MP PPH LLC v. Dist. of Columbia (In re MP PPH LLC)

660 B.R. 410

IN RE: MP PPH LLC, Debtor.

MP PPH LLC, Plaintiff, v. District of Columbia, Defendant.

Case No. 23-00246-ELG

Adv. Pro. 23-10032-ELG

United States Bankruptcy Court, District of Columbia

Signed March 12, 2024

Marc Elliott Albert, Joshua W. Cox, Bradley David Jones, Stinson LLP, Washington, DC, for Plaintiff.

Nancy L. Alper, Office of Attorney General For D.C., Washington, DC, for Defendant.

MEMORANDUM OPINION

Elizabeth L. Gunn, United State Bankruptcy Judge

This case requires the Court to determine the extent to which the automatic stay of 11 U.S.C. § 362(a)¹ impacts the enforcement of a prepetition state court order of contempt arising out of an action under the Bankruptcy Code's police and regulatory exception of § 362(b)(4). In December 2023, the Court held a multi-day evidentiary hearing (the "Hearing") on the Debtor's Motion to Address Procedures for Tenant Claims Issues and to Clarify the Order Resolving the Automatic Stay (ECF No. 109) (the "Motion to Clarify"), the Debtor's Motion for a Preliminary Injunction Pursuant to Section 105(a) of the Bankruptcy Code (the "Motion for Preliminary Injunction"),² and the oppositions filed thereto. At the conclusion of the Hearing the Court issued an oral ruling finding that the portion of the state court contempt order establishing ongoing enforcement of rent abatements beginning December 1, 2023 violates the automatic stay because it represents the immediate collection of a prepetition judgment, but otherwise the § 362(b)(4) police and regulatory exception of the automatic stay was applicable. The Court deferred judgment and retained jurisdiction on the same question as to any rent abatements enforced between the Petition Date and November 30, 2023.³ This Memorandum Opinion memorializes the Court's oral ruling and supplements the Order entered December 18, 2023.⁴ To the extent there is any inconsistency between the oral ruling, Order, and this Memorandum, this Memorandum shall control.

I. Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (G), and (O). Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409. Findings of fact shall be construed as conclusions of law and conclusions of law shall be construed as findings of fact where appropriate.⁵

II. Background

a. The Marbury Plaza Apartments

MP PPH, LLC (the "Debtor" or "MP PPH") owns a 100 percent fee simple interest in a 674-unit apartment complex located in the 2300 block of Good Hope Road SE commonly known as the Marbury Plaza apartments (the "Property"). As of the date of the Hearing, the Debtor had approximately 2,500 tenants, including both market rate and subsidized tenants throughout two main apartment towers and seven smaller outbuildings. The buildings share a common infrastructure, including such amenities as a heating and hot water plant, parking areas (including garages), an on-site convenience store, a swimming pool, laundry facilities on each floor, and a community room. Despite the multiple buildings, the Property is maintained and treated as a single complex. Shortly before the filing of this case the Debtor retained a new property management company, Noble Realty Advisors, LLC ("Noble"). In the early months of this case, the Debtor and Noble worked to repair, rehabilitate, and prepare to sell the Property to a third party. As of the date of the Hearing, the Debtor (with the assistance of Noble and its post-petition lender PP & H Realty, LLC (the "DIP Lender")) remained in control of the Property, continued to collect tenant rents, and continued to pay ongoing operating costs and capital improvement costs under the terms of the Court's orders approving the use of cash collateral and the Debtor's debtor-in-possession financing.

b. The Superior Court Action

In the years since the Debtor's acquisition of the Property in 2015, it has been issued numerous violations (the "Violations") of the District of Columbia's Housing and Property Maintenance Codes. Many of the Violations remained partially or fully unresolved or unremedied as of the Hearing. As a result of the conditions at the Property including the ongoing and unremedied Violations, on July 2, 2021, the District brought suit (the "Superior Court Action") against the Debtor in the Superior Court for the District of Columbia (the "Superior Court").⁶ In January 2022, the Superior Court entered a consent order (the "Consent Order") between the Debtor and the District regarding the rehabilitation and repair of the Property. The Debtor did not timely comply with all the terms of the Consent Order, and in April 2023 after a multiple-day evidentiary hearing, the Debtor was found in contempt of the Superior Court's earlier orders (the "Contempt Order").⁷ When the Debtor's contempt was not timely purged, on August 22, 2023, the District sought the appointment of a receiver over the Property (the "Receiver Motion").⁸ Shortly thereafter, on August 31, 2023 the Debtor filed its voluntary petition under chapter 11 initiating this case.⁹

In the Contempt Order, the Superior Court found "by clear and convincing evidence that MP PPH failed to comply with the provision in the consent order requiring it to expeditiously and fully fund all work called for under the consent order."¹⁰ Specifically, as relevant in this case, the Superior Court found that:

[T]he evidence presented in the parties' filings and at the hearing on the District's renewed motion has shown clearly and convincingly that MP PPH repeatedly failed to comply with clear and unambiguous terms of the consent order. Although in a few instances MP PPH established the existence of circumstances beyond its control, the evidence showed that, in the great majority of cases, it was MP PPH's own unwillingness to comply or to invest the money necessary for full compliance that led to its violations of the order. Because of the magnitude and longstanding nature of the violations and their profoundly negative impact on the health and safety of the residents of the Marbury Plaza complex, the court concludes, in its discretion, that MP PPH should be adjudicated in civil contempt of court.¹¹

Upon the finding of civil contempt, the Superior Court continued:

The court concludes that the best way to coerce MP PPH's compliance with the consent order and, at the same time, to compensate the victims of MP PPH's noncompliance is to order an across-the-board rent abatement for all tenants of Marbury Plaza retroactive to June 1, 2022—120 days after the court's approval of the consent order and the date by which MP PPH was to have completed all of the order's requirements. The court will order a 50% reduction in rent from June 1, 2022 to the present [April 2023], in acknowledgement of the severity of the unsafe and unsanitary conditions the residents of the complex have been forced to endure these many months. The pervasive mold, floods, leaks, and insect and rodent infestations, along with the malfunctioning plumbing and HVAC systems and the broken elevators and wheelchair lift—all of which the residents of Marbury Plaza have suffered through because of MP PPH's abject contempt for the court's order—have greatly diminished the value of the residents' tenancies. The residents thus deserve to be compensated for their losses. Even without a finding of civil contempt, it would be a miscarriage of justice for MP PPH to be allowed to retain the residents' rent in the face of its flagrant and extensive violations of the implied warranty of habitability. See Javins v. First Nat'l Realty Corp., 428 F.2d 1071, 1082 (D.C. Cir. 1970) ("[T]he tenant's obligation to pay rent is dependent upon the landlord's performance of his obligations, including his warranty to maintain the premises in habitable condition.").

The 50% rent abatement will remain in effect, indefinitely, from the date of this order, with the hope that its ongoing nature will coerce MP PPH's prompt compliance with the terms of the consent order while continuing to compensate the victims of MP PPH's contemptuous conduct. The abatement will be vacated upon the District's—or, if necessary, the court's—certification of MP PPH's full compliance with the consent order, but it will increase to 60% if MP PPH remains out of full compliance 120 days after the date of this order (August 24, 2023) and to 75% if MP PPH remains noncompliant 180 days after the date of this order (October 23, 2023).¹²

The rent abatement¹³ mandated in the Contempt Order, by its own terms, was assessed retroactively to "compensate the tenants" of MP PPH for their losses. The continuing nature of the rent credits were then intended to "continue to compensate" the tenants with the "hope that the ongoing nature" would also coerce MP PPH to comply with the terms of the Consent Order and Contempt Order.¹⁴ The rent abatements were applicable both to existing tenants of MP PPH (as of April 2023) and all future tenants, until such time as the contempt was purged.

c. The Stay Motion

On August 31, 2023 (the "Petition Date"), the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. Upon the filing of the debtor's petition, the stay of § 362(a) became automatically and immediately effective.¹⁵ In the initial days of this case, the Debtor sought and obtained authority to use cash collateral and approval of post-petition financing.¹⁶ Two weeks after the Petition Date, the District filed a motion (the "Stay Motion") requesting the Court either confirm that the automatic stay of § 362(a) did not apply to the Superior Court Action or grant the District relief from the automatic stay to continue the Superior Court Action.¹⁷ A preliminary hearing on the Stay Motion was held on October 4, 2023, after which the Court entered a Scheduling Order establishing a discovery timeline and setting a final evidentiary hearing on October 26, 2023.¹⁸ On the eve of evidentiary...