In re Morreale
| Decision Date | 28 May 2015 |
| Docket Number | Bankruptcy Case No. 13-27310 TBM |
| Court | U.S. Bankruptcy Court — District of Colorado |
| Parties | In re: Samuel Jesse Christian Morreale, Debtor. |
The central issue before the Court is whether the Chapter 7 Debtor, Samuel Jesse Christian Morreale (the "Debtor"), has legal standing to object to matters concerning administration of his own Chapter 7 bankruptcy estate. Tom H. Connolly, the duly-appointed Chapter 7 Trustee (the "Trustee"), filed motions to sell certain of the Debtor's assets (membership interests in two limited liability companies formed to own and operate a restaurant and nightclub) under 11 U.S.C. §§ 363(b) and (f)(the "Sales Motions").1 Only the Debtor objected to the Sales Motions.2 The Debtor argued that the Trustee had failed to properly conduct due diligence prior to the proposed sales of the assets and, as a result, the Sales Motions should be denied. Put another way, the Debtor challenged the Trustee's administration of the Debtor's own bankruptcy estate.
Contending that the bankruptcy estate was insolvent and the Debtor had no standing to object to the Sales Motions, the Trustee filed his "Motion to Strike Debtor's Objections to Trustee's Motions to Approve Purchase and Sale Agreements (Stanzi, LLC and Juarez Restaurant, LLC)" (the "Motion to Strike," Docket No. 415). The Debtor objected.3 Apparently wishing to bolster his standing, two weeks after the Motion to Strike was filed, the Debtor obtained an assignment of a purported creditor claim from a law firm: Allen & Mitzner, LLC ("A&M"). A&M assigned its rights against the Debtor — to the Debtor — as a "gift." Subsequently, and based upon the assignment, the Debtor filed a Proof of Claim for $3,274 ("Claim No. 12"), thus placing himself in the unique role of both debtor and purported creditor. The Debtor contended that his new alleged creditor position conferred standing on him to object to the Trustee's proposed actions. Responding to the Debtor's new standing gambit, the Trustee submitted an "Objection to Claim No. 12 Filed by Jesse Morreale" (the "Claim Objection," Docket No. 426). The Debtor contested the Claim Objection.4
Since the Claim Objection and response appeared closely related to the standing issues initially raised in the Motion to Strike and response, the Court consolidated such matters into a single evidentiary hearing. Meanwhile, the Court deferred adjudication of the Trustee's Sales Motions until after the threshold standing issues could be determined.
The Court conducted a hearing on the Motion to Strike, Claim Objection, and responses on May 5, 2015. During the hearing, the Trustee and the Debtor presented testimony and exhibits as well as legal arguments in support of their respective positions. These matters are now ripe for decision.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B), (N) and (O).
The Debtor has a long and notable history as an independent businessman engaged in the entertainment and hospitality sectors. For many years, he was a successful concert promoter. About a decade ago, he started opening restaurants, nightclubs, bars, and hotels. His work also involved the development or redevelopment of real estate assets.
The Debtor conducted some of his business activities through a wholly-owned company: Morreale Hotels, LLC ("Morreale Hotels"). In turn, Morreale Hotels owned and operated two buildings in Denver: a property located at 101-115 Broadway Avenue (the "Broadway Property"); and a property located at 3015 E. Colfax Avenue (the "Colfax Property"). Morreale Hotels spent considerable time and resources to revitalize the Broadway Property and Colfax Property but, in doing so, also incurred substantial debt. The Debtor personally guaranteed some of Morreale Hotels' debt.
During 2012, Morreale Hotels became embroiled in disputes with its primary secured lender, 2011-SIP-1 CRE/CADC Venture, LLC ("SIP/CRE"), and with the City and County of Denver. SIP/CRE began foreclosure proceedings against the Broadway Property. As a result of the foreclosure proceedings and other events, on December 14, 2012, Morreale Hotels filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code in the case captioned: In re Morreale Hotels, LLC, Case No. 12-35230-TBM (Bankr. D. Colo.).5
The Debtor did not immediately initiate his own bankruptcy case. Instead, he continued to manage Morreale Hotels. However, SIP/CRE brought a legal action against the Debtor based upon the Debtor's personal guaranty of certain of the debts of Morreale Hotels. On September 30, 2013, the District Court for the City and County of Denver entered a judgment in favor of SIP/CRE and against the Debtor in the amount of $3,550,257 plus statutory interest at the rate of eight percent (8%) per annum.6 According to the Debtor's testimony, the entry of judgment against him was the "sole factor" leading to his own bankruptcy case. The Debtor filed this individual bankruptcy case on October 15, 2013.
The Debtor initially operated his individual Chapter 11 case as a debtor-in-possession. In compliance with the Bankruptcy Code, the Debtor filed his Statement of Financial Affairs and Schedules on October 29, 2013.7 At the request of the Debtor, this Court set December 30, 2013, as a bar date for the filing of proofs of claim.8 The Debtor eventually filed a Plan of Reorganization about a year after the commencement of his own bankruptcy case. On October 31, 2014, the Debtor filed his Disclosure Statement under 11 U.S.C. § 1125.9
Meanwhile, the United States Trustee and SIP/CRE both sought conversion. On December 9, 2014, this Court entered an Order converting this case from Chapter 11 to Chapter 7 based upon 11 U.S.C. §§ 1112(b)(4)(A) and (I).10 The United States Trustee appointed Tom H. Connolly as the Chapter 7 Trustee for this case the next day.11
In his Summary of Schedules, the Debtor listed assets of $3,623,699 against liabilities of $7,152,069 — thus suggesting an insolvent estate from the start.12 As set forth above, SIP/CRE had obtained a pre-petition judgment of $3,550,257 (plus interest) against the Debtor.13 The Debtor also identified a business debt owing to the United States Small Business Administration of $1,561,461.14 Further, the Debtor listed an undisputed debt of $979,744 owing to U.S. Bank, N.A. for his home mortgage. Just these three debts alone (which together total more than $6,091,462) establish the insolvency of the Debtor's estate.
Until recently (in connection with the Motion to Strike), the Debtor repeatedly confirmed the insolvency of his bankruptcy estate both in the context of a Chapter 11 reorganization and a Chapter 7 liquidation. In his Disclosure Statement, which he filed less than four and a half months before the Motion to Strike, the Debtor engaged in substantially the same exercise now required for standing purposes: a liquidation analysis.
In the text of the Disclosure Statement, the Debtor advised the Court and creditors:
COMPARISON OF PLAN TO LIQUIDATION UNDER CHAPTER 7 OF THE BANKRUPTCY CODE: The Debtor projects that under his Plan, the Debtor's general unsecured creditors... in Class 6 will realize a return of 100% of their allowed unsecured claims, and Class 7 will realize a return of 43.6% of their allowed unsecured claims, with interest. The Debtor estimates that liquidation under Chapter 7 of the Bankruptcy Code would result in a payment of 38.2% to general unsecured creditors.... A liquidation analysis under Chapter 7 is attached hereto.... The Debtor believes that there would be sufficient Assets to pay Chapter 7 administrative expenses and allowed Chapter 11 administrative expenses in full, but not allowed unsecured claims.15
The Debtor touted his Plan of Reorganization as better than a Chapter 7 liquidation which would not pay unsecured creditors in full. The Debtor signed the Disclosure Statement.
The Debtor also attached a Liquidation Analysis to the Disclosure Statement. The Liquidation Analysis lists assets of only $1,052,347. This amount is less than the amount on the Debtor's initial Summary of Schedules. The Debtor explained that one of the assets was "discounted in Chapter 7 liquidation for costs of sale and quick sale discount." This discount seems appropriate since asset values frequently are not fully realized in liquidation. The Liquidation Analysis also lists estimated Chapter 11 administrative expenses of $175,000 and estimated Chapter 7 administrative expenses of $75,000. The literal bottom line of the Liquidation Analysis is quite clear: "Estimated Chapter 7 Distribution to Unsecured Creditors: 38.2%."
Even this Liquidation Analysis, which was presented by the Debtor to estimate returns to creditors in a Chapter 7 liquidation, seems optimistic. This is because the Debtor ignored his single biggest liability: the SIP/CRE judgment claim. SIP/CRE filed a proof of claim in this case for $3,567,376 (plus interest).16 But the Disclosure Statement and Liquidation Analysis sidestep this liability and suggest that it will be satisfied in the Morreale Hotels bankruptcy case instead. Several other debts filed against the Debtor in this case by the City and County of Denver (one claim for $307,254 and another for $66,300) also were not accounted for in the Liquidation Analysis. Moreover, the Liquidation Analysis appears to acknowledge only $1,908,269 of other unsecured claims and presumes that other filed claims would be disallowed.
But, if the Court were to accept as true everything in the Debtor's own Liquidation Analysis, the Liquidation Analysis shows liabilities totaling $2,178,01017 against assets totaling $1,052,347, as of October 31, 2014. Thus, the Debtor's bankruptcy estate clearly was insolvent...
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