Matter of Newark Airport/Hotel Ltd. Partnership
1993 Bankr. LEXIS 1590, 1993 WL 275638, 156 B.R. 444 (1993)
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Rule of Law:
A Chapter 11 petition filed on the eve of a foreclosure sale by a single-asset real estate debtor will not be dismissed for bad faith if the debtor is an ongoing business with a genuine intent to reorganize. At an early stage of the case, such a debtor can defeat a motion for relief from the automatic stay by showing a reasonable possibility of a successful reorganization, and can obtain an extension of the exclusivity period by showing cause.
Facts:
- In June 1989, Newark Airport/Hotel Limited Partnership acquired the Newark Sheraton Hotel, financing the purchase with a $15,250,000 loan from FGH Realty Credit Corp. ('FGH').
- The loan was secured by a first priority mortgage and security agreement encumbering all of the debtor's assets.
- Beginning in June 1990, the debtor failed to make the required monthly interest payments to FGH.
- The debtor's sole asset is the Hotel, an ongoing business with over one hundred employees and existing contracts with airlines and for catering.
- The debtor had no equity in the Hotel; FGH's secured claim of approximately $19.4 million significantly exceeded the Hotel's appraised fair market value of $10.6 million.
- Expert witnesses for both parties agreed that the local hotel market, after a period of over-construction and declining rates, had 'bottomed out' and was expected to slowly improve.
Procedural Posture:
- FGH Realty Credit Corp. commenced foreclosure proceedings against Newark Airport/Hotel Limited Partnership in the Union County Superior Court of New Jersey, a state trial court.
- The state trial court entered a final judgment of foreclosure against the debtor.
- The debtor appealed the final judgment to the Appellate Division of the Superior Court, a state intermediate appellate court.
- The Appellate Division denied the debtor's motion for a stay of the sheriff's sale pending the outcome of the appeal.
- On July 7, 1992, one day before the rescheduled sheriff's sale, the debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court.
- In the bankruptcy court, FGH, as a secured creditor, filed a motion to dismiss the Chapter 11 petition for bad faith and a separate motion for relief from the automatic stay.
- The debtor, as debtor-in-possession, filed a motion to extend its exclusive period to file a plan of reorganization.
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Issue:
Does a Chapter 11 debtor who filed its petition on the eve of foreclosure, has no equity in its single asset, but operates an ongoing business, demonstrate sufficient cause to deny a creditor's motions for dismissal and for relief from the automatic stay, and to grant an extension of the exclusivity period to file a reorganization plan?
Opinions:
Majority - William F. Tuohey
Yes. A Chapter 11 debtor that filed on the eve of foreclosure can defeat early motions for dismissal and relief from the automatic stay and obtain an extension of the exclusivity period if it demonstrates a genuine intent to reorganize an ongoing business and a reasonable prospect of success. The court addressed three motions: 1) FGH's motion to dismiss under § 1112(b) for bad faith, 2) FGH's motion for relief from the automatic stay under § 362(d), and 3) the debtor's motion to extend the exclusivity period under § 1121(d). First, the court denied the motion to dismiss, holding that the petition was filed in good faith. The test for bad faith is whether the debtor has a real intention to reorganize and some possibility of success, rather than merely seeking to delay creditors. The court found that because the Hotel is an ongoing business with over 100 employees, the filing was not solely to buy time for the principals, and an eve-of-foreclosure filing is not dispositive of bad faith. Second, the court denied relief from the stay. Under § 362(d)(2), relief requires both (A) no debtor equity and (B) the property is not necessary for an effective reorganization. While the debtor conceded no equity, it met its burden under the Supreme Court's standard in Timbers to show the property was necessary for an effective reorganization that is 'in prospect.' Given the early stage of the case, the debtor's evidence of potential funding from partners and its ongoing operations was sufficient to show a 'reasonable possibility of a successful reorganization within a reasonable time.' Under § 362(d)(1), the court found FGH's interest was adequately protected because expert testimony indicated the property's value was not declining and was likely to increase, meaning the undersecured creditor was not suffering harm from the delay. Finally, the court granted the debtor's motion to extend the exclusivity period, finding 'cause' under § 1121(d). The court cited delays in forming a creditors' committee, the need for the debtor to obtain its own appraisal, pending litigation, and the time spent defending against FGH's early motions as sufficient cause for a first-time extension request early in the case.
Analysis:
This case illustrates the 'breathing spell' concept that is fundamental to Chapter 11, particularly in single-asset real estate cases. It demonstrates that courts are reluctant to grant motions that would effectively end a case at its inception, even when faced with factors often associated with bad faith, such as an eve-of-foreclosure filing and a lack of equity. The decision reinforces the principle from United Savings Ass’n v. Timbers that the debtor's burden to show a 'reorganization in prospect' is lower during the initial exclusivity period. The ruling signals to secured creditors that they may not be able to short-circuit the bankruptcy process with early 'death-trap' motions if the debtor is operating a viable business with employees and can present some evidence of a path toward reorganization.
