MARY KAY VYSKOCIL, Bankruptcy Judge.
Secured creditor, Capital One Equipment Finance Corp., f/k/a All Points Capital Corp., d/b/a Capital One Taxi Medallion Finance ("
The Debtor, Red Bull Taxi, Inc., has three primary assets: three taxicab medallions (collectively, the "
Pursuant to a loan agreement dated November 22, 2011 (the "
On October 23, 2015, after the Debtor failed to comply with the terms of the Forbearance Agreement, the County Clerk of New York County entered a judgment against the Debtor in the amount of $1,869,622.27 (the "
As of the Petition Date, the Medallions were in the physical custody and possession of the TLC, pursuant to a levy by and partial surrender to Capital One. (Friedman Aff. ¶ 8). At some point post-petition, the Debtor obtained the Medallions from the TLC and, on an unspecified date, entered into a lease arrangement with Tunnel Taxi Management, LLC ("
Under the lease arrangement, Tunnel Management uses the Debtor's Medallions to sublease taxi vehicles to licensed taxis drivers and receives the gross revenues from the operation of the taxis. Tunnel Management is responsible for paying, from the gross revenues, all expenses associated with the utilization of the Medallions and the operation of the taxi vehicles (e.g. insurance coverage, vehicle maintenance and repairs). (Friedman Aff. ¶ 9.)
Capital One argues that cause to dismiss or convert the Debtor's chapter 11 case under section 1112(b) exists for three reasons: (1) there is a substantial or continuing loss to the estate and there is no reasonable likelihood of rehabilitation; (2) the Debtor filed its case in bad faith and (3) the case was filed for the improper purpose of benefitting non-debtor parties.
Section 1112(b) of the Code directs that, on the request of a party in interest, and after notice and a hearing, the court shall, subject to exceptions set forth in sections 1112(b)(2) and 1112(c), convert a chapter 11 case to a chapter 7 case, or dismiss a case, whichever is in the best interests of creditors and the estate, for cause, unless the court determines that the appointment under section 1104(a) of a trustee or examiner is in the best interests of creditors and the estate. 11 U.S.C. § 1112(b). The moving party bears the burden to establish "cause" under section 1112(b) by a preponderance of the evidence. See Faflich Assocs. v. Court Living Corp. (In re Court Living Corp.), No. 96 CIV 965, 1996 WL 527333, at *2 (S.D.N.Y. Sept. 16, 1996); In re Adbrite Corp., 290 B.R. 209, 214, 218 (Bankr. S.D.N.Y. 2003); In re Pulp Finish 1 Co., No. 12-13774, 2013 WL 5487933, at *2 (Bankr. S.D.N.Y. Oct. 2, 2013). Bankruptcy courts have broad discretion in determining whether cause exists for conversion or dismissal under section 1112(b). See Taylor v. U.S. Trustee (In re Taylor), No. 97 CIV. 5967, 1997 WL 642559, at *3 (S.D.N.Y. Oct. 16, 1997); In re 1031 Tax Group, LLC, 374 B.R. 78, 93 (Bankr. S.D.N.Y. 2007); In re Adbrite Corp., 290 B.R. at 215.
Section 1112(b)(4) contains a non-exhaustive list of examples of what constitutes cause for dismissal or conversion. Pursuant to section 1112(b)(4)(A), cause includes "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation." 11 U.S.C. § 1104(b)(4)(A). Thus, to establish cause under section 1112(b)(4)(A), the moving party must establish two separate prongs: (1) that the estate is suffering a substantial or continuing loss or diminution and (2) the absence of a reasonable likelihood of rehabilitation. Section 1112(b)(4)(A) is "intended to preserve estate assets by preventing the debtor in possession from gambling on the enterprise at the creditors' expense when there is no hope of rehabilitation." In re Lizeric Realty Corp., 188 B.R. 499, 502 (Bankr. S.D.N.Y. 1995); see also In re Court Living Corp., No. 96 CIV. 965, 1996 WL 527333, at *3 (S.D.N.Y. Sept. 16, 1996). For purposes of this analysis, the term "rehabilitation" is not synonymous with the term "reorganization," which, for purposes of chapter 11 generally, may include a liquidation. See In re Adbrite Corp., 290 B.R. at 216. Rather, the term "rehabilitate" means" to put back in good condition; re-establish on a firm, sound basis." In re Lizeric Realty Corp., 188 B.R. at 503 (quoting 5 Collier on Bankruptcy ¶ 1112.03 at 1112-19 (Lawrence P. King et al. eds., 15
Although the case is just over five months old, based on the evidence submitted in support of the Motion and counsel's admissions at the Hearing, the Court finds that Capital One has established "cause" pursuant to section 1112(b)(4)(A). Since the Petition Date, there has been a substantial and continuing loss to, and diminution of the estate. At the time the Debtor filed its petition, the Medallions were being held by the TLC, and therefore the Debtor was not operating or generating any revenue. The Debtor's current revenue is insufficient to meet the Debtor's post-petition expenses, which continue to accrue. As of March 30, 2017, the Debtor's cash on deposit totaled $9,555.95, and as of February 28, 2017, "the Debtor has accrued unpaid administrative expenses in the amount of $174,421.58, and there are $0 in unencumbered funds in the Estate." (First interim fee application of Debtor's counsel, dated March 30, 2017 [ECF No. 34] ¶ 12.)
The Debtor has conceded that it has no equity in the Medallions, its primary assets and sole source of revenue,
It is well settled that the examples of what constitutes "cause" for conversion or dismissal set forth in section 1112(b)(4) are illustrative, and not exhaustive. See C-TC 9
The Second Circuit has identified eight factors that support a finding that a chapter 11 case was commenced in bad faith:
See In re C-TC 9th Ave. P'ship, 113 F.3d at 1311. These factors, commonly referred to as the "C-TC factors," should not be considered in isolation and no one factor is determinative. See In re General Growth Props., Inc., 409 B.R. 43, 56 (Bankr. S.D.N.Y. 2009). Courts may consider any or all of the C-TC factors, see In re Hampton Hotel Investors, L.P., 270 B.R. 346, 359 (Bankr. S.D.N.Y. 2001), and must also consider the totality of the circumstances in each particular case. See In re C-TC 9th Ave. P'ship, 113 F.3d at 1312 (noting that "a determination of bad faith requires a full examination of all the circumstances of the case"); In re Liberate Techs., 34 B.R. 206, 211 (Bankr. N.D. Cal 2004) ("Whether a petition is filed in good faith is to be determined upon consideration of all the facts and circumstances of the case.").
In this case, applying the C-TC factors, the Court finds that there is additional cause for dismissal or conversion of the Debtor's case:
Capital One also argues that an additional basis for cause to convert or dismiss the Debtor's case should be found based on the fact that the Debtor commenced this case for the improper purpose of benefitting a non-debtor party. The Court finds that Capital One has failed to meet its burden with respect to this argument. There is no evidence that Mr. Friedman commenced the Debtor's case for the purpose of protecting his investment in Tunnel Management.
Having found cause to convert or dismiss the Debtor's case, the Court further concludes that conversion, rather than dismissal, is in the best interest of the creditors and the estate. In the Debtors Schedule A/B: Assets — Real and Personal Property [ECF No. 17] ("
Capital One also seeks relief from the automatic stay pursuant to sections 362(d)(1) and (d)(2). Section 362(d) provides as follows:
11 U.S.C. § 362(d). Capital One, as the party seeking relief from the automatic stay pursuant to section 362(d), has the burden of proof on the issue of the Debtor's equity in the Medallions, and the Debtor, as the party opposing such relief, has the burden of proof on all other issues. See 11 U.S.C. § 362(g). For the reasons discussed below, the Court finds that the Debtor lacks equity in the Medallions and that the Medallions are not necessary for an effective reorganization, and therefore concludes that stay relief is warranted under section 362(d)(2). As such, the Court need not address Capital One's lack of adequate protection argument under section 362(d)(1).
Capital One has shown, and the Debtor has conceded, both in its Schedules and at the Hearing, that the Debtor lacks equity in the Medallions. According to the Debtor, the total value of all three Medallions is $1.5 million. See Schedule A/B, line 62. The Debtor has listed Capital One's claim on its Schedule D: Creditors Who Have Claims Secured by Property [ECF No. 17] ("
Since Capital One has met its burden of proving, and the Debtor concedes, that the Debtor has no equity in the Medallions, the Court turns to whether the Debtor has met its burden of proving that the Medallions are necessary for an effective reorganization. To satisfy its burden, it is not enough for the Debtor to show that if there is conceivably to be an effective reorganization, the Medallions would be necessary for such reorganization. See In re 160 Bleecker St. Assocs., 156 B.R. 405 (S.D.N.Y. 1993) (quoting United Sav. Ass'n v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 376 (1988)). Rather, the Debtor must prove that the Medallions are essential for "an effective reorganization that is in prospect" and that "there is a reasonable possibility of a successful reorganization within a reasonable time." Id. (emphasis in original). The Debtor has not met its burden.
The Debtor argues that its reorganization will be based on deferred cash payments to Capital One that will be paid, at least in part, from the monthly revenue the Debtor receives under its lease arrangement with Tunnel Management. (Obj. ¶ 43) However, as discussed above, the Debtor is administratively insolvent and concedes that it has no prospect for an increase in revenue. In addition, as discussed above, if the Debtor were to make the proposed deferred cash payments to Capital One, in order to meet the requirements of Bankruptcy Code section 1129(b)(2)(A)(i)(II), it would take nearly 28 years just to pay the face amount of Capital One's claim. The Debtor does not contest this point. Rather, the Debtor has stated that its prospect for a successful rehabilitation is based on a potential capital contribution from Mr. Friedman. Notwithstanding that Capital One's Motion was filed nearly five months ago, there is no evidence that Mr. Friedman has any intention of making a capital contribution or loan to the Debtor and the Debtor conceded at the Hearing that there are no concrete proposals to fund a deferred payment plan. The Court finds further unlikely the potential of a capital contribution by Mr. Friedman, in an amount sufficient to serve as a basis for demonstrating an effective reorganization "that is in prospect" given that the Debtor has no unencumbered assets to serve as collateral for a loan, and the fact that the Debtor's largest receivable, of over $1 million, is owing to the Debtor, according to the Debtor's Schedule A/B, by Mr. Friedman.
Since Capital One has proven that the Debtor lacks equity in its collateral — the Medallions — and since the Medallions are not necessary to an effective reorganization, relief from the automatic stay under section 362(d)(2) is warranted.
For the reasons stated herein, the Debtor's chapter 11 case will be converted to a case under chapter 7 of the Bankruptcy Code and, pursuant to Rule 2002(f) of the Federal Rules of Bankruptcy Procedure, the clerk shall notify creditors of the conversion. In addition, Capital One is granted relief from the stay under section 362(d)(2) for the purpose of foreclosing on the Medallions in accordance with the Loan Agreement and the Forbearance Agreement, subject to the requirement that Capital One account for, and turn over to the estate, any proceeds of foreclosure that exceed the Capital One Claim Amount.
Counsel for Capital One is directed to prepare an order in accordance with the foregoing, which, if not agreed upon as to form by the Debtor, shall be settled on three business days' notice.
