Matter of Washtenaw/Huron Inv. Corp. No. 8

• Citation: 160 BR 74
• Decision Date: 12 April 1993
• Docket Number: No. 92-76851.,Bankruptcy No. 92-0454,92-76851.
• Parties: In the Matter of WASHTENAW/HURON INVESTMENT CORPORATION NO. 8, Debtor.
• Court: U.S. District Court — Western District of Michigan

160 B.R. 74 (1993)

In the Matter of WASHTENAW/HURON INVESTMENT CORPORATION NO. 8, Debtor.

Bankruptcy No. 92-0454, No. 92-76851.

United States District Court, E.D. Michigan, S.D.

April 12, 1993.

Deborah L. Fish and Sharon M. Woods, Detroit, MI, for plaintiff.

Barbara J. Rom, Detroit, MI, for defendant.

OPINION AND ORDER AFFIRMING DECISION OF BANKRUPTCY COURT

EDMUNDS, District Judge.

This matter came before the Court upon the debtor's appeal of the bankruptcy court's decision to annul the automatic stay. The bankruptcy court held that because the debtor filed its bankruptcy petition in bad faith, it was not entitled to the benefits of an automatic stay. For the reasons set forth below, the bankruptcy court's decision is hereby affirmed.

I. Facts

In its opinion dated January 11, 1993, the bankruptcy court set forth certain undisputed facts as follows:

On June 29, 1988, Main Huron Associates Limited Partnership (Main) borrowed $12.7 million from MONY (the loan), to purchase real property located at One North Main Street, Ann Arbor consisting of residential condominium units and commercial and retail office space (the property). Main executed certain documents in connection with the loan (collectively, the loan documents), including:

a. Note Secured by First Real Estate Lien (the note);

b. Mortgage and Security Agreement (the mortgage) encumbering the retain and office space described as Units 1 and 2 and 16 through 29;

c. Master Lease; and

d. Assignment of Lessor\'s Interest in all leases of the property, including the master lease (the assignment).

Main is a Michigan limited partnership and its general partners are Albert Enterprises Associates Limited Partnership (Albert Partnership), Jon Fox, Harold Koss, and Richard McCoppin. Albert Partnership is a Michigan limited partnership and its general partner is Albert Enterprises, Inc. (Albert Enterprises). Albert Enterprises is a Michigan corporation with the following officers and directors: Mike Kojaian, President and Director; Kenneth J. Kojaian, Vice President, Secretary, and Director; C. Michael Kojaian, Vice President, Treasurer, and Director. Kojaian Management Corp. (Kojaian Management) is a Michigan corporation and its officers and directors are identical to those of Albert Enterprises.

The master lease was executed contemporaneously with the loan documents. The tenants under the master lease are the general partners of Main, and the full performance of the tenants\' obligations under the master lease is guaranteed by Mike Kojaian, C. Michael Kojaian, Kenneth Kojaian, Jon Fox, Harold Koss and Richard McCoppin. The master lease expired in June, 1991.

Approximately $2 million in delinquent lease payments were paid in April, 1991 to Main, and the funds were paid to Main insiders. At the same time, Main and MONY entered into a letter agreement under which MONY promised not to take any action against the property before May 17, 1991. The purpose of the agreement was to give the parties time to negotiate a settlement.

The debtor was incorporated on January 25, 1991 as M-Tel Corporation; on January 31, 1991 its name was changed to Alanna Corporation, effective January 25, 1991; and on May 1, 1991 its name was changed to its current name and its registered agent was changed from Gregory J. DeMars of Honigman, Miller, Schwartz & Cohn (the Honigman firm) to Adrian J. Balinski. Mr. Balinski is the sole stockholder and president of the debtor.

Main conveyed the property to the debtor by quit claim deed dated May 16, 1991 (the deed), which was recorded with the Washtenaw County Register of Deeds on that date at 4:18 p.m. The closing statement from the sale of the property to debtor recited the payment of $100 net cash to Main for the property, with the purchase price as the lesser of $13,521,666.67 or the "fair market value as determined by an appraiser." Closing Statement, Pl.\'s Ex. J. Main and the debtor also executed an "Agreement With Respect to Additional Consideration," dated as of April 28, 1991.

The building in which the property is located is managed by a condominium association (the association). Mr. Balinski is on the board of directors of the association. The association hired Mortgage and Financial Strategies, Ltd. (MFS) to manage the property on its behalf. According to the records of the Michigan Department of Commerce, MFS was incorporated in October, 1988, its registered agent and secretary is John E. Amerman, an attorney with the Honigman firm, and its president is Mr. Balinski. MFS, in turn, subcontracts the management of the property to Kojaian Management. The association pays a management fee equal to five percent of monthly rents. At the 341 examination, Mr. Balinski estimated that the monthly management fee paid to MFS is approximately $5,500, of which approximately $4,000 is paid to Kojaian Management.

After receiving notice of the May 16, 1991 quit claim deed, MONY filed a foreclosure action in Washtenaw County Circuit Court on May 21, 1991, against the debtor and Main. On February 10, 1992, an opinion and order was entered in that case in favor of MONY. The debtor filed its Chapter 11 petition on April 9, 1992, just a few hours before MONY\'s scheduled foreclosure sale. Unaware that a bankruptcy petition had been filed by the debtor, the foreclosure sale was conducted on April 9, 1992, at which time the property was sold.

The debtor\'s proposed plan of reorganization filed on June 25, 1992, (i) gives MONY a secured claim of $7 million, (ii) places MONY\'s deficiency claim "if any" in a separate class, and (iii) proposes to pay a total of 20% of the deficiency claim over 5 years at a 5% interest rate.

In re Washtenaw Huron Investment Corp. No. 8, 150 B.R. 31, 32-33 (Bankr.E.D.Mich. 1993).

II. Standard of Review

The decision to lift or annul the automatic stay is within the discretion of the bankruptcy court. 11 U.S.C. § 362(d). Thus, this Court must apply an abuse of discretion standard in reviewing the bankruptcy court's decision to annul the automatic stay. Stephens Indus. Inc. v. McClung, 789 F.2d 386, 391 (6th Cir.1986). A district court must apply a clearly erroneous test to findings of fact and plenary review to findings of law. In re Charfoos, 979 F.2d 390, 392 (6th Cir.1992).

III. Bad Faith Standard

Under the law of the Sixth Circuit, there is no particular test for determining whether a bankruptcy petition was filed in good faith. Good faith is evaluated "under flexible and multiple standards," Charfoos, 979 F.2d at 393, and is determined on an ad hoc basis. In re Zick, 931 F.2d 1124, 1129 (1991).¹ See also In re Barrett, 964 F.2d 588, 591 (6th Cir.1992) ("Our circuit's good faith test requires consideration of the totality of circumstances.")

The seminal Sixth Circuit case regarding good faith is Matter of Winshall Settlor's Trust, 758 F.2d 1136 (6th Cir.1985). In Winshall, the court dealt with a motion to dismiss a Chapter 11 petition on the ground that the petition was filed in bad faith. The court emphasized that the purpose of Chapter 11 is to aid a distressed business by giving it "breathing space" to return to a viable state. Id., at 1137. Key factors in determining whether a Chapter 11 petition was filed in good faith include "whether the debtor had any assets, whether the debtor had an ongoing business to reorganize, and whether there was a reasonable probability of a plan being proposed and confirmed." Id.

Subsequently, the Sixth Circuit outlined a different standard for determining good faith in a Chapter 7 case in In re Zick. After noting that good faith must be determined ad hoc, the court noted:

Good faith should be confined carefully and is generally utilized only in those egregious cases that entail concealed or misrepresented assets and/or sources of income, lavish lifestyle, and intention to avoid a large single debt based on conduct akin to fraud, misconduct or gross negligence.

931 F.2d at 1129. Most recently, the Sixth Circuit considered the issue of good faith in the Chapter 13 context in In re Charfoos, 979 F.2d 390. The court confirmed that bad faith is an ad hoc determination, evaluated under various flexible standards, but specifically noted that bad faith should only be found in egregious cases, quoting Zick. 979 F.2d at 392.

In this case, the bankruptcy court relied on the recent discussion and analysis of the law regarding good faith set forth in Matter of Laguna Assoc. Ltd. Partnership, 147 B.R. 709, 715 (Bankr.E.D.Mich.1992). In Laguna, the bankruptcy court held that there was no particular test for determining whether a bankruptcy petition was filed in good faith. The court noted that other jurisdictions have cited a myriad of factors in determining the issue of good faith. For example, the Eleventh Circuit in In re Natural Land Corp., 825 F.2d 296 (11th Cir.1987) set forth the following general factors:

(1) the lack of a realistic possibility of effective reorganization;

(2) evidence that the debtor seeks merely to delay or frustrate secured creditors\' enforcement of their rights;

(3) evidence that the debtor seeks to use bankruptcy to create and organize a new business instead of to reorganize and preserve a going concern;

(4) timing of the debtor\'s actions;

(5) whether the debtor is a mere shell corporation;

(6) whether the debtor was created or the property was transferred to the debtor for the sole purpose of obtaining protection under the automatic stay provision of Chapter 11.²

The Laguna court held that a court "may consider any factors which evidence `an intent to abuse the judicial process and the purposes of the reorganization provisions,\' in particular, facts which evidence that the petition was filed `to delay or frustrate the legitimate efforts of secured creditors to enforce their rights.\'" Id., at 716 (citation omitted).³

This Court agrees with the analysis set forth in Laguna; however, a finding of bad faith must be limited by the Zick standard. Thus, in...