In re Lcgi Fairfield, LLC, 09-48466 T.
| Decision Date | 22 February 2010 |
| Docket Number | No. 09-48617 T.,No. 09-48466 T.,09-48466 T.,09-48617 T. |
| Citation | 424 B.R. 846 |
| Parties | In re LCGI FAIRFIELD, LLC, Debtor-in-Possession. In re LCGI Victorville, LLC, Debtor-in-Possession. |
| Court | U.S. Bankruptcy Court — Northern District of California |
John H. MacConaghy, MacConaghy and Barnier, Sonoma, CA, for Debtor-in-Possession.
The motion of General Electric Asset Business Funding Corporation ("GE Capital")1 to dismiss the above-captioned chapter 11 cases came before the Court on February 16, 2010. The above-captioned debtors (the "Debtors") opposed the motion. At the conclusion of the hearing, the Court took the motion under submission. Having considered the issues, the Court concludes that the motion should be denied.
In 2002, GE Capital loaned the former owner of real property located in Fairfield California (the "Fairfield Property") approximately $1.7 million, payable over ten years, secured by a first deed of trust. Interest was to accrue at the rate of 3.5 percent per annum above the one month London Interbank Offered Rate ("LIBOR") published in the Wall Street Journal on the last business day of each month.
In 2004, Imperial Capital Bank ("Imperial") loaned the former owner of real property located in Victorville, California (the "Victorville Property") approximately $2 million, payable over twenty years, secured by a first deed of trust.3 Interest was to accrue at the rate of 5 percent per annum above the six month London Interbank Offered Rate ("LIBOR") published in the Wall Street Journal on certain quarterly Interest Change Dates, as defined in the promissory note evidencing this loan. Sometime thereafter, Imperial assigned the loan obligation to GE Capital.
The Properties were each leased to an entity that operated a "Johnny Carino's" themed restaurant. The principal behind each restaurant entity as well as the former owner of the Properties is an individual named John Gantes ("Gantes"). GE Capital made working capital loans to Gantes in connection with his various business activities. On a date or dates that have not been disclosed, additional loans were made to the former owners of the Properties by LGCI Mortgage ("LGCI Mortgage"), and the loan obligations were secured by junior deeds of trust.
In mid-2008, GE Capital filed a civil action to enforce the working capital loans and obtained appointment of a receiver (the "Receiver") to take control of and operate the restaurant businesses located on the Properties. The Receiver collected the gross proceeds of the businesses and paid wages, taxes, and costs of goods but did not pay rent to the owners of the Properties. As a result, the owners were unable to pay debt service to GE Capital or to LCGI Mortgage.
Early in 2009, LGCI Mortgage issued notices of default. When the defaults were not cured, it issued notices of sale, scheduling foreclosure sales for May 2009. In April 2009, GE Capital issued notices of default and, when the defaults were not cured, issued notices of sale, scheduling foreclosure sales for September 2009. The LGCI Mortgage foreclosure sales were concluded prior to the sales scheduled by GE Capital. The Properties were sold to LGCI Mortgage pursuant to credit bids. However, title to the Fairfield Property was taken in the name of LCGI Fairfield, and title to the Victorville Property was taken in the name of LCGI Victorville. Both LCGI Fairfield and LCGI Victorville are wholly owned subsidiaries of LCGI Mortgage. All three entities are affiliated with Lafayette Capital Group, Inc. ("Lafayette"), a commercial mortgage lender, which manages LCGI Mortgage.
LCGI Fairfield filed a chapter 11 petition on September 10, 2009. LCGI Victorville filed a chapter 11 petition on September 14, 2009. The chapter 11 filings stayed the foreclosure sales scheduled by GE Capital. The GE Capital receivership was terminated on or about September 25, 2009, and Gantes, through two of his entities, resumed control of the operation of the restaurants. The Debtors permitted Gantes to continue to lease the Properties upon payment of $15,000 per month rent on a triple net basis.4
On October 7, 2009, an order was entered providing for joint administration of the two chapter 11 cases. Schedules of Assets and Liabilities were filed in each case on September 16, 2009. The Schedules of Assets and Liabilities filed in Case No. 09-48466 T (the "Fairfield Case") valued the Fairfield Property at $2.5 million subject to a secured claim totaling approximately $1.3 million. No priority debts were scheduled, and only approximately $26,000 in general, unsecured claims were scheduled. The Schedules of Assets and Liabilities filed in Case No. 09-48617 T (the "Victorville Case") valued the Victorville Property at $2.75 million subject to a secured claim totaling approximately $2 million. No priority debts were scheduled and only approximately $17,000 in general, unsecured claims. The moving party, GE Capital, holds all of the secured debt of any significance in each case.
A status conference was conducted in the two cases on November 2, 2009. On October 29, 2009, the Debtors filed a joint status conference statement, acknowledging that the cases are "single asset real estate" cases. See 11 U.S.C. § 101(51B). A joint reorganization plan, unaccompanied by a disclosure statement, was filed on October 30, 2009. At the conclusion of the status conference, the Court set a December 15, 2009 deadline for the Debtors to file a disclosure statement and to submit it for conditional approval. The Debtors filed a joint disclosure statement on December 9, 2009 and submitted a proposed order conditionally approving it. The Court had some minor problems with the disclosure statement and denied conditional approval, giving the Debtors 30 days to amend the plan and disclosure statement.
An amended plan and disclosure statement and a motion for conditional approval were filed on December 23, 2009. On January 7, 2010, the Court issued an order conditionally approving the amended disclosure statement and scheduling a confirmation hearing on February 16, 2010. On January 26, 2010, GE Capital filed a motion to dismiss the two chapter 11 cases. The motion was noticed for hearing on February 16, 2010. On January 27, 2010, the Debtors filed an adversary proceeding against GE Capital, alleging, inter alia, that GE Capital had lost its security interest in the Properties through its pre-petition collection activities. On February 8, 2010, GE Capital filed an objection to confirmation of the amended plan (the "Plan").5
At the conclusion of the confirmation hearing and hearing on GE Capital's motion to dismiss, the Court took the motion to dismiss under submission. The Court indicated that, if it decided not to dismiss the case, the confirmation hearing would have to be set for an evidentiary hearing.
GE Capital advances three grounds for its motion to dismiss. First, it contends that the bankruptcy case was filed in bad faith. Second, it contends that there are independent grounds to dismiss the case under 11 U.S.C. § 1112(b). Third, it contends that the Court should abstain from hearing the case under 11 U.S.C. § 305. The Debtors respond to these arguments and also assert that the motion is barred by laches. Each of these arguments is addressed below.
GE Capital asserts that the above-captioned chapter cases were filed in bad faith and that this constitutes grounds for dismissal. See In re Marsch, 36 F.3d 825 (9th Cir.1994).6 It notes that the two chapter 11 cases are admittedly "single asset real estate" cases filed by entities which were created and took title to the Properties shortly before filing the chapter 11 cases. It notes that the monthly operating reports demonstrate that the Debtors have no ongoing business operations and no employees. Between the two of them, the Debtors have less than $47,000 in unsecured claims. GE Capital contends that these are classic indicia of a bad faith filing.
GE Capital also asserts that reorganization of the Debtors is not feasible. It notes that the Plan provides for only a one-time capital infusion of $100,000. Otherwise, the Debtors' sole source of income is from rents, which are GE Capital's cash collateral. However, according to GE Capital, the amount of the rents is inadequate to service GE Capital's secured claim. Moreover, according to GE Capital, the rents have not been paid with consistency since the filing of the case. GE Capital contends that the Plan presents it with an unacceptable risk.
Finally, GE Capital asserts that the cases are two party disputes between the Debtors and GE Capital and are not proper chapter 11 cases for that reason. It contends that the sole purpose of the filings was to stop GE Capital's foreclosure sales and to attempt to force GE Capital to accept lower payments calculated at a lower interest rate than required by GE Capital's existing loan obligations. GE Capital contends that bankruptcy was not intended as an "alternate forum for private disputes," citing In re Van Owen Car Wash, Inc., 82 B.R. 671, 673 (Bankr.C.D.Cal.1988).7
GE Capital argues that, if the Court were to countenance this type of filing, there would be a flood of filings by junior secured creditors, attempting to gain an unfair advantage over senior secured creditors. It notes that, in In re ACI Sunbow, LLC, 206 B.R. 213 (Bankr.S.D.Cal.1997), a similarly motivated chapter 11 filing was found to be in bad faith by the bankruptcy court.8
In response, the Debtors dispute GE Capital's contention that the cases were filed in bad faith. They contend that no bankruptcy filings were contemplated when the Debtors were created and acquired title to the Properties. To the contrary, it was Lafayette's normal procedure to take title in a separate entity when acquiring real property through a foreclosure sale. The purpose of the procedure was...
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