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Reorganization Not Feasible After Sale Of Debtor's Property; Appeals Dismissed

Wednesday, March 19, 2014
By Stephanie M. Acree

March 13 — Two appeals by a Chapter 11 debtor, one from an order lifting the automatic stay and one from an order dismissing the bankruptcy case, were dismissed March 3 by the U.S. District Court for the Eastern District of Michigan (R.T.R. Bldg. Co. v. The PrivateBank (In re R.T.R. Bldg. Co.), 2014 BL 57809, E.D. Mich., No. 5:13-cv-12956-JCO-LJM, 3/3/14).

Judge John Corbett O'Meara found that because the debtor had failed to obtain a stay pending appeal and the debtor's only valuable asset had been sold, the appeals should be dismissed as moot because no effective relief could be granted.

Vacant Property
R.T.R. Building Company Inc. was a real estate holding company that owned a commercial building in Detroit. The building had been occupied by various tenants, but after October 2012, the property was vacant and RTR was unable to secure a new tenant.

The PrivateBank held a mortgage on RTR's property. RTR went into default on the mortgage in November 2012. PrivateBank began to foreclose on the property and a foreclosure sale was scheduled for March 7, 2013. However, on that same day, RTR filed for Chapter 11 protection.

Lack of Adequate Protection
PrivateBank moved for relief from the automatic stay in order to proceed with the foreclosure. The bank argued that the stay should be lifted “for cause, including the lack of adequate protection of an interest in property of such party in interest” under Section 362(d)(1) of the Bankruptcy Code. The bank argued that interest was accruing on unpaid taxes, threatening to deplete the bank's secured claim, and that RTR had not attempted to offer any sort of adequate protection payments. The bank also argued that the stay should be lifted under Section 362(d)(2) because RTR did not have equity in the property and it was not necessary to an effective reorganization. The bank argued that because the property had been vacant and RTR had no prospective tenants, it could not propose a reorganization plan that would meet the requirements of the Bankruptcy Code.

RTR argued that a period of vacancy was not uncommon for that type of property. RTR also argued that a related entity, Polaris Construction Inc., could fund its operational and plan expenses. RTR presented Polaris's tax returns as evidence that a plan was feasible.

No Feasible Plan
The bankruptcy court found that there was cause to lift the stay under both Sections 362(d)(1) and (2). The court agreed that the bank lacked adequate protection. The court also found that there was no possibility RTR could propose a feasible plan in a reasonable time. The court said that the tax returns alone did not prove that funds were available to fund a plan.

The bankruptcy court granted the bank's motion to lift the stay and RTR did not seek a stay pending appeal. The bank conducted a foreclosure sale of the property on June 13, 2013. RTR appealed the order lifting the stay on July 9, 2013. Then on July 30, 2013, the bankruptcy court entered an order dismissing RTR's bankruptcy, which RTR also appealed.

Failure to Obtain Stay
On appeal, the bank argued that the appeal of the order lifting the stay should be dismissed as moot. The district court said that the U.S. Court of Appeals for the Sixth Circuit has held that mootness applies in the bankruptcy context when an appellant fails to obtain a stay from an order for the sale of the debtor's assets.

In this case, the court said that RTR failed to obtain a stay and the foreclosure sale went through. The court said it could not rescind the sale and therefore could not grant RTR effective relief. Furthermore, the court said that RTR's only asset of any value was sold at the foreclosure sale and so RTR was unable to reorganize. Therefore, the court found that dismissal was appropriate. Accordingly, the court dismissed RTR's appeals.

To contact the reporter on this story: Stephanie M. Acree in Washington at sacree@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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