New Bankruptcy Opinion: SIERRA DEVELOPMENT CO. v. CHARTWELL ADVISORY GROUP, LTD. – Dist. Court, D. Nevada, 2015

SIERRA DEVELOPMENT CO., d/b/a CLUB CAL NEVA, Plaintiff,

v.

CHARTWELL ADVISORY GROUP, LTD., Defendant.

CHARTWELL ADVISORY GROUP, LTD., Counterclaim Plaintiff,

v.

SIERRA DEVELOPMENT CO., et al., Counterclaim Defendants.

Case No. 3:13-cv-00602-RFB-VPC.

United States District Court, D. Nevada.

June 22, 2015.

ORDER

RICHARD F. BOULWARE, II, District Judge.

On May 26, 2015, the Court held a hearing in this case in which it denied the Counterclaim Defendants’ pending Motions to Dismiss and denied their pending Motions to Sever without prejudice. At the hearing, the Court noted that an automatic stay is applicable to certain of the Caesars-related Counterclaim Defendants pursuant to 11 U.S.C. § 362, and indicated that it would issue a written order clarifying the parties to which the automatic stay applies. The Court also informed the parties that it would issue a written ruling clarifying whether Counterclaim Defendant Caesars Entertainment Corporation (CEC) should be dismissed from this case as requested in the Motion to Dismiss (ECF No. 108) filed by CEC and other Caesars parties. This Order follows that hearing and contains the Court’s ruling on these issues.

A. Automatic Stay

On January 22, 2015, Counterclaim Defendants Caesar’s Entertainment Operating Company, Inc., 3535 LV Corporation, Caesar’s Entertainment Golf, Inc., Desert Palace, Inc., FHR Corporation, Harveys Tahoe Management Company, Inc., Parball Corporation, and Rio Development Company, Inc. filed a Notice of Suggestion of Bankruptcy on the record. ECF No. 217. For the reasons stated on the record at the hearing on May 26, 2015, this Court reiterates that this filing operates as a stay of the continuation of this action against those parties pursuant to 11 U.S.C. § 362(a).

Moreover, counsel for Caesars [1] informed the Court at the May 26 hearing that Counterclaim Defendant Harrah’s Imperial Palace Corporation is now known as 3535 LV Corporation and that these two entities are one and the same. Therefore, the automatic stay shall also apply to Harrah’s Imperial Palace Corporation to the extent Chartwell continues to assert any claims against it.

B. Dismissal of Caesars Entertainment Corporation

In its Motion to Dismiss, Caesars asserted that CEC should be dismissed from this case because it is a parent corporation that was not a party or successor-in-interest to any of the contracts its subsidiaries signed with Chartwell. Caesars also requests that the Court take judicial notice of various SEC filings, press releases, and newspaper articles it claims demonstrate the corporate structure of the Caesars parties and establish that Caesars Entertainment Corporation is not a party to any of Chartwell’s contracts with the Caesars parties. ECF Nos. 110, 111.

Courts may take judicial notice of adjudicative facts that cannot be reasonably disputed because they “can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.” Fed. R. Evid. 201(b)(2). Further, courts are required to take judicial notice of adjudicative facts if a party so requests and supplies the court with the necessary information. Fed. R. Evid. 201(c).

The Court takes judicial notice of the existence of the documents provided by Caesars, but not their contents. The articles and press releases submitted by Caesars serve to demonstrate what was in the public domain at the time and are admissible for that purpose, but are not admissible to demonstrate the truth of their contents. Von Saher v. Norton Simon Museum of Art, 592 F.3d 954, 960 (9th Cir. 2009) (“Courts may take judicial notice of publications introduced to indicate what was in the public realm at the time, not whether the contents of those articles were in fact true.”). As for the SEC filings, while they are properly subject to judicial notice, Dreiling v. Am. Express Co., 458 F.3d 942, 946 n.2 (9th Cir. 2006), Chartwell has opposed the taking of judicial notice insofar as it pertains to the truth of the contents of the filings. The Court finds that the contents of Caesars’ SEC filings are subject to reasonable dispute and it shall therefore only take judicial notice of the existence of these filings, not the truth of their contents. See Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001) (“A court may take judicial notice of matters of public record without converting a motion to dismiss into a motion for summary judgment. But a court may not take judicial notice of a fact that is subject to reasonable dispute.”); id. at 690 (holding that by accepting as true the validity of a waiver contained in an external court document, “the district court failed to draw all reasonable inferences from plaintiffs’ allegations” claiming otherwise); cf. Northstar Fin. Advisors Inc. v. Schwab Investments, 779 F.3d 1036, 1043 (9th Cir. 2015) (taking judicial notice of SEC filings, but noting that the documents were referenced in the complaint, the information was made publicly available by the SEC, and neither party disputed “the authenticity of the [documents] or the accuracy of the information displayed therein.”) (alteration in original).

At the May 26 hearing, the Court found that Chartwell has stated claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment against CEC. The reasons for this finding were stated on the record at the hearing. The existence of the documents contained in Caesars’ Request for Judicial Notice do not establish that CEC must be dismissed from Chartwell’s contract-based claims. Without conducting a detailed factual inquiry and considering evidence as to the truth of the documents filed in CEC’s Request for Judicial Notice, the Court cannot make the heavily fact-bound determination of which entities succeeded to the Chartwell-Park Place contract and whether CEC now bears any liability on any of the contracts between Chartwell and the Caesars parties. The Court declines to do so at the motion to dismiss stage.

ORDER

For the reasons stated above,

IT IS ORDERED that this case is hereby STAYED as to Counterclaim Defendants Caesar’s Entertainment Operating Company, Inc., 3535 LV Corporation, Caesar’s Entertainment Golf, Inc., Desert Palace, Inc., FHR Corporation, Harveys Tahoe Management Company, Inc., Parball Corporation, Rio Development Company, Inc., and Harrah’s Imperial Palace Corporation pursuant to 11 U.S.C. § 362(a).

IT IS FURTHER ORDERED that Counterclaim Defendant Caesars Entertainment Corporation’s motion to be dismissed as a party, made within its Motion to Dismiss (ECF No. 108), is DENIED.

[1] The term “Caesars” refers collectively to the following entities as named in Chartwell’s Answer and Counterclaim (ECF No. 18): Caesar’s Entertainment Corp.; Caesar’s Entertainment Operating Co., Inc.; Harrah’s Las Vegas LLC; Harrah’s Laughlin LLC; Harvey’s Tahoe Management Co., Inc.; Rio Development Co., Inc.; Rio Properties, LLC; 3535 LV Corp.; Caesar’s Entertainment Golf, Inc.; Desert Palace, Inc.; FHR Corp.; Harrah’s Imperial Palace Corp.; and Parball Corp. Counsel for the Caesars Parties informed the Court that Counterclaim Defendant Colony Resorts LVH Acquisitions, LLC (“Colony”) is not a Caesars-related entity, despite it being so named in the Counterclaim. Chartwell did not dispute this representation. Therefore, Colony is excluded from any discussion of the Caesars parties.

Save trees – read court opinions online on Google Scholar.

300x600

New Bankruptcy Opinion: IN RE WEST 160 SCRAP & SALVAGE, LLC – Bankr. Court, WD Missouri, 2015

In Re: West 160 Scrap & Salvage, LLC, Debtor.

WEST 160 SCRAP & SALVAGE, LLC Plaintiff(s)

v.

Bi-State Scrap and Recycling, LLC, Benjamin Marcak, Clifford Lawing, Shane Braynard, Defendant(s).

Bankruptcy Case No. 14-61498-abf11, Adversary Case No. 15-06006-abf.

United States Bankruptcy Court, W.D. Missouri.

June 26, 2015.

JUDGMENT

This proceeding having come on for trial or hearing before the court, the Honorable Arthur B. Federman, United States Bankruptcy Judge, presiding, and the issues having been duly tried or heard and a decision having been rendered.

IT IS ORDERED AND ADJUDGED: That judgment is hereby entered in favor of Defendant Bi-State Scrap and Recycling, LLC on Count II of the Debtor—Plaintiff’s Complaint for Turnover, and in favor of Defendant Benjamin Marcak on Count III of the Debtor—Plaintiff’s Complaint for Turnover. Each party to bear its own costs.

Save trees – read court opinions online on Google Scholar.

300x600

New Bankruptcy Opinion: IN RE UNIVERSITY GENERAL HOSPITAL SYSTEM, INC. – Bankr. Court, SD Texas, 2015

IN RE UNIVERSITY GENERAL HOSPITAL SYSTEM, INC., ET AL., Debtors, [1]

Case No. 15-31086-H3-11, Jointly Administered.

United States Bankruptcy Court, S.D. Texas, Houston Division.

June 22, 2015.

MEMORANDUM OPINION

LETITIA Z. PAUL, Bankruptcy Judge.

The court has held an evidentiary hearing on the “Emergency Motion for Relief from Automatic Stay Regarding Non-Residential Real Property and Exempt Personal Property” (Docket No. 365) filed by The Arena Group, L.P. The following are the Findings of Fact and Conclusions of Law of the court. A separate Judgment will be entered denying the motion. To the extent any of the Findings of Fact are considered Conclusions of Law, they are adopted as such. To the extent any of the Conclusions of Law are considered Findings of Fact, they are adopted as such.

Findings of Fact

University General Hospital System, Inc., and eight other related entities (“Debtors”) filed voluntary petitions under Chapter 11 of the Bankruptcy Code on February 27, 2015. The cases are jointly administered.

In the instant motion, The Arena Group, L.P. (“Movant”) seeks relief from stay, in order to foreclose an alleged security interest in personal property located at space leased by the Debtors in Movant’s real property. Movant seeks the lifting of stay for cause, and on grounds Debtor lacks equity in the property and the property is not necessary to an effective reorganization.

Debtors’ lease of the real property provides for a contractual lien in favor of Movant for the payment of rent. (Movant’s Exhibit A).

Debtors have moved to reject the lease. (Docket No. 356). Debtors’ motion to reject the lease is presently set for hearing on June 29, 2015.

Tim Naizer, who manages Movant’s records regarding the property, testified that, to the best of his knowledge, Movant has not filed a UCC-1 financing statement with respect to the contractual lien contained in the lease.

Conclusions of Law

Section 362(d) of the Bankruptcy Code provides in pertinent part:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;

(2) with respect to a stay of an act against property under subsection (a) of this section, 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)(1), 362(d)(2).

Section 362(g) of the Bankruptcy Code provides:

(g) In any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under subsection (a) of this section—

(1) the party requesting such relief has the burden of proof on the issue of the debtor’s equity in property; and

(2) the party opposing such relief has the burden of proof on all other issues.

11 U.S.C. § 362(g).

Cause is not defined in the Code, and must be determined on a case by case basis based on an examination of the totality of circumstances. In re Reitnauer, 152 F.3d 341, 343 n. 4 (5th Cir. 1998) ; In re Mendoza, 111 F.3d 1264 (5th Cir. 1997) .

In the instant case, Movant has not met its burden of proof with respect to the absence of Debtors’ equity in the property. A landlord’s contractual lien must be perfected by filing under the UCC. Bank of North America v. Kruger, 551 S.W.2d 63 (Tex. Civ. App.—Houston [1st Dist.] 1977). On the evidence before this court, the court concludes that Movant did not perfect its contractual lien in the personal property located in the leased space.

On the question of cause, the only cause asserted by Movant is that it wants to utilize Debtors’ personal property in attempting to relet the space, in order to mitigate its damages. As addressed above, the court has concluded that Movant did not perfect its contractual lien. In the absence of such perfection, Movant has no present right to possession of Debtors’ personal property. The court concludes, based on the totality of circumstances, that cause does not exist for the lifting of stay.

Based on the foregoing, a separate Judgment will be entered denying the “Emergency Motion for Relief from Automatic Stay Regarding Non-Residential Real Property and Exempt Personal Property” (Docket No. 365) filed by The Arena Group, L.P.

[1] The Debtors and the last four digits of their respective taxpayer identification numbers are as follows: University General Health System, Inc. (2346), UGHS Autimis Billing, Inc. (3352), UGHS Autimis Coding, Inc. (3425), UGHS ER Services, Inc. (6646), UGHS Hospitals, Inc. (3583), UGHS Management Services, Inc. (4100), UGHS Support Services, Inc. (3511), University General Hospital, LP (7964), and University Hospital Systems, LLP (3778).

Save trees – read court opinions online on Google Scholar.

300x600

New Bankruptcy Opinion: IN RE SYNTAX-BRILLIAN CORPORATION – Court of Appeals, 3rd Circuit, 2015

IN RE: SYNTAX-BRILLIAN CORPORATION, ET AL., Debtors.

AHMED AMR, Appellant.

No. 15-1315.

United States Court of Appeals, Third Circuit.

Submitted Pursuant to Third Circuit LAR 34.1(a) June 25, 2015.
Opinion filed: June 26, 2015.

Before: FISHER, KRAUSE and VAN ANTWERPEN, Circuit Judges.

NOT PRECEDENTIAL

OPINION [*]

PER CURIAM.

Ahmed Amr appeals from an order of the United States District Court for the District of Delaware dismissing his appeal from an order of the United States Bankruptcy Court for the District of Delaware. For the following reasons, we will vacate the District Court’s order and remand for further proceedings.

Syntax Brillian Corporation (“SBC”) was a public company engaged in the manufacture and distribution of high-definition televisions under the “Olevia” brand name. In July 2008, SBC filed a petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware (“the Bankruptcy Court”). (See Bankr. D. Del. No. 08-11407.) SBC sought the Bankruptcy Court’s approval of a proposed sale of SBC’s assets. They were represented in those proceedings by Greenberg Taurig, LLP (“GT”). Nancy A. Mitchell (“Attorney Mitchell”) handled the case primarily.

Ahmed Amr (“Amr”), an individual, was an investor and shareholder in SBC. Shortly after SBC filed its bankruptcy petition, Amr filed a motion in the Bankruptcy Court opposing the sale of SBC’s assets on grounds that SBC’s management and business partners had engaged in fraud and misconduct. Over Amr’s objections, the Bankruptcy Court allowed the sale to proceed. On July 6, 2009, the Bankruptcy Court entered an “Order Confirming Debtors’ Second Amended Chapter 11 Liquidating Plan, as Modified.” The Plan became effective on July 7, 2009.

On December 20, 2011, over two years after GT ceased performing in its role as counsel to SBC, Amr filed in the Bankruptcy Court a motion for sanctions against GT and Attorney Mitchell. He also filed a motion to compel the release of certain documents. On March 2, 2012, the Bankruptcy Court denied both motions. Amr then proceeded to file a series of motions for reconsideration or amendment of those orders. On January 14, 2013, the Bankruptcy Court entered an order denying Amr’s first, second, and third motions to alter or amend. [1]

Amr appealed from that decision to the United States District Court for the District of Delaware (“the District Court”). GT and Attorney Mitchell filed a joint motion to dismiss the appeal as untimely under Rule 8002 of the Federal Rules of Bankruptcy Procedure. On January 12, 2015, the District Court entered an order granting the motion to dismiss. This appeal followed. [2]

Appeals from the Bankruptcy Court must be brought “in the time provided by Rule 8002 of the Bankruptcy Rules.” 28 U.S.C. § 158(c)(2). Rule 8002 gives persons aggrieved by a bankruptcy order fourteen days to file a notice of appeal with the Clerk of the Bankruptcy Court. See Fed. R. Bankr. P. 8002(a). This requirement is jurisdictional. See In re Caterbone, 640 F.3d 108, 113 (3d Cir. 2011) .

The Bankruptcy Court entered its order denying Amr’s motions for reconsideration on January 14, 2013. Thus, Amr had until January 28, 2013 to file his appeal of that decision. GT and Attorney Mitchell argued in their motion to dismiss that Amr’s appeal was untimely because it had been filed one day late—on January 29, 2013. They pointed to the fact that the notice had been stamped by the Clerk on January 29, 2013, and that the Bankruptcy Court’s docket reflected the same. [3] Amr countered that his appeal was, in fact, timely. Presenting a United States Postal Service tracking sheet, Amr argued that his appeal had been timely received by the Bankruptcy Court (on January 28th at 11:42 a.m.), but that it was incorrectly docketed late. The District Court granted the motion to dismiss over Amr’s objections but did not specifically address Amr’s argument that the Clerk had erred in docketing his appeal.

In most circumstances, the date stamped on the notice of appeal will be the date of filing. However, Amr has offered credible evidence showing that his notice was actually received into the custody of the Bankruptcy Clerk on January 28, 2013, one day before it was stamped as filed. Cf. City of Chicago v. U.S. Dep’t of Labor, 737 F.2d 1466, 1471 (7th Cir. 1984) (“It is well settled that a notice of appeal or a petition for review is filed once the Court of Appeals receives actual custody of the document.”). [4] We have previously observed that the date stamped on the notice of appeal by a court clerk is not always conclusive of the date of filing. See, e.g., United States v. Solly, 545 F.2d 874, 876 (3d Cir. 1976) (construing Federal Rule of Appellate Procedure 4). In Solly, the defendant claimed that the clerk’s office received his notice of appeal on the last day for filing, by certified mail, but that it was not entered on the docket until five days later. Id. We determined that “whenever a notice of appeal is filed in a district court, it is filed as of the time it is actually received in the clerk’s office even though it is designated as filed by the clerk’s office at a later date.” Id. If we held otherwise, “the timeliness of the filing would be under the control of the personnel of the clerk’s office rather than the appellant.” Id.

Given that, and in light of Amr’s documentary evidence, we conclude that his notice of appeal was timely received by the Bankruptcy Court, and thus timely filed under Rule 8002(a).

Accordingly, we will vacate the District Court’s dismissal order and remand this matter for further proceedings consistent with this opinion. [5] We express no opinion as to the merits of Amr’s appeal from the Bankruptcy Court’s order. [6]

[*] This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent.

[1] Amr filed a fourth such motion which the Bankruptcy Court also denied, but he did not appeal that ruling to the District Court.

[2] We have jurisdiction pursuant to 28 U.S.C. § 158(d)(1), and we exercise plenary review over the District Court’s ruling. See Kool, Mann, Coffee & Co. v. Coffey, 300 F.3d 340, 353 (3d Cir. 2002) .

[3] GT and Attorney Mitchell further argued that Amr’s notice of appeal was not properly filed in any event because he mailed it to the Bankruptcy Court rather than filing it electronically, as is required under Local Bankruptcy Rule 5005-4. We have reviewed that Rule, however, and determine that it does not appear that electronic filing is the exclusive means for filing documents in the Bankruptcy Court—particularly for those pro se litigants who (like Amr) are not registered users of CM/ECF. Moreover, the Bankruptcy Court has accepted numerous filings from Amr via mail, including his original motion for sanctions and his various motions for reconsideration.

[4] GT and Attorney Mitchell have not argued that the document that was delivered to the Bankruptcy Court on January 28, 2013, was, or could have been, something other than Amr’s notice of appeal.

[5] GT’s and Attorney Mitchell’s joint motion to file a supplemental appendix is granted. Amr’s motion to supplement the record is denied. His proffered exhibits are either already part of the record or not relevant to the issue on appeal.

[6] The motions to intervene which have been filed in this case are denied. Movants have not satisfied the high threshold for intervening for the first time on appeal. In re Grand Jury Investigation Into Possible Violations of Title 18, U.S. Code, Sections 201, 371, 1962, 1952, 1951, 1503, 1343 and 1341 “A”, 587 F.2d 598, 601 (3d Cir. 1978).

Save trees – read court opinions online on Google Scholar.

300x600

New Bankruptcy Opinion: IN RE SAPPHIRE DEVELOPMENT, LLC – Bankr. Court, D. Connecticut, 2015

In re: Sapphire Development, LLC, Chapter 11, Debtor.

No. 13-50043.

United States Bankruptcy Court, D. Connecticut, Bridgeport Division.

June 26, 2015.

Randolph E. White, Esq., David Y. Wolnerman, Esq., White & Wolnerman, PLLC, New York, NY, for the Debtor.

James R. Fogarty, Esq., Fogarty Cohen Selby & Nemiroff, LLC, Old Greenwich, CT, for Robert McKay.

David K. Fiveson, Esq., Butler, Fitzgerald, Fiveson & McCarthy, New York, NY, for Hudson City Savings Bank.

Gary S. Klein, Esq., Carmody Torrance Sandak & Hennessey LLP, Stamford, CT, for Stuart Longman.

MEMORANDUM OF DECISION AND ORDER ON MOTION TO DISMISS

ALAN H.W. SHIFF, Bankruptcy Judge.

I. Introduction

In conjunction with the District Court’s November 5, 2014 ruling (“District Court Ruling”) [1] and a corresponding evidentiary hearing on Robert McKay’s motion to dismiss this case as a bad-faith filing (“Motion to Dismiss”; see ECF No. 16), the motion is granted for the reasons that follow.

II. Background

The Court assumes the parties’ familiarity with the findings and conclusions of its September 30, 2013 Abstention Order (“Abstention Order”; ECF No. 222) and with the District Court Ruling, which vacated the Abstention Order and remanded this case for further proceeding. [2] For convenience of the parties, the following limited background is provided to give context to this memorandum of decision.

A. Pre-Remand

In 1996, McKay obtained a $3.96 million judgment in his favor from a New York state court (“NYS Judgment”). (See Abstention Order at 2.) The judgment was based on a finding of actual fraud committed by Stuart Longman against McKay, which the state court described as gross, wanton, and willful. (See id. (citing Exh. A of Abstention Trial Exh. B).)

In September 2010, McKay commenced an action against Longman, Sapphire and others in the superior court of the state of Connecticut “to recover his judgment against Longman from Sapphire, by reaching Sapphire’s sole asset, a 25.237-acre parcel of real property located . . . in Ridgefield, Connecticut (`the Property’)” (“State Court Action” [3] ). District Court Ruling at 4 (emphasis added); see also Abstention Order at 3 (describing the Property as Sapphire’s “only asset”). The State Court Action was assigned to the Complex Litigation Docket and scheduled for trial on January 14, 2013. See id. The trial was stayed three days before it was to commence when, on January 11, 2013, Sapphire filed this Chapter 11 case. See id.; see also District Court Ruling at 4; 11 U.S.C. § 362(a)(1).

On January 15, 2013, McKay filed the instant Motion to Dismiss or, in the alternative, to abstain pursuant to 11 U.S.C. § 305(a). On January 23, 2013, McKay filed an amended Motion for Relief from Stay to proceed with the State Court Action. (“MFRS”). See Abstention Order at 3. On June 19 and 20, and July 24, 2013, the Court held hearings on McKay’s abstention motion (“Abstention Hearing”). On September 30, 2013, the Court granted McKay’s Motion to Abstain. See Abstention Order at 2. On October 10, 2013, Sapphire filed a notice of appeal. (See ECF No. 224.)

B. The Remand

On November 5, 2014, the District Court agreed with this Court’s findings, but concluded abstention under § 305(a) was not an appropriate remedy in the context of those findings. The District Court vacated the Abstention Order and remanded the case for further proceedings. In its Ruling, the District Court stated that it

share[d] the bankruptcy court’s assessment of Sapphire’s unsavory motives for commencing the bankruptcy, which could be a basis for dismissing the bankruptcy, lifting the automatic stay, or even imposing sanctions. . . .

District Court Ruling at 5 (emphasis added). The District Court further

stresse[d] . . . that the bankruptcy court remains empowered to take further action on McKay’s motion to dismiss and motion for relief from the automatic stay. . . [and that] the bankruptcy court’s existing factual findings [hereafter, “Existing Factual Findings”] as to Sapphire’s motives-which are supported by the evidence-are relevant to those motions and would likely support granting either the motion to dismiss or the motion for relief from the automatic stay.

Id. at 12 (emphasis added).

C. Post-Remand — Motion to Dismiss

On December 16, 2014, the Court conducted a status conference on McKay’s Motion to Dismiss and MFRS. Notwithstanding the District Court’s determination that McKay is a creditor in this case, and even if he was not, he has standing as a “party in interest”, see District Court Ruling at 5-6, Sapphire, Longman, and Hudson City Savings Bank (collectively, “Respondents”) nonetheless urged the Court to proceed with Sapphire’s adversary proceeding, Adv. Pro. No. 13-5024, which seeks:

a declaration providing: (A) that McKay does not possess a bona fida claim against Sapphire, and therefore, is not entitled to relief against the Debtor for any purpose, is not entitled to vote in or otherwise recover against the Debtor or its assets in [Sapphire’s] Chapter 11 Bankruptcy case and otherwise lacks standing in this Case; and (B) that the Hudson City Mortgage is a valid first priority mortgage on the Property.

(Adv. Pro. No. 13-5024, Complaint at 4, ¶21 (main case, ECF No. 148).)

Sapphire also requested that the Court address its proposed plan of reorganization. McKay countered with a request that the Court grant his Motion to Dismiss on the basis of the evidence presented at the trial on his Motion to Abstain, i.e., the Existing Factual Findings. (See Dec. 16, 2014 Audio File, ECF No. 257.)

On January 15, 2015, after considering the parties’ positions, the Court entered an order scheduling a hearing on the Motion to Dismiss to give the parties an opportunity to supplement the Existing Factual Findings. (See Scheduling Order (ECF No. 259) at 2 (quoting District Court Order, 523 B.R. at 12 ).) Accordingly, the Court “ORDERED that the relevant evidence adduced at the trial on McKay’s Motion to Abstain will be included in the record of the trial on McKay’s Motion to Dismiss”. (Id. at 3 (emphasis added).) Neither party objected.

At the commencement of the trial on April 14, 2015 (“Dismissal Trial”), the parties again acknowledged and did not dispute that, consistent with the District Court Ruling and the Scheduling Order, the record in the Motion to Dismiss would include the Existing Factual Findings. (See Apr. 14, 2015 Audio File, ECF No. 300.) That record was supplemented by the parties, as discussed infra.

III. Discussion

The predicate for a Motion to Dismiss is 11 U.S.C. § 1112(b), which provides in relevant part:

(1) Except as provided in paragraph (2) . . . the court shall convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause . . .

(2) The court may not convert a case under this chapter to a case under chapter 7 or dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor or any other party in interest establishes that—

(A) there is a reasonable likelihood that a plan will be confirmed . . . within a reasonable period of time;

* * *

11 U.S.C. §1112(b)(1) & (2) (emphasis added).

The party seeking dismissal under § 1112(b)(1) has the burden of proving “cause” by a preponderance of the evidence. See In re Julian, No. 11-30151 (LMW), 2012 WL 506573, at *3, slip op. (Bankr. D. Conn. Feb. 15, 2012) (citations omitted). The party seeking to invoke the § 1112(b)(2) exception has the burden of establishing its entitlement to that exception (“Exception”). See id. at *4.

While recognizing that debtor “bad faith” is not included in the illustrative list of “cause” under § 1112(b)(4), the Second Circuit, nonetheless, has held that bad faith may be “cause” warranting the dismissal of a Chapter 11 bankruptcy case. See C-TC 9th Ave. P’ship v. Norton Co. (In re C-TC 9th Ave. P’ship), 113 F.3d 1304, 1311 ; see also Julian, 2012 WL 506573 at *311 . The Second Circuit further stated that when assessing whether there is cause warranting dismissal, “The Court will be able to consider other factors as they arise, and to use its equitable powers to reach an appropriate result in individual cases.” C-TC 9th Ave. P’ship, 113 F.3d at 1311 n.5 (quoting House Report No. 95-595, 95th Cong., 1st Sess. at 405-06, U.S. Code Cong. & Admin. News 1978, pp. 5787, 6363-64; further citation omitted). The C-TC 9th Ave. court listed eight factors indicative of a bad faith filing:

(1) the debtor has only one asset;

(2) the debtor has few unsecured creditors whose claims are small in relation to those of the secured creditors;

(3) the debtor’s one asset is the subject of a foreclosure action as a result of arrearages or default on the debt;

(4) the debtor’s financial condition is, in essence, a two party dispute between the debtor and secured creditors which can be resolved in the pending state foreclosure action;

(5) the timing of the debtor’s filing evidences an intent to delay or frustrate the legitimate efforts of the debtor’s secured creditors to enforce their rights;

(6) the debtor has little or no cash flow;

(7) the debtor cannot meet current expenses including the payment of personal property and real estate taxes; and

(8) the debtor has no employees.

C-TC 9th Ave. P’ship, 113 F.3d at 1311 (citing Pleasant Pointe Apartments, Ltd. v. Kentucky Hous. Corp., 139 B.R. 838, 832 (W.D. Ky. 1992) ) (the “C-TC Factors”). The C-TC Factors are non-exhaustive indicators of bad faith which

guide courts in considering the question of whether a bankruptcy case has been filed in good faith, and assist courts in assessing the totality of the circumstances. Depending on the situation, one or another factor may have greater weight, and the number of factors on one side or the other of the balance is not, standing alone, determinative of the outcome.

In re Hartford & York, LLC, No. 13-45563-ess, 2014 WL 985449, *4, slip op. (Bankr. E.D.N.Y. Mar. 13, 2014) (relying on the C-TC Factors in determining whether a filing was in bad faith); see also In re Loco Realty Corp., No. 09-11785 (AJG), 2009 WL 2883050, at *3, slip op. (Bankr. S.D.N.Y. June 25, 2009) (“[The C-TC Factors] are not to be applied mechanically and the existence of bad faith does not depend on any particular combination of factors, but rather must be gauged from the facts and circumstances of each case.” (Citation omitted)).

A. Bad Faith Filing as Cause

At the commencement of the Dismissal Trial, the parties again acknowledged and did not dispute that the record in this Motion to Dismiss would include the Existing Factual Findings. [4] (See Apr. 14, 2015 Audio File, ECF No. 300.) Accordingly, the record here includes the following:

Sapphire is an artificial entity whose only purpose is to hold title to the Property, its only asset, which is not income producing. For the last three years (2011, 2012, and 2013) [Sapphire] has “receive[d] contributions from other related entities”. (Debtor’s Statement of Financial Affairs (“SOFA”), ECF No. 36, at p.14; Amendment to SOFA, ECF No. 74, at p.1.). It has not filed federal income tax returns for several years. (See June 24, 2013 Trial Tr. at 112:21-23 (ECF No. 217).) [Sapphire] has no employees and conducts no business. Without considering McKay’s NYS [$3.96 million [5] ] Judgment, [Sapphire] has approximately $27,000 in general unsecured claims (see Sch. F, ECF No. 36, amended by ECF Nos 74 and 84 (deleting two listed creditors)), and for each of those unsecured creditors, Longman is identified as a co-debtor with the debtor. (See Schs. F and H, ECF No. 36, at pp. 9-10, 12). Moreover, [Sapphire] has been making monthly mortgage payments to the first mortgagee, Hudson (see Amendment to SOFA, ECF No. 74, at p.1.), and there are no foreclosure actions pending against it (see SOFA, Item 5, ECF No. 36 at 16).

Abstention Order at 6-7.

The issue then is whether the Existing Factual Findings, viewed through the lens of the Second Circuit’s C-TC Factors regarding a bad faith filing, would warrant a finding of cause that would support dismissal. They would.

The following findings are undisputed. Sapphire has only one asset, i.e., the Property, which satisfies C-TC Factor 1. C-TC Factor 2 is also satisfied as there are few and de minimis unsecured claims in comparison to the claims of Sapphire’s secured creditors and, potentially, McKay. C-TC Factors 5, 6, and 8 are also satisfied by the evidence offered at the Abstention Hearing. That is, the timing of Sapphire’s filing evidences an intent to delay or frustrate McKay’s legitimate efforts to enforce his collection of the NYS Judgment (see Abstention Order at 2, District Court Ruling, 523 B.R. at 4 ), Sapphire has little or no cash flow, being supported with advances from other Longman-Controlled Entities (see Abstention Order at 7), and Sapphire continues to have no employees and conducts no business (id.).

Accordingly, the Court concludes that the Existing Factual Findings support McKay’s assertion that this case was filed in bad faith which warrants granting this Motion to Dismiss. The next issue becomes whether the evidence adduced at the Dismissal Trial trial would change that result. It would not.

McKay offered the following evidence. Sapphire is in arrears on post-petition real estate taxes. It continues to be funded with contributions from another Longman-Controlled Entity, i.e., Lurie Investments. Although Sapphire’s Chapter 11 case hinges on filing a confirmable plan of reorganization, the core of which is the subdivision of the Property, Sapphire cannot accomplish that goal without zoning approval from the Town of Ridgefield, which it has neither sought nor obtained. Sapphire did not persuasively [6] dispute any of that evidence.

Sapphire’s opposition to the Motion to Dismiss primarily centered on the value of the Property and its intention to subdivide, develop, and sell a portion of the Property to fund its plan, utilizing a plan-funding agreement with a Longman-Controlled Entity. The balance of the Property would remain as Longman’s residence with Longman paying rent to Sapphire.

Having reviewed the evidence and assessed the credibility of the witnesses, the Court finds that McKay’s evidence debunked Sapphire’s subdivision scheme, which was the alleged basis for the commencement of this Chapter 11 case and the proposal of its plan of reorganization. That evidence also satisfied other C-TC Factors. For example, C-TC Factor 6 is satisfied since Sapphire has little or no cash flow, and C-TC Factor 7 is satisfied since Sapphire is in arrears on post-petition real estate taxes.

Parenthetically, it is reasonable to conclude that the evidence at the Dismissal Trial, independent of the Existing Factual Findings, would warrant the finding of cause under §1112(b)(1) & (4) [7] and granting the Motion to Dismiss. That aside, the Existing Factual Findings supplemented at the Dismissal Trial by the evidence of a bad faith filing demonstrate that requisite cause.

B. Conversion or Dismissal

The analysis turns to the issue of whether it is in the “best interests of the creditors and the estate” to convert this case to Chapter 7 or to dismiss it. 11 U.S.C. § 1112(b)(1). Where cause exists, a bankruptcy court has “wide discretion” to “decide whether to convert the case to one under Chapter 7 or to dismiss.” In re Babayoff, 445 B.R. 64, 76 (Bankr. E.D.N.Y. 2011) (citing In re BH S&B Holdings, LLC, 439 B.R. 342, 346 (Bankr. S.D.N.Y. 2010) ). “There is no `bright-line test to determine [whether] conversion or dismissal is in the best interests of creditors and the estate.'” Id. (quoting In re Westhampton Coachworks, Ltd., 2010 WL 5348422, at *6 (Bankr. E.D.N.Y. Dec. 21, 2010)).

1. Best Interests of Creditors and the Estate

Having found the requisite cause, “the court shall convert [this] case . . . or dismiss [it] . . ., whichever is in the best interests of creditors and the estate . . .” except as provided in subparagraph (2). 11 U.S.C. §1112(b)(1). It is noted that no party sought conversion. McKay requested dismissal, and the Respondents opposed that request.

The Court finds it is in the best interests of the creditors and the estate [8] to dismiss this case. Currently, Sapphire is a debtor-in-possession with all the rights, powers, functions, and duties of a case trustee. See 11 U.S.C. § 1107(a); see also §§ 704(a)(2), (5), (7)-(12); 323. In other words, Sapphire is now in control of the estate, which, in this case, is the Property. Upon dismissal, Sapphire will remain in control of the Property. Conversion would change that status. Sapphire would then be dispossessed, and a Chapter 7 trustee would be appointed to oversee, manage, and distribute the Property. See 11 U.S.C. §§ 701, 322, 704. Indeed, a Chapter 7 trustee could decide to manage the Property, e.g., pursue a subdivision of the Property or operate it as an income-producing property with new tenants. See 11 U.S.C. § 721. [9]

The interests of creditors are not better served by conversion than by dismissal. The secured creditors are not affected whether the case is converted or dismissed. If converted, the secured creditors’ claims are not subject to discharge. If dismissed, the secured creditors’ claims remain as they were when the case was filed. That result is the same as to the claims of unsecured creditors.

As to the de minimus unsecured creditor pool of non-McKay unsecured creditors (totaling approximately $27,000, see supra at 7), Longman has been identified as a co-debtor. See Abstention Order at 7. Therefore, the interests of those claimants are not affected by conversion or dismissal.

McKay, the largest unsecured creditor, [10] specifically requests dismissal so that he may pursue the State Court Action that was stayed by the bad faith filing of this case. Sapphire’s opposition to McKay’s request is motivated by an attempt to prevent McKay from securing a determination, by pursuing the State Court Action, as to whether he can make a claim against the Property. This Court previously recognized and rejected as repugnant to equity, Sapphire’s attempt to block McKay’s efforts to resolve that linchpin issue:

[B]y filing for bankruptcy protection, [Sapphire] is not just seeking to stay the State Court Action, but, by claiming McKay is not a creditor or even a party-in-interest, is also seeking to eradicate McKay’s ability to have his day in court, either here or in state court.

See Abstention Order at 7-8; see also District Court Ruling, 523 B.R. at 5, 12-13 .

2. Exception to Conversion or Dismissal

The remaining issue is whether Sapphire is entitled to an exception to the mandate that the Court dismiss this case. Section 1112(b)(2) provides, in relevant part:

the court may not . . . dismiss a case under this chapter if the court finds and specifically identifies unusual circumstances establishing that converting or dismissing the case is not in the best interests of creditors and the estate, and the debtor . . . establishes that—

(A) there is a reasonable likelihood that a plan will be confirmed within . . . a reasonable period of time . . .

11 U.S.C. § 1112(b)(2)(emphasis added).

To the extent Sapphire offered evidence at the Dismissal Trial to satisfy the §1112(b)(2) Exception, its attempt is fatally flawed. To satisfy its burden of proof, see supra at 5, Sapphire offered evidence, primarily through Longman, about its proposed plan of reorganization, focusing on the subdivision of the Property for which no approval was sought or received. More to the point: Sapphire appears to believe that if it ignores McKay’s allegations that he should be able to enforce his NYS Judgment against the Property, see District Court Ruling, 523 B.R. at 4, those allegations will disappear, and it will be able to utilize the Property to implement its plan. Indeed, Sapphire’s proposed Property subdivision assumes (a) the conclusion that it is the rightful owner of the Property, and (b) it will be permitted to subdivide the Property, despite admitting it has not sought any of the requisite zoning approval from the Town of Ridgefield.

Thus, after “a full examination of all the circumstances of the case,” C-TC 9th Ave., 113 F.3d at 1312, the Court finds this case was filed in bad faith, which is cause warranting its dismissal, and it is in the best interests of creditors and the estate that this case be dismissed. See § 1112(b)(1).

IV. Conclusion

Accordingly, IT IS ORDERED that McKay’s Motion to Dismiss is GRANTED.

IT IS FURTHER ORDERED that, consistent with the District Court Ruling, any party appealing this ruling “shall file a motion with the appeal indicating” that in Judge Shea’s view such an appeal is related to the District Court Ruling and “should be assigned to [him].” [11]

[1] See Sapphire Dev’l, LLC v. McKay (In re Sapphire Dev’l, LLC), 523 B.R. 1 (D. Conn. 2014) .

[2] The defined terms used in the District Court Ruling and in the Abstention Order will be used in this memorandum of decision.

[3] See McKay v Longman et al., FST-CV10-6007056-S (Conn. Super. filed Oct. 15,2010).

[4] The District Court also stated:

Given the strong evidence of Sapphire’s bad-faith conduct, already addressed in [the Abstention Hearing] before the bankruptcy court, it may well be within the bankruptcy court’s discretion to impose sanctions. . . .

District Court Ruling, 523 B.R. at 13 (emphasis added). However, when the Court asked McKay if he wished to seek sanctions, he stated that he did not. (See Dec. 16, 2014 Audio File, ECF No. 257.)

[5] This figure does not include post-judgment interest, which has been accruing since 1996.

[6] Longman’s credibility is questionable, at best. The Court notes this is not inconsistent with the observations of other courts where Longman and/or one or more of his entities were parties. See, e.g., McKay v. Longman et al., No. 6253-90, Judgment (N.Y. Sup. Ct. (Albany) July 10, 1996) (finding Longman liable to McKay for actual fraud based on, inter alia, his gross, wanton and willful conduct in illegally converting mortgage proceeds); McKay v. Longman et al., FST X08 CV 106007056S, slip op. at 9-10, n.3 (Conn. Super. Nov. 30, 2012) (denying defendant bank’s motion for summary judgment; finding the discrepancy between Longman’s deposition testimony and documentary evidence raised a genuine issue of fact precluding summary judgment); Kriti Ripley, LLC et al. v. Emerald Invs., LLC, et al., 404 S.C. 367, 746 S.E.2d 26 (S.C. 2013) (upholding foreclosure of Emerald’s interest in another LLC to satisfy judgment against Emerald and Longman based on their “wrongful acts” of diverting and misappropriating funds); In re Emerald Invs., LLC, No 14-13407 (MG), 2015 WL 1540941, slip op. (Bankr. S.D.N.Y. Mar. 31, 2015) (appointing Ch. 11 trustee based on current manager Longman’s pre- and post-petition conduct, including bad-faith, “ulterior motives”, and non-disclosure of property and potentially related other Longman-controlled entities, including Sapphire and Debtor 60 Shelter Rock Assocs., LLC, another Longman-associated entity, which is also a debtor in this court, Case No. 14-50217); see also District Court Ruling, 523 B.R. at 5 (D. Conn. 2014) (sharing bankruptcy court’s assessment of Sapphire’s “unsavory motives” for commencing case).

[7] See, e.g., § 1112(b)(4)(I).

[8] Compare 11 U.S.C. § 305(a)(1), which measures the effect of abstention on creditors and the debtor.

[9] Section 721 provides:

The court may authorize the trustee to operate the business of the debtor for a limited period, if such operation is in the best interest of the estate and consistent with the orderly liquidation of the estate.

11 U.S.C. § 721.

[10] See District Court Ruling, 523 B.R. at 5-6 ; see also 11 U.S.C. §§ 101(10)(defining “creditor”), 101(5) (defining “claim”).

[11] See District Court ruling, 523 B.R. at 13 .

Save trees – read court opinions online on Google Scholar.

300x600

New Bankruptcy Opinion: IN RE REVEL AC, INC. – Bankr. Court, D. New Jersey, 2015

In Re: REVEL AC, INC., et al., Chapter 11, Debtors. [1]

IDEA Boardwalk, LLC, Plaintiff,

v.

Revel Entertainment Group, LLC, Defendant.

Case No. 14-22654 (MBK), Ad. Pro. No. 14-01756 (MBK).

United States Bankruptcy Court, D. New Jersey.

June 24, 2015.

Stuart J. Moskovitz, Esq., Law Offices of Stuart J. Moskovitz, Esq., Freehold, NJ, Attorney for Polo North Country Club, Inc.

Jeffrey Cooper, Esq., Barry Roy, Esq., Rabinowitz, Lubetkin & Tully, L.L.C., Livingston, NJ, Attorneys for IDEA Boardwalk, LLC.

Warren J. Martin Jr., Esq., Porzio Bromberg & Newman P.C., Morristown, NJ, Attorneys for Exhale Enterprises XXI, Inc., GRGAC1, LLC, GRGAC2, LLC, GRGAC3, LLC, Mussel Bar AC, LLC, PM Atlantic City, LLC, RJ Atlantic City, LLC and The Marshall Retail Group, LLC (“Amenity Tenants”).

Robert K. Dakis, Esq., Morrison Cohen, LLP, New York, NY, Attorneys for American Cut AC Marc Forgione, Azure AC Allegretti, and Lugo AC, LLC (“LDV Tenants”).

Michael D. Sirota, Esq., Warren A. Usatine, Esq., Ryan T. Jareck, Esq., Cole Schotz P.C., Hackensack, NJ, Attorneys for the Official Committee of Unsecured Creditors.

Michael Viscount, Esq., Samuel Israel, Esq., Fox Rothschild LLP, Philadelphia, PA, and John K. Cunningham, Esq., Richard S. Kebrdle, Esq., Kevin M. McGill, Esq., Jason N. Zakia, Esq., White & Case LLP, Miami, FL, Attorneys for the Debtors.

MEMORANDUM DECISION

MICHAEL B. KAPLAN, Bankruptcy Judge.

INTRODUCTION

Before the Court is the cross motion (“Cross Motion”) of IDEA Boardwalk, LLC (“IDEA”), filed in connection with the Debtors’ prior motion to reject certain leases and executory contracts, in which IDEA seeks an order clarifying its rights under 11 U.S.C. § 365(h). In rendering its decision herein, the Court also addresses the respective rights of the Amenity Tenants [2] and the LDV Tenants [3] , which subsequently joined in the Cross Motion (hereinafter, IDEA, the Amenity Tenants, and the LDV Tenants may be referred to, collectively, as “the Tenants”). Prior to the bankruptcy filing, each of the Tenants had entered into agreements (“Agreements”) with the Debtors, under which the Tenants operated various retail facilities on the Debtors’ premises. Whether the Agreements are in fact true leases or memorializations of some other form of contractual relationship (e.g., management or joint venture agreements) is an issue in dispute that must be decided in order for the Court to determine whether the Tenants are entitled to protections afforded by § 365(h).

This matter also comes before the Court on the Debtors’ motion to dismiss the first amended adversary complaint (“Complaint”) filed by IDEA against the Debtor/Defendant, [4] seeking temporary and permanent injunctive and declaratory relief. The Court addresses only Count One of the Complaint, which consists of IDEA’s request to preliminarily enjoin the Defendant from engaging in conduct that prevents IDEA from enjoying its possessory rights, including the right to utilities and necessary easements. The Court has heard oral argument on June 11, 2015 and June 24, 2015 and has accepted, in lieu of testimony, the following documents and accompanying exhibits:

• First Amended Verified Complaint in Adversary Proceeding; Ad. Pro. No. 14-01756

• Affidavits of Michael I. Barry, Dkt. Nos. 1521 and 1782

• Affidavit of Kevin DeSanctis, Dkt. No. 1541

• Affidavits of Jason Spillerman, Dkt. Nos. 1828 and 1873

• Affidavit of John Meadow, Dkt. No. 1830

• Affidavit of Barbara Stack, Dkt. No. 1869

For the reasons set forth below, the Court denies the Defendant’s pending motion to dismiss and grants, in part, the relief sought by IDEA in its Cross Motion and in Count One of the Complaint.

PROCEDURAL BACKGROUND IN THE MAIN CASE

On June 19, 2014, Revel AC, Inc. and its affiliated debtors and debtors in possession (“Debtors”) [5] each filed a voluntary petition for relief under Chapter 11 of the United States Code (“Bankruptcy Code”).

On August 28, 2014, the Debtors filed a motion (the “Rejection Motion)” to reject the Agreements held with the Tenants. The Rejection Motion sought rejection of the Agreements nunc pro tunc to the Debtors’ shutdown date of September 2, 2014 (“Shutdown Date”). On the Shutdown Date, the Debtors ceased operations and barred the Tenants from accessing the premises. Each of the Tenants gave notice of its intent to continue exercising possessory leasehold rights under § 365(h).

On April 6, 2015, the Court entered an order (“Sale Order”) approving the sale of the Debtors’ assets to Polo North, pursuant to § 363 of the Bankruptcy Code. The sale closing occurred on the following day. Thereafter, on April 13, 2015, IDEA filed its Cross Motion, seeking clarification of its § 365(h) rights as they related to the pending Rejection Motion. Subsequently, on April 20, 2015, the Court entered an order granting the Rejection Motion. [6]

Polo North adopts the position originally set forth by the Debtor/Defendant, that the Tenants’ § 365(h) elections were invalid because the Agreements are not true leases. Polo North contends that the Agreements are either management or joint venture agreements, and, consequently, there are no possessory rights capable of being retained by the Tenants. As such, the Agreements would not fall within the purview of § 365(h). Needless to say, the Tenants maintain that the dictates of § 365(h) do apply because the Agreements are indeed true leases. At this juncture, the parties seek a determination of their respective rights. For the reasons set forth below, the Court grants IDEA’s Cross Motion in part, by reaffirming the applicability of § 365(h) with regard to the rejected Agreements.

PROCEDURAL BACKGROUND IN THE ADVERSARY PROCEEDING

On September 3, 2014, IDEA filed its initial verified complaint, which commenced an adversary proceeding against the Debtor/Defendant. As noted above, as a consequence of the § 363 sale, Polo North is now deemed the Defendant in this action. On September 26, 2014, IDEA filed its first amended Complaint. In Count One of the Complaint, IDEA seeks to preliminarily enjoin the Defendant from engaging in conduct that prevents IDEA from enjoying its possessory rights, including the right to utilities and necessary easements. On October 13, 2014, the Debtors filed a motion to dismiss the Complaint.

JURISDICTION

The Court has jurisdiction over both the contested matter and complaint under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court.

In Stoe v. Flaherty, 436 F.3d 209 (3d Cir. 2006), the Third Circuit outlined the bankruptcy court’s jurisdiction as follows:

Bankruptcy jurisdiction extends to four types of title 11 matters: (1) cases “under” title 11; (2) proceedings “arising under” title 11; (3) proceedings “arising in” a case under title 11; and (4) proceedings “related to” a case under title 11. In re Combustion Eng’g, Inc., 391 F.3d 190, 225 (3d Cir.2005) . The category of cases “under” title 11 “refers merely to the bankruptcy petition itself.” Id. at 225-26 n. 38 (quotation and citation omitted). A case “arises under” title 11 “if it invokes a substantive right provided by title 11.” Torkelsen v. Maggio (In re Guild & Gallery Plus, Inc.), 72 F.3d 1171, 1178 (3d Cir.1996) . Bankruptcy “arising under” jurisdiction is analogous to 28 U.S.C. § 1331, which provides for original jurisdiction in district courts “of all civil actions arising under the Constitution, laws, or treaties of the United States.” 1 Collier on Bankruptcy § 3.01[4][c][i] at 3-21-22 (15th ed. rev.2005); see also Wood v. Wood (Matter of Wood), 825 F.2d 90, 96-97 (5th Cir.1987) . The category of proceedings “arising in” bankruptcy cases “includes such things as administrative matters, orders to turn over property of the estate and determinations of the validity, extent, or priority of liens.” 1 Collier on Bankruptcy § 3.01[4][c][iv] at 3-31 (quotations and footnotes omitted).

Proceedings “arise in” a bankruptcy case, “if they have no existence outside of the bankruptcy.” United States Trustee v. Gryphon at the Stone Mansion, Inc., 166 F.3d 552, 556 (3d Cir.1999) . Finally, a proceeding is “related to” a bankruptcy case if “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” In re Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984) ; see also In re Federal-Mogul Global, Inc., 300 F.3d 368, 381 (3d Cir.2002) (noting that Pacor “clearly remains good law in this circuit” in this respect).

Stoe, 436 F.3d at 216 .

These matters are core proceedings within the meaning of 28 U.S.C. § 157(b)(2)(A), (N), and (O), and these matters “arise under” title 11. In In re Bell, 476 B.R. 168, 175 (Bankr. E.D. Pa. 2012), the court explained that “arising under” jurisdiction includes any proceeding which invokes a substantive right under the Bankruptcy Code. Indeed, the current action is one which involves the substantive rights granted by § 365(h). See In re Ciena Capital LLC, 2009 WL 2905759, at *4 (Bankr. S.D.N.Y. July 28, 2009) (noting that § 365(h) is “a substantive section of the Bankruptcy Code.”).

A proceeding that arises under title 11 is also described as one that “involve[s] a cause of action created or determined by a provision of title 11.” In re Ciena Capital LLC, 2009 WL 2905759, at *5. In Ciena Capital LLC, the debtor subleased a portion of its property to Alstra, and then rejected the lease. Among other things, Alstra sought a declaration regarding its § 365(h) rights. The court held that:

[i]n seeking to apply a section of title 11 of the United States Code (the “Bankruptcy Code”), Alstra invokes the Court’s “arising under” jurisdiction. Congress used the phrase “arising under title 11″ to describe those proceedings that involve a cause of action created or determined by a provision of title 11. Wood v. Wood (Matter of Wood), 825 F.2d 90, 96 (5th Cir.1987) . Indeed, the only reason that Alstra can avail itself of that section of title 11 is because of the Debtor’s bankruptcy filing. Had there been no bankruptcy case, there would be no basis upon which Alstra could seek to have that section apply.

The claims “arising under” Title 11 need not affect or benefit the estate as a condition of bankruptcy jurisdiction. In re Housecraft Industries USA, Inc., 310 F.3d 64 (2d Cir.2002) . Consequently, “arising under” jurisdiction is present “even if the litigation could not affect the estate.” Id. Thus, the Court has jurisdiction to determine the issue raised by Alstra concerning that Bankruptcy Code section.

In re Ciena Capital LLC, 2009 WL 2905759, at *5. Here, the only reason that the Tenants may avail themselves of the possessory rights set forth under § 365(h) is because of the Debtors’ bankruptcy filing. Thus, the Court holds that these proceedings are predicated upon a provision of title 11, and qualify as matters “arising under” title 11.

At a bare minimum, the Court maintains “related to” jurisdiction over the disputes. If the Agreements were deemed to not be true leases, so that § 365(h) would not come into play, the Tenants would retain pre-petition breach of contract claims (or maybe even administrative claims) against the estate. In that instance, the nature and extent of such claims would impact confirmation of a plan of reorganization and the distribution to general unsecured creditors thereunder.

A matter is “related to” a Chapter 11 case if it “could conceivably have any effect on the estate being administered in bankruptcy.” Belcufine v. Aloe, 112 F.3d 633, 636 (3d Cir. 1997) (quoting Pacor v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984) ). In Belcufine, the Third Circuit further defined the test as whether the outcome of the case “could alter the Debtor’s rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate.” United States Trustee v. Gryphon at the Stone Mansion, Inc., 166 F.3d 552, 556 (3d Cir. 1999) . As the Eleventh Circuit has stated, any “interpretation of [related to jurisdiction] must . . . avoid the inefficiencies of piecemeal adjudication and promote judicial economy by aiding in the efficient and expeditious resolution of all matters connected to the debtor’s estate.” Matter of Lemco Gypsum, Inc., 910 F.2d 784, 787 (11th Cir. 1990) . Without a doubt, resolution of the disputes between the Tenants and Polo North potentially impacts the Debtors’ obligations and the continued administration of this Chapter 11 proceeding.

To the extent this Court’s statutory jurisdiction remains at issue, the Court notes that it also possesses ancillary jurisdiction to hear these matters. Bankruptcy courts, as courts of limited jurisdiction, may exercise subject matter jurisdiction on two grounds: statutory jurisdiction under 28 U.S.C. § 1334 and ancillary (sometimes called inherent) jurisdiction. See In re Fibermark, Inc., 369 B.R. 761, 764 (Bankr. D. Vt. 2007) ; In re Chateaugay Corp., 201 B.R. 48, 62 (Bankr.S.D.N.Y.1996), aff’d 213 B.R. 633 (S.D.N.Y.1997) . The District Court, in In re Chateaugay Corp., held that “[b]ankruptcy courts have inherent or ancillary jurisdiction to interpret and enforce their own orders wholly independent of the statutory grant under 28 U.S.C. § 1334.” Cf. Local Loan Co. v. Hunt, 292 U.S. 234, 239 (1934) (“That a federal court of equity has jurisdiction of a bill ancillary to an original case or proceeding in the same court, whether at law or in equity, to secure or preserve the fruits and advantages of a judgment or decree rendered therein, is well settled.”).

The United States Supreme Court has held that federal courts may assert ancillary jurisdiction for two separate, though sometimes related purposes: (1) to permit disposition by a single court of claims that are, in varying respects and degrees, factually interdependent, and (2) to enable a court to function successfully, that is, to manage its proceedings, vindicate its authority, and effectuate its decrees. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 380-81 (1994) (citations omitted). Here, the Court is asserting ancillary jurisdiction to enforce the Sale Order, which expressly reserved this Court’s jurisdiction over matters arising out of or related to the Sale Order. The Sale Order provides:

This Court shall retain exclusive jurisdiction to resolve any controversy or claim arising out of or related to this Sale Order, the [Asset Purchase] Agreement or any related agreements, including, without limitation: (i) any actual or alleged breach or violation of this Sale Order, the [Asset Purchase] Agreement or any related agreements; (ii) the enforcement of any relief granted in this Sale Order; or (iii) as otherwise set forth in the [Asset Purchase] Agreement.

Sale Order, Dkt. No. 1550, ¶ 37 (emphasis added). The Sale Order further specifies that the sale was made subject to the possessory interests of the Tenants. The Sale Order states:

Notwithstanding anything to the contrary in this Sale Order or the Agreement, the Sale of the Assets to [Polo North] pursuant to this Sale Order shall not be free and clear of (i) any existing tenancies and/or possessory interests of the Amenity Tenants, ACR and IDEA, respectively, pending the Debtors’ rejection pursuant to section 365 of the Bankruptcy Code of the agreements containing such tenancies and/or possessory interests (the “Possessory Agreements”), and (ii) any rights elected to be retained by each of the non-debtor counterparties to the Possessory Agreements pursuant to section 365(h) of the Bankruptcy Code after the Debtors’ rejection of the respective Possessory Agreements (such tenancies, interests and rights referred to in (i) and (ii) collectively, the “Possessory Interests”).

Sale Order, Dkt. No. 1550, ¶ 18. Issues as to whether the Tenants possess any rights under § 365, and their ability to act on such rights over Polo North’s objection, fall well within the parameters of ¶ 37 of the Sale Order, and this Court maintains exclusive jurisdiction to resolve the disputes.

As noted, the matters presented herein are core proceedings under 28 U.S.C. § 157(b). To the extent there is a challenge to the Court’s ability to render a final judgment, the failure of the parties to object to the Sale Order constitutes consent to this Court’s authority. The United States Supreme Court recently reaffirmed that “Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge.” Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1939 (2015) . The Supreme Court acknowledged that consent need not be express. Id. at 1947. Here, when the parties agreed to the terms of the Sale Order, they consented to the specific grant of both exclusive jurisdiction and authority of the bankruptcy court.

Lastly, venue is proper in this Court under 28 U.S.C. §§ 1408 and 1409. The Court issues the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052. [7]

DISCUSSION

I. Cross Motion

a. True Leases or Management/Joint Venture Agreements

The Court rules that the Agreements are true leases. Each of the Agreements share certain characteristics, and therefore, the Court examines them together. First, the Court looks to New Jersey law to determine what constitutes a true lease.

Generally, a lease exists when there is an agreement by the lessor to turn over specific premises to the exclusive possession of a lessee for a definite time period. In return, the lessor receives a payment of rent from the lessee. Thiokol Chem. Corp. v. Morris County Bd. of Taxation, 41 N.J. 405, 197 A.2d 176, 182 (1964) . “Frequently, a lease is spoken of as a hiring of land, or a sale of the possession, occupancy and profits of land for a term.” Id. Whether a lease exists depends on the intention of the parties as expressed by a written document or the conduct of the parties to the alleged lease. Id. Where the intentions of the parties is unclear, the burden is on the party asserting the existence of a lease to demonstrate a landlord-tenant relationship. Id.; Town of Kearny v. Municipal Sanitary Landfill Auth., 143 N.J.Super. 449, 363 A.2d 390, 393-94 (1976) ; Outerbridge Terminal, Inc. v. City of Perth Amboy, 179 N.J.Super. 400, 432 A.2d 141, 144 (1980) . Matter of Great N. Forest Products, Inc., 135 B.R. 46, 55 (Bankr. W.D. Mich. 1991) (applying New Jersey law). This Court regards Thiokol Chemical Corp. v. Morris County Board of Taxation, 41 N.J. 405 (1964) as persuasive authority for what constitutes a true lease in the state of New Jersey. In Thiokol, the court held that

whether a particular agreement is a lease depends upon the intention of the parties as revealed by the language employed in establishing their relationship, and, where doubt exists, by the circumstances surrounding its making as well as by their course of operation under it. 51 C.J.S. Landlord & Tenant s 202e. And, in situations where the ambiguity or doubt gives rise to a factual question as to the intention of the parties, the burden is on the party asserting it to demonstrate existence of the lessor-lessee relationship.

Thiokol, 41 N.J. at 417 . The Defendant places before the Court ample case law supporting the contention that a court must not be swayed by “form over substance” when determining the existence of a true lease. While this maxim is accurate, at some point form becomes substance. We have reached that point. The express terms of the Agreements, together with supporting affidavits, make it clear that the Debtors and the Tenants had the unequivocal intention of entering into true lease agreements. As set forth in Thiokol, supra , the intention of the parties may be revealed by language in the Agreements. Within the Agreements, the terms “tenant”, “lease”, “landlord”, and “rent” are used hundreds, if not thousands of times. Moreover, each of the Agreements contain explicit language that illustrate the creation of a true lease. For instance, section 21.12 of IDEA’s Agreement expressly states that

[n]othing contained in this Lease shall be deemed or construed as creating the relationship of principal and agent, employer and employee or of partnership or joint venture between the parties hereto, it being understood and agreed that neither the method of computing rent, payment of the Tenant Fees nor any other provision contained herein nor any acts of the parties hereto shall be deemed to create any relationship between the parties other than that of Landlord and Tenant. The provisions of this lease relating to the Percentage Rent payable hereunder are included solely for the purpose of providing a method whereby adequate rent is to be measured and ascertained.

IDEA Lease Agreement, Dkt. No. 1521, Exhibit A-2, section 21.12 (emphasis added). Similar language is contained in the Agreements held by the Amenity Tenants and the LDV Tenants. Additional provisions in the Agreements serve as indicia that the parties intended to create possessory leasehold interests. For instance, the Agreements contain quiet enjoyment provisions. Such language, which grants the Tenants the right to enjoy the property for the purpose for which it was leased, is typically found in lease agreements and suggests a grant of possessory rights.

In the resolution of ambiguity or doubt, the Court considers the factors listed in Thiokol, supra , as stated below:

[I]n the resolution of ambiguity or doubt, absence of (1) a stipulation for rent as such, or other consideration regarded by the parties as constituting payment for the transfer of possession, and (2) a term; and presence of (1) limitations on exclusive possession and control of the premises, and (2) a right in the owner to revoke the permit to use at any time, are factors militating against the existence of a lease.

Id. First, the Agreements provide for the payment of rent. Polo North has adopted an argument, previously set forth by the Debtors, that since rent payments are based on a percentage of revenue, the Agreements do not qualify as true leases. The Court disagrees. As noted by the Tenants, percentage rent leases have been accepted for over 100 years in New Jersey. See Thropp v. Field, 26 N.J. Eq. 82, 83 (Ch. 1875) ; see also In re Adoption of N.J.A.C. 13:38-1.3(f), N.J. Super. 536, 545 (App. Div. 2001) (noting that there exists “a longstanding common practice of paying rent to a shopping mall landlord based on a percentage of gross income.”). Second, each Agreement provides for a set term of years, with options to renew at the end. Third, the Agreements grant the Tenants possessory interests and the rights to exclusive use of the leased premises during the specified term. Lastly, the Agreements are not revocable at any time by the landlord, but rather, are revocable only upon certain events of default. Each of these factors militates in favor of finding that the Agreements are true leases.

The Court is cognizant that it must look at the substance of the transaction rather than simply the form of the agreement in determining whether there exists a true lease. For the foregoing reasons, the language contained in the Agreements, as well as the conduct of the parties undertaken from the outset of the Agreements, demonstrate typical landlord-tenant relationships, and the substance of the transactions buttress the Court’s determination that the Agreements are indeed true leases.

b. Interplay Between §§ 365 and 363

Since IDEA, the Amenity Tenants, and the LDV Tenants are each found to hold true leases, they are also entitled to their respective possessory rights under § 365(h). The Tenants retain these rights notwithstanding a sale of the Debtors’ assets under § 363 of the Bankruptcy Code.

Sections 363(b) and (f) of the Bankruptcy Code permit for the sale of a debtor’s assets free and clear of any interest in property. Here, the sale to Polo North was expressly made subject to the interests of the Tenants. See Sale Order, Dkt. No. 1550, ¶ 18. Notwithstanding, the Court rules that a § 363 sale does not and could not trump the rights granted to the Tenants by § 365(h).

Section 365(h) provides:

(h)(1)(A) If the trustee rejects an unexpired lease of real property under which the debtor is the lessor and—

(i) if the rejection by the trustee amounts to such a breach as would entitle the lessee to treat such lease as terminated by virtue of its terms, applicable nonbankruptcy law, or any agreement made by the lessee, then the lessee under such lease may treat such lease as terminated by the rejection; or

(ii) if the term of such lease has commenced, the lessee may retain its rights under such lease (including rights such as those relating to the amount and timing of payment of rent and other amounts payable by the lessee and any right of use, possession, quiet enjoyment, subletting, assignment, or hypothecation) that are in or appurtenant to the real property for the balance of the term of such lease and for any renewal or extension of such rights to the extent that such rights are enforceable under applicable nonbankruptcy law.

(B) If the lessee retains its rights under subparagraph (A)(ii), the lessee may offset against the rent reserved under such lease for the balance of the term after the date of the rejection of such lease and for the term of any renewal or extension of such lease, the value of any damage caused by the nonperformance after the date of such rejection, of any obligation of the debtor under such lease, but the lessee shall not have any other right against the estate or the debtor on account of any damage occurring after such date caused by such nonperformance.

11 U.S.C. § 365(h). This Court previously has addressed the interplay between §§ 363 and 365. In In re Crumbs Bake Shop, Inc., 522 B.R. 766, 777 (Bankr. D. N.J. 2014), this Court held that nothing in § 363(f) trumps, supersedes, or otherwise overrides the rights of licensees under § 365(n). The Court sees no reason to reach a different conclusion in the present case with regard to the Tenants’ rights under § 365(h). Inasmuch as there are notable similarities between § 365(n) and § 365(h), the Crumbs analysis is relevant here:

It is well established that the appropriate way to construe a statute is to conclude that the specific governs over the general . . . In re Churchill Properties III, Ltd. P’ship, 197 B.R. 283, 288 (Bankr. N.D. Ill. 1996) . In Churchill, the court recognized that § 365(h) is specific, as it grants a particular set of clearly stated rights to lessees of rejected leases. That is, Congress specifically gave lessees the option to remain in possession after a lease rejection. If the court were to allow a § 363(f) sale free and clear of the lessee’s interest, “the application of [§ 365(h)] as it relates to non-debtor lessees would be nugatory.” In re Churchill Properties, 197 B.R. at 288 . Indeed, “it would make little sense to permit a general provision, such as [§] 363(f), to override [§ 365’s] purpose. The Code is not intended to be read in a vacuum.” Id.

. . .

Moreover, the legislative history of § 365(h) evinces that Congress had the desire to protect the rights of tenants.

A 1978 Senate Report remarked that under the terms of § 365(h), “the tenant will not be deprived of his estate for the term for which he bargained.” S.Rep. No. 95-989, at 60 (1978). . . . The Section-by-Section Analysis of the 1994 amendments to the Bankruptcy Code further reflect a Congressional desire to protect the rights of those who are lessees of debtors:

This section clarifies section 365 of the Bankruptcy Code to mandate that lessees cannot have their rights stripped away if a debtor rejects its obligation as a lessor in bankruptcy. This section expressly provides guidance in the interpretation of the term “possession” in the context of the statute. The term has been interpreted by some courts in recent cases to be only a right of possession (citations omitted). This section will enable the lessee to retain its rights that appurtenant to its leasehold. These rights include the amount and timing of payment of rent or other amounts payable by the lessee, the right to use, possess, quiet enjoyment, sublet and assign.

In re Zota Petroleums, LLC, 482 B.R. 154, 161-62 (Bankr. E.D. Va. 2012) (citations omitted). The court in In re Haskell L.P., 321 B.R. 1 (Bankr. D. Mass. 2005) also noted the legislative history to § 365(h), and denied the debtor’s motion to sell real property free and clear of a leasehold interest under § 363(f) because such a sale would permit the debtor to achieve under § 363 what it was proscribed from achieving under § 365(h), namely, stripping the lessee of its rights to possession. This line of reasoning fits squarely with Congressional intent, and with the principle of statutory construction that the specific governs over the general.

In re Crumbs Bake Shop, Inc., 522 B.R. at 777-78 .

c. Respective Rights and Obligations under Rejected Agreements

Before the Sale Order was entered, the Debtors were the landlords under the Agreements. As a consequence of the sale, Polo North has stepped into the shoes of the Debtors, and thus, Polo North is now treated as the landlord, with both the benefits and burdens of § 365. At the time of the Rejection Motion, the Tenants elected to remain in possession of the leased premises pursuant to § 365(h). Under § 365(h), the Tenants are entitled to remain in possession for the balance of the terms set forth in the Agreements, and any renewal or extension period. § 365(h)(1)(A)(ii). During their time in possession, the Tenants retain the right to use and quiet enjoyment of the premises, as well as such rights appurtenant to the real property. Appurtenant rights include such privileges which are incident and necessarily connected to the real estate. Furthermore, the Tenants may offset (against rent) any damages caused, after rejection, by the Debtors’ nonperformance. § 365(h)(1)(B). Inasmuch as the Tenants have elected to remain in possession, their rights to damages as a result of rejection (which was granted nunc pro tunc to the Shutdown Date) is limited to setoff against future rents. After rejection, the landlord is no longer obligated to continue performance under the lease, other than to provide the tenant with possession of the premises, and the rights appurtenant thereto. See In re Flagstaff Realty Associates, 60 F.3d 1031, 1034 (3d Cir. 1995) (“The primary function of rejection is to `allow a debtor-lessor to escape the burden of providing continuing services to a tenant’ [and] rejection `relieves the estate from covenants requiring future performance, such as the provision of utilities, repairs, maintenance and janitorial services by the debtor'”) (citations omitted). [8] The Court reaffirms that any undertakings required by the landlord in order to allow the Tenants to restart operations cannot come at the expense of Polo North.

II. Adversary Proceeding

The Court grants, in part, IDEA’s preliminary injunction request. To qualify for preliminary injunctive relief, a litigant must demonstrate “(1) a likelihood of success on the merits; (2) that it will suffer irreparable harm if the injunction is denied; (3) that granting preliminary relief will not result in even greater harm to the nonmoving party; and (4) that the public interest favors such relief.” Kos Pharmaceuticals, Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir. 2004) . IDEA has demonstrated a likelihood of success on the merits because § 365(h) protects IDEA’s rights under the Agreement that are in or appurtenant to the real property. In this regard, IDEA’s quiet enjoyment and use of the facilities, protected under § 365(h), requires access to the building’s infrastructure. IDEA will suffer irreparable harm if the injunction is denied, because without the right to possession and access to the property’s energy distribution systems, IDEA is likely to suffer a loss that threatens the very existence of its business. See Packard Elevator v. I.C.C., 782 F.2d 112, 115 (8th Cir. 1986) (“It is also well settled that economic loss does not, in and of itself, constitute irreparable harm. . . . Recoverable monetary loss may constitute irreparable harm only where the loss threatens the very existence of the [petitioner]’s business.”) (emphasis added). Furthermore, there is nothing before the Court that suggests IDEA’s continued use of the leased premises would result in greater harm to Polo North. Lastly, the public interest favors such relief because it is consistent with and in furtherance of provisions set forth under the Bankruptcy Code, and the recommencement of operations would result in the creation of jobs and revitalize a depressed portion of Atlantic City.

Polo North shall be preliminarily enjoined from interfering with IDEA’s ability to avail itself of the rights under the Agreement and appurtenant to the real property. This includes the right to quiet enjoyment. “An act or omission by a landlord, or someone acting under the landlord’s authority, constitutes a breach of the covenant of quiet enjoyment . . . if the conduct `renders the premises substantially unsuitable for the purpose for which [it was] leased,’ or if it `seriously interferes with the beneficial enjoyment of the premises [.]'” Nhu Thi Do v. Phuong Trong Nguyen, 2012 WL 3628784, at *4 (N.J. Super. Ct. App. Div. Aug. 24, 2012) (citing Reste Realty Corp. v. Cooper, 53 N.J. 444, 457 (1969) ). In order to avoid breaching the obligation of quiet enjoyment, Polo North must refrain from interfering with IDEA’s access to the premises, its infrastructure and distribution systems. IDEA must have access to utilities for operation, including electricity, hot and cold water, plumbing, gas, internet, cable and telephone service. Without these functionalities, the premises would be rendered substantially unsuitable for the purpose for which it was leased.

IDEA asserts that it is also entitled to an easement, as part of its appurtenant rights. However, the Court declines to grant IDEA an easement or license at this juncture. To grant IDEA with such tangible interests would enhance IDEA’s rights, rather than preserve them. “Section 365(h) preserves certain tenant rights; it does not enhance them.” In re MMH Automotive Group, LLC, 385 B.R. 347, 366 (Bankr. S.D. Fla. 2008) . Quite simply, there is no need for this Court to grant or create an easement or license in favor of IDEA, as part of its preliminary injunction. IDEA is free to explore its entitlement to such relief during the balance of the litigation.

Rather, appropriate relief may be found in an order of the Court, preliminarily enjoining Polo North from interfering with IDEA’s access to the premises, including infrastructure and distribution systems, so long as IDEA’s use and access complies with all local, state and federal regulations and laws. Notwithstanding, Polo North is not responsible for providing services, incurring costs, or increasing its liability. The Court reiterates that IDEA’s possessory rights are subject to compliance with all local, state and federal regulations. However, assuming IDEA can satisfy all such requirements, Polo North cannot impede IDEA’s efforts. Indeed, Polo North must provide sufficient access to allow IDEA (and all Tenants) to preserve physical assets, as well as to investigate, plan, and take the necessary steps to restart operations.

The Court highlights Section 12.1(e) of the IDEA Agreement, which states:

In no event shall Landlord be liable to Tenant in damages or otherwise for any interruption, curtailment or suspension of any of the foregoing utility services, sewer and HVAC in the event of a default by Tenant under this Lease or due to repairs, action of public authority, strikes, acts of God, or public enemy, or any other cause, whether similar or dissimilar to the aforesaid. Landlord shall, however, use its reasonable best efforts to restore the discontinued service in all situations which are not due to the fault of Tenant hereunder.

IDEA Lease Agreement, Dkt. No. 1521, Exhibit A-1, section 12.1(e) (emphasis added). This Court’s decision falls in line with the language set forth in the Agreement, and only commands Polo North to comply with its existing obligations.

CONCLUSION

For the reasons stated above, IDEA’s Cross Motion is granted in part. The Agreements are true leases, as opposed to management or other similar agreements. IDEA, the Amenity Tenants, and the LDV Tenants made valid elections to stay in possession of the leased premises pursuant to § 365(h). Furthermore, IDEA’s request for a preliminary injunction is granted in part. IDEA is entitled to the possessory rights appurtenant to the real property, subject to compliance with applicable local, state and federal laws and regulations. The Debtors’ motion to dismiss is denied.

[1] The Debtors in these chapter 11 cases, along with the last four digits of each debtor’s federal tax identification number, are: Revel AC, Inc. (3856), Revel AC, LLC (4456), Revel Atlantic City, LLC (9513), Revel Entertainment Group, LLC (2321), NB Acquisition, LLC (9387) and SI LLC (3856).

[2] The Amenity Tenants consist of Exhale Enterprises XXI, Inc., GRGAC1, LLC, GRGAC2, LLC, GRGAC3, LLC, Mussel Bar AC, LLC, PM Atlantic City, LLC, RJ Atlantic City, LLC and The Marshall Retail Group, LLC.

[3] The LDV Tenants consist of American Cut AC Marc Forgione, LLC, Azure AC Allegretti, LLC, and Lugo AC, LLC. The group of entities that now constitute the LDV Tenants were originally part of the Amenity Tenants, but later obtained separate counsel and received designation as the LDV Tenants.

[4] After the Court approved a sale of the Debtors’ assets to Polo North Country Club, Inc., (“Polo North”), Polo North stepped into the shoes of the Debtors. On June 22, 2015, an order was entered which substituted Polo North as defendant in this adversary proceeding.

[5] The Debtors owned and operated a 6.2 million square foot facility that served as a resort and casino, with retail stores, restaurants and bars on the premises.

[6] The Tenants had also made certain administrative expense requests as to lost profits and other damages under the Agreements as a result of the Debtors’ shutdown. The Debtors filed an objection to the administrative claims of the Amenity Tenants and the LDV Tenants. This objection has been resolved pending the Court’s determination of the parties’ respective § 365(h) rights. In other words, the Amenity Tenants and LDV Tenants intend to withdraw their administrative expense requests so long as the Court fixes their possessory rights under § 365(h).

[7] To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as such. Conversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as such.

[8] But see Saravia v. 1736 18th St., N.W., Ltd. P’ship, 844 F.2d 823, 827 (D.C. Cir. 1988) (“Inasmuch as the obligations imposed by District of Columbia for the benefit of public health and safety are independent of private leases, we are of the view that rejection of leases under section 365(h) has no bearing on the debtor-landlord’s obligations under applicable local law.”) However, Saravia is factually distinguishable from the instant case because Saravia dealt with residential, not commercial, property. See In re Old Carco LLC, 406 B.R. 180, 202 (Bankr. S.D.N.Y. 2009) (noting that Saravia addressed residential buildings, so its holding did not apply to a case involving commercial property).

Save trees – read court opinions online on Google Scholar.

300x600

New Bankruptcy Opinion: IN RE RAMALLO BROS. PRINTING INC. – Bankr. Court, D. Puerto Rico, 2015

IN RE: RAMALLO BROS. PRINTING INC., Chapter 11, Debtor.

Case No. 14-01948 EAG.

United States Bankruptcy Court, D. Puerto Rico.

June 22, 2015.

OPINION AND ORDER

EDWARD A. GODOY, Bankruptcy Judge.

Pending before the court are debtor’s motion to voluntarily dismiss the case and the Municipality of San Juan’s response thereto seeking to either convert the case to chapter 7 or condition dismissal on the payment of administrative expenses. (Docket Nos. 312 & 319.) For the reasons stated below, the court grants the debtor’s motion to voluntarily dismiss the case and denies the Municipality’s request.

I. Introduction.

On March 30, 2015, debtor Ramallo Bros. Printing Inc. filed a motion to dismiss this case under section 305(a), asserting that it was unable to present a feasible chapter 11 reorganization plan since it had failed to reach an agreement with the Municipality, one of its major creditors. [1] (Docket No. 312.) On April 24, 2015, the Municipality filed its response to the debtor’s dismissal request, arguing that the case should either be converted to chapter 7 under section 1112(b), or, alternatively, to condition dismissal on the 1 immediate payment of unpaid administrative expenses if the court found dismissal to be in the best interests of creditors and the estate. (Docket No. 319.) Prior to the hearing, creditors American Paper Corp., Sachs Chemical, Inc., Tropigas de Puerto Rico, and United Surety & Indemnity Company all filed motions in support of debtor’s voluntary dismissal. (Docket Nos. 345, 348, 350 & 352.) LSREF2 Island Holdings Ltd. (“Island Holdings”) appeared at the hearing stating that it was in favor of dismissal, as will be explained in more detail below. In addition, the United States of America, on behalf of the Environmental Protection Agency (“EPA”), filed a motion and appeared telephonically at the hearing, indicating that it took no position as to whether the case should be dismissed or converted. (Docket No. 332.) The EPA did, however, have a limited objection to the Municipality’s request for a conditional dismissal to the extent such a dismissal did not seek to treat all administrative priority claims equally. Id.

An evidentiary hearing was held on the matter on June 5, 2015, at which the court heard testimony from Aida Escribano Ramallo, the debtor’s in-house CPA, Alberto Ramallo Yllanes, the debtor’s president, and Manuel Cruz Soto, the executive officer of the Municipality for the Department of Economic Development. One exhibit was entered into evidence, during the testimony of Ms. Escribano. See Exhibit A. After hearing the witnesses’ testimony and the attorneys’ arguments, the court took the matter under advisement. The parties were ordered to file supplementary briefs consisting of a statement of proposed findings of fact, with documentary and/or testimonial references, as to whether it was in the best interest of creditors and the estate for the case to be voluntarily dismissed or whether it should be converted to chapter 7.

II. Legal Analysis.

In this case, the debtor is seeking to voluntarily dismiss the bankruptcy case under section 305(a). (Docket No. 312.) Among other things, section 305(a) permits a court to dismiss a case if both the debtor and the creditor would be better served by such a dismissal. 11 U.S.C. § 305(a)(1). See In re Monitor Single Lift I, Ltd., 381 B.R. 455, 462 (Bankr. S.D.N.Y. 2008) (“Granting an abstention motion pursuant to §305(a)(1) requires more than a simple balancing of harm to the debtor and creditors; rather, the interests of both the debtor and its creditors must be served by granting the requested relief.”). Courts considering such a motion take into account several factors, including: “(i) the purpose of the bankruptcy; (ii) the availability of a more appropriate forum to decide the unsettled issues; (iii) efficiency and economy of administration; and (iv) the interests of the creditors and debtor.” In re Costa Bonita Beach Resort, 479 B.R. 14, 46 (Bankr. D.P.R. 2012) .

The Municipality, on the other hand, seeks to convert or dismiss the case pursuant to section 1112(b). This provision allows a court to convert or dismiss a case, whichever is in the best interests of creditors and the estate, for “cause.” 11 U.S.C. § 1112(b). While the phrase “best interest of the creditors and the estate” is not defined in the Bankruptcy Code, courts have taken the following factors into consideration in determining whether to dismiss or convert a chapter 11 case:

(1) whether some creditors received preferential payments, and whether equality of distribution would be better served by conversion rather than dismissal, (2) whether there would be a loss of rights granted in the case if it were dismissed rather than converted, (3) whether the debtor would simply file a further case upon dismissal, (4) the ability of the trustee in a chapter 7 case to reach assets for the benefit of creditors, (5) in assessing the interest of the estate, whether conversion or dismissal of the estate would maximize the estate’s value as an economic enterprise, (6) whether any remaining issues would be better resolved outside the bankruptcy forum, (7) whether the estate consists of a “single asset,” (8) whether the debtor had engaged in misconduct and whether creditors are in need of a chapter 7 case to protect their interests, (9) whether a plan has been confirmed and whether any property remains in the estate to be administered, and (10), whether the appointment of a trustee is desirable to supervise the estate and address possible environment and safety concerns.

In re Costa Bonita Beach Resort, 513 B.R. 184, 200-01 (Bankr. D.P.R. 2014) (quoting Alan N. Resnick & Henry J. Sommer, 7 Collier on Bankruptcy ¶1112.04[7] (16th ed. 2011)). While the parties rely on different sections of the Code to support their requested relief, in this particular case the analysis essentially boils down to whether it is in the best interest of creditors and the estate for the case to be dismissed or whether it would be better to convert the case to chapter 7. This is because the debtor has already conceded that it cannot remain in chapter 11 and would have to convert to chapter 7 if its motion were denied. Bearing this in mind, the parties’ focus on the hearing and in their papers was on establishing whether the debtor and creditors were better served by dismissal or conversion. Indeed, the Municipality’s request for conversion does not specify a particular “cause” under section 1112(b) for conversion or dismissal, instead focusing on which option was in the best interests of creditors and the estate. [2] (Docket No. 319.)

In its motion, the debtor argued that dismissal was warranted because it was in the best interest of creditors and the estate to allow the debtor to exit bankruptcy in order to give it time to either obtain sufficient financing to allow the business to continue or to “maximize the return of its asset through an orderly liquidation outside of bankruptcy.” (Docket No. 312 at p. 2.) The debtor maintains that its two main assets, the printing machinery and equipment, would quickly lose substantial value if not in regular use, which weighs against converting the case to chapter 7. Id. The Municipality, on the other hand, argued that a conditioned dismissal or conversion to chapter 7 was warranted because the debtor had not disclosed sufficient information about what its proposed liquidation outside of bankruptcy would entail or about a potential agreement the debtor was finalizing with its main secured creditor, Island Holdings. (Docket No. 319 at pp. 4-5.) Furthermore, the Municipality argued that a chapter 7 trustee would be able to pursue avoidance actions against the debtor for various alleged payments to insiders and preferential treatment given to related entities. Id. The Municipality also accused the debtor of misusing funds subject to the court’s cash collateral order by ceasing to make post-petition rent and utility payments after January 2015. Id.

At the beginning of the hearing, the debtor informed the court that it had reached a settlement agreement with Island Holdings, which had filed a secured claim in the case in the amount of $11,411,672.44. (Claims Register No. 16-1.) The agreement provided for a settlement payment to the secured creditor in the amount of $5,558,000.00, representing a discount of nearly $6 million that the debtor would not obtain if the case was converted to chapter 7. A joint motion further describing the agreement was filed during the course of the hearing. (Docket No. 357.)

During the testimony of Ms. Escribano, a chart she prepared was entered into evidence comparing liquidation and dismissal scenarios. See Exhibit A. Ms. Escribano stressed that this chart was intended to represent the “worst case scenario” in which the debtor was unable to obtain sufficient financing to continue operations. She estimated that a liquidation outside of bankruptcy could take up to two years. According to the chart, an orderly liquidation conducted outside of bankruptcy is projected to result in a payout to general unsecured creditors of $608,202.00, while a liquidation by a chapter 7 trustee would result in no payout to unsecured creditors. See Exhibit A. Ms. Escribano testified as to her methodology, first explaining that she heavily discounted the projected recovery of the accounts receivable given the age of some of those accounts, which in some cases extended back 20 years or more. Ms. Escribano then demonstrated why the sale of the inventory, property and equipment would result in a much higher amount in a dismissal scenario versus liquidation by the chapter 7 trustee. In particular, Ms. Escribano explained why she heavily discounted the inventory under the liquidation scenario because the company’s main raw material, paper, is extremely sensitive to humidity. She stated that by the time a chapter 7 trustee could hold a sale, the majority of the paper would be worthless. The court finds this point persuasive, especially given that the trustee would likely not be able to keep the debtor in business long enough to complete any sale, since the debtor only had approximately $9,500.00 on hand as of March 2015.

Ms. Escribano’s testimony is also supported by that of debtor’s president, Mr. Ramallo. Specifically, Mr. Ramallo testified in detail about how quickly rust could develop if the printing machines were not properly maintained and in continuous operation, and thus how quickly the machines would lose value if not sold while still in operation. Mr. Ramallo’s also explained that the market for printing equipment is quite specialized and that it would be difficult for a chapter 7 trustee to effectively market and sell the inventory and equipment quickly for a good price. Toward that end, Mr. Ramallo explained in the context of moving the debtor’s operations to another location, that it would take the debtor 8 weeks to disassemble one line of the printing equipment and another 6 weeks to re-assemble it. The court finds the testimony of Ms. Escribano and Mr. Ramallo to be credible.

That being said, the Municipality did establish during cross-examination that Ms. Escribano’s forecast was far from certain. Also, there appears to be a discrepancy between the amount of the discounted payoff included in the chart compared to the motion. In the chart, the settlement payment is stated to be $5,150,000.00, whereas the joint motion lists it as $5,558,000.00. See Exhibit A; (Docket No. 357.) If the amount included in the joint motion is accurate, this would reduce the amount left over for general unsecured creditors in the dismissal scenario to $200,202. The debtor has clarified in a subsequent motion, however, that the $5,150,000 is the amount that debtor must pay the secured lender by the end of the liquidation process, which debtor estimated as taking two years. (Docket No. 365.) Notwithstanding, the court finds that the testimony of debtor’s in-house accountant and president, together with the submission of the joint motion informing the court of the agreement reached between the debtor and Island Holdings, sufficiently addressed the Municipality’s concerns regarding a lack of disclosure about the debtor’s proposed liquidation outside of bankruptcy and of the agreement debtor had reached with its mortgage creditor.

Turning to the Municipality’s other arguments in favor of conversion, the Municipality did not strongly pursue at the hearing its contention that a chapter 7 trustee would bring preference actions to avoid certain of the debtor’s transactions with insiders. The only relevant testimony came from the debtor’s president, who testified that he had received a partial repayment during the year preceding the filing of the petition of a loan he had made to the debtor, although he could not recall the amount he had received. Thus, while the Municipality alleges that several payments made by the debtor to one of its affiliates, Caribbean Printing Group, Inc., qualify as preferences, the Municipality has not put the court in a position to determine how likely a chapter 7 trustee would be to recover any benefit for the estate under section 547(b) or any of the other trustee’s avoidance powers.

Finally, the court finds that the Municipality did not establish at the hearing that the debtor misused funds subject to the court’s cash collateral order by ceasing to make post-petition rent and utility payments after January 2015. Instead, the witnesses’ testimony reveals that there is a genuine dispute between the parties as to the amount of rent owed, taking into account any credit owed to the debtor for expenses it paid to maintain the common areas and for electricity consumption. Nevertheless, both the debtor and the Municipality agree that this dispute, which basically concerns alleged breaches of the lease agreement by both parties, can be resolved through litigation in local court.

Based on the foregoing, the court finds that it is in the best interests of creditors and the estate to dismiss the bankruptcy case. Even assuming that the Municipality established that there was a “cause” to dismiss or convert the case under section 1112(b), the Municipality did not show how creditors would benefit from the conversion of the case to chapter 7. Indeed, the court fails to see how conversion would even be to the benefit of the Municipality, given the value of Island Holdings’ secured claim and the fact that conversion would probably not lead to the debtor being evicted from the property any sooner. Instead, considering the amount of Island Holdings’ secured claim, it is likely that a chapter 7 trustee would simply abandon all of the debtor’s assets, which again would leave the Municipality and the other creditors to pursue their claims against the debtor in local court. Furthermore, if the case was converted, it would result in an administratively insolvent chapter 7 case both because there is only $9,500.00 on hand as of March 2015, and because of the high rent and utility expenses which would continue even if the trustee were to shut down the operation.

III. Conclusion.

In light of the above, the court grants the debtor’s motion to voluntarily dismiss the case at docket number 312 and denies the Municipality’s request at docket number 319 to convert the case to chapter 7 or to condition dismissal on the payment of unpaid administrative expenses.

SO ORDERED.

[1] Unless otherwise indicated, the terms “Bankruptcy Code,” “section” and “§” refer to Title 11 of the United States Code, 11 U.S.C. §§ 101, et seq., as amended. All references to “Bankruptcy Rule” are to the Federal Rules of Bankruptcy Procedure, and all references to “Rule” are to the Federal Rules of Civil Procedure. All references to “Local Bankruptcy Rule” are to the Local Bankruptcy Rules of the United States Bankruptcy Court for the District of Puerto Rico. And all references to “Local Civil Rule” are to the Local Rules of Civil Practice of the United States District Court for the District of Puerto Rico.

[2] The Municipality’s opposition does make reference to the fact that debtor had fallen behind in filing the monthly operating reports. (Docket No. 319 at p. 5.) However, this failure is cited as evidence that the debtor has not supplied sufficient information to its creditors to determine whether dismissal or conversion was in their best interests rather than as an independent basis to dismiss or convert the case under section 1112(b). Id.

Save trees – read court opinions online on Google Scholar.

300x600

New Bankruptcy Opinion: IN RE PLATTE RIVER BOTTOM, LLC – Bankr. Court, D. Colorado, 2015

In re: PLATTE RIVER BOTTOM, LLC, et al., Chapter 11, Debtors.

PLATTE RIVER BOTTOM, LLC, Plaintiff,

v.

ADVANTAGE BANK, et al., Defendants.

Case No. 13-13098 HRT, Adversary No. 14-1231 HRT.

United States Bankruptcy Court, D. Colorado.

June 23, 2015.

ORDER ON MOTION TO ABSTAIN

HOWARD R. TALLMAN, Bankruptcy Judge.

This case comes before the Court on Northstar Bank of Colorado’s Motion for Abstention (docket #83) (the “Motion”).

I. BACKGROUND FACTS (as alleged by the parties) [1]

1. Plaintiff, Platte River Bottom, LLC, (hereinafter “PRB” or “Plaintiff”) filed its voluntary petition under chapter 11 (Case No. 13-13098 HRT) on March 5, 2013. Since that time, Plaintiff has remained in possession of its assets, and has operated its business as a Debtor-in-Possession. Its business involves the ownership and leasing of real property and the purchase and sale of water rights, including the water rights at issue in this proceeding.

2. In August, 2003, Plaintiff acquired certain real property (the “Tisdall Property”) and associated water rights consisting of 16 shares of the Godfrey Ditch Company (the “Tisdall Shares”) from Donald H. Tisdall.

3. At the time of the acquisition a certificate for the Tisdall Shares standing in the name of Donald H. Tisdall, Certificate No. 277, was transferred and delivered to Plaintiff.

4. At or about the same time, Plaintiff entered into a “Dry Up Covenant” with the City of Evans (the “City”), acting through its then Director of Public Works, Earl Smith (“Smith”), under which, among other things, Plaintiff agreed that the water and water rights represented by the Tisdall Shares would not be used in connection with the Tisdall Property.

5. The City has recently informed Plaintiff and others that Smith lacked the authority necessary to accept the Dry Up Covenant and enter into related transactions on behalf of the City and that the Dry Up Covenant and related transactions described below were never lawfully reviewed, approved or authorized by the City. The City takes the position that the Dry Up Covenant and related transactions with the City are void ab initio. [2]

6. Pursuant to the Dry Up Covenant, Plaintiff transferred the Tisdall Shares to the City, and the City, through Smith, issued 1,280 Equivalent Residential Units (“EQRs”) to Plaintiff, evidenced and represented by an entry made on the books of the City’s water bank.

7. In December, 2003, Plaintiff acquired additional real property (the “Gabel Property”) and associated water rights consisting of 4 shares of Godfrey Ditch Company (the “Gabel Shares”) from Steven and Audrey Gabel. Plaintiff transferred the Gabel Shares to the City, who, through Smith, issued 320 EQRs to Plaintiff, evidenced and represented by an entry on the books of the City’s water bank.

8. In December, 2005, Plaintiff acquired additional real property (the “Sloan Property”) and associated water rights consisting of 1 share of Godfrey Ditch Company (the “Sloan Share”) from Steven and Audrey Gabel. The Sloan Share, like the Gabel Shares and Tisdall Shares, was transferred by Plaintiff to the City. Smith, on behalf of the City, accepted the transfer and issued 80 EQRs to Plaintiff, evidenced and represented by an entry on the books of the City’s water bank.

9. In addition to the foregoing acquisitions and transfers, in 2004 and 2005, Plaintiff acquired 4 additional shares of Godfrey Ditch Company and transferred the same to the City, acting through Smith, who issued 320 EQRs to Plaintiff in exchange, all as evidenced and represented by entries on the books of the City’s water bank.

10. The Godfrey Ditch Company shares and EQRs referenced and described above are hereafter referred to as the “Ditch Shares” and “Disputed EQRs” respectively.

11. Northstar claims a security interest in and lien against, and associated rights to, 525 of the Disputed EQRs, and claims a security interest in and lien against, and associated rights to, an additional 200 EQRs held in the name of Third Party Defendant NPK Water Holdings, LLC (“NPK Water”). Northstar has foreclosed upon and sold 725 EQRs. Plaintiff disputes the validity of that foreclosure and sale.

12. Advantage Bank (“Advantage”) claims a security interest in and lien against, and associated rights to, 325 of the Disputed EQRs, and an additional 80 EQRs held in the name of NPK Water. Plaintiff disputes the validity of Advantage’s claim.

13. On May 18, 2012, Northstar initiated a lawsuit in Logan County District Court (the “Logan County Court”), Civil Action No. 2012CV55, captioned Colorado Community Bank v. Nolan Ulmer, Platte River Bottom, LLC and UIV Properties RS, LLC (the “Logan County Litigation”), asserting claims for the appointment of a receiver for certain real property commonly known as 18501 County Road 27, Sterling, Colorado 80751 (the “Property”), breach of contract, and unjust enrichment.

14. On September 7, 2012, the defendants in the Logan County Litigation, which includes the Plaintiff in this adversary proceeding, filed their Answer to Verified Complaint. Thereafter, on December 12, 2012, the Logan County defendants/counterclaimants and NPK Water, and H Bar G, LLC, (both Nolan Ulmer entities) filed an Amended Answer To Verified Complaint and Counterclaims (the “Logan County Counterclaim”), asserting numerous claims against Northstar and the receiver.

15. The Logan County Counterclaim asserted claims against Northstar, et al., for: (i) Declaratory and Injunctive relief; [3] (ii) Breach of Contract; (iii) Violation of UCC Art. 9; (iii) Tortious Interference; (iv) Breach of Fiduciary Duty; and (v) Conversion/Civil Theft. On March 6, 2013, Northstar answered the Logan County Counterclaim.

16. The Logan County Litigation was set for a five-day jury trial on June 17, 2013, through June 21, 2013, in the Logan County Court.

17. Originally, Plaintiff’s Bankruptcy Schedules indicated that its only meaningful asset was the Property. However Plaintiff has amended its Schedules to assert an interest in certain EQRs.

18. On May 14, 2013, Northstar filed its Motion for Relief from Stay (docket #43) (the “Relief from Stay Motion”). Thereafter, the Plaintiff filed its Objection to [Northstar’s] Motion for Relief from Automatic Stay (docket #49) (the “Response”). On June 11, 2013, the Court convened a preliminary hearing on the Relief from Stay Motion and set a final hearing on Monday, July 8, 2013, which hearing was later rescheduled to August 14, 2013.

19. Plaintiff and Northstar entered into a Stipulation Between [Plaintiff] and [Northstar] for Relief from Stay and to Vacate August 14, 2013 Final Hearing (docket #65) (the “Stipulation”). The Stipulation was approved by the Court on August 12, 2013 (docket #66) (the “Order”) and provided, in relevant part, that:

(1) the stay is modified to allow [Northstar] and the Debtor to continue and fully prosecute the Logan County Litigation against one another, but no execution upon or attempt to enforce any judgment entered in the State Court Litigation is permitted without further order by this Court;

(2) [Northstar’s] request for relief from stay with regard to the Property is held in abeyance pending the outcome of the State Court Litigation, including the trial presently set for January 6-10, 2014 (the “State Court Trial”); and

(3) the Debtor, its principal, and affiliates who are parties to the State Court Litigation shall not seek a continuance or stay of the State Court Litigation based on the Debtor’s bankruptcy filing, or on this Stipulation, or the entry of an Order approving this Stipulation, and, absent unforeseen circumstances wholly unrelated to the Debtor’s bankruptcy case, shall not seek a continuation of the State Court Trial.

20. On November 20, 2013, Nolan Ulmer (“Ulmer”), a Defendant and counterclaimant in the Logan County Litigation, along with his spouse Patricia Ulmer, filed a voluntary Chapter 11 petition in this Court. The following day, UIV Properties RS, LLC (“UIV”), NPK Water, and NPK Investments, LLC (“NPK Investments”) (collectively, the “Ulmer Related Entities”) also filed chapter 11 petitions in this Court. The Logan County Court vacated the trial date and stayed the Logan County Litigation for a second time.

21. Prior to the Ulmers and the Ulmer Related Entities filing their bankruptcy petitions, Advantage had initiated litigation styled Advantage Bank v. NPK Investments, LLC, et al., Case No. 2013CV136 in the Weld County District Court (the “Weld County Litigation”). Defendants in the Weld County Litigation include the Ulmers, Ulmer Investments and PRB. Also named is the U.S. Internal Revenue Service because of its tax lien on Mr. Ulmer’s personal property. Advantage has taken no position on the instant Motion.

22. On January 3, 2014, Advantage filed its Motion for Relief from Automatic Stay (Case No. 13-13098-HRT; docket #100). It sought relief in order to continue prosecution of the Weld County Litigation.

23. On or about June 4, 2014, Plaintiff, Advantage, the Ulmers and NPK Investments entered into a Settlement Agreement (Case No. 13-13098-HRT, docket #142, Exhibit 1) providing, among other things, that Advantage would receive payment in a certain amount, and if not, would be entitled to relief from the automatic stay to proceed with foreclosure upon the EQRs in which it claims a security interest (the “Settlement Agreement”). The City was not a party to the Settlement Agreement.

24. The Settlement Agreement was approved by order of this Court on June 27, 2014 (Case No. 13-13098-HRT, docket #150). The Ulmer parties did not perform their obligations under the Settlement Agreement and Advantage initiated foreclosure with respect to the EQRs subject to the Settlement Agreement.

25. On October 28, 2014, the City, through its attorneys, issued a letter in which it took the position that Smith had no authority to either accept the PRB Shares or issue the Disputed EQRs, and that the transactions through which the PRB Shares were transferred to the City and the Disputed EQRs were issued were and are void ab initio.

26. On May 9, 2014, Plaintiff commenced this adversary case. Its original complaint (docket #1) sought declaratory relief. It named Advantage Bank, Northstar Bank of Colorado, the City of Evans, Colorado, and Nolan and Patricia Ulmer as Defendants. That complaint sought a declaration from the Court as to the respective interests in the Disputed EQRs and the Ditch Shares and the validity of Northstar’s foreclosure sale of those EQRs that it claimed a security interest in.

27. Plaintiff’s Amended and Supplemented Complaint (docket #71-2), in addition to the originally requested relief, seeks the Court’s declaration regarding the validity of the transaction with the City whereby ditch shares were exchanged for EQRs including the validity of the Dry Up Covenant; the City’s obligation to return shares ostensibly exchanged for EQRs and the City’s obligations under the Dry Up Covenant; and the validity and enforceability of the Settlement Agreement.

II. DISCUSSION

Northstar urges the Court to abstain from adjudicating the instant controversy. It argues that the Court must abstain under 28 U.S.C. § 1334(c)(2) and that, even if the Court finds that mandatory abstention under § 1334(c)(2) is inappropriate, the Court should exercise its discretion to abstain, under 28 U.S.C. § 1334(c)(1). The Court agrees with Northstar and will grant the Motion.

A. Bankruptcy Court Authority to Hear the Motion to Abstain

Section 1334 of the Judicial Code vests federal bankruptcy jurisdiction in the district courts. 28 U.S.C. § 1334. In turn, the district courts refer bankruptcy matters to the bankruptcy courts under 28 U.S.C. § 157. Unique to federal jurisdiction generally is the statutory provision in § 1334(c) providing that the district court may abstain from hearing a matter that is otherwise well within § 1334’s jurisdictional grant.

Because the language of § 1334(c) gives authority to the “district court” to abstain under certain circumstances, the initial question is whether the adjudicative authority given to the bankruptcy courts under 28 U.S.C. § 157 extends to the decision whether to abstain from the exercise of federal bankruptcy jurisdiction. In the case of Nat’l Roofing & Sheet Metal, Inc. v. Cincinnati Ins. Co. (In re Nat’l Roofing & Sheet Metal, Inc.), the court held that section 1334(c) “authorizes bankruptcy courts to enter binding orders on motions to abstain and permits the appeal of these orders to the district court.” 130 B.R. 768, 776-78 (Bankr. S.D. Ohio 1991). It explained that the 1990 amendments to the Judicial Code and the 1991 amendment to FED. R. BANKR. P. 5011 permit the bankruptcy courts to make the abstention determination subject to appellate review by the district court. See also FED. R. BANKR. P. 5011 (“A motion for abstention pursuant to 28 U.S.C. § 1334(c) shall be governed by Rule 9014 . . . .”).

B. Mandatory Abstention

Federal courts must decline the exercise of federal bankruptcy jurisdiction over state law based actions that were pending in state courts prior to the filing of a related bankruptcy case if there is no other basis for the exercise of federal jurisdiction over the dispute, a party makes a timely motion for abstention, and allowing the matter to proceed in its original state court forum will not unduly delay the administration of the bankruptcy estate. The mandate to abstain from the exercise of federal bankruptcy jurisdiction over disputes of this type is codified in 28 U.S.C. § 1334 as follows:

Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.

28 U.S.C. § 1334(c)(2). Application of § 1334(c)(2) to this case requires the Court to find that:

1. Northstar’s motion for abstention was timely filed;

2. this proceeding is “based upon a State law claim or State law cause of action;”

3. this proceeding is “related to a case under title 11 but not arising under title 11 or arising in a case under title 11;”

4. Plaintiff’s “action could not have been commenced in a court of the United States absent jurisdiction under [28 U.S.C. § 1134];”

5. “an action [has been] commenced . . . in a State forum of appropriate jurisdiction;” and

6. the state court action “can be timely adjudicated” in the State Court.

In re Taub, 413 B.R. 81, 88 (Bankr. E.D. N.Y. 2009) . See also 28 U.S.C. § 1334(c)(2).

1. Northstar’s Motion for Abstention Was Timely Filed

Northstar’s Motion was timely filed. This Court set a deadline of January 16, 2015, for the filing of any motions for abstention or for withdrawal of the reference. Northstar’s Motion was timely filed on January 16, 2015.

2. This Proceeding Is Based upon a State Law Claim or State Law Cause of Action

Plaintiff’s original complaint named Advantage, Northstar, the City, and the Ulmers as Defendants. It sought relief based solely upon the parties’ rights under state law. There, it sought the Court’s declaration of ownership rights in the Disputed EQRs, lien rights in the Disputed EQRs, and the validity of Northstar’s foreclosure of its claimed lien rights in the Disputed EQRs.

Plaintiff amended its complaint following the City’s repudiation of the Dry Up Covenant and related transactions whereby the City gave EQRs to the Debtor and related entities in exchange for Ditch Shares. The Amended Complaint (docket 71-2), in addition to declaratory relief requested in the original Complaint, seeks declaratory relief regarding validity of transactions with the City, validity and enforceability of the Settlement Agreement and the obligations of the parties with respect to those matters. Finally, Plaintiff seems to seek lien avoidance under 11 U.S.C. § 544 in the event that the Court should declare the various disputed liens to be valid.

The validity and enforcement of the Dry Up Covenant and related transactions are matters to be decided solely with reference to state law and do not imply any federal question. As noted below, Plaintiff’s reference to § 544 fails to pass muster under federal notice pleading standards and the Court disregards it.

The issues concerning the validity of the Settlement Agreement present a more mixed question. Because the Settlement Agreement was entered into to settle a motion filed in this Court and the Settlement Agreement was approved by the Court, issues concerning that agreement would seem to be matters of unique interest to the Court. But the underlying subject matter of the Settlement Agreement is far more closely related to the litigation taking place in the Weld County Court.

The Settlement Agreement was entered into in order to resolve Advantage’s Motion for Relief from Automatic Stay in the main bankruptcy case (Case No. 13-13098-HRT, docket #100). Signatories to the Settlement Agreement are Advantage Bank, the Ulmers, NPK Investments and PRB. The parties agreed that Advantage would be paid a sum certain in settlement of the parties’ dispute and, upon the failure of the Ulmer parties to perform that obligation, they agreed to withdraw their opposition to Advantage’s motion in this Court and to cooperate with the foreclosure process in the Weld County Court. Objections to Advantages’ motion were originally filed by PRB (Case No. 13-13098-HRT, docket #105) and by the Ulmers and NPK Investments (Case No. 13-13098-HRT, docket #106). [4] The Ulmer parties failed to make the settlement payment. The Ulmers and NPK Investments withdrew their objection (Case No. 13-13098-HRT, docket #169) and so did PRB (Case No. 13-13098-HRT, docket #170). Following withdrawal of the objections, the Court entered its order granting Advantage relief from the automatic stay (Case No. 13-13098-HRT, docket #172). Thus, the Debtors’ obligations to either pay a settlement amount or to withdraw their opposition to relief from stay in this Court has been fully performed.

Moreover, the relief from stay aspect of the Settlement Agreement is a moot point. Quite apart from Advantage’s motion for relief or the parties’ Settlement Agreement, the Court must and will lift the stay to allow these issues to be fully litigated in the Weld County Court.

The other primary aspect of the Settlement Agreement is appropriately addressed by the Weld County Court. In that portion of the Settlement Agreement, the Debtors agreed to cooperate with foreclosure proceedings in the Weld County Court. That issue is inextricably bound with the enforceability of the Dry Up Covenants and related transactions because the focus of the Plaintiff’s argument with respect to the Settlement Agreement is that it is unenforceable due to mutual mistake. The matters to be decided in the Weld County Court will determine whether or not the Dry Up Covenants and related transactions are fully enforceable; whether Advantage’s collateral merely changes from EQRs to Ditch Shares such that the fundamental basis of the Settlement Agreement is largely in-tact; whether the form of property subject to the parties pre-petition transactions is so transformed that it would be unjust to enforce the pledge of the Ulmers and their entities to cooperate with foreclosure proceedings; or none of the above. Regardless of the Weld County Court’s conclusions regarding the Settlement Agreement, the enforceability of the pledge of cooperation in the Weld County foreclosure proceedings is strictly a matter of state law based interpretation of the Settlement Agreement in light of that court’s conclusions with respect to the Dry Up Covenants and related transactions. It raises no federal question. [5]

The Court finds that all causes of action stated in the Amended Complaint are based upon state law.

3. This Proceeding Is Related to a Case under Title 11 but Not Arising under Title 11 or Arising in a Case under Title 11

As noted above, Plaintiff’s original complaint in this case was substantially similar to the counterclaims that Ulmer and related entities asserted in the Logan County Litigation. Nothing in that original complaint could be construed as either arising under title 11 or arising in a case under title 11.

However, in its Amended Complaint, Plaintiff makes reference to a cause of action “arising under title 11″ by citing to § 544 of the Bankruptcy Code. It seeks the Court’s declaration that:

The PRB Shares and/or equivalent Godfrey Ditch shares are not subject to any enforceable security interest or lien in favor of Northstar and/or Advantage or, alternatively, any security interest or lien that Northstar and/or Advantage might claim is avoidable under 11 U.S.C. 544, or otherwise . . . .

Amended Complaint, ¶ 24.D.

Section 544 allows a debtor-in-possession to exercise state law avoidance rights possessed by certain hypothetical judicial lien holders, judgment creditors or bona fide purchasers of real property. 11 U.S.C. § 544(a)(1)-(a)(3). It also allows a debtor-in-possession to “avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim . . . .” 11 U.S.C. § 544(b). Thus a cause of action under § 544(a) relies on hypothetical rights of certain classes of creditor and a cause of action under § 544(b) allows a trustee or debtor-in-possession to step into the shoes of an existing unsecured creditor to exercise lien avoidance rights on behalf of the estate. The basis of a claim under § 544(a) is different from one under § 544(b) yet the Amended Complaint only makes reference to § 544 and not to an applicable subsection. What §§ 544(a) & (b) do have in common is that they both rely on underlying non-bankruptcy law avoidance theories. Yet the Amended Complaint reveals no underlying non-bankruptcy law avoidance theory Plaintiff might utilize under either subsection of § 544. On its face, the Court finds that the Plaintiff has stated no claim for § 544 relief under federal notice pleading rules. See Fed. R. Civ. P. 8. [6] As a consequence Plaintiff’s reference to § 544 does not make this a proceeding that arises under title 11.

The Plaintiff does seek one form of relief that, in a sense, arises “in a case under title 11.” It seeks the Court’s determination of whether and to what extent the Settlement Agreement is enforceable. See Amended Complaint ¶ 24.C. & ¶ 24.F. The Amended Complaint that includes the issue concerning the Settlement Agreement was filed following the City’s repudiation of the Dry Up Covenant and related transactions.

But the Court does not apply abstention doctrine by parsing a complaint into all of its component causes of action. The statutory language refers to “a proceeding.” 28 U.S.C. § 1334(c)(2). Thus, the Court must analyze the case as a whole and does not perform multiple abstention analyses to determine the applicability of § 1334(c)(2) to each individual cause of action. The principal dispute among the parties and the gravamen of the Amended Complaint goes to ownership of EQRs; validity and enforceability of associated security agreements; and how the City’s repudiation of the Dry Up Covenant and related transactions affects those ownership rights and security interests. The fact that the Settlement Agreement was entered into in the course of a bankruptcy case does not transform this proceeding into one either arising under title 11 or arising in a case under title 11.

4. Plaintiff’s Action Could Not Have Been Commenced in a Court of the United States Absent Jurisdiction under 28 U.S.C. § 1134

Bankruptcy jurisdiction under 28 U.S.C. § 1334 is the sole basis alleged for federal jurisdiction of any causes of action appearing in the Plaintiff’s Amended Complaint.

5. An Action Has Been Commenced in a State Forum of Appropriate Jurisdiction

On May 18, 2012, Northstar initiated The Logan County Litigation in Logan County District Court naming Nolan Ulmer, Platte River Bottom, LLC and UIV Properties RS, LLC, as defendants and asserting claims for the appointment of a receiver for the Property, breach of contract, and unjust enrichment. The defendants in the Logan County Litigation, asserted claims against Northstar and others for (i) Declaratory and Injunctive relief; [7] (ii) Breach of Contract; (iii) Violation of UCC Art. 9; (iii) Tortious Interference; (iv) Breach of Fiduciary Duty; and (v) Conversion/Civil Theft.

Advantage has commenced a second action in Weld County. That action concerns Advantage’s efforts to foreclose its interest in EQRs that it alleges were pledged to it by the Ulmers and by NPK Investments. Thus, all of the parties present in this proceeding and all of the claims present in this proceeding are the subject of prior litigation in state courts.

6. The State Court Action Can Be Timely Adjudicated in the State Forum

The timely adjudication factor is not an exercise in predicting when a matter will be resolved in a state forum compared to when it is likely to be resolved in a bankruptcy court. Instead, the Court’s focus is primarily whether proceedings in this Court are likely to be prejudiced by allowing matters raised in this adversary proceeding to be adjudicated in the state courts. Personette v. Kennedy (In re Midgard Corp.), 204 B.R. 764, 778 (B.A.P. 10th Cir. 1997) .

In considering whether allowing a case to proceed in state court will adversely affect the administration of a bankruptcy case, courts have considered some or all of the following factors: (1) backlog of the state court and federal court calendar; (2) status of the proceeding in state court prior to being removed (i.e., whether discovery had been commenced); (3) status of the proceeding in the bankruptcy court; (4) the complexity of the issues to be resolved; (5) whether the parties consent to the bankruptcy court entering judgment in the non-core case; (6) whether a jury demand has been made; and (7) whether the underlying bankruptcy case is a reorganization or liquidation case. While some of these factors require the moving party to present evidence, such as the status of the state court calendar and status of proceedings in the state court, other factors are evident from a bankruptcy court’s record, such as the status of the adversary proceeding before it, the consent of parties to have the court enter judgments, and the nature of the underlying bankruptcy case.

Id. at 778-79.

The record discloses that the Logan County Litigation was expeditiously set for trial in the Logan County Court. The case was filed on May 18, 2012. On October 29, 2012, Defendants’ counsel served notice that a trial was set for June 27, 2013. Plaintiff filed its bankruptcy petition on March 5, 2013. The primary issues raised in the instant adversary proceeding with respect to Northstar were postured for resolution in the Logan County Court and would likely have been resolved there but for the Plaintiff’s filing of its bankruptcy case.

Subsequently, in August of 2013, the Plaintiff and Northstar stipulated to relief from the automatic stay to allow the Logan County Litigation to resume. That stipulation recited that the Logan County Litigation was scheduled for trial on January 6 through 10 of 2014. Again, the primary disputes among those parties were postured for resolution in the Logan County Court and, again, the resolution was derailed when the Ulmers and the Ulmer Related Entities filed their bankruptcy cases.

The evidence before the Court persuades it that the Logan County Court had diligently tried to move the parties’ disputes to a final resolution only to be frustrated in its efforts by, first, the Plaintiff and, later, the Ulmers and related entities filing bankruptcy cases which had the effect of staying the Logan County Litigation. The Court is further persuaded that, if unhindered by the automatic stay or the prospect of potentially conflicting federal bankruptcy jurisdiction, the Logan County Court will continue its efforts to adjudicate these matters.

The record is more sparse with respect to the Weld County Litigation. According to Advantage, “the Weld county Litigation revolves around Advantage’s efforts to foreclose upon the 325 EQRs that were pledged to it by the Ulmers and the 80 EQRs that were pledged to it by NPK Water Investments, LLC (which efforts have addressed the existence and pledging of various EQRs by the Ulmers and related Ulmer entities).” (docket #100 ¶ 3.b.). By the court’s order of July 26, 2013, it entered a money judgment by default in favor of Advantage and against the Ulmers and NPK Investments in the total amount of $2,659,084.22. “[T]he current parties to the Weld County Litigation include NPK Investments, LLC, Nolan Ulmer, Patricia Ulmer, Platte River Bottom, LLC, Advantage Bank and the Internal Revenue Service (which possesses a federal tax lien on the personal property of Mr. Ulmer, including ostensibly the EQRs that are issue . . .).” (docket #100, ¶ 3.a.). “[U]ntil July 2014, Northstar was also a party to said action.” Id. According to Northstar,

After responding to the Advantage Complaint, Advantage and Northstar undertook substantial efforts to determine if the Ulmer and the Ulmer Related Entities owned sufficient EQRs to satisfy Advantage’s and Northstar’s respective security interests. As a result of these efforts, Northstar, Advantage, and the City of Evans executed a Stipulation that the Ulmer and the Ulmer Related Entities owned sufficient EQRs to satisfy both Northstar’s and Advantage’s security interests. (docket #30, ¶18).

Turning to the timeliness factors listed in Midgard the Court finds that abstention is unlikely to interfere with administration of the bankruptcy case:

(1) Backlog of the state court and federal court calendar. The Court has no information as to the relative backlog of the Court’s calendar as compared to Weld and Logan counties. It is apparent, however, that the Logan County Litigation was proceeding through that court at a rate that would compare favorably with adjudication in this Court and likely result in resolution of those issues more rapidly than would be possible starting from the beginning in this Court. The Court has less information on the progress of proceedings in Weld County. It is clear that a money judgment had been entered and that alter-ego issues had been litigated in that court. Thus, the Weld County Court has conducted significant proceedings but the Court has no information relating to the progress of Advantage’s foreclosure of its interest in EQRs. The Weld County Litigation was filed on February 19, 2013. (docket #30, ¶17). In July, 2013, the money judgment was entered. On September, 13, 2013, that court had entered its ruling on the alter-ego issues. (docket 100, ¶19). The Court concludes that matters brought before the court in the Weld County Litigation were being expeditiously handled and that moving the litigation into federal court would more likely have the effect of slowing down the adjudicative process rather than speeding it up.

(2) Status of the proceeding in state court prior to being removed (i.e., whether discovery had been commenced). The Logan County Litigation was scheduled for trial. At minimum, a money judgment had been entered against the Ulmers and NPK in the Weld County Litigation and a decision had been rendered on alter-ego issues before the Ulmers and NPK filed their bankruptcy petitions. It does not appear to the Court that the issues of ownership of, and security interests in, the EQRs were matters that were well developed in that case before the bankruptcy cases were filed.

(3) Status of the proceeding in the bankruptcy court. Matters have not proceeded far in this Court so both the Logan County and the Weld County courts have substantially more history with the parties and the issues than this Court does.

(4) The complexity of the issues to be resolved. Issues of ownership and security interests generally do not present particularly complex legal issues. This factor neither supports abstention or retention of jurisdiction.

(5) Whether the parties consent to the bankruptcy court entering judgment in the non-core case. No party has objected to adjudication of these matters in the bankruptcy court.

(6) Whether a jury demand has been made. The Logan County Litigation was scheduled to be tried to a jury before it was derailed by the bankruptcy filings. The Court has no information concerning jury trial in the Weld County Litigation and no jury demand has been made in this Court.

(7) Whether the underlying bankruptcy case is a reorganization or liquidation case. Since these are reorganization cases, the Court is sensitive to the needs of the reorganization debtors and has considered whether retention of jurisdiction is necessary in order to facilitate the reorganization cases. Because the Court cannot find that retention of federal jurisdiction over these disputes is likely to confer an advantage with respect to speed of adjudication, this factor does not counsel in favor of retaining these matters in federal court.

After considering the above factors, with particular focus on the progress of proceedings in Weld and Logan Counties, the Court finds that abstention will not adversely affect administration of the bankruptcy cases. That does not mean that resumption of the Logan County Litigation and the Weld County Litigation will be without complication. The fact that litigation is occurring in two different counties is a concern to the Court and that is a factor in favor of retention of federal jurisdiction over these disputes. Also, a new complication has arisen since the initial filing of the Logan County Litigation and the Weld County Litigation that will affect the course of those cases. The City’s repudiation of the Dry Up Covenant and related transactions raises closely related issues that will likely be joined with those that were pending at the time those proceedings were stayed. Moreover, formulation of a reorganization plan will be difficult until these matters are resolved. Nonetheless, because many of those factors will be present regardless of where the cases are adjudicated, on balance, the Court finds that resumption of the cases in the state courts, which have conducted significant proceedings with respect to both cases, will not hamper administration of the bankruptcy cases.

The Court must abstain from adjudicating this proceeding under 28 U.S.C. § 1334(c)(2). As the above discussion indicates, the Court finds all of six elements required for mandatory abstention under § 1334(c)(2) are present in this case. Accordingly, it will abstain and modify the automatic stay in the related bankruptcy cases to allow the state court cases to move forward.

C. Discretionary Abstention

Even when abstention is not mandatory under § 1334(c)(2), federal courts, in their discretion, may abstain from hearing certain matters that are within the federal courts’ bankruptcy jurisdiction when such abstention serves “the interest of comity with State courts or respect for State law.” 28 U.S.C. § 1334(c)(1). The fact that abstention is specifically provided for in the bankruptcy jurisdiction statute shows that Congress was cognizant of the potential for conflicts to arise between state and federal jurisdiction and contemplated that, when the exercise of federal bankruptcy jurisdiction would impact the relationship between state and federal courts, the federal courts should give consideration to those issues of federalism in making the determination whether or not to exercise federal bankruptcy jurisdiction. See, e.g., In re WorldCom, Inc. Securities Litigation, 293 B.R. 308, 332 (S.D. N.Y. 2003) (“The various abstention doctrines `share a common matrix: a complex of considerations . . . .’ Those considerations include comity and federalism, judicial economy, and efficiency.”) (quoting In re Pan American Corp., 950 F2d 839, 846 (2nd Cir. 1991) ).

When courts consider applicability of discretionary abstention under § 1334(c)(1), they consider the following factors:

1. the effect or lack thereof on the efficient administration of the estate if a Court recommends abstention,

2. the extent to which state law issues predominate over bankruptcy issues,

3. the difficulty or unsettled nature of the applicable law,

4. the presence of a related proceeding commenced in state court or other nonbankruptcy court,

5. the jurisdictional basis, if any, other than 28 U.S.C. § 1334,

6. the degree of relatedness or remoteness of the proceeding to the main bankruptcy case,

7. the substance rather than form of an asserted . . . proceeding [arising under title 11 or arising in a case under title 11], [8]

8. the feasibility of severing state law claims from . . . bankruptcy matters [arising under title 11 or arising in a case under title 11] to allow judgments to be entered in state court with enforcement left to the bankruptcy court,

9. the burden of [the bankruptcy court’s] docket,

10. the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties,

11. the existence of a right to a jury trial, and

12. the presence in the proceeding of nondebtor parties.

Matter of Chicago, Milwaukee, St. Paul & Pacific R. Co., 6 F.3d 1184, 1189 (7th Cir. 1993) .

Of the above enumerated factors, the Court relies primarily on 1, 2, 4, 5, 7, 10 and 11. In short, the clear majority of the above factors favor discretionary abstention.

1. The Effect or Lack Thereof on the Efficient Administration of the Estate If a Court Recommends Abstention

The Court has discussed this factor in detail above. The fact that there are two cases pending in different courts makes this a more difficult question than it would be with respect to either of the individual cases. Nonetheless, as explained above, the Court finds no advantage to be gained, with respect to estate administration, by retaining federal jurisdiction.

2. The Extent to Which State Law Issues Predominate over Bankruptcy Issues

This factor weighs in favor of abstention. The case involves primarily state law based property rights and security interests. The Plaintiff has hinted at one federal law based cause of action under 11 U.S.C. § 544 but that creates no barrier to the State Court’s determination of the issues even if the Plaintiff should successfully articulate a cause of action under § 544. Causes of action under § 544 do not fall within the exclusive jurisdiction of the federal courts. Under the Judicial Code, federal courts have “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). See also In re Athens/Alpha Gas Corp., 715 F.3d 230, 237-38 (8th Cir. 2013) (giving preclusive effect to state court exercise of concurrent jurisdiction over cause of action under 11 U.S.C. § 544). Moreover, any determination made under § 544 is predicated on state law rights. Under § 544, a trustee or debtor-in-possession may avoid transfers avoidable by hypothetical ideal creditors: a judicial lien creditor, a judgment creditor who has obtained an execution against the debtor, or a bona fide purchaser of real property who has perfected the transfer, 11 U.S.C. § 544(a), and also transfers that are avoidable by actual holders of unsecured claims. 11 U.S.C. § 544(b).

Thus, the only hint at a federal question in this case is what appears to be a failed attempt to state a cause of action under § 544 in the Amended Complaint. If the Plaintiff is able to articulate a cogent theory of recovery under § 544, such a theory would still be based in state-created rights and would be no hindrance to the state courts which enjoy concurrent jurisdiction over causes of action under § 544.

4. The Presence of a Related Proceeding Commenced in State Court or Other Nonbankruptcy Court

This factor weighs strongly in favor abstention because the primary disputes among these parties have been pending in the state courts for three years now.

5. The Jurisdictional Basis, If Any, Other than 28 U.S.C. § 1334

Any possible federal jurisdiction over the issues presented by this adversary proceeding was created by the serial chapter 11 filings of the Plaintiff, the Ulmers and their related entities. The sole basis for federal jurisdiction over the disputes among these parties is 28 U.S.C. § 1334.

7. The Substance Rather than Form of an Asserted . . . proceeding [Arising under Title 11 or Arising in a Case under Title 11]

Plaintiff has stated no cause of action either arising under title 11 or arising in a case under title 11. The Plaintiff has made reference to 11 U.S.C. § 544 in its Amended Complaint. A cause of action under § 544 arises under title 11. That section allows a plaintiff to avoid certain pre-bankruptcy transfers of the debtor and bring such transferred property back into the bankruptcy estate. However, as previously discussed, Plaintiff has given the assertion no substance and has failed to state a cause of action under § 544.

10. The Likelihood That the Commencement of the Proceeding in Bankruptcy Court Involves Forum Shopping by One of the Parties

The record persuades the Court of the likelihood that this adversary proceeding represents an exercise in forum shopping by Ulmer and related entities. The Logan County Litigation was originally stayed by Plaintiff’s bankruptcy filing. After Plaintiff agreed with Northstar, in May of 2013, to return to the State Court to complete the Logan County Litigation, the Ulmers and related entities filed new bankruptcy cases and the Logan County Litigation was again stayed along with the Weld County Litigation. Thereafter Plaintiffs filed this adversary proceeding. The issues raised in the original complaint are a substantial repeat of counterclaims asserted by Ulmer and related entities in the Logan County Litigation. The timing of the bankruptcy filings; their effect on the litigation in both courts; and the assertion of substantially similar claims in this adversary proceeding as were already at issue in the state courts are all circumstances that the Court finds highly suggestive of a motive to move these disputes into this Court and out of the state courts.

11. The Existence of a Right to a Jury Trial

The issues presented in this proceeding are predominantly legal issues that may be tried to a jury. The Logan County Litigation was originally set for a five day jury trial. Even though no jury demand has been made in this Court, the nature of the issues to be tried entitles the parties to a trial by jury.

The Court has considered other factors as well. Factor number 6, the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, weighs in favor of retaining federal jurisdiction over this case. Resolution of the property rights and security interest disputes among these parties is closely related to the main case. Resolution of those issues will determine the nature of property interests in the bankruptcy estates and the extent to which those property rights are encumbered with security interests. Those determinations, in turn, will affect the ability of the various debtors to reorganize and the nature of their reorganization plans.

Factors that the Court does not find especially important to its determination are factor number 3, the difficulty or unsettled nature of the applicable law; factor number 8, the feasibility of severing state law claims from . . . bankruptcy matters [arising under title 11 or arising in a case under title 11] to allow judgments to be entered in state court with enforcement left to the bankruptcy court (because no such “arising under” or “arising in” matters have been effectively raised); factor number 9, the burden of [the bankruptcy court’s] docket; and factor number 12, the presence in the proceeding of nondebtor parties.

The gravamen of any discretionary abstention determination is the extent to which abstention from exercising federal bankruptcy jurisdiction over a case serves “the interest of comity with State courts or respect for State law.” 28 U.S.C. § 1334(c)(1). The above list of factors has been developed over the years by the federal courts as an aid to highlighting how the interests of comity and respect for state law are served by a decision to abstain. However, in the end, the decision to abstain is always made on the basis of the totality of circumstances and the above recognized factors do not serve to limit the circumstances that a court may consider relative to a given case or the weight a court chooses to give to particular factors.

The factor that weighs strongly in favor of retaining jurisdiction is the relationship of the property and security interest issues raised in the case to the main bankruptcy cases. These disputes are central to the ability of the Plaintiff and the other debtors to reorganize. But the factors on the other side of the ledger overwhelm that one factor. Principle among them is the fact that the circumstances strongly suggest this adversary proceeding and, by extension, the main bankruptcy cases themselves, are an exercise in forum shopping by Mr. Ulmer and the entities under his control. The disputes among these parties are garden variety property rights and security interest issues. Those issues are controlled by state law and were well on their way towards resolution in the appropriate state courts of general jurisdiction.

The specialized bankruptcy jurisdiction of the federal courts has been invoked by the Plaintiff and related parties by the filing of their various bankruptcy cases. But the primary effect has been to involve the federal courts in controversies that were already well on their way to resolution in the appropriate state courts. The debtors in these related cases have not filed plans and the Court doubts their ability to do so until the property rights and security interest controversies have been resolved. Thus, the valid purpose to file these chapter 11 petitions, formulation of plans for reorganization, is frustrated until these underlying disputes are resolved and the resolution of those disputes has been significantly delayed by the attempt of Mr. Ulmer and his controlled entities to move the controversies into a federal forum.

Under the circumstances here presented, the federal courts’ duty of comity to the state courts could not be more clearly implicated. Comity is a reciprocal duty owed by one sovereign to another that is indispensable in our federal system. In Younger v. Harris, the Supreme Court described comity as

a proper respect for state functions, a recognition of the fact that the entire country is made up of a Union of separate state governments, and a continuance of the belief that the National Government will fare best if the States and their institutions are left free to perform their separate functions in their separate ways.

401 U.S. 37, 44 (1971).

The bankruptcy jurisdiction statute, 28 U.S.C. § 1334, is unique in its explicit provision for discretionary abstention where necessary to serve interests of comity and respect for state law. Under § 1334, federal bankruptcy jurisdiction can extend to cover cases exclusively controlled by state law because of a connection to a bankruptcy case and, as a consequence, there is great potential for conflict between state courts and federal courts exercising bankruptcy jurisdiction. Frequently, conflicts are resolved in favor of bankruptcy jurisdiction where there is a significant federal bankruptcy interest to be served by retaining jurisdiction. But here, an analysis of the surrounding circumstances reveals that asserting federal jurisdiction constitutes a positive interference in ongoing state court cases; the circumstances reveal no overriding federal bankruptcy interest to be served by assertion of jurisdiction; and no advantage accrues to either the parties or the Court. In this case, abstention in deference to the state courts is plainly indicated.

Under the facts of this case, largely because of the history of proceedings in the state court, abstention would be appropriate even in the absence of any possibility that filing this adversary case represents an exercise in forum shopping. But the strong suggestion of a forum shopping motive that arises from the circumstances of this case reinforces the Court’s conviction that abstention is required and serves the interests of comity and respect for state law.

III. CONCLUSION

For the reasons stated above, it is

ORDERED that Northstar Bank of Colorado’s Motion for Abstention (docket #83) is GRANTED and the Court hereby abstains from the exercise of federal bankruptcy jurisdiction under 28 U.S.C. § 1334 over this adversary proceeding. It is further

ORDERED that the Court GRANTS RELIEF FROM THE AUTOMATIC STAY to Northstar Bank of Colorado and to Advantage Bank to the extent necessary to fully liquidate all of their claims against the Debtors in these jointly administered bankruptcy cases and to seek determinations of all ownership rights to and security interests in property of the bankruptcy estates. It is further

ORDERED that, until further order of the Court, the automatic stay remains in effect with respect to all property of the Debtors’ bankruptcy estates and, until further order of the Court, neither Northstar Bank of Colorado or Advantage Bank is authorized to execute on any money judgment received in a state court or to complete foreclosure proceedings on estate property beyond obtaining judgment as to rights in the disputed collateral.

[1] This recitation of factual allegations is taken from the pleadings and from the Court’s docket. It does not represent facts found by the Court as a result of evidentiary proceedings.

[2] The City denies that void ab initio is a fair description of its position. See Case No. 13-13098-HRT, docket #230. The City has not responded with respect to the instant Motion, however, in a pleading filed in the main case, it explains that it takes the position that the Dry Up Covenant and related EQR for ditch share exchange transactions were not properly authorized and, as a consequence of that failure, it must either properly ratify the transactions or it must deem the transactions invalid and return the consideration it received. It does not explain why it has not yet made that determination or when it expects to.

[3] The request for declaratory and injunctive relief included 14 requests for relief, all arising under state law, and largely focused on Northstar’s foreclosure of 725 EQRs. While not identical in all respects, the prayer for declaratory relief asserted by PRB, Ulmer, and others in the Logan County Counterclaim is substantially similar to the original complaint filed in this adversary proceeding.

[4] In addition, Northstar filed a limited objection (Case No. 13-13098-HRT, docket #110). The objection was subsequently withdrawn pursuant to a stipulation entered into among Northstar, Advantage and the City.

[5] The Plaintiff suggests that this Court must adjudicate the Settlement Agreement issues because the Settlement Agreement includes a forum selection clause that designates this as the court to adjudicate any disputes that arise with respect to the agreement. But, while the Court takes the parties’ forum selection clause into account, such a clause cannot be used to impose a duty upon the Court to retain federal bankruptcy jurisdiction over these matters in a case that presents no federal question and where 28 U.S.C. § 1334(c)(2) mandates abstention.

[6] Made applicable to this proceeding by FED. R. BANKR. P. 7008.

[7] The request for declaratory and injunctive relief included 14 requests for relief, all arising under state law, and largely focused on Northstar’s foreclosure of 725 EQRs. While not identical in all respects, the prayer for declaratory relief asserted by PRB, Ulmer, and others in the State Court Counterclaims is substantially similar to the original complaint filed in this adversary proceeding.

[8] The Court has altered the original quoted language to replace the term “core” with “arising under title 11 or arising in a case under title 11.” It does so to avoid confusion between 1) issues pertaining to the exercise of federal jurisdiction and 2) whether a matter that does come within federal bankruptcy jurisdiction may be decided by a bankruptcy judge or must be decided by an Article III judge. The term “core” is used in the Judicial Code solely in reference to those matters that both come within the ambit of federal bankruptcy jurisdiction and may be determined by a bankruptcy judge as opposed to an Article III judge. 28 U.S.C. §§ 157(b) & (c). See also Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71 (1982) . The Supreme Court has reminded us of that vital distinction in a recent series of cases beginning with Stern v. Marshall, 131 S. Ct. 2594 (2011) . See also Executive Benefits Ins. Agency v. Arkinson, 134 S. Ct. 2165 (2014) ; Wellness Int. Newtwork, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) . By contrast, the term “core” is nowhere present in 28 U.S.C. § 1334, which defines federal bankruptcy jurisdiction and controls abstention from the exercise of that jurisdiction. Thus, a federal court has no occasion to consider whether a matter is a core or non-core proceeding unless it first determines that it has proper bankruptcy jurisdiction and that abstention is not appropriate. Only after those issues are determined does a federal court consider the core or non-core nature of the proceeding in order to determine whether it is a matter that may be adjudicated by a bankruptcy judge or must be adjudicated by an Article III judge instead. By substituting the jurisdictional language of “arising under title 11 or arising in a case under title 11,” the Court seeks to focus the analysis on the distinction between those matters that are most intimately connected to federal bankruptcy jurisdiction and those that are merely “related to” a case under title 11.

Save trees – read court opinions online on Google Scholar.

300x600

New Bankruptcy Opinion: IN RE MARSHALL CREEK RETAIL INVESTORS, LLC – Bankr. Court, MD Florida, 2015

In re: Marshall Creek Retail Investors, LLC, Chapter 11, Debtor.

Case No. 3:14-bk-1777-PMG.

United States Bankruptcy Court, M.D. Florida, Jacksonville Division.

May 18, 2015.

ORDER ON CONFIRMATION OF PLAN OF REORGANIZATION AND OBJECTION BY M. CLAY WINSLETT

PAUL M. GLENN, Bankruptcy Judge.

THIS CASE came before the Court for hearing to consider confirmation of the Plan of Reorganization filed by the Debtor, Marshall Creek Retail Investors, LLC. (Docs. 53, 71). M. Clay Winslett (Winslett) filed an Objection to the Plan. (Doc. 81).

The Debtor’s primary creditor is Acorn Loan Acquisition Venture III (Acorn). The Court finds that the Plan offers a reasonable probability that the Debtor will be able to make the payments proposed by the Plan, including the payments to Acorn, from its future operations and from the Capital Contributions provided by Guarantors of the Acorn debt.

Additionally, the Court finds that the Plan may enjoin Winslett from pursuing his claims against the Guarantors, because the injunction is fair and necessary to the Debtor’s reorganization. Accordingly, Winslett’s Objection should be overruled, and the Plan should be confirmed.

Background

The Debtor, Marshall Creek Retail Investors, LLC, is a limited liability company that is owned by a separate entity known as Marshall Creek Retail Holdings, LLC (Holdings). The membership interests in Holdings are owned directly or indirectly by David P. Hill (Hill), Gary J. Davies (Davies), and M. Clay Winslett (Winslett).

The Debtor owns and operates a shopping center in St. Augustine, Florida. The shopping center was built in 2008, and includes an anchor space and eight additional tenant units. (Doc. 54, p. 5).

The Debtor filed a petition under Chapter 11 of the Bankruptcy Code on April 15, 2014.

On its schedule of real property filed in the Chapter 11 case, the Debtor listed the shopping center located on U.S. Highway 1 in St. Augustine (the Property), with a scheduled value of $1,823,148.00 and a scheduled lien in the amount of $5,436,508.38.

On its schedule of liabilities, the Debtor listed Acorn Loan Acquisition Venture III, L.P. (Acorn) as a creditor holding a secured claim on the Property in the amount of $5,436,508.38. Acorn has filed a secured Proof of Claim in the case in the amount of $6,496,960.80. (Claim No. 4).

On its schedule of co-debtors, the Debtor listed Hill, Davies, and Winslett as Guarantors of the debt owed to Acorn.

On August 13, 2014, the Debtor filed a proposed Plan of Reorganization. (Doc. 53). Generally, the Plan provided for the Debtor to continue its business operations, and for the Guarantors to form a new entity (Newco) which would fund a portion of the payments to creditors by making a Capital Contribution to the Reorganized Debtor.

On February 25, 2015, the Debtor filed a Modification to its Plan. (Doc. 71). The Modification is based on an approved settlement agreement between the Debtor, Acorn, Davies, and Hill. (Docs. 69, 77).

Under the Modification, Acorn would receive a Promissory Note “in the principal amount of $4,687,000.00, with monthly payments of principal and interest based on a 30 year amortization and 5% interest rate.” The Note would mature in thirty months from the Effective Date of the Plan, with one twelve-month extension of the maturity date.

Under the Modification, the Reorganized Debtor would be owned by Newco, which in turn would be owned by those Guarantors who have consented to and paid their share of the Capital Contribution and other expenses. The Capital Contribution is defined in the Modification as the advances necessary to pay Allowed Administrative Expenses, to fund a Debt Service Account (including an amount sufficient to service the Acorn Note for one year), and to pay the 2014 real estate taxes.

Finally, the Modification provides that the “injunction/releases contained in Article VII shall not apply to Acorn.” (Doc. 71, p. 6). Article VII of the Plan generally enjoins all persons or entities who hold impaired claims in the case from pursuing actions against the Guarantors who have paid their share of the Capital Contribution. The injunction extends for as long as the Reorganized Debtor remains in compliance with the Plan.

Discussion

The requirements for confirmation of a Chapter 11 plan are set forth in §1129(a) of the Bankruptcy Code. For a plan to be confirmed, for example, the debtor must show that the plan was proposed in good faith, that each rejecting claimant in an impaired class will receive at least as much as the claimant would receive in liquidation, that each class of claims has accepted the plan or is not impaired by the plan, and that the plan is feasible. 11 U.S.C. §1129(a)(3),(a)(7),(a)(8),(a)(11).

The Debtor’s Plan in this case divides claims against the estate into four classes.

The creditor in Class 1 is Acorn. Acorn is the Debtor’s primary creditor as the holder of a secured claim on the Debtor’s shopping center Property in the approximate amount of $6,496,960.80. (Claim No. 4). Acorn entered into a settlement agreement with the Debtor, which was approved by the Court and incorporated into the Debtor’s Plan. (Docs. 69, 77). Acorn has accepted the Plan. (Doc. 85).

The creditor in Class 2 is the St. Johns County Tax Collector. Under the Plan Modification, the Tax Collector will be paid in full on the Effective Date of the Plan, and the class is therefore not impaired. (Doc. 71, p. 6).

The creditors in Class 3 are the holders of allowed unsecured claims. On its schedule of liabilities, the Debtor listed creditors holding general unsecured claims in the total amount of $13,860.98. (Doc. 30). The Plan provides for unsecured creditors to “receive equal monthly payments over twelve (12) months from the Effective Date, the total amount of which shall equal 100% of each Holder’s Allowed Class 3 Claim.” (Doc. 53, p. 15). Class 3 is impaired and has accepted the Plan. (Doc. 85).

The creditors in the last Class are the holders of membership interests in the Debtor. The Plan provides that the membership interests will be extinguished on the Effective Date, and that “[e]quity in the Reorganized Debtor will be sold to Newco in exchange for the Capital Contribution.” (Doc. 53, p. 16).

The only Objection to confirmation was filed by Winslett as an interested party. (Doc. 81). Winslett primarily asserts that confirmation should be denied because (1) the Plan is not feasible, and because (2) he should not be enjoined from pursuing his contribution or subrogation claims against Hill and Davis.

A. Feasibility

The feasibility requirement is set forth in § 1129(a)(11) of the Bankruptcy Code. For a Chapter 11 plan to be confirmed, that section requires the debtor to show that confirmation is not likely to be followed by the debtor’s liquidation or the need for further financial reorganization. 11 U.S.C. §1129(a)(11).

Although a determination of feasibility should be supported by facts, the section does not require a debtor to guarantee the success of its plan. Instead, a plan may be feasible if it offers a reasonable probability of success. In re Berry & Berry Wings, LLC, 2014 WL 6705779, at 6 (Bankr. M.D. Fla.) (quoting In re F.G. Metals, Inc., 390 B.R. 467, 476 (Bankr. M.D. Fla. 2008) ). In other words, the debtor must show that it is more likely than not that it will be able to make all payments required by the plan. In re J.C. Householder Land Trust# 1, 501 B.R. 441, 448 (Bankr. M.D. Fla. 2013) .

In this case, the Debtor’s primary obligation under the Plan is the debt owed to Acorn. The Plan provides for Acorn to receive a Note in the principal amount of $4,687,000.00, and to be paid monthly payments of principal and interest with a scheduled maturity date thirty months from the Effective Date of the Plan.

The Plan proposes to fund payments to Acorn and the Debtor’s other creditors from two sources.

First, the Debtor will continue to operate the shopping center and generate revenue from tenant leases. The Debtor is receiving rental income from existing leases of some of its retail spaces. Additionally, Davies states in a Confirmation Affidavit in support of the Plan that the Debtor “has several viable prospects for a long term lease with a new tenant,” and that the Debtor “will soon secure a new anchor tenant.” (Doc. 86, ¶ 13). At the confirmation hearing, Davies testified that the anchor space is marketable, useable space, and that the Debtor is in active negotiations with several prospective tenants.

Second, the Debtor will receive a Capital Contribution from Davies and Hill. The term Capital Contribution is defined in the Plan Modification to mean deposits from Davies and Hill to “(a) pay Allowed Administrative Expenses; (b) fund the Debt Service Account; and (c) pay the 2014 real estate taxes.” (Doc. 71). The Debt Service Account includes an amount sufficient to fund the monthly payments to Acorn for one year, and Davies and Hill agreed to continue to fund the payments thereafter until an anchor tenant is found for the Property.

According to Davies, “the funds for the Debt Service Account are held in escrow by the Debtor’s Counsel.” (Doc. 86, Confirmation Affidavit, ¶ 33). At the confirmation hearing, a trust account statement for the law firm was admitted into evidence. (Debtor’s Exhibit 1). The statement reflects a balance in the account in the amount of $480,271.98. The Debtor represented at the hearing that the amount is sufficient to fund the attorney’s fees for the Debtor’s counsel, the Debtor’s real property taxes in the approximate amount of $101,000.00, and the Debt Service Account for one year.

In other words, Davies and Hill have fulfilled their commitment to “pre-pay” the Debtor’s first-year obligations under the Plan, and the cash to make the payments is in a trust account for that purpose.

In the Confirmation Affidavit in support of the Plan, Davies states that the revenue from the Debtor’s tenant income, combined with the Capital Contribution from Davies and Hill, will be sufficient to fund all payments under the Plan. (Doc. 86, ¶ 13).

“In close cases, the better approach is to give the debtor an opportunity to demonstrate feasibility by performance.” In re Berry & Berry Wings, 2014 WL 6705779, at 6 (citing In re Gelin, 437 B.R. 435, 438 n.9 (Bankr. M.D. Fla. 2010) ).

The Court finds that the Plan offers a reasonable probability that the Debtor will be able to make the payments proposed by the Plan, including the payments to Acorn, from its future operations and from the Capital Contribution provided by Davies and Hill. The Plan satisfies the feasibility requirement of § 1129(a)(11) of the Bankruptcy Code, and Winslett’s Objection should be overruled.

B. Injunction

Winslett’s second objection relates to Article VII of the Plan, which enjoins certain actions against the Guarantors who have paid their share of the Capital Contribution. Winslett asserts that he should not be enjoined from pursuing his claims for contribution or subrogation against Davies and Hill.

In appropriate circumstances, Chapter 11 plans may include injunctions that prohibit actions against non-debtors such as guarantors. In re J.C. Householder Land Trust# 1, 501 B.R. at 457-58 . Courts generally have found that such injunctions or third-party releases are permissible in unusual cases, as long as they are fair and necessary to the debtor’s reorganization. In re Scrub Island Development Group Limited, 523 B.R. 862, 876 (Bankr. M.D. Fla. 2015) (citing In re Transit Group, 286 B.R. 811, 817-18 (Bankr. M.D. Fla. 2002) ). In determining whether an injunction is fair and necessary, courts consider a number of factors involving the particular plan and third party. In re Scrub Island, 523 B.R. at 876 .

In this case, section VII.C.2 of the Plan enjoins claimants or interest-holders from “commencing or continuing in any manner any action or proceeding against the Guarantors.” By its terms, the injunction extends only “to the Guarantors who contribute to the Capital Contribution.” (Doc. 53, § VII.C.2).

The injunction begins on the confirmation date, and is effective “as long as the Reorganized Debtor are [sic] not in default of any obligation under the Plan or any agreements contemplated by the Plan.” (Doc. 53, p. 22). See also, Doc. 53, p. 23 (The injunction is effective “for so long as Reorganized Debtor remain in compliance with the Plan or any agreements contemplated by the Plan.”).

The Court finds that the injunction is fair and necessary to the Debtor’s reorganization. In re Scrub Island, 523 B.R. at 876 .

First, the injunction is fair because the benefitted Guarantors are contributing substantial assets to the reorganization. Hill and Davies signed a Term Sheet with Acorn, the holder of the mortgage on the Debtor’s Property, which provided for a Note payable to Acorn in the amount of $4,687,000.00. Paragraph 5 of the Term Sheet provides:

5. Upon Effective Date of Plan, Guarantors will cause amount equal to one-year’s payment to be placed with Acorn (the “Debt Service Account” or “DS”). Acorn’s lien will extend to the Debt Service Account and monthly payments will be drawn directly from such account until tenant lease payments commence. If no anchor tenant is in place, guarantors shall fund the amount again (for 12 months) each November 1, commencing on 11/1/2015 and continuing thereafter (in an amount so the remaining balance equals the amount needed for 12 months of payments).

(Doc.71, Exh. A). Additionally, in paragraph 11 of the Term Sheet, Davies and Hill agreed to advance the amount required to pay the 2014 and 2015 real property taxes for the Debtor’s Property. (Doc. 71, Exh. A).

Significantly, Davies and Hill have already contributed more than $500,000.00 under the agreement, as evidenced in part by the sum of $480,271.98 that is currently held in the Debtor’s counsel’s trust account. (Debtor’s Exhibit 1).

Second, the injunction is essential to the Debtor’s reorganization. The Debtor’s settlement with Acorn is the centerpiece of the reorganization. (Doc. 71). The settlement requires Davies and Hill to fund the Debt Service Account, which includes an amount sufficient to make the monthly payments to Acorn for one year. Accordingly, the injunction is necessary to protect Davies and Hill from the expense and diversion of future litigation, so that they can make the financial contributions under the Plan.

In addition to the initial funding obligations, Davies testified at the confirmation hearing that any pending litigation against the contributing Guarantors would impair their ability to refinance the Acorn indebtedness before the restructured debt matures. See In re Transit Group, Inc., 286 B.R. 811, 818 (Bankr. M.D. Fla. 2002) (Third-party protection was fair and necessary where the third party agreed to fund the debtor’s plan through exit financing.).

The Court finds that the Plan may enjoin Winslett from pursuing his claims against the Guarantors of the debt owed to Acorn, because the injunction is fair and necessary to the Debtor’s reorganization.

Conclusion

The matters before the Court are confirmation of the Debtor’s Plan of Reorganization, and Winslett’s objection to confirmation.

The Debtor’s primary creditor is Acorn. The Court finds that the Plan offers a reasonable probability that the Debtor will be able to make the payments proposed by the Plan, including the payments to Acorn, from its future operations and from the Capital Contributions provided by Guarantors of the Acorn debt.

Additionally, the Court finds that the Plan may enjoin Winslett from pursuing his claims against the Guarantors, because the injunction is fair and necessary to the Debtor’s reorganization. Accordingly, Winslett’s Objection should be overruled, and the Plan should be confirmed.

Accordingly:

IT IS ORDERED that:

1. The Objection to Debtor’s Plan of Reorganization filed by M. Clay Winslett is overruled.

2. Counsel for the Debtor is directed to submit a proposed Order Confirming the Debtor’s Plan of Reorganization within fourteen (14) days of the date of this Order.

Save trees – read court opinions online on Google Scholar.

300x600

New Bankruptcy Opinion: IN RE GUYNES PRINTING COMPANY OF TEXAS, INC. – Dist. Court, WD Texas, 2015

IN RE: GUYNES PRINTING COMPANY OF TEXAS, INC., Debtor.

J. MARSHALL MILLER, Chapter 7 Trustee Plaintiff,

v.

BOUTWELL, OWENS & CO., INC., GUYNES PACKAGING AND PRINTING OF TEXAS, LLC, DAVID TIDBALL, TIMOTHY GALLEGLY and GENE MAGRUDER, Defendants.

No. 15-cv-149-KC.

United States District Court, W.D. Texas, El Paso Division.

June 19, 2015.

ORDER

KATHLEEN CARDONE, District Judge.

On this day, the Court considered Defendants Guynes Packaging and Printing of Texas, LLC’s (“GPPC”) and Boutwell, Owens & Co., Inc.’s (“Boutwell”) (collectively, the “Corporate Defendants”) Motion to Withdraw the Reference (the “Motion”), ECF No. 1-2, in the above-captioned case (the “Case”). For the reasons set forth below, the Motion is DENIED.

I. BACKGROUND

On September 26, 2014, Guynes Printing Company of Texas, Inc. (the “Debtor”) filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. See Trustee’s Original Compl. to Recover Fraudulent Transfers, for Turnover of Property of the Estate and to Obtain Other Relief ¶ 10 (“Complaint”), ECF No. 1-3. On that same date, Plaintiff J. Marshall Miller (“Plaintiff”) was duly appointed as Chapter 7 Trustee of the Debtor’s bankruptcy estate. Id.

On February 11, 2015, Plaintiff filed an adversary proceeding in bankruptcy court asserting various causes of action against the Corporate Defendants and certain of the Debtor’s shareholders (the “Shareholders”). See id. ¶¶ 5-9, 12. As relevant here, the Complaint alleges that six months prior to the Debtor filing a voluntary claim for bankruptcy, the Shareholders entered into an Asset Purchase Agreement with the Corporate Defendants whereby GPPC acquired substantially all of the Debtor’s assets for an amount far less than fair market value. Id. ¶¶ 12, 20. As a result, Plaintiff brings numerous causes of action against the Shareholders and the Corporate Defendants, including claims for fraudulent transfer and civil conspiracy. Id. ¶¶ 35-73.

On May 1, 2015, the Corporate Defendants filed the Motion, and on May 6, 2015, Plaintiff filed his Response to Motion to Withdraw the Reference (“Response”), ECF No. 1-9.

II. DISCUSSION

By the Motion, the Corporate Defendants argue that the Court must withdraw the reference to bankruptcy court under 28 U.S.C. § 157(d) because the Corporate Defendants are entitled to a jury trial on Plaintiff’s fraudulent transfer and civil conspiracy claims. See Mot. 3-4. The Corporate Defendants further argue that it “is both logical and in furtherance of judicial economy that the reference be withdrawn without delay to permit the Court that will preside over the trial to become familiar with the parties’ claims and defenses in the case.” Id. at 5-6.

Plaintiff concedes that the Corporate Defendants timely filed their jury demand, but contends that, “[a]t this early stage of the adversary proceeding, it is impossible for the Court to determine with any reasonable certainty whether a jury trial must be conducted.” Resp. 2, 4. Plaintiff further argues that even if the Corporate Defendants are entitled to a jury trial, an immediate withdrawal of the reference is unnecessary because “pretrial matters may still appropriately be handled in bankruptcy court.” Id. at 3.

Under § 157(d), a district court may withdraw the reference to bankruptcy court if there is “cause shown.” 28 U.S.C. § 157(d); see also Wellness Int’l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S. Ct. 1932, 1939, 1945 (2015) (observing that “bankruptcy courts hear matters solely on a district court’s reference . . . which the district court may withdraw sua sponte or at the request of a party”). Although the statute does not define “cause shown,” the Fifth Circuit has explained that the decision “must be based on a sound, articulated foundation.” Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 998 (5th Cir. 1985) . In Holland, the Fifth Circuit identified a list of factors that district courts should weigh when determining whether to withdraw a reference to bankruptcy court. See id. at 998-99. This Court has previously summarized those factors as follows: “(A) whether the matter is a core or a non-core proceeding, (B) whether there is a right to a jury trial, (C) whether withdrawal promotes efficiency, and (D) whether withdrawal raises forum shopping concerns.” See City Bank v. Compass Bank, No. EP-11-MC-372-KC, 2011 WL 5442092, at *3 (W.D. Tex. Nov. 9, 2011) (citing Holland, 777 F.2d at 998 ; In re Gulf States Long Term Acute Care of Covington, L.L.C., 455 B.R. 869, 874 (E.D. La. 2011) ; In re EbaseOne Corp., Bankruptcy No. 01-31527-H4-7, 2006 WL 2405732, at * 2 (Bankr. S.D. Tex. June 14, 2006)). The Court discusses the applicable factors below.

A. Core versus Non-Core Proceeding

The first Holland factor to consider is whether the claims at issue are “core” or “non-core” proceedings under bankruptcy law. See Holland, 777 F.2d at 999 ; see also In re Gulf States, 455 B.R. at 874 . This distinction is significant because, absent consent, a bankruptcy judge is not statutorily authorized to enter final judgments in non-core proceedings. 28 U.S.C. § 157(c); see also Wellness, 135 S. Ct. at 1940 . Instead, a bankruptcy judge may only “submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district judge.” Id. § 157(c)(1); see also Wellness, 135 S. Ct. at 1940 .

Core proceedings are those “that arise in a bankruptcy case or under Title 11.” Stern v. Marshall, ___ U.S. ___, 131 S. Ct. 2594, 2605 (2011) ; see also Matter of Wood, 825 F.2d 90, 97 (5th Cir. 1987) (“[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”). However, even if a matter is a core proceeding under § 157(b), the Supreme Court has held that Article III of the Constitution prohibits a bankruptcy court from entering final judgment on a state law claim, when that claim is independent of a federal statutory scheme. See Stern, 131 S. Ct. at 2614-15, 2620 . Instead, when a bankruptcy court is confronted with such claims, it should “issue proposed findings of fact and conclusions of law to be reviewed de novo by the district court.” Exec. Benefits Ins. Agency v. Arkison, ___ U.S. ___, 134 S. Ct. 2165, 2168 (2014) .

Here, the Corporate Defendants contend that the Case “contains a mix of core and non-core matters.” Statement Regarding Consent ¶ 3, ECF No. 1-15; see also Answer to Trustee’s Compl. ¶ 2, ECF No. 1-14. Specifically, they claim that “Plaintiff’s fraudulent transfer, preferential transfer, and turnover causes of action are likely core,” and “Plaintiff’s breach of fiduciary duty, civil conspiracy, and conversion causes of action are likely non-core.” Statement Regarding Consent ¶ 3.

For the purpose of this Motion, the Court assumes that the Corporate Defendants are correct in asserting that the Case contains a mixture of core and non-core matters. Even so, the Court finds that it is more efficient to allow the Case to proceed in the bankruptcy court. For the core matters, a bankruptcy judge can enter a final judgment. For the non-core proceedings, the bankruptcy court can handle all pretrial matters, and issue findings of fact and conclusions of law for any dispositive motions that this Court will then review de novo. See 28 U.S.C. § 157(c)(1); Wellness, 135 S. Ct. at 1940 . Thus, although the Case may contain a mix of core and non-core matters, “`at this stage of the proceeding, it is premature to find that this factor favors withdrawal of the reference.'” Post Confirmation Bd. of Wadleigh Energy Grp., Inc. v. Wadleigh, 516 B.R. 850, 856 (E.D. La. 2014) (quoting In re OCA, Inc., Civil Action No. 06-3811, 2006 WL 4029578, at *4 (E.D. La. Sept. 19, 2006)).

B. Right to a Jury Trial

The second factor to consider — and the one that the Corporate Defendants focus on in their Motion — is whether the parties have a right to a jury trial. This factor is relevant to the Holland analysis because a bankruptcy judge lacks the authority to conduct a jury trial unless the parties consent. In re Clay, 35 F.3d 190, 196-97 (5th Cir. 1994) ; see also 28 U.S.C. § 157(e). However, even if a party has a right to a jury trial, immediate withdrawal of the reference is not required. See Wadleigh, 516 B.R. at 854-55 (collecting cases). Indeed, a district court has discretion to allow the bankruptcy court to manage the pretrial proceedings. See, e.g., In re Centrix Fin., LLC, Civil No. 09-CV-00088-PAB, 2009 WL 1605826, at *3 (D. Colo. June 8, 2009) (“[I]t is within the district court’s discretion to determine at what stage in the proceedings the reference should be withdrawn.”); Levine v. M & A Custom Home Builder & Developer, LLC, 400 B.R. 200, 203 (S.D. Tex. 2008) (“[W]ithdrawal should be deferred until [the bankruptcy] court has ruled on all dispositive motions, to further judicial economy and expedite the bankruptcy process.”); In re OCA, 2006 WL 4029578, at *5 (“[A] number of courts have held that even if a party does have a right to a jury trial, a motion to withdraw is premature until such time [as] it is determined that a jury trial must be conducted.”); Gen. Elec. Capital Corp. v. Teo, No. CIV. 01-CV-1686(WGB), 2001 WL 1715777, at *5 (D.N.J. Dec. 14, 2001) (“[E]ven when a district court must ultimately preside over a trial by jury, there is no reason why the Bankruptcy Court may not `preside over [an] adversary proceeding and adjudicate discovery disputes and motions only until such time as the case is ready for trial.'” (quoting In re Lands End Leasing, Inc., 193 B.R. 426, 436 (Bankr. D.N.J. 1996) )).

Applying these standards here, even if the Corporate Defendants are correct that they are entitled to a jury trial on at least one of Plaintiff’s claims, see Mot. 3 (citing Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41, 48-49 (1989) ), “a Seventh Amendment jury trial right does not mean the bankruptcy court must instantly give up jurisdiction and that the case must be transferred to the district court.” [1] See In re Healthcentral.com, 504 F.3d 775, 787 (9th Cir. 2007) ; see also Levine, 400 B.R. at 203 ; In re OCA, 2006 WL 4029578, at *5. To the contrary, as explained below, efficiency considerations militate in favor of maintaining the reference in bankruptcy court until such a time as the Case must proceed to trial.

C. Efficiency Considerations

Efficiency is a critical factor in the Holland analysis. See Holland, 777 F.2d at 999 . According to the Fifth Circuit, in determining whether to withdraw the reference in a bankruptcy case, district courts should consider the goals of promoting uniformity in bankruptcy administration, fostering the economical use of the debtor’s and creditors’ resources, and expediting the bankruptcy process. See id.

Here, efficiency concerns counsel in favor of allowing the Case to proceed in bankruptcy court. First, if the Case is in fact a mixture of core and non-core proceedings, as the Court assumes and as the Corporate Defendants assert, it is more efficient for the bankruptcy court to handle all pretrial proceedings in the Case. Subject to the Supreme Court’s decisions in Stern v. Marshall, ___ U.S. ___, 131 S. Ct. 2594 (2011) and Executive Benefits Ins. Agency v. Arkison, ___ U.S. ___, 134 S. Ct. 2165 (2014), the bankruptcy court can determinatively rule on the core proceedings, and the parties or the district court can move to withdraw only the non-core proceedings and any Stern claims when and if it is determined that a jury trial is indeed required. See, e.g., Wadleigh, 516 B.R. at 855-56 . This will conserve judicial resources by only allowing the non-core proceedings to be withdrawn to the district court. See id.

Moreover, the bankruptcy court’s familiarity with the Case and expertise in bankruptcy matters also weigh against immediately withdrawing the reference. The Corporate Defendants argue that immediate withdrawal from the bankruptcy court will promote efficiency because the bankruptcy court “has not heard arguments on any substantive matters or made any substantive rulings on any claims or defenses.” See Mot. 5. However, the Corporate Defendants do not offer any reason, and the Court sees none, as to why pretrial matters cannot continue in the bankruptcy court. See id. Indeed, under the circumstances, “maintaining the current arrangement is preferable to conducting duplicative pretrial proceedings.” In re OCA, Inc., 2006 WL 4029578, at *5; see also Wadleigh, 516 B.R. at 856 (“Allowing the bankruptcy court to supervise all pretrial and discovery matters will prevent a duplication of effort that would result from maintaining separate but closely related proceedings.”).

E. Weighing the Factors

In sum, the Holland factors counsel this Court against granting the Corporate Defendants’ Motion and withdrawing the reference to the bankruptcy court. Although certain Defendants may be entitled to a jury trial on some of Plaintiff’s claims, allowing the bankruptcy court to oversee pretrial proceedings does not infringe on the Corporate Defendants’ Seventh Amendment right. See Adler v. DJ Robinson Const. Inc., Civil Action No. 13-5521, 2013 WL 5507152, at *3 (E.D. La. Oct. 1, 2013); In re Centrix, 2009 WL 1605826, at *4 ; Levine, 400 B.R. at 203 . Maintaining the reference will be more efficient because the bankruptcy court is familiar with the Case, and allowing the bankruptcy court “to function much like [a] magistrate[]” could considerably expedite the litigation. See Holland, 777 F.2d at 999 ; see also Wadleigh, 516 B.R. at 856 . Therefore, the Court DENIES the Motion to withdraw the reference from the bankruptcy court.

III. CONCLUSION

For the foregoing reasons, the Corporate Defendants’ Motion, ECF No. 1-2, is DENIED without prejudice to renewal at the appropriate time.

The Clerk shall close the Case.

SO ORDERED.

[1] The Court makes no finding on whether the Corporate Defendants are actually entitled to a jury trial on any of Plaintiff’s claims.

Save trees – read court opinions online on Google Scholar.

300x600

News, Analysis & Bankruptcy Court Filings

%d bloggers like this: