585 B.R. 22
Bankr. W.D.N.Y.2018Background
- Encore Western (debtor) owns commercial properties originally tied to loans consolidated and assigned to Wells Fargo; state court entered a $68.8M foreclosure judgment in 2010 that, with interest, exceeds $117M and was not appealed.
- A state-court receiver has managed the properties for ~9 years; multiple state actions by Encore entities unsuccessfully challenged the mortgages.
- Encore Western filed successive Chapter 11 petitions on the eve of scheduled foreclosure sales (December 2017 dismissed sua sponte; January 2018 filed represented by counsel).
- Wells Fargo moved to dismiss the 2018 petition for cause under 11 U.S.C. § 1112(b) (bad faith filing) and alternatively sought stay relief and in rem relief under 11 U.S.C. § 362.
- Encore Western argued it filed to protect bondholder-investors’ interests against alleged self-dealing by Wells Fargo/KeyBank under a Pooling and Servicing Agreement; Wells Fargo asserted Encore Western lacks standing and filed in bad faith.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing to assert bondholders’ rights | Encore Western: may protect bondholders from trustee/master servicer self-dealing | Wells Fargo: bondholders are not parties in interest; Encore Western lacks constitutional and prudential standing | Held: Encore Western lacks standing to assert bondholders’ rights; only Wells Fargo may represent those interests |
| Whether the Chapter 11 petition was filed in good faith | Encore Western: filing seeks to protect investors and preserve property value; contemplates a §363 sale/plan | Wells Fargo: petition is a litigation tactic to delay foreclosure and relitigate state-court rulings; case has no reorganization prospect | Held: Petition filed in bad faith; dismissal for cause under §1112(b) granted |
| Whether conversion to Chapter 7 is appropriate instead of dismissal | Encore Western: (implicitly) preserve estate; reorganization possible | U.S. Trustee/Others: conversion not favored due to no unsecured creditors or assets; Wells Fargo would not consent to carve-out | Held: Dismissal preferred; conversion would not benefit creditors, so case dismissed rather than converted |
| Stay relief / in rem relief under §362 (alternative request) | Wells Fargo sought relief to permit foreclosure or obtain in rem relief for 2 years | Encore Western opposed seeking to preserve properties | Held: Motion for stay relief and in rem relief denied as moot because case dismissed |
Key Cases Cited
- In re C-TC 9th Ave. P’ship, 113 F.3d 1304 (2d Cir.) (bad-faith filing grounds for dismissal of Chapter 11)
- Rajamin v. Deutsche Bank Nat’l Trust Co., 757 F.3d 79 (2d Cir.) (standing principles for third-party interests)
- In re Refco, Inc., 505 F.3d 109 (2d Cir.) (limits on who is a party in interest under §1109(b))
- Warth v. Seldin, 422 U.S. 490 (U.S.) (prudential standing—cannot assert third parties’ rights)
- In re Innkeepers USA Trust, 448 B.R. 131 (S.D.N.Y. Bankr.) (investors in a creditor are not parties in interest under §1109(b))
- In re GEL, LLC, 495 B.R. 240 (Bankr. E.D.N.Y.) (Chapter 11 should not be used to collaterally attack state-court judgments)
- Winshall Settlor’s Trust, 758 F.2d 1136 (6th Cir.) (Chapter 11’s purpose is rehabilitation; no relief where no viable business)