In re 1776 Am. Props. IV, LLC

KAREN K. BROWN UNITED STATES BANKRUPTCY JUDGE

Chapter 11
Jointly Administered

Before the Court is Blavesco Limited's Motion for Relief from the Automatic Stay With Respect to State Court Lawsuit (Docket No. 60). This Court has reviewed the pleadings and the evidence, and now lifts the stay for cause to allow the state court litigation to proceed.

On the petition date, six of these Debtors held approximately 150 parcels of real property for sale and development. The other seven Debtors managed approximately 100 parcels of rental real property.

Blavesco Limited ("Blavesco") is an entity owned by real estate broker Heather Carlile and real estate investor Jeff Fisher. Fisher and Carlile formed Blavesco in 2013. Fisher marketed investments in real property primarily to Asian investors through two sets of entities. One set of entities acquired real property on behalf of the investors. The other set of entities loaned funds to finance the acquisition of real property. Fisher signed conveyance and loan documents both on behalf of Debtors and on behalf of the investment entities.

Prepetition, Blavesco managed the real estate owned by these Debtors. (Trial Tr. 4/12/2017, p. 45). Carlile filed suit in state court, asserting direct and derivative claims on behalf of Blavesco against Fisher and several entities, including Debtors, of which Fisher is a director. Carlile asserts that Fisher diverted the business of Blavesco to an entity he controls, Independence Construction and Finance, Inc. ("Independence," one of the Chapter 11 Debtors in these cases). Carlile asserts in state court that Debtors and the other entities are alter egos of Fisher and each other. (Blavesco Exhibit 14).

In state court, Carlile sought a temporary injunction and appointment of a custodian for Blavesco. In July 2016, the state court granted the temporary injunction and appointed Michael Stein as custodian. The order appointing Stein as custodian provided that Stein would serve as the sole director of Blavesco, take possession of all its assets, and prepare monthly reports of the custodianship. (Blavesco Exhibit 16).

The parties announced an agreement on the record in the state court on November 15, 2016, partially resolving the matters before that court. The agreement provided in part:

1. Blavesco's property management agreements as to all of the properties at issue in the state court suit would terminate on December 31, 2016;

2. The state court defendants would deposit $138,185.36 into the state court registry pending that court's determination of entitlement to the funds;

3. Fisher would surrender his shares and management of Blavesco. (Blavesco Exhibit 17). The parties' other issues in the state court remain to be tried.

The Debtors hired Erich Mundinger to serve as chief restructuring officer to run these Debtors, including Independence. The Debtors filed Chapter 11 petitions on January 27, 2017. Fisher executed a consent on behalf of each of the Debtors authorizing Mundinger to "prepare or cause to be prepared all other documents, pleadings and other instruments necessary to prosecute the Bankruptcy Case, subject to the discretion and consent of Jeff Fisher." (Blavesco Exhibit 2; Trial Tr. 4/12/2017, p. 69).

Fisher testified that he has resigned as a director of the Debtors. He testified that another entity he owns, 1776 Investment Management Ltd., has a management contract with each of the Debtors. (Trial Tr. 4/12/2017, p. 70).

Fisher testified that Debtors are current in their payments to bank lenders. He testified that the only issues Debtors have are with Blavesco. (Trial Tr. 4/12/2017, p. 78).

Debtors have sued Blavesco in Adversary Proceeding No. 17-3140 to collect amounts they assert Blavesco collected in rents due in November 2016 through January 2017. Blavesco has moved this Court to abstain from Adv. No. 17-3140, in light of the pending state court suit.

At the hearing on this motion for relief from stay, Debtors argued that the parties can better resolve their issues in a claims estimation proceeding in this Court. Debtors do not oppose relief from stay as to the non-Debtor parties, including Fisher. Blavesco argued trial is set for August 2017 in the state court suit and that a claims estimation proceeding would result in piecemeal results because some entities other than Debtors (alleged to be alter egos of each other and Debtors) are defendants in state court.

Section 362(d)(1) of the Bankruptcy Code provides that the court shall grant relief from stay for cause. The Bankruptcy Code does not precisely define cause for lifting the stay. In re Mirant Corp., 440 F.3d 238 (5th Cir. 2006). Courts determine whether cause exists on a case-by-case basis. Matter of Reitnauer, 152 F.3d 341 (5th Cir. 1998). In determining whether cause exists, the Court must balance the inherent hardships on all parties and base its decision upon the degree of hardship and the overall goals of the Bankruptcy Code. Matter of Northtown Mall Assoc., 3 F.3d 436 (5th Cir. 1993), citing In re Opelika Mfg. Corp., 66 B.R. 444 (Bankr. N.D. Ill. 1986).

Fisher's uncontroverted testimony is that Debtors are current with all creditors other than Blavesco. The disputes regarding the relationships among Debtors, the non-Debtor entities, Blavesco, Fisher and Carlile are all properly before the state court. All of the parties to the dispute are parties to the state court litigation; only some of the parties are parties in these cases. The state court has conducted pretrial proceedings and ordered injunctive relief. Judicial economy favors resolution in the single forum of the state court. There is no showing of a substantial harm to the interests of either the Debtors or Blavesco through allowing the litigation to proceed in state court. The Court concludes that the stay should be lifted for cause.

Signed at Houston, Texas on this 10^TH day of May, 2017.

/s/_________

KAREN K. BROWN

UNITED STATES BANKRUPTCY JUDGE