In Re Walden Ridge Development, LLC
OPINION
These matters are before the court upon (1) the motion by Nicholas Rizzo to dismiss the Chapter 11 as a bad faith filing pursuant to 11 U.S.C. § 1112(b) or, alternatively, to vacate the automatic stay under 11 U.S.C. § 362(d), which the Debtor has opposed, and (2) the Debtor’s motion to (A) assume an option agreement and (B) assume and assign a contract for the purchase of real property, which is opposed by Nicholas Rizzo. For the reasons that follow, the motion to dismiss and vacate the stay is DENIED and the motion to allow assumption and assignment is GRANTED.
JURISDICTION
The Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 151 and 157(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (G). Venue is proper under 28 U.S.C. § 1409(a). The following shall constitute the Court’s findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
STATEMENT OF FACTS
The Debtor, Walden Ridge Development, LLC (“Debtor”), filed its Chapter 11 petition on December 18, 2002 (“Petition Date”). The Debtor is an entity formed on August 3, 2002 for the purpose of acquiring and developing a specific parcel of real property known as the Walden Village, Hardyston Township, Sussex County, New Jersey consisting of 86.4 acres (the “Property”). At the time of its formation, the managing and sole member of the Debtor was Michael Quigley (“Quigley”).
On August 23, 2002, the Debtor entered into a contract with Nicholas Rizzo, t/a Edgewater Associates (“Rizzo” or “Mov-ant”) for the purchase of the Property (“Purchase Contract”). The purchase price set forth in the contract is $7,170,500. A deposit of $100,000 was paid and is being held by the attorneys for Rizzo. Between the date of the Purchase Contract and the Petition Date, the Debtor incurred unsecured debts totaling $351,700 in connection with the real estate project. As of the Petition Date, all government approvals had finally been obtained to build 287 townhouses on the Property and building permits are available.
The closing date was extended four times due to the failure of the parties to satisfy contingencies within the time parameters originally contemplated. Although the Purchase Contract was not contingent on the Debtor obtaining financing, the Debtor asserts the seller’s delay in obtaining the governmental approvals affected the Debtor’s efforts to obtain financing necessary for closing. By letter dated December 13, 2002, Rizzo advised that due diligence had ended and made closing time of the essence, setting a closing date of December 19, 2002. The Debt- or requested additional time, which was denied. The Debtor was not able to obtain the necessary financing in that time period and filed for Chapter 11 bankruptcy protection on December 18, 2002, the day before the closing date.
Quigley is blunt in acknowledging he did not want to be a member of an entity which filed a bankruptcy petition. As a result, on December 16, 2002, Quigley re
At the time the motion to dismiss was heard, PPL had obtained a loan commitment from First Savings Bank (“FSB”) which provides $5,000,000 for land acquisition. Quigley certifies he has more than $2,000,000 of his own marketable securities available for liquidation. PPL has also obtained equity investors who will provide sufficient funds to pay the balance due Rizzo and enable the Debtor to propose a plan which will immediately pay its creditors 100% of their claims. PPL asserted it would exercise the Option and file a Plan of Reorganization paying creditors in full. The proposed plan was filed February 26, 2003.
An appraisal of the Property offered by Debtor indicates a fair market value in excess of $8,000,000. Rizzo presented no evidence contradicting the appraisal. Since the Purchase Contract with Rizzo is for $7,170,500, the substantial equity in the Property adequately protects the interest of Rizzo despite his assertion of prejudice due to his fear of the uncertainty of the economy and the real estate market.
After the hearing on the motion to dismiss, the Debtor filed its motion for assumption of the Option and assumption and assignment of the Purchase Contract. That motion was argued and the parties submitted briefs after the hearing on issues first raised by Rizzo at the time of argument. The last brief was filed on April 3, 2003 and the record closed at that time. This opinion follows.
LEGAL ANALYSIS
1. Motion to Dismiss and/or Vacate Automatic Stay
Rizzo has moved seeking an order dismissing the Chapter 11 proceeding pursuant to 11 U.S.C. § 1112(b), contending it was filed in bad faith, and lifting the automatic stay imposed by § 362 of the Bankruptcy Code. 11 U.S.C. § 362(a).
11 U.S.C. § 1112(b) permits a court, in its discretion, to convert or dismiss a Chapter 11 petition on the request of a party in interest. It provides in part:
... the court may convert a case under this chapter [Chapter 11] to a case under chapter 7 of this title or may dismiss a case under this chapter, whichever is the best interest of creditors and the estate, for cause ...
In addition to the court’s discretion to dismiss a Chapter 11 case for “cause,” the court may also dismiss a case for the ten reasons enumerated in the statute. 11 U.S.C. § 1112(b)(1) — (10). The list is not exhaustive and courts should “consider other factors as they arise.”
First Jersey National Bank v. Brown (In re Brown),
A debtor’s lack of good faith constitutes cause for dismissal of a Chapter 11
The reason for imposing a good faith requirement was stated by the Third Circuit as follows:
It is easy to see why courts have required Chapter 11 petitioners to act within the scope of the bankruptcy laws to further a valid reorganizational purpose. Chapter 11 vests petitioners with considerable powers — the automatic stay, the exclusive right to propose a reorganization plan, the discharge of debts, etc. — that can impose significant hardship on particular creditors. When financially troubled petitioners seek a chance to remain in business, the exercise of those powers is justified. But this is not so when a petitioner’s aims lie outside those of the Bankruptcy Code. In re SGL Carbon Corp.,200 F.3d at 165-66 . See also First Jersey Nat’l Bank v. Brown,127 B.R. 108 , 112 (D.N.J.1991), rev’d on other grounds.
A determination of a debtor’s motive for filing centers upon the totality of the circumstances.
In re SGL Carbon Corp.,
Courts have dismissed cases as bad faith filings for a variety of reasons, including but not limited to: (1) when the petition is filed merely as a litigation tactic; (2) when the petition was filed solely to frustrate the legitimate efforts of other parties to enforce their rights; (3) when the debtor lacks a valid reorganizational purpose; and (4) when the debtor’s sole motive is to avoid a contract.
See In re SGL Carbon Corp.; In re Ravick Corp.; See also In re Y.J. Sons & Co., Inc.,
Significantly, dismissals of Chapter 11 cases caused by a debtor’s bad faith routinely show elements of prejudice to one or more creditor classes. Rizzo argues here that he is being prejudiced due to the uncertainty of the economy and the real estate market, conditions always present. Debtor counters by stating it is simply attempting to close title and take advantage of that market since the Property has substantially increased in value. Rizzo also argues that the Debtor has no real property, personal property, secured creditors or unsecured priority creditors; how
On the Petition Date, the Debtor still had the opportunity to perform the contract. Under ordinary circumstances, the contract is subject to assumption or rejection under 11 U.S.C. § 365.
See In re ERA Central Regional Services, Inc.,
Rizzo relies heavily upon
In re Laguna Associates, Ltd. Partnership,
In
Laguna,
the debtor had acquired the property in issue (its sole asset) one day before filing its Chapter 11. The mortgage secured by the property expressly prohibited transfer of the property unless certain conditions had been met. Despite this prohibition, the property was transferred to the debtor who immediately filed its Chapter 11 and sought bankruptcy protection and the automatic stay against foreclosure. The facts in the instant matter are clearly distinguishable from those in
Laguna.
The Debtor here was not created immediately prior to the filing for the specific purpose of acquiring title and seeking bankruptcy protection. The Debt- or holds the Purchase Contract as its primary asset which, by its terms, permits assignment to an entity provided Quigley is principal. Such an assignment clause in real estate contracts is routine and evidence an understanding of the parties that the property in issue may well be taken by an entity other than the contract purchaser. This is exactly the intent of the Option and the proposal to assume and assign the Purchase Contract to PPL, an entity controlled by Quigley. Thus, Rizzo cannot be heard to complain that the assignment violates his Purchase Contract, a significant distinction from the mortgagee in
Laguna
Moreover, even the
Laguna
court acknowledged one of the governing principles embodied within Chapter 11 when the court observed Chapter 11 was an “opportunity to protect (the debtor’s) assets for a period of time so that the resources might be marshalled to satisfy outstanding obligations.”
In re Laguna\
In addition, the Court finds that the Debtor operates a legitimate business, the business of acquiring and developing a specific parcel of real property. Single-
Significantly, the Debtor does have creditors, the amended schedules indicate the existence of general unsecured claims of over $350,000. Of this sum, the claims of Michael Quigley and his law firm Casta-ño Quigley LLC are insider claims. 11 U.S.C. § 101(31). Nevertheless, the balance of the claims totaling almost $190,000 are held by non-insider creditors who provided services in connection with the development of the Property and even the claims of insiders are considered in evaluating good faith since they remain a liability of the Debtor.
In re Central Jersey Airport Services, LLC,
Finally, even if the Debtor had no ongoing business, the lack of an ongoing business is irrelevant for purposes of evaluating eligibility for Chapter 11 relief.
See Toibb v. Radloff,
In summary, the test to be applied by this Court relative to a motion to dismiss is an examination of the totality of the circumstances, not rigid application of specific factors. Here, the Court can find no prejudice to Rizzo nor sufficient circumstances to determine this Petition was filed in bad faith. It is undisputed that the Debtor’s motive in filing Chapter 11 was to preserve its Purchase Contract. The preservation of value is a permissible motive for filing Chapter 11 and the good faith requirement must be viewed in context with Congress’ intent to promote reorganization. Thus, the filing was an appropriate exercise of business judgment and protected the equity of the Debtor in the Purchase Contract for the benefit of other creditors, as well as the Debtor.
The application to vacate the automatic stay must also be denied. The automatic stay, of course, comes into effect upon filing of the petition. 11 U.S.C. § 362(a). Presumably, Rizzo moves under § 362(d) for relief from the stay. Section 362(d)(1) provides for relief from the stay for cause, including lack of adequate protection of an interest in property. Here, the Court has determined that cause, or more appropriately Debtor’s lack of good faith in filing the petition, has not been demonstrated or evidenced by the facts in the instant matter. In addition, the appraisal of the Property showing a fair market value in excess of $8,000,000, which is not contested by Rizzo, evidences substantial adequate protection of Rizzo’s interest in the Property. Accordingly, relief is not appropriate under § 362(d)(1) and is denied.
Section 862(d)(2) provides for relief from the stay if (A) the debtor does not have equity in such property; and (B) such property is not necessary to an effective reorganization. 11 U.S.C. § 362(d)(2)(A) and (B). Section 362(g)(1) states that the movant requesting relief from the automatic stay has the burden of proof on the
2. Motion to (A) Assume Option Agreement and (B) Assume and Assign Contract for the Purchase of Real Property
The Debtor’s motion seeks (1) to assume the Option with PPL and (2) to assume and assign the Purchase Contract to PPL. The moving papers indicate that by agreement dated February 28, 2003, and subject to approval of the Bankruptcy Court, the Debtor and PPL modified the payment terms of the Option and that by agreement of the same date, PPL exercised the Option, subject to approval by the Bankruptcy Court authorizing the Debtor to assume and assign the Purchase Contract to PPL. A certification in support of the motion indicates the financing contingency had been satisfied, the sums due under the Purchase Contract with Rizzo were available, and creditors would be paid 100% of their claims.
The assumption and assignment motion was opposed by Rizzo who essentially relied upon his pleadings previously filed on the dismissal motion. Rizzo argues against the assumption and assignment contending that, as a result of the Option, Debtor would be left with no assets to reorganize. In addition, he argues that the alleged payoff to him of $7,070,500 lacks interest and taxes he is owed and that, due to the delay since the filing of the Petition, his position has been compromised.
At the hearing, Rizzo for the first time argued that § 108(b) of the Bankruptcy Code granted the Debtor 60 days beyond the Petition Date to cure the default under the Purchase Contract caused by Debtor’s failure to close under the time-of-the-essence notice setting December 19, 2002 as the date of closing.
See
11 U.S.C. § 108(b). Rizzo argues that the additional 60-day period expired on February 18, 2003, weeks before the Debtor filed the instant Motion to Assume the Option and Assume and Assign the Purchase Contract; and thus, since the Debtor did not perform, or even move to assume within the 60-day period, the Purchase Contract has terminated as a matter of law. Rizzo relies upon
In re New Breed Realty Enterprises, Inc.,
The Purchase Contract between the Debtor and Rizzo is an executory contract governed by the provisions of § 365 of the Bankruptcy Code. 11 U.S.C. § 365. In a Chapter 11 proceeding, the trustee or debtor-in-possession may assume or reject an executory contract at any time before the confirmation of a plan subject only to the condition that the court may, on the request of a party to such contract, order the debtor to determine within a specified period of time whether to assume or reject such contract. 11 U.S.C. § 365(d)(2).
Section 365(f)(2) provides for the assignment of an executory contract if (A) the contract is assumed in accordance with § 365 and (B) adequate assurance of future performance by the assignee of such contract is provided, whether or not there
11 U.S.C. § 108(b), relied upon by Rizzo, states:
(b) Except as provided in subsection (a) of this section, if applicable nonbank-ruptcy law, an order entered in a non-bankruptcy proceeding, or an agreement fixes a period within which the debtor or an individual protected under section 1201 or 1301 of this title may file any pleading, demand, notice, or proof of claim or loss, cure a default, or perform any other similar act, and such period has not expired before the date of the filing of the petition, the trustee may only file, cure, or perform, as the case may be, before the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) 60 days after the order for relief. The majority of courts have determined
that the 60-day limitation on cure periods provided in § 108(b) does not alter the specific provisions of § 365. It has long been recognized that “Section 108(b) does not apply to curing defaults in executory contracts. Section 365 specifically governs the time for curing defaults in executory contracts, and thus, it controls ...”
Moody v. Amoco Oil Co.,
The courts in this district have followed
Moody. See Matter of Dunes Casino Hotel,
“The court here notes that to the extent there is a conflict between the specific sections of §§ 362, 365 and 105, and the general provision of § 108 (which provides for a 60-day limitation on cure periods), the specific provisions prevail. ‘Section 108(b) does not apply to curing defaults in executory contracts. Section 365 specifically governs the time for curing defaults in executory contracts, and thus, it controls here.’ Moody v. Amoco Oil Co., supra,734 F.2d at 1215 (citation omitted).”
Other courts have consistently recognized that the specific assumption and assignment provisions of § 365 prevail over the general provisions of § 108.
See In re Round Hill Travel, Inc.,
If an exception exists, it appears to arise from the notion that certain “historical facts” constitute non-monetary defaults which cannot be cured (such as anti-closure provisions in automobile franchise agreements) and thus are limited to the 60-day extension provision in § 108(b). This concept gained recognition through
In re Claremont Acquisition Corp., Inc.,
Here, unlike New Breed where the debt- or conceded that seller suffered economic harm as a result of debtor’s default, there is no substantial economic detriment to Rizzo if closing occurs. Upon assumption and assignment, Rizzo will be paid in full together with all interest and advances allowed under the Purchase Contract. Rizzo will have obtained the benefit of his bargain while, at the same time, the assumption and assignment allows the bankruptcy estate to realize the value of this asset. Realization of that value allows for the creditors to be paid in full and the Debtor or its assignee to obtain the net profit from the transaction, the benefit of its bargain. To rule otherwise would be to allow a windfall to Rizzo, to the detriment of creditors and the Debtor. 3 The Debtor herein was not limited by § 108(b) to assume and assign the Purchase Contract within 60 days of the Petition being filed. I find that the Debtor’s Motion to Assume and Assign was timely filed, is properly before the Court, and should be granted.
The closing shall occur within 30 days of the entry of the Order granting the motion. The parties are directed to cooperate in effectuating the closing. Rizzo is entitled to full payment under the terms of the Purchase Contract, at the time of closing. The parties are urged to discuss and come to agreement on the amount due to
For the reasons set forth above, Rizzo’s motion is denied and Debtor’s motion is granted. The attached Orders have been entered by the Court.
Notes
. The terms of the Option were subsequently amended, but 100% payment to creditors would still be immediately available to be paid.
. Other courts have also limited or failed to follow the holding in
Claremont. See In re Vitanza,
. Rizzo has indicated he would satisfy general creditors but takes exception to the debts owed to insiders and thus has not agreed to pay all of Debtor’s general creditors.