Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: July 23, 2010
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. 09-38204-TD. Honorable Thomas B. Donovan, Bankruptcy Judge, Presiding.
Before HOLLOWELL, DUNN and MARKELL, Bankruptcy Judges.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
The debtor developed a large parcel of property into a retail shopping and hotel complex and then defaulted on the loan that financed the development. The secured creditor holding the loan sought state court remedies including the appointment of a receiver, but before the receiver could take control of the property, the debtor filed bankruptcy. The creditor then sought relief from the automatic stay to resume proceedings in state court.
The bankruptcy court granted stay relief under § 362(d)(1), for cause, based on its finding that the debtor filed its case in bad faith, and, under § 362(d)(2) because the property lacked equity and the bankruptcy court determined the debtor would be unable to effectively reorganize in a reasonable time. The debtor appealed. We AFFIRM the bankruptcy court's order for relief under § 362(d)(2) and, therefore, do not reach the issue of whether relief was appropriate under § 362(d)(1).
I. FACTS
F& F, LLC (the Debtor) is a limited liability company established in 2005. The Debtor is co-managed and co-owned by Choung Fann Yik and Ying Faung Ley, husband and wife, and their four adult children. The Debtor owns 10 acres of real property in the City of Rancho Cucamonga, California (the Property). The Debtor has been developing the Property, since it purchased it in 2005, into a multi-building retail shopping center and hotel complex (the Project).
East West Bank provided the Debtor with funding for the Project (the Loan Agreement). As part of the Loan Agreement, the Debtor executed a promissory note dated June 1, 2007, in the amount of $34,850,000 secured by a first position deed of trust encumbering the Property (the Note). The Note provided funds for the estimated $17,000,000 in construction costs, as well as satisfied an earlier secured loan that the Debtor had with East West Bank. East West Bank recorded its deed of trust on June 14, 2007 (the DOT).
The Debtor hired Patterson Builders (Patterson) in 2007 to serve as the general contractor for the Project. Thereafter, construction disputes arose on the Project. Change orders totaled over $5,000,000. Patterson did not submit lien releases or pay all of its subcontractors. To resolve some of these disputes, Patterson, East West Bank, and the Debtor entered into a Term Sheet Regarding Resolution of Disputes on November 13, 2008, which allowed Patterson an additional $5,000,000 from the loan proceeds but did not require Patterson to obtain lien releases with subcontractors and materialmen before receiving the additional funding. In February 2009, Patterson abandoned the Project leaving in its wake approximately 40 subcontractors and suppliers with asserted liens totaling nearly $7,000,000 against the Property (the Construction Claimants).
Approximately 28 of the Construction Claimants filed state court actions to foreclose their mechanics' liens. Those actions were consolidated, along with an action brought by Patterson to foreclose its mechanics' liens against the Property, in Beta Constr., Inc. v. Patterson Builders, et al., San Bernardino County Superior Court of California (the Mechanics' Lien Litigation). Most of the Construction Claimants allege that their liens relate back to the date the work was first performed in April 2007, and are senior in priority to the DOT.
When the Note matured by its terms on June 1, 2009, the Debtor failed to pay. On August 6, 2009, East West Bank recorded a Notice of Default and Election to Sell Under Deed of Trust. At that time, the Debtor owed East West Bank $35,440,641.09.
On or about September 30, 2009, U.S. Hung Wui Investments, Inc. (Hung Wui) purchased the Loan Agreement and Note from East West Bank for $22,500,000. Pursuant to the purchase, East West Bank assigned all its interests in the Note and DOT to Hung Wui. On October 13, 2009, Hung Wui filed a complaint in state court seeking judicial foreclosure and the appointment of a receiver for the Property (the Foreclosure Action). The Debtor filed a cross-complaint in the Foreclosure Action alleging that East West Bank had made improper disbursements under the Loan Agreement.
On November 19, 2009, the state court entered an order in the Foreclosure Action appointing a receiver for the Property (the Receiver). A foreclosure sale was scheduled for December 4, 2009. On November 20, 2009, just before the Receiver was to take possession of the Property, the Debtor filed a chapter 11 bankruptcy petition.
Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532. All Rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
Development of the Property was completed about one year prior to the time the Debtor filed bankruptcy. On the petition date, the Debtor had leases in place for approximately 70% of the 136, 000 square feet of rentable space, which included a Sheraton Hotel and a Union 76 service station, along with nine retail tenants. The hotel, service station and four of the retail businesses were owned and operated by entities related to the Debtor or controlled by insiders of the Debtor. Hung Wui has alleged that because those leases are to insiders they are generating either no rents or under-market rents.
The Property is the Debtor's main asset and source of revenue. According to the Debtor's statement of financial affairs, the operation of business from the Project generated no income in 2007 or 2008, and $571,064 in 2009.
On January 14, 2010, the bankruptcy court held a § 105(d) status and scheduling conference on the Debtor's chapter 11 case. It set March 20, 2010, as the date by which the Debtor had to file a disclosure statement and plan of reorganization.
On February 4, 2010 , Hung Wui filed a motion for relief from the automatic stay (the Stay Relief Motion) in order to pursue its state court and contractual remedies under the Loan Agreement. In its Stay Relief Motion, Hung Wui sought relief under § 362(d)(1), (d)(2) and (d)(3). Hung Wui asserted that the Debtor filed its bankruptcy case in bad faith, citing factors set out in Little Creek Dev. Co. v. Commonwealth Mortg. Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072 (5th Cir. 1986), including that the Property is the Debtor's only asset; the Property is fully encumbered; the Property was scheduled for foreclosure; and, the bankruptcy case was filed the day before the Receiver was to take possession of the Property.
Hung Wui initially filed its stay relief motion on January 21, 2010. The Debtor filed an opposition on January 28, 2010. However, Hung Wui's motion did not properly notice the Construction Creditors as required under Local Bankruptcy Rule 4001-1 and was re-filed on February 4, 2010.
Additionally, Hung Wui asserted there was no equity in the Property and the Debtor could not effectively reorganize because it would be unable to propose a feasible plan with a consenting impaired class of creditors. Furthermore, Hung Wui asserted that the Debtor was a single asset real estate debtor who could not propose a reasonable plan of reorganization within the 90-day time limit of § 362(d)(3).
With its Stay Relief Motion, Hung Wui submitted an appraisal of the Property, which valued it at $25,910,000. Hung Wui asserted a prepetition claim in the amount of $36,238,504.23 and a postpetition claim of $584,081.24 consisting of accrued interest.
On February 10, 2010, the Debtor filed an opposition to the Stay Relief Motion. In its opposition, the Debtor denied it had filed its case in bad faith and contended that it had been working diligently to resolve operational and legal problems fundamental to the formulation of a plan. The Debtor stated it was " exploring all of its options" for reorganization and would have a plan on file by the March 20, 2010 deadline set at the status hearing.
At a separate hearing held on February 18, 2010, regarding the Debtor's January 28, 2010 request to extend the 90-day deadline of § 362(d)(3), the bankruptcy court ruled that the case was a single asset real estate case and that the Debtor had to submit a plan of reorganization or commence interest payments to Hung Wui no later than March 20, 2010. At the hearing, the Debtor and Hung Wui agreed that if no plan was filed by the March 20 deadline, the Debtor would pay $63,904.17 per month to Hung Wui, which would constitute interest at the applicable non-default contract rate pursuant to § 362(d)(3).
A week later, on February 25, 2010, the bankruptcy court held a hearing on Hung Wui's Stay Relief Motion. The hearing was combined with a hearing on stay relief that had been filed by Patterson to allow the Mechanics' Lien Litigation to continue in state court. The Debtor and Patterson announced at the hearing that they agreed to modify the automatic stay so that the state court could determine the validity, amounts, and priority of the Construction Claimants' liens in the Mechanics' Lien Litigation.
The bankruptcy court determined that the nature and complexity of the disputes among the various parties, including the Construction Claimants, which was going to be resolved in potentially lengthy litigation in state court, combined with a lack of any identified capital to fund a plan of reorganization, would make it unlikely that the Debtor could confirm a plan of reorganization in a reasonable time. Additionally, the bankruptcy court found that the Debtor's bankruptcy was " an act of forum shopping." On March 3, 2010, the bankruptcy court entered its order granting the Stay Relief Motion pursuant to § 362(d)(1), (d)(2), and, under (d)(3) if there was no plan of reorganization or no contractual monthly payments tendered in the agreed upon amount by March 20, 2010. The Debtor timely appealed.
The Debtor obtained a stay pending appeal from the Panel on March 5, 2010. However, before the stay was obtained, the Receiver took possession of the Property. Under the terms of the stay, the Receiver is to collect $63,904.17 per month from rents and/or the Debtor.
On March 4, 2010, the Debtor filed an emergency motion with the BAP for a stay pending appeal. A temporary stay was granted March 5, 2010. Through subsequent orders of the BAP, entered March 8, March 9, March 11, and April 22, 2010, the stay has been clarified, and payments to the Receiver have been set at the $63,904.17 amount the parties agreed upon at the February 18, 2010 hearing. To the extent the Receiver does not collect this amount in rents, the Debtor is obligated to make up the difference. On May 17, 2010, the BAP entered an order denying the Debtor's motion to remove the Receiver.
II. JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(G). The Panel has jurisdiction pursuant to 28 U.S.C. § 158.
III. ISSUE
Did the bankruptcy court err by granting Hung Wui relief from the automatic stay?
IV. STANDARDS OF REVIEW
We review a bankruptcy court's order granting relief from the automatic stay for an abuse of discretion. Arneson v. Farmers Ins. Exch. (In re Arneson), 282 B.R. 883, 887 (9th Cir. BAP 2002).
In determining whether the bankruptcy court abused its discretion, we first " determine de novo whether the [bankruptcy] court identified the correct legal rule to apply to the relief requested." United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009). If the bankruptcy court identified the correct legal rule, we then determine whether its " application of the correct legal standard [to the facts] was (1) illogical, (2) implausible, or (3) without support in inferences that may be drawn from the facts in the record." Id . (internal quotation marks omitted). Therefore, if the bankruptcy court did not identify the correct legal rule, or if its application of the correct legal standard to the facts was illogical, implausible, or without support in inferences that may be drawn from the facts in the record, then the bankruptcy court has abused its discretion. Id.
V. DISCUSSION
Section 362(d) requires the bankruptcy court, on request of a party in interest, to grant relief from the automatic stay when there is " cause, " including a lack of good faith on the part of the debtor; when there is no equity in a property and the property is not necessary for an effective reorganization; or, when the debtor is a single asset real estate debtor who has not, within 90 days of the petition date, filed a feasible reorganization plan or commenced monthly payments to the secured creditor.
The bankruptcy court granted stay relief to Hung Wui based on a finding of bad faith (§ 362(d)(1)), as well as a finding that the Property lacked equity and was not necessary for an effective reorganization because it was unlikely that the Debtor could successfully reorganize within a reasonable time (§ 362(d)(2)). Our discussion begins with the bankruptcy court's findings and analysis under § 362(d)(2).
Section 362(d)(2) of the Bankruptcy Code provides that " on request of a party in interest and after notice and hearing, the court shall grant relief from the stay . . . if - (A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization." 11 U.S.C. § 362(d)(2).
As provided in § 362(g), the party opposing relief from the stay has the burden of proof on all issues other than the debtor's equity in a property. Thus, once a movant establishes that a debtor has no equity in a property, " it is the burden of the debtor to establish that the collateral at issue is necessary to an effective reorganization." United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988).
Equity, for purposes of § 362(d)(2)(A), is the difference between the value of the property and all the encumbrances on it. Sun Valley Newspapers, Inc. v. Sun World Corp. (In re Sun Valley Newspapers, Inc.), 171 B.R. 71, 75 (9th Cir. BAP 1994) (citing Stewart v. Gurley, 745 F.2d 1194, 1196 (9th Cir. 1984)). The Debtor listed Hung Wui as a secured creditor with a claim of $35,244,690.45. Additionally, the Construction Claimants hold liens against the Property in the approximate amount of $7,000,000.
Hung Wui attached an appraisal to its Stay Relief Motion that valued the Property at $25,910,000. The Debtor has not contested the appraisal and concedes there is no equity in the Property.
Therefore, the Debtor had the burden of demonstrating that the Property is necessary for an effective reorganization. The Debtors argue that they " met the minimal or relaxed burden of a chapter 11 debtor in the early stages of a reorganization case" to show that it could propose a plausible plan of reorganization. Appellant's Opening Br. at 18-19. Under the standard set by the Supreme Court in Timbers, to establish that property is necessary for an effective reorganization under § 362(d)(2)(B), a debtor is required to show that " the property is essential for an effective reorganization that is in prospect. . . . This means a reasonable possibility of a successful reorganization within a reasonable time." 484 U.S. at 376 (internal quotations omitted); In re Dev., Inc., 36 B.R. 998, 1005 (Bankr. D. Haw. 1984) (cited with approval by Timbers).
The Property is the Debtor's principal asset and source of all the Debtor's operating income. The Debtor conceded that in order to successfully reorganize, it would require an infusion of capital. To demonstrate that it would be able to effectively reorganize, the Debtor submitted a declaration from Chaung Fann Yik that stated, in relevant part:
(1) the Debtor was working toward formulating a plan;
(2) the Debtor would likely regain any value the Property lost in the recession and would eventually create equity to provide recovery to the estate's creditors;
(3) the Debtor was exploring its options for formulating a plan;
(4) the Debtor was examining a number of potential avenues to obtain additional funding;
(5) the Debtor was working to identify third-parties potentially interested in providing financing or equity investment to the Debtor;
(6) the Debtor was negotiating with related parties for the possible acquisition of ownership interest in the Debtor; and that
(7) the Debtor anticipated it would conclude the negotiations before the March 20, 2010 deadline for filing a plan of reorganization.
At the stay relief hearing, the Debtor contended that it " harbored no illusions" that its plan for reorganization could rely on the Property to generate sufficient cash flow to make payments to its creditors. However, it contended there was " progress" in the effort to bring in equity investment that would allow a feasible reorganization and that the Debtor " believed" an agreement would be in place by March 20, 2010.
The bankruptcy court found that while the Debtor:
today gives me a positive report that a deal is just around the corner and will be filed within a matter of three weeks or so and that it's going to be a terrific deal, . . . there's absolutely no evidence of a reasonable likelihood of a successful deal that can be concluded within a reasonable time. . . . I think to conclude otherwise or to credit the Debtor's hopes today would be basing my decision on pure speculation that flies in the face of the weight of the evidence in this case.
Hr'g Tr. (Feb. 25, 2010), at 25:4-16.
" Courts usually require the debtor to do more than manifest unsubstantiated hopes for a successful reorganization." In re Sun Valley Newspapers, Inc., 171 B.R. at 75; see also In re Dev. Corp., 36 B.R. at 1006. A debtor must do more than merely assert that it can reorganize if only given the opportunity to do so. See, e.g., Am. State Bank v. Grand Sports, Inc. (In re Grand Sports, Inc.), 86 B.R. 971, 975 (Bankr. N.D.Ill. 1988). Thus, while the evidence demonstrated that the Debtor may have taken some preliminary steps toward obtaining the funding necessary to formulate a feasible plan of reorganization, any negotiations were still in a speculative stage. There was no term sheet, agreement, or other documentation (even in the form of emails or letters) that demonstrated there were investors or loan commitments in place. See Pegasus Agency, Inc. v. Grammatikakis (In re Pegasus Agency, Inc.), 101 F.3d 882, 887 (2d Cir. 1996) (an effective reorganization cannot be based on speculation).
Furthermore, the bankruptcy court determined that it would be a " fairly complex problem" to sort out the various liens and claims among Patterson, the Construction Claimants, Hung Wui, and the Debtor. Hr'g Tr. (Feb. 25, 2010), at 22:1-6. It found that those issues would " exacerbate the problem that the Debtor is going to have in trying to arrive at any kind of resolution that will preserve the Debtor's business and equity coverage." Id . at 24:19-23.
The bankruptcy court determined that in order to confirm a plan of reorganization within a reasonable time, the Debtor would need to propose " payment in full or something pretty close to that until all these things are sorted out and it can be determined who owes what to whom and who has liens and who doesn't." Id . at 22:3-10. Because the bankruptcy court found that the Debtor was unable to demonstrate it could secure the funding necessary to make payment in full, the bankruptcy court concluded that the Debtor did not provide evidence to satisfy the Timbers test by being able to effectively reorganize within a reasonable time. Id . at 25:8-20.
The bankruptcy court identified the correct legal standard for granting relief to a secured creditor under § 362(d)(2). The Debtor did not produce evidence that it had secured the capital it needed to support a plan of reorganization. Additionally, there were many parties with competing liens on the Property. The bankruptcy court determined that the time involved in sorting out the issues of validity and priority would preclude confirmation of a plan within a reasonable time unless a plan offered full or near full payment to garner the consent of all those with impaired claims.
As the Ninth Circuit held in United States v. Hinkson, we may not substitute our own view for that of the bankruptcy court and may only be able to have a " definite and firm conviction" that the bankruptcy court abused its discretion by making a clearly erroneous finding of fact if the bankruptcy court's application of the facts to the legal standard was illogical, implausible or without support in the record. 585 F.3d at 1262. The bankruptcy court's findings supporting stay relief were not illogical, implausible, or unsupported by the record. Accordingly, we conclude that the bankruptcy court did not abuse its discretion in granting Hung Wui relief from the automatic stay under § 362(d)(2).
Because we have concluded that the bankruptcy court did not abuse its discretion in granting Hung Wui relief from the automatic stay under § 362(d)(2), we need not reach the issue of whether the bankruptcy court erred in granting relief under § 362(d)(1) when it found that the Debtor filed its chapter 11 case in bad faith.
VI. CONCLUSION
For the foregoing reasons, we affirm the bankruptcy court's order granting relief from the automatic stay to Hung Wui.