In re Body Transit, Inc.

619 B.R. 816

IN RE: BODY TRANSIT, INC. d/b/a Rascals Fitness, Debtor

Bky. No. 20-10014 ELF

United States Bankruptcy Court, E.D. Pennsylvania.

Signed August 7, 2020

Maggie S. Soboleski, Center City Law Offices LLC, Philadelphia, PA, for Debtor.

Dave P. Adams, George M. Conway, United States Trustee, Philadelphia, PA, for U.S. Trustee.

AMENDED OPINION

ERIC L. FRANK, U.S. BANKRUPTCY JUDGE

I. INTRODUCTION

On January 2, 2020, Body Transit, Inc. ("the Debtor") filed a voluntary petition under chapter 11 of the Bankruptcy Code. In the petition, the Debtor designated itself as a "small business debtor" as defined in 11 U.S.C. § 101(51D).

On March 2, 2020, the Debtor filed a motion requesting authority to proceed under the Small Business Reorganization Act of 2019 ("the SBRA"), codified as subchapter V of chapter 11 of the Bankruptcy Code, 11 U.S.C. §§ 1181 - 1195. The motion was contested by the Debtor's secured creditor, First Bank.

By Memorandum and Order dated March 24, 2020, I granted the Debtor's Motion, see In re Body Transit, Inc., 613 B.R. 400 (Bankr. E.D. Pa. 2020), and the case has proceeded since then under subchapter V.

Presently before the court are two (2) interrelated contested matters:

(1) the Debtor's objection to First Bank's Election Pursuant to § 1111(b) of the Bankruptcy Code ("the § 1111(b) Election Objection") (Doc. #'s 142, 166); and

(2) the Debtor's Motion to Value and Determine Secured Status of First Bank's Lien on the Debtor's Tangible and Intangible Property, based on 11 U.S.C. § 506(a) and Fed. R. Bankr. P. 3012 ("the Valuation Motion") (Doc. # 149).

At the risk of oversimplification, § 1111(b) permits an undersecured creditor to elect to have its claim treated as fully secured for certain purposes in a chapter 11 reorganization. In this case, the Debtor filed an objection, asserting that First Bank is not entitled to make that election. Instead, the Debtor argues that it should be permitted to bifurcate First Bank's claim into secured and unsecured components pursuant to 11 U.S.C. § 506(a), so that the two (2) components can be treated differently in a plan of reorganization.

For the reasons stated below:

(1) the Debtor's § 1111(b) Election Objection will be sustained;

(2) the Debtor's Valuation Motion will be granted; and

(3) an order will be entered determining that First Bank holds an allowed secured claim of $80,000.00 and a general unsecured claim of $890,233.13.¹

II. PROCEDURAL HISTORY AND BACKGROUND

I described the procedural history and background of this bankruptcy case in some detail in my prior Memorandum. To put the current disputes in context, it is helpful to review briefly certain aspects of that background, as well as subsequent developments in the case.

As stated earlier, the Debtor commenced this case on January 2, 2020. At that time, the Debtor operated three (3) fitness clubs in Montgomery County, Pennsylvania. On January 31, 2020, First Bank filed four (4) claims totaling approximately $1.1 million, asserting a secured position in all of the Debtor's assets.²

Since commencement of the case, the Debtor closed and sold the assets in its location in Pottstown, PA, referred to by the parties as "North Coventry location" (for the township in which it is located). (See Doc. # 55). The Debtor also closed its second location in Limerick, PA and the lessor at that site has been granted relief from the automatic stay to retake possession of the premises. (See Doc. # 95).

The Debtor seeks to reorganize through the operations of its one (1) remaining location, in Collegeville, PA.

On February 21, 2020, Collegeville Plaza Associates, L.P. ("CPA"), the Debtor's lessor of the premises at the Collegeville location filed a motion for relief from the automatic stay, seeking authority to pursue the entry of a money judgment and a judgment for possession of the premises. (Doc. # 72). After a number of consensual continuances, probably driven by the COVID-19 shutdown that began in Pennsylvania on March 16, 2020, a hearing on CPA's Motion was held on May 13, 2020. The day following the hearing, I entered an order granting CPA relief to proceed with its state court litigation, but solely for the purpose of obtaining a money judgment and a judgment for possession; i.e., the stay remaining in place to preclude any enforcement of the judgment. The May 13, 2020 order also required the Debtor to make an adequate protection payment and scheduled a further hearing on June 24, 2020 to consider whether CPA should be granted additional relief. (See Doc. # 153). The June 24^th hearing was continued by agreement to July 15, 2020, when it was continued again by agreement to August 19, 2020.

On April 11, 2020, the Debtor filed a proposed chapter 11 plan of reorganization, (Doc. # 125), and an amended plan on April 22, 2020, (Doc. # 146).³

On April 19, 2020, First Bank filed an "Election Pursuant to 11 U.S.C. § 1111(b)(2) to Have its Claim Treated as Fully Secured" ("the § 1111(b) Election"). (Doc. # 142). The § 1111(b) Election states: "First Bank hereby elects that its claim, notwithstanding 11 U.S.C. § 506(a), be treated as a secured claim to the extent that such claim is allowed ...." Id.

The Debtor responded by filing the Valuation Motion on April 29, 2020. (Doc. # 149).

At a status conference held on May 20, 2020, the Debtor stated its intent to object to the § 1111(b) Election. After a colloquy with counsel, I scheduled a hearing on June 18, 2020 to consider the Valuation Motion and the Debtor's as-of-then unfiled § 1111(b) Election Objection. The Debtor filed the § 1111(b) Election Objection on June 4, 2020. (Doc. # 165).

A consolidated hearing on the two (2) contested matters was held and concluded on June 18, 2020, after which I took the matters under advisement.

III. THE PARTIES' RESPECTIVE POSITIONS

A. The Debtor

The Debtor's position in these contested matters is grounded in the reorganization strategy that is set forth in the proposed amended plan of reorganization ("the Plan"), filed on April 22, 2020.

1. the Plan

The Plan is straightforward: it provides for payment of administrative expenses (estimated at $60,000.00) and for no distribution on account of allowed unsecured claims.

As for First Bank, the Plan posits that First Bank's claim will be reduced to $944,364.00 after credit is given for payments made from the sale of the Debtor's assets during the course of the bankruptcy case. The Plan also proposes to treat and pay First Bank as a secured creditor, but only to the extent of $317,578.82.

The Debtor proposes to pay First Bank's allowed secured claim (described in the plan as being $317,578.82) over 60 months, at an interest rate of 3.5%. The payments are graduated, starting with monthly payments of $1,153.12, increasing at several junctures during the repayment term, and culminating with 24 payments of $7,392.60 per month. The Debtor calculates that First Bank will receive $29,059.51 in interest, in addition to full payment of its (proposed) allowed secured claim.⁴

The Debtor's reorganization strategy may be summarized as follows. The Debtor seeks to:

• bifurcate First Bank's allowed claim into secured and unsecured components through 11 U.S.C. § 506(a)(1) ;⁵

• provide in the Plan for payment of First Bank's allowed secured claim pursuant to 11 U.S.C. § 1191(b), (c)(1) (incorporating 11 U.S.C. § 1129(b)(2)(A) );⁶ and • pay nothing on account of First Bank's substantial allowed unsecured claim or to the holders of all other allowed unsecured claims, see 11 U.S.C. § 1191(b), (c)(2).⁷

2. the Valuation Motion

The Debtor filed the Valuation Motion as the mechanism for implementing the bifurcation of First Bank's claim into secured and unsecured components, as contemplated by the Plan.

In the Valuation Motion, the Debtor asserts, pursuant to § 506(a), that First Bank's allowed secured claim should be determined to be $267,573.82. The Debtor calculates the $267,573.82 by adding the amount it contends is the value of the tangible bankruptcy estate assets subject to First Bank's lien ($29,750.00) to the equity available to First Bank in the Debtor's principal's residence ($237,823.82), First Bank holding a mortgage on the residence in conjunction with a personal guaranty given by the principal.⁸

3. the § 1111(b) Election and the § 1111(b) Election Objection

Section 1111(b) of the Bankruptcy Code provides:

(1)

(A) A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse, unless —

(i) the class of which such claim is a part elects, by at least two-thirds in amount and more than half in number of allowed claims of such class, application of paragraph (2) of this subsection ; or

(ii) such holder does not have such recourse and such property is sold under section 363 of this title or is to be sold under the plan.

(B) A class of claims may not elect application of paragraph (2) of this subsection if —

(i) the interest on account of such claims of the holders of such claims in such property is of inconsequential value ; or

(ii) the holder of a claim of such class has recourse against the debtor on account of such claim and such property is sold under section 363 of this title or is to be sold under the plan.

(2) If such an election is made, then notwithstanding section 506(a) of this title, such claim is a secured claim to the extent that such claim is allowed .

(emphasis added).

By making the § 1111(b) Election, First Bank seeks to override the operation of § 506(a).

In its § 1111(b) Election Objection, the Debtor seeks to prevent First Bank from invoking § 1111(b)(2) and to preserve its ability to bifurcate First Bank's claim under § 506(a) through the Valuation Motion. The Debtor relies on § 1111(b)(1)(B)(I) in support of the § 1111(b) Election Objection, contending that First Bank's interest in property of the bankruptcy estate is...