Normally, a single asset real estate chapter 11 is filed on the eve of a foreclosure sale by the debtor who is making one last ditch attempt to keep the property. Meanwhile, the secured lender wants out of bankruptcy as quickly as possible so that it may go to state court and proceed with a foreclosure as quickly as possible. In this case, the opposite was true. The secured lender, Northbrook Loans LLC had been sitting on its rights to hold a foreclosure sale since November of 2012. Meanwhile, a receiver who has been in possession since June of 2011 has been collecting fees to manage the property, probably from the secured lender (who else?). The debtor, BlackAMG LLC, came to bankruptcy court with a plan to sell the property to a third party, who had agreed to finance the bankruptcy process in order to consummate the sale. When that transaction fell through, the debtor moved to dismiss the case, which was opposed by Northbrook who favored conversion to Chapter 7. All the other creditors and the United States Trustee (the Department of Justice watchdog for bankruptcy cases) agreed that dismissal was appropriate. Wait, but why? Under Section 1112(b), the court may dismiss a chapter 11, or convert it to chapter 7, whichever is in the best interest of creditors. For purposes of Section 1112(b), creditors means (for the most part) unsecured creditors, because secured creditors are fully protected inside or outside bankruptcy. Here, the bankruptcy court found that most likely, nothing would go to unsecured creditors in bankruptcy court or in state court, if money was leftover, the unsecured creditors would be entitled to it outside of bankruptcy as well, and the mechanic’s lien holders would get whatever relief in state court regardless of what was done in bankruptcy court, and that there were no allegations of fraud which a chapter 7 trustee could investigate to possibly bring money into the estate to repay creditors. The bankruptcy court found none of Northbrook’s arguments convincing. Accordingly, she dismissed the case instead of converting. That ruling was reviewed for abuse of discretion, and unsurprisingly, no abuse of discretion was found. One reason may have been Northbrook’s belief that it could have gotten out of a sales contract that it now finds onerous. During the foreclosure, Northbrook agreed to sell the property to Wells Street Companies at a predetermined price, provided Northbrook obtained title after a judicial sale. Apparently, the value of the real estate (3339-41 N. Halsted Street in Chicago) had appreciated considerably, and Northbrook believed that a sale by a chapter 7 trustee would have let it out of that contract, and Northbrook would not have been forced to sell to Wells Street Companies’ successor. Whatever the merits of that theory (and who knows, maybe the sale contract was drafted so that this would come to pass), it ignores what a chapter 7 trustee was likely to do. On seeing a single asset encumbered by a mortgage worth much more than the property, the trustee would have promptly abandoned it and issued a no-asset report. The LLC, being not an individual, would not have received a discharge. The bankruptcy case would have closed, and the parties would have found themselves in state court, waiting for a judicial sale.
