In re Creekside Senior Apartments, L.P.

No. 13b0001p.06, 2013 FED App.0001P (B.A.P. 6th Cir. Mar 15 2013)
Bankruptcy Court did not abuse its discretion in dismissing Chapter 11 cases for "cause" pursuant to Section 1112(b) where it projected negative net cash flow through 2020, ceased making adequate protection payments, and where it was unable to confirm plan of reorganization.
Procedural context:
Sixth Circuit Bankruptcy Appellate Panel affirms Bankruptcy Court's dismissal of jointly-administered Chapter 11 cases for "cause" under Section 1112(b) of the Bankruptcy Code.
The appellants, debtors ("Debtors") in five jointly administered single-asset real estate cases, filed Chapter 11 petitions in September and October 2010. Each Debtor was a Kentucky LLP with a general partner, an administrative limited partner, and an investor limited partner. Each Debtor owned a piece of real property (the "Properties") on which it operated a low-income housing apartment building, which were developed pursuant to the federal Low-Income Housing Tax Credit Program (the "LIHTC Program"). The Debtors financed their acquisition and development of the Properties via loans from Bank of America ("Bank"), who took a mortgage on the Properties. The Debtors ceased making adequate protection payments to Bank in February 2011. The Plan's funding was to come from an affiliate of the Debtors. Bank filed a motion to dismiss or convert, and for automatic stay relief. The Bankruptcy Court conducted a hearing Debtor's principal testified that he could not estimate the anticipated amounts of the balloon payments under the plan, and that the Debtor could not meet operating expenses and plan payments from net operating income. The Debtors' cash flow projections predicted negative cash flow until 2020. The funding source had not committed to funding a balloon payment shortfall. The Bankruptcy Court entered an order dismissing the cases for cause on May 30, 2012, finding that the Debtors' goal was "to protect the Debtors' investors" and that they took actions to do so "to the detriment of their creditors to whom they owed a fiduciary obligation." The Bankruptcy Court identified several grounds, including the Debtors' failure to make adequate protection payments, various procedural delays, failing to include judicially-established values in its plans of reorganization, admitting that the Debtors' overriding concern was to maximize investor value, that the Debtors' separate classification of the deficiency claim "was evidence of bad faith" and rendered the plan unconfirmable, that the funding source's commitment was "illusory," and that there was substantial and continuing diminution of the estate. The BAP affirmed on the continuing loss/absence of rehabilitation standard in Section 1112(b)(4)(A), noting that although the Bankruptcy Court found several grounds for "cause," even one was enough to dismiss. The BAP agreed that the Debtors' annual cash flow was negative and that the values of the Properties were declining, establishing the "continuing loss" prong. The BAP also agreed that the Debtors did not have a reasonable likelihood of rehabilitation, in part because the plans did not provide for any meaningful repayment of the Bank's claims until the expiration of the tax credit recapture period. The BAP also gave weight to the Debtor's failure to make an adequate protection payment after February 2011. It stated "A debtor who is unable to service its debt at the outset of the case and remains unable to do so for the foreseeable future does not have a reasonable likelihood of rehabilitation."
Harris, Humphrey, Preston

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