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Creditors Entitled to Relief From Automatic Stay; No Disclosure Statement Filed

Monday, May 6, 2013
By Diane Davis

The U.S. Bankruptcy Court for the District of Columbia April 8 held that creditors are entitled to relief from the automatic stay under Bankruptcy Code Section 362(d)(3) because the debtor has not shown that confirmation of a plan will ensue within a reasonable period of time (In re Trigee Foundation Inc., Bankr. D.D.C., No. 12-00624, 4/8/13).

Judge S. Martin Teel Jr. concluded that the debtor's delay in filing a disclosure statement was an unreasonable delay and has “deprived the court of assistance to assess whether there is a reasonable possibility that its [Chapter 11] plan can be confirmed.

The court noted, however, that it has discretion to condition the automatic stay instead of lifting it outright. Because the creditor conceded that there was equity in the properties securing its liens, the court said it was a factor to take into account in fashioning appropriate relief under Section 362(d)(3).

According to the court, a junior lienor can file a plan calling for the sale of the debtor's properties. By setting a deadline to achieve confirmation of a liquidation plan, absent which the creditor will be allowed to proceed with a foreclosure sale, the junior lienor's interests will be protected but the creditor will be certain that it will face no further delay. This resolution, the court said, “comports with the purpose of § 362(d)(3), which was added to 'ensure that the automatic stay provision [was] not abused, while giving the debtor the opportunity to create a workable plan of reorganization.'”

Thus, the court gave the junior lienor 14 days from the date of the order within which to file a plan calling for the sale of the debtor's properties, and 90 days within which to obtain confirmation of the plan. If that fails, the court said, relief from the stay would be in effect to permit the creditor to proceed to a foreclosure sale. 

Chapter 11 Filing

Debtor Trigee Foundation Inc. filed for Chapter 11 protection Sept. 13, 2012. The parties agreed that the case is a single asset real estate case, and that, for the debtor to defeat a request for relief from the automatic stay under Section 362(d)(3), the debtor must (1) file a plan within 90 days of the commencement of the case that “has a reasonable possibility of being confirmed within a reasonable time,” or (2) commence making certain monthly payments to the creditor [Blackburne].

The debtor filed a plan by the required deadline of Dec. 12, but did not commence making payments to Blackburne and Brown Mortgage Fund I. 

Automatic Stay Motion

Blackburne and Blockacre Enterprises LLC filed motions for relief from the automatic stay under Section 362(d)(3) with respect to the debtor's property. Blockacre purchased tax sale certificates regarding the real property and wanted to commence litigation to enforce them. Blockacre piggybacked on Blackburne's request for relief under Section 362(d)(3).

According to Blackburne, relief from the automatic stay is appropriate because the plan is not confirmable within a reasonable period of time because the debtor did not file and still has not filed a disclosure statement. “The intent of Congress in enacting 11 U.S.C. § 362(d)(3) was not to allow a debtor to file a mere place-holder plan on the last day of the 90-day period, to hold creditors hostage and not commence the payment of interest as required by 11 U.S.C. § 362(d)(3),” Blackburne argued.

The debtor objected, contending that the Bankruptcy Code and Rules did not impose a deadline for filing a disclosure statement. The debtor also said it needed additional time to stabilize its operations to the point of a substantial positive cash flow before it could file a disclosure statement based on data that confirmed its ability to carry out a plan.

Junior lienor KH Funding Co. also opposed Blackburne's motion insofar as it requested an outright lifting of the stay. As an alternative, KH Funding argued that, to the extent the debtor consents, the debtor should retain an agent to market the properties and be given 90 days to market the properties and secure bid and auction procedures from the court, and then at the conclusion of the marketing period, have within 30 days for an auction sale approval hearing. 

'Bumps in the Road.'

The court noted that the debtor's failure to file a disclosure statement has resulted in the confirmation process being stalled. This case, the court said, has been pending for seven months and the debtor's exclusive right to file a plan has expired because the debtor did not obtain acceptance of a plan within 180 days after the commencement of the case. In addition, in a disclosure statement, the debtor is required to provide creditors information that would enable them to make an informed judgment about the plan.

Because there is no disclosure statement, the court said it was left with “sketchy (as in shallow) testimony of an officer of the debtor that came nowhere close to providing the type of information that a disclosure statement would be required to provide.”

The court found that there was no degree of certainty that a plan would be promptly confirmed. The evidence suggests that there will be “substantial bumps in the road,” the court said. The debtor is counting on ongoing renovations to put apartments into rental condition and thereby achieve the point that it can carry out its plan, the court noted; however, the debtor has no source for doing renovations other than cash collateral, and it has in place no order now permitting it to use cash collateral. The debtor did not show that it would be able to have its operations at the point that its plan will be feasible if it has no source before a confirmation hearing with which to make renovations, the court said. 

Cash Collateral Problems

The court also noted that the existing cash collateral order, which has expired, required the debtor to put aside escrows for taxes, but the debtor has failed to do so and has used cash collateral to make renovations. This suggests that the debtor's attempts to obtain a further cash collateral order will be contested on the basis of the debtor's untrustworthiness, the court said.

According to the court, the debtor's plan failed to place the secured claim of the District of Columbia in a class. If there had been a disclosure statement hearing, this shortcoming would have been addressed by now, the court said.

The existing cash collateral order required the debtor to file its plan by Dec. 12, the court noted. Thus, the first 90 days of the case was the breathing space to which the debtor agreed to have its operations in place for purposes of having a plan in place that could be confirmed within a reasonable period of time, the court said. The debtor's exclusivity period has expired, the court said, and the debtor is subject to a higher burden of showing that a confirmable plan is reasonably in prospect.

The debtor's delay in filing the disclosure statement is unreasonable, the court held, and has deprived it of assistance to assess whether there is a reasonable possibility that its plan can be confirmed. Thus, relief under Section 362(d)(3) is appropriate, the court said.

Modification of Automatic Stay

The court has discretion, however, to condition the automatic stay instead of lifting it outright, the court said. Blackburne conceded that there is equity in the properties securing its liens, the court said, which is a factor to take into account in fashioning appropriate relief under Section 362(d)(3). By setting a deadline to achieve confirmation of a liquidation plan from KH, absent which Blackburne will be allowed to proceed with a foreclosure sale, KH's interest will be protected but Blackburne will have certainty that it will face no further delay, the court said. “This comports with the purposes of § 362(d)(3), which was added to 'ensure that the automatic stay provision [was] not abused, while giving the debtor the opportunity to create a workable plan of reorganization,'” the court said, citing NationsBank NA v. LDN Corp. (In re LDN Corp.), 191 B.R. 320 (Bankr. E.D. Va. 1996).

Thus, the court modified the automatic stay to provide that KH will have 14 days from the date of the order within which to file a plan calling for a sale of the debtor's properties, and 90 days within which to obtain confirmation of a plan. If it fails to file a plan or obtain confirmation of a plan within those deadlines, relief from the stay will be in effect to permit Blackburne to proceed with a foreclosure sale, the court said.

Blockacre is entitled to relief from the stay to initiate litigation to enforce its tax sale certificates if Blackburne becomes entitled to proceed, and does proceed to a foreclosure sale, the court said.

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