In re Ryan 1000, LLC

• Decision Date: 02 July 2021
• Docket Number: Case No. 21-21326-beh, Case No. 21-21327-beh
• Citation: 631 B.R. 722
• Parties: IN RE: RYAN 1000, LLC, Debtor. In re: Ryan 8641, LLC, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

631 B.R. 722

IN RE: RYAN 1000, LLC, Debtor. In re: Ryan 8641, LLC, Debtor.

Case No. 21-21326-beh

Case No. 21-21327-beh

United States Bankruptcy Court, E.D. Wisconsin.

Signed July 2, 2021

Averi Anne Niemuth, Evan Schmit, Kerkman & Dunn, Milwaukee, WI, Paul A. Strouse, Strouse Law Offices, Milwaukee, WI, for Debtor.

Michelle S. Y. Cramer, Milwaukee, WI, for Trustee.

DECISION AND ORDER DENYING (1) DEBTORS’ APPLICATIONS TO EMPLOY COUNSEL AND (2) THE UNITED STATES TRUSTEE'S SECOND MOTIONS TO CONVERT

Beth E. Hanan, United States Bankruptcy Judge

On May 18, 2021—more than two months after the debtors filed their Chapter 11 petitions—they filed applications seeking authorization to employ Strouse Law Offices as their counsel. The United States Trustee objected to the applications, asserting that employment was not in the best interest of the debtors’ estates or interested parties. The U.S. Trustee also moved to convert these cases to Chapter 7 (for the second time), based on the debtors’ unauthorized use of cash collateral. The debtors oppose conversion.

The Court held a consolidated hearing on the debtors’ applications to employ counsel and the U.S. Trustee's motions to convert in both of these cases. Based on the record, and for the reasons that follow, the Court will deny the debtors’ applications to employ, and deny the U.S. Trustee's motions to convert.

BACKGROUND

A. The Ryans’ Chapter 13 Bankruptcy

On January 17, 2018, David Paul Ryan and Jean Marie Ryan filed a Chapter 13 petition, commencing Case No. 18-20366-gmh. Attorney Paul Strouse, of Strouse Law Offices, represents the Ryans in their Chapter 13 case. In their Schedule A/B, the Ryans listed as assets their ownership interest in debtors Ryan 1000, LLC and Ryan 8641, LLC. The Ryans valued their 100% ownership interest in Ryan 1000, LLC at $0, stating:

A single real estate asset company. 1000 - 1018 West Pierce Street, Milwaukee, Wisconsin 53204. Based on the 2016 City of Milwaukee Real Property Tax Bill the property has an estimated fair market value of $180,700.00. The corporation owes on a mortgage with Waterstone Bank, SSB, secured on the property located at 1000-1018 West Pierce Street, Milwaukee, Wisconsin 53204. The principal balance owed on this mortgage on the date of filing was $200,850.90 ....

Case No. 18-20366-gmh, ECF No. 19, at 8; ECF No. 80, at 6.¹ The Ryans valued their 100% ownership interest in Ryan 8641, LLC at $16,456.96, with a similar explanation:

A single real estate asset company. 8641 West Capitol Drive, Milwaukee, Wisconsin 53204. Based on the 2016 City of Milwaukee Real Property Tax Bill the property has an estimated fair market value of $164,700.00. When you subtract a 6.5% broker's fee and $5,000.00 in closing costs it leaves $149,995.00. The corporation owes on a mortgage with Waterstone Bank, SSB, secured on the property located at 8641 West Capitol Drive, Milwaukee, Wisconsin 53204. The principal balance owed on this mortgage on the date of filing was $133,538.04 ....

Case No. 18-20366-gmh, ECF No. 80, at 6. On their Schedule C, the Ryans claimed as exempt their $0 interest in Ryan 1000, LLC, and $5,491.25 of their interest in Ryan 8641, LLC. Id. at 12–13.

The mortgage note between Ryan 1000, LLC and WaterStone Bank is signed by Mr. Ryan, both as managing member of Ryan 1000, LLC, and in his individual capacity. See Case No. 18-20366-gmh, Claim No. 13. The mortgage note between Ryan 8641, LLC and WaterStone Bank is signed by Mr. and Mrs. Ryan, both as members of Ryan 8641, LLC and in their individual capacities. See Case No. 18-20366-gmh, Claim No. 12. Nevertheless, in their Schedule E/F, the Ryans did not disclose any personal or contingent unsecured obligations owed to WaterStone Bank by virtue of the mortgage notes signed on behalf of Ryan 1000, LLC and Ryan 8641, LLC, and in their individual capacities,² nor did they identify Ryan 1000, LLC and Ryan 8641, LLC as creditors, despite the LLCs’ rights of contribution against them.

The Ryans’ Schedule I, as of January 28, 2019, disclosed that they were not employed and that they received total monthly income of $3,220.66—$2,166 in social security income, and $1,054.66 from operating four rental properties (including $456.47 in profits from Ryan 1000, LLC, and $284.19 in profits from Ryan 8641, LLC). See Case No. 18-20366-gmh, ECF Nos. 23 and 90. After expenses of $2,521.00, the Ryans reported net monthly income of $699.66. Id. In their Chapter 13 plan, the Ryans proposed making monthly payments to the Chapter 13 trustee in that same amount—$699—for 60 months, and paying unsecured creditors a dividend of $10,965.71 (the amount of the Ryans’ non-exempt equity in Ryan 8641, LLC, which equates to roughly 48% of filed unsecured claims). The Ryans’ plan was confirmed in March 2019. Case No. 18-20366-gmh, ECF No. 101.³

Just prior to plan confirmation, WaterStone Bank moved for relief from the automatic stay as to the real property owned by Ryan 1000, LLC and Ryan 8641, LLC, plus a third rental property owned by the Ryans, based on the LLCs’ and the Ryans’ delinquencies in post-petition mortgage payments. Case No. 18-20366-gmh, ECF No. 82. In March 2019, WaterStone's motion was granted in part and denied in part; the court's order included terms that modified the interest rates and payment terms on the three underlying notes, required the Ryans to make a payment of $5,000 to reduce the arrearages on all three notes, and required the Ryans to execute a cross-collateralization mortgage on the properties. See Case No. 18-20366-gmh, ECF No. 103. Ultimately, the Ryans defaulted under the terms of that order by failing to maintain insurance on the property owned by the LLCs, and the court granted WaterStone Bank relief from stay as to those two properties in June 2019. See Case No. 18-20366-gmh, ECF Nos. 114 and 117.

B. These Chapter 11 Bankruptcy Cases

On March 15, 2021, Attorney Strouse filed Chapter 11 petitions on behalf of Ryan 1000, LLC (commencing Case No. 21-21326-beh) and Ryan 8641, LLC (commencing Case No. 21-21327-beh). The debtors’ bankruptcy petitions contained several errors:

• Although David and Jean Ryan are joint shareholders of the debtors, the debtors’ petitions were signed by Mr. Ryan as "Sole Shareholder."

• Neither petition identified the pending and concurrently-filed bankruptcies of the debtor's affiliates (the Ryans and the other LLC).

• Each debtor listed its business as "single asset real estate" (SARE) within the meaning of 11 U.S.C. § 101(51B), and also identified itself as a "small business debtor" under 11 U.S.C. § 101(51D), but the two concepts are mutually exclusive.⁴

On March 24—after prompting from counsel for the U.S. Trustee—Attorney Strouse attempted to amend the petitions to remove the "small business debtor" designations, but mistakenly refiled the debtors’ original petitions. On April 19, he filed corrected amendments (to select only the SARE designation), but these amendments still identified Mr. Ryan as the sole shareholder of the debtors, and did not disclose the bankruptcy cases of the debtors’ affiliates. Further amendments to remedy these remaining deficiencies were filed on May 6, 2021.

In the debtors’ schedules, filed on March 30, 2021, Ryan 1000, LLC valued its property at 1000–1018 West Pierce Street at $500,000, based on a "comparable sale," while Ryan 8641, LLC valued its property at 8641 West Capitol Drive at $275,000, using the same valuation method. The debtors’ schedules did not identify either Mr. or Mrs. Ryan as codebtors on the WaterStone Bank notes.

On April 1, 2021, the United States Trustee moved to convert the debtors’ cases to Chapter 7, after learning that neither debtor had property or liability insurance in place for its real estate (aside from force-placed property insurance purchased by WaterStone Bank). See 11 U.S.C. § 1112(b)(4)(C). At an expedited hearing on April 20, 2021, Attorney Strouse reported that the debtors had purchased property and liability insurance just prior to the hearing. As a result, the Court denied the U.S. Trustee's motions on the condition that the debtors provide proof of insurance by the close of business on April 21, which they did.⁵

On May 10, the U.S. Trustee again moved to convert these cases to Chapter 7, this time based on the debtors’ unauthorized use of WaterStone Bank's cash collateral (the rents collected from their properties). See 11 U.S.C. § 1112(b)(4)(D). According to the U.S. Trustee's second motions to convert, the debtors had been using their post-petition rent for various purposes (including paying for repairs and insurance) during the eight weeks they had been in bankruptcy, without seeking permission from WaterStone Bank or authority from the Court to do so.⁶

The debtors filed motions seeking authority to use WaterStone Bank's cash collateral (to which the bank agreed, and the Court later granted) on May 18. On that same date, the debtors also filed applications to employ Strouse Law Offices. The applications and the accompanying documents contain a number of mistakes:

• The applications seek to employ Strouse Law Offices as "general counsel" rather than bankruptcy counsel.

• The applications are signed by Attorney Paul A. Strouse, rather than each debtor-in-possession.

• The applications do not state whether Strouse Law Offices seeks to have compensation limited as provided in 11 U.S.C. § 328 (though section 328 is mentioned in the proposed orders), nor whether Strouse Law Offices is willing to have any request for fees reviewed under section 330(a)’s compensation standards. See L.R. 2014(a) ("If the applicant seeks to have compensation limited as provided in 11 U.S.C. § 328, then the applicant must specifically request in the application that the court approve the employment subject to § 328, and the application also must state whether the applicant is willing to have any request for fees reviewed under 11 U.S.C. § 330(a) ’s compensation standards.").

• The proposed orders do not set forth

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