In re Dublin Properties, Bankruptcy No. 80-03020G

• Decision Date: 19 June 1981
• Docket Number: 81-0027G.,Bankruptcy No. 80-03020G,Adv. No. 81-0026G
• Citation: 12 BR 77
• Parties: In re DUBLIN PROPERTIES, a Limited Partnership, Debtor. FRANKFORD TRUST COMPANY, Plaintiff, v. DUBLIN PROPERTIES, a Limited Partnership, Defendant. In re DUBLIN PROPERTIES, a Limited Partnership, Debtor. OLNEY FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. DUBLIN PROPERTIES, a Limited Partnership, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

12 B.R. 77 (1981)

In re DUBLIN PROPERTIES, a Limited Partnership, Debtor.

FRANKFORD TRUST COMPANY, Plaintiff, v. DUBLIN PROPERTIES, a Limited Partnership, Defendant.

In re DUBLIN PROPERTIES, a Limited Partnership, Debtor.

OLNEY FEDERAL SAVINGS AND LOAN ASSOCIATION, Plaintiff, v. DUBLIN PROPERTIES, a Limited Partnership, Defendant.

Bankruptcy No. 80-03020G, Adv. Nos. 81-0026G, 81-0027G.

United States Bankruptcy Court, E.D. Pennsylvania.

June 19, 1981.

John Francis Gough, Stuart F. Ebby, Toll, Ebby & Gough, Philadelphia, Pa., for plaintiff, Frankford Trust Company.

Rush T. Haines, II, Ralph Rodak, Jack B. Justice, R. Leonard Davis, III, Drinker Biddle & Reath, Philadelphia, Pa., for plaintiff, Olney Federal Savings and Loan Association.

Nathan B. Feinstein, Richard M. Squire, Cohen, Shapiro, Polisher, Shiekman & Cohen, Philadelphia, Pa., for defendants Dublin Properties, a Limited Partnership.

Andrew S. Hillman, Fidelcor, Inc., Philadelphia, Pa., for The Fidelity Bank.

OPINION

EMIL F. GOLDHABER, Bankruptcy Judge:

The issue before us is whether a debtor in a chapter 11 case under the Bankruptcy Code ("the Code") must introduce evidence of the feasibility of a plan of reorganization in order to survive a preliminary hearing for relief from the automatic stay under § 362(e) of the Code. We conclude that, where the debtor contends that relief from the stay should not be granted because the property which is sought to be foreclosed is necessary for an effective reorganization, the debtor must offer some evidence that an effective reorganization of the debtor is realistically possible. In the case at bench, we find that the debtor has offered sufficient evidence on that issue at the preliminary hearing so that there is a reasonable likelihood that the debtor will prevail at the final hearing under § 362(d).

The facts of the case sub judice are as follows:¹ Dublin Properties ("the debtor") is a Pennsylvania limited partnership which was engaged in the construction of town-houses on certain real property located in Upper Dublin Township, Montgomery County ("the Tannerie Wood Subdivision"). In order to obtain financing for that project, the debtor executed and delivered, between 1977 and 1979, various notes and mortgages secured by different sections of the Tannerie Wood Subdivision to Frankford Trust Company ("Frankford") and to Founders Federal Savings and Loan Association ("Founders").²

The debtor allegedly defaulted on the various notes and mortgages³ as a result of which Frankford and Founders each began foreclosure proceedings by confessing judgments against the debtor and issuing writs of execution thereon.⁴ Subsequently, on August 28, 1980, Frankford entered into possession of the Tannerie Wood Subdivision.

On November 17, 1980, the debtor filed a petition for a reorganization under chapter 11 of the Code. Thereafter, on January 12, 1981, Frankford and Olney each filed complaints for relief from the automatic stay provisions of § 362(a) of the Code to permit them to proceed with the enforcement of their liens on the Tannerie Wood Subdivision. Those complaints were consolidated for the purpose of trial and preliminary hearings thereon were held on four separate trial dates (March 9, 18, 23 and 30) during which time considerable evidence was introduced by all parties.⁵ At the end of the fourth day of the preliminary hearings, we held this case under advisement and requested briefs on the issue of whether the debtor was obliged to offer evidence of the feasibility of any plan or reorganization which it would be proposing in the chapter 11 case and, if so, whether the debtor herein had offered sufficient evidence on that point to survive the preliminary hearings.

The Code provides in § 362(e) that, at the conclusion of a preliminary hearing thereunder, the bankruptcy court shall order the stay continued "if there is a reasonable likelihood that the party opposing relief from the stay will prevail at the final hearing under subsection (d) of this section." Under § 362(d) of the Code, a party is entitled to relief from the stay:

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or

(2) with respect to a stay of an act against property, if —

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization.

Section 362(g) apportions the burden of proof in stay litigation by providing that the party opposing the request for relief from the stay has the burden of proof on all issues except the issue of the debtor's equity in the property. Thus, in order to continue the automatic stay after the preliminary hearing there must be a reasonable likelihood that the one opposing the relief (the debtor in the instant case) will be able to carry its burden of proof on all issues except the issue of the debtor's equity in the property.

In this case extensive evidence was offered at the preliminary hearing by both parties. Frankford and Olney offered evidence of the amounts due on their notes and mortgages as well as testimony of the value of the various sections of the Tannerie Wood Subdivision in order to establish that the debtor lacks equity in the property on which the lenders have liens. Frankford and Olney also offered evidence on the issue of the lack of adequate protection of their interests in the property.

For its part the debtor offered extensive evidence to support its argument that it had equity in the property. The debtor's evidence on that issue consisted of testimony of the fair market value — on completion — of the 26 townhouses which are presently in various stages of completion, minus the cost to complete those townhouses. With respect to the rest of the property in the Tannerie Wood Subdivision (4 improved lots and 36 semi-improved lots), the debtor offered testimony of both the fair market value if completed, minus the cost to complete, as well as the fair market value if those lots were sold as is. In addition, to support its contention that the property is necessary for the debtor's effective reorganization, the debtor offered evidence that the Tannerie Wood Subdivision is the only property which the debtor owns.

On the issue of whether — at a preliminary hearing under § 362(e) — the debtor must offer evidence of the feasibility of any plan it may propose, we conclude that where a successful plan is a necessary element of the debtor's proof under §§ 362(d) and (g), the debtor must present some evidence that such a plan will be achievable. In the instant case we find that the debtor's defense of this § 362(d) complaint depends on a successful plan of reorganization for two reasons. Firstly, the debtor's evidence on the issue of the value of the Tannerie Wood Subdivision is dependent on the debtor's completion of at least the partially finished portion of that project. Secondly, the debtor has asserted that the Tannerie Wood Subdivision is necessary for its effective reorganization. Several courts have held, correctly we believe, that in order for property to be necessary for an effective reorganization of a debtor it must be demonstrated that an effective reorganization is possible. If no reorganization of...