In re AdBrite Corp.

• Decision Date: 24 March 2003
• Docket Number: No. 02-30225.,02-30225.
• Citation: 290 B.R. 209
• Parties: In re The ADBRITE CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

290 B.R. 209

In re The ADBRITE CORPORATION, Debtor.

No. 02-30225.

United States Bankruptcy Court, S.D. New York, Poughkeepsie Division.

March 24, 2003.

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Robinson & Cole, LLP, Stephen H. Gross, David Burke, Eric J. Dale, Christopher J. Major, New York City, for AB Media Corporation, Norman Rothstein and Allan R. Avery.

Richard L. Koral, New York City, for The AdBrite Corporation Debtor and Debtor in Possession.

Greenberg Traurig, LLP, Rick B. Antonoff, New York City, for Carmco Investments, LLC.

MEMORANDUM OPINION ON AB MEDIA CORPORATION'S MOTION TO CONVERT THE CHAPTER 11 CASE TO CHAPTER 7 AND NORMAN ROTHSTEIN'S MOTION FOR RELIEF FROM THE AUTOMATIC STAY TO FORECLOSE ON CERTAIN LIENS AND FOR ADEQUATE PROTECTION

CECELIA MORRIS, Bankruptcy Judge.

INTRODUCTION

AB Media Corporation ("AB Media") moves this Court for the entry of an order, pursuant to Section 1112(b) of the Bankruptcy Code, converting the above-captioned Chapter 11 case of AdBrite Corporation ("AdBrite" or "Debtor") to a case under Chapter 7 of the Bankruptcy Code, and directing the appointment of a Chapter 7 trustee to promptly administer the liquidation of the Debtor's estate. The United States Trustee, although not formally joining AB Media's motion, noted at the March 4, 2003 preliminary hearing on this motion that this is a "classic case" for conversion.

Norman Rothstein ("Rothstein"), a creditor of AdBrite and a principal stockholder of AB Media, also moves for the entry of an order, pursuant to Section 362(d) of the Bankruptcy Code, terminating the automatic stay to permit Rothstein to foreclose on certain liens and for adequate protection.

AdBrite opposes both motions but has withdrawn its defense, first asserted in its Opposition to the Rothstein Motion, dated December 31, 2002, that Rothstein did not properly perfect the security interest granted to Rothstein by the debtor in connection with Rothstein's $560,000 loan to AdBrite. Rothstein is therefore a perfected secured creditor of Debtor.

Carmco Investment, LLC also filed a statement in opposition to both motions, although it did not appear at the evidentiary hearing for either motion held on March 6, 2003.

FACTUAL BACKGROUND

AdBrite filed a petition for relief under Chapter 11 of the Bankruptcy Code on October 15, 2002. It holds a patent for advertising kiosks involving the illumination of advertisements on waste receptacles by the use of an electro-luminescent film or an acrylic prism. It has filed further patent applications with respect to adaptations of the patent. AdBrite asserts that it is in the business of manufacturing these advertising kiosks for public space trash receptacles called the AdBrite 360. Debtor's Chief Executive Officer is Caesar Passannante ("Passannante"). He testified at the § 341(a) meeting of the creditors on December 3, 2002 that AdBrite only has one "real asset," the patent.

AB Media, a Delaware corporation, was formed for the express purpose of acquiring the assets and assuming some of the liabilities of AdBrite. AB Media's principal stockholders are Messrs. Allan Avery ("Avery") and Rothstein.

Rothstein loaned AdBrite $560,000, in two increments, $150,000 on April 19, 2002, and $410,000 on May 14, 2002. In connection with these loans, Rothstein and Debtor executed the following loan documents: (a) Promissory Note; (b) Amended and Restated Promissory Note; (c) Security Agreement; (d) Security Agreement (Patents); and (e) Security Agreement (Trademarks). On behalf of AdBrite, Passannante executed the loan documents between Norman Rothstein as lender and AdBrite as borrower. AdBrite granted a security interest in all of the Debtor's property, assets, and rights wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Rothstein asserts that none of the debtor's assets were, or were intended to be, excluded from Rothstein's lien. Because all AdBrite's assets are liened to Rothstein, AdBrite, has no free and clear assets to use as collateral to obtain future financing.

Avery personally guaranteed nearly two million dollars of institutional loans to AdBrite, on which AdBrite defaulted, and also loaned it money.

AdBrite entered into a manufacturing agreement with a company controlled by Rothstein, Fuel Cell Components & Integrators, Inc. ("FCCI"). AdBrite and FCCI are currently involved in an adversary proceeding in which AdBrite asserts that (i) it delivered property to FCCI in reliance upon FCCI's false inducements, (ii) the property has a replacement value of $150,000, (iii) the property remains in possession of FCCI, (iv) the property is property of the estate under § 541(a), and (v) FCCI must return the property to AdBrite per § 542(a). FCCI's asserted defenses include set-off and recoupment, breach of contract, waiver and estoppel, and recovery barred by AdBrite's acts. FCCI also counterclaimed for: (i) setoff and recoupment based on labor, overhead, storage, materials, parts, expenses and costs expended for $136,059.78; (ii) quanturn meruit; and (iii) a post-petition administrative claim of $6,795.49 as of early November 2002, which it asserts is accruing.

AdBrite has no signed agreements for debtor-in-possession financing, nor does it have any signed agreements to place paid advertising on its units. It has one signed test agreement with Greyhound, dated September 27, 2002, to place its units at 26 Greyhound bus terminals. Under the agreement, AdBrite must pay Greyhound $75.00 per month for each unit placed.

AdBrite has not prepared a plan of reorganization, has never earned any revenue, and has filed only one tax return in its existence, for 1999.

DISCUSSION

AB Media's Motion to Convert the Chapter 11 Case to Chapter 7

The Court has jurisdiction to determine this matter under 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2).

A Chapter 11 case may be converted to a Chapter 7 case or dismissed on request of "a party in interest," whichever is in the best interest of creditors and the estate. 11 U.S.C. § 1112(b); In re Denrose Diamond, 49 B.R. 754, 756 (Bankr.S.D.N.Y.1985). Section 1109(b) provides a nonexclusive list of who may be a party in interest. Generally, a party in interest includes the debtor, a creditor, an equity security holder, a creditors' or equity security holders' committee, the trustee, and any indenture trustee. Here, AdBrite scheduled AB Media's claim against it at $421,751, effectively conceding that AB Media is a creditor. Accordingly, AB Media is a party in interest who may bring this motion.

Section 1112(b) provides that the Bankruptcy Court may dismiss or convert a Chapter 11 case "after notice and a hearing," which means after such notice and opportunity for a hearing as is appropriate in the particular circumstances. Bankruptcy Rule 2002(a)(5) requires 20 days notice of the hearing on dismissal or conversion of a case to another chapter. Surprise conversions are prohibited. Here, there has been no surprise. The motion was properly noticed, the parties consented to the preliminary and evidentiary hearing dates, and those hearings took place.

Section 1112(b) provides in pertinent part that a court may convert a case under Chapter 11 to Chapter 7 for cause, including: (1) continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation; (2) inability to effectuate a plan; (3) unreasonable delay by the debtor that is prejudicial to creditors; or (10) nonpayment of any fees or charges required under chapter 123 of title 28.

Under § 1112(b), the burden is on the movant to establish "cause." Loop Corp. v. United States Trustee, 290 B.R. 108, 112 (D.Minn.2003); In re Lizeric Realty Corp., 188 B.R. 499, 503 (Bankr S.D.N.Y. 1995). Once cause for relief is shown, the Court has broad discretion to either convert or dismiss the Chapter 11 case. Although this discretion is not completely unfettered, the Court is not required to give exhaustive reasons for its decision. In re Koerner, 800 F.2d 1358, 1368 (5th Cir.1986).

A Chapter 11 case may be converted or dismissed under § 1112(b)(1) for continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation. The purpose of this ground is "to prevent the debtor-in-possession from gambling on the enterprise at the creditors' expense when there is no hope of rehabilitation." United States Trustee v. GPA Technical Consultants, Inc. (In re GPA Technical Consultants, Inc.), 106 B.R. 139, 141 (Bankr.S.D.Ohio 1989). Section 1112(b)(1) was written in the conjunctive; the movant must prove not only a continuing loss to or diminution of the estate, but also must prove that there is no likelihood of rehabilitation. Lizeric, 188 B.R. at 503.

To determine whether there is a continuing loss to or diminution of the estate, a court must make a full evaluation of the present condition of the estate, not merely look at the debtor's financial statements. In re Moore Construction, Inc., 206 B.R. 436, 437-38 (Bankr.N.D.Tex.1997). A continuing loss or diminution of the estate may be tolerated where reorganization is feasible and the pattern of unprofitable operations can be reversed as a result of a successful reorganization. The debtor, however, should not continue in control of the business beyond a point at which reorganization no longer remains realistic. The courts must evaluate losses on a case-by-case basis. Small losses over an extended period may be acceptable, whereas large losses in a short period may indicate that rehabilitation is not likely. In re Photo Promotion Assocs., 47 B.R. 454, 458-59 (S.D.N.Y.1985).

In addition to the amount and the nature of the losses, there is a temporal quality to the determination. At the early stages of the case, to prove an absence of a reasonable likelihood of rehabilitation, the movant must show that there is no more than a "hopeless and...