October 6, 2014
Authored by: Amanda Cartwright and Bob Miller
In Ryerson, the court held that a debtor’s burden of showing a successful reorganization changes depending on the timing in the case. The court found that early in the case, a debtor must show that reorganization is “plausible,” near the expiration of the exclusivity period a debtor must show that reorganization is “probable,” and, after expiration of the exclusivity period, the debtor must show reorganization is “assured.”
I. Short Factual Background.
In 2003, the debtor, a real estate developer, used funds from a line of a credit to purchase acres of contiguous lakefront land on Lake Coeur d’Alene in Idaho. The debtor’s obligations under the line of credit were restated and evidenced by three promissory notes secured by liens on the property. In 2013, the debtor defaulted on his obligations and filed for chapter 11 relief less than two weeks prior to the scheduled foreclosure sale for the property. Twenty-six days after the petition date, the lender requested relief from the automatic stay under Section 362(d)(2) to pursue foreclosure on the property.
II. Legal Discussion.
The court first examined the value of the property and the various claims against the property to determine if the debtor lacked equity. The court found that after taking into considering the lender’s claim, various judgment liens, and claims for unpaid real property taxes, the debtor lacked equity in the property.
The court cited United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375-76 (1988) for the proposition that after the party seeking relief from the automatic stay demonstrates the debtor lacks equity in the property, the burden then shifted to the debtor to show both a “reasonable possibility of successful reorganization within a reasonable time” and “if there is conceivably to be an effective reorganization, this property will needed for it.” Id. Although acknowledging that a relief stay hearing should not be converted into a confirmation hearing, the court stated that the “effective reorganization is a moving target, which is more difficult to attain as the chapter 11 case progresses” and that the “debtor’s burden increases from showing a successful reorganization is ‘plausible’ early in the case, to showing reorganization is ‘probable’ near the expiration of the exclusivity period, and finally to showing reorganization is ‘assured’ after the exclusivity period expires.” In re Ryerson, 2014 WL 642876, at *7 (quoting In re Sun Valley Newspapers, Inc., 171 B.R. 71, 75 (B.A.P. 9th Cir. 1994)).
In deciding which standard to apply, the “plausible” standard—reorganization is “plausible” early in the case—the “probable” standard—reorganization is “probable” near the expiration of the exclusivity period—or the “assured” standard—after the exclusivity period expired, reorganization must be “assured”—the court noted that the lender had filed its relief stay motion only twenty-six days after the petition date, but by the time the court heard the motion, the exclusivity period had expired and the debtor had filed a plan of reorganization. The court held, however, that the debtor had not carried its burden even under the least stringent “reorganization is plausible” standard.
The proposed plan of reorganization failed to address key issues, including, among other things, the lender’s ability to credit bid and the logistics of payment of claims from the sale of the property in question while simultaneously attempting to reserve funds to later attack lender’s claim. Additionally, the proposed plan was predicated on using proceeds from the sale of the property to pay other creditors; however, the evidence established that the property would not generate value beyond the amount of the secured claims.
This case will be helpful in the representation of lenders, particularly in single asset real estate cases where the debtor under Section 362(d)(3) must either begin making adequate protection payments or file a plan of reorganization that has a reasonable likelihood of being confirmed within a reasonable time, because it holds that further along in a bankruptcy case, it becomes more difficult for a debtor to demonstrate the likelihood of a successful reorganization.