Yes, But Is It Reasonable? Lack of Plan Feasibility Allows Creditor to Proceed With Foreclosure In Single Asset Real Estate Case

March 6, 2014

Often times a visionary makes a good businessman, but bankruptcy has no room for visionary schemes, only concrete evidence. Judge Carla E. Craig of the Eastern District of New York granted a mortgagee-creditor’s motion to lift the automatic stay against 231 Fourth Avenue Lyceum, LLC, a single asset real estate (“SARE”) debtor. After the debtor defaulted on its mortgage, the creditor obtained a judgment of foreclosure and sale. In an attempt to save the property, the debtor filed for bankruptcy protection the day before the sale occurred, thereby triggering the automatic stay. So far so good. But to keep the creditor at bay, the debtor’s principal needed to convince the court of his vision by way of a reorganization plan, and in this area, the view gets quite shady.  

 

When the creditor moved the court to lift the automatic stay pursuant to § 362(d)(3), the SARE debtor was required to submit a plan of reorganization that had a “reasonable possibility” of getting a timely confirmation or, in the alternative, remit monthly payments to the creditor equal to the amount of interest required under the contract. Here is where the dreaming begins. The keyword in the relevant provision is “reasonable”; however, the debtor’s plan focused only on “possibility”. After all, with visionaries, anything is possible.

 

The debtor’s proposed plan, laden with contingencies, unsupportive data and speculative outcomes, was deemed unreasonable and unlikely to be confirmed. The debtor proposed to make its debt service payments of $56,300 per month and annual lump sum payments of nearly $1.4 million until 2018. But the debtor’s operating statements showed that the debtor only made $30k in the month prior to filing bankruptcy. In its best year, the debtor grossed $306k, which averages to $25,500 per month. So far the debtor has not shown that it could make the monthly debt service payments. Needless to say, it is an even farther cry from making the proposed annual payments. So how will the debtor meet its obligations (and did I mention that it expected to pay its creditors in full?). Try to see the vision.

 

The debtor’s plan did not rely on historical financial information but rather future projections of income, gain on investments, and a white knight foreign investor. The income projection is illogical because the debtor reported that there was no operating income since the inception of the case. Puzzling. Furthermore, the debtor would not earn enough to make the monthly payments until after 24 months. If you’re still not seeing it, don’t worry, it gets murkier. The debtor expected to earn income from an adjacent lot in which the debtor had no ownership interest (as determined by the state court) and revenue from long term leases that it had yet to obtain. The debtor also anticipated a return on its investments in theatre and dance companies.  Additionally, with the appreciation of property values, the debtor’s property would be refinanced even though a lender had not committed to any financing. Shall I continue? If all else failed, a foreign investor would provide financing through a government supported program, but there was no investor on the horizon.

 

In another attempt to save its property, the debtor sought to set aside the foreclosure by claiming lack of jurisdiction in state court because the creditor failed to move for judgment within the required time period. Judge Craig relied on good old-fashioned res judicata as well as the Rooker-Feldman doctrine to decline review. Res judicata precludes a claim from being re-litigated once a decision has been made by a court of competent jurisdiction. And the Rooker-Feldman doctrine essentially bars a federal court from presiding over a case rightfully heard in state court because the complaining party did not prevail (simply stated).

 

Although the proposed plan was tenuous, I can see the debtor’s vision. As a business owner, the principal saw great potential in his business, and with some reinvestment and reorganization, it could be saved. Better to be saved by another party than lost to a creditor. But he needed to actually create the option of a party willing to intervene (e.g. refinance) so that when considering the possibility of confirmation, the court could respond yes, it’s reasonable.

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