In re Century Inv. Fund VIII Ltd. Partnership, Bankruptcy No. 88-05127-MDM.

• Decision Date: 31 May 1990
• Docket Number: Bankruptcy No. 88-05127-MDM.
• Parties: In re CENTURY INVESTMENT FUND VIII LIMITED PARTNERSHIP, Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Eastern District of Wisconsin

114 B.R. 1003 (1990)

In re CENTURY INVESTMENT FUND VIII LIMITED PARTNERSHIP, Debtor.

Bankruptcy No. 88-05127-MDM.

United States Bankruptcy Court, E.D. Wisconsin.

May 31, 1990.

Albert Solochek, Milwaukee, Wis., for First Bank.

Paul G. Swanson, Oshkosh, Wis., for debtor.

AMENDED DECISION

M. DEE McGARITY, Bankruptcy Judge.

This case is before the court on motions by the secured creditor for relief after confirmation of a Chapter 11 plan or, alternatively, for dismissal of the Chapter 11 case. This is a core proceeding under 28 U.S.C. § 157(b)(2). The debtor requested relief pending appeal by the creditor. After reviewing the evidence, this court is satisfied that the creditor is entitled to relief, but not dismissal. The court will order the debtor to comply with the plan by a date certain; failing to do so will result in grounds for the dismissal requested by the creditor. The debtor's request for relief pending appeal is denied.

BACKGROUND

This case has had an active and interesting history. The subject of the reorganization is an 88 unit apartment complex in DePere, Wisconsin, a suburb of Green Bay. The complex was built between 1971 and 1974 at a cost of $2.7 to $2.8 million. There are four buildings of 22 units each, with a total of 8 studios, 48 one bedroom units and 32 two bedroom units. Underground and above ground parking are provided.

The property was purchased in 1987 by the debtor, a limited partnership formed for that purpose. The sole general partner is Century Capital Group, a general partnership originally consisting of Wayne C. Chaney and J. Peter Jungbacker as general partners. Century Capital Group, Ltd., a corporation, was later formed and became another general partner of Century Capital Group. Jungbacker and Chaney each own 50% of the stock of Century Capital Group, Ltd. There are eighteen limited partners.

Century Management Group, Ltd., another corporation owned by Jungbacker and Chaney, managed the property until recently. The property is now managed by a different corporation owned by former employees of Century Management Group, Ltd.

The purchase of the property was financed in part by a loan from First Bank, N.A., in an original amount of $2.1 million. The mortgage securing the loan was signed on April 3, 1987, effective April 1, 1987. Along with the mortgage, the debtor executed an "Assignment of Leases and Rents" as further security. The bank also took letters of credit totalling $400,000 from some of the limited partners. It eventually drew on the letters of credit to reduce the balance on the loan. Those limited partners have a second mortgage position.

The debtor ceased making payments on the loan after July 1, 1988, thereby going into default on the mortgage. On October 19, 1988, First Bank filed its foreclosure action in Brown County Circuit Court and moved for the appointment of a receiver. The debtor filed its Chapter 11 petition on November 17, 1988, before the receiver could be appointed.

Soon after the case was filed, the bank moved to dismiss the case for having been filed in bad faith. It also moved to lift the automatic stay to allow continuation of its foreclosure and to shorten the exclusive period for the debtor to file a plan. The debtor challenged the bank's perfection of its security interest in the rents. There was a temporary order limiting the debtor's use of rents pending a final decision. After two days of presentation of evidence, oral argument and the submission of briefs, the court denied the bank's motions to dismiss and to shorten the exclusive period to file a plan. In a decision dated March 22, 1989, it found that the bank had perfected its security interest in rents prior to filing.¹ An order was entered consistent with the bank's perfected security interest. In general, the order provided that the debtor's management company could manage the property, pay necessary expenses (except for management fees), maintain a reserve and make improvements agreed to by the bank. In that same decision the court declined to lift the automatic stay. It found that, for a short period of time, the bank would be adequately protected by a small equity cushion and excess rents it might receive after expenses. The court set a date two months after its order to determine if the bank's protection continued to be adequate.

The March 22, 1989 decision denying lifting of the stay was appealed by the bank, but this was apparently resolved when the debtor agreed to the lifting of the stay in an "Agreed Order" dated May 25, 1989. The debtor agreed not to contest the foreclosure. It would not contest the bank's bid price as long as no deficiency was requested, and the bank could request a three month redemption period. The debtor was to remain in possession until the completion of the foreclosure process, and during that period it would comply with the March 22 decision. Finally, the debtor was to file a plan of reorganization by June 1, 1989, in which case the bank could not apply for its judgment of foreclosure until after June 10, 1989. If no plan was filed, the bank could apply for judgment after June 1, 1989.

The debtor did file its plan and disclosure statement on June 1, 1989. These were later modified by the amended plan and disclosure statement dated July 17, 1989, and filed July 19, 1989. The bank objected because the plan called for reinstatement of the mortgage, a provision that the bank argued was nonconfirmable. If a plan is on its face nonconfirmable as a matter of law, then it is appropriate for the court not to approve the disclosure statement. In re Spanish Lake Associates, 92 B.R. 875, 877 (Bankr.E.D.Mo.1988); In re Pecht, 57 B.R. 137, 139 (Bankr.E.D.Va. 1986). More briefs ensued. The bank maintained that any plan confirmed after the stay was lifted must comply with Wis. Stat. § 846.13, which delineates the rights of a mortgagor after judgment of foreclosure under Wisconsin law. Under that section, the mortgagor must pay the full amount due in order to redeem.² The debtor's rights in property are determined under state law under Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979), the argument went, and the plan could not modify the provision requiring full payment to redeem the debtor's property interest. The bank also argued that allowing treatment of a secured creditor as the debtor proposed would be contrary to public policy in that it would create uncertainty in secured lenders who have had the stay lifted and have proceeded to enforce their rights in the property under state law in reliance on such an order. Confirming a plan under these circumstances would make the lift stay order meaningless. Finally, it was suggested that confirming such a plan would have the practical effect of vacating the court's previous order, and the debtor should be required to show a change in circumstances justifying what amounted to a reimposition of the stay (actually, modification of the creditor's rights so it had no right to foreclose as long as the debtor complies with the plan).

The court overruled the bank's objection. It distinguished Wisconsin law from other states applicable to cases cited by the bank. See In re Monroe Park, 18 B.R. 790 (Bankr.D.Del.1982); In re DeMers, 89 B.R. 48 (D.S.D.1987); In re East Lansing 30 Associates, 47 B.R. 593 (Bankr.W.D.Mich.1985). In Monroe Park, Delaware law provided that the judgment of foreclosure merged with the mortgage, thereby changing the debtor's property interest under state law. This could not later be modified or expanded by a plan. In both DeMers and East Lansing, a sheriff's sale had taken place, and it appears that in those states ownership vested in the purchaser subject to redemption within a specified time by the mortgagor. See 11 U.S.C. § 108(b). In East Lansing, the term of the mortgage had expired, and there was no mortgage to reinstate. These cases are in contrast to Wisconsin law, which provides that the parties' ownership interests do not change when judgment of foreclosure is entered. Matter of Madison Hotel Associates, 749 F.2d 410, 422-24 (7th Cir.1984). The creditor continues to have merely a lien. Id. at 422 (cites omitted).

Furthermore, this court doubted that the derailment of a lift stay order by a subsequent plan would have the dire consequences envisioned by the bank. Any affected creditor is protected by the requirements for confirming a plan. Obviously circumstances must have changed if at one time the creditor is entitled to have the stay lifted, and later the debtor is able to meet the requirements of 11 U.S.C. § 1129. See also 11 U.S.C. § 362(d). A separate criterion need not be added to 11 U.S.C. § 1129 for debtors that have had the stay lifted during the pendency of the case.

Finally, the court could discern no policy reason for treating one debtor, for whom the stay was lifted to allow entry of a foreclosure judgment, differently from another debtor that had the foreclosure judgment entered before filing and then filed a confirmable plan without an intervening lift stay order. The property interests of both debtors would be the same, and the plan provisions could be the same.

The disclosure statement was approved by order dated August 7, 1989. Then came the hearing on confirmation of the plan. Predictably, the bank objected to its treatment under the plan. It continued to insist that it was entitled to full payment under the redemption provisions of Wisconsin foreclosure law. The plan, on the other hand, called for retention of its lien and monthly payments of interest only at the lower of the market rate or contractual rate provided in the mortgage note. The obligation would be due and payable 36 months from the date of confirmation or upon sale, whichever occurred first. The debtor contemplated sale of the apartment complex after deferred maintenance was corrected and certain improvements were made. The bank also argued that limited partners who agreed to...