In re Omni Lion's Run, L.P. - 578 B.R. 394 (Bankr. W.D. Tex. 2017)

Rule:

11 U.S.C.S. § 362(d)(1) instructs courts to grant relief from the automatic stay where there exists cause to do so. The section explicitly includes lack of adequate protection as a ground for stay relief, but "cause" is not otherwise defined in the Bankruptcy Code. Therefore, determining whether cause exists involves case-by-case scrutiny. 11 U.S.C.S. § 362(d)(2) requires a court to lift the stay if a debtor has no equity in property and the property is not necessary to an effective reorganization. A party requesting stay relief must show a prima facie case before a debtor is required to put on its own evidence. Beyond the prima facie case, which is required in all stay litigation, a movant only bears the burden of proof with respect to a debtor's equity in the property; the party opposed to the relief has the burden on all other issues. 11 U.S.C.S. § 362(g). Sections 362(d)(1) and (d)(2) are disjunctive. 

Facts:

Before the Court are two Motions for Relief from the Automatic Stay (the "Motions") filed by LB-UBS 2007-C2 Lookout Ridge Boulevard, LLC (the Lender for Omni Lookout Ridge, L.P.) and COMM 2015-CCRE22 East Central Texas Expressway, LLC (the Lender for Omni Lion's Run, L.P.) (collectively, the "Lenders"). The Lenders ask the Court to lift the stay on the only meaningful asset in each bankruptcy estate: two apartment complexes in Harker Heights, Texas. Omni Lion's Run, L.P. and Omni Lookout Ridge, L.P. (collectively, the "Debtors") filed chapter 11 petitions. Both businesses are designated single asset real estate as defined in 11 U.S.C. § 101(51B). Omni Lion's Run, L.P. owns an apartment complex (the "Lion's Property") on one piece of property; Omni Lookout Ridge, L.P. owns an apartment complex (the "Lookout Property") on an adjacent piece of property. Mr. Gregory Hall is the limited partner in the Debtors and is the sole member of the general partner, Omni GP, LLC. He is also the guarantor on the secured notes to the Lenders. Because the Debtors are affiliated entities, are jointly owned, share a common loan special servicer, have a history of joint management, and own adjacent apartment complexes that are associated with each other, their bankruptcies became jointly administered on September 12, 2017. The Lenders are also related and their interests were represented by the same counsel at trial; the arguments to lift the stay are largely the same for both properties and the Court will deal with both Motions from the Lenders in this Opinion. In January of 2016, a fire destroyed Building Four of the Lookout Property; twenty-four units became uninhabitable and the insurance company paid out the proceeds. Omni Lookout Ridge, L.P. hired Belfor USA Group, Inc. ("Belfor") to repair and rebuild Building Four. The Lender for the Lookout Property did not consent to the use of the insurance proceeds and held the proceeds—totaling just over $1,000,000—despite the fact that Belfor completed its work. Belfor filed a state court lawsuit, which is currently pending in Bell County. Belfor has filed a mechanic's lien affidavit; a foreclosure by the Lender would wipe out Belfor's lien. Mr. Hall desires to pay Belfor through the plan and release the insurance proceeds to the Lender; Belfor believes that the plan will pay it more quickly than the state court lawsuit, and therefore supports the reorganization. The Lookout Property has filed for chapter 11 protection once before, in September of 2016, a few months after the fire. The court in the first bankruptcy was presented with no plan, no disclosure statement, no appropriate management, no capital supplied by the guarantor, and a situation where rent proceeds were being used to pay Mr. Hall's personal mortgage payments; the court consequently lifted the stay.

Issue:

Were the Lenders able to show that there were grounds under 11 U.S.C.S. § 362(d)(1) or (2) for lifting the stay that was imposed when the partnerships declared Chapter 11 bankruptcy?

Answer:

No.

Conclusion:

The Court held that the  Lenders failed to show there were grounds under 11 U.S.C.S. § 362(d)(1) or (2) for lifting the stay that was imposed when the partnerships declared Chapter 11 bankruptcy so they could begin foreclosure proceedings. Although both properties were mismanaged before the partnerships declared bankruptcy, a receiver who was appointed to manage one of the properties and a manager who was hired to manage the other property had addressed past errors and increased the value of both properties, the lenders were receiving adequate protection payments in excess of $20,000 a month for each property, and the properties were necessary to the partnerships' ability to reorganize their businesses.