Single Asset LLC's Chapter 11 Petition Dismissed As Bad Faith Filing

Posted on January 13, 2012 by Morris James Delaware

In re: Jer/Jameson Mezz Borrower II, LLC, Case No. 11-13338 (MFW) (December 22, 2011) 

On October 18, 2011 (the “Petition Date”), debtor JER/Jameson Mezz Borrower II (“Mezz II”) filed its Chapter 11 petition on the eve of a UCC auction for Mezz II’s only asset; its membership interest in JER/Jameson Mezz Borrower I, LLC (“Mezz I”).  CDCF JIH Funding, LLC and ColFin JIH Funding, LLC (collectively, “Colony”) was Mezz II’s sole lender and issued a notice of intention to auction Mezz II’s asset prior to the bankruptcy filing because Mezz II failed to repay its debt on the maturity date. 

 

The debt was initially incurred in 2006 and, at that time, Mezz II was formed as part of a capital structure to acquire a chain of economy hotels known as the Jameson Inns and Signature Inns for approximately $400 million.  JER/Jameson Properties LLC and JER/Jamesone NC Properties LP “Operating Companies’) borrowed $175 million and four affiliates, including Mezz II, were formed for the sole purpose of borrowing additional funds. 

Approximately one week after the Petition Date, on October 26, 2011, Mezz I and the Operating Companies filed chapter 11 petitions.  Shortly after the Petition Date, but before the bankruptcy filings of Mezz I and the Operating Companies, Colony filed a motion to dismiss Mezz II’s petition and to obtain relief from the automatic stay to foreclose on its collateral.  Colony sought to dismiss the Mezz II petition with prejudice pursuant to section 1112(b) and 349(a) of the Bankruptcy Code, arguing that the petition was filed in bad faith that was designed to forestall the foreclosure efforts.  Mezz II and the other debtors (the “Debtors”) contended, however, that the petition was filed in good faith with an honest intent to reorganize their affairs and maximize value for their constituents.

The Court, relying upon Third Circuit authority, noted that the burden was on the Debtors to establish that the petition was filed in good faith to preserve their going concern value or to maximize the value of the Debtors’ estates rather than as a litigation tactic.  In determining whether Mezz II’s petition was filed in good faith, the Court considered the factors set forth in In re Primestone Inv. Partners, L.P., 272 B.R. 554, 557 (D. Del. 2002).  Weighing the factors, the Court concluded that the case had been filed for an improper purpose.  Specifically, the Court noted that Mezz II:  (i) had one asset (the membership interest in Mezz I); (ii) had few if any unsecured creditors who, if they existed, exerted no pressure on Mezz II before the filing; (iii) had no ongoing business operations or employees; (iv) filed the petition on the eve of foreclosure solely to obtain the benefit of the automatic stay; (v) had no cash or income and (vi) had no likelihood of reorganization because its sole lenders contended that they would oppose any plan of reorganization.  The Court also found that the case involved “only a two-party dispute” between Mezz II’s lenders and lenders to Mezz II’s affiliates. 

Mezz II’s sole non-independent director admitted that the Mezz II bankruptcy petition was filed to stop the UCC sale and to “get Colony’s attention” because negotiations were not going well.

Debtors argued, however, that the purpose behind the filing was to preserve their enterprise value for the benefit of all constituents and by seeking to recapitalize and restructure the entire capital stack or to conduct a sale of the Inns.  While the Court agreed with the Debtors that it should consider the business enterprises holistically, it ruled that, absent substantive consolidation, a plan could not be confirmed over Colony’s objection.  Therefore, Mezz II would be unable to obtain an accepting class of any plan.  

Debtors failed to offer any evidence that more value would be realized in bankruptcy than without it.  The Court concluded that the petition was filed in bad faith and for no legitimate purpose.  Cause existed under section 349(a) of the Bankruptcy Code to dismiss the petition with prejudice.  Colony was entitled to relief from the automatic stay under section 362(d)(1) of the Bankruptcy Code because Mezz II’s interests were not adequately protected and under section 362(d)(2) of the Bankruptcy Code because the collateral was not necessary for an effective reorganization (as one was not possible).
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Circumstances Did Not Warrant Interlocutory Appeal of Order Denying Plaintiff's Motion to Dismiss Its Own Complaint as Lacking Subject Matter Jurisdiction

Posted on September 2, 2011 by Morris James Delaware

Mata v. Eclipse Aerospace, Inc. & Production Line Group v. Eclipse Aerospace, Inc. (In re AE Liquidation, Inc.), Case No. 08-13031 (MFW), Adv. Pro. No. 08-51891 (MFW), Misc. No. 10-193-LPS (May 10, 2011) (J. Stark)

On August 4, 2010, the Bankruptcy Court denied plaintiff Production Line Group’s (the “Plaintiff” or the “PLG”) motion to dismiss its own complaint as lacking subject matter jurisdiction. The issues set forth in the Plaintiff’s motion to dismiss centered around a dispute concerning the status of certain aircraft which members of the Plaintiff’s constituency had purchased from the Debtor prior to the bankruptcy filing, and the ownership of which had yet to be determined. Although the PLG had entered into purchase agreements for the aircraft and made substantial down payments (typically 60% of the purchase price), there was some question as to whether the airplanes were property of the estate.

During the course of the bankruptcy (which was filed under chapter 11 and subsequently converted to chapter 7), a sale of substantially all of the Debtor’s assets was consummated, subject to the PLG’s rights in the airplanes. Thereafter, the PLG moved to dismiss the adversary proceeding it had filed in the bankruptcy case, claiming the Bankruptcy Court no longer had jurisdiction to determine the ownership of the airplanes. Post-sale, the PLG argued, the airplanes were either owned by the PLG or by Eclipse Aerospace, Inc., the purchaser of the Debtor’s assets, both of which were non-debtor parties. 

The Bankruptcy Court denied the motion, concluding that it had exclusive jurisdiction over at least one of the questions raised in the PLG complaint – namely, whether the airplanes constituted property of the estate prior to the sale. The PLG filed a motion for leave to appeal the Bankruptcy Court’s order, which the District Court denied for the reasons set forth below.

Discussion:

The District Court concluded that none of the three factors favoring interlocutory appeal were present, nor had the Plaintiffs presented any rationale which might persuade the Court to entertain the interlocutory appeal, and, accordingly, denied the motion for leave to appeal. Though the Bankruptcy Code does not identify the standard district courts should use in deciding whether to grant an interlocutory appeal, district courts typically follow the standards set forth under 28 U.S.C. § 1292(b), which govern interlocutory appeals from a district court to a court of appeals. 

Under the § 1292(b) standards, an interlocutory appeal is “permitted only when the order at issue (1) involves a controlling question of law upon which there is (2) substantial grounds for a difference of opinion as to its correctness, and (3) if appealed immediately, may materially advance the ultimate termination of the litigation.” At 5.

First, the District Court found that first factor did not favor the interlocutory appeal because the issue did not involve a controlling question of law, but rather was inextricably fact-based as it centered around “whether the property is or is not bankruptcy estate property…the very question presented by the Adversary Proceeding.” At 6.

Second, the District Court waived off the Plaintiffs’ concerns as mere disagreement with the Bankruptcy Court’s conclusions, which “does not create a substantial ground for difference of opinion.” At 8.

Finally, rather than materially advance the litigation towards termination, the District Court concluded that an interlocutory appeal would “only promote piecemeal determination of the questions raised in the adversary action and would likely create unnecessary delay.” At 9. Without any "circumstance or reason that distinguishes the case from the procedural norm and establishes the need for immediate review,” the case did not warrant interlocutory appeal and the District Court denied the Plaintiffs’ motion for same.

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