In re Koopmans
| Decision Date | 11 August 1982 |
| Docket Number | Civ. No. 81P-0890.,Bankruptcy No. 81-00510 |
| Citation | 22 BR 395 |
| Parties | In re Leo W. KOOPMANS and Connie J. Koopmans, Debtors. EMPIRE ENTERPRISES, INC., Plaintiff, v. Leo W. KOOPMANS, Connie J. Koopmans, and William T. Thurman, Trustee, Defendants. |
| Court | U.S. Bankruptcy Court — District of Utah |
Brent V. Manning, Holme, Roberts & Owen, Salt Lake City, Utah, for Empire Enterprises, Inc.
David E. Leta, Roe & Fowler, Salt Lake City, Utah, for debtors.
William T. Thurman, McKay, Burton, Thurman & Condie, Salt Lake City, Utah, pro se.
INTRODUCTION AND BACKGROUND
This case asks when property is "necessary to an effective reorganization" under 11 U.S.C. Section 362(d)(2)(B).
Debtors filed a petition under Chapter 11 on February 18, 1981. Plaintiff Empire Enterprises, Inc. (Empire) brought this action for relief from the stay on October 27. The complaint alleged, among other things, that debtors have no equity in the property at issue and no "prospect of rehabilitation."
A preliminary evidentiary hearing was held November 25. The evidence showed that debtors are in the business of buying and managing real property. They own 14 homes which have been converted into apartments and rented. The homes are valued at $973,000. Total debt equals $484,504. Empire holds a lien for $41,000 on one of these homes worth $60,000.1 Other debt, however, totalling $62,600, encumbers the home. Hence, debtors have no equity in the home.2
No evidence was presented concerning the rehabilitation of debtors. The home, however, earns $226 net income per month,3 and if sold, would satisfy Empire and some of the junior debt. Moreover, this junior debt encumbers the other property. Reduction in this debt, therefore, would enlarge the equity in the other property.
By its complaint, Empire argued that the debtors have no equity in the home and no prospect of rehabilitation. Debtors have no equity in the home. And since they did not carry their burden of persuasion on the issue of rehabilitation, if this be the standard under Section 362(d)(2)(B), Empire would be entitled to relief from the stay. By resisting the complaint, however, debtors maintained that the standard is not whether they have a prospect of rehabilitation, but whether the property is "necessary to an effective reorganization." The court concurred with debtors and held that property may be "necessary to an effective reorganization" if it is necessary either to an effective rehabilitation or to an effective liquidation. Because the meaning of Section 362(d)(2)(B) is frequently debated in stay litigation in this district, the court files this explanatory opinion.
THE MEANING OF SECTION 362(d)(2)(B)
Section 362(d)(2) requires relief from the stay of an act against property when two conditions are met: (2)(A) "the debtor does not have an equity in such property" and (2)(B) "such property is not necessary to an effective reorganization."
Some courts, taking their cue from Collier, have construed subpart (2)(B) to require relief from the stay when there is no prospect of rehabilitation: 2 Collier on Bankruptcy ¶ 362.072 at 362-49—362-50 (15th ed. 1981) (emphasis in original). See also id. ¶ 362.073 at 362-51.4
This construction, while plausible, may be questioned on several fronts. The language of subpart (2)(B) may bear faint resemblance to a rehabilitation test. The legislative history of subpart (2)(B) appears to reinforce this view, since the genesis and evolution of the statute may evince a concern with the need for property in the business or a plan, not with the rehabilitation of debtors. And while the language and history of subpart (2)(B) may not be conclusive, reading a rehabilitation test into the statute may be anomalous in light of other provisions of the Code.
The Language and Legislative History of Section 362(d)(2)(B)
"The starting point in every case involving construction of a statute is the language itself." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct. 1917, 1935, 44 L.Ed.2d 539 (1975). Section 362(d)(2)(B) asks whether the property is necessary to an effective reorganization. This language, viewed alone or in tandem with subpart (2)(A), may be different from the rehabilitation test. The former is concerned with whether an asset may be instrumental in the continued operation or ultimate sale of the business. The latter is concerned with whether the business, viewed as a bundle of assets, liabilities, management, markets, and the economy at large, can stay alive. If the business rather than one house were the focus under subpart (2)(B), then net worth of the business rather than equity in the property might be considered under subpart (2)(A).5 Instead, Section 362(d)(2) is satisfied when the business is under water (even when rehabilitation is hopeless) so long as there is equity in the house.5a
The term, "effective reorganization," may not transform subpart (2)(B) into a rehabilitation test. First, "effective" modifies "reorganization," which embraces rehabilitation and liquidation; property may be necessary either to an "effective" rehabilitation or to an "effective" liquidation.6 But courts which apply the rehabilitation test, because they look to the condition of the business rather than the need for an asset, will give relief from the stay where there is no prospect of rehabilitation, whether or not the asset is necessary for an effective liquidation. Under these circumstances, neither word, "necessary" or "reorganization," may be accorded the breadth intended by Congress.
Second, where Congress meant to employ a rehabilitation test, as in 11 U.S.C. Section 1112(b)(1), it knew how to say so. The negative implication may be that no similar meaning was attached to subpart (2)(B).6a
Third, the choice of words, "effective reorganization," may be explained by formulations of the necessity test under prior law. This was phrased as "the likely need of the property subject to the lien for a successful reorganization," Kennedy, "The Automatic Stay in Bankruptcy," 11 U.Mich.J.L.Ref. 175, 239 (1978), and whether "the withdrawal of the property by the secured party will materially affect the prospect of a successful arrangement or reorganization," Seidman, "The Plight of The Secured Creditors in Chapter XI," 80 Com.L.J. 343, 347 (1975). Thus, the term "effective reorganization," may be a carryover of familiar verbiage employed with and merely incidental to the necessity test under the Act, which held that the property is necessary, because without it, there may be no reorganization.7
Moreover, the necessity test, notwithstanding its use of the term, "effective reorganization," was distinct from the rehabilitation test. This distinction continues in subpart (2)(B), but with the modification, noted above, that "reorganization" has an expanded scope; it includes liquidation. Prior law used the rehabilitation test in addition to the necessity test; if they both had meant the same thing, one or the other would have been superfluous. Congress, by focusing on necessity rather than rehabilitation in subpart (2)(B), showed that it intended to recognize and perpetuate, rather than blur, this distinction. Indeed, now that reorganization may mean liquidation, necessity cannot be tied to rehabilitation alone. In light of this distinction, and the new scope for reorganization, it is improbable that the necessity language creates a rehabilitation test in subpart (2)(B).8
The legislative history lends some support to this analysis. As proposed, Section 362(d) of H.R. 8200, 95th Cong., 1st Sess. (1977) and Section 362(d) of S. 2266, 95th Cong., 1st Sess. (1977) did not contain a necessity test. The former permitted relief for cause including a lack of adequate protection. The latter allowed relief where debtor had no equity in the property.
The necessity test was the brainchild of insurance industry representatives who testified at hearings on S. 2266. They believed "that the basic concept of Section 362(d) which authorizes the court to lift the automatic stay where the debtor has no equity in the property is sound," but "in order to permit reorganization to go forward where the property is essential to an ongoing business, an exception must be provided for such situation." Hearings on S. 2266 and H.R. 8200 Before the Subcomm. on Improvements in Judicial Machinery of the Sen. Comm. on the Judiciary, 95th Cong., 1st Sess. 856 (1977) (emphasis supplied). In their view, "in the case of a piece of real property ... which is the security for a real estate mortgage and not part of a business that should be reorganized for the benefit of all parties in interest, the stay should be lifted." Id. (Emphasis supplied.) They argued that Id. at 857. (Emphasis supplied.)9
These proposals, including guidelines explaining "necessary to an effective reorganization," were added to Section 362(d), S. 2266, 95th Cong., 2d Sess. (1977) and were elucidated in the Senate Report: Section 362(d) is intended "to reach the...
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