UNITED STATES BANKRUPTCY COURT
_____________ DISTRICT OF TEXAS
_____________ DIVISION
IN RE: § CASE NO. 00000
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DEADBEAT, INC., §
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DEBTORS. § CHAPTER 11
BANK’S MOTION _________ FOR AN ORDER,
PURSUANT TO SECTION 362(D) OF THE BANKRUPTCY CODE,
MODIFYING THE AUTOMATIC STAY
THIS IS A MOTION FOR RELIEF FROM THE AUTOMATIC STAY. IF IT IS GRANTED, THE MOVANT MAY ACT OUTSIDE OF THE BANKRUPTCY PROCESS. IF YOU DO NOT WANT THE STAY LIFTED, IMMEDIATELY CONTACT THE MOVING PARTY TO SETTLE. IF YOU CANNOT SETTLE, YOU MUST FILE A RESPONSE AND SEND A COPY TO THE MOVING PARTY AT LEAST TWO DAYS BEFORE THE HEARING. IF YOU FILE YOUR RESPONSE LESS THAN 5 DAYS BEFORE THE HEARING, YOU MUST SEND A COPY TO THE MOVANT BY FACSIMILE, BY HAND, OR BY ELECTRONIC DELIVERY. IF YOU CANNOT SETTLE, YOU MUST ATTEND THE HEARING. EVIDENCE MAY BE OFFERED AT THE HEARING AND THE COURT MAY RULE.
REPRESENTED PARTIES SHOULD ACT THROUGH THEIR ATTORNEY.
__________________________ (“Bank”), a creditor and party in interest herein, hereby files this Motion for an Order, Pursuant to Section 362(d) of the Bankruptcy Code, Modifying the Automatic Stay (the “Motion”) and respectfully represents as follows:
JURISDICTION
This Court has jurisdiction to consider this Motion pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.
BACKGROUND
General
On __________, 20__ (the “Petition Date”), ___________________________________ (the “Debtor”), filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). Since the Petition Date, Debtor has continued to operate its business and manage its properties as debtor in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
No trustee or examiner has been appointed, and no official committees were appointed in these chapter 11 cases.
The Debtor has filed its Schedules of Assets and Liabilities (the “Schedules”) and Statement of Financial Affairs (the “SOFAs”) on ________________, 20__.
The Loan
Debtor owns an apartment complex commonly known as Underwater Apartments, which has a physical address of __________________________________, ___________ County, Texas _____, and consists of two tracts of land totaling 2.90 acres (the “Property”). The Property is Debtor’s only source of revenue. Construction of the Property was funded by certain lenders pursuant to a Construction Loan Agreement, dated ____________, 20__ (as amended and modified, the “Loan Agreement”), by and among Debtor and the persons and entities identified therein and in any amendments thereto (collectively, the “Lenders”). See Affidavit of __________________ in Support of Motion of Bank for an Order, Pursuant to Section 362(d) of the Bankruptcy Code, Modifying the Automatic Stay, dated June ___, 20__ (the “Aff.”) at ¶ 3. A true and correct copy of the Loan Agreement is attached hereto as Exhibit A.
The loan is evidenced by a Promissory Note, dated ____________, 20__ (the “Note”), in favor of the Lenders and secured by a Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing, dated _________, 20__ (as amended and modified, the “Deed of Trust”). Id. at ¶ 6. The Deed of Trust grants the Bank a security interest in the Property and all improvements thereon, as well as all personal property, and rents and profits, among other things, pertaining to the Property. Id. at ¶ 7. True and correct copies of the Note, Deed of Trust, and UCC Financing Statement are attached hereto as Exhibits D, E and F, respectively.
The obligations under the Loan are guaranteed by ___________________ (“Guarantor”), as set forth in the Unconditional Repayment Guaranty, dated on or about _______, 20__ (the “Guaranty”). Id. at ¶ 9. A true and correct copy of the Guaranty is attached hereto as Exhibit H.
The original principal amount of the loan was $______________, however, the Note and the Loan Agreement permitted additional draws by the borrower subject to the discretion of the Bank, resulting in increases in the principal amount of the loan. Id. at ¶ 10. In accordance therewith, the loan was subsequently increased over time to $______________ (the “Loan”). Id. A true and correct copy of the Amendment to Loan Documents, dated _____________, 20__, is attached hereto as Exhibit I. These increases were also reflected in amendments to the Deed of Trust. Id. at ¶ 11. A true and correct copy of the Amendment to Deed of Trust, dated ____________, 20__, is attached hereto as Exhibit J.
The Loan originally matured on _______________, 20__, however, the maturity date was extended to _______________, 20__ pursuant to a Loan Extension Agreement. Id. at ¶ 13. A true and correct copy of the Loan Extension Agreement is attached hereto as Exhibit K. Debtor did not pay the Loan on its due date and has not made principal payments since the inception of the loan. Id. Additionally, the Note required Debtor to make monthly interest payments on the first day of each month, in arrears. Id. at ¶ 14. Debtor made interest payments in accordance with the Note until _________ 20__. Id. As such, the Loan is in payment default. Id. at ¶ 15.
To date, the amount outstanding on the Loan is approximately $_____ million, including principal, accrued interest, and fees as provided for in the Loan Agreement, Note and other loan documents (collectively, the “Loan Documents”). See Id. at ¶ 16. A statement of Bank reflecting the historical payments since the inception of the Loan through _________, 20__ is attached hereto as Exhibit L.
The Property Appraisal
On _________, 20__, the Debtor provided Bank with an appraisal of the Property (the “Appraisal”). The Appraisal reflects that the market value of the Property is $__________ as of _________, 20__. The Appraisal also includes a prospective market value upon projected completion of construction and stable occupancy of the Property in the amount of $__________ as of _________, 20__.
Because the Appraisal demonstrates that the Property is worth much less than the approximately $____ million due to Bank, there is no equity in the Property. Moreover, Debtor’s Schedules reflect that other secured creditors are owed, in the aggregate, approximately $___ million.
The Cash Collateral Motion and Final Budget
On ____________, 20__, Debtor filed its Motion for Order Authorizing Use of Cash Collateral, wherein it sought authorization to use the cash and revenue produced by the Property to operate its business and pay its bankruptcy administration costs. This Court entered an Agreed Final Order Authorizing Debtor to Use Cash Collateral on _____________, 20__ authorizing Debtor to use cash collateral in accordance with the budget (the “Budget”) attached thereto. See Docket No. 29. The Cash Collateral Order provides that Debtor’s right to use the cash collateral expires at midnight on _______________, 20__, unless (i) such expiration date is extended or modified by the Court or a written agreement of the Secured Creditors (as defined therein), (ii) a Chapter 11 Trustee is appointed, (iii) the Chapter 11 cases are converted to Chapter 7, or (d) the automatic stay is lifted to allow any of the Secured Creditors to foreclose on the collateral. Id. Debtor has not sought to extend or modify such expiration date and, to date, no contingency has occurred that would change the expiration date.
The Budget, which details Debtor’s proposed income and expenses for the months of __________ and _____________ 20__, reflects a cash shortfall for each month. Debtor has neither remedied this shortfall nor proposed a budget reflecting that the shortfall will be remedied in the future.
RELIEF REQUESTED
By this Motion, Bank requests that the Court enter an order, pursuant to sections 362(d)(1) and (2) of the Bankruptcy Code, granting Bank relief from the automatic in order to exercise its right to foreclose on the Property.
BASIS FOR REQUESTED RELIEF
Section 362(d) of the Bankruptcy Code provides as follows:
On the request of a party in interest and after notice and a hearing, the court shall grant relief from the stay . . . by terminating, annulling, modifying, or conditioning such stay—
for cause, including the lack of adequate protection of an interest in property of such party in interest; [or]
with respect to a stay of an act against property under subsection (a) of this section, if —
the debtor does not have equity in such property; and
such property is not necessary to an effective reorganization.
11 U.S.C. § 362(d)(1) and (2).
Bank submits that it is entitled to relief from the automatic stay in accordance with section 362(d)(1) and (2) of the Bankruptcy Code because the Bank is undersecured and Debtor has failed to adequately protect its interests. The Property is currently operating at a loss and Debtor projects that the Property will continue to operate at a loss in the future. More importantly, there are no prospects for rehabilitating Debtor or the Property. Additionally, there is insufficient insurance to cover the Property in the event of a loss. There is no equity in the Property and there is no probability that Debtor can effectively reorganize. Accordingly, the stay should be lifted to permit Bank to exercise its right to foreclose on the Property.
CAUSE EXISTS TO LIFT THE AUTOMATIC STAY
Section 362(d)(1) of the Bankruptcy Code provides that a court shall grant relief from the automatic stay for “cause.” 11 U.S.C. § 362(d)(1). While the Bankruptcy Code does not define the term “cause,” one specified basis for finding cause to grant relief from the automatic stay is the debtor’s lack of adequate protection of a party’s interest. To determine whether other bases exist for finding that cause exists, a court should consider the “facts of each request [to] determine whether relief is appropriate under the circumstances.” Mazzeo v. Lenhart (In re Mazzeo), 167 F.3d 139, 142 (2nd Cir. 1999) (citing Sonnax Industries, Inc. v. Tri Component Prod. Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1286 (2nd. Cir. 1990), (quoting H.R. Rep. No. 95-595, at 343-44 (1977))). Cause can be any reason cognizable to the equity power and conscience of the court as constituting an abuse of the Bankruptcy process.” In re Little Creek Dev. Co., 779 F.2d 1068, 1072 (5th Cir. 1986).
Courts generally consider many factors in assessing whether cause exists to grant relief from the automatic stay, including “the [d]ebtor’s financial condition and motives for filing the Chapter 11 proceeding.” In re Canal Place Ltd. P’ship, 921 F.2d 569, 579 (5th Cir. 1991). Additionally, courts consider whether any party will be harmed as a result of modification of the automatic stay. Mooney v. Gill, 310 B.R. 543, 546 (N.D. Tex. 2002) (noting that the court must balance the hardships of the parties and base its decision regarding modification of the stay on “the degree of hardship involved and the goals of the Bankruptcy Code.”); see also In re C & S Grain Co., 47 F.3d 233, 238 (7th Cir. 1995) (“In determining whether cause exists [to modify the stay], the Bankruptcy court should base its decision on the hardships imposed on the parties with an eye towards the overall goals of the Bankruptcy Code.”).
THE INTERESTS
OF THE SECURED CREDITORS
ARE NOT ADEQUATELY PROTECTED
As a secured creditor whose interests are undersecured, the Bank is entitled to adequate protection of its interest. Debtor has not, however, taken any steps to ensure that the interests of the Bank is adequately protected. Indeed, Debtor has permitted substantial loss to the value of its estate by continuing to operate without profit or protection of the interests of its secured creditors.
While Debtor’s Appraisal suggests that the Property may increase in value when construction is complete and the occupancy rate is more stable, the interests held by secured creditors far exceed the purported $____ million value of the Property reflected in the Appraisal. The outstanding amount due under the Loan is in excess of $____ million and other secured creditors, including judgment creditors and creditors holding mechanic’s liens and grant deeds, are owed at least $____ million as reflected in Debtor’s Schedules. Clearly there is no equity in the Property and the estates will realize no value by continued operation of the Property. Despite this fact, Debtor has not proposed a course of action to protect the interests of its secured creditors.
Additionally, as evidenced by ______________________________, the Property is not generating enough income to sustain its business operations. Moreover, the source of income is monthly rent and deposits received from tenants who lease the apartment units. Going forward, however, there is no guarantee that vacant units will be leased to new tenants at the asking price. Furthermore, there is no guarantee that the current tenants will remain under lease throughout the pendency of this chapter 11 case.
Given the fact that the Property is operating at a loss and its only income is not guaranteed, Debtor cannot demonstrate that it has any definitive prospects for income. As such, Debtor cannot demonstrate the possibility that it can be rehabilitated and effectively reorganize. See, e.g., Quarles v. U.S. Trustee, 194 B.R. 94, 97 (W.D. Va. 1996) (holding that there is no likelihood of rehabilitation where the debtor continued to lose money and its only hope of reorganization depended on speculative outcomes in pending litigation); In re Cont’l Holdings, Inc., 170 B.R. 919, 931 (Bankr. N.D. Ohio 1994) (holding that there was no reasonable likelihood of rehabilitation where the debtor had no reasonably certain income).
Under the present circumstances, the interests of the Lenders and Bank as their agent, as well as other secured creditors, are not adequately protected. The Debtors Risked Harm to the Property by Failing to Maintain Proper Insurance The Loan Agreement requires Debtor to maintain “all risk” insurance covering the Property, any improvements thereon and any personal property located at or used in connection with the Property, “in an amount not less than the full replacement cost of the property covered by such property.” See Exhibit A at p. 26. Additionally, the United States Trustee’s Guidelines for Debtors-in-Possession requires all debtors to maintain casualty and general liability insurance, among other types of insurance, throughout the pendency of their chapter 11 cases. See U.S. Trs. Program, Dep’t Of Justice, Guidelines For Debtors-In-Possession § II (2007), available at http://www.usdoj.gov/ust/r07/sanantonio/Guidelines.htm (last modified Mar. 8, 2007).
There is no casualty insurance covering the Property in the event of loss.
Absent adequate insurance coverage, the interest of the Bank is at significant risk. Additionally, the tenants and any visitors on the Property are at risk as well. The Bank should not bear the risk of damage to the Property. Accordingly, modification of the automatic stay is warranted.
THE DEBTORS’
HAVE NO EQUITY IN THE PROPERTY AND THE
PROPERTY IS NOT NECESSARY FOR AN
EFFECTIVE
REORGANIZATION
Section 362(d)(2) requires a court to grant relief from the automatic stay if “the debtor does not have any equity in [its] property; and . . . such property is not necessary to an effective reorganization.” In re Nw. Timberline Enters. Inc., 348 B.R. 412, 429-3 1 (Bankr. N.D. Tex. 2006). A debtor has no equity in property when the encumbrances against such property exceed the value of the property. Id. Moreover, where the debtor’s estate will realize no value upon a sale of the property, “relief should be granted so that the party with a real interest in the property can control its disposition.” 3 Collier on Bankruptcy ¶ 362.07[4][a] (Lawrence P. King ed., 15th ed. 2007).
It is evident, as demonstrated above, that there is no equity in the Property. The Debtor’s own Appraisal values the Property at just over $____ million, while the outstanding amount due Bank on the Loan is in excess of $____ million and other secured creditors are owed at least $____ million.
Furthermore, Debtor cannot demonstrate that the Property is necessary to an effective reorganization. The U.S. Supreme Court has interpreted the “term ‘necessary to an effective reorganization’ . . . to mean that the debtor has a reasonable probability of a successful reorganization within a reasonable period of time.” In re T-H New Orleans Ltd. P’ship, 10 F.3d 1099, 1101-02 (5th Cir. 1993) (citing United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375 (1988)). In order to demonstrate that there is a possibility of a successful reorganization, the debtor must do more than merely “manifest unsubstantiated hopes for a successful reorganization.” In re Canal Place, 921 F.2d at 577. If the debtor is unable to “generate sufficient funds to pay normal operating expenses and satisfy its obligations under any proposed plan of reorganization,” the court can modify the automatic stay “even without the necessity of reviewing any plan of reorganization submitted by Debtor.” Id. at 579.
The Fifth Circuit has mandated that when “there is no reasonable likelihood that the statutory objective or reorganization can be realized, . . . the automatic stay and other statutory provisions designed to accomplish the reorganization objective become destructive of the legitimate rights and interest of creditors.” Id. at 577. “[T]he challenge to the Bankruptcy court is to recognize these cases as promptly as possible and limit the administrative expenses and costs borne by the creditors.” Id.
As discussed above, the Property is operating at a loss and there is no evidence that it is likely to begin operating at a profit in the near future. Furthermore, there is no evidence that Debtor has any prospects for obtaining financing to support its business operations or pay its debt obligations. Absent a showing that the ever increasing monthly deficit can be cured, there is no possibility that the Property can effectively reorganize.
Based on the foregoing, Bank is entitled to relief from the automatic stay pursuant to section 362(d)(1) and (2) of the Bankruptcy Code. Accordingly, the Court must modify the automatic stay to allow Bank to exercise its right to foreclose on the Property.
NOTICE
Notice of this Motion has been provided in accordance with Rule 4001(a)(1) of the Federal Rules of Bankruptcy Procedure and Rule 4001(a)(4). Bank submits that no other or further notice need be provided.
No previous motion or application for the relief sought herein has been made to this or any other Court.
CONCLUSION
WHEREFORE, Bank respectfully requests that this Court enter an order modifying the automatic stay to the extent necessary to permit Bank to foreclose on the Property, and granting Bank such other and further relief as is just.
Dated: ____________, 20__
__________, Texas
Respectfully
submitted,
By:
________________________________
ATTORNEYS FOR BANK
CERTIFICATE OF CONFERENCE
This is to certify that an attempt was made to confer with counsel for the Debtor on __________, 20__ regarding the foregoing Motion, but counsel for the Debtor were unavailable and were unable to respond to the messages that were left at their offices prior to the filing of this Motion.
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CERTIFICATE OF SERVICE
This is to certify that a true and correct copy of the foregoing Motion for an Order, Pursuant to Section 362(d) of the Bankruptcy Code, Modifying the Automatic Stay was served upon the parties on the attached Service List by first class mail on this ___ day of __________, ____.
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