In re The Sunshine Group

Case Type:
Case Status:
BAP Nos. CC-19-1105-GSL; CC-19-1106-GSL; CC-19-1107-GSL (9th Circuit, Apr 10,2020) Not Published
BAP for 9th Circuit affirmed rulings of bankruptcy court (CD Cal.) denying motion to sell property free and clear and dismissing chapter 11 case based on findings that debtor filed the petition in bad faith and that the motion to sell was part of debtor’s bad faith scheme to avoid receivership rulings in the state court. Property was debtor's only valuable asset, debtor was not operating, had no revenues to reorganize debts, and the case was essentially a two party dispute. State court receivership health and safety violation abatements could not be set aside.
Procedural context:
Bankruptcy court (CD Cal.) granted creditors' motion to dismiss debtor's chapter 11 case and denied debtor's motion to sell property free and clear of liens. Debtor appealed to BAP for 9th Circuit.
The Sunshine Group, LLC, (“Debtor”) appeals from two orders dismissing its chapter 11 case and from an order denying its motion to sell property free and clear of liens and interests. Appellees, the City of Dana Point, California, (the “City”) and California Receivership Group, (“Receiver”) each filed motions to dismiss the chapter 11 case and asserted that Debtor filed its petition in bad faith as a litigation tactic to evade rulings made by the state court in a receivership action involving Debtor’s sole asset, a 28-room motel located in Dana Point, California (the “Property”). Debtor was formed in late 1990s for the purpose of purchasing and developing commercial properties in Dana Point, California. For approximately 18 years, Debtor operated the Property and earned revenue. However, by about 2015, Debtor states that it was developing plans to demolish the Property and build an upgraded motel with larger rooms and more amenities. In 2016, the City notified Debtor of several municipal code violations which needed to be immediately rectified. On September 1, 2016, the City “red-tagged” the Property after a Fire and Life Safety Inspection uncovered several violations of the California Fire Code, California Building Code, and the Dana Point Municipal Code which posed an immediate fire threat and safety hazard to the public. Debtor responded that it intended to demolish the Property rather than abate the code violations. In April 2017, the City filed a nuisance action in Orange County Superior Court and moved, ex parte, for an appointment of a health and safety receiver to take possession and control of the Property. The state court appointed the Receiver and authorized it to take control of the Property and correct the code violations. The Receiver was permitted to borrow funds to correct the conditions and to issue a receiver’s certificate to secure the debt with a super-priority lien on the Property. The state court permitted the Receiver to fund a receiver’s certificate with super priority status for purpose of securing the Property, cleaning it out, and obtaining bids to remediate the violations. The Debtor opposed the Receiver’s remediation plan and argued that the Property should instead be demolished and the receivership should be terminated. At the hearing, the state court confirmed the appointment of the Receiver, rejected Debtor’s request to terminate the receivership, and authorized the Receiver to increase the receiver’s certificate to remediate safety issues. The day before a continued hearing in state court, Debtor filed bankruptcy under chapter 11.
Gan, Spraker, Lafferty

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