The Bankruptcy Court for the Northern District of California recently granted a secured lender’s request for relief from the automatic stay, pursuant to sections 362(d)(1) and (d)(2) of the Bankruptcy Code, to allow a trustee’s sale of the debtor’s marina under state law. In re Delta Waterways, LLC, Case No. 18-42076-CN (Bankr. N.D. Cal. December 7, 2018). Several missteps and omissions by the debtor appear to have driven the Court’s decision.
Delta Waterways, LLC (“Delta Waterways”) operated a marina in Brentwood, California. On September 6, 2018, it filed chapter 11 to stay the foreclosure proceedings initiated by Atlantic Capital Finance Company (”Atlantic Capital”), which held the senior deed of trust against the marina.
Shortly after the bankruptcy filing, Atlantic Capital filed its motion for relief from the automatic stay.
Pursuant to section 362(d)(1) of the Bankruptcy Code, “cause” existed to lift the stay, because Allied Capital was not being provided adequate protection and it had demonstrated that it was undersecured and had incurred substantial postpetition attorneys’ fees and costs that were recoverable under its note and deed of trust. Indeed, the debtor could not afford to make adequate protection payments, as its operating expenses and debt servicing obligations well-exceeded its monthly revenue in 2018.
The evidence also demonstrated that the Delta Waterways used Atlantic Capital’s cash collateral, without court approval, including failing to deposit rents in the DIP account and allowing the debtor’s owner to use the DIP account as his own. This behavior heightened the Court’s concern for Allied Capital’s lack of adequate protection. See, e.g., In re Madawaska Hardscape Prods., 476 B.R. 200, 215 (Bankr. D.S.C. 2012).
In defense of its reorganization efforts, Delta Waterways presented a potential investor who testified he “could” provide needed funding to the marina. But, the Court found his proposal to revive the marina was more akin to “Field of Dreams” than a viable reorganization plan. Not only was the investor not ready to commit a specific level of funding, he also could not testify as to whether the funding would be used to cure arrears owed to Atlantic Capital or pay for the marina’s substantial deferred maintenance and/or his proposed, innovative improvements. On top of that, the investor had no experience operating a marina. The potential investor therefore did not provide a realistic prospect for providing adequate protection to Atlantic Capital.
The Court also granted relief under § 362(d)(2), which authorizes relief (a) if a debtor does not have any equity in a property and (b) such property is not necessary to an effective reorganization. An “effective reorganization” requires that there be a reasonable possibility of a successful reorganization within a reasonable time. See United Sav. Ass’n v. Timbers of Inwood Forest Assoc. Ltd., 484 U.S. 365, 376, 98 L.Ed. 2d 740, 108 S.Ct. 626 (1988). However, this element is a moving target, depending on the stage of the case, and at the earlier stages (before expiration of the exclusivity period) the debtor need only show that a successfully reorganization within a reasonable time is “plausible.” Sun Valley Newspapers v. Sun World Corp. (In re Sun Valley Newspapers), 171 B.R. 71, 75 (Bankr. 9th Cir. 1994).
Here, the first element of section 362(d)(2) was met because there was no equity in the marina, given that Atlantic Capital’s secured debt exceeded the value of the marina. The second element was met because, although the case was in its early stages, a successful reorganization within a reasonable time was not plausible. In particular, the proposed chapter 11 plan was premised on an iffy investment from a potential investor that, in any instance, purported to cover too many expenses, including the modernization of the marina. Delta Waterways also offered no real evidence regarding what permits would be necessary to modernize and expand its operations, what further negotiations with the potential investor were necessary, and the negotiation time lines with the other potential business partners of the debtor. Finally, the debtor’s financial projections relied too heavily on a potential tourist attraction, which Atlantic Capital’s expert discounted.
Accordingly, the Court concluded that a successful reorganization within a reasonable time was not plausible and relief from stay under section 362(d)(2) was warranted.
Takeaway– secured creditors, like Atlantic Capital, have recourse under section 362 when a debtor is not complying with certain sections of the Bankruptcy Code (e.g., §§ 361 and 363) and the debtor also has no equity in property. Moreover, in instances where a debtor is defending against a section 362(d)(2) motion, it behooves the debtor, who is relying on a white knight to fund a chapter 11 plan, to make sure the white knight’s solution is solid, explainable and well-planned. Anything less may be deemed not plausible, as the Court found in the Delta Waterways case.