In re Novus Structures, Inc.
| Docket Number | 23 B 6723 |
| Decision Date | 11 September 2023 |
| Parties | In re: NOVUS STRUCTURES, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
This matter comes before the court on the motion () of J&D Commercial, LLC ("Lender") for an order pursuant to 11 U.S.C. § 543 authorizing Ryan McNaughton ("Receiver") to remain in possession, custody and control of the real property located at 200 East 87th Street, Chicago ("200 East Property"). The Motion to Excuse also asks that the court modify the automatic stay to the extent necessary to permit the Receiver to exercise his powers to operate and maintain the 200 East Property. Debtor Novus Structures, Inc. ("Debtor") and the U.S. Trustee objected to the Motion to Excuse.
The Debtor filed a motion for turnover of property of the estate ("Motion for Turnover"), asking that the court order the Receiver to comply with section 543 and turn over all property of the estate in his possession, as well as furnish an accounting. The Lender objected to the Motion for Turnover.
The court entered an order ("June 28 Order") setting a briefing schedule. The June 28 Order also excused the Receiver from compliance with section 543 pending resolution of the Motion to Excuse and the Motion for Turnover, and authorized him to continue operating and maintaining the 200 East Property in the meantime. It also modified the automatic stay to the extent necessary to permit the Receiver to exercise his rights in accordance with his operation and maintenance.
Debtor timely filed its response ("Response") and Lender replied ("Reply"). The parties agreed that no evidentiary hearing was necessary. Therefore, having reviewed the papers submitted and considered the applicable law, the court will enter an order denying the Motion to Excuse and setting the Motion for Turnover for further status.
The court has subject matter jurisdiction under 28 U.S.C. § 1334 and the district court's Internal Operating Procedure 15(a). This is a core proceeding under 28 U.S.C § 157(b)(2)(A), (E) and (G). Venue is proper under 28 U.S.C. § 1409(a).
After prepetition litigation between Debtor and Lender, Debtor elected to file for relief under chapter 11.[1] Debtor's purpose in seeking relief under chapter 11 was to utilize the provisions of the Bankruptcy Code in an effort to maximize its estate for all creditors and potential equity holders, whether by restructuring or refinancing its debt or through a sale. Like most creditors, Lender does not favor the Debtor's entitlement to pause its efforts to collect amounts allegedly due to it. Therefore, Lender asks the court to excuse the Receiver's obligations under the Code that require turnover of property of the estate to Debtor. Lender also requests a modification of the automatic stay that halted the Receiver's control and administration of the 200 East Property.
In order "to protect the interests of the secured creditors," the state court appointed the Receiver in Lender's foreclosure action. (Motion to Excuse, ¶ 16 (emphasis added).) The Receiver has control of the 200 East Property and Lender prefers that the Receiver maintain that control.
The parties do not dispute the material facts; instead, they differ in application of those facts to the appropriate statutory analysis. See 11 U.S.C. § 543. Section 543(d)(1) provides that (1) if the interests of creditors would (2) be better served by a custodian retaining control of property of the estate, then (3) the court may excuse compliance with the turnover requirement in § 543(b). The Lender asserts that it is in the best interests of all creditors, and that it would be "better served," if the Receiver appointed in its foreclosure action remains in place, controlling and administering the 200 East Property according to the state court receiver order and in compliance with state law.
In exercising its discretion, and after considering relevant factors, however, the court finds that creditors will not be better served if the Debtor remains dispossessed of property of the estate, thereby hindering or eliminating the possibility of its restructuring, refinancing or sale efforts for the benefit of all creditors. Turnover will not be excused, and the Receiver must comply with § 543(b).
Debtor owns the 200 East Property, which is a three "unit apartment masonry building with (2) car detached masonry garage on site." (Response, Ex. A.) According to the Receiver's reports attached to the Response, which cover the period from April 14, 2022, to March 31, 2023, there are two residential tenants. Only one of the tenants pays rent.
In the Motion to Excuse, the Lender alleges that Debtor is obligated on a promissory note in the original principal amount of $176,250 ("Note"). The Note matured on May 5, 2019. Debtor's obligations under the Note are secured by a mortgage ("Mortgage") on the 200 East Property as well as an Assignment of Rents to the Lender.
On July 11, 2019, Lender initiated a state court case to foreclose on the Mortgage. On April 14, 2022, the state court entered an order ("Receiver Order") appointing the Receiver. Pursuant to the Receiver Order, the Receiver has been maintaining the 200 East Property. He details his activities and the status of the 200 East Property in regularly filed reports with the state court, which the Debtor attached to its Response. According to those reports, Debtor "has been cooperative and provided some information to Receiver in terms of keys, access, and general information." (Response, Exs. A-D.)
Beginning sometime during the period between July 1 and September 30, 2022, the "2nd floor tenant has been experiencing roof leaks and water damage due to strong deterioration of the existing building roof shingles." (Id., Ex. B.) The Receiver requested state court approval to retain a vendor to "remove and replace the existing roof[.]" (Id.)
On September 22, 2022, the state court entered a judgment of foreclosure and sale in the amount of $318,013.21. About two months later, the state court granted the Receiver "permission to apply a new layer of architectural shingles over the existing roof[.]" The Lender filed an insurance claim, and on or about November 22, 2022, the "insurance adjuster determined that the existing roof should have all of the existing layers of shingles removed[.]" (Id., Ex. C.) Therefore, the Receiver did not undertake the previously approved repair, but instead asked "to proceed with a temporary tarp of the roof until the spring 2023 season as a temporary measure[.]" (Id.)
On January 10, 2023, the Receiver attended a motion to authorize him to put on a roof tarp. (Id., Ex. D.) According to his report for the period from January 1 to March 31, 2023, no repairs were made during this period and no future repairs are to be made. (Id.) Debtor's counsel stated in open court on August 16, 2023, that there is still a tarp over the roof.
In the Response, Debtor asserts that the 200 East Property consists of two legal rental units. At the time of the Receiver's appointment, only one unit was rented. Over a year later, the other unit is still not rented out. There is also a garden unit.
Debtor further asserts in the Response that if the court ordered turnover of the 200 East Property, it would immediately make efforts to put a tenant in the unrented unit. The income from this rental would increase the monthly rent from $1,250/month to at least $2,500/month. Debtor would use the rental income, along with other funds, to repair the roof. "These steps will significantly increase the value of the Property and will allow the Debtor to either sell or refinance the Property and pay all creditors, in full." (Response, ¶ 10.)
On May 22, 2023, Debtor filed its petition for relief under chapter 11 of the Bankruptcy Code. The next day, it sent a letter to the Receiver notifying him of the bankruptcy case filing and demanding that he turn over the 200 East Property. Debtor received no response to this letter. (Motion for Turnover, ¶ 9.)
About a week later, Debtor's attorney sent an email to the Receiver, again demanding turnover of property of the estate. (Id.) When the Receiver still did not respond, Debtor filed the Motion for Turnover.
About a week after Debtor filed the Motion for Turnover, the Lender filed the Motion to Excuse. It asked the court to excuse the Receiver from compliance with the turnover requirement of § 543(b), and instead authorize the Receiver to remain in possession, custody and control of the 200 East Property pursuant to § 543(d). The Lender also requested modification of the automatic stay pursuant to § 362(d), to permit the Receiver to exercise his powers to operate and maintain the 200 East Property.
For the approximately three-month period covered by each of the Receiver's reports, his fees and expenses varied between $1,861.25 and $2,480. (Response, Exs. A-D.) As of July 31, 2023, the balance in the Receiver's bank account was $7,945.35. (EOD 38, attachment.)
It is still early in the life of this bankruptcy case. Debtor does not have possession of the 200 East Property and its revenue and thus has not been afforded the opportunity to maintain it, to seek additional tenants, or to develop a restructuring, refinancing or sale strategy. Debtor has been dispossessed of the 200 East Property since the inception of the case; it has not yet filed a chapter 11 plan. Debtor has filed its schedules, listing its creditors, as well as the three...
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