In re Settlers' Hous. Serv., Inc.

• Decision Date: 16 January 2014
• Docket Number: No. 13–28022.,13–28022.
• Parties: In re SETTLERS' HOUSING SERVICE, INC., Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

505 B.R. 483

In re SETTLERS' HOUSING SERVICE, INC., Debtor.

No. 13–28022.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Jan. 16, 2014.

William J. Factor, Ariane Holtschlag, David Paul Holtkamp, Law Office of William J. Factor, Ltd., Chicago, IL, for Debtor.

Francis X. Buckley, Jr., Matthew Johns, Todd A. Rowden, Emily L. Peel, Thompson Coburn LLP, Chicago, IL, for Schaumburg Bank & Trust Company.

Elizabeth E. Richert, Eugene J. Schiltz, Coleman Law Firm, Chicago, IL, for Robert Markay.

Office of the U.S. Trustee, Region 11, Chicago, IL.

Douglas Chalmers, Douglas M. Chalmers, P.C., Chicago, IL, for Connie M. Saiger and John J. Frale.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON SCHAUMBURG BANK'S MOTION TO LIFT THE AUTOMATIC STAY

JACK B. SCHMETTERER, Bankruptcy Judge.

Debtor, Settlers' Housing Service Inc. (“Settlers' ”), filed for bankruptcy relief under chapter 11 of the Bankruptcy Code. Creditor, Schaumburg Bank and Trust Co. (“Schaumburg Bank” or “the Bank”), moved for relief from the automatic stay under § 362(d), asserting (1) lack of adequate protection of its interest in certain property of Settlers', and (2) that Debtor has no equity in the property and it is not necessary to an effective reorganization because there is no prospect of an effective reorganization. Debtor was ordered to file and it did file a proposed Plan.

Trial was held and the parties rested on the Bank's stay motion. Oral closing argument was heard, and the parties were invited to file supplemental briefs on the effect of Schaumburg Bank's § 1111(b)(2) election.

For reasons stated below, it is found and held that (1) presently there is no prospect of an effective reorganization because evidence shows that Debtor has inadequate cashflow to support a feasible plan of reorganization if the Bank's filed claim is found to be valid, but (2) Debtor may have a feasible plan if it prevails in its objection and counterclaim to the Bank's proof of claim, and (3) the Bank does not presently lack adequate protection. The stay will remain in effect until the claim objection and counterclaims are decided.

The Court now makes and enters the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

Debtor is a non-profit organization under Illinois law that seeks to provide low-cost housing to refugees with resident alien status in the United States. Debtor was originally organized in 1992 by KJ Lodico and Joe Lodico, who were married at the time. Settlers' acquired its properties through grants provided directly or indirectly through the Department for Housing and Urban Development (“HUD”). Debtor's mission included acclimating recently arrived immigrants to American life, including provision to its residents of training in how to own and care for property. Many of the properties originally acquired from HUD were rented to and eventually sold to the residents, with proceeds from the sales funding further work by Debtor. KJ Lodico, executive director of Settlers' testified without contradiction that prior to the July 2008 acquisition of property from Bank of Commerce, Debtor was always able to meet its financial obligations.

In July, 2008, Debtor owned five properties in DuPage County (“the DuPage County Properties”) and a thirteen-unit property in Oak Park (“the Washington Taylor Property”). In July, 2008, Setters' acquired additional property (“the Faulkner Properties”) through the Bank of Commerce in exchange for assuming a $3.4 million loan. Debtor alleges that its acquisition of the Faulkner Properties was accomplished through a fraudulent scheme by the Bank of Commerce. Further, Debtor executed a line of credit agreement with Bank of Commerce which cross-collateralized the Washington Taylor Property and the Faulkner properties, another transaction which Debtor alleges was fraudulent. Altogether, forty-nine rental units owned by Setters' are encumbered by mortgages that were executed in favor of the Bank of Commerce (“the Bank of Commerce Properties”).

In 2011, Schaumburg Bank acquired the Bank of Commerce from an FDIC receivership. In 2012, the Bank foreclosed on the Bank of Commerce Properties. In the state court foreclosure proceedings, Stephen H. Baer was named receiver for the properties. Debtor filed an answer together with counterclaims and third-party claims against individuals associated with Bank of Commerce, asserting an allegedly fraudulent scheme whereby Bank of Commerce sold Debtor the Faulkner properties and obtained a mortgage on the Washington–Taylor Property.

On July 12, 2013, Debtor filed the above entitled case for relief under chapter 11 of the Bankruptcy Code. The Bank filed its Proof of Claim (as subsequently amended) for $5,103,3225.97 ¹, assertedly secured by mortgages on property worth $2,721,000. The parties have stipulated for purposes of the stay relief motion that the properties are worth the latter amount.

On August 27, 2013, the Bank moved for relief from the automatic stay under §§ 362(d)(1) and 362(d)(2), alleging lack of adequate protection and lack of equity and the lack of necessity for a viable plan of reorganization, and also a motion for the receiver appointed in the state court case to retain possession of the real estate. By agreement of the parties, the receiver was ordered to be retained until resolution of the stay motion. (Docket 70.)

The court sua sponte ordered the debtor to file a proposed plan and disclosure statement by October 21, 2013. The motion for relief from the automatic stay was then set for trial. The issue considered was primarily whether Debtor's proposed plan is economically feasible.

At present, only ten of the forty-nine Bank of Commerce Properties are occupied and paying rent. Since the parties have stipulated that the properties are worth $2,721,000, Debtor does not have equity in the property within the meaning of 11 U.S.C. § 362(d)(2)(A).

Debtor's Plan and Disclosure Statement propose to regain possession of the properties and through effective management ramp up the occupancy level to 90% or greater within six to twelve months. Under the proposed plan, since the Bank has made a § 1111(b) election (Docket 85), the Plan proposes to give the Bank a note for the entirety of its allowed claim at 5% interest, with monthly payments of $12,000 for thirty years, followed by a balloon payment. The disclosure statement argues that the proposed payment amount is feasible because Debtor can generate over $260,000 per year in rents net of operation expenses, which is said to be enough to cover $144,000 per year in payments to the Bank. KJ Lodico testified that Settlers will be able to achieve even greater than 90% occupancy because it has a history of achieving such high occupancy rates on account of its contacts with recent immigrants seeking homes, and will continue to have that ability. Indeed, KJ Lodico testified that she is confident that a 90% or greater occupancy rate could be achieved within three to six months after Settlers' Housing recovers control of the mortgaged properties. Independent evidence showed that there is a heavy demand for similar rentals in the area.

In order to challenge feasibility, the Bank introduced the expert testimony of William Haegele, a Certified Public Accountant, and Certified Insolvency and Restructuring Advisor, who performed an analysis of Debtor's Plan and Disclosure Statement. Haegele testified that the Disclosure Statement lacked enough financial information for a creditor to evaluate the plan. For example, the Disclosure Statement does not contain an analysis or projection of the first twelve months following a Plan confirmation during which Debtor would ramp up occupancy, and therefore Haegele provided an analysis of that period. Haegele's analysis relied on statements made in Debtor's Plan and Disclosure Statement, filings in this case and in the state court foreclosure case, including the receiver's reports. That analysis assumed that KJ Lodico's salary would be $40,000 per year, and that a third-party property manager would cost $5,000 per month, that the cost to make an unoccupied unit ready to rent would be $1,200 per unit, and that in each building the most expensive units in each building would be rented first. Haegele used a 90% occupancy rate for his report because historically, even when Debtor achieved higher than a 90% occupancy rate, it had enough delinquencies that the rate of occupied and paying units was never over 88%.

Simultaneous with the Bank's motion to lift the automatic stay, Debtor moved for Bankruptcy Rule 2004 examinations of Connie Saiger, John Frale, Robert Markay, and the firm of Kolnicki, Person and Wirth LLC, the individuals allegedly involved in the asserted frauds against Debtor. Robert Markay has since filed for bankruptcy individually, and the motion for his Rule 2004 examination was withdrawn. As to the others, the motion was denied because an adversary proceeding was filed here, (13ap1328) and any necessary discovery should take place in that proceeding.

Additional findings of fact appear in the following Conclusions of Law.

CONCLUSIONS OF LAW

Jurisdiction

Jurisdiction lies over this objection to proof of claim under 28 U.S.C. § 1334 and is referred here by Internal Procedure 15(a) of the District Court for the Northern District of Illinois. This matter is a motion to modify the automatic stay and is therefore a core proceeding under 28 U.S.C. § 157(b)(2)(G). A motion to modify the automatic stay “stems from the bankruptcy itself,” and may constitutionally be decided by a bankruptcy judge. Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011).

Relief from Stay

Section 362(a) of the Bankruptcy Code provides for an automatic stay against “the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor ...” § 362(a)(1). Section 362(d) provides,

On...