In a recent Chapter 11 bankruptcy case here in Texas, a corporate debtor filed bankruptcy in an effort to protect their sole asset, a commercial building on which his company had a mortgage. The creditor in the case demanded that the court exempt them from the automatic stay.
After hearing arguments on both sides, the bankruptcy court granted the creditor automatic stay relief for three reasons:
- It was apparent that the debtor only filed Chapter 11 bankruptcy because they wanted to gain an advantage over the creditor in a dispute about the mortgage attached to the real estate property. However, filing Chapter 11 bankruptcy to gain a legal advantage over a creditor is not a valid reason for bankruptcy. Chapter 11 bankruptcy and other bankruptcy chapters are designed to give financial relief to those who are financially distressed. The bankruptcy court found that the debtor had no financial reason for filing Chapter 11 bankruptcy.
- Even if the debtor did have a financial reason for filing Chapter 11 bankruptcy, he failed to submit operating reports to the bankruptcy court. Failure to submit operating reports in Chapter 11 bankruptcy can end in the case being dismissed.
- But probably the most important factor in this bankruptcy case is that the debtor did not demonstrate a financial ability to protect the creditor’s interest in the property. In other words he would not be able to operate his business successfully and pay the mortgage attached to the property even if the automatic stay was kept in place.
This is what the bankruptcy court said:
“Moreover, the evidence indicates the Debtor’s inability to provide adequate protection of Sterling’s interest in Debtor’s property. Debtor has present revenue of $4,000 per month, and it appears it will have additional revenue of $6,000 per month beginning in July, 2010. This revenue is insufficient to pay the Debtor’s expenses and also provide funds to make adequate protection payments to Sterling. The only other apparent potential source of revenue during the short term is Debtor’s lease with the San Jacinto Pawn Shop, an entity controlled by Marlin, and as to which Marlin’s testimony is that it cannot begin operations unless and until it obtains a sizable capital investment from a new equity investor.”
“Marlin has testified that he is unable to provide capital for the pawn shop, though apparently he continues to seek out real estate investments in his individual capacity. There is insufficient evidence as to Marlin’s ability to quickly obtain the needed equity investor for San Jacinto Pawn, such that it would contribute to Debtor’s revenues in the short term. Likewise, Debtor’s intermediate term plan to increase revenues by leasing the remainder of the first floor property to individual lawyers requires a significant capital investment, which Marlin is unprepared to make, and there is no evidence he will be able to raise such capital.The debtor in this Chapter 11 bankruptcy was unable to prove that he would be able to benefit from the automatic stay by fulfilling his financial obligations to the creditor. Because of this, the automatic stay was lifted and the creditor was allowed to move forward with their collections actions.”