a trustee or an examiner is in the best interests of creditors and the estate.

11 U.S.C. § 1112(b)(1).

The Bankruptcy Code states that cause to dismiss a chapter 11 case includes the following:

(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;

(D) unauthorized use of cash collateral substantially harmful to 1 or more creditors;

(E) failure to comply with an order of the court;(F) unexpected failure to satisfy timely any filing or reporting requirement established by this title or by any rule applicable to a case under this chapter;

(G) failure to attend the meeting of creditors convened under section 341(a) or an examination ordered under rule 2004 of the Federal Rules of Bankruptcy Procedure without good cause shown by the debtor;

(H) failure to timely provide information or attend meetings reasonably requested by the United States trustee (or the bankruptcy administrator, if any);

(I) failure to timely pay taxes after the date of the order for relief or to file tax returns due after the date of the order of relief;

(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;

(L) revocation of an order of confirmation under section 1144;

(M) inability to effectuate substantial consummation of a confirmed plan;

(N) material default by the debtor with respect to a confirmed plan;

(O) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan; and

(P) failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.

11 U.S.C. § 1112(b)(4).

There are no specific standards for determining whether a chapter 11 debtor has filed a petition without good faith, however, courts may consider any factors which evidence an intent to abuse the judicial process and the purposes of the Bankruptcy Code and factors which evidence that a debtor's petition was filed to delay or frustrate the legitimate efforts of secured creditors to enforce their rights. Canpartners Realty Holding Co. IV, L.L.C. v. Vallambrosa Holdings, L.L.C. (In re Vallambrosa Holdings, L.L.C.), 419 B.R. 81, 85 (Bankr. S.D. Ga. 2009).

"Although section 1112(b) does not explicitly provide that the lack of good faith may constitute cause, section 1129(a)(3) does require that plans be 'proposed in good faith'; courts have sensibly considered bad faith to be an acceptable basis for conversion or dismissal." In re Jartran, Inc., 886 F.2d 859, 867 (7th Cir. 1989). Good faith is recognized as a prerequisite for eligibility to file a chapter 11 case and lack of good faith may constitute "cause" for dismissal of a case under § 1112(b) of the Bankruptcy Code. In re Madison Hotel Associates, 749 F.2d 410, 426 (7th Cir. 1984).

Bad faith may be found where:

1. a debtor has few or no unsecured creditors;

2. there has been a previous bankruptcy petition by the debtor or a related entity;

3. the prepetition conduct of the debtor has been improper;

4. the petition effectively allows the debtor to evade court orders;

5. there are few debts to nonmoving creditors;

6. the petition was filed on the eve of foreclosure;

7. the foreclosed property is the sole or major asset of the debtor;

8. the debtor has no ongoing business or employees;

9. there is no possibility of reorganization;

10. the debtor's income is not sufficient to operate;

11. there was no pressure from nonmoving creditors;

12. reorganization essentially involves the resolution of a two-party dispute;

13. a corporate debtor was formed and received title to its major assets immediately before the petition and

14. the debtor filed solely to create the automatic stay.

In re Grieshop, 63 B.R. 657, 663 (N.D. Ind. 1986).

The Legacy Re - Rock Solid Motion for Relief from the Automatic Stay (Docket No. 206) alleges that the Debtor has no employees, that its sole asset has no equity in that its Schedule A of Real Estate states that the property is worth $15 million with claims in excess of $19 million and that the secured debt encumbering the real estate matured long ago. That motion also alleges that the Debtor has few creditors other than the movants. In essence, the Debtor has no purpose for pursuing Chapter 11 relief except to avoid foreclosure and the lawsuit contesting which entity is the Debtor's general partner.

The Court finds that this bankruptcy case serves none of the purposes for which bankruptcy relief is designed, to increase the value of estate assets to maximize distributions to creditors and to maintain going concerns. Here, the Debtor's principals are trying to disadvantage Legacy Re and Rock Solid by assigning via settlement with 330 South Wells LLC only $200,000 and certain litigation proceeds. Legacy Re and Rock Solid hold 29% of the 330 South Wells claim against the Debtor. According to 330 South Wells' Proof of Claim No. 9 it isowed $4,264,165.93 on its mortgage lien. The only reason the Debtors' principals propose to pay $200,000 towards a $4,264,165.93 debt held by the principals is to squeeze out Legacy Re and Rock Solid who are part owners of that debt.

Legacy Re and Rock Solid filed a Motion for Appointment of a Trustee (Docket No. 248). The purported successor general partner 401 Properties, Inc. filed a Motion to Withdraw Debtor's Alleged General Partner (at Docket No. 242). That issue was addressed in the June 30, 2016 order that, in addition to allowing the use of cash collateral, designated 401 Properties, Inc. as the Debtor's representative for cash collateral and budgeting purposes. The basis for the motion regarding the general partner is part of a control dispute amongst the Debtor's principals which is the basis of a pending state court declaratory judgment action, Case No. 2015-CH-16611 in the Circuit Court of Cook County, Illinois. See Motion for Determination that Automatic Stay Does Not Apply to Declaratory Judgment Lawsuit, Docket No. 194. That motion was granted on March 2, 2016. Docket No. 212. This Court concludes herein that all matters involving these parties belong in state court and that appointment of a chapter 11 trustee is not warranted where no legitimate bankruptcy objectives are being pursued.

When this chapter 11 case was filed 401 LaSalle General Partner, LLC (an entity controlled by Michael Horrell and/or Goriana Alexander) was the Debtor's general partner. Motion for...