In re Alison Corp., Bankruptcy No. 80-03393-P

• Decision Date: 17 March 1981
• Docket Number: C80-0615-P and C80-0670-P.,Bankruptcy No. 80-03393-P
• Citation: In re Alison Corp., 9 B.R. 827, 7 B.C.D. 500, 4 C.B.C.2d 199 (Bankr. S.D. Cal. 1981)
• Parties: In re The ALISON CORPORATION, a California Corporation, Debtor. CAPITAL MANAGEMENT COMPANY and Palmcrest Company, Plaintiffs, v. The ALISON CORPORATION, a California Corporation, Defendant. SOUTHWEST BANK, a California Banking Corporation, La Casa Trust Deed Service, a California Corporation, Plaintiffs, v. The ALISON CORPORATION, a California Corporation, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of California

9 B.R. 827 (1981)

In re The ALISON CORPORATION, a California Corporation, Debtor.

CAPITAL MANAGEMENT COMPANY and Palmcrest Company, Plaintiffs, v. The ALISON CORPORATION, a California Corporation, Defendant.

SOUTHWEST BANK, a California Banking Corporation, La Casa Trust Deed Service, a California Corporation, Plaintiffs, v. The ALISON CORPORATION, a California Corporation, Defendant.

Bankruptcy Nos. 80-03393-P, C80-0615-P and C80-0670-P.

United States Bankruptcy Court, S.D. California.

March 17, 1981.

John J. Hargrove of Strauss, Kissane, Davis & Hargrove, San Diego, Cal., for debtor.

Craig O. Correll, Cardiff-By-The-Sea, Cal., specially appearing for J. Warren Beall for Capital Management Co. & Palmcrest Co.

L. Scott McClanahan of Weil & Fritz, Whittier, Cal., for Southwest Bank & La Casa Trust Deed Service.

Darvy Mack Cohan, La Jolla, Cal., for Curtis S. & Judith A. Sword.

MEMORANDUM OF DECISION

ROSS M. PYLE, Bankruptcy Judge.

On February 18, 1981, the Court announced its decision to dismiss the Chapter 11 bankruptcy case filed by The Alison Corporation ("Alison") pursuant to an oral motion made by Capital Management Co. ("Capital Management") and Palmcrest Co. ("Palmcrest"), creditors. This Memorandum of Decision is intended to further explain the Court's decision.

FACTS

Alison, the Debtor herein, is a California corporation which was formed shortly before the filing of the Chapter 11 petition. It has two shareholders, James W. Street and Charles Street, and its only asset consists of real property in San Marcos, California, improved with a racquetball facility. Alison has leased the premises to Racquetime Corporation ("Racquetime") which operates the racquetball facilities. That lease is in default and the premises are, and have been during the pendency of these proceedings, closed down.

The Debtor's assets before incorporation were owned by James W. Street and Charles Street individually. They had been part of a joint venture partnership which terminated on or about January 1, 1980, when the Streets bought out their remaining partners. It is uncontradicted that the Debtor was formed for the purpose of filing this Chapter 11 petition without involving the other assets of the two shareholders.

The market value of the racquetball facility is approximately $1,200,000.00. It is encumbered by three trust deeds totaling approximately $954,000.00. There are also 1980-81 real property taxes owing in the approximate amount of $6,500.00. Those are all of the debts listed in Debtor's schedules. There are no unsecured creditors, and no creditors claims have been filed.

The facility is not operating, thus there is no income stream available to the Debtor for the servicing of the outstanding encumbrances against the property. The first trust deed holder, Southwest Bank, and the second trust deed holder, Capital Management and Palmcrest, have filed relief from stay actions (C80-670-P and C80-0615-P respectively).¹ The Debtor argues that the equity cushion provides adequate protection to these creditors. See In re San Clemente Estates, 5 B.R. 605 (Bkrtcy.S.D.Cal.1980); In re Pitts, 2 B.R. 476 (Bkrtcy.C.D.Cal. 1980).

DISCUSSION

The Motion to Dismiss centered upon the question of the good faith of the Debtor in filing its Chapter 11 petition in that it had been formed only two days prior to its filing for the specific purpose of filing to prevent foreclosure. See In re Fast Food Properties, Ltd. No. 1, 5 B.R. 539 (Bkrtcy.C. D.Cal.1980), Matter of Northwest Rec. Activities, Inc., 4 B.R. 36 (Bkrtcy.N.D.Ga. 1980). The Debtor argues that there is no lack of good faith since the Streets could have individually filed this Chapter 11 proceeding the same as the corporation.

The creditors, however, argue the proper standard to be considered is the detriment to creditors. By transferring this property to the Debtor, the Streets have shielded all of their business and personal assets from availability for any plan of reorganization. Since the property is not producing any income, there are no funds to service the loans, pay insurance premiums or maintain a burglar alarm system on the premises, whereas if the individuals had filed, funds would perhaps be available for those purposes.

In order to resolve the Motion to Dismiss, the Court has considered the dual underlying policies of the Bankruptcy Code (11 U.S.C. §§ 101 et seq.) to determine whether this case is an imposition upon the jurisdiction of the Court.²

One basic purpose of the Bankruptcy Code remains the same as was formerly the case under the old Bankruptcy Act. That is to afford the debtor a "new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt." Local Loan Co. v. Hunt, 292 U.S. 234, 244-245, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1933). Also see Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970). This basic purpose has been expressed as giving the debtor a "fresh start".

In a chapter 11 context, this fresh start can be characterized as rehabilitation through the implementation of a plan of reorganization whereby the debtor will emerge as a functioning unit in the economy.

Another main thrust of the bankruptcy system is the orderly amassing of the non-exempt assets of the debtor and equitable, systematic distribution to creditors. Segal v. Rochelle, 382 U.S. 375, 379, 86 S.Ct. 511, 514, 15 L.Ed.2d 428 (1965); Kokoszka v. Belford, 417 U.S. 642, 645-646, 94 S.Ct. 2431, 2433-34, 41 L.Ed.2d 374 (1974).

In a Chapter 11 context, this is accomplished through the plan of reorganization after it passes the scrutiny of the Court and the votes of any creditor class whose claims or interests are impaired. See 11 U.S.C. §§ 1124, 1126. The debtor or its equity holders are the last category of persons or entities which the code is designed to benefit. 11 U.S.C. § 1129; 5 Collier on Bankruptcy, ¶ 1129.034d (15th Ed. 1980); 11 U.S.C. § 726.

Concededly, the within case was filed solely to obtain the benefit of the automatic stay and to stave off the foreclosing creditors while the Debtor attempts to market the property. This...