Burton Perlman
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
____________________
Burton Perlman
United States Bankruptcy Judge
Chapter 11
Judge Burton Perlman
DECISION RE PROPRIETY OF FILING
I. Introduction.
In this chapter 11 bankruptcy case, Debtor filed a Motion to Reject Executory Contracts (Docket Number 15), and an Application to Employ a realtor (Docket Number 16). Debtor requested an evidentiary hearing on its motions. An evidentiary hearing was held on March 29, 2013. After hearing the presentations of the parties, the Court was left with a concern as to whether the case had not been filed in good faith and should be dismissed. The Court requested that the parties brief that issue. A timely response was filed by Debtor as was that of Purchasers, whose interest will be discussed below. The Purchaser's response was framed as a Motion to Dismiss.
II. Jurisidiction.
This court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding arising under 28 U.S.C. § 157.
III. Core Facts.
Eagle View Professional Park ("Eagle View") is a multi-building, multi-unit professional condominium development. Debtor owns sixteen units therein. Eagle View Professional Park Condominium Unit Owners Association, Inc. ("Owner's Association") by virtue of a Certificate of Lien holds a lien on the units owned by Debtor. Stock Yards Bank & Trust Company ("Stock Yards") holds an overall mortgage on the entire development. Robert Rockenfield is the sole owner and managing member of Debtor. At an auction of the units owned by Debtor which was held December 8, 2012, Michael Yoakum, Michael White, Christopher Boerger, Chris Eubank and Tom Sullivan bid on units which were subjects of the sale. They are the Purchasers.
IV. General Facts.
Eagle View has long been in a state court receivership. One may infer that this occurred after Stock Yards had instituted a mortgage foreclosure action against Eagle View. Debtor bought its units out of foreclosure for investment long ago. Four and a half years ago it sold two units.
On October 31, 2011, the Owner's Association filed a foreclosure action in Butler County Court of Common Pleas against Debtor, the subject of which was the sixteen units owned by Debtor. On October 26, 2012, Debtor, the Owner's Association, and Stock Yards approved the entry of an Agreed Final Appealable Judgment Order and Decree in Foreclosure in the Butler County Litigation ("Agreed Judgment"). An order, which is of public record, was entered in the Court of Common Pleas of Hamilton County, Ohio on December 18, 2012 entitled Order and Entry Granting Plaintiff Stock Yards Bank & Trust Company's Motion to Charge the Membership Interest of Defendant Robert Rockenfield. The effect of the Hamilton County Common Pleas Order is the entry of a judgment against Robert Rockenfield and in favor of Stock Yards in the amount of $1,956,489.50.
The usual course for a mortgagee upon the successful conclusion of a foreclosure action is to conduct a foreclosure sale. But here, during the pendency of the Butler County Common Pleas Court proceeding, the decree of foreclosure was not followed by a sheriff's sale. Instead, Debtor, the Owner's Association, and Stock Yards agreed to sell Debtor's units at auction. An auction was held, but events subsequently occurred which led the parties to vacate the results of that auction. The involved parties, Debtor, Stock Yards, and the Owner's Association then entered into an agreement entitled Right to Sell Agreement. That agreement provided for a second auction. The second auction was held December 8, 2012. At the second auction, the Purchasers bought units of Debtor. Each of the Purchasers signed a Contract to Purchase, which was also signed by Rockenfield, the owner and sole member of Debtor.
Before these purchase agreements could be closed, however, Debtor filed the present chapter 11 bankruptcy case on January 2, 2013. Only then, on January 2, 2013, after a long history of involvement with the state court processes, the receivership, and the foreclosure action, did Debtor seek the intervention of the bankruptcy court. On February 7, 2013, Debtor moved to reject the Contracts to Purchase. Debtor also filed a motion to employ a realtor.
V. Good Faith.
Section 1112(b)(1) of the Bankruptcy Code provides that a case may be dismissed for cause. "Cause" may be a "debtor's lack of good faith in filing a petition for bankruptcy." Laguna Assocs. Ltd. P'ship v. Aetna Cas. & Sur. Co. (In re Laguna Assocs. Ltd. P'ship), 30 F.3d 734, 737 (6th Cir. 1994). While the Laguna case dealt with the propriety of lifting the automatic stay, the court said: ". . . we see no substantive difference between the cause requirement for dismissal of a petition under Section 1112(b) and the cause requirement for relief from an automatic stay. . . ." Id. at 737-38. Thus, the statement of the court in Laguna that "a debtor's lack of good faith in filing a petition for bankruptcy may be the basis for lifting the automatic stay . . ." applies as well to dismissal under § 1112(b). The Laguna the court further stated at 738:
Whether the debtor filed for relief in good faith is a discretionary determination that turns on the bankruptcy court's evaluation of a multitude of factors. As this Court has emphasized, "[g]ood faith is an amorphous notion, largely defined by factual inquiry."
In re Okoreeh-Baah, 836 F.2d 1030, 1033 (6th Cir. 1988).
See also
In re Bennett,
964 F.2d 588, 591 (6th Cir. 1992) ("Our circuit's good faith test requires consideration of the totality of the circumstances.").
VI. Discussion.
Eagle View and Debtor both have a long history of economic tribulation: Eagle View was and is in a state court receivership, and Debtor was the subject of a foreclosure action in the state court.
Stock Yards, which could have taken the project to a foreclosure sale long ago, has been extremely forbearing in the state court matters. It bid in the entire Eagle View development at the first auction sale for $500,000.00. When a possible buyer surfaced at a higher amount, Stock Yards set aside its successful bid. When that fell through, it agreed to the second auction. This auction resulted from a foreclosure action filed by the Owner's Association against Debtor. In addition, in its agreement to the second auction, Stock Yards agreed not to bid at the sale. Debtor and the Owner's Association also agreed to the terms of the second auction. All three parties' agreement was expressed in the Right to Sell Agreement.
Debtor now contends that the Right to Sell Agreement is invalid. Debtor points out that the Right to Sell Agreement was executed in duplicate. One copy was signed by Stock Yards and Owner's Association. The other was signed by Rockenfield. The two documents are identical, except that on the copy signed by Rockenfield he inserted language intended to mean that all units would be offered as a package. The Court holds that Debtor's arguments in this respect are without merit. The evidence at the hearing was that (1) the other parties to the agreement accepted Rockenfield's condition, and (2) the auctioneer did indeed at the auction offer all units as a package in addition to singly.
The Right to Sell Agreement expressly provided that the units would be offered for sale without reserve, that is, says the Agreement, the properties were to be sold to the highest bidder without requiring a minimum bid. The sale then proceeded. The results of the sale were disappointing.
Against all of the foregoing background, Debtor then filed a chapter 11 bankruptcy case. After due consideration, the Court has concluded that the totality of the circumstances leads to a conclusion that this case was not filed in good faith and should be dismissed.
1. The Case was not Filed for a Valid Bankruptcy Purpose
Because of the disappointing results of the sale, the Debtor contends that the sale was not fair. This is the reason that it filed the bankruptcy case. More specifically, its purpose is to utilize the mechanism of the Bankruptcy Code which makes it possible for a debtor to reject an executory contract. We find as a fact that this is the reason why Debtor filed its bankruptcy case, that is, for the purpose of undoing the results of a duly conducted state court sale. This is not a valid bankruptcy purpose.
2. Other Factors
The Sixth Circuit in Laguna enumerated a number of "meaningful" factors for use when evaluating an organizational debtor's good faith. See In re Laguna Assocs., 30 F.3d at 738. Many of these factors are present here. Debtor has only one asset—its condominium units. There are only a few unsecured creditors based on what is listed in Schedule F of Debtor's petition. Unsecured claims total $3,737.00 owed to only four creditors, one of whom is Rockenfield, the owner and sole member of Debtor. Debtor's property has been posted for foreclosure, and Debtor has been unsuccessful in defending against the foreclosure in state court. In fact, the foreclosure has been completed, with the properties sold at an auction that Debtor consented to. Debtor has "no ongoing business or employees." The possibility of reorganization is improbable.
The court in Laguna does note that "no single fact is dispositive." Id. Further, "no list is exhaustive of all the conceivable factors which could be relevant when analyzing a particular debtor's good faith." Id. (citing In re Caldwell, 851 F.2d 852, 860 (6th Cir. 1988)). The Court finds that the number of factors from Laguna present here weigh heavily against Debtor.
3. Similar Cases
A case with similar facts is In re S. Cal. Sound Sys., Inc., 69 B.R. 893 (Bankr. S.D. Cal. 1987). There, the court was faced with the question of dismissal for bad faith filing in a case where the sole purpose of filing the case was to reject an executory contract. The court first denied the debtor's motion to reject the executory contract for lack of good faith and lack of a valid reorganization purpose.
In dismissing the case, the court then considered factors much like ones present in the Laguna case discussed above. Among others, the court weighed "(1) the absence of employees except for the principals, (2) there is little or no cash flow and no available sources of income to sustain a plan of reorganization, (3) there are few, if any, unsecured creditors whose claims are relatively small, and (4) the debtor and one creditor may have proceeded to a standstill in state court litigation and the debtor has lost or has been required to post a bond which it cannot afford." Id. at 899. The court there went on to conclude that dismissal is appropriate where "the true purpose of filing a petition is other than to reorganize a financially distressed business, but merely to take advantage of one of the remedies available under the Code." Id. at 900. Having already found that the Debtor's sole purpose for filing this case was to seek the rejection of the Contacts to Purchase, the Court similarly concludes that dismissal is appropriate here.
The Court also finds the following cases involving dismissal for cause under similar factors discussed above to be persuasive: Pal Family Credit Co., Inc. v. County of Albany (In re Pal Family Credit Co.), 425 B.R. 1 (N.D.N.Y. 2010); Maryland Port Admin. v. Premier Auto. Servs., Inc. (In re Premier Auto. Servs., Inc.), 492 F.3d 274 (4th Cir. 2007); and In re Cardi Ventures, Inc., 59 B.R. 18 (Bankr. S.D.N.Y. 1985). As in Laguna and S. Cal. Sound Sys., all of these cases involve some combination of the factors present here: debtors with bad faith purposes for filing their cases, little to no assets and/or employees, few unsecured creditors with relatively small claims, the existence of state court litigation in which the debtors were previously unsuccessful, and no reasonable likelihood of reorganization. In all, the courts dismissed the cases under § 1112(b) for the absence of good faith.
VII. Debtor's Position.
Debtor argues that the case should not be dismissed. In support of this position, it filed a Memorandum by the date required by the Court. In that Memorandum, Debtor recounts the events leading up to the second auction as related above. He says that the advertising budget for the first auction was $10,000.00, whereas that for the second auction was $500.00. Debtor says that when the condominium units were offered at auction as an entire unit, the auctioneer required that there would be a $5,000.00 per unit premium above the purchase price to be paid. Debtor says further that the contracts to purchase signed by the Purchasers provided for a payment to the Owner's Association in the amount of $5,000.00, and this was improper. Debtor argues that it seeks to prevent an unjust action against the interest of the mortgage company and Debtor. Debtor says that the Owner's Association "had no intent to allow for a fair auction and acted with malice and with an intent to obtain an unconscionable advantage as against the Debtor."
In compliance with the requirement of the Court, that briefs be filed on both sides of the issue of dismissal for bad faith filing, the position in favor of dismissal was presented by Motion of Purchasers to Dismiss Bankruptcy. The Purchasers thus took the laboring oar in favor of dismissal. Debtor then filed a response to the motion of Purchasers. In that response, Debtor refers to "the methods used . . . to defeat the ability of the Debtor to get a fair sale on the property." Debtor says further that it was purposed that the second auction sale was set up ". . . in such a way as to insure that a fair sale would not be held."
The Court finds Debtor's assertions to be unpersuasive. The sale was conducted pursuant to the Right to Sell Agreement to which Debtor was a signatory. If Debtor is troubled by the conduct of the auction sale its remedy would lie with the state court in whose province the events subsequent to the order of foreclosure lay.
VIII. Conclusion.
After considering the totality of the circumstances shown in the record of this case, the Court has reached the conclusion that the case was not filed in good faith and should be dismissed. Copies to: All Creditors and Parties in Interest