In re Marble Cliff Crossing Apartments, LLC

• Decision Date: 25 January 2013
• Docket Number: No. 11–61545.,11–61545.
• Citation: 485 B.R. 849
• Parties: In re MARBLE CLIFF CROSSING APARTMENTS, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

485 B.R. 849

In re MARBLE CLIFF CROSSING APARTMENTS, LLC, Debtor.

No. 11–61545.

United States Bankruptcy Court,

S.D. Ohio,

Eastern Division.

Jan. 25, 2013.

Adam J. Biehl, Timothy A. Riedel, Yvette A. Cox, Bailey Cavalieri LLC, Matthew T. Schaeffer, Columbus, OH, for Debtor.

Daniel Craine, Office of the U.S. Trustee, Lawrence Hackett, Pamela Arndt, Columbus, OH, for U.S. Trustee.

MEMORANDUM OPINION AND ORDER DENYING MTGLQ INVESTOR'S MOTION TO CONVERT DEBTOR'S CASE TO CHAPTER 7 (DOC. NO. 333) AND MOTION TO DESIGNATE CLAIMS AS INSIDERS AND IN BAD FAITH (DOC. NO. 331)

CHARLES M. CALDWELL, Chief Judge.

MTGLQ Investors, L.P. (“MTGLQ”), secured creditor of Marble Cliff Crossing Apartments, LLC (“Debtor”), filed two motions on October 4, 2012. The first motion requested conversion of the Debtor's bankruptcy from Chapter 11 to Chapter 7 of the United States Bankruptcy Code (“Code”). MTGLQ's second motion sought to designate claims held by The Security Network (“TSN”) as insider claims or have the Court disregard them as votes cast in bad faith. Based upon the evidence, the Court DENIES MTGLQ's Motion to Convert and the Motion to Designate. The Court's findings of fact and conclusions of law follow.

The basis for these Motions is the sale of two claims in the Debtor's bankruptcy by Bresco Solutions, LLC (“Bresco”) to TSN. Bresco installed a wireless internet system and security cameras at the Debtor's upscale apartment complex. The Debtor scheduled these obligations as secured. In July 2012 and after the Debtor filed a plan and disclosure statement, MTGLQ offered to purchase Bresco's claims.

Mr. Brent Beatty, a principal of Bresco, both spoke and corresponded with counsel for MTGLQ. They sent Bresco a check representing full payment of its claims. Mr. Beatty testified that he was uncomfortable with MTGLQ's offer because he believed the verbal descriptions of the claims purchase did not correspond with the language in the offer letter included with the check. MTGLQ's counsel also talked with Bresco's counsel, and they discussed purchase terms for Bresco's claims. Those negotiations failed.

Mr. Beatty voided MTGLQ's check and returned it with a note stating that he was not interested in selling his claims. Mr. Beatty also mentioned MTGLQ's purchase offers to Mr. Christopher Deibel, Vice President at Scioto Management Company, who manages the Debtor's apartment community. Further, counsel for MTGLQ told Bresco's counsel that they would file an adversary proceeding to contest the validity and priority of Bresco's claims, and did so on August 24, 2012.

Mr. Beatty testified that after MTGLQ filed the adversary proceeding, a representativeof TSN contacted him and wanted to purchase his claims. Mr. Beatty discussed these purchases with his counsel and a business partner. After deciding to sell, his counsel handled the negotiation of contractual terms, and Bresco received payment in full from TSN.

Mr. Thomas Alexander, owner of TSN, testified that he purchased the claims to position himself favorably to receive future work from Scioto Management Group and the Debtor. Mr. Alexander testified that Mr. John Chester, a member of JJC Trabue Road, LLC, and a minority member of the Debtor, contacted him on August 24, 2012 about purchasing the Bresco claims. The next morning, Mr. Alexander met with Mr. Chester and Bradford Armstrong, managing member of the Debtor and owner of Scioto Management Company, to discuss the potential claims purchase. Mr. Alexander testified that he considers Mr. Chester a friend, and they have been acquainted since childhood. Mr. Alexander has also known Mr. Armstrong since high school.

According to the testimony, during the August 25, 2012 meeting, Mr. Alexander asked about the terms of repayment on his investment and the terms of the purchase. Messrs. Chester and Armstrong did not provide Mr. Alexander with any documentation or written commitment, but they stated that by purchasing the Bresco claims he would position himself favorably for future work planned at the Debtor's property. Additionally and according to the testimony, Mr. Chester stated to Mr. Alexander that he would reimburse any attorney fees associated with this Chapter 11 case.

Mr. Alexander testified that he was familiar with the equipment that secured the Bresco claims, and he inspected the equipment prior to payment. In addition, Mr. Alexander testified he was aware of the Bresco claims litigation, and that he weighed this factor in making his purchase decision. Further, Mr. Alexander testified that as part of the transaction he was not required to vote the claims in any particular manner. Mr. Chester testified that he assisted the sale from Bresco to TSN because he believed that the plan needed an impaired accepting class of creditors.

Having described the factual background, the Court now separately discusses the two Motions.

I. MTGLQ's Motion for Conversion to Chapter 7

As the bases for dismissal or conversion of this case to Chapter 7, MTGLQ points to Mr. Chester and Mr. Armstrong's actions. Mr. Chester introduced the parties, and both men facilitated the transaction by promising TSN potential future work. Mr. Chester provided additional incentive by agreeing to pay TSN's legal costs. In addition, MTGLQ asserts that the execution of a joint defense agreement between Bresco, TSN, and the Debtor is further proof of bad faith.

Mr. Beatty testified that he had tired of the repeated contact from MTGLQ's representatives and their attempts to purchase the claims. The prospect of litigation and lack of trust were additional factors driving him to pursue alternatives. According to the testimony, Mr. Chester, on behalf of the Debtor, facilitated the purchase of Bresco's claims by TSN. Further, Mr. Chester presented Mr. Alexander an opportunity to potentially perform future services on behalf of the Debtor, and then promised to reimburse Mr. Alexander's legal fees to minimize the risk of his involvement in this bankruptcy proceeding. In turn, Mr. Alexander, exercising his business judgment, purchased the claims for potential future work.

Turning to the legal standards, bad faith actions associated with the filing or prosecution of a bankruptcy case may warrant conversion or dismissal. Trident Assoc. Ltd., P'ship v. Metropolitan Life Ins. Co. (In re Trident Assoc. Ltd., P'ship), 52 F.3d 127, 130 (6th Cir.1995). Courts consider all circumstances, along with the principle of providing a “fresh start” to financially distressed companies and individuals. Laguna Assoc. Ltd P'ship v. Aetna Casualty and Surety Co. (In re Laguna Assoc. Ltd P'ship), 30 F.3d 734, 737–38 (6th Cir.1994). The Sixth Circuit articulated a list of factors that indicate a debtor's bad faith, which includes whether a debtor attempts to avoid repaying debts, forestall an impending foreclosure, or frustrate secured creditors from exercising their legal rights. Id. at 738. Movants must establish cause for conversion or dismissal by a preponderance of the evidence. In re Costa Bonita...