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