In re Gregory, Bankruptcy No. 383-02411.

• Decision Date: 16 April 1984
• Docket Number: Bankruptcy No. 383-02411.
• Citation: 39 BR 405
• Parties: In re Ernestine GREGORY and Guinn Gregory, Debtors.
• Court: U.S. Bankruptcy Court — Middle District of Tennessee

39 B.R. 405 (1984)

In re Ernestine GREGORY and Guinn Gregory, Debtors.

Bankruptcy No. 383-02411.

United States Bankruptcy Court, M.D. Tennessee.

April 16, 1984.

Steven L. Lefkovitz, Nashville, Tenn., for debtors.

Rebecca Lyford, Nashville, Tenn., for Federal Deposit Ins. Corp.

MEMORANDUM

KEITH M. LUNDIN, Bankruptcy Judge.

The Federal Deposit Insurance Corporation ("FDIC") seeks relief from the § 362 stay. The issues are: (1) whether nonbusiness, consumer, wage-earning debtors are eligible for Chapter 11 relief; and (2) whether the debtors' residence is "necessary to an effective reorganization" within the meaning of 11 U.S.C.A. § 362(d)(2)(B) (West1979).¹ The court finds that the debtors qualify for Chapter 11 relief, however, the FDIC is entitled to relief from the stay because the debtors have no equity in their residence and the property is not necessary to an effective reorganization.

The following constitute findings of fact and conclusions of law as required by Bankruptcy Rule 7052.

Ernestine and Guinn Gregory ("debtors") filed a voluntary Chapter 11 on September 12, 1983. The debtors scheduled Smith County Bank as a creditor secured by Lots 26 and 49 of a subdivision in Smith County, Tennessee and a 1979 Fleetwing camper and trailer.² The debtors' principal residence is located on Lot 26 and is not used to produce income.³ Lot 49 is adjacent to the debtors' residence and is undeveloped.

On September 23, 1983, the FDIC, as successor in interest to the insolvent Smith County Bank, filed a motion for relief from the stay to foreclose on the lots and camper.⁴ The FDIC had scheduled a foreclosure for September 13, 1983 but the sale was stayed by the debtors' bankruptcy petition the prior day.⁵ The parties stipulated that the debtors have no equity in the property and that the debtors' offer of $500 monthly payments is adequate protection of the FDIC's interest in the residence.

I. ELIGIBILITY FOR RELIEF UNDER CHAPTER 11

The FDIC argues that it is entitled to relief from the stay because consumer, nonbusiness debtors like the Gregorys are ineligible for Chapter 11. The FDIC relies on In re Ponn Realty Trust wherein the bankruptcy court held that "certainly the legislative history can leave no doubt that Chapter 11 of the Bankruptcy Code was intended for utilization solely in the business setting and not in a consumer context." 4 B.R. 226, 231 (Bankr.D.Mass. 1980).

This court declines to adopt such a restrictive interpretation of Chapter 11 eligibility.⁶ Starting with the plain language of the Code, there is nothing in the eligibility provisions of 11 U.S.C.A. § 109 (West1979) barring nonbusiness individuals from Chapter 11. Section 109(d) provides that "only a person that may be a debtor under chapter 7 of this title, except a stockbroker or commodity broker and a railroad may be a debtor under chapter 11 of this title." Congress imposed no other explicit requirements or restrictions. The debtors are not stockbrokers or commodity brokers or a railroad, but are individuals eligible for relief under Chapter 7 and consequently eligible for relief under Chapter 11.

If Congress intended that only business debtors be eligible under Chapter 11, a qualifying term or express limitation would have been included in § 109(d). Congress was careful to exclude stockbrokers, commodity brokers, and railroads from Chapter 11, but did not exclude individual consumer, wage-earning debtors. Elsewhere in § 109, Congress was careful to limit Chapter 13 eligibility to "only an individual with regular income," 11 U.S.C.A. § 109(e) (West1979), eschewing the broader term "person," and the drafters established maximum debt ceilings to further restrict Chapter 13 eligibility. In the face of obvious Congressional exactitude in drafting the eligibility criteria in § 109, this court will not imply the intent to exclude wage-earning debtors suggested in Ponn Realty.

The legislative history addressing Chapter 11 eligibility, rather than demonstrating an intention to exclude nonbusiness debtors from Chapter 11 relief, states that:

Chapter 11, Reorganization is primarily designed for businesses, although individuals are eligible for relief under the chapter. The procedures of chapter 11, however, are sufficiently complex that they will be used only in a business case and not in a consumer context.

S.REP. NO. 989, 95th Cong., 2d Sess. 3 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5789 (emphasis added). Although Chapter 11 petitions are primarily filed by business debtors, the legislative history supports the view that consumer debtors might opt for Chapter 11 under certain circumstances.⁷ The legislative history does not support the contention that Congress intended to force individual, wage-earning debtors into a Chapter 7 liquidation if relief under Chapter 13 is unavailable or unsatisfactory. Chapter 11 is available to wage-earning, consumer debtors willing to master the procedural complexities and shoulder the attendant costs.

II. "NECESSARY TO AN EFFECTIVE REORGANIZATION"

The FDIC is entitled to relief from the stay under 11 U.S.C.A. § 362(d)(2) (West1979). Section 362(d)(2) allows relief from the stay if the debtors have no equity and the property is not necessary to an effective reorganization.⁸ The debtors have stipulated that they have no equity in their residence. The debtors bear the burden of proof that the property is necessary to an effective reorganization. 11 U.S.C.A. § 362(g) (West1979).

Application of the phrase "necessary to an effective reorganization" requires two levels of analysis: the court must first ascertain what is an "effective reorganization", and then measure the necessity of particular property against that standard. No universal definition of "effective reorganization" is offered by the parties or apparent in the caselaw.⁹

"Effective" has been sensibly defined by many courts to require that a reorganization is possible or likely. See Provident Bank v. Taylor, 28 B.R. 691, 694 (Bkrtcy.S. D.OH.1983) ("court will lift the automatic stay where debtor has only illusory prospects for reorganization with or without the property"); In re Boca Development Associates, 21 B.R. 624, 630 (Bkrtcy.S.D.N. Y.1982) ("The debtor does not have any prospects for present financial restructuring nor has it filed a plan. . . . The debtor has not established that an `effective' reorganization is likely . . ."); Roslyn Savings Bank v. Comcoach Corp., 19 B.R. 231, 234 (Bkrtcy.S.D.N.Y.1982) ("While the property is clearly necessary to the reorganization, this does not address whether reorganization is possible or likely (i.e. that it be `effective')."); In re Dublin Properties, 12 B.R. 77, 80 (Bkrtcy.E.D.Pa.1981) (reorganization must be "realistically possible"); In re Clark Technical Associates, Ltd., 9 B.R. 738, 740 (Bkrtcy.D.Conn.1981) (relief from stay will be granted if all "debtor can offer is high hopes without any financial prospects on the horizon").

Some courts have suggested that different § 362(d)(2) standards should apply in consumer-debtor cases and in business cases:

The "necessary to an effective reorganization" standard should take on an entirely different meaning given the rehabilitative purpose of Chapter 13.

Dale Funding Corp. v. Garner, 18 B.R. at 371; In re Breuer, 4 B.R. 499, 501-502 (Bkrtcy.S.D.N.Y.1980) ("Unlike Chapter 11, which by definition is a `Reorganization' chapter designed to assisting distressed businesses, Chapter 13 is directed to consumer relief."); Carpenter v. Youngs, 7 B.R. 69, 71 (Bkrtcy.D.Mass.1980) (concern of bankruptcy court in addressing relief stay request is different in Chapter 13 context than in Chapter 11).

There are decisions holding that § 362(d)(2) is inoperative, in whole or in part, in Chapter 13 cases. See, e.g., Citicorp Homeowners, Inc. v. Willey, 24 B.R. 369 (Bkrtcy.E.D.Mich.1982); In re Garner, 13 B.R. 799 (Bkrtcy.E.D.N.Y.1981); Citizens and Southern National Bank v. Feimster, 3 B.R. 11 (Bkrtcy.N.D.Ga.1979); In re Sulzer, 2 B.R. 630 (Bkrtcy.S.D.N.Y. 1980). Other courts have held that the "necessary for effective reorganization" requirement applies in Chapter 13 and that the standards developed in Chapter 13 cases provide useful guidelines for § 362(d)(2) motions in nonbusiness Chapter 11 cases. See, e.g., Savings & Loan Ass'n. v. Rodebaugh, 12 B.R. 81 (Bkrtcy.D.Me. 1981); Standard Mortgage Corp. v. Stewart, 11 B.R. 93 (Bkrtcy.N.D.Ga.1981); Beneficial Mutual Savings Bank v. Roselli, 10 B.R. 665 (Bkrtcy.E.D.Pa.1981); First Federal Savings v. Crouse, 9 B.R. 400 (Bkrtcy. S.D.Tex.1981); First National Bank v. Pittman, 8 B.R. 299 (D.Colo.1981); In re Zellmer, 6 B.R. 497 (Bkrtcy.N.D.Ill.1980).¹⁰

In this case, the debtors contend that retention of their home is the sine qua non of this Chapter 11 case, thus "effective reorganization" means keeping the house. The debtors' argument is circular: "we filed Chapter 11 to save our house; therefore, saving our house is necessary to an effective reorganization." Although the debtors' desire to keep their home is no doubt sincere, the invitation to define "effective reorganization" in debtor-subjective terms must be refused, else the bankruptcy courts slip into the "never-never land" of measuring the psychological effect on debtors of retaining property interests. A purely subjective definition of "effective reorganization"—a scheme in which "effective reorganization" means the reorganization proposed by the debtor—would lead to absurd outcomes.

It is the opinion of this court that "effective reorganization" for a consumer-debtor includes provision for some place for the debtor (and, if applicable, the debtor's dependents) to live. This is necessarily a general statement—it is impossible for a bankruptcy court to fix the form of abode that would satisfy § 362(d)(2)(B) in all cases.¹¹ Here enters the calculus the statutory requirement that the property also be "necessary." If an "effective reorganization"...