In re Aurora Memory Care, LLC
Bеfore the court for ruling is the motion of creditor West Suburban Bank (the "Bank") to convert or dismiss the chapter 11 case of debtor Aurora Memory Care, LLC ("AMC") under section 1112(b) of the Bankruptcy Code,
1. Background
The facts are drawn from the parties' papers; other materials on the docket of the bankruptcy case; materials on the docket in a related and now-dismissed adversary proceeding, Aurora Memory Care, LLC v. West Suburban Bank , No.
AMC operates a health care facility in Aurora, Illinois. The 100% owner of AMC is Aurora Real Estate and Property Investments, LLC ("ARE") which is itself a debtor in a chapter 11 case, In re Aurora Real Estate & Property Invs., LLC , No.
AMC is one of several health care facilities in Illinois and Florida with which Kameli is involved. These facilities, or more specifically the investment funds Kameli established in connection with them, have served as investment vehicles for foreign nationals interested in gaining U.S. citizenship though the U.S. Citizenshiр and Immigration Service's EB-5 Program. Created under the Immigration Act of 1990, the EB-5 Program extends citizenship to immigrants who invest in designated U.S. businesses that create a certain number of jobs.
Kameli's investment scheme has not sat well with the federal government. In April 2017, the SEC brought a civil enforcement action (the "SEC action") against Kameli and others alleging that the handling of the investment funds violated the Securities Act of 1933 and the Securities Exchange Act of 1934. AMC was named in the action as a "relief defendant," meaning that it was not accused of any wrongdoing but was joined to have it disgorge monies received as a result of the wrongdoing of other defendants. See, e.g. ,
Foreign investment was not the only one source of AMC's funding. In 2015, the Bank loaned AMC $6.5 million. The loan was secured by a mortgage on AMC's property as well as pledges of ARE's ownership interest in AMC and Kameli's ownership interest in ARE. Kameli also personally guaranteed the loan.
The loan matured on December 1, 2016. When AMC failed to repay it on the maturity date, the Bank filed an action in Illinois state court to foreclose on the mortgage and recover on the note. The complaint also included a claim for replevin seeking to recover Kameli's interest in ARE and ARE's interest in AMC. Within days of the action's filing, the state court appointed a receiver who assumed responsibility for the property. At some point, the Bank moved for partial summary judgment on its complaint, and the state court set the motion for ruling on April 27, 2017.
On April 18, before the state court could rule on the motion, a creditor of AMC, Meridian Senior Living, LLC, filed an involuntary chapter 11 petition against AMC. The Bank moved under section 543(d)(1) of the Code,
For reasons that have never been clear, petitioning creditor Meridian waited until May 9 to have a summons issued to AMC. Rather than contest the petition, though, on June 4 AMC consented to the entry of an order for relief, and an order for relief was entered the next day. Since then, the case has proceeded as a voluntary case under chapter 11.
AMC's list of creditors and other entities was due on June 12, and its schedules, statement of financial аffairs, and other documents were due on June 19. See
AMC eventually filed partial schedules on July 23, several days late. AMC filed its list of creditors the next day, more than a month late. The remaining schedules and amended versions of the earlier schedules were not filed until August 7, two months after the order for relief was entered. The statement of financial affairs was not filed until August 22. A set of amended schedules was filed the same day. (After the amended schedules were filed, the U.S. Trustee withdrew its motion.)
AMC's schedules (as amended on August 22) disclosed $8.561 million in secured debt, $8.4 million of it owed to the Bank. The schedules also disclosed $13.206 million in unsecured debt. Of that amount, the vast majority, more than $12 million, is owed to entities connected with Kameli: Chicagoland Foreign Investment Group, Bright Oaks Development, Aurora Assisted Living EB-5 Fund LLC, and others. Another $214,478 is owed to Kameli personally and to his law firms (he appears to have two).
To date, AMC has filed no monthly operating reports in the case, as sections 1106(a)(1) and 704(a)(8) require.
AMC also has yet to propose a plan. AMC's intention (reflected in, among other places, Kameli's deposition testimony in the adversary proceeding) is to obtain post-petition financing in an amount sufficient both to pay the Bank and allow for continued operations.
The T2 letter of intent has several contingencies, one of which is the dismissal of AMC with prejudice as a party to the SEC action. Kameli testified at his deposition that he had discussed the dismissal idea with the SEC's attorneys and reached an agreement on the subject back in April. Under the agreement, AMC and its related fund would be dismissed as parties with prejudice, but if AMC's financing fell through, the SEC would be able to rejoin them. (Dep. 39-40). According to Kameli, the agreement required approval from the SEC in Washington, but he believed he would have that approval "in the next few months." (Id. at 41). That was on July 6, more than three months after the supposed agreement with the SEC's attorneys.
Two months later, on September 17, AMC moved to lift the automatic stay to allow it to "take action, including the filing of motions, in the SEC litigation, to bring the case to a conclusion and to resolve the claim of the SEC against it." The motion said that AMC had "been in discussions with the SEC for months in an attempt to resolve the SEC claims against it, but to
Kameli conceded at his deposition that even the T2 finanсing would not be enough for AMC to make a go of it. In addition, he testified, AMC would need to "increase[ ] the number of occupants to support the debt." (Dep. at 51). As of May 14, 2018, AMC had 44 residents, up from 22 when the receiver was appointed. Kameli estimated that the facility would need to increase occupancy to "54, 55 residents" to generate enough cash for debt service. Servicing the T2 debt, Kameli estimated, would take "70 to $80,000" each month. (Id. at 50).
According to the receiver, however, full occupancy of 60 residents would give AMC annual total revenue of $3,659,307 and annual net operating income of $554,000. (Mot. Ex. 8, Aff. of M. Flanagan, Ex. B). And that figure does not take into account real estate taxes on the property. (Id. ¶ 9). Each installment of the 2017 real estate taxes (the first due in June 2018, the second due in September 2018) is $117,027, or a total of $234,054. (Id. ¶ 10). Subtracting that sum from annual net operating income would leave only $319,946, or $26,662 each month, for debt service.
The Bank now moves under section 1112(b) to convert or dismiss AMC's case. As "cause" for conversion or dismissal, the Bank asserts that AMC has no reasonable likelihood of confirming a plan. The Bank adds that AMC has filed no monthly operating reports in the case. The Bank asks for dismissal rather than conversion to chapter 7. AMC opposes the motion.
2. Discussion
The Bank's motion will be granted. The Bank has shown cause to convert or dismiss the case, and AMC has not shown unusual circumstances warranting the case's continuation, let alone any of the other statutory exceptions. Dismissal or conversion is therefore mandatory. Given the uncertainty about the facility's value, however, the case will not be dismissed but will be converted to chapter 7.
a. Statutory Framework
Section 1112(b) of the Code provides for the conversion or dismissal of a chapter 11 case on motion of a party in interest. Before Congress amended the Code in 2005, conversion or dismissal under section 1112(b) was a matter left mostly tо the court's discretion. Since 2005, however, that discretion has been curtailed; conversion or dismissal is now mandatory if the movant meets its burden of proof. See In re Domiano ,
Once the movant shows cause, the burden shifts to the debtor to establish thе exceptions in section 1112(b)(2). Waterworks ,
Second, the debtor must demonstrate (1) that a plan is reasonably likely to be confirmed within the statutorily required time,
Whether to dismiss or convert a case under section 1112(b) remains a decision committed to the discretion of the bankruptcy court. Bartle ,
b. Cause
"Cause" exists to convert or dismiss this case for two reasons: (1) AMC has filed no monthly operating reports, and (2) AMC has no reasonable likelihood of confirming a plan. Each separately constitutes "cause" to convert or dismiss the case.
i. No Monthly Operating Reports
First, the Bank has shown that AMC has failed to "satisfy timely" a "filing or reporting requirement" under the Code, see
Monthly operating reports "are much more than busy work imposed upon a Chapter 11 debtor for no reason other than to require it do something." In re Berryhill ,
In this case, AMC has filed no operating reports, even though the order for relief was entered nearly four months ago. The Bank points out the omission in its motion, and in response AMC acknowledges the Bank's point (see Resp. at 2). What AMC does not do is offer any excuse for its omission (let alone a "reasonable" one, as the statute requires). Nor does AMC suggest the problem can be rectified in a reasonable time. AMC notes the problem and then says nothing.
AMC does say that it was unable to file schedules and other required documents in a timely fashion partly because the receiver was excused from turning over the facility. It may be that AMC would offer the same excuse for its failure to file monthly operating reports. But that excuse would be unavailing. Nothing in the Code exempts a chapter 11 debtor from its duties under section 1106 when a prepetition custodian is excused from compliance with section 543(b), see Woodale Props., Ltd. v. American Chtd. Bank , No.
ii. No Reasonable Likelihood of Reorganization
Second, the Bank has shown that AMC has no reasonable likelihood of successfully confirming a plan of reorganization.
Before the 2005 amendments to the Code, section 1112(b)(2) specifically listеd the "inability to effectuate a plan" as "cause" to convert or dismiss a chapter 11 case. See
One requirement for confirming a plan is that the debtor demonstrate "[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan ...."
AMC has not made that showing. The reorganization AMC proposes - indeed, the only one it has ever mentioned - entails refinancing its $8.4 million debt to the Bank. But AMC has no financing currently available and has shown no prospect of obtaining any. AMC claims in its response to the Bank's motion that it has "secured financing through T2 Investments." (Resp. at 2). As evidence, AMC attaches T2's March 28 letter of intent. The letter, though, declared that it was "presented for discussion purposes only and does not constitute an offer, agreement, or commitment to lend." At most, then, T2 expressed an interest in discussing a loan. T2 made no financing commitment. AMC has produced no financing commitment from T2 or anyone else.
What is more, T2's loan proposal has long since expired. In its letter, T2 spelled out in some detail the terms of the loan it was prepared to make. Thоse terms included a closing date "no later than April 13, 2018." That date passed more than five months ago. AMC nonetheless maintains the T2 financing is still available, and as evidence of T2's supposed continued interest AMC submits another letter, this one
Even if T2 were still interested in lending on the terms in its April letter, the letter laid out several conditions to financing that AMC cannot meet. One was that "[AMC] shall have been dismissed with prejudice and all claims against the property shall have been forever waived and released from [the SEC action]." To date, though, AMC remains a defendant in the SEC action. Kameli insisted at his deposition that in April AMC had reached an agreement with the SEC's attorneys to have AMC dismissed as a party with prejudice; AMC was waiting only on Washington's approval of the agreement. But AMC offers nothing to corroborate Kameli's testimony - no correspondence between AMC and the SEC, nothing in writing representing so much as a draft of the agreement. The SEC (which has appeared in this case) has not confirmed such an agreement or, for that matter, that one has been discussed.
In addition to dismissal from the SEC action, T2 required as conditions to closing that AMC pay "up-front points" of $200,000 at closing and a six-month "interest reserve" at closing. The interest reserve aside, AMC has no ability to pay the "up-front points," since its amended Schedule A/B shows it has only $35,598 in cash on hand, nowhere close to the $200,000 it would need.
And аssuming the loan did close, AMC has not explained how it could pay off the $10 million principal by the two-year maturity date - or pay the minimum $1 million in interest T2 required or the "deferred points" of 1.5% of the loan balance outstanding (or $150,000). In fact, the record shows that AMC would be unable to service the debt even with its facility at full occupancy. At his deposition, Kameli estimated that the monthly debt service would be somewhere in the region of $70-80,000. According to the receiver, however, at full occupancy AMC would generate annual operating income (net of all expenses, including substantial real estate taxes) of $319,946, or just $26,662 per month. At peak operation, in other words, AMC's net monthly income would leave it more than $40,000 short of the amount needed to service the T2 debt.
To these financial obstacles AMC has no answer. AMC cites gross revenue figures from past reports the receiver made to the state court. (Resp. at 3). But those figures concern gross revenue, not net revenue. What matters is the money AMC would have left over for debt service. AMC also
AMC then asserts that a "recent appraisal" shows the facility to be worth $16 million, far more than the Bank's debt. (Id. ). The relevance of the mysterious appraisal (which has been mentioned but never produced) is unclear. Even if the Bank is indeed protected by a "substantial equity cushion," as AMC asserts, the Bank wants the case dismissed, not the stay lifted (when questions of equity can be relevant, see
Confirmation cannot be based on "speculation" or "visionary projections" of a plan's success. Repurchase Corp. ,
Although the prospects for confirming a plan are not evaluated as stringently early in a case as they are later on, a debtor facing a motion under section 1112(b) must still show that a reorganization is plausible and not "a mere financial pipe dream." Ramreddy ,
c. Exceptions to Dismissal or Conversion
Because the Bank has unquestionably demonstrated "cause" under section 1112(b)(1), conversion or dismissal is mandatory unless AMC has met its burden to establish the exceptions in section 1112(b)(2). In re McTiernan ,
AMC has not. No "unusual circumstances" have been "specifically identified" indicating that neither dismissal nor conversion would be in the best interest of creditors and the estate.
d. Conversion or Dismissal
The only remaining question is whether dismissal or conversion is appropriate. The question is a close one, but on balance conversion appears to be the better course - even though the Bank urges dismissal. See In re Del Monico , No.
Whether a chapter 11 case should be dismissed or converted depends on what is "in the best interest of creditors and the estate."
Better than a multi-factor test is a general principle: creditors are generally "best served by the course of action that results in the largest number of [them] being paid the largest amount of money in the shortest amount of time." Rey ,
With this question in mind, the decision becomes simpler. When the estate has no assets with equity a trustee could liquidate to pay unsecured creditors, dismissal is in the best interest of creditors and the estate. See, e.g. , Fall ,
Whether to dismiss оr convert the case is a decision entrusted to the bankruptcy court's discretion. Ramreddy ,
It is true, as the Bank observes, that certain aspects of this case arguably favor dismissal over conversion. The AMC facility is the only significant asset in the estate, and that asset is currently in the hands of a receiver. Conversion to chapter 7 would simply substitute a new custodian (a trustee) for the current one. The Bank is also the sole creditor that has participated significantly in the case, and of the three creditors that have participated at all (the other two are the SEC and Meridian) only the Bank has expressed a preference.
Still, with some indication that the AMC facility could have significant equity to pay unsecured creditors, the prudent course is to convert the case rather than dismiss it. A chapter 7 trustee has greater powers than a receiver and has duties to creditors receivers do not have. Conversion will allow a trustee to investigate whether a sale of the facility would indeed produce a significant dividend for AMC's unsecured creditors. From the Bank's point of view, the resulting delay from a conversion should be minimal. If the trustee concludes a sale is not worthwhile, a "no distribution" report will be filed, the case will close, the property will be deemed abandoned, and the Bank will be free to pursue its remedies in the state court.
3. Conclusion
The motion of West Suburban Bank to convert or dismiss this chapter 11 case is granted. The case is convertеd to a case under chapter 7. A separate order will be entered consistent with this opinion.
Notes
Because the replevin claim was directed at Kameli, the automatic stay did not affect the claim, and on June 5 the state court awarded the Bank judgment on it. The day before, ARE filed its own chapter 11 petition, staying the Bank's efforts to sell Kameli's ownership interest in ARE and ARE's ownership interest in AMC. The adversary proceeding, Aurora Memory Care, LLC v. West Suburban Bank , No.
According to the Bank, Kameli testified at the meeting of creditors that he knew of no such appraisal. But the Bank has not produced a transcript of the meeting. Nor has the Bank submitted an appraisal of its own. At his deposition in the adversary proceeding, Kameli said in passing that the value of the property was "over $16 million." (Mot. Ex. 6, Dep. at 69). But he did not explain where that value came from, and he was not pressed on the point.
Kameli testified:
Q: Can you tell me what ... is ... your successful plan for reorganization of Aurora Memory Care?
A: Sure. Obtaining a loan from a lender to pay West Suburban Bank and the lienholders right now and hopefully to have enough monеy for some operation also. That's it.
(Dep. at 32). Later, he testified:
Q: And the plan of reorganization is simply refinancing, correct?
A: It's very simple. Refinancing.
(Id. at 80).
In a written response, the SEC declared that it had "no idea what Debtor's Counsel intends to file in the SEC Enforcement Action to 'bring the case to a conclusion and resolve the case against it.' " The motion was denied as unnecessary as to AMC (since the stay does not prevent a debtor from defending an action against it) and denied for lack of standing as to the SEC. See In re Sweports, Ltd. ,
After the 2005 amendments to the Code, some courts read the exceptions in section 1112(b)(2) disjunctively, so that a debtor could avoid dismissal or conversion by showing either unusual circumstances or the reasonable likelihood of a confirmable plan as well as a reasonable justification for the act or omission constituting "cause." See, e.g. , In re Park ,
In In re Attack Props., LLC ,
AMC mentions the Hyve letter but fails to submit the letter with its response. A copy is attached to AMC's motion for preliminary injunction in the adversary proceeding.
The SEC's actions in this bankruptcy case and the tone it has taken tend to suggest otherwise. When the U.S. Trustee moved to dismiss or convert the case, the SEC did not sit on the sidelines but instead joined the motion. More recently, the SEC opposed AMC's motion to lift the stay to bring the SEC action against it "to a conclusion." The SEC said that it had "no idea" how AMC could accomplish that end and characterized the motion as "a waste of judicial resources and the parties' time and expense."
Because the Bank has demonstrated that AMC is in fact not reasonably likely to confirm a plan, no showing to the contrary - that a plan is likely to be confirmed - is even possible. See Attack Props. ,
In fact, the Bank is the only party in interest that has expressed a preference. AMC has not weighed in. Neither has the U.S. Trustee.