MIKE K. NAKAGAWA, Bankruptcy Judge.
On May 18, 2016, the court heard the Motion of United States Trustee, Pursuant to 11 U.S.C. § 1112(b) and Federal Rules of Bankruptcy Procedure 1017(f) and 9014, to Convert or Dismiss Chapter 11 Case. ("Conversion Motion"). The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.
On April 4, 2011, R&S St. Rose Lenders, LLC ("Lenders") commenced the above-captioned Chapter 11 proceeding. Its voluntary Chapter 11 petition was accompanied by its schedules of assets and liabilities ("Schedules") in addition to its statement of financial affairs. (Lenders ECF No. 1). Lenders's Schedule "A" listed no real property assets. Lenders's personal property Schedule "B" listed two checking accounts totaling $574.38, a claim in the amount of $12 million against R&S St. Rose, LLC, and a "judgment against Branch Banking and Trust Company" in the amount of $41,000.
On the same date, R&S St. Rose, LLC ("St. Rose") commenced a separate voluntary Chapter 11 proceeding, denominated Case No. 11-14974-MKN. Its voluntary Chapter 11 petition was accompanied by its schedules of assets and liabilities ("Schedules") in addition to its statement of financial affairs. (St. Rose ECF No. 1). St. Rose's Schedule "A" listed a fee simple interest in approximately 38 acres of raw land located on St. Rose Parkway in Henderson, Nevada ("the Property").
On July 22, 2011, Branch Banking and Trust Company ("BB&T") filed in the Lenders proceeding an unsecured proof of claim in the amount of $38,539,707.47. The claim is based on a 2007 loan ("Construction Loan") between Colonial Bank, N.A. ("Colonial Bank") and St. Rose, secured by a deed of trust against the Property. The rights under the loan and deed of trust allegedly had been obtained by BB&T from the Federal Deposit Insurance Corporation ("FDIC") as receiver for Colonial Bank. The claim asserts that BB&T's lien against the Property is senior to that of Lenders and references an action previously commenced in state court by Colonial Bank.
On July 26, 2011, Commonwealth Land Title Insurance Company ("Commonwealth") filed in the Lenders proceeding a separate unsecured proof of claim in an amount to be determined. The claim asserted that it has an estimated value of $43,980,000 based on certain consolidated litigation that had begun in state court in 2008. In connection with the previously described Construction Loan, Commonwealth, through Nevada Title Company, issued a title insurance policy in the amount of $43,980,000 for the benefit of Colonial Bank. In completing the Construction Loan, however, a deed of trust that had been recorded against the Property in 2005 in favor of Lenders was never conveyed, nor was it subordinated to Colonial Bank's later recorded deed of trust securing the Construction Loan in 2007. As a result, the consolidation litigation mentioned in Commonwealth's proof of claim was commenced in state court.
On May 1, 2012, BB&T filed a motion to substantively consolidate the two bankruptcy estates ("Consolidation Motion"). (St. Rose ECF No. 116; Lenders ECF No. 135). On June 11, 2012, St. Rose filed opposition to the Consolidation Motion. (St. Rose ECF No. 128). Lenders joined in the opposition. (Lenders ECF No. 153). On the same date, Commonwealth joined in the Consolidation Motion. (Lenders ECF No. 155). A consequence of substantive consolidation of the separate bankruptcy estates would be to eliminate Lenders's claim against St. Rose, thereby leaving BB&T with the only claim secured by the Property.
On September 4, 2012, this court entered an order denying the Consolidation Motion ("Consolidation Order"). (St. Rose ECF No. 168; Lenders ECF No. 172). On September 12, 2012, BB&T filed a notice of appeal to the United States District Court ("USDC") for the District of Nevada. (St. Rose ECF No. 173; Lenders ECF No. 175). On September 18, 2012, Commonwealth also filed an appeal from the Consolidation Order to the USDC. (St. Rose ECF No. 183; Lenders ECF No. 190).
On August 2, 2013, St. Rose filed a proposed Chapter 11 liquidating plan ("St. Rose Plan"). (St. Rose ECF No. 242).
On November 8, 2013, in the St. Rose Chapter 11 proceeding, an order was entered on confirmation of the St. Rose Plan. (St. Rose ECF No. 291). On November 21, 2013, in the St. Rose proceeding, an order was entered approving a sale of the subject Property ("Sale Order") in accordance with the confirmed St. Rose Plan. (St. Rose ECF No. 302).
On March 27, 2014, an order was entered by the USDC vacating the bankruptcy court's Consolidation Order and remanding the matter to the bankruptcy court for further proceedings ("Remand Order"). (St. Rose ECF No. 378; Lenders ECF No. 312).
On July 15, 2014, a stipulation was filed regarding further substantive consolidation proceedings after remand on the Consolidation Motion. (Lenders ECF No. 421). Discovery and supplemental briefing deadlines were established.
On August 7, 2014, an order was entered by the USDC affirming the bankruptcy court's order confirming the St. Rose Plan. (St. Rose ECF No. 446).
On October 27, 2014, an evidentiary hearing commenced on the renewed Consolidation Motion as required by the Remand Order.
On November 21, 2014, the evidentiary hearing on the Consolidation Motion was completed.
On January 9, 2015, BB&T submitted its closing brief. (Lenders ECF No. 598). Commonwealth submitted its closing brief. (Lenders ECF No. 600). St. Rose submitted its closing brief ("St. Rose Closing"). (Lenders ECF No. 599). Joinders in the St. Rose Closing brief were filed by RSIG (Lenders ECF No. 601), the Creditor Group (Lenders ECF No. 604), and Lenders ("Lenders Closing"). (Lenders ECF No. 602). Because the Lenders Closing brief included additional legal arguments, an additional joinder in that brief was filed by RSIG. (Lenders ECF No. 603).
On January 26, 2015, closing arguments on the renewed Consolidation Motion were presented.
On April 24, 2015, proposed findings of fact and conclusions of law were submitted by all parties. (Lenders ECF Nos. 652 and 653).
On March 15, 2016, the UST filed the instant Conversion Motion. (Lenders ECF No. 748). The Dismissal Motion was noticed to be heard on April 13, 2016. (Lenders ECF No. 749).
On March 15, 2016, an order was entered denying the renewed Consolidation Motion ("Second Consolidation Order") (Lenders ECF No. 751; St. Rose ECF No. 601), accompanied by a memorandum decision ("Memorandum Decision"). (Lenders ECF No. 750; St. Rose ECF No. 600).
On March 29, 2016, BB&T appealed the Second Consolidation Order. (Lenders ECF No. 762; St. Rose ECF No. 605).
On April 1, 2016, an order was entered continuing to May 18, 2016, the hearing on the Conversion Motion. (Lenders ECF No. 772).
On April 6, 2016, Commonwealth separately appealed the Second Consolidation Order. (Lenders ECF No. 774; St. Rose ECF No. 618).
On April 18, 2016, Lenders filed its Third Amended Chapter 11 Plan ("Plan") (Lenders ECF No. 794) along with its Sixth Amended Disclosure Statement ("Disclosure Statement"). (Lenders ECF No. 793).
On April 19, 2016, Commonwealth filed a notice (Lenders ECF No. 797) scheduling a hearing for May 18, 2016, on various claim objections (Lenders ECF No. 264) that it previously filed in the Lenders Chapter 11 proceeding.
On April 27, 2016, BB&T filed a motion seeking to stay the Second Consolidation Order as well as portions of the Chapter 11 proceeding, pending resolution of the appeals of the Second Consolidation Order ("Stay Motion"). (Lenders ECF No. 804).
On April 29, 2016, an order was entered shortening time so that the Stay Motion could be heard on an expedited basis. (Lenders ECF No. 808).
On May 3, 2016, Commonwealth joined in the Stay Motion. (Lenders ECF No. 811).
On May 4, 2016, opposition to the Conversion Motion was filed by Commonwealth (Lenders ECF No. 813) and BB&T (Lenders ECF No. 816). On the same date, Commonwealth also filed it objection to the Disclosure Statement (Lenders ECF No. 812) and BB&T did so as well. (Lenders ECF No. 815).
On May 6, 2016, Lenders filed opposition to the Conversion Motion. (Lenders ECF No. 819).
On May 9, 2016, St. Rose, the Creditor Group, and Double E Family, LLC, separately joined in the Lenders's opposition to the Conversion Motion. (Lenders ECF Nos. 820, 821, and 822).
On May 10, 2016, RSIG joined in the Lenders's opposition to the Conversion Motion. (Lenders ECF Nos. 823). On the same date, an opposition to the Stay Motion was filed on behalf of St. Rose ("Stay Opposition") (Lenders ECF No. 824), and Lenders and the Creditor Group joined in that opposition. (Lenders ECF Nos. 825 and 826).
On May 11, 2016, RSIG and Double E Family, LLC, also joined in the Stay Opposition that was filed on behalf of St. Rose. (Lenders ECF Nos. 827 and 828).
On May 12, 2016, the UST filed a reply in support of its Conversion Motion ("UST Reply"). (Lenders ECF No. 829).
On May 13, 2016, BB&T filed a reply in support of its Stay Motion ("Stay Reply"). (Lenders ECF No. 830).
On May 16, 2016, a hearing was conducted on the Stay Motion.
On May 17, 2016, an order was entered denying the Stay Motion. (Lenders ECF No. 831).
The court having considered the written and oral arguments of the parties, together with the record in this proceeding, concludes that the Conversion Motion must be denied.
The UST seeks to end the Chapter 11 proceeding by converting the case to a liquidation proceeding under Chapter 7.
Section 1112(b)(1) provides as follows:
(Emphasis added.) 11 U.S.C. § 1112(b)(1). Section 1112(b)(4) provides a non-exclusive list of circumstances constituting "cause," including the circumstance suggested by the UST in the Conversion Motion:
(Emphasis added.) 11 U.S.C. § 1112(b)(4)(A). The burden of establishing cause rests with the party seeking relief under Section 1112(b)(1).
The operative command in Section 1112(b)(1) that the court
The UST argues that both elements under Section 1112(b)(4)(A) are present in this case. First, it maintains that there is a substantial or continuing loss to or diminution of the estate because the Sale Proceeds have declined by more than $814,000 in the last two years due to the payment of allowed administrative costs, primarily attorney's fees.
Second, the UST maintains that no rehabilitation of Lenders is contemplated even if its proposed Plan is confirmed. The UST initially argued that there is no likelihood of rehabilitation because the Lenders Chapter 11 proceeding has been pending for nearly five years without a confirmed plan.
None of the cases cited by the UST is controlling, and none are particularly useful or persuasive under the circumstances of the instant case. More important, none of the creditors in the Lenders's bankruptcy proceeding support conversion of the case to Chapter 7, nor dismissal of the Chapter 11 case.
What happens if Lenders's Chapter 11 proceeding is converted? A chapter 7 trustee would be appointed to administer the Sale Proceeds. Assuming those proceeds are approximately $12,000,000, the trustee's compensation would be up to $383,250 under Section 326(a).
And what happens if Lenders's Chapter 11 proceeding is dismissed? A judgment previously was entered in State Court that included findings determining Lenders's claim to have priority over BB&T.
In this instance, the UST has not demonstrated why conversion of the Chapter 11 proceeding to Chapter 7 is preferable to simply dismissing the case. Additionally, the UST has not demonstrated that the appointment of a Chapter 11 trustee is a better alternative to dismissal. In fact, the UST does not even address what would happen if the Lenders Chapter 11 proceeding is dismissed so as to provide a basis for comparison of the alternatives available under Section 1112(b)(1).
Even if the UST addressed the actual impact of its request, however, the court concludes that neither conversion nor dismissal of the Lenders Chapter 11 proceeding is in the "best interests of creditors and the estate" as required by Section 1112(b)(1). Instead, the alternatives provided by Section 1112(b)(1) would increase the burdens on the parties who actually have a financial stake in this proceeding without providing any corresponding benefit. Moreover, none of the alternatives are supported by any of the creditors in the case. Because these threshold requirements for relief under Section 1112(b)(1) have not been met, it is unnecessary for this court to address whether the requirements under Section 1112(b)(2) can be satisfied.
In July 2009, Colonial Bank, Commonwealth's insured, commenced the second action in the State Court against St. Rose, and others, denominated Case No. 09-A-594512-C. Both Colonial Bank and Lenders were secured creditors of St. Rose. Colonial Bank's primary assertion was that Lenders had improperly obtained a lien against the subject Property ahead of Colonial Bank's deed of trust. Shortly after the second action was commenced, Colonial Bank was placed into receivership by which the FDIC became the receiver. Subsequently, BB&T, as the alleged purchaser from the FDIC of the assets of Colonial Bank, filed an amended cross-complaint, again asserting various claims against St. Rose, Lenders, and others. Lenders counterclaimed, seeking a declaration that its deed of trust had priority over Colonial Bank's deed of trust. That second action subsequently was consolidated with the first action that had been commenced by Murdock and Keach. (In this Order, the consolidated action is referred to as the "State Court Action.")
On January 8, 2010, a ten-day trial of the State Court Action was commenced and concluded on or about April 14, 2010, resulting in a variety of rulings by the State Court. A foreclosure of the Property by Lenders under its deed of trust was scheduled to be conducted on June 1, 2010, and BB&T's request to stay the foreclosure was denied by the State Court.
On May 13, 2010, to prevent the foreclosure by Lenders, BB&T commenced an involuntary Chapter 7 proceeding against St. Rose, denominated Case No. 10-18827-MKN ("Involuntary Proceeding"). As a result of the involuntary Chapter 7 petition filed by BB&T, the foreclosure of the Property, as property of the St. Rose bankruptcy estate, was prevented by the automatic stay under Section 362(a).
On May 25, 2010, a motion to dismiss the Involuntary Proceeding was filed by Rad and Forouzan (Involuntary Proceeding ECF No. 9) and later joined by Lenders. (Involuntary ECF No. 25).
On June 23, 2010, the State Court entered Findings of Fact and Conclusions of Law determining,
On July 13, 2010, the State Court entered an initial judgment against Lenders in favor of Murdock in the amount of $166,741.83 and in favor of Keach in the amount of $1,009,163.61, resulting in a total judgment of $1,175,905.44.
On October 29, 2010, an order was entered by the bankruptcy court dismissing the Involuntary Proceeding. (Involuntary ECF No. 37).
On or about November 5, 2010, a final judgment was entered in the consolidated State Court Action granting judgment in favor of Murdock and Keach against Lenders, granting judgment in favor of Lenders against BB&T as to the priority of Lenders's deed of trust, and dismissing all other claims not previously resolved in the action. BB&T appealed that judgment to the Nevada Supreme Court.
On or about March 31, 2011, Murdock and Keach assigned to Commonwealth their rights under the judgment in the consolidated State Court Action.
On April 4, 2011, Lenders and St. Rose voluntarily commenced their separate Chapter 11 reorganization proceedings.
On May 31, 2013, the judgment reflected by the State Court Order was affirmed by the Nevada Supreme Court. On September 26, 2013, a petition for rehearing was denied. On February 21, 2014, the Nevada Supreme Court denied BB&T's petition for rehearing en banc. BB&T then petitioned for writ of certiorari to the United States Supreme Court. On October 6, 2014, the certiorari petition was denied.
On April 18, 2016, Lenders filed a fifth amended disclosure statement (Lenders ECF NO. 790) along with a second amended Chapter 11 plan (Lenders ECF No. 791), which were rejected by the court clerk as nonconforming entries. Later on April 18, 2016, Lenders filed the instant Disclosure Statement (Lenders ECF No. 793) along with the third amended Chapter 11 plan of liquidation. (Lenders ECF No. 794).
