In re Ryyz, LLC

• Decision Date: 04 April 2013
• Docket Number: Nos. 1–12–47383–JF, 1–12–47384–JF.,s. 1–12–47383–JF, 1–12–47384–JF.
• Citation: 490 B.R. 29
• Parties: In re RYYZ, LLC, and RYYZ 2, Corp., d/b/a Westbrook Apartments, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of New York

490 B.R. 29

In re RYYZ, LLC, and RYYZ 2, Corp., d/b/a Westbrook Apartments, Debtors.

Nos. 1–12–47383–JF, 1–12–47384–JF.

United States Bankruptcy Court,

E.D. New York.

April 4, 2013.

Gary F. Eisenberg, Esq., Perkins Coie LLP, New York, NY, for Fannie Mae.

Albert A. Ciardi, III, Esq., Jennifer E. Cranston, Esq., Daniel S. Siedman, Esq., Ciardi Ciardi & Astin, Philadelphia, PA, for RYYZ, LLC and RYYZ 2, Corp.

DECISION AND ORDER GRANTING FANNIE MAE'S MOTION FOR RELIEF FROM THE AUTOMATIC STAY PURSUANT TO 11 U.S.C. § 362(d)(3)

JEROME FELLER, Bankruptcy Judge.

Before the Court is Fannie Mae's motion for relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(3) in the jointly administered, single asset real estate cases of RYYZ, LLC (“LLC”) and RYYZ 2, Corp. (“Corp.”) (together, “Debtors”). Based on the entire record and applicable law, Fannie Mae's motion is granted. The Debtors did not demonstrate that their plan has a reasonable prospect of being confirmed within a reasonable time as required by Section 362(d)(3)(A). This conclusion is premised on the Debtors' inability to establish (i) they can obtain acceptance of their plan by at least one validly impaired class of claims ( see11 U.S.C. §§ 1111(b), 1122, 1129(a)(10), 1129(b)(1)) and/or (ii) their plan does not violate the absolute priority rule ( see11 U.S.C. § 1129(b)(2)(B)). As the Debtors also failed to make the payments required by Section 362(d)(3)(B), relief from the stay must be granted. This Memorandum Decision and Order constitutes the Court's findings of fact and conclusions of law to the extent required by Fed.R.Civ.P. 52, made applicable here by Fed. R. Bankr.P. 7052.

I.

The Debtors each filed petitions for relief under Chapter 11 of title 11 of the United States Code on October 18, 2012, designating their business as “single asset real estate.” ECF No. 1.¹ The Debtors are New York-based entities with the same principals, Joseph Jusewitz and Nediva Schwartz. ECF No. 30. Each debtor owns a portion of a 495–to 500–unit rental apartment complex situated on 43 acres of land in Lake County, Gary, Indiana (“Property”). ECF Nos. 86–2 ¶ 2; 92 at 10. LLC owns Westbrook Apartments Phase I, containing some 350 rental units, and Corp. owns Westbrook Apartments Phase II and its approximately 140 units. ECF Nos. 33–6; 33–12. The bulk of the units command monthly rent between $560 and $600, and the Debtors indicate that some 400 of them are rented. ECF Nos. 86–2 ¶ 5; 92 at 10.

Fannie Mae is a secured creditor by virtue of certain multifamily notes, securitization instruments, and assignments (“loan documents”). ECF No. 33 (Exhs. A–Q).² The aggregate principal sum of the notes is slightly more than $13.5 million, consisting of a $10.5 million note dated March 19, 2007, signed by Schwartz on behalf of LLC in connection with Phase I (ECF No. 33–3), and a note of just over $3 million dated January 2, 2009, executed by Jusewitz on behalf of Corp. for Phase II (ECF No. 33–9). Both notes are secured by first-priority mortgages, assignments of rents and leases, and security agreements. ECF Nos. 33–4; 33–10. In addition, Jusewitz and LLC are guarantors of Corp.'s Phase II note. ECF Nos. 35–15; 33–16.

In July 2012, the Debtors defaulted under the loan documents by failing to pay the sums due. ECF No. 33 ¶ 24. Fannie Mae accelerated the debt and commenced a foreclosure proceeding in Lake County Superior Court. Id. ¶¶ 24–29. That action was stayed when the Debtors filed their bankruptcy petitions. Fannie Mae filed two proofs of claim, for an aggregate claim of over $12.3 million. Case No. 12–47383 (POC 12–1); Case No. 12–47384 (POC 3–1).

Fannie Mae's security interest extends to the post-petition rents generated by the Property pursuant to the assignments of rents and leases and by operation of 11 U.S.C. § 552(b). Four orders have been entered on consent of Fannie Mae authorizing the Debtors' use of cash collateral on an interim basis pursuant to stipulated terms and in accordance with certain budgets. ECF Nos. 28; 52; 70; 87. The last order covered February 2013.

On November 19, 2012, just a month after the petition date, Fannie Mae filed a motion for relief from the stay for cause pursuant to 11 U.S.C. § 362(d)(1). ECF Nos. 31; 32; 33. The motion was couched in terms of lack of adequate protection, but Fannie Mae also argued that reorganization was impossible based on the Debtors' insufficient cash flow. ECF No. 47 at 3–4. On December 19, the day before the scheduled hearing on the motion, the Debtors filed a plan of reorganization and disclosure statement. ECF Nos. 54; 55. As Fannie Mae had not sustained its burden of demonstrating diminution of the value of its collateral, and in light of the early stage of the case, the Court denied the motion without prejudice. ECF Nos. 61; 62 at 16:2–22.

Fannie Mae filed the present motion on January 31, 2013 (ECF Nos. 76; 77; 78; 79), the Debtors filed an objection on February 28 (ECF No. 86), and Fannie Mae filed a reply on March 5 (ECF No. 89). On March 11, the Debtors filed an amended plan and disclosure statement. ECF Nos. 91; 92. The Court held a hearing on the motion on March 14, 2013, at which counsel for Fannie Mae and the Debtors appeared and were heard, and reserved decision.

II.

The filing of a bankruptcy petition begets a stay of foreclosure proceedings brought by secured lenders to recover their collateral. 11 U.S.C. § 362(a). Unlike injunctive relief in other courts, a debtor need not demonstrate likelihood of success, irreparable harm, or any other factors to obtain stay relief; the bankruptcy stay is by name, and by nature, automatic. “However, restraining creditors from enforcing their legitimate legal rights is strong medicine and our bankruptcy laws do not sanction the stay for stay's sake.” In re 266 Washington Assocs., 141 B.R. 275, 281 (Bankr.E.D.N.Y.) (“266 Washington ”), aff'd,147 B.R. 827 (E.D.N.Y.1992).

Accordingly, “[o]n request of a party in interest and after notice and a hearing, the court shall grant relief from the stay ... such as by terminating, annulling, modifying, or conditioning such stay....” 11 U.S.C. § 362(d). Under paragraph (1) of subsection (d), relief may be granted “for cause, including the lack of adequate protection of an interest in property of such party in interest;” and under paragraph (2), relief “with respect to a stay of an act against property” is warranted if “(A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization....” 11 U.S.C. § 362(d)(1) and (2).

Congress enacted 11 U.S.C. § 362(d)(3) in 1994 to fast-track single asset real estate cases.³Section 362(d)(3) compels debtors to act swiftly by obligating them to fulfill one of two mandates by “not later than the date that is 90 days after the” petition date. 11 U.S.C. § 362(d)(3). The debtor must either (A) “file[ ] a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time” ( 11 U.S.C. § 362(d)(3)(A)), or, failing this, (B) make monthly payments “in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor's interest in the real estate” ( 11 U.S.C. § 362(d)(3)(B)(ii)). Although a court may enlarge the 90–day period for cause shown, the statute carefully circumscribes this relief by requiring the order to be entered before the 90–day period expires. 11 U.S.C. § 362(d)(3).

While (d)(1) and (d)(2) have general application, (d)(3) is designed specifically for single asset real estate cases. These cases typically amount to little more than a contest between the debtor and secured lender over real property that is, or can be, the subject of a foreclosure action. As explained by one court, by enacting Section 362(d)(3) “Congress expressly attempted to avoid the usual delays experienced in Chapter 11 in single asset real estate cases, which historically have been filed to avoid a foreclosure and in the hope that the debtor can come up with some form of a miracle in order to formulate an acceptable plan.” NationsBank, N.A. v. LDN Corp. (In re LDN Corp.), 191 B.R. 320, 326 (Bankr.E.D.Va.1996) (“LDN ”).

The term “miracle” is apt. With insufficient cash flow, an inability to obtain alternative financing, few creditors besides the lender, and quite often binding judgments of foreclosure, an attempt to satisfy the confirmation requirements of 11 U.S.C. § 1129 is often a fool's errand.⁴ In many instances, the only real promise of a single asset real estate case is a “nasty and costly two-party dispute....” In re Union Meeting Partners, 178 B.R. 664, 681 (Bankr.E.D.Pa.1995). Under these circumstances the continuation of the automatic stay is of questionable value, and there is little reason to continue to frustrate a lender's legitimate right to pursue its collateral. ⁵

Section 362(d)(3) is designed to protect secured creditors by requiring debtors to act quickly, either by filing a confirmable plan within a prescribed timeframe or by compensating the creditor with statutory payments. See, e.g., LDN, 191 B.R. at 327 (stating that Section 362(d)(3) “was enacted to assist secured creditors in single asset real estate cases”); In re Heather Apts. Ltd. P'ship, 366 B.R. 45, 50 (Bankr.D.Minn.2007) (“[W]here the case does not early kick forward toward confirmation,” the purpose of Section 362(d)(3)(B) is to “compensate [the] mortgagee for the time-value of the mortgagee's debt investment, by the payment of interest at the original contractual rate.”).⁶At the same time, Section 362(d)(3) provides a window of opportunity for debtors. Section 362(d)(3)'s specific, albeit nonexclusive, criteria for stay relief ought to counsel against knee-jerk motions at the outset of the case that merely parrot the elements of “bad faith,” or other grounds for relief, just because the case involves single asset real estate.⁷ Its parameters often dictate how a case...