502 B.R. 47
Bankr. M.D. Penn.2013Background
- Debtors Stanley and Susan Dye filed Chapter 11 on Feb 2, 2012; they own multiple residential and commercial properties and operate businesses (including a septic service). Several Orrstown Bank loans (seven) secured by various parcels were transferred to Magnolia Portfolio, LLC.
- Magnolia moved for relief from the automatic stay to enforce state-law remedies against collateral and alternatively sought conversion to Chapter 7; it alleged postpetition defaults, unpaid taxes, lack of insurance, deterioration, and inability to fund a reorganization.
- At issue are four properties still subject to the stay (33-37 W. North St., 29 W. North St., Sand Bank Rd., and Red Tank Rd.); some other properties and the drag strip already had stay relief granted earlier.
- The seven loans have differing payment histories; the court found Loans 4231, 4232, 4233, and 4235 in default, Loans 4236 and 4237 current, and loan 4234 ambiguous on the record.
- Six of seven mortgages contain cross‑collateralization (dragnet) clauses; the court ruled the mortgage for Loan 4236 did not cross‑collateralize with the others.
- Debtors failed to obtain approval of amended disclosure statements and have not shown realistic prospect of confirming a feasible plan based on current asset values and unsupported income projections.
Issues
| Issue | Magnolia's Argument | Debtors' Argument | Held |
|---|---|---|---|
| Whether Magnolia is entitled to relief from the automatic stay under § 362(d)(1) for lack of adequate protection | Debtor arrears, missed postpetition payments, unpaid taxes, inadequate insurance, deterioration — Magnolia’s lien not adequately protected | Debtors contend payments are being made, some loans overpaid, arrearages small and will be paid under proposed plan funded by business income | Magnolia entitled to relief as to collateral securing cross‑collateralized loans (Sand Bank Rd. and 33‑37 W. North St.) — inadequate protection shown; relief denied for Loan 4236 properties (29 W. North & Red Tank) because loan current and there is equity cushion |
| Whether cross‑collateralization binds Red Tank Rd./29 W. North to other loans | All loans cross‑collateralized; Magnolia argues all listed properties secure all loans | Debtors argued relatedness/limits; evidence showed one mortgage (Loan 4236) lacks dragnet clause | Court held Loan 4236 mortgage did not cross‑collateralize; only six loans are cross‑collateralized together |
| Whether Magnolia is entitled to relief under § 362(d)(2) (no equity and not necessary for effective reorganization) | No equity in combined collateral for cross‑collateralized loans; properties not necessary because Debtors’ plan is unconfirmable | Debtors argue plan will pay Magnolia in full via consolidated 20‑year loan and business cash flow | Court found Debtors lack equity in the relevant properties and failed to show plan is realistically confirmable; therefore properties are not necessary — stay relief granted for cross‑collateralized properties |
| Whether case should be converted to Chapter 7 under § 1112(b)(1) | Magnolia sought conversion citing mismanagement, declining collateral, inadequate net income, failure to comply with court order | Debtors pointed to compliance with reporting, sales that paid other creditors, and ongoing business income | Court declined immediate conversion but ordered Debtors to file amended disclosure statement and plan by Jan 1, 2014 and confirm by Apr 1, 2014 or case will be converted to Chapter 7 |
Key Cases Cited
- In re Swedeland Dev. Grp., Inc., 16 F.3d 552 (3d Cir. 1994) (adequate protection concepts and forms explained)
- In re Indian Palms Assoc., Ltd., 61 F.3d 197 (3d Cir. 1995) (method for determining equity in property for stay relief)
- United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365 (U.S. 1988) (property necessary for effective reorganization requires realistic prospect of confirmation)
- John Hancock Mut. Life Ins. Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154 (3d Cir. 1993) (plan must not be patently unconfirmable to defeat stay relief under § 362(d)(2))
- Potomac Coal Co. v. $81,961.13 in Hands of Escrow Agent, 451 Pa. Super. 289 (Pa. Super. Ct. 1996) (Pennsylvania treatment of dragnet clauses and relatedness rule)