In re River Glen Land P'ship, Case No. 14-32732

In re RIVER GLEN LAND PARTNERSHIP a/k/a RIVER GLEN LAND PARTNERS Debtor

Case No. 14-32732

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF TENNESSEE

February 11, 2015

MEMORANDUM ON AMENDED MOTION FOR RELIEF FROM THE AUTOMATIC STAY AND ABANDONMENT OR, ALTERNATIVELY, FOR ADEQUATE PROTECTION

APPEARANCES:

GENTRY, TIPTON & MCLEMORE, PC

Maurice K. Guinn, Esq.

Post Office Box 1990

Knoxville, Tennessee 37901

Attorneys for the Debtor

MORRIS/SCHNEIDER/WITTSTADT, LLC

Brent Heilig, Esq.

200 Jefferson Avenue

Suite 1350

Memphis, Tennessee 38103

Attorneys for LPP Mortgage Ltd.

SAMUEL K. CROCKER, ESQ.

UNITED STATES TRUSTEE

Kimberly C. Swafford, Esq.

Howard H. Baker, Jr. United States Courthouse

800 Market Street

Suite 114

Knoxville, Tennessee 37902

Attorneys for United States Trustee

SUZANNE H. BAUKNIGHT UNITED STATES BANKRUPTCY JUDGE

This contested matter is before the court upon the Motion for Relief From the Automatic Stay and Abandonment or, in the Alternative, for Adequate Protection (Motion for Stay Relief) filed by LPP Mortgage Ltd. (LPP Mortgage) on October 8, 2014, as amended on December 5, 2014, asking the court to find that this is a "single asset real estate" case as defined by 11 U.S.C. § 101(51B), seeking relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(1), (2), and/or (3), and/or asking the court for adequate protection under 11 U.S.C. § 361. Debtor filed its Objection to Motion for Relief From the Automatic Stay and Abandonment or, Alternatively, for Adequate Protection (Objection) on October 28, 2014.

The evidentiary hearing on the Motion for Stay Relief was held on January 23, 2015. The record before the court consists of Stipulations, nineteen exhibits stipulated into evidence, and the testimony of two witnesses, William J. Graves and James Burke Wallace.

I. Issues

Debtor filed the Voluntary Petition commencing its Chapter 11 case three days before a scheduled foreclosure sale by LPP Mortgage, which is a secured creditor of Debtor by virtue of a Note executed by a former partner of Debtor in the amount of $250,000.00. The June 9, 2005 Note is secured by a Deed of Trust recorded June 10, 2005, through which Debtor's former partner and Debtor's current majority partner, William J. Graves, granted a security interest in approximately 182 acres located at 1839 London Road, New Market, Jefferson County, Tennessee, known as River Glen Equestrian Park (Park Property). LPP Mortgage filed a proof of claim in the amount of $476,530.93, and holds a security interest in the Park Property junior to First Peoples Bank's claim of $95,593.48. The Note to LPP Mortgage matures on July 1, 2015.

As framed in the Joint Statement of Issues [Doc. 60], the court is to determine (1) whether this is a single asset real estate case as defined by § 101(51B) of the Bankruptcy Code;and (2) whether LPP Mortgage is entitled to stay relief under § 362(d)(1), (2), and/or (3) or, alternatively, adequate protection under § 363(e). However, because Debtor recently proposed a plan of reorganization, if the court finds that the proposed plan has a reasonable possibility of being confirmed within a reasonable time, the court need not reach the question of whether Debtor qualifies as a single asset real estate debtor under § 101(51B). This is a core proceeding. 28 U.S.C. § 157(b)(2)(G).

II. Section 362(d)

The automatic stay provides debtors with the opportunity to protect assets and marshal their resources to satisfy outstanding obligations. Laguna Assocs. Ltd. P'ship v. Aetna Cas. & Sur. Co. (In re Laguna Assocs. Ltd. P'ship), 30 F.3d 734, 737 (6th Cir. 1994). Creditors should not, however, "be deprived of the benefit of their bargain" during the pendency of the automatic stay and may seek relief from the automatic stay. In re Planned Sys., Inc., 78 B.R. 852, 860 (Bankr. E.D. Ohio 1987). Motions for relief from the stay are governed by 11 U.S.C. § 362(d), which states, in material part:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay —

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;

(2) with respect to a stay of an act against property under subsection (a) of this section, if -

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization; [or]

(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of

the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later -

(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or

(B) the debtor has commenced monthly payments that -

(i) may, in the debtor's sole discretion, notwithstanding section 362(c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and

(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor's interest in the real estate . . . .

The party seeking relief bears the burden of establishing "a prima facie showing of cause sufficient to support the party's request," after which the burden shifts to the debtor to show "lack of cause to grant relief" from the stay. In re Scalera, 521 B.R. 513, 517 (Bankr. W.D. Pa. 2014).

A. Cause Under Subsection (d)(1)

"Cause" is not defined by the Bankruptcy Code; accordingly, "[t]he determination whether cause exists to lift the stay is a fact-intensive inquiry made on a case-by-case basis." In re Shivshankar P'ship, LLC, 517 B.R. 812, 817 (Bankr. E.D. Tenn. 2014) (citation omitted). LPP Mortgage's primary arguments under subsection (d)(1) are that Debtor has not made any payments under the Note in more than five years even though it allegedly is current on its debt on the first mortgage to First Peoples Bank, that Debtor is not making post-petition payments toLPP Mortgage, that Debtor filed for bankruptcy on the eve of foreclosure, that Debtor has been and continues to be mismanaged, and that LPP Mortgage's collateral is not adequately protected.

At trial, William Graves, 51% owner and managing partner of Debtor, did not dispute that Debtor's payments with First Peoples Bank were current when the petition was filed and that Debtor stopped paying LPP Mortgage regularly in 2009 and has not made any payments to LPP Mortgage since making a $5,000.00 payment in October 2010. As explanation, Mr. Graves testified that in 2009, Debtor was a party to state-court litigation against a former partner of Debtor's over ownership of the Park Property and that because Mr. Graves was unsure of the outcome of the dispute, he decided to stop payments on the mortgage obligation to LPP Mortgage's predecessor, Beal Bank. After the state court initially decided the ownership issues in Debtor's favor, Mr. Graves attempted to refinance Debtor's obligation with Beal Bank, but the title company refused to write a title policy because of a problem with the wording of the state-court judgment. Debtor returned to state court to seek amendment of the judgment, which amendment did not occur until June 2011.

Debtor also experienced additional financial problems in 2011 due to a state-wide quarantine on horse shows that resulted in the cancellation of a hunter-jumper show, including the loss of revenues for a third-party lease of the Park Property related to the cancelled show. Mr. Graves testified that in 2012, Debtor had sufficient funds to pay the mortgage obligations current. By that time, however, the second mortgage was no longer held by Beal Bank but had been assigned to LPP Mortgage. When Mr. Graves could get no response from LPP Mortgage's loss mitigation department to negotiate resolution of debt, Mr. Graves and Debtor used the funds that could have brought current the LPP Mortgage obligation for capital improvements of thePark Property, including adding a wash house, water complexes, ditches and banks, portable jumps, and cross-country jumps.¹

The court found Mr. Graves to be credible and his explanation as to why Debtor made no payments on its mortgage obligation to LPP Mortgage to be plausible. The record establishes that there was a genuine dispute over ownership of the Park Property, leading to litigation in state court, and during that time, notwithstanding LPP Mortgage's contention that only its mortgage was unpaid, Debtor did not make payments to either LPP Mortgage or First Peoples Bank. Mr. Graves testified that he did not want to pay debt on property that might not be owned by him or an entity owned in part by him. The court finds such conduct reasonable under the circumstances. Once ownership of the Park Property was resolved by the state court, however, Debtor worked with First Peoples Bank to bring its debt current in order to avoid a foreclosure.

With respect to LPP Mortgage, Mr. Graves explained that although Debtor had funds available to pay to LPP Mortgage, his attempts to work out an arrangement for payment on the second mortgage, first with Beal Bank and then with LPP Mortgage after he learned that LPP Mortgage was the successor in interest to Beal Bank, were unfruitful because LPP Mortgage did not communicate with Mr. Graves to negotiate a plan to catch up the obligation. Although in hindsight it might not have been altogether wise for Debtor to expend on capital...