Matter of Holly's, Inc.
| Decision Date | 28 April 1992 |
| Docket Number | GG91-85811,Motion No. 91-861 R.,Bankruptcy No. GG91-84931 |
| Citation | 140 BR 643 |
| Parties | In the Matter of HOLLY'S, INC., d/b/a Holly's Landing, Holly's Bistro, Holly's By Golly!, Grazin' in the Brass, Holiday Inn Expressway, Holiday Inn West, Holiday Inn-Grand Rapids South, Holiday Inn-Grand Rapids North, Holly's Holiday Lanes, Holiday Inn-Grand Rapids East, Econolodge-Grand Rapids, Econolodge-Muskegon, Meadowwood Country Club, Nob Hill Bakery, Division Laundry, Holly's Back Door Bar & Grill, Escapades, and formerly 644*644 d/b/a Holly's Hotel, J.C. Grundy, Shade Tree, Cafe Amolfi, Holly's Commissary, Holly's Steak & 4, Marriott Hotel, Holly's At The Inn, Holly's Suburban, Ristorante Holly's, Rodeway Inn-Grand Rapids, Debtors. The SUMITOMO TRUST & BANKING CO., LTD., LOS ANGELES AGENCY, Movant, v. HOLLY'S, INC., Debtor-in-Possession, Respondent. In the Matter of GRAND RAPIDS HOTEL LIMITED PARTNERSHIP, d/b/a Holiday Inn Crowne Plaza, Debtor. The SUMITOMO TRUST & BANKING CO., LTD., LOS ANGELES AGENCY, Movant, v. GRAND RAPIDS HOTEL LIMITED PARTNERSHIP, d/b/a Holiday Inn Crowne Plaza, Debtor-in-Possession, Respondent. |
| Court | U.S. Bankruptcy Court — Western District of Michigan |
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Jeffrey R. Hughes, Grand Rapids, Mich., for Holly's, Inc.
Harold E. Nelson, Grand Rapids, Mich., for Grand Rapids Hotel Ltd. Partnership, d/b/a Holiday Inn Crowne Plaza.
Patrick E. Mears, Grand Rapids, Mich., Jeffrey R. Hudson, Los Angeles, Cal., Bruce Ortwine, New York City, and Robert Nelson, for Sumitomo Trust & Banking Co., Ltd., Los Angeles Agency.
Perry Pastula, Wyoming, Mich., for the creditors' committee of Holly's, Inc.
The two chapter 11 debtors entered into a prepetition hotel management agreement which has not yet been assumed or rejected. The management agreement provides that all management fees earned by the debtor which manages the hotel shall be subordinated to a bank in the event the debtor which owns the hotel is in default on its obligations to the bank. Is the management agreement, and the asserted subordination clauses therein, enforceable postpetition in connection with the debtors' chapter 11 cases? Should the debtors be compelled to assume or reject the management agreement prior to possible confirmation of their respective plans? Does cause exist to modify the automatic stay to permit the bank to take action to collect the postpetition management fees and apply those fees toward partial satisfaction of its prepetition indebtedness?
Does cause exist to modify the automatic stay in favor of the bank because of the debtors' alleged prepetition or postpetition mismanagement and fraud? Does cause exist to modify the automatic stay in favor of the bank, as an undersecured creditor, because the debtors' failure to pay, or hold in escrow sufficient funds to pay, postpetition real and personal property taxes respecting the bank's collateral?
Given that there exists no equity in the property which serves as the bank's collateral, should the automatic stay be modified because the property is not necessary to the debtors' effective reorganization? What standards should the court apply to determine whether an effective reorganization is in prospect?
This court has jurisdiction over this contested matter pursuant to 28 U.S.C. ž 1334. This matter is a core proceeding in accordance with 28 U.S.C. ž 157(b)(2)(A), (G), and (O). However, to the extent that this court must interpret state law and the matter may be a noncore, related proceeding, the parties have impliedly consented to this court entering a final order. DuVoisin v. Foster (In re Southern Indus. Banking Corp.), 809 F.2d 329, 331 (6th Cir.1987) (); Cain Partnership, Ltd. v. Pioneer Inv. Servs. Co. (In re Pioneer Inv. Servs. Co.), 946 F.2d 445, 449-50 (6th Cir.1991) (). This court therefore determines it has the authority to enter a final order in this contested matter. 28 U.S.C. ž 157(c)(2). The following constitutes the court's findings of fact and conclusions of law. FED.R.BANKR.P. 7052.
Holly's, Inc. ("Holly's") filed a petition for relief under chapter 11 of the Bankruptcy Code on September 13, 1991. Six days later, on September 19, 1991, the Sumitomo Trust & Banking Co., Ltd., Los Angeles Agency ("Sumitomo" or "Bank") filed its Motion for Relief From Automatic Stay and for Other Related Relief against Holly's. Sumitomo has requested the following relief: (1) modifying the automatic stay to permit commencement of a state court action for appointment of a receiver for certain hotel collateral known as the Holiday Inn Crowne Plaza ("Crowne Plaza", "hotel property" or "hotel facility") to the extent Holly's has an interest in the collateral; (2) modifying the automatic stay to permit commencement of a state court action to foreclose upon the Crowne Plaza real and personal property; (3) compelling Holly's to reject a certain management agreement for the Crowne Plaza immediately or, in the alternative, directing Holly's to assume or reject the agreement before a date certain; and (4) granting such other relief as may be just and proper. A preliminary hearing was held on October 8, 1991 and a final hearing was scheduled for November 8, 1991.
Grand Rapids Hotel Limited Partnership, d/b/a Holiday Inn Crowne Plaza ("the Partnership")1 filed its petition for relief under chapter 11 of the Bankruptcy Code on October 29, 1991. Seven days later, on November 5, 1991, Sumitomo filed a Motion for Relief From Automatic Stay and for Other Related Relief against the Partnership. Sumitomo requested the following relief: (1) modifying the automatic stay to allow Sumitomo to commence a state court action for appointment of a receiver for the Crowne Plaza, enforcement of an assignment of rents and other hotel revenues, and foreclosure upon the Crowne Plaza; (2) compelling the Partnership to reject its management agreement with Holly's immediately or, in the alternative, to direct the Partnership to assume or reject the agreement before a date certain; (3) obtaining a declaratory judgment that the Partnership is prohibited and permanently enjoined from paying management fees to Holly's; and (4) granting such further relief that is just and proper.
On November 7, 1991, Sumitomo, Holly's, the Partnership, and the Creditors' Committee in Holly's chapter 11 case, filed a Stipulation for Consolidating Contested Matters and Regulating Other Procedures in Related Contested Matters. The parties requested the court to consolidate Sumitomo's motion against Holly's and its motion against the Partnership. An order authorizing the consolidation of the contested matters was entered on November 18, 1991.
On November 13, 1991, Sumitomo filed an Amended Motion for Relief From Automatic Stay and for Other Related Relief against the Partnership. The only difference between the original motion and the amended motion is that Sumitomo has asserted the Partnership lacks equity in the Crowne Plaza and it is not necessary for an effective reorganization.
On November 21, 1991, Sumitomo filed an Amended Motion for Relief From Automatic Stay and for Other Related Relief against Holly's. In this amended motion, Sumitomo has separated its claims against Holly's into three counts regarding relief from the automatic stay, rejection of the management agreement, and declaratory and injunctive relief. Sumitomo asserts that cause exists to lift the automatic stay. Sumitomo also requests a declaratory order that Holly's is prohibited and enjoined from accepting any payment of management fees from the Partnership.
The final hearing began on November 25, 1991. On January 7, 1992, after seven days of trial, proofs were closed.2 During the trial, the court heard the testimony of eight witnesses. The court admitted seventy-six exhibits into evidence (fifty-four by Sumitomo, eighteen by Holly's, and four by Crowne Plaza).
At the conclusion of the evidence, final oral arguments were scheduled for February 12, 1992. The parties were required to file proposed findings of fact and proposed conclusions of law. In addition, the Debtors were required to file written offers of adequate protection; Sumitomo was given an opportunity to respond. The parties were permitted, but not required, to file supplemental post-hearing memoranda of law.3 Holly's and the Partnership filed a Joint Offer of Adequate Protection on January 17, 1992. Sumitomo filed a Response to Joint Adequate Protection Offer on January 22, 1992. On January 24, 1992, Holly's and the Partnership filed Joint Proposed Findings of Fact. On the same date, Sumitomo filed its Proposed Findings of Fact.
During the hearing of the consolidated contested matters, the court heard testimony from eight witnesses. To better comprehend this opinion, it is helpful to identify the witnesses and assess the credibility of their testimony.
First, it is necessary to identify a person who was not a witness at the hearing but who was figuratively present throughout the proceedings. Frank Krok ("Krok") was the prior Chief Executive Officer and major (or sole) shareholder of Holly's. He was also the controlling insider of the Partnership which acquired the hotel property. Krok committed suicide, by gunshot, on June 10, 1991, apparently during the early morning hours. Nearly all witnesses, to a greater or lesser degree, testified about Krok's actions and business...
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