Mercado v, Combined Investments, LLC

BAP No. MB 14-030
AFFIRMED. The Debtor did not provide evidence demonstrating her ability to reorganize within a reasonable time and failed to satisfy her burden under § 362(d)(2)(B). A debtor’s burden under this prong of § 362(d)(2)(B) cannot be fulfilled by merely manifesting unsubstantiated hopes for a successful reorganization. Thus, “[a] debtor must do more than merely assert that it can reorganize if only given the opportunity to do so.” Ripon Self Storage, LLC v. Exchange Bank (In re Ripon Self Storage, LLC), BAP No. EC-10-1325-HkiD, 2011 WL 3300087, *5 (B.A.P. 9th Cir. Apr. 1, 2011).
Procedural context:
Adalgisa Mercado (the “Debtor”) appeals from the bankruptcy court’s order after remand granting Combined Investments, LLC (“CI”) relief from the automatic stay pursuant to § 362(d)(2). The requirements set forth in § 362(d)(2)(A) and (B) are expressed in the conjunctive, and, therefore, each element must be met for the court to grant relief under that section. Tucy v. Digital Fed. Credit Union (In re Tucy), No. MB 11-014, 2011 WL 4572026, at *3 (B.A.P. 1st Cir. Sept. 15, 2011) (citations omitted). As the moving party, CI had the initial burden of demonstrating the Debtor’s lack of equity in the Property, and the Debtor had the burden of establishing that the Property was necessary for an effective reorganization. 11 U.S.C. § 362(g); see also Aja v. Emigrant Funding Corp. (In re Aja), 442 B.R. 857, 862 (B.A.P. 1st Cir. 2011). The record reflects that the parties at the remand hearing did not dispute the Debtor lacked equity in the Property. Thus, the only issue before the bankruptcy court was whether the Debtor met her burden to establish that the Property was necessary to an effective reorganization. “[W]hat § 362(d)(2) calls for is much more of a discretionary inquiry, rather than a mechanical one, which, at bottom, requires the court to make a judgment call as to whether the debtor is making sufficient progress towards a sufficiently realistic goal such that its efforts should be allowed to continue.” In re SW Boston Hotel Venture, LLC, 449 B.R. 156, 179 (Bankr. D. Mass. 2011) (quoting In re Brian Wise Trucking, Inc., 386 B.R. 215, 219 (Bankr. N.D. Ind. 2008)). Various courts have developed a list of requirements that a debtor should show in order to meet its burden under § 362(d)(2)(B): 1. The debtor must be moving meaningfully to propose a plan; 2. The plan must provide that the lender’s allowed secured claim would be valued and payable from the debtor’s net operating income generated by its property or the ability to propose a plan based on the infusion of new capital, sale, or other viable means; 3. The plan must have a realistic chance of confirmation; 4. Without deciding the issue with the same scrutiny as a confirmation hearing, the debtor’s proposed plan must not be obviously unconfirmable; 5. The reorganization must occur in a reasonable period of time. In this regard the factors to look at are: a. the negotiations among the parties; b. the amount of time that the debtor has been in possession and operating the business; c. the length of time since the expiration of the exclusivity period. At the remand hearing held more than two years after the commencement of the case, there was no proposed plan of reorganization pending. The Debtor did not provide any further information about the Property and its condition, or how she expected to maintain a stable cash flow going forward or how she would address routine and any non-routine property maintenance expenses for a property of its age. Furthermore, at the hearing, the Debtor did not provide the bankruptcy court with any kind of outline of a potential reorganization plan, or explain how such a plan would treat CI’s secured and unsecured claims. She did not testify about her other creditors, expenses, assets, aggregate income, or capital expenses. She offered no exhibits or other witnesses, other than her appraiser who would have testified concerning the value of the Property in which she lacked any equity. In short, the Debtor failed to demonstrate that she had a confirmable reorganization plan in prospect.
The Debtor and her husband jointly own three properties, one of which is the subject of this appeal. In January 2012, the Debtor filed a chapter 11 petition. On her Schedule D, the Debtor identified CI as a creditor holding a $434,146.00 claim secured by the Property. The Debtor valued the Property at $205,000.00. CI filed a secured proof of claim in the amount of $452,639.58. CI filed a motion seeking relief from the automatic stay under § 362(d)(1) and (d)(2). The Debtor conceded she had no equity in the Property, but argued, among other things, that it was necessary for her reorganization because the excess rental income it produced would be sufficient to fund a reorganization plan. After hearing arguments from the parties, the bankruptcy court issued a bench ruling granting CI’s motion. The Debtor appealed. On November 20, 2013, the Panel issued a decision in which it determined there was no issue before it as to the first prong for stay relief under § 362(d)(2)(A) because the Debtor did not dispute she lacked equity in the Property, and that the only issue was whether the Debtor had demonstrated the Property was necessary for an effective reorganization under § 362(d)(2)(B). The Panel determined it could not adequately review the bankruptcy court’s decision as to that prong because the court did not make explicit findings of fact or conclusions of law on the elements of stay relief under § 362(d)(2)(B). The Panel vacated the order and remanded the matter to the bankruptcy court “to provide explicit findings of fact and conclusions of law” under § 362(d)(2)(B). On remand, the Bankruptcy Court held a hearing and concluded, based upon testimony and appraisals, that the Property would not cash flow profitably and therefore was not necessary for an effective reorganization. The Debtor appealed again to the BAP. The standard of review on appeals from automatic stay decisions is the abuse of discretion standard. See Aguiar v. Interbay Funding, LLC, 311 BR 129 (BAP 1st Cir. 2004). An abuse of discretion occurs when a court “relies upon an improper factor, neglects a factor entitled to substantial weight, or considers the correct mix of factors but makes a clear error of judgment in weighing them.” Bacardí Int’l Ltd. v. Suárez & Co., 719 F.3d 1, 9 (1st Cir. 2013).
Deasy, Kornreich and Finkle

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