In re Royalty Props., LLC
| Decision Date | 30 August 2019 |
| Docket Number | Case No. 19 B 07692 |
| Citation | 604 B.R. 742 |
| Parties | IN RE: ROYALTY PROPERTIES, LLC, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
John H. Redfield, Crane, Simon, Clar & Dan, Attorneys for Debtor
Christopher W. Carmichael, Victor P. Henderson, Henderson Parks, LLC, Attorneys for Creditor Forest Preserve District of Cook County
This Court has jurisdiction to hear and determine this motion pursuant to 28 U.S.C. § 1334(a), which provides that federal district courts have original and exclusive jurisdiction of all cases filed under the Bankruptcy Code, title 11 of the United States Code (the "Bankruptcy Code"). 28 U.S.C. § 157(a) allows the district courts to refer title 11 cases to the bankruptcy judges for their districts. The District Court for the Northern District of Illinois has promulgated Internal Operating Procedure 15(a), which refers its bankruptcy cases to the judges of this court. This matter is a core proceeding in which this court may enter a final order pursuant to 28 U.S.C. § 157(b)(2)(A) - matters concerning the administration of a bankruptcy estate - the motion to dismiss or convert.
The Debtor, Royalty Properties, LLC, filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on March 19, 2019. It owns and operates Horizon Farms in Barrington Hills, Illinois; it manages its business and financial affairs as a debtor-in-possession pursuant to 11 U.S.C. § 1108.
Horizon Farms is a 400-acre horse farm which consists of eleven barns, three residences including a large residence known as Hunt Ridge, a guest house, a farm house, a duplex staff house, a bunk house, staff apartment building, race track, hunter jumper arena, jumper trail, a shed, a dog kennel, an equipment shop, pastured paddocks, internal roads, two running creeks, a 20-acre lake, an 8-acre conservation area, a 15-acre wooded area and 150 tillable acres. Schedule D: Creditors Who Have Claims Secured by Property, Docket 18, p. 1; Motion to Convert to Chapter 7 or Dismiss and Objection to Debtor's Plan, Docket 74, Ex. 2, p. 3, Memorandum Opinion in Foreclosure Case - "Foreclosure Opinion."
The Debtor's principals are a married couple, Richard and Meryl Cannon. Mr. Cannon is a patent attorney. Mrs. Cannon is the founder and CEO of Merix Pharmaceutical, Corp.
According to its federal 2017 Tax Return the Debtor's pre-petition business consisted of renting real estate. Exhibit 16. It suffered a $43, 815 loss that year. The tenant is a related entity, Royalty Farms, LLC, which grew hay on the property. Motion of Debtor to Approve Contracts to Grow Hemp, Docket 56, p. 2, ¶ 11. The Debtor's gross revenue for 2018 was $0.00. Schedule D, Docket 18, p. 13.
The Debtor wants to satisfy its debts with the proceeds of farming hemp/hemp seeds. Industrial hemp and marijuana are variations of the cannabis sativa plant. The main difference between the two is the amount of a mind-altering, psychoactive compound called delta -9 tetrahydrocannabinol (THC) that each plant contains. Industrial hemp has .3% or lower amounts of THC and marijuana tends to have 1% or more. Renée Johnson, Cong. Research Serv., R44742, 3 Defining Hemp: A Fact Sheet (March 22, 2019); Transcript of testimony of Western Illinois University Professor Dr. Winthrop Phippen ("Transcript"), Docket 77, p. 38. Generally, "1% THC is considered the threshold for cannabis to have a psychotropic effect or an intoxicating potential." Renee Johnson, supra. Despite this significant difference, the Controlled Substances Act of 1970 categorized all forms of cannabis (including industrial hemp) as Schedule I drugs and made them illegal to grow in the United States. Elizabeth Ousley, Hemp: How the Comeback Crop is Budding in the Bluegrass , 11 Ky. J. Equine, Agric. & Nat. Resources L. 103, 104 (2018-2019). In 2018, the Agricultural Improvement Act of 2018 (commonly called the 2018 Farm Bill) changed this by removing industrial hemp from the controlled substances list. 21 USC § 802(16). The 2018 Farm Bill in effect legalized hemp and its derivative products. U.S. v. Mallory , 2019 WL 252530, *3 (S.D.W. Va. 2019).
Dr. Phippen's testimony is relevant to the court's evaluation of whether the Debtor's plan to grow and sell hemp and or hemp seed is reasonable. He testified that growing hemp is very different from growing hay. Transcript pp. 10-11 and 51: spacing requirements and weeds. He also testified that it is not now clear what diseases are expected from hemp production. Transcript p. 47. He also said that hemp production efforts are not likely to make money in their first year. Transcript pp. 22-23.
The court finds that the Debtor's plan is not reasonable at this time, 10 years after its secured creditor (and its successor the Forest Preserve District) sought to foreclose on the debt owed for the 2006 purchase of the farm. According to the state court not one payment has been made on the debt. Foreclosure Opinion, p. 23 ()
This court noted in its May 17, 2019 Opinion granting relief from the automatic stay that the Debtor did not oppose the Forest Preserve District's assertion that it had not paid all real estate taxes due since 2009. Stay Relief Opinion, Docket 48, p. 4. The court recalls being told that the Forest Preserve District has paid some of the farm's real estate taxes which are delinquent in the amount of $173,830. Required Statement To Accompany Motions for Relief from Stay, Docket 4, p. 17.
In 2006, the Debtor and a related entity, Cannon Squires Properties, LLC, borrowed $14,500,000.00 from Amcore Bank to finance the purchase of the farm. It also borrowed $1,500,000.00 from the McGinley Marital Trust, the seller. The loan documents, mortgages, notes and assignments of rent were eventually transferred to the Forest Preserve District of Cook County, Illinois - the first lien holder and to McGinley Partners, LLC - the second lien holder.
A mortgage foreclosure complaint was filed in the Circuit Court of Cook County, Illinois in 2009 alleging that the Debtor and it principals, who guaranteed the debt, were in default on their obligations to repay the loan.
Meryl Cannon testified at an August, 2019 hearing that she did not know why Amcore Bank defaulted the obligors on the loan. The judge in the foreclosure case found that the Debtor's principals admitted in that case that they defaulted on purpose.
Several other lawsuits were filed against the secured creditors in state and federal court by the Debtor and its principals; several appeals were pursued. After the Debtor and its principals failed in those lawsuits and a previous foreclosure judgment was reversed on appeal the foreclosure case was set to proceed to trial on February 25, 2019; the trial date was reset to May 20, 2019.1 This bankruptcy case was filed in the interim on March 19, 2019.
Filing a bankruptcy case operates as an automatic stay applicable to all entities of acts to collect or recover a claim against the debtor that arose before commencement of the bankruptcy case. In re Thigpen , 600 B.R. 19, 23 (Bankr. N.D. Ill. 2019) ; 11 U.S.C. § 362(a). The automatic stay was modified on May 17, 2019 after a contested hearing where the Forest Preserve District presented expert testimony of Professor Phippen that producing hemp crops are not a sure thing. The Debtor did not present expert testimony in opposition. This court found that "the Debtor has not proven its ability to succeed in this venture." See Stay Relief Opinion, Docket 48. p. 4. That order was not appealed although an order which grants a motion to modify the automatic stay is final and appealable. 28 U.S.C. § 158(a)(1) ; In re Sonnax Industries, Inc. , 907 F. 2d 1280, 1283 (2nd Cir. 1990) ; In re Comer , 716 F.2d 168, 172 (3rd Cir. 1983) ( ).
The foreclosure case proceeded to trial. The Forest Preserve District obtained a judgment in the amount of $27,858,248.45 on June 21, 2019 against the Debtor and the Cannons. Docket 74, Ex. 1, Foreclosure Judgment, p. 6. Secured creditor McGinley Partners obtained a judgment in case 2014 L 005231in the amount of $8,320,669.43 against the Debtor and the Cannons. Docket 18, Schedule D; Foreclosure Opinion, p. 11. The Debtor and its principals have recently filed two new lawsuits in the Circuit Court of Cook County, Illinois: Case 2019 L 007133, suing the Forest Preserve District, court-appointed receiver Mary B. Grossman and V & G Property Management, LLC regarding the upkeep of the farm while the receiver had possession pursuant to a state court order, before bankruptcy relief was sought and Case 19 L 1682, suing persons related to secured creditor McGinley Partners, LLC for fraud, conspiracy, forgery, negligence and negligent misrepresentation.2
A state court denied a request in the 2019 L 007133 case for a temporary restraining order seeking to stay the foreclosure case until resolution of the new allegations.
The Forest Preserve District asks this court to dismiss or convert this case to chapter 7 pursuant to 11 U.S.C. §§ 348(a) and 1112(b).
The relevant law can be found at § 1112(b)(1) of the Bankruptcy Code :
Except as provided in paragraph (2) and subsection (c), on request of a party in interest, and after notice and a hearing,...
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...F.3d 734, 737 (6th Cir.1994). The good faith standard should be assessed objectively rather than subjectively. In re Royalty Prop. , 604 B.R. 742, 750 (Bankr. N.D. Ill. 2019) (citing In re Schlangen, 91 B.R. 834, 837 (Bankr. N.D. Ill. 1988) ). This court's inquiry will focus on the presence......