In re Victory Const. Co., Inc., Bankruptcy No. LA-80-07936-RO
| Decision Date | 23 February 1981 |
| Docket Number | Bankruptcy No. LA-80-07936-RO,Adv. No. LA-80-213-KO |
| Citation | 9 BR 570 |
| Parties | In re VICTORY CONSTRUCTION CO., INC., Debtor. John H. HADLEY et al., Plaintiff, v. VICTORY CONSTRUCTION CO., INC., et al., Defendant. |
| Court | U.S. Bankruptcy Court — Central District of California |
William C. Moritz, Los Angeles, Cal., for plaintiff.
Gilbert Robinson, Los Angeles, Cal., for defendant Victory Construction Co., Inc.
On January 21, 1981, this court filed its "Memorandum Opinion on Complaint to Vacate Stay for Cause (Lack of Good Faith of the Debtor in Filing its Petition Under Chapter 11)". In that opinion, 9 B.R. 549, the court held that (i) the "good faith" of the debtor is an implicit prerequisite to the filing or continuation of a proceeding under Chapter 11 of the Code;1 and (ii) the debtor's "lack of good faith" in filing a case under Chapter 11 is "cause", independent of the existence or lack of adequate protection, to vacate the automatic stay under § 362(d)(1).2 Accordingly, the automatic stay was terminated.3
The debtor filed timely notice of appeal and now moves to stay Hadley's right to foreclose pending the appeal.4 A hearing was held on debtor's request for a stay on February 20, 1981. The debtor appeared by Fred Roven, and its counsel, Gilbert Robinson. John H. Hadley appeared by his attorney, William C. Moritz. Green appeared through his attorney, Mason Brown.5
Debtor's request for stay is based upon Bankruptcy Rule 805, which authorizes the trial court to:
suspend or order the continuation of proceedings or make any other appropriate order during the pendency of an appeal upon such terms as will protect the rights of all parties in interest.6 (Emphasis added)
In support of its request for a stay, the debtor contends:
1. Irreparable harm to debtor
Failure to grant the stay will result in irreparable harm to the debtor. A foreclosure sale by Hadley will result in a forfeiture of the debtor's interest in the real property. As a result, the debtor will lose all chance of reorganization, realizing equity in the real property, and confirming a plan of arrangement. No plan of arrangement can be proposed or consummated unless the debtor retains its rights and interests in the real estate.
2. Significance of the issues on appeal
The issues presented on this appeal are of great importance in the bankruptcy field and a decision by an appellate court on the "good faith" issues dealt with by the trial court will have far-reaching effect on the reorganization process under the Code.
3. Lack of prejudice to Hadley
Hadley will not be prejudiced by a stay on appeal. Mere delay from the passage of time is of little significance to Hadley, compared to the irreparable harm which will occur to the debtor if a stay is not granted. The harm resulting from such delay, if any, is purely economic and can be eliminated by imposing appropriate financial conditions on the stay.
4. The prospect of success on appeal
The trial court's opinion, dealing with matters of first impression and for which there is no appellate case authority, must be regarded as having "broached new territory."7
Accordingly, there is no reason to assume that the appellate court will necessarily follow Bankruptcy Judge Ordin\'s analysis of the law. Therefore, appellant\'s chances of success are equally as good as those of any of the appellee\'s."8
In response, Hadley urges the following:
a. Conduct of Victory.
The facts found by the trial court preclude Victory's right to a stay because the stay would accomplish the very purpose found by the trial court to constitute lack of "good faith"; that is, the use of the bankruptcy process (including the appellate function) to protect and preserve existing low-interest liens on property as a means of financing its acquisition with a minimum of front money cash.
b. The harm to Victory.
Victory has placed itself in a position where any harm it suffers is the result of its own deliberate choice. Victory cannot complain of irreparable damage or injury from a course of conduct it has deliberately and knowingly pursued.
c. The harm to Hadley.
Hadley contends9 that he has sustained a loss as a result of the automatic stay10 equal at least to the return available at market interest rates on his investment in the property. He asserts that the foreclosure sale set for August 12, 1980 would have permitted effective use of the realizable proceeds from that sale, or the interest in the property derived from that sale, at market rates of return. His declaration asserts that the available rate of return to him is between one percent under prime, and 40 percent per annum. He bases this on his existing and immediate experience as a real estate investor. It should be noted that Hadley's lien dates from February 8, 1978, and that by its terms he was entitled to monthly interest payments of eight percent per annum, with a balloon payment of principal eight years later. He has received no interest payments, and foreclosure has been prevented by successive automatic stays resulting from the Leslie Linder's London Club bankruptcy, and the Victory bankruptcy. His right to proceed with foreclosure sale on August 12, 1980, was only obtained after successfully litigating his right to foreclose in the state court proceedings brought by Victory to enjoin foreclosure. During all this time, he has been precluded from resort to the collateral and the use of that collateral or its proceeds in his business activities as a real estate investor. Further denial of his potential in this area effectively deprives him of market rate returns on an investment of substantial proportions.
It is clear that denial of the stay pending appeal in this case will effectively eliminate Victory's potential for reorganization. No authority is cited by Hadley to support an order which will have that result, and effectively deny Victory's right to appeal the trial court's decision. The right to an effective appeal is as significant and vital to a litigant as the right to a fair and impartial trial in the first instance. The Rules relating to appeal are wholly consistent with liberal exercise of discretion by the trial court to facilitate and encourage resort to appellate process to vindicate the claims and contentions of the parties litigant. As Victory contends, the issues raised and determined by the trial court in this case may have far reaching effects on the reorganization process under Chapter 11. To deny Victory the opportunity to contest these issues before an appellate tribunal would be an effective denial of rights to which every litigant should be entitled under the circumstances here presented. The protection of Hadley's rights and interests should not be accomplished at the expense of denying Victory an effective appeal. Hadley can be protected by the imposition of fair and reasonable conditions on the stay, as provided in Rule 805.
By its terms, the rule contemplates the protection of the rights of both appellant and respondent. Counsel cite no authorities which define or delineate the standards or principles to which the court may look for guidance in fashioning terms which "protect the rights" of the parties. However, the provisions of the Code dealing with relief from the automatic stay and the terms upon which that stay can be continued in effect may assist in conceptualizing the problem posed in applying Rule 805 to the case at bar.
The stay contemplated by Rule 805 is similar to the stay resulting from § 362, in that both may prevent enforcement of liens on the debtor's property. In order to continue the § 362 stay over objection of a creditor, "adequate protection" must be provided. That "protection" is intended to prevent "decrease in the value of" the secured creditor's interest in the property11 as a result of the stay. Is the fixing of "terms as will protect the rights of all parties in interest" as a condition to granting a stay under Rule 805 not similar to fixing adequate protection to protect the interests of secured creditors as a condition to continuing the stay under § 362? Terms which protect the secured party whose right to foreclose is stayed pending appeal have much in common with terms defining adequate protection of the secured creditor's interest in property when foreclosure is stayed under § 362. The essence of the protection under Rule 805, like the protection under § 361, is the maintenance of status quo: the avoidance of impairment, erosion, or diminution of the property rights and interests of the parties stayed, i.e., decrease in the value of the interests affected.
How does one measure and protect against decrease in the value of the property rights or interests pending appeal? There are several possibilities.
(i) One could measure the decrease by the depreciation in the market value of the collateral;
(ii) The decrease could be measured by the loss of income from the collateral; and that loss of income could be equated to the interest rate contracted for by the parties, or to the interest rate prevalent in "the market."
(iii) One could attempt a formula which takes all of the foregoing into account.
(iv) The protection to be afforded could take the form of periodic money payments;
(v) Or a bond;
(vi) Or both a bond and payments.
(vii) Provisions related to taxes, insurance, and default of senior liens could also be provided.
Obviously, this list is not exclusive; the potential here is limited only by the ingenuity and creativity of imaginative and industrious lawyers.
Hadley asserts that the issuance of a stay will cause erosion,...
To continue reading
Request your trial