Hassen Imports Partnership, et al. v. City of West Covina (In re Hassen Imports Partnership)
- Citation:
- Hassan Imports Partnership, et al. v. City of West Covina, et al (In re Hassan Imports Partnership), CC-13-1019 (BAP 9th Cir. August 19, 2013)
- Tag(s):
-
- Ruling:
- The Bankruptcy Appellate Panel for the Ninth Circuit ("9th Cir BAP") affirmed (a) an order of the bankruptcy court granting the motion of appellees to convert Debtor's case from chapter 11 to chapter 7 for "cause" under 11 U.S.C. § 1112(b)(4)(A); and (b) the bankruptcy court's order denying the Debtor's motion for reconsideration of the conversion order.
- Procedural context:
- The Debtor, a California limited partnership, filed for chapter 11 on July 27, 2011. After many months in chapter 11, Debtor proposed a plan to restructure (whereby it proposed to pay all creditors in full) that was dependant upon a sale that was subject to several contingencies and based upon changing deal terms. Later, the Debtor would propose to accept a significant cash infusion as a "gift" from an anonymous donor to partially fund its obligations under the proposed plan. One of the Debtor's primary secured lenders, the City of West Covina, moved to convert the case to a chapter 7 for "cause" under 11 U.S.C. 1112(b)(4)(A) due to alleged continuing losses, Debtor's alleged failure to pay postpetition taxes and other amounts as they came due, and because no reasonable likelihood of rehabilitation existed given the Debtor's alleged failure to propose a confirmable plan. The Bankruptcy Court issued a tentative ruling in December 2012 granting the motion to convert the case on the basis that the City has demonstrated a substantial and continuing loss to the estate and on its finding that there was no reasonable likelihood of rehabilitation because the Debtor's plan depended on a sale to a purchaser that has not appeared in the case or otherwise demonstrated a reasonable likelihood of consummating the transaction. Prior to issuing a final ruling, the Bankruptcy Court agreed to a brief continuance of the hearing on the City's motion so that the parties could negotiate. At the final hearing, the Bankruptcy Court granted the motion.
The Debtor moved for reconsideration of the Bankruptcy Court's oral decision granting the motion to convert (i.e., prior to the entry of an order) and significant briefing on the motion for reconsideration took place. Prior to the Court's decision on the motion for reconsideration, the Debtor filed a pleading stating that it had obtained a back-up commitment for the purchase of the Debtor's dealerships. The Bankruptcy Court entered an order denying the motion for reconsideration on the basis that there was not sufficient evidence presented to alter its prior ruling on the motion to convert. After the hearing began, the Debtor filed a declaration from the consultant to the anonymous benefactor stating that the $3 million gift had been wired to the Debtor and was available for its immediate use.
The Debtor appealed both the Bankruptcy Court's order converting the case for "cause" and its order denying the motion for reconsideration.
- Facts:
- The Debtor, a developer of commercial real estate, had leased its most lucrative properties to related entities that operated car dealerships The City-appellant had lent the Debtor money secured by junior deeds of trust on certain properties owned by the Debtor. Prior to the Debtor's chapter 11 filing, the City sued to recover on the debts, obtained a state court judgment and sought to proceed with the liquidation of certain of the Debtor's properties A receiver was appointed and the Debtor promptly filed for chapter 11. The state court judgment was, at the time of the chapter 11 filing, on appeal and no decision had been rendered.
After the City lost a determination that the Debtor was a single asset real estate debtor, the City filed a motion to convert the case to chapter 7 or to dismiss the case. The Bankruptcy Court entered an order converting the case for "cause" under 11 U.S.C. 1112(b)(4)(A), and upon finding both that the Debtor was suffering substantial and continuing losses and that there was no reasonable likelihood of rehabilitation. The Bankruptcy Court denied the Debtor's motion for reconsideration on the basis that there was insufficient new evidence presented to change its prior ruling.
The Debtor appealed both orders. The issues on appeal were: (1) whether the Bankruptcy Court abused its discretion in converting the Debtor's case to chapter 7; and (2) whether the Bankruptcy Court abused its discretion in denying the Debtor's motion for reconsideration.
On the first issue, the 9th Cir BAP held that the Bankruptcy Court had "wide discretion" in determining what constitutes "cause" adequate for conversion of a case under Bankruptcy Code section 1112(b).
The Court further held that the City, as the movant, was required to establish both (1) a continuing loss to or diminution the estate; and (2) an absence of a reasonable likelihood of rehabilitation. With respect to the first prong, the 9th Cir BAP held that the City was only required to show that the loss was substantial or continuing - that it need not demonstrate both to constitute "cause" under Bankruptcy Code section 1112(b)(4)(A).
The 9th Cir BAP held that the Bankruptcy Court had not abused its discretion in determining that this prong of the test had been met both because the Debtor failed to make its postpetition property tax payment of $175,000 that was due November 1, 2012, and because the Debtor continued to accrue administrative and various other expenses (which the 9th Cir BAP held was an implicit finding that the Debtor was administratively insolvent because it had not demonstrated a means of satisfying such growing administrative expenses). The 9th Cir BAP also looked to the record in the case and found that there was further evidence of the fact that this prong was satisfied given that the Debtor had not consistently collecting rent due postpetition (which the Debtor's disputed) and because the Debtor was unable to function going forward without the "promised, but unfulfilled, $3 million case infusion" from the anonymous donor. In short, the 9th Cir BAP held that there was no clear error in the Bankruptcy Court's decision that the City had demonstrated, and the Debtor failed to rebut, that there was a continuing or substantial loss.
As to the second prong - reasonable likelihood of rehabilitation - the 9th Cir BAP held that the issue is whether the debtor's business prospects justify continuance of the reorganization effort. The Court noted that "rehabilitation" is a different and much more demanding standard than reorganization. The 9th Cir BAP held that there was no clear error in the Bankruptcy Court's finding that there was an absence of a reasonable likelihood of rehabilitation based on the lack of evidence that the sale transaction, which was the keystone of the Debtor's plan, would close. The Court further noted that the Bankruptcy Court had not based its decision on the absence of the likelihood of a confirmable plan (as the Debtor contended). Rather, the 9th Cir BAP stated that the Bankruptcy Court had only expressed a concern about such a likelihood but that its decision on the Debtor's rehabilitation prospect was properly founded on the fact that the current circumstances of the Debtor's case did not justify the Debtor continuing its reorganization efforts. The 9th Cir BAP noted that the Bankruptcy Court considered all of the evidence properly before it when it rendered its decision on the motion to convert and that the subsequent evidence offered by the Debtor (e.g., the $3 million gift and the presence of an alleged back-up bidder) was not before the Bankruptcy Court at that time.
With respect to the Debtor's motion for reconsideration, the 9th Cir BAP held that such a motion should not be granted "absent highly unusual circumstances, unless the court is presented with newly discovered evidence, committed clear error, or if there is an intervening change in the controlling law." The 9th Cir BAP held that the Debtor's failure to articulate any specific argument on appeal as to why the Bankruptcy Court had abused its discretion in denying the Debtor's motion and, therefore, the Debtor waived the issue on appeal. The Court noted, however, that even if it had considered the Debtor's challenge of the Bankruptcy Court's denial of the motion for reconsideration, that it saw no error in the Bankruptcy Court's decision to deny the motion on the applicable standards and the record before the Court.
- Judge(s):
- Bankruptcy Judges KIRSCHER, PAPPAS and DUNN
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