In re Indian River Estates, Inc., No. 02-36330.

• Decision Date: 17 March 2003
• Docket Number: No. 02-36330.
• Parties: In re INDIAN RIVER ESTATES, INC., Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio

293 B.R. 429

In re INDIAN RIVER ESTATES, INC., Debtor.

No. 02-36330.

United States Bankruptcy Court, N.D. Ohio.

March 17, 2003.

COPYRIGHT MATERIAL OMITTED

Thomas G. Ilstrup, Toledo, OH, for debtor.

Dana M. Farthing, Dusty Renee Tinsley, Cooper & Walinski LPA, Toledo, OH, foe creditors.

Saul Eisen, Office of the U.S. Trustee, Cleveland, OH, U.S. Trustee.

MEMORANDUM OPINION AND DECISION

RICHARD L. SPEER, Bankruptcy Judge.

This cause comes before the Court after a final hearing on the Motion by Preferred Properties Inc., a creditor, for an Order Requiring the Debtor-in-Possession to Execute a Sales contract for Real Property held in Constructive Trust. In its Motion, Preferred Properties requests a number of forms of relief, including relief from the automatic stay of 11 U.S.C. § 362(a), injunctive relief and findings of fact regarding the status of real property. (Doc. No. 56). The Debtor-in-Possession has objected to this Motion, arguing that the disposition of the real property at issue in this case may be properly handled through its Chapter 11 bankruptcy. As it concerns this matter, the Court, after considering the arguments raised by the Parties, including those arguments submitted by the Parties' in their Memoranda to the Court, finds that the Motion of Preferred Properties, Inc. should be Granted in Part and Denied in Part.

FACTS

The Debtor-in-Possession, Indian River Estates, Inc. (hereinafter DIP), is a land development company whose primary business has involved developing subdivisions. The company is owned by Duane Tillimon who is both the President and the sole shareholder of the DIP.

Preferred Properties is a nonprofit housing development corporation. In 1997 Preferred Properties executed an option contract with the DIP to purchase eight of 23 lots in a residential subdivision. The purpose of this project was to construct affordable housing for disabled persons with mobility impairments. In accordance with the Parties' contract, the DIP platted lots specifically tailored for Preferred Properties use. (Doc. 44, at pg. 6). In addition, Preferred Properties obtained funding from the U.S. Department of Housing and Urban Development to support the project. (Doc. 28, at pg. 2).

Later, for reasons which are not relevant in this case, Preferred Properties sued the DIP and Mr. Tillimon in federal district court, alleging two causes of action: (1) breach of contract; and (2) discrimination against handicapped persons in the sale of real property in violation of both state and federal housing laws. On March 10, 2000, after a jury trial, the DIP was found liable on both these causes of action. Judgment was thereafter rendered against the DIP in the amount of One Hundred Fifty-six Thousand Five Hundred dollars ($156,500.00), plus interest. (Doc. 28, Exhibit C).

In addition to awarding monetary damages, the district court, with the Honorable Judge David A. Katz presiding, also issued an ordered requiring the DIP and Mr. Tillimon to sell to Preferred Properties the eight plots in the subdivision developed by the DIP.¹ The actual terms of this order for specific performance provided:

... Plaintiff's Motion for a Permanent Injunction and Specific Performance (Doc. No. 72) is granted. The Defendants are permanently enjoined from refusing to sell or negotiate for the sale of property on the basis of handicap. Further, the Defendants shall execute a purchase agreement and convey to Plaintiff lot numbers 10, 12, 14, 15, 17, 19, 21, and 23 on Abygail and David's Creek's on Indian River Estates under the terms set forth in the option contract and purchase agreement, as reflected in Plaintiff's Trial Exhibits 1 and 4.

(Doc. 28, Exhibit D). This decision was subsequently upheld on appeal to the Sixth Circuit Court of Appeals. See Preferred Properties v. Indian River Estates, et al., 276 F.3d 790 (6th Cir.2002). Similarly, on June 28, 2002, the DIP's petition for writ of certiorari to the Supreme Court of the United States was denied. See Indian River Estates v. Preferred Properties, 536 U.S. 959, 122 S.Ct. 2663, 153 L.Ed.2d 838 (2002).

On September 20, 2002, the DIP filed a petition in this Court for relief under Chapter 11 of the United States Bankruptcy Code. The only significant asset listed in the DIP's bankruptcy schedules was the real property subject to Judge Katz's order for specific performance. On January 6, 2003, Preferred Properties filed the Motion at issue in the proceeding, seeking to have Judge Katz's order for specific performance enforced.

LEGAL ANALYSIS

Determinations concerning the administration of the debtor's estate, and proceedings affecting the adjustment of the Debtor-Creditor relationship are core proceedings pursuant to 28 U.S.C. § 157. Thus, this case is a core proceeding.

Preferred Properties in this case seeks a finding that Judge Katz's order requiring specific performance created in its favor a constructive trust. In doing so, Preferred Properties seeks an order from this Court relieving the automatic stay of 11 U.S.C. § 362(a) so as to allow it to continue in its action to enforce Judge Katz's order of specific performance. (Doc. 56, at pg. 13). In addition, Preferred Properties seeks an order from the Court requiring the Debtor to execute a sales contract on the property. (Doc. No. 56, Exhibit A).

The automatic stay of § 362(a) generally stops any and all actions against a debtor to collect a debt, including orders issued by a court for specific performance. § 362(a)(1)/(2)/(3). However, pursuant to § 362(d)(1), a court may relieve the stay for, among other reasons, "cause." As used in § 362(d)(1), the term "cause" is a broad and flexible concept which permits a bankruptcy court, as a court of equity, to respond to inherently fact-sensitive situations. In re Texas State Optical Inc., 188 B.R. 552, 556 (Bankr.E.D.Tex.1995).

In a situation such as this, where relief from the stay is being sought in order to continue the enforcement of a prior judgment, this Court in determining the existence of "cause," has applied a balancing test, whereby the interests of the estate are weighed against the hardships that will be incurred by the creditor-plaintiff. In re Bock Laundry Mach. Co., 37 B.R. 564, 566 (Bankr.N.D.Ohio 1984). For example, if lifting the stay would be unfairly detrimental to a debtor's other creditors, relief will generally not be granted. See In re General Oil Distr., Inc., 33 B.R. 717 (Bankr.E.D.N.Y.1983). On the other hand, if the debtor will unlikely be able to propose a plan of reorganization, "cause" for lifting the stay will usually be found. See In re CBJ Development, Inc., 202 B.R. 467, 473 (9th Cir. BAP 1996). The same is also true, if the effect on the debtor and the debtor's estate are minimal. For example, relief has been granted where a debtor merely wishes to liquidate a claim pending in a state court action. See In re Aquarius Disk Services, Inc., 254 B.R. 253, 260 (Bankr.N.D.Cal.2000); In re Donington, Karcher, Salmond, Ronan & Rainone, P.A., 194 B.R. 750, 761 (D.N.J.1996).

As it pertains to the above balancing test, the DIP, in objecting to Preferred Properties' Motion, makes what are essentially two different arguments: (1) Judge Katz's order of specific performance is simply a "debt" or "liability on a claim" and thus subject to discharge under the provisions of Chapter 11; and (2) no constructive trust was created by Judge Katz's order requiring specific performance. Each of these positions will now be addressed in order.

Existence of a Debt/Claim under the Bankruptcy Code

Only "debts" are subject to being discharged in a Chapter 11 Plan of Reorganization. 11 U.S.C. § 1141(d)(1)(A). As it applies to this principle, it is the DIP's position that Judge Katz's order of specific performance simply created a debt, and as such, it may be handled through its Chapter 11 Plan of Reorganization.

A "debt" is defined under the Bankruptcy Code as "liability on a claim." 11 U.S.C. § 101(12). Based upon this definition, the Supreme Court of the United States has held that the terms "debt" and "claim" are essentially synonymous with one another. Pennsylvania Department of Public Welfare v. Davenport, 495 U.S. 552, 557, 110 S.Ct. 2126, 2130, 109 L.Ed.2d 588 (1990). Under the circumstances in this case, where an equitable remedy is at issue, § 101(5)(B) defines a "claim" as:

right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured[.]

This definition was explained by the Supreme Court of the United States in Ohio v. Kovacs where, in quoting from the legislative history of the Bankruptcy Code, the Court stated:

Section 101(4)(B) [now § 101(5)(B)] ... is intended to cause the liquidation or estimation of contingent rights of payment for which there may be an alternative equitable remedy with the result that the equitable remedy will be susceptible to being discharged in bankruptcy. For example, in some States, a judgment for specific performance may be satisfied by an alternative right to payment in the event performance is refused; in that event, the creditor entitled to specific performance would have a `claim' for purposes of a proceeding under title 11.

469 U.S. 274, 279, 105 S.Ct. 705, 708, 83 L.Ed.2d 649 (1985) (quoting 124 Cong.Rec. 32393 (1978) (remarks of Rep. Edwards)).

The key therefore, in determining whether an equitable remedy gives rise to a claim under bankruptcy law is to ascertain whether the equitable remedy would also give rise to a right to payment; that is, could a monetary award substitute for the equitable remedy. In re Roxse Homes, 74 B.R. 810, 818 (Bankr.D.Mass.1987) (when the only remedy allowed by state law to enforce a judgment is a nonmonetary one, that judgment is not a claim under § 101(5)). In making this determination,...