In re Scimeca Found., Inc.

• Decision Date: 16 September 2013
• Docket Number: No. 10–13662.,10–13662.
• Parties: In re SCIMECA FOUNDATION, INC., Debtor.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

497 B.R. 753

In re SCIMECA FOUNDATION, INC., Debtor.

No. 10–13662.

United States Bankruptcy Court,

E.D. Pennsylvania.

Sept. 16, 2013.

Roger V. Ashodian, Regional Bankruptcy Center of SE PA, Havertown, PA, Robert B. Eyre, Foehl & Eyre, PC, Media, PA, William H Hall, IV, Jennifer Song, The Regional Bankruptcy, Havertown, PA, for Debtor.

Kevin P. Callahan, United States Trustee, Dept. of Justice, Philadelphia, PA, for U.S. Trustee.

Gary F. Seitz, Gellert Scali Busenkell & Brown LLC, Philadelphia, PA, Jennifer M. Zelvin, Gellert Scali Busenkell & Brown, LLC, Philadelphia, PA, for Trustee.

MEMORANDUM

BRUCE FOX, Bankruptcy Judge.

The chapter 7 trustee, Gary F. Seitz, has filed a motion seeking court approval to sell the debtor's real and personal property free and clear of liens. In connection with this sale, the trustee seeks approval of an agreement with a secured creditor, Ciena Capital Funding LLC, which settles the trustee's potential claim under 11 U.S.C. § 506(c) and includes authorization to pay from the sale proceeds all normal costs of sale, including real estate commissions, as well as “undisputed liens.” Furthermore, as part of the sale order, the trustee seeks to terminate five alleged leaseholds held by the debtor's principal, Peter DeFeo, and by an entity owned and/or controlled by him, International Artist Studio (IAS), and to order these two tenants to vacate these leaseholds.¹

The trustee's motion is opposed by the debtor, by Mr. DeFeo, and by Creek Road Funding LLC, which is another entity owned and/or controlled by Mr. DeFeo. The trustee's motion is supported by Ciena Capital and by South Street Head House District. The City of Philadelphia has no objection to the trustee's request to sell the debtor's property free and clear of liens, nor to pay undisputed lien claims, so long as the trustee places funds from the sale proceeds in escrow equal to the City's disputed claims.

An evidentiary hearing took place over five days, with all parties in interest participating. Mr. DeFeo elected to represent himself, agreeing to his counsel's request to withdraw made at the start of the hearing. The parties have submitted post-hearing memoranda, which have been reviewed. ²

The following facts were either not disputed or were proven.

I.

A.

The debtor filed a voluntary petition in bankruptcy under chapter 11 on May 3, 2010. Its sole assets are real and personal property located at 517–529 South 4th Street, Philadelphia, Pennsylvania (the Foremost Building). At the time of its bankruptcy filing, and thereafter, the debtor leased its realty to commercial tenants on its ground and basement (the “Mall”) floors, and office space on the second through fourth floors. There appears to be space used as an apartment on the fifth floor.

The debtor identified Mr. DeFeo as its president and the only individual or entity with an equity interest in the debtor. See docket entry # 14.

On its Bankruptcy Schedule A, the debtor valued its real estate in the amount of $9 million. See docket entries 19, 35. On its Bankruptcy Schedule B, the debtor averred that it owned “various pictures on the wall” worth $500, miscellaneous tools and office equipment worth $2,000, cash on hand of only $1,800, and $300,000 in unpaid rent from its tenants. Id. It only disclosed seven creditors holding unsecured claims, none of which were listed as disputed or contingent. Except for the unsecured claim of Mr. DeFeo, listed on Bankruptcy Schedule F at approximately $564,000 for “sales, management and construction maintenance,” no other unsecured creditor was scheduled by the debtor as owed more than $15,000, none were affiliated entities of the debtor, and the non-DeFeo claims totaled about $45,000. See docket entry # 19.

The debtor later filed an amended Schedule F, listing only two unsecured creditors beside Mr. DeFeo, both of which it asserted now held disputed claims totaling $27,000. See docket entry # 35. The debtor also filed a list of leases and executory contracts, Schedule G, which list did not include Mr. DeFeo or Industrial Artist Studio as lessees. See docket entry # 19.

At the time of its bankruptcy filing and at all relevant times thereafter, the debtor's real property was encumbered by a mortgage held by Ciena Capital Funding, LLC, f/k/a BLX Capital, LLC. The debtor filed its voluntary petition to stay a May 4, 2010 sheriff sale scheduled by Ciena. See docket entry # 37 (Amended Statement of Financial Affairs # 4).

In August 2010, the debtor and Ciena entered into a stipulation in which the debtor acknowledged that in January 2006 it borrowed $2.75 million from Ciena secured by its real estate, by all tangible and intangible personal property, and by an assignment of rents and leases. See docket entry # 46 (Stipulation dated August 2, 2010). This loan was guaranteed by Mr. DeFeo. Id. Ciena later assigned its loan interest to HSBC Bank USA, N.A., but has been acting as agent for the assignee throughout this bankruptcy case. Id.³

The debtor also stipulated that the debtor defaulted in loan payments to Ciena in November 2008,⁴ as well as defaulted under its loan documents owing to its failure to tender payments for property taxes and insurance. Id. In March and November 2009, as well as in March 2010, Ciena sent notices to the debtor's tenants exercising its assignment of rents. Id. Ciena also obtained a prepetition confessed judgment against the debtor in the amount of approximately $3.2 million. Id.

This August 2010 stipulation included Ciena's authorization for the debtor's limited use of its cash collateral— i.e., rent payments—in return, inter alia, for a promise of specified future loan payments, and the debtor's obtaining and retaining property insurance. It also fixed a deadline for the debtor's filing of a chapter 11 plan. Id.

As alluded to above, at the time of its bankruptcy filing the debtor was delinquent in taxes to the City of Philadelphia, which asserted a first priority municipal lien on the realty. See53 P.S. § 7102. The City has filed numerous proofs of claim in this case.

On October 4, 2010, the United States Trustee filed a motion to convert or dismiss this case pursuant to 11 U.S.C. § 1112(b). This motion alleged, among the grounds for relief, that the debtor was unable to effectuate a plan of reorganization and that the debtor had caused unreasonable delay that was prejudicial to its creditors. The U.S. Trustee's motion was opposed by the debtor and by Mr. DeFeo (acting pro se ).

After various postponements requested by the parties, an evidentiary hearing was held and the U.S. Trustee's motion to dismiss or convert was conditionally denied for reasons stated in an order dated March 11, 2011, with the debtor given a confirmation deadline of July 11, 2011. See generally11 U.S.C. § 1112(b)(4)(J); In re Hoyle, 2013 WL 210254, at *9 (Bankr.D.Idaho Jan. 17, 2013). The debtor ultimately filed an Amended Disclosure Statement and Third Amended Plan dated June 7, 2011. See docket entry # 137 (Third Amended Plan).

As part of its chapter 11 reorganization efforts, the debtor and the City of Philadelphia entered into a stipulation to resolve the debtor's objections to various proofs of claims filed by the City. This agreement, dated July 11, 2011, required, inter alia, that the debtor pay the City $20,000 immediately, pay $12,972.98 within 30 days of the entry of a confirmation order, and pay various other amounts as part of any confirmed chapter 11 plan. The stipulation further provided that the City held secured claims in the amounts of $92,772.69 and $5,076.85 for delinquent real estate taxes, plus priority tax claims in excess of $46,209.22. See docket entry # 156.

On August 2, 2011, the debtor's Third Amended Plan, as modified, was confirmed. The confirmation order, inter alia, incorporated the debtor's aforementioned stipulation with the City. The confirmed plan provided that the debtor would fund its required plan payments from future rental income; alternatively, the plan provided for the sale or refinancing of its real property by a date certain if the debtor's rental income was insufficient to meet its plan obligations. See docket entries 137, 171, 172.

On October 28, 2011, the City filed a pleading asserting that the debtor had failed to tender funds promised in its stipulation and confirmed plan. See docket entry # 203. On December 16, 2011, the City filed a motion to convert this case to chapter 7 under 11 U.S.C. § 1112(b)(4)(N), owing to the debtor's failure to comply with the terms of its confirmed plan, which motion the debtor opposed. See docket entries 213, 216. Ciena supported the motion to convert averring, in part, that it also had not been paid according to the terms of the confirmed plan. See docket entry # 215.

At the hearing on the City's motion to convert, the debtor conceded that it had not tendered to the City the funds owing under the terms of the confirmed plan. It argued, however, that this failure triggered the plan provision affording it until April 30, 2012, to sell or refinance its realty and pay all creditors, including the City and Ciena.

By order dated February 23, 2012, the City's motion to convert was conditionally denied based upon the debtor's confirmed plan commitment to sell its real estate or refinance its secured debt by April 30, 2012. See docket entries 227, 228. On April 30, 2012, the debtor filed a motion for approval to sell its real estate to an entity called Foremost Acquisition Partners, LP. See docket entry # 245.

Under the terms of this agreement of sale dated April 24, 2012, the prospective buyer agreed to pay $6.1 million for the debtor's real and personal property. The sale agreement included, among its provisions, that the purchaser had a 45–day due diligence period, which could be extended 30 days, and a warrant that the seller's rent roll and leasehold information was accurate. See docket entry # 245 (Ex. A). During the due diligence period, the...