Hon. David T. Thuma, United States Bankruptcy Judge.
Before the Court is a secured creditor's motion for relief from the automatic stay, sought so it can continue its pre-petition foreclosure action on the debtor's strip shopping center in Albuquerque, New Mexico. The Court held an evidentiary hearing on the motion on January 13, 2016. For the reasons set forth below, the Court rules that the motion should be denied without prejudice, so the Debtor can attempt to confirm its plan of reorganization/liquidation.
The Court finds the following facts:
Debtor is a trust that owns residential, mixed use, and commercial real estate. The settlor and beneficiary of the trust is Joseph Kadlubek, an 84-year old widower. The trustees are Mr. Kadlubek's daughters, Gwen Gomez and Vaune Kadlubek. The net income from the trust corpus is used to support Mr. Kadlubek.
Debtor's assets are worth between $3,000,000 and $3,500,000. Its debts total about $2,000,000.
The property at issue is a small "strip" shopping center with a street address of 4605-4615 Menaul Blvd. NE, Albuquerque, NM 87110 (the "Property"). The Property has seven units fronting Menaul Boulevard and one in the rear of the building. The trust leases the units to tenants such as restaurants, salons, insurance brokers, tax preparers, or accountants. The Property is managed by Roger Cox and Associates, a local property management company.
Pineda REO, LLC ("Pineda") holds a promissory note signed by the Debtor, evidencing a debt of about $1.6 million.
Pineda filed a collection and foreclosure action in state court in June 2014. Progress in the foreclosure action prompted the Debtor's March 25, 2015 bankruptcy filing.
The Property is worth substantially less than the debt to Pineda. Estimates of Property's current value range from about $750,000 to about $925,000.
The Property is being adequately maintained and insured. In general, the real estate market in Albuquerque for commercial properties like the Property is stable. A major concern about the Property is the tenant occupancy rate. As of the date of the hearing, five units were occupied, compared to six on the petition date. More importantly, a major tenant (a restaurant owned by Jennifer James, a chef of some local renown), has moved out or is leaving shortly. Loss of tenants has an adverse effect on value, and Pineda is rightly concerned that its collateral has lost value post-petition.
The Debtor and Roger Cox are taking reasonable steps to re-tenant the Property. In addition, the Debtor's broker, Colliers International, is marketing the Property appropriately for sale.
Pineda's representative testified that, if the automatic stay were lifted, he did not know how much Pineda would credit bid for the Property at a foreclosure sale. According to the representative, Pineda likely would make a decision on a credit bid amount shortly before the sale. Debtor is
No matter what happens, Pineda is highly likely to be paid in full. The real question is how much of the estate will be left for Mr. Kadlubek and his heirs after Pineda and other creditors have been paid.
As of the date of the hearing Debtor was collecting about $5,870 per month in rent from the Property. This amount will drop to about $4,000 a month once the Jennifer James restaurant leaves. In addition, Debtor owns unencumbered real estate in Santa Barbara, California, which is worth about $1,600,000. Starting in April 2016, Debtor expects to receive $7,900 in monthly rental income from the Santa Barbara property, so Debtor's monthly income will be at least $12,000 until it finds new tenants for the Property. Further, Debtor's disclosure statement estimates monthly income of $19,000 per month starting about a year after plan confirmation. That figure may be realistic, but the Court has no evidence confirming its accuracy.
Debtor filed a plan on January 19, 2016, after the evidentiary hearing. In the plan Debtor proposes to treat Pineda's claim as follows:
A final hearing on confirmation of the plan is scheduled for March 3, 2016.
Pineda argues it is entitled to stay relief under 11 U.S.C. § 362(d)(2),
Pineda has the burden of proving that there is no equity in the Property. § 362(g)(1). At the hearing Debtor's co-trustee Gwen Gomez admitted the lack of equity. One can quibble about the value of the Property but there is no dispute it is worth substantially less than Pineda's debt. Pineda has carried its burden of proof.
If a creditor establishes a lack of equity in a subject property, the debtor has the burden of showing that the property is necessary to an effective reorganization. § 362(g)(2). Any analysis of § 362(d)(2)(B) begins with the Supreme Court's dicta in United Sav. Assn. of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 376, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988): "What [necessary to an effective reorganization] requires is not merely a showing that if there is conceivably to be an effective reorganization, this property will be needed for it; but that the property is essential for an effective reorganization that is in prospect. This means ... that there must be a `reasonable possibility of a successful reorganization within a reasonable time." 484 U.S. at 376, 108 S.Ct. 626. Although the Timbers case turned on § 362(d)(1), the Supreme Court explained that § 362(d)(2) prevents a creditor from suffering an "inordinate and extortionate delay." Id.
From this dicta, courts have found two separate but "intermingled" requirements in § 362(d)(2) cases. See generally In re Panther Mountain, 438 B.R. 169, 180-81 (Bankr.E.D.Ark.2010). First, Debtor must make a showing that the property is necessary. 438 B.R. at 180. In addition, "the necessity of the property is only important to the extent that it exists simultaneously with a reasonable possibility of reorganization." Id. at 180-81. Under this second requirement, the Debtor must show there is a "reasonable possibility of successful reorganization within a reasonable time." Timbers, 484 U.S. at 375, 108 S.Ct. 626; In re Dublin Properties, 12 B.R. 77, 80 (Bankr.E.D.Pa. 1981).
1. Is the Property Necessary? Property is necessary if it furthers "the interests of the estate through rehabilitation or liquidation." In re Keller, 45 B.R. 469, 472 (Bankr.N.D.Iowa 1984). In re Koopmans, 22 B.R. 395, 407 (Bankr. D.Utah 1982), an early case addressing this element of § 362(d)(2), stated:
See also In re Commonwealth Renewable Energy, Inc., 540 B.R. 173, 194 (Bankr. W.D.Pa.2015) (citing Koopmans); In re Harper Development, Inc., 2002 WL 32114481, at *3 (Bankr.E.D.Ark.2002) (quoting Koopmans).
Either liquidation or rehabilitation plans may be an "effective reorganization" under § 362(d)(2)(B). See United Sav. Assn. of Texas v. Timbers of Inwood Forest Assocs., Ltd., 808 F.2d 363, 371 n. 14 (5th Cir.1987), aff'd, 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) ("[T]here may be circumstances under which the debtor is able to satisfy the "effective reorganization" test of § 362(d)(2) by showing that the property at issue is necessary to an effective liquidation of the debtor under Chapter 11, as distinguished from an effective rehabilitation of the debtor"). See also In re Diplomat Elecs. Corp., 82 B.R. 688, 693 (Bankr.S.D.N.Y.1988) ("[A] liquidating plan of reorganization which is more advantageous to creditors because it is an orderly liquidation may nonetheless constitute an `effective reorganization'"); In re Conroe Forge & Mfg. Corp., 82 B.R. 781, 784-85 (Bankr.W.D.Pa.1988) (the concept of reorganization includes liquidation). Cf. JCP Properties, Ltd., 540 B.R. 596, 617-18 (Bankr.S.D.Tex.2015) (5th Circuit law unsettled whether a liquidation plan may be an effective reorganization under § 362(d)(2).) Liquidation is expressly provided for in Chapter 11. See § 1123(b)(4).
Under a liquidation plan, property may further the interest of the estate or creditors if retaining and liquidating it would benefit the estate. See Matter of Sandy Ridge Dev. Corp., 881 F.2d 1346, 1354 n. 19 (5th Cir.1989) (retaining property appropriate if it would bring a greater price through liquidation plan than through foreclosure). See also in re Conroe Forge & Mfg. Corp., 82 B.R. at 785 ("In a liquidating Chapter 11 where Debtor has ceased operations and collateral value is not decreasing, ordinarily all property will be necessary for an effective reorganization."). Where there is no such benefit, on the other hand, retaining property to sell it is not allowed. See, e.g., In re 6200 Ridge, Inc., 69 B.R. 837, 844 n. 12 (Bankr.E.D.Pa.1987) (in granting stay relief, the court held that in an insolvent, single asset real estate case, retaining property and selling it would not benefit estate or any creditors).
Here, Debtor would like to control the sale of the Property because it believes it could obtain a higher price than Pineda would realize in foreclosure. It is impossible to know whether that is true, but it seems reasonable. The beneficiary of any increase in the Property's sales price would be equity (in this case Mr. Kadlubek and his heirs), because it would reduce the deficiency owed to Pineda and payable from other estate assets. Analogizing to the cases holding that liquidating an asset for the benefit of unsecured creditors can be "necessary," the Court concludes that with a solvent estate, liquidation of an asset for the benefit of equity also can be "necessary."
2. Reasonable Possibility of Reorganizing. Debtor must also show that it has a "reasonable possibility of a successful reorganization within a reasonable time." Timbers, 484 U.S. at 376, 108 S.Ct. 626. "The fact that a debtor lacks equity in the property in question is not fatal where the secured claimant is adequately protected, the debtor has made progress in formulating a plan and there is a reasonable possibility of confirmation within a reasonable time." In re White Plains Dev. Corp., 140 B.R. 948, 951 (Bankr. S.D.N.Y 1992).
Relief from stay should be denied where a debtor shows (1) it is meaningfully moving toward a plan, and (2) successful reorganization is not a "mere financial pipedream." Planned Systems Inc., 78 B.R. 852, 866 (Bankr.S.D.Ohio 1987). Relief from stay is not appropriate where the Debtor is moving meaningfully toward confirmation. Matter of Holly's, Inc., 140 B.R. 643, 700 (Bankr.W.D.Mich. 1992) ("When considering the debtor's burden of proof target under § 362(d)(2)(B), one consideration is a secured creditor may be expected to bear some reasonable delay while the debtor is moving meaningfully to propose a plan. Conversely, a secured creditor should not bear inordinate delay if the debtor is not progressing to plan confirmation."). Debtor must show that a possible reorganization is not a "mere financial pipe dream." In re Jug End in The Berkshires, Inc., 46 B.R. 892, 902 (Bankr.D.Mass.1985), cited in Planned Systems, 78 B.R. at 867.
In judging the reasonableness of delay, courts analyze whether a failed reorganization would likely mean less for the undersecured creditor/movant and/or unsecured creditors. See Timbers, 808 F.2d at 373 (stay relief appropriate to avoid excessive administrative and interest expense which eats away at distribution to unsecured creditors). This is not a major concern here because of the uncontested solvency of Debtor's estate.
If a plan has been filed, the debtor need only show that it "has a realistic chance of being confirmed and not patently unconfirmable." In re White Plains Development Corp., 140 B.R. at 951 (citing In re Ashgrove Apartments of DeKalb County, Ltd. 121 B.R. 752, 756 (Bankr.S.D.Ohio 1990). See also Planned Systems, 78 B.R. at 866 (Debtor should have broad outline of possible plan of reorganization).
The Debtor has a reasonable chance of confirming a plan in the near future. A confirmation hearing is scheduled within 30 days. Without getting into detail about the proposed plan, it is not "unconfirmable on its face." Furthermore, it seems to the Court that a solvent debtor with current monthly income and a willingness to liquidate as needed to pay creditors in full should be a good candidate to confirm a plan of liquidation.
Pineda argues that the plan cannot be completed in a reasonable amount of time because it may take several years to rehabilitate the property to sell it. This argument is not well taken. Pineda is the holder of long-term secured debt, and it is reasonable to propose that the debt be repaid over time. When the subject loan was made, it was amortized over a number of years (the amortization schedule is not in evidence), with a five year call. The proposed plan treatment is similar, and includes a $50,000 initial payment and $10,000 monthly payments pending a sale. While the Court is not ruling on whether any of the proposed plan terms are fair and equitable or otherwise comply with § 1129,
Pineda carried its burden of showing that there is no equity in the Property, while Debtor met its burden of showing that the Property is necessary for an effective reorganization (or in this case partial liquidation). Debtor should be given a chance to try to confirm its plan. The Court will therefore deny Pineda's motion for relief from stay, without prejudice to revisiting the issue if the Debtor cannot confirm a plan in the reasonably near future.
A separate order consistent with this opinion will be entered.