In re Pappas

• Decision Date: 12 February 1982
• Citation: 17 BR 662
• Court: U.S. Bankruptcy Court — District of Massachusetts
• Parties: In re Harry Charles PAPPAS, Debtor. PACCAR FINANCIAL CORP., Plaintiff, v. Harry Charles PAPPAS, Defendant.

17 B.R. 662 (1982)

In re Harry Charles PAPPAS, Debtor PACCAR FINANCIAL CORP., Plaintiff, v. Harry Charles PAPPAS, Defendant.

United States Bankruptcy Court, D. Massachusetts.

February 12, 1982.

James F. Queenan, Jr., Bowditch & Dewey, Worcester, Mass., for plaintiff.

Steven A. Kressler, Kressler, Kressler & Pitnof, P.C., Worcester, Mass., for defendant.

MEMORANDUM AND ORDER

PAUL W. GLENNON, Bankruptcy Judge.

Before the Court in the above-captioned proceeding is a motion to convert the case from a case under Chapter 11 of the Bankruptcy Code (11 U.S.C. §§ 101, et seq., as amended by the Bankruptcy Reform Act of 1978, P.L. 95-598) to a case under Chapter 7 filed by Paccar Financial Corp. ("Paccar"),¹ a creditor. Also before the Court is a complaint filed by Paccar to modify the automatic stay pursuant to 11 U.S.C. § 362 to permit it to exercise its right of foreclosure under applicable state law with respect to either a mortgage it holds on certain real estate of the debtor in Manchester, New Hampshire or with respect to an attachment lien on this same Manchester real estate.

The debtor originally filed his petition under Chapter 13 of the Bankruptcy Code. The Chapter 13 petition was filed on July 22, 1980. Paccar filed a complaint to modify stay with respect to the Manchester property on November 14, 1980. The Chapter 13 case was dismissed on March 17, 1981 because the debtor's noncontingent, liquidated, secured debts exceeded $350,000 and thus under 11 U.S.C. 109(e) the petitioner was not eligible to be a debtor under Chapter 13.

On March 18, 1981 the debtor filed this petition under Chapter 11. Paccar again filed the complaint to modify stay and also filed the motion to convert the case to a case under Chapter 7. Paccar is both a secured and an unsecured creditor in this proceeding. It is a secured creditor by virtue of its status as the holder, by a February 24, 1981 assignment, of a mortgage in the original principal amount of $175,000 given by the debtor to the Amoskeag Savings Bank. The property covered by this mortgage is the real estate at 143 Frontage Road, Manchester, New Hampshire. This property was used by Peterbilt of New Hampshire, Inc., a corporation controlled by the debtor, which operated the Peterbilt franchise in New Hampshire. Paccar is also the holder of a judgment² against the debtor entered in May of 1979 in the principal amount of $247,508 plus six percent interest from May of 1979. This judgment is secured by a $300,000 attachment on all the debtor's real estate. This attachment, according to a Stipulation filed with the Court as to the state of record title for four properties owned of record by the debtor, is junior to the first mortgage held by Paccar and is also junior to two other attachments.³

Paccar also claims to be an unsecured creditor in this case, although not so listed on the debtor's schedules, by virtue of the debtor's personal guarantee of retail financing granted by Paccar to the customers of Peterbilt of New Hampshire, Inc. Ronald H. Russo, Northeast Area Manager for Paccar Financial Corp., testified that the amount due Paccar as of April 30, 1981 under this guarantee was $481,698.32, plus "some other losses", less a credit for the reserve account of $283,808.61, and that the net amount due was not secured.⁴

Counsel agreed to consolidate the motion to convert and the complaint for relief from stay for hearing. This hearing was conducted over five days during the summer of 1981: June 15, June 29, July 20, August 10, and August 12.

I. MOTION TO CONVERT TO CHAPTER 7

Paccar asserts three statutory grounds, 11 U.S.C. § 1112(b)(1)-(3), as the basis for its motion to convert this case to a case under Chapter 7: (1) continuing loss to or diminution of the estate, and the absence of a reasonable likelihood of rehabilitation; (2) the debtor's inability to effectuate a plan; and (3) unreasonable delay by the debtor that is prejudicial to creditors. In addition, Paccar contends that continuing bad faith has been demonstrated by the debtor in this proceeding and in his prior Chapter 13 proceeding and is sufficient cause in itself to grant the motion to convert to Chapter 7.

(A) Continuing loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation.

The assets of the debtor consist almost entirely of real estate.⁵ Schedule B-1 of the debtor's schedule of assets and liabilities lists three properties as constituting the real property of the debtor on the date of the filing of the Chapter 11 petition. The first property is the Manchester property which the debtor lists as having a market value of $750,000. This property was listed at $400,000 in the debtor's Chapter 13 schedules. The real estate appraisal submitted by Paccar through John M. Crafts of Crafts Appraisal Associates concluded that the fair market value of the Manchester property as of June 13, 1980 was $350,000. Mr. Crafts testified that the value of the property, in his opinion, had appreciated to $395,000 as of July 20, 1981. Robert G. Bramley, an appraiser previously retained by Paccar but called by the debtor, concurred in this opinion and I so find.

The second property scheduled by the debtor is located on California Street in West Swanzey, New Hampshire ("the California Street property"). The debtor reported the market value of this property to be $250,000 in his Chapter 11 schedules and $100,000 in his Chapter 13 schedules. No other evidence having been presented to the Court as to the value of this property, the Court concludes only that the market value lies somewhere in the $100,000 to $250,000 range.

The third property is located on Route 12 in Swanzey ("the Butler building") and its market value is listed at $40,000 in both the Chapter 13 and Chapter 11 schedules.

A fourth property, the debtor's home in Swanzey Lake, New Hampshire, was not listed on the Chapter 11 schedules but did appear in the Chapter 13 schedules at a market value of $90,000.

Each of these properties is heavily encumbered. Paccar has an attachment in the amount of $300,000 on each of the four properties, securing a judgment in the principal amount of $247,508 plus six percent interest from May 1979. As of June 1981 $260,853.09 was owed on the judgment. Attachments by Messers. Bickford and Roberts are also on record.⁶ Thermo King Corp. has a $90,000 attachment on all the debtor's real estate with the exception of the Manchester property. Thus, after satisfaction of mortgages and taxes, any remaining value in the debtor's real estate is to be applied toward the satisfaction of liens in the amount of $390,000, excluding the Bickford and Roberts attachments.

Before arriving at a conclusion as to the current position of the debtor's estate, the mortgage and tax obligations must be identified. The Manchester property is encumbered by a first mortgage in excess of $163,000 and past due real estate taxes, as of June 24, 1981, of $26,439.19. Thus, using the $395,000 market value figure, no more than $205,560 is available for satisfaction of the claims secured by attachments. With respect to the California Street property, the parties stipulated that the total pay-off figure on the mortgage as of June 15, 1981 is $238,369.48 and the per diem is $64.79.⁷ Using the debtor's market valuations of $100,000 and $250,000, this property at best can do no more than satisfy the first mortgage.

As to the third property, the Butler building which the debtor valued at $40,000, the debtor's schedules show the amount of $29,637.42 as due the mortgagee.

The debtor's residence in Swanzey Lake is encumbered by two mortgages. The payoff figure as of June 15, 1981 on the first mortgage was $41,913.93 ($7.75 per diem) and $57,676.34 on the second mortgage ($20.16 per diem). Adopting the debtor's market value figure of $90,000 leaves the debtor with a negative equity of $9,590.27 as of June 15, 1980.⁸

In sum, the amount of "equity" that the debtor has in all his real property after satisfaction of mortgages and taxes is approximately $216,000⁹ and this "equity" is more than consumed by the $300,000 Paccar attachment lien on all the debtor's real estate. Moreover, these figures represented the economics of the estate as of the spring and summer of 1981. Interest on the secured debt has been accruing daily, taxes continue to come due, and insurance and other costs assessable to the debtor are being incurred by mortgagees. The Court can only conclude that the position of secured creditors is further deteriorating with the passage of time.

It is also clear that there is no reasonable likelihood of rehabilitation. The debtor has no unencumbered assets which might serve as the collateral for refinancing. There has been no evidence as to any source of additional capital.¹⁰ Two potential sources of cash flow, the debtor's earned income and the rental income from his three business properties, are not viable here. The debtor's earned income, according to his testimony, is only $15,000 and is more than exhausted by his ordinary living expenses which, as reported by the debtor in his proposed Chapter 13 plan, exceed $20,000. As for rental income, the debtor over the course of this Chapter 11 proceeding has shown an inability or disinclination to realize on this source. Except for the Manchester property which the debtor asserted could produce $5000 to $6000 a month in rental income,¹¹ the debtor made no attempt to demonstrate to the Court the income-producing capacity of his various properties and the sufficiency of the income to rehabilitate the debtor. To the contrary, the evidence showed that the debtor was permitting the two most valuable properties, the Manchester property and the California Street property, to be used by Linehaul Express and Nessy Leasing, respectively, businesses controlled by relatives of the debtor. The debtor has made no effort to collect rent and the president of Linehaul Express testified...