In re Curtis Center Ltd. Partnership, Bankruptcy No. 95-12616 SR.

• Decision Date: 16 February 1996
• Docket Number: Bankruptcy No. 95-12616 SR.
• Citation: 192 BR 648
• Parties: In re CURTIS CENTER LIMITED PARTNERSHIP, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

192 B.R. 648 (1996)

In re CURTIS CENTER LIMITED PARTNERSHIP, Debtor.

Bankruptcy No. 95-12616 SR.

United States Bankruptcy Court, E.D. Pennsylvania.

February 16, 1996.

COPYRIGHT MATERIAL OMITTED

Frederic J. Baker, Asst. U.S. Trustee, Philadelphia, PA.

Jeffrey Kurtzman, Morton R. Branzburg, Klehr, Harrison, Harvey, Branzburg & Ellers, Philadelphia, PA, for Debtor.

Thomas E. Biron, Regina Kelbon, Blank Rome Comisky & McCauley, Philadelphia, PA, for Sumitomo Trust & Banking Co.

Pauline K. Morgan, Clark Ladner Fortenbaugh & Young, Philadelphia, PA, for Official Committee of Unsecured Creditors.

Joseph A. Dworetzky, City Solicitor, Cynthia E. White, Chief Deputy City Solicitor, City of Philadelphia, Law Dept., Philadelphia, PA, for the City of Philadelphia.

OPINION

STEPHEN RASLAVICH, Bankruptcy Judge.

Introduction.

Before the Court is the Second Motion of Sumitomo Trust and Banking Co. Ltd., New York Branch, (hereinafter "Sumitomo") for relief from the automatic stay (the "Motion") Answers in opposition to the Motion were filed by the above Chapter 11 Debtor, Curtis Center Limited Partnership (hereinafter the "Debtor" or "Curtis Center") and the Official Committee of Unsecured Creditors. Hearings were held January 3, 1996 and January 17, 1996, and the issues raised have been extensively briefed by the parties. For the reasons which follow the Motion will be denied.

Background.

The instant Chapter 11 case was commenced on April 4, 1995. From its inception it has featured an ongoing battle royale between the Debtor and Sumitomo. Most disputes have been resolved by the Court from the Bench, and to date the Court has not yet had occasion to prepare a written opinion. Written findings, however, are appropriate in this instance. A chronology of the more relevant events is thus appropriate.

The Debtor is a Pennsylvania limited partnership formed in 1984 to acquire and renovate an historically certified twelve story office building located at 6th and Walnut Streets, Philadelphia, Pennsylvania. The building contains approximately 785,000 square feet of "rentable" commercial office space, 31,000 square feet of rentable retail space and 25,000 square feet of rentable storage space. There is also a 250 unit underground parking garage. The totality of ownership interests in the realty and its improvements is shared between the Debtor and its affiliated entity, Washington Square Limited Partnership. (hereinafter "Washington Square") That is to say, Washington Square owns the ground and the improvements, but has leased both to the Debtor pursuant to separate long term "land" and "building" leases.¹ Renovation of the property, has been completed for some years and was financed, in part, through a loan from Mellon Bank (East), N.A. ("Mellon"), and in part with some $38,000,000 in equity investments raised from the Debtor's limited partners. The building was further leveraged in January 1990 with a $95,000,000 working capital credit facility extended by Sumitomo. Sumitomo's three loans under the credit facility are evidenced by promissory notes and are secured, in their entirety, by a first mortgage lien on the combined interests in the realty and improvements of both the Debtor and Washington Square, as well as by a collateral assignment of tenant leases and rents. There also exists a related agreement which, inter alia, subordinates the entire Mellon indebtedness, as well as a junior secured mortgage debt of the Debtor to Washington Square, to the debt of Sumitomo. Sumitomo's loans were due to mature on June 13, 1995, however in April of the same year the Debtor and Washington Square defaulted by failing to remit a quarterly interest payment. That triggered the filing of the instant Chapter 11 case.

The rents of Curtis Center tenants are cash collateral in this proceeding within the meaning of 11 U.S.C. § 363. The Debtor has continued in possession and control of the building and its operations during the case, using the rentals to pay operating and capital expenses pursuant, mostly, to a consensual series of stipulations with Sumitomo. These stipulations, together with certain other orders of Court, have also provided for the Debtor's remission of certain post petition "adequate protection" payments to Sumitomo from excess cash flow.

Sumitomo first moved for relief from the automatic stay on June 6, 1995. In its first Motion, Sumitomo sought relief from the automatic stay under both subsections of 11 U.S.C. § 362(d). In this respect, Sumitomo alleged that "cause" existed under 11 U.S.C. § 362(d)(1) for the entry of an Order modifying the automatic stay for the following reasons:

(a) Sumitomo lacks adequate protection of its lien on the Debtor\'s interest in the Curtis Center, including, inter alia,

(i) the Debtor\'s inability to make debt service payments to Sumitomo

(ii) the Debtor\'s inability to pay the real estate taxes required under the Mortgage Agreement.

(iii) the value of the Debtor\'s interest in the Curtis Center has been and continues to decline.

(b) Debtor\'s inability to propose a confirmable plan for, inter alia, the following reasons:

(i) the rents from the Curtis Center are Sumitomo\'s collateral and are accumulating for Sumitomo\'s benefit, and the Debtor cannot use them to fund a plan of reorganization without Sumitomo\'s consent, which consent Sumitomo will not give. See In re Union Meeting Partners, 178 B.R. 664 (Bankr.E.D.Pa. 1995).

(ii) Sumitomo\'s claim is woefully under-secured and its deficiency claim prevents the Debtor from proposing a plan which can satisfy the requisite elements of Section 1129 without Sumitomo\'s consent. See In re Swedeland Development Group, Inc., 16 F.3d 552, 568 (3d Cir. 1994); John Hancock Mutual Life Ins. v. Route 37 Business Park Associates, 987 F.2d 154, 161 (3d Cir.1993).

(iii) even though the amount of general unsecured claims is relatively small, the huge amount of unsecured insider claims, the Mellon and Washington Square claims and the Sumitomo claim makes unrealistic any plan which preserves value to the Debtor or to its equity security holders, since there is insufficient value to distribute to creditors.

(c) In violation of its obligations under the Bankruptcy Code, specifically Section 704(7) made applicable to Chapter 11 debtors in possession by Section 1106(a)(1) and 1107(a), Debtor refuses to cooperate with Sumitomo\'s requests for the information Sumitomo requests to monitor the operations at the Curtis Center, information about the Debtor\'s assets, liabilities, business and conduct, and access to Debtor\'s books and records to Sumitomo\'s agent Heitman/JMB Advisory Corporation.

(d) To Sumitomo\'s knowledge, the Debtor has taken no action to formulate a plan of reorganization. Sumitomo has received no proposals.

Sumitomo further alleged that "cause" existed for the entry of an Order modifying the stay under 11 U.S.C. § 362(d)(2) for the following reasons:

(a) The Debtor has no equity in its interest in the Curtis Center.

(b) The Debtor\'s interest in the Curtis Center is not necessary for an effective reorganization in that:

(i) the Debtor cannot propose a confirmable plan and no reorganization is possible without the consent of Sumitomo;

(ii) since Sumitomo holds an assignment of the rents from the Curtis Center, there is no operating income which the Debtor can utilize to operate its business without providing Sumitomo with adequate protection which the Debtor cannot provide;

(iii) the Debtor cannot utilize the rents, which are Sumitomo\'s collateral, to fund a plan of reorganization; and

(iv) even though the amount of general unsecured claims is relatively small, the huge amount of unsecured insider claims, the Mellon and Washington Square claims and the Sumitomo claim makes unrealistic any plan which preserves value to the Debtor or to its equity security holders since there is insufficient value to distribute to creditors.

(c) To Sumitomo\'s knowledge, the Debtor has taken no action to formulate a plan of reorganization. Sumitomo has received no proposals.

(d) This is essentially a single asset real estate case involving a two-party dispute between Sumitomo and the Debtor. The automatic stay effectively holds only Sumitomo hostage to this Chapter 11 case because there is no value available for other creditors or for the Debtor and its equity security holders. There is no societal gain or advantage to be served by a reorganization. A confirmed reorganization plan will not further employment or the continuing of business at the Curtis Center. Business at the Curtis Center will continue even if Sumitomo pursues the remedies in the Mortgage Agreement and other loan documents. If permitted to foreclose, Sumitomo or a successful Marshal\'s sale purchaser will succeed to ownership of the Debtor\'s interest in the Curtis Center, and to continue operating the Curtis Center, will need to employ individuals and contract with third-party servicers, and will continue to lease space to tenants. Thus, the breathing spell accorded the Debtor by the automatic stay should end.

Answers in opposition to Sumitomo's first Motion for relief from the stay were filed by both the Debtor and the Committee and a lengthy, consolidated, evidentiary hearing was held July 28, 1995, with respect to the Sumitomo lift stay motion, as well as with respect to the Debtor's requests for continued use of cash collateral and an extension of the exclusivity period afforded to it under 11 U.S.C. § 1121(d), both of which requests were opposed by Sumitomo.

Evidence presented at the hearing on July 28, 1996 clearly established a number of facts. First, regardless of which parties' expert appraiser was more convincing, it was undisputed that Sumitomo is substantially under-secured. Its proof of claim filed July 14, 1996 states an indebtedness for loans made pursuant to its credit agreement with the Debtor in the aggregate amount of $84,027,080.94, plus accrued and accruing fees,...