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In re Woodbrook Assocs. - 19 F.3d 312 (7th Cir. 1994)

Rule:

Where a motion to dismiss for cause is opposed, the movant bears the burden of proving by a preponderance of the evidence that cause exists for dismissal of the debtor's bankruptcy case.

Facts:

Woodbrook Associates ("Woodbrook"), is an Indiana real estate limited partnership whose sole asset is the Woodbrook Apartments constructed in 1980 in Indianapolis. The apartment complex was primarily funded by a first mortgage loan of $ 5,559,700.00, at 7.5 percent, insured by the United States Department of Housing and Urban Development (HUD). Woodbrook Apartments failed to generate the expected income levels, the partnership defaulted, and the original mortgage holder assigned the mortgage in 1988 to HUD. In July 1990, HUD advertised Woodbrook Apartments for sale by private bid stating that it would not bid over $ 3.4 million. On August 21, 1990, Woodbrook filed a voluntary Chapter 11 petition, and the advertised foreclosure sale was stayed. Deci-Ma Management Corporation ("Deci-Ma Management") continued to serve as project manager of the apartments during the bankruptcy, as it had since the inception of the project. Woodbrook then ceased paying net operating revenues to HUD, which had been less than the stipulated debt service. Woodbrook filed a proposed Plan of Reorganization eight months after the bankruptcy petition, and a substantially similar amended plan on June 14, 1991, by which time Woodbrook had possession of a net operating surplus of about $ 225,000 which it would otherwise have paid to HUD. The debtor's reorganization plan provided that the creditor's secured claim would be paid in full, that its unsecured claim would receive only partial payment, and that other unsecured creditors would be paid in full. Of the other unsecured, impaired creditors, a partner of the debtor held a beneficial interest. A creditor filed a motion to dismiss the debtor's Chapter 11 bankruptcy case on the grounds, among others, that the debtor's reorganization plan unfairly discriminated among unsecured creditors, violated the absolute priority rule of 11 U.S.C.S. § 1129(b)(2)(C), and required the creditor's approval for confirmation. The bankruptcy court dismissed the bankruptcy case, ruling that the plan improperly discriminated between unsecured claims in that it classified separately the creditor's claim from the other unsecured claims under 11 U.S.C.S. § 1122(a) and violated the absolute priority rule of § 1129(b)(2)(C). The district court affirmed.

Issue:

Was the dismissal due to discrimination between secured and unsecured creditors proper?

Answer:

Yes.

Conclusion:

The court affirmed. The dismissal of the debtor's bankruptcy case for cause was in the creditor's best interest because the debtor's confirmation plan could not be confirmed over the creditor's objection, as there was, other than insiders to the debtor, no other unsecured creditors, the debtor had a single asset estate, and the creditor's claim would not be paid in full.

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