In Re Wells
This ease is before the Court upon Motion to Dismiss filed by Michael Nortman, Trustee for the Namtron Family Trust (collectively “Namtron”), and Motion to Reject Executory Contract with Namtron filed by Katherine C. Wells (“Debtor”). The motions were consolidated and hearings conducted on August 25, 1998 and September 17, 1998. Upon the evidence presented, the Court enters the following Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
1. Debtor is a fifty-six year old widow. During the course of her marital relationship, her husband had operated as an entrepreneur and handled all of the financial aspects of the business. Consequently, when her husband died unexpectedly, Debtor had not accumulated any financial or employment experience.
2. Debtor and her husband had accumulated several parcels of real property. Two of the parcels are residential properties located on ocean front sites in Daytona Beach, Florida. One of the lots is a rental property and the other is Debtor’s homestead. Volu-sia County has a tax claim against the rental property for $6,619.06.
3. Debtor also owns a certain nine acre parcel of commercial real property located in Seminole County, Florida (“Seminole County Property”). The three properties have five mortgage holders retaining various lien interests totaling approximately $557,000. (Namtron’s Ex. 14).
4. During the course of Debtor’s ownership of the Seminole County Property, mortgage liens, tax liens and other encumbrances accumulated on the property to the extent of approximately $402,000. (Debtor’s Ex. 4, 5).
5. Ultimately, in February, 1997, Debtor retained Emerald Realty, Inc., a commercial real estate firm, and its president, Robert G. Doher (collectively “Emerald Realty”) in an effort to sell the Seminole County Property.
6. Debtor received several written offers from prospective purchasers through Emerald Realty, including one by Sembler Realty for $2,095,000. However, none of the offers materialized to closing. (Debtor’s Ex. 6).
7. On March 20, 1998, Debtor received a notice of “Intent to Levy” from the Internal Revenue Service for a tax claim owing on the Seminole County Property in the amount of $408,768.
8. Debtor then informed Emerald Realty to market the Seminole County Property at an accelerated rate.
9. On April 20, 1998, Emerald Realty and the Debtor called Namtron concerning the sale of the Seminole County Property.
10. Debtor made an offer to Namtron to sell the subject property for $1,000,000.
11. Namtron refused the initial offer and counteroffered for $900,000.
12. Ultimately, after approximately four hours of negotiations, Debtor and Namtron entered into a commercial contract for the purchase and sale of the Seminole County Property (“Commercial Contract”).
13. The parties agreed that Namtron would pay $900,000 within three days. An addendum to the contract was added which provided for an additional $100,000 to be paid to Debtor if the subject property was resold by Namtron within six months of the Nam-tron/Wells closing.
14. Subsequently, Emerald Realty hired Mr. Reinhard Stephan to act as escrow agent and to conduct the closing on behalf of the Debtor.
15. The closing was scheduled to take place at Mr. Stephan’s office on April 23, 1998.
16. Namtron tendered the full purchase price, including deposit, to Mr. Stephan prior to the scheduled date of closing.
17. On April 23, 1998, Namtron appeared at Mr. Stephan’s office ready and willing to close on the Commercial Contract. The Debtor failed to appear for closing.
18. On April 24, 1998, Namtron filed a complaint in state court seeking specific per-
19. Upon Motion for Relief from the Automatic Stay filed by Namtron, this Court by its Order dated June 23, 1998, modified the stay as to Namtron so he could proceed with his specific performance suit against Debtor in state court. (Doc. 57). However, this Stay Relief Order specifically excludes Nam-tron from executing upon any judgment in his favor without further order of this Court.
20. On May 4, 1998, Debtor filed a Motion to Reject Executory Contract with Nam-tron. (Doc. 11). On May 28,1998, Namtron filed a Motion to Dismiss pursuant to 11 U.S.C. § 1129(a)(3) on the grounds that Debtor’s case was not filed in good faith. (Doc. 27). Hearings on Namtron’s Motion to Dismiss and Debtor’s Motion to Reject Exec-utory Contract were conducted on August 25, 1998, and September 17,1998.
21. Four issues were raised at the September 17, 1998 hearing: (1) Whether Nam-tron has standing to be heard on its Motion to Dismiss; (2) Whether this Court’s holding in
In re Jacksonville Riverfront Development, Ltd.,
22. Subsequent to these hearings, on October 6, 1998, Namtron filed two proofs of claim, one seeking return of the subject real property, and the other for an unsecured claim for attorney’s fees pursuant to the Commercial Contract. (Namtron’s App. E and F).
ADDITIONAL FACTS
23.In paragraph four, the Commercial Contract includes, in relevant part, the following provision:
4. TITLE: SELLER has the legal capacity to and shall convey marketable title to the property____
(a) Evidence of Title: SELLER shall at / SELLER’S □ BUYER’S expense and within 5 days from / Effective Date ____Deliver to BUYER
/ a title insurance commitment by a Florida licensed title insurer and, upon BUYER recording the deed, an ALTA owners policy____
BUYER shall, within.... 7 days from receipt of the commitment, deliver written notice to SELLER of title defects. Title shall be deemed acceptable to BUYER if (1) BUYER fails to deliver proper notice of defects or (2) BUYER delivers proper notice and SELLER cures the defects within 5 days from receipt of the notice (“Curative Period”). If the defects are cured within the curative period, closing shall occur within 10 days from receipt by BUYER of notice of such curing. SELLER may elect not to cure defects if SELLER reasonably believes any defect cannot be cured within the Curative Period. If the defects are not cured within the Curative Period, BUYER shall have 10 days from receipt of notice of SELLER’S inability to cure the defects to elect whether to terminate this contract or accept title subject to existing defects and close the transaction with 1 reduction in purchase price.
With respect to buyer’s remedies as a result of seller’s default, the Commercial Contract provided:
10. Default:
(A) In the event the sale is not closed due to any default or any failure on the part of seller other than failure to make the title
24. Following the filing of Debtor’s Chapter 11 petition, Namtron requested a refund of the $900,000 total purchase price that had been deposited with the closing attorney/escrow agent. The escrow agent wired the money back to Namtron. (Debtor’s Ex. 2).
Conclusions of Law
Debtor’s motion seeks to reject an execu-tory contract entered into with Namtron pursuant to § 365(a). Namtron’s § 1112(b) dismissal motion is predicated upon the assertion that the Debtor’s petition was filed in bad faith. The Court will first address the threshold question of whether Namtron has standing to seek dismissal, because if standing is lacking, the dismissal motion will be moot. Next, if necessary, the Court will address the dismissal motion, because if dismissal is proper, the issues of executoriness and contract-rejection will be moot.
1. Standing to Request Motion to Dismiss pursuant to 11 U.S.C. §§ 1112(b); 1129(a)(3)
The bankruptcy court may dismiss a chapter 11 case on request of a “party in interest,” after notice and a hearing. 11 U.S.C. § 1112(b) (1997). Debtor argues that Nam-tron lacks standing to request dismissal because he is not a “party in interest” as the term is used in 11 U.S.C. § 1112(b). 11 U.S.C. § 1112(b); see also 11 U.S.C. § 1109(b) (1997) (listing who has right to be heard under chapter 11). Although “party in interest” is not specifically defined in § 1109(b) or otherwise in the Bankruptcy Code (“the Code”), the Debtor claims that “party in interest” is defined inversely in 11 U.S.C. § 101(14). Section 101(14) defines “disinterested person” as “not a creditor” or equity security holder or insider. 11 U.S.C. § 101(14) (1998). Therefore, Debtor contends the Code intended the term “party in interest” to mean “creditor” as inversely defined from § 101(14). See 11 U.S.C. § 101(10) (defining “creditor” as entity that has a “claim” against Debtor that arose at time or before order of relief concerning Debtor).
The crux of Debtor’s argument relies on this Court finding the Wells/Namtron Contract to be executory. The Debtor asserts that since the contract is executory, any “claim” Namtron may have only arises after rejection and subsequent breach. See 11 U.S.C. §§ 502(g); 365(g) (1997); see also 11 U.S.C. § 101(5) (1998) (defining “claim” as “right to payment” or equitable remedy for breach of performance if such breach gives rise to right to payment). Accordingly, the Debtor argues that since Namtron did not have a “claim” or “right to payment” at the time the bankruptcy petition was filed, Nam-tron was not a “creditor” or “party in interest,” and consequently lacked standing to file a motion to dismiss.
Namtron argues that he is a “creditor” of the bankruptcy estate, and therefore, has “party in interest” standing to bring a motion to dismiss. First, Namtron bases this argument on the fact that he has filed two proofs of claim in this bankruptcy case.
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Second,
Under 11 U.S.C. § 1109(b), “[a] party in interest, including the debtor, the trustee, a creditors’ committee, an equity security holder, or any indenture trustee, may raise and may appear and be heard on any issue in a case under this chapter.” 11 U.S.C. § 1109(b) (1998). However, this list of examples is not exhaustive and not meant to exclude other types of interested parties from the purview of the section.
In re Amatex Corp.,
Courts have recognized that the term “party in interest” should be construed broadly to allow all parties affected by a chapter 11 proceeding to be heard.
See e.g., Amatex Corp.,
However, because of § 1109(b)’s broad scope, this Court is of the opinion that anyone who has a pecuniary interest, practical stake; or legally protected interest that could be affected by the bankruptcy proceeding is entitled to assert that interest to any issue to which it pertains.
See In re Charter Co.,
Namtron’s “stake” in the underlying chapter 11 case is clear, and it seems apparent that he ought be permitted to seek dis
Furthermore, simply because Nam-tron had not filed his proofs of claims until after he brought his motion does not preclude him from seeking dismissal. While a party who wishes to participate in the distribution of an estate is required to file a proof of its claim, and while that participation can be denied by the disallowance of the claim, the underlying claim continues to exist and has viability until it is discharged.
See Gaudio v. Stamford Color Photo, Inc., (In re Stamford Color Photo, Inc.),
II. Section 1112 Dismissal for Bad Faith Filing
A case under Chapter 11 may be dismissed for cause pursuant to section 1112 of the Bankruptcy Code. 11 U.S.C. § 1112(b) (1998). Section 1112 of the Code provides in relevant part that:
(b) ____ the court may convert a case under this chapter to a case under Chapter 7 of this title or may dismiss a case under this chapter whichever is in the best interests of creditors and the estate, for cause____
11 U.S.C. § 1112(b).
While this subsection list several factors constituting “cause” for dismissal, the list is not exhaustive.
In the Matter of Welwood Corp.,
The Eleventh Circuit has firmly established that good faith is an implicit prerequisite to filing a Chapter 11 bankruptcy petition.
In re Albany Partners, Ltd. v. Westbrook, (In re Albany Partners, Ltd.),
B.
Section 1112(b) Bad Faith Analysis in Light of In re Jacksonville Riverfront Development, Ltd.,
This Court has previously held that the
Phoenix Piccadilly
factors, which are present in the majority of single asset real estate cases, are no longer relevant in deciding
(i) The Debtor has only one asset, the Property, in which it does not hold legal title;
(ii) The Debtor has few unsecured creditors whose claims are small in relation to the claims of the Secured Creditors;
(in) The Debtor has few employees;
(iv) The Property is the subject of a foreclosure action as a result of arrearages on the debt;
(v) The Debtor’s financial problems involve essentially a dispute between the Debtor and the Secured Creditors which can be resolved in the pending State Court Action; and
(vi) 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.
Id. at 1394-95 (emphasis added) (citations omitted).
Since the impact of the
Phoenix Piccadilly
decision had been to bar the large majority of single asset bankruptcy cases, this Court, in
Jacksonville Riverfront,
found that the application of those factors directly conflicts with the Congressional intent of the Bankruptcy Reform Act of 1994 (“Reform Act”).
“single asset real estate” means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor and on which no substantial business is being conducted by a debt- or other than the business of operating the real property and activities incidental thereto having aggregate noncontingent liquidated secured debts in an amount no more than $4,000,000.
11 U.S.C. § 101(51B).
Moreover, the Reform Act added a section providing a time frame to expedite single asset real estate cases. Section 362(d) provides that the automatic stay will be lifted in a single asset real estate case after 90 days, unless the debtor files a plan with a reasonable possibility of confirmation, or commences payments to creditors whose claims are secured by the subject real estate. 11 U.S.C. § 362(d)(3).
Despite the fact that the subject property in
Jacksonville Riverfront
did not fall within the definition of “single asset real estate,” this Court found that Congress had clearly expressed its intention that the automatic stay not be lifted, and the case not be dismissed, simply because the case was a single asset real estate case.
Jacksonville Riverfront,
However, in
Jacksonville Riverfront,
this Court did not specifically reject the application of the
Phoenix Piccadilly
factors in analyzing whether bad faith exists in multiple asset cases.
Jacksonville Riverfront,
The United States Supreme Court has held that an individual debtor is eligible to reorganize under chapter 11, even if that individual does not have an ongoing business.
Toibb v. Radloff,
However, prior to the Supreme Court’s decision in
Toibb,
courts in this circuit have recognized that while being an individual debtor, not engaged in business, by itself cannot form the sole ground for dismissal of a chapter 11 case, it remains a factor which may be considered by the court when passing on a party’s challenge to a debtor’s right to maintain the case.
See In re Moog,
However, this Court is of the opinion that in light of
Toibb,
being an individual Chapter 11 debtor, not engaged in business, is not a factor this Court may consider when determining whether a petition was filed in bad faith.
See generally, Toibb,
C. Merits of § 1112(b) Motion to Dismiss
Namtron contends the Debtor has filed her ease in bad faith. Namtron relies on the several factors outlined by the Eleventh Circuit in
Phoenix Piccadilly
as indicative of a lack of good faith on her part.
See Phoenix Piccadilly,
Next, Namtron argues that Debtor’s financial problems are essentially a dispute between the Movant and the Debtor which can better be resolved in state court. However, the Debtor’s financial problems involve more than Namtron’s specific performance lawsuit. The Debtor’s financial problems involve multiple parcels of real property with multiple lien claims by state and federal taxing authorities and various mortgage holders.
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Moreover, if this Court finds that the Com
Namtron also contends that because the debtor has no employees and is not in business, her case was not filed in good faith. However, Namtron ignores the plain language of § 109, Supreme Court precedent, and the long history of allowing individuals to reorganize under Chapter 11.
See
11 U.S.C. § 109 (1997) (noting who may be debtor in bankruptcy);
Toibb,
Lastly, Namtron argues that Debt- or’s filing was nothing more than an attempt to get out of a contract that she didn’t like. Nonetheless, the fact that Debtor seeks to revoke the Commercial Contract is not, by itself, indicative of bad faith. Chapter 11 gives a debtor a second chance through the reorganization process, which includes the right to attempt to reject a potential executo-ry contract that may be financially burdensome to the estate.
See
11 U.S.C. § 365 (1998);
In re Marina Enter., Inc.,
Namtron cites
Chinichian v. Campolongo,
In the present case, the evidence presented is insufficient to show any bad faith on the part of the Debtor in filing her bankruptcy petition. The Court does not find any improper conduct 7 on part of the Debtor that would justify a finding of a bad faith filing. Additionally, the evidence does not establish that the Debtor intended to abuse the judicial process or the reorganization provisions of Chapter 11. Moreover, the Debtor’s proposed plan and disclosure statement evidences the Debtor’s desire and ability to accomplish an effective reorganization. Thus, the Court finds that the petition was filed in good faith with the sincere intent to reorganize.
Section 365(a) of the Bankruptcy Code provides, in relevant part, that “the trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a) (1998). In Chapter 11 cases, the debtor-in-possession succeeds to this power pursuant to § 1107(a). 11 U.S.C. § 1107(a) (1998). The authority to reject certain contracts is essential to the bankruptcy process and provides a mechanism through which extreme economic burdens may be alleviated while the debtor attempts to reorganize.
See Sun City Investments Inc.,
This Court on prior occasions has adopted Professor Countryman’s pre-code definition of executory contract as the proper construction of the term: “An executory contract is ‘a contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute material breach excusing performance of the other.’”
See e.g. In re Maralak, Ltd.,
The Court finds unperformed obligations on the part of both parties to the purchase and sale transaction. As evidenced by the deposition testimony of the closing attorney, there were numerous unresolved issues that needed to be addressed before a proper closing could have occurred. (Stephan Depo. at 5-12). Both parties needed to resolve the technical issues concerning the addendum to the Commercial Contract relating to the potential resale of the Seminole County Property. Both parties needed to resolve issues relating to retail and billboard leases and other ongoing liens which encumber the subject property. The payment and pro-ration of taxes, closing attorney fees, and the execution of numerous other documents in connection with the closing, including owner’s affidavits, tax I.D. numbers and DR-219 documents, were left unresolved.
Moreover, the escrow agreement and closing statement were not executed, and the deed had not been delivered. Namtron had not taken possession of the subject property and Debtor had not accepted any funds. Debtor had not delivered a title insurance commitment, and thus, Namtron had not delivered written notice of title defects. Clearly, no closing had occurred. In fact, the closing attorney indicated he was not prepared to close on the Seminole County Property on the scheduled closing date. (Stephan Depo. 8-10). Further, pursuant to the terms of the Commercial Contract, Namtron clearly had the right to elect not to proceed with the transaction and to recover the funds placed in escrow. Therefore, as material obligations on both sides 8 of the contract had yet to be performed, the Court concludes that this cop-tract is executory, and thus, subject to rejection pursuant to § 365(a).
Ordinarily, the decision to assume or reject an executory contract is left entirely to the debtor.
Sun City Investments,
Here, the Debtor has produced credible evidence that rejection will benefit the estate and assist in a successful reorganization. The executory contract only provides for a gross sale price of $900,000. The evidence presented is convincing that the fair market value of the subject property more closely approximates $1.5 million. The Debt- or’s Plan of Reorganization proposes to sell the property at a higher price more commensurate with the market value. This will allow Debtor to retain her other commercial property, help her to maintain her living expenses, and ultimately pay her creditors a greater amount. Therefore, the rejection serves to benefit the estate, and thus, is rejected pursuant to § 365(a).
CONCLUSION
After considering the evidence presented, the Court concludes that Namtron’s Motion to Dismiss pursuant to § 1112(b) for bad faith filing is not well taken, and is thus overruled. Additionally, the Court finds that pursuant to Debtor’s § 365(a) motion, the Commercial Contract is properly rejected as executory and in the best interests of the estate. The Court will enter a separate order consistent with these Findings of Fact and Conclusions of Law.
Notes
. The word “with” was written into the contract, but had not been initialed to by Debtor as other changes had been. The absence of Debtor's initials with respect to such a crucial change raises suspicions about the credibility of the Commercial Contract.
. The filing of a proof of claim generally allows a party to assert "creditor” standing under Bankruptcy Code § 1112(b) pending determination of its allowability.
See In re Abijoe Realty Corp.,
. Debtor lists Namtron as Michael Nortman, Trustee, in her Schedules.
. Namtron does, however, have a disputed interest in the subject property via the lis pendens filed in connection with his state court specific performance lawsuit.
. This Court finds, and as both parties concede, this case is clearly a multiple asset, multiple creditor, Chapter 11 reorganization.
. Namtron also contends Debtor's reorganization depends on the outcome of the state court litigation. On the one hand, Namtron argues Debtor must be successful in defeating the pending specific performance suit in order to fund the plan. However, on the other hand, Namtron argues that Debtor must assume the contract, if it is found to be executory, contending this will be in the best interests of the creditors and the estate. The Court finds this argument inapposite.
. Namtron alleged the Debtor was untruthful in her Schedules, however, he failed to set forth credible evidence to substantiate those claims.
. Debtor asserts the Eleventh Circuit has recently expanded the definition of "executory contract” in its 1996 decision in
Sipes v. Atlantic Gulf Communities Corp.,