Ronald B. King, Chief United States Bankruptcy Judge.
Before the Court are two Motions for Relief from the Automatic Stay (the "Motions") filed by LB-UBS 2007-C2 Lookout Ridge Boulevard, LLC (the Lender for Omni Lookout Ridge, L.P.) and COMM 2015-CCRE22 East Central Texas Expressway, LLC (the Lender for Omni Lion's Run, L.P.) (collectively, the "Lenders"). The Lenders ask the Court to lift the stay on the only meaningful asset in each bankruptcy estate: two apartment complexes in Harker Heights, Texas. This Court finds that there is no compelling cause to lift the stay and that both properties are necessary to an effective reorganization of the Debtors. Accordingly, both Motions will be denied.
Omni Lion's Run, L.P. and Omni Lookout Ridge, L.P. (collectively, the "Debtors") filed chapter 11 petitions on May 2, 2017, and June 6, 2017, respectively. Both businesses are designated single asset real estate as defined in 11 U.S.C. § 101(51B). Omni Lion's Run, L.P. owns an apartment complex (the "Lion's Property") on one piece of property; Omni Lookout Ridge, L.P. owns an apartment complex (the "Lookout Property") on an adjacent piece of property. Mr. Gregory Hall is the limited partner in the Debtors and is the sole member of the general partner, Omni GP, LLC. He is also the guarantor on the secured notes to the Lenders. Because the Debtors are affiliated entities, are jointly owned, share a common loan special servicer, have a history of joint management, and own adjacent apartment complexes that are associated with each other, their bankruptcies became jointly administered on September 12, 2017. The Lenders are also related and their interests were represented by the same counsel at trial; the arguments to lift the stay are largely the same for both properties and the Court will deal with both Motions from the Lenders in this Opinion.
In January of 2016, a fire destroyed Building Four of the Lookout Property; twenty-four units became uninhabitable and the insurance company paid out the proceeds. Omni Lookout Ridge, L.P. hired Belfor USA Group, Inc. ("Belfor") to repair and rebuild Building Four. The Lender for the Lookout Property did not consent to the use of the insurance proceeds and held the proceeds — totaling just over $1,000,000 — despite the fact that Belfor completed its work. Belfor filed a state court lawsuit, which is currently pending in Bell County. Belfor has filed a mechanic's lien affidavit; a foreclosure by the Lender would wipe out Belfor's lien. Mr.
The Lookout Property has filed for chapter 11 protection once before, in September of 2016, a few months after the fire.
With respect to the current bankruptcy cases, when the secured note for the Lion's Property was determined to be in default, its Lender accelerated the note, obtained a receiver in state court, and posted for foreclosure. The Lookout Property's note was also accelerated and its Lender posted for foreclosure. The bankruptcy cases were filed shortly before the foreclosures were to occur. The receiver presently manages the Lion's Property, but Omni Lookout Ridge, L.P. operates the Lookout Property as a debtor in possession. The Lookout Property is currently being managed by Mr. Brian Blaylock, who replaced a less successful property manager at the behest of Mr. Hall.
The Court heard extensive argument over the Motions, both of which were filed in June of 2017. Trial began as to the Lion's Property on June 27, 2017, but did not conclude; the Lenders moved for and were granted a continuance to August 2, 2017. Another continuance was granted when the Lenders submitted an agreed motion to continue the setting twenty more days. Trial resumed as to both properties on August 22, 2017, and again did not conclude. The scheduled September hearing was then reset for October. The hearings on the Motions recommenced and finally concluded on October 17, 2017. The Court took the Motions under advisement.
The Court finds that it has jurisdiction to render a final order in this core proceeding pursuant to 28 U.S.C. §§ 157(b) and 1334. Venue is proper under 28 U.S.C. §§ 1408 and 1409. This Opinion constitutes the findings of fact and conclusions of law of the Court pursuant to FED. R. BANKR. P. 7052 and FED. R. BANKR. P. 9014.
The Lenders request relief under two provisions of the Bankruptcy Code: 11 U.S.C. §§ 362(d)(1) and 362(d)(2). Section 362(d)(1) instructs courts to grant relief from the automatic stay where there exists cause to do so. The section explicitly includes lack of adequate protection as a ground for relief from stay, but "cause" is not otherwise defined in the Code. Therefore, determining whether cause exists involves case-by-case scrutiny.
The party requesting the relief must show a prima facie case before the
The Lenders advance three arguments to lift the stay for cause. First, that the Debtors filed their bankruptcies in bad faith; second, that the Lenders are not adequately protected; and third, that lifting the stay would avoid needless legal fees and expenses.
The automatic stay is a pillar of bankruptcy, providing temporary relief from creditors so that debtors may reorganize their finances and have time to determine how best to pay their creditors.
The Court finds no evidence of bad-faith filing in these cases. It does not appear that the Debtors are trying to take advantage of the automatic stay and needlessly prolong hopeless proceedings; indeed, the Debtors have at each hearing demonstrated the progress made in their plans to pay the Lenders. Mr. Hall has put capital into the properties, Mr. Blaylock is increasing the value of the Lookout Property, the receiver is increasing the occupancy of the Lion's Property, a disclosure statement has been approved, and a plan confirmation hearing is set for December of 2017. Filing for bankruptcy just prior to foreclosure is a factor when assessing bad faith, but is not dispositive. While these are single asset real estate cases, these are not cases where the Debtors seek to delay bankruptcy proceedings or have come to a standstill with the Lenders in state court. This is not merely a two-party dispute. Cf.
There is hope for rehabilitation; this is not terminal euphoria. The
Secured creditors are entitled to adequate protection of their security interests against the depreciation of collateral prior to the confirmation of a plan.
Considering the past mismanagement of the properties, it is understandable that the Lenders were concerned that the value of their collateral might decline. The evidence shows, however, that while the stay has been in place the Debtors have increased the value of the properties to the best of their ability. The Lookout Property is particularly demonstrative, as Omni Lookout Ridge, L.P. is still able to directly manage it. Mr. Blaylock has done an exemplary job improving the property by making it safer, more attractive, and better occupied. His actions have established the Debtors' ability to maintain or improve the value of the collateral, now that appropriate and competent management is in place.
Additionally, the Lenders now receive substantial adequate protection payments, in excess of $20,000 a month for each property. It appears uncontested that the payments are occurring; in fact, keeping the adequate protection payments current on the Lookout Property is a condition of Omni Lookout Ridge, L.P.'s use of cash collateral for actual expenses. Accordingly, the Court finds that the properties are not depreciating and adequate protection exists; the stay may be left in place without unduly harming the Lenders.
While the Bankruptcy Code does not define "cause," not every possible detriment to the creditor or estate independently justifies lifting the stay. Recognized causes generally take into account relevance, significant prejudice, or improper activity within the bankruptcy proceeding. See, e.g.,
The Lenders raise a concern that if immediate relief is not granted, estate-administration expenses will build. Perhaps this would have been more persuasive if Lenders' counsel had concluded the hearings in July, August, or September, but it does not appear in reality that there exists much actual alarm about the costs associated with extensive proceedings. In any event, the cost of administering legitimate bankruptcy cases, which the Court finds the present matters to be, does not itself constitute cause to lift the stay. Therefore, the stay will not be lifted for cause under § 362(d)(1).
For the Lenders to prevail in their § 362(d)(2) challenges, the Court must find both that the Debtors have no equity in the respective properties and that the properties are not necessary to an effective reorganization. The Lenders' proofs of claim are disputed, but it is unquestioned that there remains substantial debt on the properties. Appraisal testimony that would indicate lack of equity was presented in the June hearing, but the Lookout Property, at least, has increased in value since then due to Mr. Blaylock's management. The Court, however, need not spend an inordinate amount of time on the equity consideration, as lifting the stay under § 362(d)(2) requires a finding of both no equity and that the properties are not necessary to an effective reorganization. Even if the Court were to assume no equity, because the Lion's Property and Lookout Property are necessary to the Debtors' reorganizations, the requirements of § 362(d)(2) are not satisfied and the stay will not be lifted.
Whether a property is necessary to effective reorganization is a fact-intensive question.
Here, it is undisputed that the only possibility of reorganization would involve the properties. The properties are income-producing and are the only meaningful assets in the estates; without them, there is no reorganization. The final remaining question — and the most crucial for the lift-stay determination — is whether there is a reasonable possibility of reorganization on the horizon.
It would be improper for the Court to engage in a full-scale confirmation hearing when considering motions for relief from stay. Instead, the Court employs standard feasibility factors in its determination of a prospect for reorganization, including but not limited to the earning power of the properties, economic conditions, business prospects, a debtor's management ability, and the probability of continued management.
It would be a disservice not to begin with the most compelling change since the first bankruptcy involving the Lookout Property: the management. Additionally, because the Lookout Property is managed as a debtor-in-possession property, it is most telling regarding the Debtors' potential to operate the collateral post-confirmation.
The previous manager hired by Mr. Hall did not properly care for the apartment complexes. There was extensive testimony from both sides regarding the poor condition of the collateral prior to the appointment of the receiver and prior to Mr. Blaylock's employment; such conditions would cause any lender distress over the value of its collateral. Mr. Hall's personal mortgage was also being paid, entirely inappropriately though possibly without his knowledge, from the rental income of the properties. Mismanagement occurred for some time; Mr. Hall finally made a change by hiring Mr. Blaylock around the time of the bankruptcy petition. While the Motions at hand — and the accompanying possibilities of foreclosure — have been looming over the properties for months, the Debtors' silver lining is that Mr. Blaylock has had a chance to busily prove his ability the whole time.
Mr. Blaylock was brought on in early June of 2017 once Mr. Hall realized how poorly the previous manager was doing; at the first hearing Mr. Blaylock had only been managing the Lookout Property for two to three weeks. By that time he had already begun repairs, opened ten extra units, and leased five. Prior to coming onto the Lookout Property, Mr. Blaylock was a hospital administrator and CEO for twenty-five years, built several hospitals including Dell Children's Medical Center, managed all operations for pediatrics statewide for Scott & White, and organized financial operational plans for hospitals. When Lenders' counsel questioned whether Mr. Blaylock had ever operated an apartment complex before, Mr. Blaylock responded that he had "never run anything this simple." (ECF No. 69 at 103). The Court agrees that Mr. Blaylock's background makes him "more than strong enough to be able to run an apartment complex after [he ran] multi-million-dollar hospitals." (ECF No. 147 at 10).
Since his instatement in June, Mr. Blaylock has achieved a great deal. After the unfortunate passing of his maintenance man, Mr. Blaylock even performed some of the unit maintenance himself. His property improvements include:
Mr. Blaylock has also made wise financial moves for the property, including:
Building Four, gutted by the fire, has been fully repaired but was uninhabitable at the time of the final hearing; Belfor withheld the certificate of occupancy while in a place of uncertainty regarding its payment. Building Five at the time of the hearing was eighty-three percent uninhabitable due to damaged stairwells. The Lookout Property has approximately 140 units and more than forty of them cannot be rented; despite this setback, Mr. Blaylock has managed to rent seventy-two units and line up potential tenants for many of the remaining available apartments.
Through Mr. Blaylock, the Debtors show that they are capable of properly managing the complexes, supporting the idea of a feasible reorganization.
At trial, much was made of the fact that portions of the plans for reorganization are based on Mr. Hall's promises to invest, and that the Court would have to determine whether or not it believed Mr. Hall, particularly in light of his past errors. The tale of debtors making business errors and then finding new ways forward is not novel in chapter 11 bankruptcy. Today's decision is, again, not a full-blown confirmation hearing; the Court need not determine whether the plan is even likely to succeed. But Mr. Hall's decisions to change management and invest his own funds impart some measure of believability to his intent to confirm a feasible plan.
Mr. Hall, despite his prior oversights, has put his money where his mouth is. Mr. Hall is the guarantor on the notes to the Lenders, and has now put more than $250,000 of his money into the Lookout Property in the face of ongoing motions for relief from stays, before the confirmation hearing. He has a great deal to lose if the reorganization is unsuccessful, and his commitment to investing capital to improve the properties lends credibility to the Debtors' push to reorganize.
In addition to pouring capital into the properties, Mr. Hall has shown a willingness to work with creditors to improve the cash flow of the complexes. Building Four has remained repaired but uninhabited due to the battle over the insurance money; Mr. Hall paid Belfor $30,000 and is working
The final chapter in the credible story of reorganization is that, unlike in the Lookout Property's original bankruptcy case, there is an approved disclosure statement and a plan on file. It is much easier to find that reorganization is a possibility when a plan of reorganization has actually been proposed. The Debtors are also providing monthly operating reports for both complexes and there is an agreed cash collateral order for the Lookout Property. Testimony provided under seal gave the Court additional details regarding ongoing business negotiations that support the prospect of successful reorganization. The Debtors have projections and estimates for future payments, income sources, and occupancy of the complexes. The details of confirmation will be considered another day, but the aforementioned factors provide weight to the Debtors' argument that successful reorganization is more than a pipe dream.
This Court finds that both the Lookout Property and the Lion's Property are necessary to the Debtors' reorganization and that the reorganization is reasonably in prospect. Therefore, the stay will not be lifted under § 362(d)(2).
It is certainly true that some debtors attempt to abuse chapter 11 bankruptcy by stiff-arming creditors with the automatic stay and then simply "mowing the grass and waiting for market conditions to turn."
For the foregoing reasons, both Motions for Relief from Stay must be denied. A separate order will be entered.
