MAGDELINE D. COLEMAN, Bankruptcy Judge.
Before this Court for consideration is LEI SS Investor LP's (the "Movant" or "LEI SS") Motion for (i) Dismissal of Chapter 11 Case Pursuant to 11 U.S.C. § 1112 or, (ii) alternatively, Relief from Automatic Stay Pursuant to 11 U.S.C. § 362 (the "Motion"). LEI SS requests that the Court dismiss the Chapter 11 case of the Debtor, Dewey Commercial Investors, L.P. (the "Debtor" or "Dewey") pursuant to 11 U.S.C. § 1112(b) for cause including that the petition was filed in bad faith. In the alternative, the Movant requests relief from the automatic stay pursuant to 11 U.S.C. § 362(d) to permit it to cause the transfer of the Debtor's 79.52% Class B limited partnership interest in DCI-Station Square, L.P. (the "Partnership"). As set forth in its Objection dated October 7, 2013 (the "Objection"), the Debtor opposes dismissal arguing that it seeks Chapter 11 relief to enable it to "reorganize its affairs" and to avoid "the attendant distraction of legal action over the transfer of the [Partnership Interest]." Objection, ¶¶ 45 & 52. Following a hearing on the issues and consideration of the evidence, this Court will grant the Motion and enter an Order dismissing the Debtor's bankruptcy case as a bad faith filing involving a two party dispute and filed without a valid bankruptcy purpose.
On August 21, 2013 (the "Petition Date"), the Debtor filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code, as amended (the "Bankruptcy Code") (the "Chapter 11 Case"). A week later, the Debtor filed its schedules. The Debtor's schedules reveal that it owns no real estate. It lacks secured creditors and any creditors who may hold unsecured priority claims. The Debtor only identifies one unsecured creditor, the Movant, on its List of Creditors Holding 20 Largest Unsecured Creditors. The Debtor scheduled the Movant as the holder of a disputed claim in the amount of $8,974,636.00.
As of the date of the hearing on the Motion, three creditors had filed proofs of claim. On September 24, 2013, PECO Energy Company filed a claim in the amount of $210.82 relating to unpaid utility bills. On October 11, 2013, SGS Concrete, Inc. filed a claim in the amount of $126,758.84 relating to goods sold to the Debtor. Finally,
The Debtor's property interests are similarly limited. The Debtor's schedules identify five assets: (1) a commercial checking account with a balance of $375.00; (2) a 2012 New Jersey state tax refund in the amount of $2,960.00; (3) an executory management contract with Dewey Commercial Management, L.P.; (4) a 99.00% limited partnership interest in Dewey Commercial Management, L.P.; and (5) a 79.52% Class B limited partnership interest in the Partnership (the "Partnership Interest"). The Debtor states that the total value of these assets is worth $7,795,336.00. Of this amount, $7,792,000.00, or 99.96% of the Debtor's assets, is attributable to the Partnership Interest.
On September 20, 2013, the Movant filed the Motion. The Movant sought dismissal of the Chapter 11 case on the grounds that (1) the Debtor filed its Chapter 11 petition in bad faith and solely for the improper purpose of preventing the transfer of the Partnership Interest, rather than to maximize value for creditors of the Debtor's estate, (2) the Debtor will not be able to satisfy the plan confirmation requirements of § 1129 of the Bankruptcy Code, and (3) the Chapter 11 case constitutes a two-party dispute between the Movant and Debtor. The Debtor filed its Objection asserting that "[t]he dispute between the Debtor and the Movant involves more than two parties ..." Objection, ¶ 54. With regard to the Debtor's opposition to the Movant's request for relief from the automatic stay, the Debtor contends that relief should be denied on the grounds that it holds significant equity in the Partnership Interest and that the Partnership Interest is necessary for an effective reorganization. Objection, ¶ 128.
On October 15, 2013, the Court held a hearing on the Motion. At that time, the Movant presented evidence in support of both its request for dismissal and its request for relief from the stay. The Movant presented the testimony of John Gaghan, the Movant's Vice President. Mr. Gaghan testified regarding, among other things, the Movant's financial dealings with the Partnership and the Debtor, the parties' dispute relating to the Partnership Interest, and the status of the Movant's efforts to transfer the Partnership Interest from the Debtor to Movant.
In support of its Objection, the Debtor presented the testimony of John Dewey. Mr. Dewey is the Managing Member of the Debtor's General Partner, Dewey Commercial Investors, LLC. Mr. Dewey testified regarding the value of the Partnership Interest, the Debtor's equity in the Partnership Interest, and the purpose of the Debtor's bankruptcy filing including the proposal of a plan of reorganization providing for payment of the monies owed to the Movant.
At the close of the Hearing, this Court took the matter under advisement. Consistent with its obligations under Fed. R. Bankr.P. 7052, this Court provides the following explanation of its reasons for granting the Motion and ordering dismissal of this bankruptcy case.
Pursuant to an Amended and Restated Agreement of Limited Partnership dated January 23, 2013 (the "Partnership Agreement"),
To accomplish this refinancing, Fannie Mae requested the Partnership to pay off the Mezzanine Loan. However, the Partnership was unable to come up with the funds necessary to pay off the Mezzanine Loan. To allow the refinancing to proceed, the Movant agreed to convert the unpaid principal balance of the Mezzanine Loan into a senior class of preferred equity in the Partnership. As of the date of the Partnership Agreement, the unpaid principal balance of the Mezzanine Loan was $12,621,014.39 (the "Capital Contribution"). Pursuant to § 5.1 of the Partnership Agreement, the Capital Contribution constituted consideration for the receipt of the Movant's Class A Partnership Interest in the Partnership. Exh. M1, § 5.1.
It appears that the parties intended that the Movant's Class B Partnership position be temporary and did not intend for the Movant to retain its equity position. The Partnership Agreement reflects that the parties contemplated that the Partnership would buyout the Movant's equity interest within six-months of the effective date of the Partnership Agreement. The mechanism for the buyout was set forth in §§ 6.2(a) and 8.4 of the Partnership Agreement. Section 6.2(a) provides the method of payment by the Partnership for buyout of the Movant's interest. Pursuant to § 6.2(a), the Movant was entitled to payment from the Partnership's net proceeds of a "Preferred Return" as "redemption" of its Capital Contribution.
It is well-settled that a debtor's lack of good faith in filing a Chapter 11 petition establishes "cause" for dismissal. Sante Fe Minerals, Inc. v. Bepco, L.P. (In re 15375 Mem'l Corp.), 589 F.3d 605, 618 (3d Cir.2009) (citing NMSBPCSLDHB, L.P. v. Integrated Telecom Express, Inc. (In re Integrated Telecom Express, Inc.), 384 F.3d 108, 119-20 (3d Cir.2004)). The Bankruptcy Code contains no express requirement that a petition be filed in good faith nor does it define what constitutes a bad faith purpose for filing of a petition. However, courts have found that to be filed in good faith, a debtor's Chapter 11 filing must serve a valid bankruptcy purpose. 15375 Memorial, 589 F.3d at 618 (citing In re SGL Carbon Corp., 200 F.3d 154, 165 (3d Cir.1999)). The valid purposes for bankruptcy petition include the preservation or enhancement of estate assets.
Whether the debtor has satisfied this "good faith" requirement in commencing its case is a "fact intensive inquiry" in which the court will examine the totality of the circumstances to determine where "a petition falls along the spectrum ranging from clearly acceptable to the patently abusive." 15375 Memorial, 589 F.3d at 618 (citing SGL Carbon Corp., 200 F.3d at 162). In connection with the good faith inquiry, the courts have considered multiple factors including the following: (i) whether the debtor has few or no unsecured creditors; (ii) whether there have been previous bankruptcy filings by the debtor or related entities; (iii) whether the pre-petition conduct by the debtor has been improper; (iv) whether the filing permits the debtor to evade or delay court orders; (v) whether there are few debts to non-moving creditors; (vi) whether the petition was filed on the eve of foreclosure; (vii) whether the foreclosure property is the major asset of the debtor; (viii) whether the debtor has an ongoing business or employees; (ix) whether there is no possibility of reorganization; (x) whether the debtor's income is insufficient to operate; (xi) whether there was no pressure from non-moving creditors; (xii) whether the reorganization essentially involves resolution of a two-party dispute; (xiii) whether the corporate debtor was formed and received title to its assets immediately before the petition; and (xiv) whether the debtor filed solely to obtain the protection of the automatic stay. In re Stingfree Technologies Co., 427 B.R. 337, 352 (E.D.Pa.2010) (quoting In re SB Properties, Inc., 185 B.R. 198, 205 (E.D.Pa.1995)).
Examining the facts of this case, this Court has determined that factors (i), (v), (vi), (vii), (viii), (xi), (xii), and (xiv) weigh in favor of a finding that the petition was not filed in good faith because there is not a valid reorganization purpose.
This Court finds that the Debtor has few or no unsecured creditors (factor one) and there are few debts owed to non-moving creditors (factor five). These factors weigh strongly in favor of a finding of bad faith. As admitted by the Debtor in its schedules, the Movant is the Debtor's only unsecured creditor. Even considering the Debtor's claims register, this Court must conclude that the Movant is the Debtor's only significant creditor accounting for greater than 98% of the Debtor's indebtedness. In re Adell, 332 B.R. 844, 849 (Bankr.M.D.Fla.2005) ("With only one `real' creditor, there is little competition for the Debtor's assets, no race to the courthouse, and no need to employ the automatic stay to ensure an equitable and orderly distribution of the Debtor's assets"); In re Primestone Investment Partners L.P., 272 B.R. 554, 558 (D.Del.2002).
This Court finds the Debtor's situation to be similar to that of the debtor in Primestone. In that case, the District of Delaware upheld the bankruptcy court's determination that the debtor's petition should be dismissed because it was filed "to disadvantage its sole secured creditor." The Primestone debtor was a Delaware limited partnership that existed to hold ownership shares in a real estate trust. The debtor had obtained a $62 million loan that was secured by its interest in the real estate trust. When the Primestone debtor failed to make payment on the loan, its creditor treated it as an event of default which ultimately led to the creditor arranging for the auction of the debtor's interest in the real estate trust. Sixteen hours prior to the auction, the Primestone debtor filed for chapter 11 bankruptcy relief. Explaining the rationale of the bankruptcy court, the district court stated:
Id. at 558.
Here, the parties occupy almost identical positions. The Debtor's sole asset is its interest in the Partnership that, due to the Partnership's failure to make the Redemption Payment in accordance with the terms of the Partnership Agreement, the Movant now claims for itself. The rationale underlying the Primestone decision is equally applicable to the respective contractual rights of the Debtor and the Movant. Just as in Primestone, this Court must conclude that the parties are adequately protected by their bargained for contractual rights embodied by the terms of the Partnership Agreement. When the interests of no other creditors would be benefited, to allow the Debtor to escape its bargain is an inappropriate use of the bankruptcy system.
This Court finds factors six and seven to weigh strongly in favor of a finding of bad faith. The Debtor's only asset of any significance is the Partnership Interest, and immediately prior to the Petition Date, the Movant was in the process of causing the transfer of the Debtor's Partnership Interest. Typically, cases addressing this factor do so in the context of pending foreclosure proceedings. While the Partnership Interest is not subject to foreclosure or even a pending litigation,
This Court finds this factor weighs strongly in favor of a finding of bad faith. The Debtor is not an operating business. The only significant asset that the Debtor owns is its interest in the Partnership which in turn owns the Property. See, e.g., In re SB Properties, Inc., 185 B.R. 198, 205 (E.D.Pa.1995); In re Davis Heritage GP Holdings, LLC, 443 B.R. 448, 458-59 (Bankr.N.D.Fla.2011) (determining entity that held no assets other than interests in real estate companies "does not own anything that it can reorganize").
This Court finds this factor to weigh strongly in favor of a finding of bad faith. The Debtor has provided no evidence that its filing for Chapter 11 relief was motivated to deter the collection efforts of any non-moving creditor. The Debtor's bankruptcy schedules make reference to only one other creditor and does not even identify the amount allegedly owed to this entity. There is no evidence that any of these creditors made demand upon, or exerted any pressure for payment on the Debtor prior to the bankruptcy filing.
This Court finds this factor also weighs strongly in favor of a finding of bad faith. Prior to the Petition Date, the Debtor and the Movant were involved in a dispute over the ownership of the Partnership. The Debtor concedes that "the Movant and the Debtor are engaged in a dispute..." and that it seeks "an opportunity to efficiently reorganize its affairs without the attendant distraction of legal action
This Court finds this factor to weigh strongly in favor of a finding of bad faith. Although the Debtor has yet to file its proposed plan of reorganization, the Debtor has represented to this Court that any proposed plan would allow for the Redemption Payment to be made to the Movant thereby allowing the Debtor to retain its "equity" in the Partnership, presumably for the benefit of the Debtor's creditors. Objection, ¶ 80. The Debtor argues that it filed bankruptcy to enable the exercise of the redemption rights provided by § 8.4 of the Partnership. This Court finds two flaws in this alleged purpose. First, the Partnership Agreement does not impose upon the Debtor the obligation to make the Redemption Payment. Second, by the express terms of the Partnership Agreement, the right to redeem expired on July 23, 2013, twenty-eight days prior to the Debtor's filing for Chapter 11 relief.
While Mr. Dewey did testify that he is aware of ongoing efforts to secure funding to make the Redemption Payment and that it is his belief that such funding will become available within the Debtor's exclusivity period, Mr. Dewey and the Debtor's other representatives conveniently brush over the identity of the party who would make the Redemption Payment. The Debtor acknowledges that it is under no obligation to make the Redemption Payment.
Compounding matters, the Partnership's right to make the Redemption Payment has expired. Under the terms of the Partnership Agreement, the Movant was to surrender its Class A Partnership Interest if it received the Redemption Payment on or before July 23, 2013. If the Redemption Payment was not made on or before July 23, 2013, the Partnership Agreement provided the Debtor "shall transfer [its] Partnership Interest to the [Movant] without further consideration." Exh. M1, § 8.4. By agreeing to convert its secured interest to an equity position, the Movant conferred a benefit upon the Partnership and its partners including the Debtor (the "Partnership Parties"). As acknowledged by Mr. Dewey, the refinancing resulted in a significant increase in the net operating income of the Partnership as well as a significant increase in the overall value of the Partnership. Just as the Partnership Parties received the benefits of the bargain that is memorialized by the terms of the Partnership Agreement, the Movant is now entitled to the benefits that should accrue to it. The Debtor may not use the automatic stay, or the bankruptcy process generally, to expand the Partnership Parties' contractual rights or to deprive the Movant of its bargained for interests. In re Majestic Star Casino, LLC, 716 F.3d 736, 759 (3d Cir.2013) (recognizing that Congress did not intend the Code to expand
Contrary to the Debtor's arguments, the filing of a bankruptcy petition does not "expand the debtor's rights against others more than they exist at the commencement of the case." Moody v. Amoco Oil Co., 734 F.2d 1200, 1213 (7th Cir.1984); see also Bank of Marin v. England, 385 U.S. 99, 101, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966) (recognizing the estate "succeeds only to such rights as the bankrupt possessed; and the trustee is subject to all claims and defenses which might have been asserted against the bankrupt but for the filing of the petition"); In re Triangle Laboratories, Inc., 663 F.2d 463 (3d Cir.1981) (recognizing that the filing of a bankruptcy petition cannot resuscitate expired contractual rights). The Debtor's estate does not include any contractual rights that expired prior to the filing for Chapter 11 relief and it certainly does not include the Partnership's expired contractual rights. In re Quade, 482 B.R. 217, 225 (Bankr.N.D.Ill.2012) ("contractual rights that have expired by their own terms ... are not subject to revival").
The Debtor has not argued that the Partnership Agreement is void, voidable or otherwise unenforceable. Rather, the Debtor is requesting this Court to revive the Partnership's expired contractual rights. The right to make the Redemption Payment expired, according to the Partnership Agreement's express terms, as of July 23, 2013. In effect, the Debtor is asking this Court to rewrite the terms of the Partnership Agreement on behalf of a nondebtor party. The Debtor has cited no authority, whether within the Code or applicable nonbankruptcy law, that would allow this Court to grant such relief.
Although the Debtor did its best to confuse the issue, the issue dividing the parties is not whether the Debtor or the Partnership enjoys the benefit of an equity cushion. See, e.g., In re Swedeland Development Group, Inc., 16 F.3d at 566 (addressing whether he presence of an equity cushion constitutes sufficient adequate protection). The parties do not dispute that the Partnership may hold equity in the Property. The dispute is simply which party is entitled to ownership of that equity. This dispute may be settled by reference to the express terms of the Partnership Agreement. If the Debtor believes that it is not required to transfer its interest in the Partnership to the Movant, the Debtor is free to have that dispute adjudicated by a court of general jurisdiction.
This Court finds this factor to weigh strongly in favor of a finding of bad faith. Courts have observed that a classic example of an abusive bankruptcy filing
As stated above, this Court finds that the Debtor did not file its bankruptcy in furtherance of a valid reorganizational purpose. The Debtor did not file for Chapter 11 relief for the purpose of maximizing property available to creditors. Rather, this Court finds that the Debtor filed its bankruptcy for the purpose of frustrating the Movant's efforts, in accordance with the terms of the Partnership Agreement, to transfer to itself ownership of the Partnership. On this basis, the Movant's request to dismiss Debtor's bankruptcy case will be granted.
Exh. M1, § 6.2(a).
Exh. M1, § 8.4 (emphasis added).
Exh. M1, § 14.20.