In re Pure Repair & Trucking LLC

658 B.R. 895

IN RE: PURE REPAIR AND TRUCKING LLC, Debtor.

Case No. 24-50449

United States Bankruptcy Court, S.D. Ohio, EASTERN DIVISION AT COLUMBUS

Signed April 26, 2024

Joy Marshall, The Law Office of Joy L. Marshall, Columbus, OH, for Debtor.

Laura Atack, Nathan A. Wheatley, Office of the United States Trustee, Columbus, OH, for U.S. Trustee.

William B. Logan, Jr., Columbus, OH, Trustee, Pro Se.

MEMORANDUM OPINION AND ORDER, WITH FINDINGS OF FACT AND CONCLUSIONS OF LAW, GRANTING THE MOTION OF THE UNITED STATES TRUSTEE TO DISMISS OR CONVERT CASE AND MEMORANDUM IN SUPPORT (DOC. 30)

Mina Nami Khorrami, United States Bankruptcy Judge

I. Introduction

Before the Court is the Motion of the United States Trustee to Dismiss or Convert Case and Memorandum in Support (Doc. 30) (the "Motion") that was filed on March 14, 2024. The debtor-in-possession, Pure Repair and Trucking LLC (the "Debtor") filed its Memorandum Contra Motion of the United States Trustee to Dismiss or Convert Case (Doc. 39) (the "Objection") on March 28, 2024.

The Court held a hearing to consider the Motion and the Objection on April 11, 2024, (the "Hearing"). Present at the Hearing were Nathan Wheatley and Laura Atack on behalf of the United States Trustee and Joy Marshall on behalf of the Debtor. For the reasons stated herein, the Court finds that the United States Trustee has sustained its burden of establishing cause for conversion due to the failure to maintain appropriate insurance, so the Court will grant the Motion.

A. Positions Of the Parties

The United States Trustee in his Motion seeks an order pursuant to 11 U.S.C. § 1112(b)(1) dismissing this case or converting it to one under chapter 7. As cause for this relief, the United States Trustee asserts that the Debtor has failed to maintain appropriate insurance that poses a risk to the estate or to the public pursuant to 11 U.S.C. § 1112(b)(4)(C). He further asserts a non-statutory basis for the Court to find cause, namely that the Debtor commenced this case in bad faith, thereby warranting conversion or dismissal. Finally, the United States Trustee asserts that the Debtor's assets appear to have sufficient value to pay all creditors in full, and therefore he requests conversion to chapter 7 rather than dismissal as the preferred remedy.

In response, the Debtor states that it made a diligent attempt to obtain insurance and succeeded in obtaining property insurance on its primary asset, the real property located at 104 W. Moler St., Columbus, Ohio 43207 (the "Real Property"). Further, the Debtor asserts that it filed this case for the valid bankruptcy purposes of restructuring the Debtor's business and preserving the value of its assets. The Debtor also asserts that Dominic Adjei ("Mr. Adjei"), its sole member, did not fully understand the import of the cognovit note that he signed. The Debtor also denies that it was properly served with the foreclosure action that caused the Debtor to file this chapter 11 case. The Debtor asserts that it filed for relief under chapter 11 to prevent foreclosure and provide itself a breathing spell to determine its best course of action, which it asserts is a permissible use of the provisions of chapter 11 and is not evidence of bad faith. In support of this assertion, the Debtor articulated several potential alternative scenarios it is considering for its business to reorganize, ranging from the sale of its Real Property and relocation of operations to a new rental space, to leasing out portions of the Real Property, to changing its business model, or a complete liquidation. All of these the Debtor claims are sound and valid reasons for seeking relief under chapter 11.

B. Procedural Background of the Debtor's Chapter 11 Case

The Debtor filed a voluntary petition ("Petition") (Doc. 1) for relief under chapter 11 of the Bankruptcy Code on February 8, 2024 (the "Petition Date"). As originally filed, the Debtor indicated that it was a small business debtor, as that term is defined in 11 U.S.C. § 101(51D), but did not elect to proceed under the provisions of subchapter V. On March 21, 2024, the Debtor filed an Amended Petition (Doc. 34) which removed the small business debtor designation. Thereafter, the Court held a status conference on March 25, 2024 (the "March 25 Status Conference"), pursuant to 11 U.S.C. § 105(d). During the March 25 Status Conference, counsel for the Debtor, the representative of the Debtor, and the United States Trustee discussed the status of the case, including the insurance issues raised in the Motion and the Debtor's intentions and timeline regarding filing a plan with the Court.¹ On April 9, 2024, the Debtor filed a Second Amended Petition (Doc. 49) to change its designation back to being a small business debtor and electing to proceed under subchapter V of chapter 11.

C. The Hearing

Prior to the Hearing, the parties filed Stipulations of Fact for Hearing on April 11, 2024. (Doc. 48) ("Stipulations"). At the Hearing, testimony was taken from Jeffrey L. Pfriem ("Mr. Pfriem"), an auditor with the Office of the United States Trustee, and Mr. Adjei, the Debtor representative and sole member and employee of the Debtor. Joint Exhibits 1, 6, 7, 8, 9, 10, and 11 were offered and admitted into evidence without objection. Joint Exhibits 13 and 14 were admitted into evidence over objection of the United States Trustee for the limited purpose of showing that the Real Property had been listed for sale on a couple of occasions before the Petition was filed to show the Debtor's efforts to salvage its business and to avoid having to file a bankruptcy petition. Stipulations 1, 2, 3, 4, 5, 6, 7, 8, 12, 13, 15, 16, 17, and 18 were read into the record.²

At the conclusion of final arguments, the Court again impressed upon the Debtor the importance of having liability insurance and granted the Debtor fourteen (14) additional days from the date of the Hearing to obtain general liability insurance and provide proof of same to the United States Trustee. The Court further stated that if the Debtor was unable to obtain liability insurance during that time, the case would likely be converted to one under chapter 7. The Court then took the Motion under advisement.³

II. Facts Relevant to the Motion⁴

A. The Debtor, its Operations, and Events Leading to Bankruptcy

The Debtor is an Ohio limited liability company that was formed in 2019, and Mr. Adjei is its sole owner and operator. Mr. Adjei has twenty years of experience repairing commercial trucks and automobiles. Approximately four of these years have been as the owner and operator of the Debtor.

Prior to 2022, the Debtor operated its business from leased premises, and during that time, the business did well enough that it was able to pay substantial monthly rent. Because the Debtor encountered issues with its landlords when operating from its leased premises due to the large number of trucks on the leased property, Mr. Adjei decided to purchase a property for the Debtor's operations where he would not have these issues with a landlord. In 2022, the Debtor purchased the Real Property for $516,000.

The Real Property purchase was funded with the proceeds of a loan the Debtor had obtained from the United States Small Business Administration (the "SBA") in the amount of $258,000, all of which went toward the purchase price of the Real Property. The balance of the purchase price was funded by the seller of the Real Property, Build 24, LLC ("Build 24"), which holds a mortgage on the Real Property. The mortgage has a balance as of the Petition Date of $243,889. The monthly payment on the mortgage is $3,300 per month. Mr. Adjei testified that the documents, including the mortgage, cognovit note, and personal guarantee by Mr. Adjei, were all prepared by counsel for Build 24 and that he did not have the documents reviewed by any counsel. He also stated that he was unfamiliar with a cognovit note and did not understand that in the event of default, Build 24 would be able to obtain an immediate judgment against the Debtor. Debtor's business began to decline after the Debtor purchased the Real Property in 2022 due partly to the Covid pandemic and the slowdown of business. As a result, the Debtor fell behind on its mortgage payments. The last payment the Debtor made on the mortgage was in July 2023.

AS it was having difficulty making the monthly mortgage payments, the Debtor began considering changing its business or adding a new line of business, as well as selling the Real Property. The Debtor listed the Real Property for sale twice, once in May and again in November of 2023. Mr. Adjei testified that he had listed the Real Property for $700,000, which he knew was above its market value, hoping to make a profit on the sale that he could use to pay off his creditors and fund the reorganization of his business. The Debtor did not receive any offers for the purchase of the Real Property.

In September 2023, Build 24 commenced a foreclosure action in the Franklin County Court of Common Pleas, captioned Build 24, LLC v. Pure Repair and Trucking, LLC, et al., Case No. 23 CV 6862 (the "Foreclosure Action"). Judgment on the cognovit provision of the note and Mr. Adjei's guaranty was entered on October 10, 2023. Thereafter, a decree of foreclosure (the "Decree") was entered by the state court on December 12, 2023. The docket from the Foreclosure Action reflects that the Debtor filed a motion to set aside the Decree on January 24, 2024, which was denied on February 6, 2024. The Debtor filed an appeal in the Foreclosure Action on February 8, 2024, which has been stayed due to this bankruptcy case. The Real Property was scheduled to be sold at a sheriff's sale on February 9, 2024; the sheriff's sale has also been stayed by the bankruptcy.

At the Hearing, Mr. Adjei explained that he was never served with the summons and complaint in the Foreclosure Action. The parties stipulated that "[a]s reflected in the docket of the Foreclosure Action,...