In re Litchfield Co. of South Carolina Ltd.
| Citation | 135 BR 797 |
| Decision Date | 03 January 1992 |
| Docket Number | Bankruptcy No. C-B-91-30650,Adv. P. No. 91-3166. |
| Court | U.S. District Court — Western District of North Carolina |
| Parties | In re the LITCHFIELD COMPANY OF SOUTH CAROLINA LIMITED PARTNERSHIP, Debtor. The LITCHFIELD COMPANY OF SOUTH CAROLINA LIMITED PARTNERSHIP, Plaintiff/Appellee, v. The ANCHOR BANK, Defendant/Appellant. |
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Thomas B. Henson, Garland S. Cassada, Robinson Bradshaw & Hinson, P.A., Charlotte, N.C., for debtor.
Paul Burke O'Hearn, R. Matthew Martin, Jones Day Reavis & Pogue, Atlanta, Ga., Howell V. Bellamy, Jr., Rutenburg, Copeland, Epps, Gravely, Myrtle Beach, S.C., defendant/appellant.
This appeal arises out of an adversary proceeding by the debtor—a South Carolina limited partnership—against a creditor, The Anchor Bank, to enjoin the creditor's alleged violation of Bankruptcy Code § 362(a)(3), 11 U.S.C. § 362(a)(3) (hereinafter the "Code") and to enjoin, pursuant to Code § 105(a), the creditor's state court collection efforts against the debtor's partners and a guarantor of a substantial portion of the debts of the debtor. All of the debtor's creditors, who hold total claims of about $65 million, have recourse against the debtor's partners. Following the debtor's bankruptcy petition, defendant Anchor Bank sought to collect a $1,000,000 partnership debt from the debtor's partners and the estate of a deceased principal who guaranteed personally all of the debtor's bank debt. Without exception, the debtor's other bank creditors, who hold $24 million in claims against the debtor, concluded that the creditors as a group were better off avoiding a liquidation that would result from a chaotic scramble for the assets of the debtor, its partners, and its guarantor. Confronted with Anchor Bank's actions to collect its claim against the partners and guarantor, however, the debtor's bank creditors warned the debtor that they could not support the debtor's rehabilitation plan and refrain from joining Anchor Bank in a competition for the assets of the partners and guarantor if Anchor Bank was not restrained. On April 15, 1991, the debtor accordingly filed a complaint and motion for preliminary injunction asking the bankruptcy court to restrain Anchor Bank from continuing to prosecute its complaint.
Based on evidence offered at the hearing on the debtor's motion for a preliminary injunction, the bankruptcy court, Marvin R. Wooten, J., enjoined Anchor Bank from proceeding with its state court lawsuit against the debtor's partners and the guarantor. The bankruptcy court did so on alternative grounds. First, the court concluded that Anchor Bank's continuation of its state court action against the debtor's partners after the filing of the debtor's bankruptcy petition on March 15, 1991 violated the automatic stay of Code § 362(a)(3) because it interfered with the debtor's right under state law to marshal contributions from its partners which may be necessary to the debtor's successful reorganization. Second, the bankruptcy court exercised its discretion under Code § 105(a) to restrain the prosecution of Anchor Bank's action because such action jeopardized the debtor's ability to reorganize. To protect all of the debtor's creditors, including Anchor Bank, the court also restrained the partners and guarantors from actions that would prejudice creditors pending confirmation of a plan of reorganization under the Bankruptcy Code. Defendant Anchor Bank appealed the bankruptcy court's order enjoining its actions in state court.
The debtor is a South Carolina limited partnership engaged in the business of developing, operating and selling resort real estate, principally on the Coast of South Carolina. The sole general partner of the debtor is Litchfield Partners, a South Carolina general partnership. The two general partners of Litchfield Partners are William M. Webster, III ("Webster") and Litchfield Enterprises, Inc. (collectively the "Partners"). Until his death in October 1990, Anthony Foster McKissick, II was the sole shareholder of Litchfield Enterprises. (McKissick and his testamentary estate are referred to herein as "McKissick").
The debtor has total liabilities of about $65 million. Of this total debt, about $24 million is owed to numerous institutional lenders (the "Bank Debt"). Defendant Anchor Bank holds about $1,000,000 of the Bank Debt.
Under South Carolina law, Litchfield Partners, as the debtor's general partner, is liable for all $65 million of the debtor's liabilities. See S.C.Code Ann. 33-41-370 () Under the same rule, Webster and Litchfield Enterprises—the two general partners of Litchfield Partners—are also jointly and severally liable for all of the debtor's liabilities.1 In addition to their liability as general partners, Webster and McKissick each signed personal guarantees in which they undertook personal liability for virtually all of the debtor's Bank Debt. Thus, Webster stands liable personally for all of the debtor's $65 million in debts and McKissick for the $24 million in Bank Debt.
In 1989, the debtor began losing money. The financial losses resulted principally from two factors. First, the debtor's buy-out in 1988 of two former partners increased its debt. Second, the economic recession caused a decline in real estate sales. As the debtor's losses mounted, its ability to make regularly scheduled debt service payments were threatened.
In early 1990, the debtor anticipated substantial calendar year losses. To ensure that it would be able to pay timely its obligations, the debtor obtained a substantial operating line of credit. The debtor also called for and obtained substantial cash advances from Webster.
In response to its financial problems, the debtor undertook to restructure its debts with its creditors by way of a work out agreement out of bankruptcy. On October 1, 1990, the debtor presented a written debt restructuring plan to its institutional lenders. On the date it presented the plan, the debtor was current on all of its payment obligations. The debtor's plan required the holders of Bank Debt to decrease their contract rates of interest and increase the time period within which their debts would be paid. However, the plan provided for the satisfaction in full of all of the debtor's secured and unsecured liabilities by the orderly sale of the debtor's inventory of real estate over time.
The premise of the debtor's plan was that, given time to market its real property, the debtor can repay in full all of its debts. Doug Richardson, the debtor's chief executive, testified that the debtor could sell its real property for $103 million given a four to seven year marketing period. At this rate, the debtor would be able to pay all liabilities in full plus interest.
In the event that the debtor is forced to liquidate its real estate inventory, on the other hand, Richardson testified that the debtor would not be able to pay all debts in full. Further, the assets of Webster and McKissick, against which the debtor's creditors also have recourse, have insufficient value to pay the deficiency. Thus, Richardson testified that the debtor's creditors as a group are better off by accepting a reorganization plan that allows the debtor to sell its real estate over time than by enforcing their debt collection rights individually and thereby forcing the debtor to liquidate its inventory.
With the exception of defendant Anchor Bank, all of the debtor's lenders agreed with this conclusion and approved the debtor's restructuring plan. On the date that it presented the plan to Anchor Bank, the debtor was current on all of its payment obligations to Anchor Bank. In response to the debtor's plan, however, Anchor Bank "deemed itself insecure," accelerated the full indebtedness owed to it by the debtor, and demanded immediate payment in full from the debtor, Webster, and McKissick.
On October 11, 1990, Anchor Bank filed a complaint in South Carolina court against the debtor, Litchfield Partners, Litchfield Enterprises, Webster and McKissick, seeking immediate payment in full of $1,071,869.55. Anchor Bank's complaint against the Partners was based on their status as partners of the debtor, as well as their status as guarantors.
On March 15, 1991, the debtor filed a voluntary Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Western District of North Carolina.2 Pursuant to Code § 362(a)(1), the petition stayed Anchor Bank's collection action against the debtor. On April 11, 1991, however, the defendant sent notice to the debtor, the Partners, and McKissick that, on April 17, 1991, it was bringing a motion for summary judgment on its claims against Litchfield Partners, Webster, and McKissick.
Under South Carolina law, the debtor's partners owe a duty to the debtor to contribute to its losses. See S.C.Code Ann. 33-41-510. South Carolina law also empowers the debtor to compel contributions from its partners if necessary to pay its debts. See S.C.Code Ann. 33-41-1060. Based upon these statutes, the bankruptcy court found that the debtor negotiated with Webster and obtained his pledge to devote his net worth to support the debtor's plan of reorganization. The bankruptcy court also found that the debtor's plan of reorganization may depend on a cash contribution from Webster.
Like Anchor Bank, all of the debtor's other institutional lenders have recourse against the Partners and McKissick. With the exception of Anchor Bank, the debtor's other creditors continued, subsequent to the filing of the bankruptcy case, to support the debtor's reorganization and refrained from pursuing collection of their claims against the Partners and McKissick.3
Confronted with the Anchor Bank's unrelenting attempt to collect its debt from Webster and McKissick, however, the debtor's other unsecured...
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