In re Attack Props., LLC
| Decision Date | 11 September 2012 |
| Docket Number | No. 12 C 5892.,12 C 5892. |
| Citation | 478 B.R. 337 |
| Parties | In re ATTACK PROPERTIES, LLC, Appellant/Debtor. |
| Court | U.S. District Court — Northern District of Illinois |
OPINION TEXT STARTS HERE
Jason Whittington Bruce, Attorney at Law, Chicago, IL, for Appellant/Debtor.
On April 13, 2012, Attack Properties, LLC (“Attack Properties”), by Timothy Grover, its sole owner and representative, filed a petition for chapter 11 bankruptcy in the Bankruptcy Court for the Northern District of Illinois. On July 11, 2012, the bankruptcy court dismissed the case. This appeal followed. Attack Properties challenges both the dismissal of the case and the bankruptcy court's order excusing the receiver appointed in a state-court foreclosure action from turning over the property at issue in the bankruptcy in compliance with 11 U.S.C. § 543(b). For the reasons stated below, the court affirms the orders of the bankruptcy court excusing the receiver from turnover and dismissing the case.
Attack Properties owns an athletic training facility located at 2641 West Harrison Street in Chicago (“the Property”). Grover is the sole owner of both Attack Properties and Attack Athletics, Inc. (“Athletics, Inc.”), a professional athletic training business that leases and operates out of the Property.2 In 2007, Old Second National Bank (“the Bank”) loaned Attack Properties $9.946 million in order to develop the Property for Athletics, Inc.'s use. Athletics, Inc. and Grover guaranteed payment on the note. Attack Properties then defaulted on the loan, and in 2010, the Bank filed a foreclosure action in Illinois state court. See Old Second Nat'l Bank v. Attack Props., No.2010 CH 41352 (Cook Cnty. Cir. Ct., filed Sept. 23, 2010) (“the foreclosure action”). The state court appointed a receiver, and, given Athletics, Inc.'s default, the receiver filed a separate action seeking eviction. See Hussey v. Attack Athletics, No.2011 M1712640 (Cook Cnty. Cir. Ct., filed June 15, 2011) (“the eviction action”). In August 2011, the court in the eviction action ordered Athletics, Inc. to turn over the Property to the Bank, and in September 2011, that court entered judgment in favor of the receiver in the amount of $384,474 in past rent and late charges.
Although Grover and Athletics, Inc. were ordered to turn the Property over to the Bank, they remained in possession of the Property for several months; they also continued to collect rental payments and payments for training services. In the foreclosure action, the receiver moved for a rule to show cause why Grover and Athletics, Inc. should not be held in contempt for violating the state court's prior orders in the case. Grover and Athletics, Inc. responded by attempting to halt the eviction. The foreclosure court was not convinced, and ordered relinquishment of the Property on December 2, 2011. The court also ordered Attack Properties, Athletics, Inc., and Grover to turn over to the receiver “all monies in their possession or received since March 21, 2011 from any person or entity for the use, access or any other reason relating to the Property.”
When the receiver finally took possession of the Property in December 2011, he discovered that Athletics, Inc. and Grover had received over $750,000 for training services conducted at the Property after the receiver had been appointed. The issue was raised before the foreclosure court, and that court determined that the Bank had made a prima facie showing that Attack Properties, Athletics, Inc., and Grover were in contempt of the original order appointing the receiver. The court required them to show cause why they should not be held in contempt. In January 2012, the foreclosure court also entered a judgment of foreclosure against Attack Properties on the note and against Athletics, Inc. and Grover on the guarantees. This resulted in a judgment of $10,170,452 in favor of the Bank.
The Property was scheduled for a foreclosure sale on April 13, 2012, but just minutes before the sale could take place, Attack Properties filed a chapter 11 bankruptcy petition.3 The resulting bankruptcy case is the single-asset real estate case at issue here. As a result of the bankruptcy filing, the automatic stay provision of 11 U.S.C. § 362 kicked in, and the planned foreclosure sale was put on hold. See In re Met–L–Wood Corp., 861 F.2d 1012, 1015 (7th Cir.1988) (). Three days later, the Bank moved on an emergency basis pursuant to 11 U.S.C. § 543(d)(1) for an order excusing the receiver from turning over the property (as 11 U.S.C. § 543(b)(1) would otherwise require). On May 9, 2012, the bankruptcy court granted the motion. In its oral ruling, the court found there had been prepetition mismanagement and that there was no real likelihood of reorganization, which meant that turnover of the Property was not in the best interest of creditors. The court explained that, given that Grover had violated the foreclosure court's order by failing to pay income and rent to the receiver, and that Grover had taken money from Attack Properties' business account and used it for personal expenses, the court had no confidence that Grover and Attack Properties would use the Property for the benefit of the creditors. Given the lack of progress in the case, the bankruptcy court invited motions to dismiss.
On May 23, 2012, the Bank filed a motion to dismiss pursuant to 11 U.S.C. § 1112(b). While that motion was being briefed, the Bank assigned its interest in the loan to Ringgold Capital IV, LLC (“Ringgold”). In evaluating the motion to dismiss, the bankruptcy court commented on Attack Properties' many deficiencies in the bankruptcy proceedings, including its failure to move the case forward, its neglect in retaining counsel under 11 U.S.C. § 327(a), its failure to use cash collateral pursuant to the requirements of 11 U.S.C. § 363(c), its neglect in proposing (or even indicating that it was formulating) a disclosure statement or reorganization plan, and its failure to file monthly operating reports. After noting that “nothing ha[d] been done” over the past three months, and that the ninety-day stay period set out in 11 U.S.C. § 362(d)(3) would expire the next day, the bankruptcy court dismissed the case. Attack Properties has now appealed to this court, and the court has expedited its review in light of the foreclosure sale scheduled to take place on September 19, 2012.
This court reviews a bankruptcy court's legal conclusions de novo and its findings of fact for clear error. Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir.2009) (citing In re ABC–Naco, Inc., 483 F.3d 470, 472 (7th Cir.2007)). Mixed questions of law and fact are generally reviewed for clear error. See In re Griffin Trading Co., 683 F.3d 819, 824 (7th Cir.2012) (); Ojeda v. Goldberg, 599 F.3d 712, 716 (7th Cir.2010). But see Stamat v. Neary, 635 F.3d 974, 979 (7th Cir.2011) ().4 Where the bankruptcy code has committed a decision to the discretion of the bankruptcy court—such as dismissal for cause under 11 U.S.C. § 1112(b)—that decision is reviewed for abuse of discretion. See Wiese, 552 F.3d at 588;In re Woodbrook Assocs., 19 F.3d 312, 316 (7th Cir.1994). A bankruptcy court has abused its discretion where its decision is premised on an incorrect legal principle or a clearly erroneous factual finding, or where the record contains no evidence to rationally support the decision. Wiese, 552 F.3d at 588 (citing Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 767 (7th Cir.2004)).
A chapter 11 case may be dismissed or converted to a chapter 7 case pursuant to 11 U.S.C. § 1112(b), which establishes a three-part inquiry. First, under § 1112(b)(1), the bankruptcy court must determine whether the party moving for dismissal has established that “cause” for dismissal exists. 5 A non-exhaustive list of examples of “cause” is provided in § 1112(b)(4). Should the court find cause for dismissal, the case must be dismissed unless (1) the court “specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate,” and (2) the debtor or another party in interest establishes that (a) “there is a reasonable likelihood that a plan will be confirmed” within a certain time frame, and (b) “the grounds for converting or dismissing the case include an act or omission of the debtor ... (i) for which there exists a reasonable justification ... and (ii) that will be cured within a reasonable period of time fixed by the court.” § 1112(b)(2). Third, if the non-movant fails to meet this burden, under § 1112(b)(1), the court determines whether dismissal or conversion to chapter 7 would be in the best interests of creditors and the estate. This court addresses the “cause” issue first.
A. Cause for Conversion or Dismissal1. Failure to Satisfy Reporting Requirement
The bankruptcy court concluded that cause existed to dismiss or convert the case for two reasons. First, it determined that Attack Properties had failed to timely file reports required under 11 U.S.C. §§ 1106(a)(1) and 704(a)(8). See11 U.S.C. § 1112(b)(4)(F) (); § 704(a)(8) (...
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