In re 4848, LLC
| Decision Date | 08 April 2013 |
| Docket Number | Case No. 12-36114 |
| Parties | In re 4848, LLC, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Wisconsin |
AS ASSIGNEE TO BMO HARRIS BANK, NA's MOTION FOR RELIEF
On November 8, 2012, 4848, LLC, a single asset real estate debtor, filed a chapter 11 bankruptcy petition to stave off foreclosure on its property. Before the Court is the motion for relief from the automatic stay and abandonment filed by BMO Harris Bank, NA,1 as it relates to the real property owned by the debtor. This Court has jurisdiction under 28 U.S.C. § 1334 and this is a core proceeding under 28 U.S.C. § 157(b)(2)(G). The parties briefed the matter, an evidentiary hearing was held on February 14, 2013, and the Court rendered an oral ruling on the motion on March 14, 2013. Based on the same, as well as the pleadings and other documents on file, the Court issues this Memorandum Decision, which constitutes its findings of fact and conclusions of law as required by Fed. R. Bankr. P. 7052.
The debtor, 4848, LLC, was formed in 2000 and owns one parcel of real estate located at 4848 S. 76th Street, Greenfield, Wisconsin. The property contains approximately 28,830 squarefeet of rentable space, 17,407 square feet of which is currently leased to three separate commercial tenants. The debtor retains a third party management company, Siegel-Gallagher, to oversee the books, coordinate renovations and maintenance of the property, and negotiate with and place tenants into the property. Along with the general downturn in the economy, the debtor's occupancy and operating income decreased during the past few years.
The debtor had first executed a mortgage and General Business Security Agreement securing two promissory notes on December 29, 2000. That credit was subsequently renewed with the movant when the debtor executed a variable rate promissory note in the amount of $3,450,667.63 on December 10, 2004, along with another variable rate promissory note in the amount of $250,000.00 on January 1, 2008. Both notes were secured by perfected mortgages on the debtor's real property.
Although the notes matured on December 10, 2008, the debtor and BMO Harris entered into a forbearance agreement on April 28, 2010, wherein the outstanding obligations on the notes were due and payable on or before December 30, 2010. The forbearance agreement included the following provision:
Relief from the Automatic Stay. As a material inducement to Lender to enter into this Agreement, Borrower hereby stipulates and agrees that Lender shall be entitled to relief from the automatic stay imposed by 11 U.S.C. § 362 or any similar stay or suspension of remedies under any other federal or state law in the event Borrower becomes subject to a bankruptcy or other insolvency proceeding, to allow Lender to exercise its rights and remedies with respect to the Collateral.
(Agreement Regarding Loans executed April 28, 2010, ¶ 13, p. 16). BMO Harris commenced a foreclosure action against the debtor on October 12, 2012.
A company related to the debtor due to similar ownership, 200 Ryan, LLC, another singleasset debtor, is also obligated to BMO Harris pursuant to a mortgage note. The debtor is a guarantor of 200 Ryan's indebtedness, and BMO Harris filed a contingent claim against the debtor for the deficiency amount owed by 200 Ryan. A foreclosure action regarding 200 Ryan's real property is currently pending. As of the petition date, BMO Harris was owed $2,869,383.79, including fees and costs, on the 4848 Notes and $3,654,586.61, including fees and costs, on the 200 Ryan Note. The sale of the Ryan property, which will reduce the overall claim, has yet to occur.
The debtor filed a plan and disclosure statement on February 6, 2013, wherein it proposed that its property and equity interests would be sold via a public auction after at least 90 days of marketing2 and within 120 days from the effective date of the plan. The debtor would submit the opening bid at the auction in the amount of $3,000,000, and third parties would be allowed to exceed that bid, with the next bid being at least $3,100,000. BMO Harris would have the option to credit bid at the auction. If the debtor became the winning bidder, the debtor would repay the opening bid amount, over time, to BMO Harris. The debtor would also auction its equity interests, with the equity interest holders opening the bids in the amount of $50,000 if the debtor became the winning bidder for the property or $10,000 if the debtor was not the winning property bidder.
Two legal issues were raised by BMO Harris Bank's motion for relief from the automatic stay: (1) whether a prepetition stay waiver within a forbearance agreement between the debtorand BMO Harris amounts to "cause" for relief from the automatic stay under 11 U.S.C. § 362(d)(1), and (2) whether relief from the automatic stay should be granted because the single asset real estate debtor's proposed plan does not have "a reasonable possibility of being confirmed within a reasonable time" under 11 U.S.C. § 362(d)(3)(A).
The debtor contends the prepetition stay waiver contained in the forbearance agreement is void as a matter of law and unenforceable as against public policy. To enforce the policies of the Bankruptcy Code, the relief available to a debtor must not be circumvented by contract, and in this case, the prepetition stay waiver. A prepetition stay waiver is an ipso facto clause triggered upon the borrower's filing of a bankruptcy petition, and because the "purpose of the stay is to protect creditors as well as the debtor, the debtor may not waive the automatic stay." Ostano Commerzanstalt v. Telewide Sys., Inc., 790 F.2d 206 (2d Cir. 1986). The public policy behind the automatic stay outweighs the policies of freedom of contract and encouraging out of court workouts.
The public policy goal of encouraging out of court restructuring and settlement supports the enforceability of the prepetition waiver of the automatic stay included in the forbearance agreement. See In re Cheeks, 167 B.R. 817, 818 (Bankr. D. S.C. 1994). In this case, the debtor received substantial consideration from the lender in exchange for the prepetition stay waiver, including an additional eight months under the forbearance agreement to pay the obligation, which originally matured in 2008. As stated in the agreement, the stay waiver was a materialinducement to the lender entering into said agreement.
The debtor argues the real property is undisputedly necessary in order to proceed with its proposed plan and an effective reorganization is likely. The plan satisfies the requirements of the Code, including the "best interests" test and the "fair and equitable" standard in a cram down. The debtor's plan proposes to auction the property and the equity interests in the debtor in the open national marketplace, which will determine the actual value of the property. If the property is sold to a third party, BMO Harris will receive the proceeds from its collateral, thus receiving at least the same value of what it would receive in a liquidation, meeting the "best interests" test. Should BMO Harris believe the property is worth more than the $3,000,000 opening bid, it has the opportunity to credit bid. The auctions also comply with the "fair and equitable" requirements of the Code. Should the debtor's opening bid be the winning bid, BMO Harris will retain its liens until the balance of its secured claim is paid in full, satisfying section 1129(b)(2)(A)(i)(I) & (II). Should the property be sold to a third party in a cash sale or to BMO Harris in a credit sale, section 1129(b)(2)(A)(ii) is satisfied.
The debtor asserts that it can make necessary payments if it is the winning bidder at $3,000,000 and the creditor makes a section 1111(b) election because: (1) The electing creditor would receive a lien equal to the total amount of its allowed claim, $5,189,970 (the filed claim less the assumed value for 200 Ryan, LLC, property); (2) The electing creditor would receive an aggregate stream of payments at least equal to the electing creditor's allowed total claim3 ; and (3)The present value of the electing creditor's stream of payments would equal the present value of the collateral.
The debtor also argues the auction procedures comply with the Code. Regarding the property auction, even though the debtor's opening bid is not a cash bid, it would be repaid subject to sections 1129(a)(7) and 1129(b)(2)(A). By not proposing to use a third-party stalking horse bidder, the debtor avoids the costly obligation for break-up fees. Additionally, regarding the equity interest auction, value is maximized for the benefit of the estate. When a creditor is paid less than it is owed and does not accept the plan, section 1129(b)(2)(B)(ii) provides that equity holders cannot retain any equity interests on account of their old investments unless an auction is held. The equity auction in the debtor's plan satisfies this requirement.
BMO Harris argues the debtor's plan does not provide a reasonable possibility of a successful reorganization within a reasonable time. See DB Capital Holdings, LLC, 454 B.R. 804, 819 (Bankr. D. Colo. 2011); see also 11 U.S.C. § 362(d)(3)(A). The debtor's proposed auction arbitrarily sets an opening bid amount of $3,000,000, without any grant of authority within the Bankruptcy Code or state laws and without any reliable proof of value. The alternatives of allowing the lender the right to credit bid or a sale to a third party can be achieved via a sheriff's sale at a greatly reduced cost of sale to the lender. Furthermore, the debtor'srequested 120 days of marketing after the effective date of...
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