FILED
AUG 19 2013
SUSAN M SPRAUL, CLERK
U.S. BKCY. APP. PANEL
1 OF THE NINTH CIRCUIT
2
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. CC-13-1019-KiPaD
)
6 HASSEN IMPORTS PARTNERSHIP, ) Bk. No. 2:11-42068
)
7 Debtor. )
)
8 HASSEN IMPORTS PARTNERSHIP; )
LOS ANGELES COUNTY TREASURER )
9 AND TAX COLLECTOR, )
)
10 Appellants, )
)
11 v. ) M E M O R A N D U M1
)
12 CITY OF WEST COVINA; CITY OF )
WEST COVINA, as successor to )
13 the CITY OF WEST COVINA )
COMMUNITY DEVELOPMENT )
14 COMMISSION; COREPOINTE CAPITAL)
FINANCE, LLC; COREPOINTE )
15 INSURANCE CORPORATION, )
)
16 Appellees. )
______________________________)
17
Argued and Submitted on June 20, 2013,
18 at Pasadena, California
19 Filed - August 19, 2013
20 Appeal from the United States Bankruptcy Court
for the Central District of California
21
Honorable Ernest M. Robles, Bankruptcy Judge, Presiding
22
23 Appearances: Theodore B. Stolman, Esq. of Stutman, Treister &
Glatt PC argued for appellant, Hassen Imports
24 Partnership; Stephen Thomas Owens, Esq. of Squire
Sanders (US) LLP argued for appellees, City of West
25 Covina and City of West Covina as successor to the
City of West Covina Community Development
26 Commission.
_______________________________________
27
28 1
This disposition is not appropriate for publication.
Although it may be cited for whatever persuasive value it may have
(see Fed. R. App. P. 32.1), it has no precedential value. See 9th
Cir. BAP Rule 8013-1.
1
Before: KIRSCHER, PAPPAS and DUNN, Bankruptcy Judges.
2
3
Appellants, debtor Hassen Imports Partnership ("Debtor") and
4
the Los Angeles County Treasurer and Tax Collector ("LA County"),
5
appeal an order from the bankruptcy court granting the motion of
6
appellees (collectively, "City"), to convert Debtor's case from
7
chapter 11 to chapter 7 for "cause" under 11 U.S.C.
8
§ 1112(b)(4)(A).2 Debtor also appeals the bankruptcy court's
9
order denying its motion for reconsideration of the conversion
10
order. We AFFIRM.3
11
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
12
A. Background prior to Debtor's bankruptcy filing
13
Debtor, a California limited partnership, filed a chapter 11
14
bankruptcy case on July 27, 2011. Debtor consists of Hassen
15
Imports, Inc., as the general partner, and Dighton America, Inc.
16
("Dighton"), as the sole limited partner. Debtor is engaged in
17
the business of commercial real estate development, owning several
18
parcels of real property in the cities of Covina and West Covina,
19
California. Debtor's largest secured creditors are CorePointe,
20
LA County and the City.
21
The most valuable and lucrative of Debtor's properties have
22
23
2
Unless specified otherwise, all chapter, code and rule
24 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The
25 Federal Rules of Civil Procedure are referred to as “Civil Rules.”
26 3
Per our Conditional Order of Waiver entered on April 1,
2013, appellees CorePointe Capital Finance, LLC and CorePointe
27 Insurance Corporation (collectively, "CorePointe") waived their
rights to appear at oral argument by not filing a timely brief on
28 appeal.
-2-
1 been improved to accommodate major car dealerships and are leased
2 to either West Covina Motors, Inc. ("WCM") or West Covina Ford,
3 Inc. ("WCF"), which collectively own and operate Clippinger Ford,
4 Clippinger Chevrolet, and Clippinger Chrysler Jeep Dodge. Both
5 WCM and WCF are related to Debtor in that WCM and WCF are wholly
6 owned by West Covina Automotive Holding, Inc., which is owned by
7 Ziad Alhassen ("Alhassen"). Alhassen is also the president of
8 Hassen Imports, Inc., general partner of the Debtor.
9 Debtor's car dealership properties, which are located in West
10 Covina, include: (1) the Chevrolet Dealership Property; (2) the
11 Ford Dealership Property; (3) the property with improvements for a
12 defunct Hummer dealership ("Hummer Property"); (4) the Dodge/
13 Chrysler Dealership Property; and (5) a property with improvements
14 for a defunct Mazda dealership ("Mazda Property").4 Collectively,
15 these five properties are referred to as the "Dealership
16 Properties," and the related dealerships are referred to as the
17 "Dealership Franchises."5 Some of these properties have been
18 owned by Debtor and operated as car dealerships by Alhassen since
19 1983.
20 Besides the Dealership Properties, Debtor owns several other
21 parcels of real property in the City of Covina, which are
22
23
4
Shortly after Debtor filed bankruptcy, the City filed an
24 adversary proceeding for fraudulent conveyance to recover the
Mazda Property, which Debtor had conveyed to another party in
25 2009. The parties ultimately agreed that the Mazda Property would
be returned to the estate.
26
5
Debtor owns only the real property and improvements for the
27 Dealership Properties and does not own any of the inventory or
equipment situated thereon; such personal property is owned by the
28 dealerships.
-3-
1 generally held for development purposes (together with the
2 Dealership Properties, the "Properties").
3 In exchange for certain loans, Debtor executed several
4 promissory notes in favor of Chrysler Financial Services Americas
5 LLC, dating from July 1999 through October 2006, in the aggregate
6 principal amount of $26.2 million. CorePointe is the current
7 beneficiary of the Chrysler notes and is Debtor's largest secured
8 creditor, holding senior deeds of trust on at least eight of the
9 Properties, securing an obligation of approximately $30 million,
10 including Debtor's guarantee of about $2.4 million in wholesale
11 motor vehicle financing (known as "floorplan loans") to WCM and
12 WCF.6 CorePointe also holds a first-priority security interest in
13 virtually all assets of WCM and WCF to secure the floorplan loans
14 to those entities.
15 In 1999, the City agreed to lend Debtor and WCM $4.1 million
16 in exchange for guaranties that the City would receive certain
17 levels of sales and property tax proceeds from the operation of
18 certain dealerships located on some of the Dealership Properties
19 owned by Debtor. The obligations were secured by junior deeds of
20 trust (behind CorePointe's) on the Chevrolet Dealership Property,
21 the Ford Dealership Property and certain real property owned by
22 Alhassen.
23 Debtor's relationship with the City eventually deteriorated,
24 and in 2006 the City sued Debtor, WCM and certain guarantors under
25 the loan agreement in state court. After five years of
26 litigation, the state court found Debtor and WCM liable and
27
28 6
CorePointe filed a proof of claim for $29,473,732.
-4-
1 entered a judgment in favor of the City for $3.93 million, which
2 was later amended to include attorney's fees, for a total judgment
3 of $7.58 million.7 The state court further ordered the judicial
4 foreclosure of the Chevrolet Dealership Property, the Ford
5 Dealership Property, and certain real property owned by Alhassen.
6 A receiver was appointed for Debtor on July 26, 2011, thus
7 prompting the bankruptcy filing on July 27. Debtor and WCM have
8 appealed the state court judgment, but the outcome of that appeal
9 is unknown.
10 B. The City's motion to convert and other related events
11 After losing a determination that Debtor was a single asset
12 real estate case, the City filed its motion to convert Debtor's
13 case to chapter 7 or, alternatively, appoint a trustee on
14 February 8, 2012 ("Motion to Convert"). The City alleged that
15 "cause" existed to convert the case to chapter 7 under
16 § 1112(b)(4)(A) because Debtor was suffering substantial and
17 continuing losses to and diminution of its estate and had no
18 reasonable likelihood of rehabilitation.8 Among other things, the
19 City argued: (1) Debtor had not collected approximately $5 million
20 in unpaid rent from the car dealerships controlled by Alhassen;
21 (2) Debtor had not paid the taxes due on certain Properties going
22
23
7
The City filed a proof of claim for $11,445,502.63, which
24 included interest on the state court judgment and a claim for
additional sales tax revenues that the City asserts it is owed,
25 which Debtor disputes.
26 8
The City also moved to convert the case for gross
mismanagement under § 1112(b)(4)(B), but the bankruptcy court
27 ultimately determined that the City had failed to show cause under
that statute. The City has not cross-appealed that determination.
28 Therefore, we do not discuss it.
-5-
1 back to the 2008-2009 tax year, totaling nearly $1.5 million;
2 (3) Debtor had not paid the interest and penalties accruing
3 postpetition on the delinquent real estate taxes due on eight of
4 its Properties, paying such obligations only on the Chevrolet and
5 Ford Dealership Properties; (4) Debtor was unable to pay the
6 administrative claim for its attorney's fees and costs; (5) Debtor
7 had failed to seek other tenants or uses for those Properties
8 which were under-utilized or vacant; (6) Debtor's monthly
9 operating reports ("MORs") from July 2011 through December 2011
10 showed losses of approximately $80,000 per month; and (7) Debtor
11 had failed to submit a proposed plan of reorganization after six
12 months of being in chapter 11.
13 The original hearing date for the Motion to Convert of
14 February 29, 2012, was continued no less than ten times based on
15 either the City's motions (which Debtor opposed) or the parties'
16 joint stipulations. It was eventually heard on December 5, 2012.
17 Over the course of eleven months, numerous pleadings were
18 filed in support of, and in opposition to, the Motion to Convert.
19 Debtor filed its first opposition to the Motion to Convert on
20 March 6, 2012, contending that the City had failed to demonstrate
21 "cause." Debtor asserted that Alhassen had recently negotiated
22 the sale of the Dealership Franchises to an unrelated third party
23 for over $10 million, of which $7 million in proceeds would
24 benefit the estate ("Sale Transaction"). Debtor argued that the
25 Sale Transaction, which included leasing five of the Dealership
26 Properties to fund future plan payments, would benefit Debtor's
27 creditors by: (1) paying just over $1 million of its delinquent
28 real estate taxes; (2) paying $572,000 towards past due real
-6-
1 estate taxes owed on the Chevrolet and Ford Dealership Properties
2 — the two properties on which the City had liens; (3) and paying
3 CorePointe at least $6 million towards its outstanding secured
4 claims. In other words, WCM and WCF were giving Debtor $6 million
5 of their sale proceeds to pay towards Debtor's secured debts.
6 Debtor asserted that the purchaser had agreed to enter into new,
7 long-term leases on the Dealership Properties at lease rates that
8 were materially higher than the rent currently being collected
9 from the dealerships, which would provide a beneficial income
10 stream for at least ten years.
11 Debtor further asserted that it was current on its monthly
12 adequate protection payments to CorePointe of $121,500, which had
13 just been increased to $135,000. According to Debtor, CorePointe
14 had agreed that Debtor did not, at that time, need to pay the
15 penalties and interest accruing on the delinquent taxes on the
16 other six Properties on which CorePointe had liens (but the City
17 did not), because CorePointe was not concerned that its collateral
18 was in jeopardy.
19 Debtor admitted that it had not been collecting outstanding
20 rents on the Dealership Properties, and part of the problem of
21 reconciling its books with WCM and WCF was because those entities'
22 books were kept on an accrual basis, while Debtor's books were
23 kept on a cash basis. In any event, Debtor's forensic accountant,
24 Alan Levy ("Levy"), determined that Debtor was owed $2.87 million
25 in outstanding rent from the Dealership Franchises from January
26 2007 through July 2011 and that, overall, Debtor was owed about
27 $8 million from the Dealership Franchises, inclusive of the
28 $2.87 million in rent. As for filing a plan, Debtor argued that
-7-
1 it still had six weeks before the exclusivity period ended, which
2 was not a basis for converting its case. Finally, Debtor disputed
3 the alleged monthly operating losses of $80,000 as "overstated,"
4 because the City had failed to consider that the MORs were
5 reported on an accrual, not cash, basis; two-thirds of Debtor's
6 operating expenses were attributable to the accrual of
7 depreciation and loan interest on the Properties, and the other
8 third, the accrual of real property taxes, would be paid in full
9 by the Sale Transaction.
10 Debtor filed a supplemental opposition to the Motion to
11 Convert, along with its proposed plan of reorganization, on
12 April 23, 2012. Debtor contended that the Sale Transaction (or a
13 similar sale), which was the lynchpin of the plan, would pay all
14 claims in full. Debtor further contended that it had made all of
15 its postpetition payments to CorePointe, paid its current
16 postpetition property taxes, collected all postpetition rents from
17 its affiliates, worked with accountant Levy to determine its
18 intercompany claims and other accounting matters, was current in
19 paying its U.S. Trustee fees, and had timely filed all of its
20 MORs. As for the pending Sale Transaction, which Debtor argued
21 would benefit the estate with an estimated $8.2 million in
22 proceeds and fund the plan, the following tasks had to be
23 completed for it to close: (1) the auto manufacturers --- Ford,
24 General Motors, Chrysler and Mazda --- had to approve the buyer to
25 operate the Dealership Franchises, which Debtor anticipated would
26 be successful and done in a timely manner; and (2) by agreement,
27 the City had to approve the buyer as a lessee and operator of the
28 dealerships at the sites. Debtor believed the Sale Transaction
-8-
1 could be consummated by July 30, 2012. Accordingly, argued
2 Debtor, the City had failed to establish cause for conversion.9
3 While the Debtor and the City attempted to resolve their
4 disputes, Debtor filed its Third Amended Chapter 11 Plan ("Plan")
5 and Disclosure Statement on August 8, 2012. Debtor conceded that
6 the Plan's success depended upon the pending Sale Transaction to
7 buyer YTransport LLC ("YTransport"), which involved the sale of
8 assets not owned by Debtor but rather Debtor's affiliates, WMC and
9 WCF. The Third Amended Disclosure Statement was approved on
10 August 20, 2012, and the confirmation hearing was scheduled for
11 October 25, 2012.
12 On September 6, 2012, the City filed a supplemental
13 declaration in support of its Motion to Convert. Although the
14 parties had reached a settlement in principle of their disputes
15 and treatment of the City's claim on August 9, 2012, recent events
16 had caused the City to renew its motion: (1) CorePointe had
17 withdrawn its support for the Sale Transaction because, even
18 though Debtor made the July adequate protection payment, Debtor
19 had not made the August payment, and the default rate of interest
20 on future CorePointe payments was 4% higher than the non-default
21 rate, which the City argued eroded its junior lien position;
22 (2) Debtor had failed to make timely court-ordered payments of
23
24 9
While the Motion to Convert was pending, Debtor moved for
approval of a third stipulation for its adequate protection
25 payments to CorePointe for the time period of June 2012 through
October 2012. Debtor was to pay CorePointe $135,500 for the month
26 of June, and $145,500 for the months of July through October.
Debtor conceded that it had failed to make the July 2012 payment,
27 for which CorePointe filed a notice of default, but stated that it
would make that payment by August 9. The third stipulation was
28 approved on June 20, 2012.
-9-
1 interest and penalties due on the delinquent real estate taxes
2 owing on the Chevrolet and Ford Dealership Properties, which
3 caused these amounts to accrue and further erode the City's junior
4 lien position; (3) Debtor had retained counsel without court
5 approval to litigate against the City of Covina in a pending
6 eminent domain action, which resulted in an attorney's lien filed
7 against Debtor's assets; and (4) the Mazda Dealership franchise
8 had been terminated by Mazda Motors, which threatened consummation
9 of the Sale Transaction because that franchise was a key element
10 of the sale.
11 In response to the City's supplemental declaration, Debtor
12 contended: (1) CorePointe was onboard with the Sale Transaction,
13 and the parties were resolving the outstanding August adequate
14 protection payment and the issue of whether Debtor would be
15 charged the default rate of interest; (2) it had made all of the
16 payments for interest and penalties accrued postpetition on the
17 delinquent real estate taxes owing on the Chevrolet and Ford
18 Dealership Properties; (3) the attorney's fees for the eminent
19 domain action were incurred by, and would be paid by, Debtor's
20 limited partner; (4) termination of the Mazda Dealership franchise
21 was the subject of litigation, but, even it were lost and unable
22 to be sold, this would not affect the Sale Transaction because the
23 Mazda sale proceeds were not earmarked for Debtor's creditors,
24 given that the franchise was owned by a non-debtor and not subject
25 to either the City's or CorePointe's claims; but, in any event,
26 the Mazda Property could still be leased for other purposes to
27 fund the Plan.
28 The parties agreed to continue the hearing on the Motion to
-10-
1 Convert to October 25, 2012, to coincide with the scheduled
2 confirmation hearing. However, on October 24, 2012, the parties
3 filed a stipulation to continue both matters to December 5, 2012,
4 explaining that the Sale Transaction was stalled because
5 YTransport had not yet completed its due diligence, and it was
6 still waiting for authorization from the respective auto
7 manufacturers. YTransport had until November 16, 2012, to
8 complete its due diligence, and, if it did not do so, confirmation
9 would not proceed because the Plan relied on consummation of the
10 Sale Transaction. The bankruptcy court entered orders continuing
11 both matters to December 5, 2012.
12 As the due diligence deadline approached, the parties learned
13 that YTransport would proceed with the Sale Transaction only if
14 the terms were substantially modified. The parties ultimately
15 agreed to extend time until November 29, 2012, for the City to
16 file supplemental papers and/or CorePointe to file a joinder to
17 the Motion to Convert; Debtor had until November 30, 2012, to file
18 a supplemental opposition. The parties needed additional time to
19 negotiate with YTransport and develop potential alternatives, if
20 necessary.
21 On November 29, 2012, CorePointe filed a joinder to the
22 City's Motion to Convert. According to CorePointe, the Sale
23 Transaction was dead. YTransport was no longer willing to pay the
24 agreed $10 million cash in "goodwill" for the Dealership
25 Franchises and proposed to reduce it to $0, or do a carry-back by
26 Debtor's lenders of a ten-year $10 million subordinated note at
27 1% interest. YTransport had also proposed a dramatic reduction in
28 the lease rates for the Dealership Properties. Without the
-11-
1 $10 million up-front cash, the $5.3 million in cash necessary to
2 close the Sale Transaction was not available, and CorePointe would
3 not realize the $5.7 million in sale proceeds to reduce the
4 balance on its loans as provided in the Plan. Without the
5 reduction of CorePointe's principal balances and with the
6 significantly reduced lease rates, the Plan was not feasible.
7 CorePointe asserted that YTransport was not responding to Debtor's
8 counter-proposals or phone calls, so it appeared that YTransport
9 had withdrawn from the Sale Transaction.
10 In addition, asserted CorePointe, the Mazda Dealership
11 franchise was still terminated, and it now appeared that
12 termination of the Chevrolet Dealership franchise was imminent.
13 According to a stipulation between General Motors and WCM, which
14 was the result of a recent decision by the State of California New
15 Motor Vehicle Board, the Chevrolet Dealership franchise was set to
16 terminate by November 13, 2012, unless WCM submitted a complete
17 buy-sell package for the franchise. GM had sixty days to either
18 approve or reject the proposed buy-sell and transfer of the
19 franchise to the potential buyer. YTransport submitted its
20 proposal to GM on the November 13 deadline. If GM approved it,
21 the sale to YTransport had to close within thirty days. If it
22 rejected it, the franchise terminated voluntarily. If it approved
23 it but the sale did not close within thirty days, the franchise
24 also terminated voluntarily. Thus, with YTransport's withdrawal,
25 CorePointe speculated that either the Sale Transaction would not
26 close within thirty days, or GM would reject the proposed
27 franchise transfer once it learned of YTransport's withdrawal.
28 Either way, the Chevrolet Dealership franchise was all but gone.
-12-
1 CorePointe further noted that the dealerships were unable to
2 pay September rent based on the September 2012 MOR, which showed
3 total receipts of only $7,200, and that they paid only a partial
4 rent payment for October as reflected in the October 2012 MOR,
5 which showed total receipts of only $46,000. Moreover, Debtor had
6 failed to make its full adequate protection payment to CorePointe
7 for the month of September, instead paying only $36,650, and it
8 had also failed to make the payment for October. As a result,
9 CorePointe began charging interest at the default rate as of
10 November 1, 2012. Finally, CorePointe noted that Debtor had
11 failed to make the November payment of postpetition interest and
12 penalties accruing on the delinquent real estate taxes owing on
13 the Chevrolet and Ford Dealership Properties, and the September
14 2012 MOR showed a cash balance of only $121.77.
15 CorePointe argued that "cause" existed under § 1112(b)(4)(A)
16 to convert Debtor's case to chapter 7, because without the Sale
17 Transaction upon which the Plan was based, and with the apparent
18 loss of the Mazda and Chevrolet Dealership franchises, it was
19 unlikely a replacement transaction could be substituted upon which
20 a revised plan could be based. Further, the dealerships appeared
21 unable to make the monthly rent payment of $134,223 needed to fund
22 the Plan. Thus, a reasonable likelihood of rehabilitation seemed
23 absent. To show diminution to the estate, CorePointe argued that
24 Debtor's failure to make the adequate protection payments towards
25 the principal portion of its loans, which accrued interest at the
26 rate of $155,799.13 per month (plus attorney's fees and costs),
27 was consuming the equity in the Properties securing its various
28 loans and further impairing the City's secured portion of its
-13-
1 claim. Moreover, Debtor's failure to pay the interest and
2 penalties on its delinquent real estate taxes further eroded the
3 estate, as did the estate's unpaid and continuing $2 million-plus
4 administrative claims.
5 CorePointe argued that conversion was in the best interest of
6 creditors because, based on Debtor's appraisals and the interest
7 shown in the various properties securing its loans, liquidation of
8 those properties would realize sufficient equity to fully pay
9 CorePointe's claim and the administrative claims, and pay a
10 substantial percentage of the general unsecured claims.
11 The City's second supplemental memorandum in support of its
12 Motion to Convert essentially parroted CorePointe's joinder. The
13 City also noted that YTransport had recently announced that it
14 would not be buying the terminated Mazda Dealership franchise nor
15 leasing the Mazda Property as a result. Ford and Chrysler had
16 also not yet approved YTransport as a replacement dealer. In
17 addition, the City asserted that Debtor's counsel had claimed that
18 Debtor was under no obligation to make any further tax payments or
19 adequate protection payments, that Debtor did not intend to make
20 any more such payments before the December 5 hearing, and that
21 Debtor would never pay the taxes unless the City agreed to
22 postpone the hearing on the Motion to Convert.
23 The City argued that "cause" existed under § 1112(b)(4)(A) to
24 convert the case to chapter 7 because: (1) Debtor's monthly net
25 operating loss of $80,000 had now accumulated to a loss of more
26 than $1 million; (2) Debtor was $2 million delinquent in real
27 property taxes dating back to the 2008-2009 tax year, had not made
28 (and would not make) the $175,000 tax payment due on November 1,
-14-
1 2012, and had never paid the monthly interest and penalties
2 accruing on the delinquent real estate taxes for at least nine of
3 its eleven Properties and had now stopped making those payments on
4 the Chevrolet and Ford Dealership Properties in October; (3) the
5 estate was administratively insolvent, unable to pay its over
6 $2 million administrative claims; (4) Debtor had failed to make
7 its October and November 2012 adequate protection payments to
8 CorePointe; and (5) with the complete collapse of Debtor's Plan
9 and the absence of any alternative plan, no reasonable likelihood
10 of rehabilitation existed. The City argued that, based on
11 Debtor's appraisal figures and the City's conservatively estimated
12 value of $4 million for the Mazda Property (which Debtor's
13 liquidation analysis did not include), the sale of Debtor's eleven
14 Properties would realize proceeds of $47,575,000 to satisfy
15 $45,566,424.96 in pending claims against the estate. Therefore,
16 conversion to chapter 7 was in the best interest of creditors.
17 In its third supplemental opposition to the Motion to
18 Convert, Debtor disputed all of the City's and CorePointe's
19 arguments. Debtor countered that it was solvent, that it had paid
20 all postpetition property taxes that had come due on all of its
21 Properties to date (except the latest $175,000 payment due, which
22 it was prepared to pay by December 10, 2012, if the Motion to
23 Convert was denied), that it had paid the interest and penalties
24 accrued on the delinquent taxes for the Chevrolet and Ford
25 Dealership Properties, and that it had made all adequate
26 protection payments to CorePointe, having missed only one partial
27 payment, which it offered to cure if the case were not converted.
28 In fact, Debtor had offered to enter into a fourth stipulation
-15-
1 with CorePointe for adequate protection payments for the next
2 several months. As for the alleged operating losses of $80,000
3 per month, Debtor again contended that this was simply a
4 bookkeeping matter, and any expenses incurred by the accrual of
5 real property taxes were going to be cured with proceeds from the
6 Sale Transaction and/or lease payments made by tenants. Thus, the
7 estate was not suffering any continuing losses or diminution.
8 As for Debtor's rehabilitation, Debtor asserted that the Sale
9 Transaction was still "very much alive," as GM had just approved
10 YTransport to replace WCM as franchisee of the Chevrolet
11 Dealership franchise. Ford was still considering YTransport's
12 application and had until January 13, 2013, to either approve or
13 reject it. Further, although the parties were still negotiating
14 the sale terms, Debtor asserted that the renegotiation would not
15 result in a reduction of either the purchase price or the rents to
16 be paid under the leases of the Dealership Properties. The fate
17 of the pending sale would be known by December 30, 2012, because
18 YTransport had to close the transaction by that date under the
19 terms of the GM agreement. Therefore, argued Debtor, it was
20 reasonable for the parties to wait that short amount of time to
21 close the sale and confirm the Plan.
22 Finally, Debtor argued that conversion was not in the best
23 interest of creditors. First, contrary to CorePointe's and the
24 City's contentions, liquidation values for the Properties were far
25 less than their non-liquidation values — $34.68 million as opposed
26 to $48.5 million. Therefore, secured creditors would not be paid
27 in full, and general unsecured claims, which totaled $13.5
28 million, would have to share a distribution of $1.44 million.
-16-
1 Further, argued Debtor, CorePointe and the City presented no
2 admissible evidence that buyers were waiting to make offers on the
3 Properties once the case was converted.
4 Concurrently with its third supplemental opposition, Debtor
5 filed a status report stating that it was not able to move forward
6 with confirmation at the December 5 hearing, and that it wished to
7 continue the confirmation hearing until December 20, 2012.
8 Although YTransport was still willing to pay the same purchase
9 price and lease rates for the dealerships, more time was needed to
10 discuss the terms of the deferred portion of the purchase price.
11 In its reply to its second supplemental memorandum in support
12 of the Motion to Convert, the City contended that it needed to
13 correct numerous misrepresentations Debtor made in its third
14 supplemental opposition. First, Debtor's assertions that
15 CorePointe and the City had agreed to the modifications proposed
16 by YTransport to the Sale Transaction and modifications to the
17 Plan were false. On the contrary, the City believed that the Sale
18 Transaction had collapsed, and thus the Plan was facially
19 unconfirmable. Second, Debtor's statement that it had paid all of
20 the postpetition property taxes that had come due on all of its
21 Properties to date was also false; Debtor had never paid the
22 interest and penalties accruing on real estate taxes owed on any
23 of the Properties except the Chevrolet and Ford Dealership
24 Properties, which it admittedly stopped paying as well in October
25 2012.
26 On December 4, 2012, Debtor filed an emergency motion to
27 approve the fourth stipulation for adequate protection payments to
28 CorePointe for the months of November 2012 through April 2013.
-17-
1 Besides paying the current balance due and future monthly payments
2 of $106,500.00, Debtor agreed to pay CorePointe $1 million by
3 December 14, 2012, in exchange for CorePointe's agreement to
4 continue the Motion to Convert.10 In accordance with the parties'
5 agreement, CorePointe concurrently filed its notice of withdrawal
6 of its joinder to the Motion to Convert.
7 C. The bankruptcy court's tentative ruling on the Motion to
Convert and the December 5, 2012 hearing
8
9 It its lengthy tentative ruling dated December 4, 2012, the
10 bankruptcy court found "cause" to convert Debtor's case to
11 chapter 7 under § 1112(b)(4)(A). The City had demonstrated
12 substantial and continuing loss to the estate based on Debtor's
13 failure to pay the postpetition property taxes of $175,000 due on
14 November 1, 2012. The court further found that absence of a
15 reasonable likelihood of rehabilitation was established because no
16 evidence existed that a deal could be struck with YTransport.
17 YTransport had filed nothing in connection with the Motion to
18 Convert and had not appeared in any prior proceedings. Everything
19 Debtor wanted the court to believe about the continued viability
20 of the Sale Transaction had come only from Debtor. In the court's
21 opinion, this fell short of rebutting the City's substantial
22 evidence that no reasonable likelihood of rehabilitation existed:
23 The November 14, 2012 development in which YTransport
rejected the terms of the Transaction as originally
24 negotiated and incorporated into the Plan reflects a
failure of the parties, after more than a year of
25 negotiations to consummate the Transaction. All parties
26
10
The $1 million was not coming from the Debtor but from an
27 unknown outside source. It was not considered a loan to Debtor,
and no recourse was available against the Debtor. It is not clear
28 on the record whether this money was given to Debtor's estate.
-18-
1 agree that the Plan is premised on the successful closing
of the Transaction. The Court is not persuaded by
2 Debtor's efforts to argue that a new buyer can be found
or, based on the requested changes by YTransport, that new
3 terms to the Transaction can be reached that will allow
Debtor to successfully fund the Plan.
4
5 Tentative Ruling (Dec. 4, 2012). As a result, the confirmation
6 hearing was taken off calendar.
7 The hearing on the Motion to Convert proceeded on December 5,
8 2012. That same morning, counsel for YTransport filed a
9 declaration stating that his client was still actively negotiating
10 the Sale Transaction. At the hearing, Debtor's counsel began by
11 noting that subsequent to the court's tentative ruling, CorePointe
12 had withdrawn its joinder. Counsel admitted Debtor had not made
13 the semi-annual real property tax payment of $175,000 due on
14 November 1, 2012, but argued that the payment was not considered
15 delinquent until December 10, 2012, and that Debtor intended to
16 make the payment by then as part of the fourth stipulation for
17 adequate protection. Counsel further admitted that Debtor had not
18 made the court-ordered payments for the accruing interest and
19 penalties on the delinquent real estate taxes for the Chevrolet
20 and Ford Dealership Properties since October 2012, but said he
21 possessed a check to make the payment for November. Counsel
22 disputed the City's argument that Debtor was not collecting rents
23 from the dealerships; the money collected was being used to pay
24 the adequate protection payments, and any shortcomings for
25 September 2012 were due to some earlier overpayments. Counsel
26 admitted that his firm had an administrative claim of
27 approximately $2 million for fees, but contended that three of
28 Debtor's Properties were unencumbered, and the value of these
-19-
1 properties far exceeded the amount of the claim.
2 After hearing further argument from the parties, the
3 bankruptcy court announced its decision to convert the case to
4 chapter 7. Determining that the City had established a prima
5 facie case for "cause," the court found Debtor had not
6 sufficiently rebutted that evidence:
7 I think that it really --- at this point, I would have
preferred to hear that we will stipulate to a conversion
8 of the case if we don't meet the --- terms of the fourth
adequate protection stipulation. I didn't hear that, nor
9 did I hear that there are ongoing negotiations with
respect to a deal. There is no deal. There may be
10 potential deals out there in the future, either with
YTransport or somebody else that the Court is not aware
11 of, but as we sit here today, there is no deal.
12 So we're stuck with a motion that was filed some time
earlier this year, with continuances after continuances,
13 with no assurance that we have any deal at all. The only
thing that we're assured of is that every day the case
14 continues as a Chapter 11. There are administrative
expenses. There are other various expenses incurred by
15 the Debtor. And it behooves no one to keep this in a
Chapter 11 process . . . .
16
17 Hr'g Tr. (Dec. 5, 2012) 45:10-46:1. The court indicated that it
18 would supplement its tentative ruling to make further findings and
19 conclusions as needed, given the information disclosed at the
20 hearing.11 The court agreed to put a 14-day stay on the order
21 until December 19 so the parties could continue talking, "but
22 otherwise, the case [would] be converted." Id. at 49:16-19.
23 D. Debtor's motion to reconsider, the related order, and the
order converting Debtor's case to chapter 7
24
25 Before the bankruptcy court had entered any order converting
26 the case, Debtor moved for reconsideration on December 14, 2012,
27
11
The bankruptcy court never did supplement its findings and
28 conclusions as intended.
-20-
1 contending that significant events had occurred since the
2 December 5 hearing:
3 • YTransport had committed to closing the sale of the Chevrolet
Dealership franchise by December 31, 2012 (or shortly
4 thereafter) and entering into a long-term lease for the
Chevrolet Dealership Property and Hummer Property; however,
5 YTransport was not able to commit to purchasing the Ford or
Chrysler Dealerships at this time; and
6
• $3 million would be escrowed by a third party on behalf of
7 Debtor's estate by December 31, 2012, which would be used to
fund Debtor's performance under the fourth stipulation for
8 adequate protection payments, to pay the $175,000 tax payment
due and the interest and penalties accrued on the delinquent
9 taxes for the Chevrolet and Ford Dealership Properties, and
to pay Debtor's administrative claims.
10
11 In the interim, Debtor requested a continuance on entry of the
12 conversion order until January 3, 2013, and sought approval of the
13 leases for the Chevrolet Dealership Property and the Hummer
14 Property so the transaction with YTransport could close by
15 December 31, 2012, as required. Debtor further requested that,
16 and only in the event it provided evidence that the $3 million was
17 fully funded by December 31, the court approve the fourth adequate
18 protection stipulation, set a confirmation hearing on the Plan for
19 a date in January, and continue the Motion to Convert to May 1,
20 2013, subject to an earlier date if Debtor failed to make a timely
21 payment under the fourth stipulation.
22 CorePointe and LA County filed declarations in support of
23 Debtor's motion to reconsider. For further support, Debtor
24 offered a declaration from YTransport's counsel, who confirmed his
25 client's intent to consummate the sale of the Chevrolet Dealership
26 franchise and enter into the related property leases. Debtor also
27 offered a declaration from counsel for the $3 million donor. He
28 explained that his client, who chose to remain anonymous, held an
-21-
1 account at Barclay's Bank containing in excess of $3 million in
2 liquid funds. The $3 million would be deposited in escrow on
3 Debtor's behalf upon notification that the order converting the
4 case to chapter 7 had been vacated or otherwise modified.
5 The City opposed Debtor's motion to reconsider, contending
6 that Debtor had failed to provide any evidence that YTransport
7 actually entered into a binding commitment to purchase the
8 Chevrolet Dealership franchise and to lease the Chevrolet
9 Dealership Property and Hummer Property; counsel's declaratory
10 statement that his client was "willing" to buy the dealership and
11 lease the properties if a number of things beyond his client's
12 control happened first was not sufficient. Still convinced that
13 Debtor remained insolvent even with a $3 million gift, the City
14 argued that Debtor had failed to provide any information about the
15 "mystery" benefactor or the terms of the escrow. The City
16 contended that Debtor's motion should fail because nothing had
17 changed since December 5: (1) the Sale Transaction had fallen
18 apart, and the proposed transaction did not provide Debtor with
19 enough money to consummate the Plan; and (2) Debtor had failed to
20 pay the $175,000 property tax payment by the deadline, so the
21 estate was continuing to suffer losses.
22 With no order converting the case yet entered, Debtor filed a
23 reply and a supplemental reply to its motion to reconsider on
24 December 19 and 21, 2012, respectively. Another recent
25 development had occurred that was critical to Debtor confirming
26 its Plan as originally proposed. On December 21, WCM and WCF had
27 entered into two "non-binding" letters of intent with B & B WC,
28 LLC for the sale of the Ford and Chrysler Dealerships under the
-22-
1 same lease terms, and for the same price, that YTransport had
2 agreed to under the Sale Transaction. Binding agreements would be
3 executed on December 27, 2012, and the sale was to close by
4 March 31, 2013. This left only the Mazda Property unleased, which
5 Debtor asserted could be leased by the beginning of next year.
6 Therefore, once all of the Dealership Properties were leased as
7 contemplated by Debtor's Plan, Debtor asserted that it would have
8 sufficient cash flow to confirm its Plan, which creditors had
9 voted to accept. Attached were copies of the two letters of
10 intent signed by B & B WC, LLC.
11 In response, the City contended that even assuming the sales
12 to B & B WC, LLC and YTransport were successful, which was
13 unlikely, and assuming Debtor received the $3 million from escrow,
14 insufficient funds would be generated to satisfy the debts of
15 Debtor and its affiliates under the Plan.
16 Still with no conversion order having been entered, Debtor
17 filed a second supplemental reply to its motion to reconsider on
18 January 1, 2013. The players had changed again. On December 31,
19 2012, WCM and WCF had entered into a letter of intent with Carlos
20 Hidalgo ("Hidalgo"), a highly qualified buyer whom the City had
21 previously approved, for the sale of all of the Dealership
22 Franchises and lease of all Dealership Properties, including the
23 Mazda Property, under the same lease terms, and for the same
24 price, that YTransport had agreed to under the Sale Transaction.
25 A copy of the letter of intent signed by Hidalgo was attached.
26 Accordingly, Debtor's Plan would be fully funded and was now
27 confirmable. Hidalgo was to be a back-up buyer should YTransport
28 not proceed with the Sale Transaction in whole or in part. Debtor
-23-
1 also informed the court that WCM had to file a chapter 11
2 bankruptcy on December 28, 2012, primarily because GM required
3 that the closing of its transaction occur by December 31, 2012, or
4 its franchise would be terminated, and that clearly was not going
5 to happen by the deadline.
6 On January 2, 2013, the bankruptcy court entered its
7 memorandum decision, its order denying Debtor's motion to
8 reconsider, and its order granting the Motion to Convert
9 ("Conversion Order"). In short, the court found that the "new
10 evidence" presented by Debtor was not sufficient to alter its
11 prior ruling granting the Motion to Convert. Debtor's argument
12 that the $3 million cash infusion would prevent loss was
13 unsupported; Debtor had provided only evidence that the money was
14 ready for transfer, not that the funding was currently available
15 to prevent further postpetition diminution of the estate.
16 Further, the Hidalgo letter of intent was explicitly "non-
17 binding," and, in any event, Hidalgo still had numerous "hoops to
18 jump through in order to even be in a position to follow through
19 on his stated desire to replace YTransport as purchaser." The
20 court concluded:
21 The Debtor has a long history of proposing last minute
fixes to avoid potential failure of its attempts to
22 reorganize. Each was a mirage. This situation is no
different. The additional evidence provided by the
23 Debtor includes letters of intent from B & B to
purchase the properties that YTransport does not
24 purchase, but also includes a letter of intent to
fully replace YTransport in the Sales Transaction.
25 The Court finds that, in its haphazard and frenetic
race to avoid conversion of the case, Debtor has not
26 successfully rebutted the claim that cause exists
under § 1112(b)(4)(A). A 'reasonable likelihood of
27 rehabilitation' is no more in prospect now than it was
on December 5, 2012 and 'diminution of the estate'
28 continues so long as the anonymous benefactor remains
-24-
1 a prospective rather than actual benefactor.
2 Memorandum Decision (Jan. 2, 2013) at 4-5.
3 On January 3, 2013, Debtor filed a declaration from John
4 Egli, consultant to the anonymous benefactor. He confirmed that
5 the $3 million had been wired to the account of Dighton, Debtor's
6 limited partner, and was subject to Dighton's possession and
7 control for Debtor's immediate use. Whether the bankruptcy court
8 ever reviewed this late-filed declaration is unknown. Notably,
9 Debtor submitted no evidence of the escrow's existence or proof
10 that the wire transfer occurred. This timely appealed followed.
11 II. JURISDICTION
12 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
13 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
14 III. ISSUES
15 1. Did the bankruptcy court abuse its discretion in converting
16 Debtor’s case to chapter 7?
17 2. Did the bankruptcy court abuse its discretion in denying the
18 motion to reconsider?
19 IV. STANDARDS OF REVIEW
20 The bankruptcy court's decision to convert a chapter 11 case
21 to chapter 7 is reviewed for an abuse of discretion. Pioneer
22 Liquidating Corp. v. U.S. Trustee (In re Consol. Pioneer Mortg.
23 Entities), 264 F.3d 803, 806 (9th Cir. 2001); Johnston v. JEM Dev.
24 Co. (In re Johnston), 149 B.R. 158, 160 (9th Cir. BAP 1992).
25 Likewise, the bankruptcy court's denial of a motion for
26 reconsideration is reviewed for an abuse of discretion. Arrow
27 Elec., Inc. v. Justus (In re Kaypro), 218 F.3d 1070, 1073 (9th
28 Cir. 2000); Sewell v. MGF Funding, Inc. (In re Sewell), 345 B.R.
-25-
1 174, 178 (9th Cir. BAP 2006). A bankruptcy court abuses its
2 discretion if it applied the wrong legal standard or its findings
3 were illogical, implausible or without support in the record.
4 TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th
5 Cir. 2011). We can affirm on any basis supported by the record,
6 even where the issue was not expressly considered by the
7 bankruptcy court. O'Rourke v. Seaboard Sur. Co. (In re E.R.
8 Fegert, Inc.), 887 F.2d 955, 957 (9th Cir. 1989).
9 V. DISCUSSION
10 A. The bankruptcy court did not abuse its discretion when it
converted Debtor's case to chapter 7.
11
12 The statutory authority for conversion of a chapter 11
13 bankruptcy case is found in § 1112(b), which provides that the
14 bankruptcy court shall convert or dismiss a case, whichever is in
15 the best interests of creditors and the estate, for cause.
16 Section 1112(b)(1). The bankruptcy court has wide discretion in
17 determining what constitutes "cause" adequate for conversion under
18 § 1112(b). In re Consol. Pioneer Mortg. Entities, 248 B.R. at
19 375; In re Johnston, 149 B.R. at 160. The burden of proof is on
20 the moving party. In re Creekside Senior Apartments, L.P.,
21 489 B.R. 51, 60 (6th Cir. BAP 2013); In re Hinesley Family Ltd.
22 P'ship No. 1, 460 B.R. 547, 553 (Bankr. D. Mont. 2011).
23 1. Cause existed for conversion under § 1112(b)(4)(A).
24 The bankruptcy court found that "cause" existed due to the
25 substantial or continuing loss to or diminution of the estate and
26 the absence of a reasonable likelihood of rehabilitation.
27 Section 1112(b)(4)(A). As the movant, the City had to establish
28 both (1) a substantial and continuing loss to or diminution of the
-26-
1 estate and (2) absence of a reasonable likelihood of
2 rehabilitation. In re Bay Area Material Handling, Inc., 76 F.3d
3 384 (9th Cir. 1996) (unpublished); In re Creekside Senior
4 Apartments, L.P., 489 B.R. at 61. "The loss may be substantial or
5 continuing. It need not be both in order to constitute cause
6 under § 1112(b)(4)(A)." In re Creekside Senior Apartments, L.P.,
7 489 B.R. at 61 (citing 7 COLLIER ON BANKRUPTCY ¶ 1112.04[6][a][i]
8 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2012)).
9 a. A substantial and continuing loss to or diminution
of the estate
10
11 The substantial or continuing loss prong is demonstrated by a
12 loss that will "materially negatively impact the bankruptcy estate
13 and the interest of creditors," or "dwindling liquidity, or
14 illiquidity resulting in unpaid postpetition debts which usually
15 constitute administrative expenses that will take priority over
16 prepetition claims." 7 COLLIER ON BANKRUPTCY at ¶ 1112.04[6][a][i].
17 See also In re Schriock Constr., Inc., 167 B.R. 569, 575 (Bankr.
18 D.N.D. 1994)("This element can be satisfied by demonstrating that
19 the debtor incurred continuing losses or maintained a negative
20 cash flow position after the entry of the order for relief."). To
21 determine the existence of a continuing loss to, or diminution of,
22 the estate, the bankruptcy court must look beyond financial
23 statements and fully evaluate the present condition of a debtor's
24 estate. In re Motel Props., Inc., 314 B.R. 889, 894 (Bankr. S.D.
25 Ga. 2004)(citing In re Moore Constr., Inc., 206 B.R. 436, 437-38
26 (Bankr. N.D. Tex. 1997)).
27 In the bankruptcy court's December 4 tentative ruling, which
28 it incorporated into its oral findings at the December 5 hearing,
-27-
1 the court found that a continuing loss to or diminution of the
2 estate existed based on Debtor's failure to make its postpetition
3 property tax payment of $175,000 due on November 1, 2012. It
4 further found at the December 5 hearing that, as long as the
5 Debtor stayed in chapter 11, it continued to accrue administrative
6 and other various expenses.
7 Debtor contends that the bankruptcy court erred in
8 interpreting "continuing loss to or diminution of the estate" to
9 mean the incurrence of expenses regardless of the debtor's ability
10 to meet those expenses - i.e., that incurring expenses equals a
11 loss to the estate, thereby constituting "cause." Nothing in the
12 court's ruling indicates that it interpreted § 1112(b)(4)(A) as
13 Debtor contends. While the court did comment in its oral ruling
14 that Debtor continued to accrue administrative and other expenses
15 in chapter 11, when viewed in context with its entire ruling, the
16 court was implicitly finding that without the deal with YTransport
17 (or a substitute buyer), Debtor was unable to pay its substantial
18 $2 million (and counting) administrative expenses, which
19 constituted a loss to or diminution of the estate. This finding
20 is made clear by the court's statements in its memorandum on the
21 motion to reconsider that "diminution of the estate" continued as
22 long as the $3 million gift needed to pay these expenses was
23 "prospective" rather than "actual." Although § 1112(b)(4) does
24 not list administrative insolvency as cause to convert a
25 chapter 11 case, a court may still consider this factor. In re BH
26 S & B Holdings, LLC, 439 B.R. 342, 349 (Bankr. S.D.N.Y.
27 2010)(citations omitted).
28 The Debtor alternatively argues that, even if the bankruptcy
-28-
1 court properly applied § 1112(b)(4)(A), no evidence in the record
2 supports a finding of continuing loss to or diminution of the
3 estate. We disagree. First, as the bankruptcy court found,
4 Debtor had failed to make the $175,000 property tax payment due
5 November 1, 2012. Granted, this may not have been the strongest
6 fact to show loss considering that no penalties would accrue if
7 Debtor made the payment by December 10, 2012, but other facts
8 support the bankruptcy court's decision.12
9 Although Debtor disputes it, the record also reflects that
10 Debtor was not consistently collecting the approximate $135,000
11 monthly rent from the dealerships. The MORs from June, September
12 and October 2012 show that collections were $180.00, $7,200.00 and
13 $46,000.00, respectively. Further, as of October 2012, Debtor had
14 stopped making the monthly $7,214.26 payment for the interest and
15 penalties accruing on the delinquent real estate taxes for the
16 Chevrolet and Ford Dealership Properties. Debtor also never made
17 any payments for the interest and penalties accruing on the
18 delinquent real estate taxes on its nine other Properties.
19 Further, even if two-thirds of Debtor's continuing monthly
20 operating losses were due to its accrual-based accounting, Debtor
21 admitted that the other one-third was attributed to the accrual of
22 real property taxes, which could only be paid in full with
23 proceeds from the Sale Transaction or tenant rents, neither of
24 which was generating sufficient funds. Finally, although not
25 expressly noted by the bankruptcy court, but supported by the
26 record, it was clear that Debtor was unable to function without
27
12
At oral argument, Debtor revealed that it did not make the
28 $175,000 tax payment on December 10, 2012.
-29-
1 the promised, but unfulfilled, $3 million cash infusion. Debtor's
2 inability to pay its obligations without this outside money only
3 establishes further loss.
4 Consequently, all of these facts established a continuing
5 loss to, or diminution of, the estate, and we see no clear error
6 by the bankruptcy court.
7 b. Absence of a reasonable likelihood of
rehabilitation
8
9 Section 1112(b)(4)(A) also requires the bankruptcy court to
10 find an absence of a reasonable likelihood of rehabilitation.
11 "The issue of rehabilitation for purposes of § 1112(b)(4)(A) is
12 not the technical one of whether the debtor can confirm a plan,
13 but, rather, whether the debtor's business prospects justify
14 continuance of the reorganization effort." In re Wallace, 2010 WL
15 378351 at *4 (Bankr. D. Idaho Jan. 26, 2010)(quotations and
16 citations omitted). "Rehabilitation is a different and much more
17 demanding standard than reorganization." In re Creekside Senior
18 Apartments, L.P., 489 B.R. at 61 (citing In re Brutsche, 476 B.R.
19 298, 301 (Bankr. D.N.M. 2012)(citing 7 COLLIER ON BANKRUPTCY at
20 ¶ 1112.04[6][a][ii])).
21 In its tentative ruling, the bankruptcy court found the
22 absence of a reasonable likelihood of rehabilitation based on a
23 lack of evidence that the Sale Transaction with YTransport, which
24 the parties agreed was the lynchpin to the Plan, would close as
25 planned. Up until then, no representative from YTransport had
26 submitted a declaration or appeared at any hearing establishing
27 that the deal, as set forth in the Plan, would proceed. Although
28 counsel for YTransport attempted to file a declaration on the
-30-
1 morning of the December 5 hearing, it was filed about fifteen
2 minutes after the hearing had begun. The bankruptcy court
3 articulated these same reservations about the lack of a viable
4 deal in its oral ruling on December 5.
5 Debtor contends the bankruptcy court erred by interpreting
6 the "absence of a reasonable likelihood of rehabilitation" to mean
7 the "absence of the likelihood of confirmation of the Plan." We
8 disagree that this was the court's interpretation. While the
9 bankruptcy court expressed its concern with Debtor's ability to
10 confirm its Plan, the court was clearly focused on the viability
11 of the Sale Transaction with YTransport — the only potential buyer
12 before it at that time. It concluded that, based on recent
13 developments with YTransport's proposed deal-killing modifications
14 to the Sale Transaction, and no other buyers on the horizon, such
15 bleak business prospects did not justify Debtor continuing with
16 its reorganization effort.
17 We also reject Debtor's argument that no evidence in the
18 record supports a finding of an absence of a reasonable likelihood
19 of rehabilitation. The evidence before the bankruptcy court on
20 December 5, 2012, was: Debtor had been in chapter 11 for
21 seventeen months; the sale it had been negotiating for the past
22 year, which was its only hope for rehabilitation at that time, had
23 just fallen through; and the estate was experiencing continued
24 losses, including the accrual of substantial professional fees,
25 with no end in sight. Debtor's argument that it had presented the
26 bankruptcy court with contrary evidence of several alternative
27 rehabilitation options and the $3 million "no strings attached"
28 gift escrow lacks merit. These other alternatives and the
-31-
1 unsubstantiated $3 million gift were not offered until after the
2 bankruptcy court had made its ruling on December 5. Even when the
3 court did consider this evidence in its decision on the motion to
4 reconsider, it was not persuaded that any of these options were
5 viable - "each was a mirage." Accordingly, the record supports
6 the bankruptcy court’s finding of an absence of a reasonable
7 likelihood of Debtor's rehabilitation.
8 Debtor's argument that the bankruptcy court erroneously
9 placed the burden of proof on Debtor to establish the "absence of
10 cause" lacks merit. In its tentative ruling, the bankruptcy court
11 acknowledged that the City had the burden to establish both
12 elements for cause under § 1112(b)(4)(A). However, it concluded
13 in its tentative ruling and at the December 5 hearing that Debtor
14 had not adequately rebutted the City's prima facie case by showing
15 either that no continuing loss to or diminution of the estate
16 existed, or that rehabilitation was reasonably likely. See Matter
17 of Woodbrook Assocs., 19 F.3d 312, 317 (7th Cir. 1994)(debtor is
18 obligated to produce evidence in opposition to a well-supported
19 motion under § 1112(b)); In re Lizeric Realty Corp., 188 B.R. 499,
20 503 (Bankr. S.D.N.Y. 1995)(once cause is shown, "it is incumbent
21 upon debtor to show that relief under § 1112(b) is not
22 warranted"). Further, Debtor's argument here rests on the faulty
23 premise that the City submitted "no evidence whatsoever that the
24 Debtor had no reasonable likelihood of rehabilitation." On this
25 record, we conclude the bankruptcy court properly held the City to
26 its burden.
27 ///
28 ///
-32-
1 B. The bankruptcy court did not abuse its discretion when it
denied the motion to reconsider.
2
3 A motion under Civil Rule 59(e), made applicable here by
4 Rule 9023, should not be granted absent highly unusual
5 circumstances, unless the court is presented with newly discovered
6 evidence, committed clear error, or if there is an intervening
7 change in the controlling law. Marlyn Nutraceuticals, Inc. v.
8 Mucos Pharma GmbH & Co., 571 F.3d 873, 880 (9th Cir. 2009).
9 Although Debtor appealed the order denying reconsideration of
10 the Conversion Order, Debtor does not articulate in its appeal
11 briefs any specific argument as to why the bankruptcy court abused
12 its discretion in denying it. As a result, this issue has been
13 waived. City of Emeryville v. Robinson, 621 F.3d 1251, 1261 (9th
14 Cir. 2010)(appellate court in this circuit "will not review issues
15 which are not argued specifically and distinctly in a party’s
16 opening brief."). Even if we did consider it, we see no error in
17 the bankruptcy court's decision that reconsideration was
18 inappropriate under the grounds set forth above.
19 VI. CONCLUSION
20 For the foregoing reasons, we AFFIRM.
21
22
23
24
25
26
27
28
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