In re US Loan Co., Inc.
| Decision Date | 31 August 1989 |
| Docket Number | Bankruptcy No. 89-5013-8P1. |
| Parties | In re U.S. LOAN CO., INC., Debtor. |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida |
Nancy Farage, Tampa, Fla., for debtor.
Richard McIver, Tampa, Fla., for Federal Nat. Mortgage.
Lynn L. England, Tampa, Fla., U.S. Trustee.
ORDER GRANTING MOTION TO DISMISS, OR IN THE ALTERNATIVE, A MOTION TO CONTINUE RECEIVERSHIP
THIS is a Chapter 11 case filed by U.S. Loan Co., Inc. (Debtor), on July 12, 1989. On July 17, 1989, or five days later, the Federal National Mortgage Association (Fannie Mae) filed a Motion to Dismiss, or in the Alternative, a Motion to Continue Receivership. Fannie Mae also filed a Motion for Relief from Stay and/or Adequate Protection and a Motion to Prohibit Use of Cash Collateral. The Debtor also filed a Motion for Turnover of Property pursuant to § 543 of the Bankruptcy Code. Due to the alleged emergency involved, this Court promptly scheduled a hearing, heard testimony of witnesses and considered the documentary evidence, which established the following facts which are relevant to the matters under consideration.
The Debtor is a Florida corporation engaged in real estate management, sales and financing and commenced doing business in 1986. Its principal and only officer appears to be Vincent Bekiempis (Bekiempis). According to the schedules filed by the Debtor, it is the current owner of a real estate development located in Brandon, Florida, known as Valley View, formerly owned by Valley View Townhouse Association, Ltd (Valley View, Ltd). It appears that the project, which consists of 48 duplexes is encumbered by 48 separate mortgages securing an indebtedness represented by 48 separate promissory notes. It is without dispute that each of the 48 mortgages and notes is now in default and there is an outstanding aggregate principal balance of $3,164,572.57, plus interest accruing since November 1, 1987, representing a total debt in the approximate amount of $3,820,000.00. The interest is currently accruing at the rate of $29,338.28 per month. The schedules reveal that this obligation is the only secured debt of the Debtor and the mortgages described earlier are held by Deposit Guaranty and not by Fannie Mae, the entity which filed the Motions under consideration. The historical background of this property is somewhat complex but brief comments on same should be helpful to the resolution of the issues raised by several motions filed by Fannie Mae.
It appears that Valley View Ltd. is a limited partnership which filed a Chapter 11 Petition in the District of New Jersey in 1987. The property at that time was encumbered by a first mortgage in favor of Deposit Guaranty/Fannie Mae described earlier and by a second mortgage held by Bekiempis, the principal of this Debtor. The first mortgage in favor of Fannie Mae was signed by Bekiempis, who is also a principal of Valley View Ltd., the New Jersey limited partnership. During the pendency of the Chapter 11 case in New Jersey, both Fannie Mae and Bekiempis filed their respective Motions for Relief from the automatic stay. The Motions were granted. Shortly thereafter, Bekiempis commenced a foreclosure action of his second mortgage in the Circuit Court for Hillsborough County, Florida. In due course he applied for and obtained an appointment for receiver on February 23, 1989. It appears that on March 13, 1989, Bekiempis assigned his interest in his second mortgage to U.S. Loan, Inc., the Debtor. On July 5, 1989, the subject property was sold at the foreclosure sale and the Debtor, who purchased the property by bidding in his judgment, obtained a certificate of title on July 5, 1989. Prior to the commencement of the Chapter 11 case, the Debtor filed a Motion and sought a turnover of the property from the state court. The Motion was denied on July 14, 1989, although no formal order has been entered. The Motion to Dismiss, filed by Fannie Mae, sets forth the following allegations:
a. The Debtor has little or no equity in the property and Fannie Mae believes that the value of the property is declining rapidly.
b. Reorganization is unlikely, as the property is clearly generating insufficient income to service the first mortgage debt. In addition, past due interest is almost $700,000.00, which the Debtor is unlikely to cure within a reasonable period of time.
c. The transfer to Debtor by Vincent Bekiempis, Jr., of his interest in the second mortgage was for the sole purpose of placing the property in bankruptcy to the detriment of Fannie Mae.
d. The state court denied the Debtor's application to terminate the receivership on July 14, 1989, and the Debtor filed its Petition on July 17, 1989.
e. The Debtor has no other significant assets, and is believed by Fannie Mae to be a "shell" corporation with no significant business activity.
f. The Petition is completely devoid of facts indicating an ability to reorganize.
g. The facts and the timing of the Debtor's actions indicate that the Petition was filed solely to frustrate the legitimate efforts of secured creditors to enforce their rights in the property.
The dismissal of this Chapter 11 case is sought pursuant to § 1112(b) and is based on the contention that this is a classic bad faith case and, therefore, it is appropriate to dismiss the Chapter 11 for "cause" under the authorities which considered the issue raised by the Motion. In re Albany Partners, Ltd., 749 F.2d 670 (11th Cir. 1984); In re Natural Land Corp., 825 F.2d 296 (11th Cir.1987); In re Phoenix Picadilly Ltd., 849 F.2d 1393 (11th Cir.1988)
In opposition to the Motion to Dismiss, the Debtor contends that it has substantial equity in the property and most of the cases cited by Fannie Mae are not persuasive and controlling. In support of its position, the Debtor cites the case of In re Krilich, 87 B.R. 178 (M.D.Fla.1988) in which this Court stated that the real test still is that there must be a real need and a real ability to reorganize; that the fact that the Debtor who seeks relief under Chapter 11 has one single asset consisting of real estate encumbered by a mortgage which is in default does not by itself compel the conclusion that the Petition was filed in bad faith even if it was filed for the admitted purpose of preventing loss of the property as a result of a pending foreclosure action.
The property involved in the matter under consideration is a fully developed complex which has a steady rental income, albeit insufficient to service the outstanding mortgage indebtedness, unlike the property involved in Little Creek Development Co., 779 F.2d 1068 (5th Cir.1986). The gross revenue from the property at this time is approximately $33,000.00 a month. The cost of operating the project is about $15,000.00, leaving a net income available to service the mortgage of $18,000.00. The expenses do not include an escrow for taxes or for insurance. As noted earlier, the per diem interest accrual on the debt is $977.94, or approximately $29,338.22 per month. Thus, it is without dispute that the project has a serious negative cash flow and insufficient to pay the accruing interest and certainly far from sufficient to reduce the principal.
In order to overcome the obvious, the Debtor urges that it has a substantial equity in the subject property, and the property generates sufficient revenues to make adequate protection payments, a proposition clearly not...
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