Matter of 1025 Associates, Inc., Bankruptcy No. 89-325

• Court: U.S. Bankruptcy Court — District of Delaware
• Writing for the Court: HELEN S. BALICK
• Citation: 106 BR 805
• Parties: In the Matter of 1025 ASSOCIATES, INC., Debtor. WILMINGTON SAVINGS FUND SOCIETY, Plaintiff, v. 1025 ASSOCIATES, INC., Defendant.
• Decision Date: 14 November 1989
• Docket Number: Motion No. 89-111.,Bankruptcy No. 89-325

106 B.R. 805 (1989)

In the Matter of 1025 ASSOCIATES, INC., Debtor.
WILMINGTON SAVINGS FUND SOCIETY, Plaintiff,
v.
1025 ASSOCIATES, INC., Defendant.

Bankruptcy No. 89-325, Motion No. 89-111.

United States Bankruptcy Court, D. Delaware.

November 14, 1989.

106 BR 806

Randall E. Robbins, Jeffrey S. Welch, Wilmington, Del., for plaintiff.

Thomas D. Runnels, Newark, Del., for debtor.

MEMORANDUM OPINION AND ORDER

HELEN S. BALICK, Bankruptcy Judge.

Wilmington Savings Fund Society (WSFS) has moved for relief from the automatic

106 BR 807

stay under 11 U.S.C. § 362(d) to continue its foreclosure action in Delaware Superior Court against debtor's real property and principal asset

Background

Debtor 1025 Associates, Inc. (1025), t/a Reagan's Tavern, operates a neighborhood bar and grill with package store at 1025 Chestnut Street in Wilmington, Delaware. The debtor's real estate consists of a three-story brick and frame building situated on a corner lot in a primarily ethnic, residential neighborhood with some commercial mix. Presently, the tavern/restaurant transacts business on the first floor of the premises while the second and third floors each have an apartment in the process of renovation. This property has historically been used as a tavern since 1889, under various owners, with the apartments having been leased since the days of Prohibition to provide rental income. There is also a detached garage at the rear of the property as well as a basement which services the bar/taproom.

1025 is a Delaware corporation with Karl Weldin being the company's sole officer, director and shareholder. The building at 1025 Chestnut Street, the corporation's primary asset, was purchased along with the tavern business by 1025 on August 1, 1981, for $135,000. It should be noted that the deed conveying the property recites only $65,000 consideration for the premises; thus, 1025 appears to have paid $70,000 for the liquor license and the going-concern value of the tavern business. Mr. Weldin testified that the 100-year old building was extremely run down; therefore, improvements were commenced to the property, especially to the tavern on the first floor. Some of these improvements were a new roof in 1982, installing four air conditioning units, repaneling and retiling the tavern area, revamping the tavern's kitchen and restrooms, and installation of a 48-inch rear projection screen television in the bar. In addition, new furniture for the taproom and other equipment and fixtures were purchased. As for the apartments upstairs, these were rented initially after 1025's purchase of the premises for $150 and $85 per month for the second and third floors, respectively. Subsequently, some cosmetic improvements were made and they were re-rented for $300 and $195 — more than double the previous rental.

In order to finance some of these renovations, 1025 executed and delivered a note and mortgage to WSFS for $27,500 on December 10, 1984. With these funds, most of the renovations to the tavern were completed by 1987. From the time of purchase, it was 1025's intention to rehabilitate the upstairs apartments. In this regard, Weldin approached WSFS once again in mid-1987 to obtain financing for apartment renovation, and on November 23, 1987, 1025 entered into a Building Loan Agreement which was executed along with a mortgage and note for $142,650. The Building Loan Agreement provided that 1025 would pay off the original PMM held by the previous owner and two WSFS loans which totalled about $99,500, and WSFS would fund $43,000 for the apartment improvements. Still, the renovations had to be completed within seven months of the agreement; furthermore, the final $8,000 would be held back until a Certificate of Occupancy was issued for the apartments. Finally, 1025 had to present the receipts to WSFS to get a draw from the renovation proceeds.

Although the mortgage contains a legal description of the premises, it does not contain the city, county, or state where the property is located; however, the acknowledgement on the last page of the mortgage does mention the county and state of acknowledgement.

1025 began its renovations in the upstairs apartments by totally gutting them. Despite Mr. Weldin's experience in the construction business, the project fell seriously behind and the seven-month deadline in the Building Loan Agreement passed. WSFS paid 1025 based on its receipts from the rehabilitation in two payments of $12,000 and one payment of $10,000 for a total of $34,000, but it did not pay the other $8,000 on the loan since no Certificate of Occupancy was issued. Cost overruns, compliance with housing safety codes, and unexpected

106 BR 808

difficulties inherent in renovating an old property were some of the reasons the project was delayed. In addition, the tavern business took a 20½% drop in 1988 due to competition and personnel problems. Consequently, the construction project upstairs did not receive the additional income needed to supplement the draw for apartment renovation. As a result, 1025 fell in arrears of its loan payments, and the renovation project is only about 30% complete

On March 8, 1989, WSFS sent Mr. Weldin on behalf of 1025 a notice of default informing him that both loans were past due and that the balance on both were now due. When 1025 failed to bring current the two mortgages, WSFS began foreclosure proceedings on March 28. Although 1025 filed an answer to the foreclosure complaint, WSFS moved for default judgment based on a procedural defect. 1025 filed its Chapter 11 petition on June 6, 1989, before the scheduled hearing in Superior Court that very day. WSFS filed its motion for relief from the automatic stay on June 9.

As of the hearing date, August 23 and 24, 1025 owed the following on the 1984 $27,500 mortgage (First Mortgage) and the 1987 $142,650 mortgage (Second Mortgage).

 First Mortgage
                Principal $12,113.14
                Past Due Interest $ 993.82
                Late Charges $ 158.56
                Legal Fees $ 655.35
                 __________
                Total Due on First Mortgage $13,920.87
                Per Diem Rate of Interest $4.21
                 Second Mortgage
                Principal $132,601.17
                Past Due Interest $ 16,178.13
                Late Charges $ 928.60
                Legal Fees $ 7,438.96
                 ___________
                Total Due on Second Mortgage $157,146.86
                Per Diem Rate of Interest $46.04
                

The aggregate amount of the two mortgages is $171,067.73 and with interest accruing, the sum now exceeds $175,000. Additionally, 1025 owes...