In re: Plaza Antillana Inc.

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: February 14, 2014
• Docket: 13-10013
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT 5 FOR THE DISTRICT OF PUERTO RICO

3 || IN RE: CASE NO. 13- 10013 (ESL) 4 || PLAZA ANTILLANA INC. CHAPTER 11 ° Debtor 6 7 OPINION AND ORDER 8 This case is before the court upon LSREF2 Island Holdings, Ltd.’s (hereinafter referre 9 as “Island Holdings”) Motion to Dismiss for Bad Faith or for Cause filed on December 9 10 (Docket No. 6). Island Holdings’ motion to dismiss the case for “cause” pursuant to 11 11 U.S.C. §1112(b) is premised upon the following allegations: (i) Plaza Antillana, Inc. (hereinafte 12 ||referred to as “Debtor” or “Plaza Antillana”) is a Single Asset Real Estate (“SARE”) case an 13 same was filed in bad faith because it satisfies all six (6) Piccadilly factors; (ii) there i 14 ||“substantial or continuing loss or diminution and absence of a reasonable likelihood o 15 rehabilitation” pursuant to 11 U.S.C. §1112(b)(4)(A) since Debtor has no income to service it 16 || debt and there is a substantial and continuing diminution of the estate due to the interest accruin 17 the secured debt and “[t]here is nothing in this bankruptcy case to suggest that financia 18 || viability for this Debtor is reasonably likely in the near future;” and (iii) a plan of reorganizatio 19 not feasible for the Debtor because it has no income or an ability to reorganize. Debtor filed it 20 to LSREF2 Island Holdings, Ltd. Motion to Dismiss for Bad Faith or For Cause o 21 || December 23, 2013 (Docket No. 16). For the reasons stated herein, Island Holdings’ motion t 22 || dismiss pursuant §1112(b) is hereby granted. 23 Jurisdiction 24 The Court has jurisdiction pursuant to 28 U.S.C. §$1334(b) and 157(a). This is a cor 25 || proceeding pursuant to 28 U.S.C. §157(b)(1) and (b)(2)(A). Venue of this proceeding is prope 26 |! under 28 U.S.C. $$1408 and 1409. 27 -|-

1 Procedural Background 2 Plaza Antillana filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code o 3 || December 2, 2013. The Debtor lists a commercial property in Schedule A (Real Property) with 4 || current value of Debtor’s interest in the property of $3.5 million and a secured claim in th > amount of $8,842,881.91. The Debtor lists in Schedule D (Creditors Holding Secured Claims 6 |!Island Holdings as a secured creditor of a claim in the amount of $8,842,881.91, of whic 7 11 $5,342,881.91 is the unsecured portion. The claim was incurred in the year 2007 as a firs 8 || mortgage lien over the commercial property. The Debtor lists in Schedule H (Codebtors) ? ||Restaurants Investment, Inc. and Antonio Morales Padilla as co-debtors regarding the Islan 10 || Holdings creditor. 11 On December 9, 2013, Island Holdings filed a Motion to Dismiss for Bad Faith or fo 12 || Cause arguing that: (i) Plaza Antillana is a SARE case and the same was filed in bad fait 13 || because it satisfies all six (6) “Piccadilly” factors’; (ii) there is “substantial or continuing loss o 14 || diminution and absence of a reasonable likelihood of rehabilitation” pursuant to 11 U.S.C! 15 || §1112(b)(4)(A) since Debtor has no income to service its debt and there is a substantial an 16 || continuing diminution of the estate due to the interest accruing on the secured debt and “[t]her 17 nothing in this bankruptcy case to suggest that financial viability for this Debtor is reasonabl 18 || likely in the near future;” and (iii) a plan of reorganization is not feasible for the Debtor becaus 13 |! it has no income or an ability to reorganize (Docket No. 6). On December 11, 2013, the cou 20 |! ordered the Debtor to file an opposition to Island Holdings’ motion to dismiss within 14 days 21 notice of this Order and upon Debtor’s timely response an evidentiary hearing wa 22 1! scheduled for January 7, 2014 (Docket No. 9). 23 On December 20, 2013, the Debtor filed an Urgent Motion Requesting Order to Allo 24 || Debtor Access to Real Property that Belongs to the Estate alleging that Island Holdings is 25 |! continuously violating the provisions of the automatic stay because it is exercising control an 26 57 || ' See Inse Phoenix Piccadilly, Ltd., 849 F. 2d 1393, 1394-1395 (11" Cir. 1988).

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1 || holding possession over the real property of the estate through a security guard company tha 2 |! places 24-hour officer surveillance on the real property, thus affecting the Debtor’s ability t 3 || reorganize. The Debtor requests the court to Order Island Holdings to terminate its possession o 4 Debtor’s real property (Docket No. 14). On December 20, 2013, Island Holdings filed || Motion for Entry of Order Denying Debtor’s “Urgent” Motion alleging that the relief requeste 6 |! by Debtor in its Urgent Motion is unwarranted because the Debtor acquiesced to the presence o 7 security officers at the real property, paid by Island Holdings, to protect the single asset, 8 || given that the same has been subject to vandalism and damages in the past. The Debtor an 9 || Island Holdings have been in constant communication and, “...Debtor has always been provide 10 || access to show the property to prospective tenants.” Moreover, the Debtor’s Urgent Motion fails 11 |! to comply with Fed. R. Bankr. P. 7001(7) and PR LBR 9013-2 (Docket No. 15). On Decembe 12 || 23, 2013, the court denied the motion filed by the Debtor requesting access to the real property, 13 || on the ground that a request for turnover of property of the estate and/or injunctive relief must b 14 || initiated as an adversary proceeding pursuant to Fed. R. Bankr. P. 7001(1, 7) (Docket No. 17). 15 On January 3, 2014, the Debtor filed its Proffer of Evidence in Support to Debtor’s Repl 16 |! t0 LSREF2 Island Holdings, Ltd Motion to Dismiss for Bad Faith and for Cause attaching 17 || sworn affidavit by Mr. Antonio Morales Padilla, principal officer of Debtor, and a title study o 18 || the real property dated December 16, 2011 (Docket No. 20). On the same date, the parties filed 13 || Joint Motion in Compliance with Order filing their pre-trial report for the scheduled January 7, 20 evidentiary hearing (Docket No. 21). On January 7, 2014, Island Holdings filed proof o 21 || claim #2-1 as a secured creditor of a mortgage loan in the amount of $8,482,881.91. 22 The evidentiary hearing was held on the scheduled date. The court stated that it wil 23 || follow its prior ruling in the case of In re Costa Bonita Beach Resort, 479 B.R. 14 (Bankr. D.P.R. 24 11/2012), to determine if there is cause for dismissal for bad faith (or lack of good faith) in filing 25 chapter 11 case. The court heard the testimony of Mr. Juan A. Crespo and Mr. Antonio J) 26 || Morales Padilla. The court took the matter under advisement (Docket No. 25). 27 -3-

1 Findings of Facts 2 The parties agree that the following facts are uncontested. 3 1. Island Holdings acquired all of FirstBank Puerto Rico’s (predecessor secured creditor, 4 hereinafter referred to as “FirstBank”’) rights, title and interest in, to and under a certai 5 credit facility and the credit agreement on March 28, 2013 subject to the specific terms o 6 the agreement. Hudson Puerto Rico, LLC (“Hudson”) serves as the special servicer fo 7 the Loans. 8 2. The Court of First Instance of the Commonwealth of Puerto Rico, San Juan part, (th 9 “state court”) granted a consent judgment against Plaza Antillana, Inc., Restaurants 10 Investment, Inc., and Mr. Antonio Morales Padilla. 11 3. The state court consent judgment states on the second page that all the parties, includin 12 the Debtor have authorized and agreed for FirstBank to execute the mortgages, th 13 various mortgage promissory notes, and the public foreclosure sale of the real propert 14 that they guarantee in order to fulfill the payments of the sums indebted. 15 4. On April 1, 2013, the state court granted judgment in favor of FirstBank. On August 20, 16 2013, Island Holdings appeared in the case and filed a motion for execution of judgment. 17 The state court granted said motion on September 12, 2013, and issued the correspondin 18 Orders to execute the Judgment as proposed by Island Holdings. 19 5. A notice of public sale was issued by the state court on October 16, 2013, scheduling th 20 public sale to be held on December 3, 2013. On December 3, 2013, at the public sale 21 state court counsel was served with a notification of this bankruptcy filing, which was o 22 the eve of the foreclosure, namely, on December 2, 2013. 23 6. The bankruptcy petition indicates that the Debtor has only one asset, the Plaza Antillan 24 property and four (4) unsecured creditors whose claims total $4,875.00. The Debtor has 25 no employees, directors or officers. The Plaza Antillana property is subject to 26 foreclosure action as a result of arrearages on debt with Island Holdings. The Debtor’s 27 -4-

1 financial problems are essentially a dispute between the Debtor and Island Holdings, 2 whose secured debt accounts for 99.994% of Debtor’s entire scheduled indebtedness. 3 7. This is a single asset real estate case pursuant to 11 U.S.C. $101(51B). 4 8. On September 5, 2007, Plaza Antillana entered into a certain construction agreement (a 5 amended, supplemented, replaced, restated or otherwise modified from time to time) wit 6 FirstBank, pursuant to which FirstBank made available to Plaza Antillana an interi 7 construction loan in the aggregate principal amount of $5,525,000. 8 9. On December 30, 2008, Plaza Antillana entered into a certain First Amendment to th 9 Construction Loan Agreement with FirstBank, by which FirstBank increased Plaz 10 Antillana’s credit facility in the amount of $960,000, thereby increasing the aggregat 11 principal amount of the credit facility to $6,485,000. 12 10. On October 23, 2009, Plaza Antillana entered into a certain Second Amendment t 13 Construction Loan Agreement with FirstBank, by which FirstBank increased th 14 Debtor’s credit facility in the amount of $550,000, thereby increasing the aggregat 15 principal amount of the credit facility to $7,035,000. 16 11.On March 5, 2010, Plaza Antillana entered into a certain Third Amendment t 17 Construction Loan Agreement with FirstBank, by which FirstBank increased th 18 Debtor’s credit facility in the amount of $750,000, thereby increasing the aggregat 19 principal amount of the credit facility to $7,785,000. 20 12.On August 12, 2011, Plaza Antillana entered into a certain Fourth Amendment t 21 Construction Loan Agreement with FirstBank, by which FirstBank increased Plaz 22 Antillana’s credit facility in the amount of $700,000, thereby increasing the aggregat 23 principal amount of the credit facility to $8,485,000. 24 13. On August 12, 2011, Plaza Antillana, Restaurants Investments, Inc. and Antoni 25 Morales Padilla and FirstBank entered into a Forbearance Agreement (as amended 26 restated, supplemented, replaced or otherwise modified from time to time), pursuant t 27 5-

1 which FirstBank agreed to forbear from exercising its rights under the credit agreemen 2 during the forbearance period as defined in the Forbearance Agreement. 3 14. As of the petition date, the principal balance of the credit facility is approximatel 4 $8,842,881.91. 5 15. The credit facility is secured by the following mortgage liens pledged in favor of or mad 6 to the order of FirstBank (collectively, the “Mortgage Notes’): 7 a. Mortgage Note in the principal amount of $4,737,000 entered into by Plaz 8 Antillana in favor of FirstBank on September 5 2007, under affidavit numbe 9 4,119 of Notary Public Carmen A. Guzman and secured by Deed Number 21 o 10 even date and subscribed before the same Notary. Said Mortgage Note an 11 Mortgage were amended as follows: (1) modified and increased to the principa 12 amount of $5,697,000 on December 30, 2008 pursuant to Deed Number 35 o 13 Notary Public Edda Ivette Rodriguez; (i1) modified and increased to the principa 14 amount of $6,247,000 on October 23, 2009 pursuant to Deed Number 37 o 15 Notary Public Edda Ivette Rodriguez; (iii) modified and increased on March 5, 16 2010 to the principal amount of $6,997,000 pursuant to Deed Number 57 o 17 Notary Public Edda Ivette Rodriguez; and (iv) modified and increased on Augus 18 12, 2011 to the principal amount of $7,697,000 pursuant to Deed Number 57 o 19 Notary Public Edda Ivette Rodriguez. 20 b. Mortgage Note in the principal amount of $175,000 entered into by Plaz 21 Antillana in favor of FirstBank on July 13, 2007 under affidavit number 4,097 o 22 Notary Public Carmen A. Guzman and secured by Deed Number 15 of even dat 23 and before the same Notary. 24 c. Mortgage Note in the principal amount of $163,000 entered into by Plaz 25 Antillana in favor of FirstBank on June 12, 2007 under affidavit number 4,047 o 26 27 -6-

1 Notary Public Carmen A. Guzman and secured by Deed Number 12 of even dat 2 and before the same Notary. 3 d. Mortgage Note in the principal amount of $30,000 entered into by Plaza Antillan 4 in favor of FirstBank on November 14, 2008 under affidavit number 4,278 o 5 Notary Public Carmen T. Saliceti Maldonado and secured by Deed Number 13 o 6 even date and before the same Notary. 7 16. The Mortgage Notes encumber a certain property located in the Sabana Llana Ward o 8 San Juan and is registered in the Property Registry of Puerto Rico, Fifth Section of Sa 9 Juan. This property (parcel) was formed by a deed of grouping which was filed and i 10 pending recordation in the Registry at entry number 1,037 of the Book of Daily Entrie 11 number 880. 12 17. On or about September 5, 2007, the Debtor’s affiliated company, Restaurants Investment 13 executed guaranties for re-payment of the credit facility under affidavit number 4,123 o 14 Notary Public Carmen A. Guzman. In addition, on or about August 12, 2011, each of th 15 Debtors executed a Consent Judgment which provides for the entry of judgment agains 16 the Debtors for the full amount due under the credit facility, the foreclosure of th 17 property, the guaranty of payment of the full amount of the credit facility by the Debtors 18 and further provides for the cross collateralization of each of the credit facility. There is 19 no equity in the collateral. 20 18. On or about November 14, 2008, the Debtor’s affiliated company, GM Multystem 21 Corporation, executed guaranties for the re-payment of the credit facility under affidavi 22 4,282 of Notary Public Carmen A. Guzman. 23 The Hearing 24 During the hearing the court made the following finding: Mr. Antonio Morales Padill 25 has not been granted ready access to market the commercial property to prospective tenants, 26 This finding was made by the court. 27 -7-

1 || Testimony of Mr. Juan Antonio Crespo Figueroa 2 Mr. Juan Antonio Crespo Figueroa, has a bachelor’s degree in business administratio 3 || with a concentration in accounting and finance and is currently in law school. He is currently a 4 account manager for Hudson Puerto Rico, and administers loans for financial institutions, > Hudson Puerto Rico is a service provider that manages the assets (mainly commercial loans) 6 || owned by Island Holdings. He has reviewed all the documents related to the account and asset 7 || of Plaza Antillana, such as; collateral documents, the loan agreements, mortgage notes, securit 8 |! logs, and all correspondence related to the credit file of Plaza Antillana. 9 Mr. Crespo testified that the real property is not completed because it needs some capita 10 || investments and, thus, is not ready for tenants to occupy the same. He stated that the outside o 11 || the property is finished, but the inside of the property needs work in order for tenants to occup 12 || the property. The real property has been vandalized. Security guards were contracted to loo 13 || over the property to prevent vandalism because the property is located in a neighborhood that i 14 || known for being unsafe. The commercial property does not have the necessary use permits t 15 || operate. Hudson has paid for the insurance over the property and also pays for the securit 16 || services. 17 Mr. Crespo testified that the Debtor visited the property twice before the bankruptc 18 || filing and once after the bankruptcy filing. He stated that for the Debtor to access the propert 13 || he needs to identify himself and show his identification to the security guard. 20 |! Testimony of Mr. Antonio J. Morales Padilla 21 Mr. Antonio Jose Morales Padilla is a developer and contractor, and the President an 22 1! stockholder of Plaza Antillana. Mr. Padilla stated that Plaza Antillana was created to build 23 |! shopping mall on land that he owned for more than 10 years. The Debtor obtained financing t 24 |! construct the mall with FirstBank. The initial loan was for 20,000 square feet. However, ther 25 |! was demand for additional square footage. Thus, the Debtor requested additional financing fro 26 || FirstBank, and the latter provided another loan for an additional 20,000 square feet. FirstBan 27 -8-

1 gave Debtor another loan for buying 3 houses which were going to be used as additiona 2 || parking for the mall. 3 Mr. Morales testified that in the year 2010, FirstBank was having capital liquidit 4 || problems, and the bank would delay the loan disbursements to the Debtor for a period of 90-12 > || days. This resulted in the Debtor having to obtain a new loan. FirstBank would then add agai 6 || the interest, legal fees and closing costs to this new loan. The delay in the loan disbursement 7 |! also affected the payments to the subcontractors which would leave the project, if they would no 8 || get paid. In addition in the year 2010-2011, the prices of the cement and the constructio ? ||materials increased. The court does not give value to Mr. Morales’ conclusions regardin 10 || FirstBank’s liquidity. 11 Mr. Morales stated that he rented 47% of the commercial property. The contracts wer 12 || drafted by attorney Pedro Toledo. FirstBank, due to its financial problems, kept them waiting fo 13 || the loans and the contracts were never realized. The shopping center is certified by the architec 14 || and the inspector of the bank. The property has one or two things that need to be fixed, but th 15 || same could be fixed with $15,000 to $20,000. In the year 2012, FirstBank asked if it coul 16 || change the company that offered security services to the property, and he replied that it made n 17 || difference to him if it changed the company that provided the security services. He said that h 18 |! could pay for the insurance and the security services for the property if he could access his offic 13 |! and if they would permit him to rent the property. 20 Mr. Morales further stated that on March 2013 he was informed by Mr. Carlos Navarr 21 |! that the bank will be selling his loan with some other loans. He testified that when Islan 22 |! Holdings bought the loan, it did not let him access the property. Mr. Morales stated that to access 23 |! the property he has to first call a person in Texas to coordinate a date to visit the property. 24 Mr. Morales stated that he has several prospective tenants such as: (1) CESCO which i 25 |! interested in leasing 20,000 square feet at $18 per square feet which would yield $370,000 plu 26 |! the CAM which would be an additional $160,000 to $170,000; (ii) the Department of Health i 27 -9_

1 || interested in leasing 10,000 square feet; and (iii) attorney Agustin Diaz has contacted Mr. 2 || Morales because his client which is a health provider that specializes in kidneys is interested i 3 || leasing 7,000 square feet. He has a list of 60 prospective tenants, but does not have letters o 4 of any of these prospective tenants. He also testified that the property has not bee > || vandalized during the last 10 years. 6 The court inquired if there was a recent appraisal of the property. Island Holdings replie 7 || that the most recent appraisal it had is dated March 17, 2011 and the property was valued in th 8 || following manner: (i) upon completion $3 million; (ii) $4.5 million prospective market valu 2 |! upon stabilized occupancy; and (iii) as is $2.7 million. Island Holdings informed the court that i 10 had requested an appraisal of the property. i Applicable Law and Analysis 12 Dismissal pursuant to 11 U.S.C. $1112(b)(4) Section 1112(b) of the Bankruptcy Code mandates the bankruptcy court, after notice an: a hearing, to convert or dismiss a chapter 11 case, whichever is in the best interests of creditor

16 and the estate, if the movant establishes cause and the case is devoid of unusual circumstances

17 || pursuant to 11 U.S.C. §1112(b)(2). 11 U.S.C. §1112(b)(1). Section 1112(b)(4) of the Bankruptc 18 || Code fails to define what the term “cause” means but provides a list of circumstances whic 19 constitute “cause” for conversion or dismissal. This list of causes is nonexhaustive, thus a cas 20 may be converted or dismissed for other causes. See AmeriCERT, Inc. v. Straight Throu Processing, Inc. (in re AmeriCERT, Inc.), 360 B.R. 398, 401 (Bankr. D. N.H. 2007). The initial burden is on the movant to argue and present evidence by a preponderance o

the evidence standard to prove its position that there is cause for either conversion or dismissal o 25 ||the chapter 11 case, whichever is in the best interests of creditors and the estate. See Alan □□ 26 || Resnick & Henry J. Sommer, 7_Collier on Bankruptcy §]1112.04[4] d6" ed. 2013). “Thus, unti 27 -10-

1 ||the movant carries the burden, the statutory direction that the court ‘shall convert the case to case under chapter 7 or dismiss the case’ is not operative.” Id. The court, after finding cause, ha ° broad discretion to determine whether conversion or dismissal is in the best interest of creditor and the estate. See Gilroy v. Ameriquest Mortg. Co. Un re Gilroy), 2008 Bankr. Lexis 396

é (B.A.P. 1“ Cir. 2008); 2008 WL 4531982. However, if the movant proves that there is cause fo

+ || dismissal pursuant to 11 U.S.C. §1112(b)(4) by the preponderance of the evidence standard, th 8 || court must find that movant has established cause. See Alan N. Resnick & Henry J. Sommer, 7 9 |! Collier on Bankruptcy §1112.04[4] de" ed. 2012). Once “cause” has been established, the burden shifts to the debtor to identify unusua circumstances that evince that conversion or dismissal is not in the best interest of creditors an the estate. Even, if there are no unusual circumstances, the court may not convert or dismiss

14 if the debtor establishes and the court finds that: “(1) there is a reasonable likelihood that 15 || plan will be confirmed within a reasonable time; (2) the ‘cause’ for dismissal or conversion i 16 ||}something other than a continuing loss or diminution of the estate coupled with a lack o 17 reasonable likelihood of rehabilitation; and (3) there is a reasonable justification or excuse for debtor’s act or omission and the act or omission will be cured within a reasonable time.” In r Orbit Peroleum, Inc. 395 B.R. 145, 148 (Bankr. D. N.M. 2008). 20 Lack of Good Faith (or Bad Faith) 22 This court inIn re Costa Bonita Beach Resort Inc., 479 B.R. 14 (Bankr. D.P.R. 2012) hel 23 || that lack of good faith (or bad faith) in filing a Chapter 11 petition constitutes “cause” to dismiss 24 Chapter 11 petition pursuant to 11 U.S.C. §1112(b)(1). This court also rejected the use of th 25 |! mechanical checklist approach to determine lack of good faith (or bad faith) for all cases, irrespective of whether they fall under the SARE category pursuant to 11 U.S.C. $101(51B). Th 27 -l1-

1 || court held the following in In re Costa Bonita Beach Resort Inc., regarding lack of good faith (o 2 |! bad faith) as a cause for dismissal of a Chapter 11 petition: ° “Good faith is not a statutory requirement for the filing of a Chapter 11 4 petition. However, it is a requirement for a Chapter 11 plan to be confirmed. 11 U.S.C. §1129(a)(3). The unsettled issue is whether lack of good faith (or ba ° faith) may constitute “cause” to dismiss a Chapter 11 petition under 11 U.S.C] 6 §1112(b)C1). See Ali M.M. Mojdehi & Janet Dean Gertz, The Implicit “Goo Faith” Requirement in Chapter 11 Liquidations: A Rule in Search of 7 Rationale 14 Am. Bankr. Inst. L. Rev. 143 (2006). Any determination of goo faith, or lack of good faith (bad faith) is fact intensive and must consider th 8 totality of the circumstances on a case by case basis. In Chapter 11 cases the cour must carefully consider the distinctions between liquidation and reorganization a 3 both are valid objectives under the Bankruptcy Code. Several Circuits have determined that lack of good faith (or bad faith) 1 11 filing a chapter 11 bankruptcy petition constitutes “cause” to dismiss or convert case to Chapter 7 pursuant to 11 U.S.C. $1112(b). See Little Creek Dev. Co. 12 Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F. 2d 1068 (5 Cir. 1986); In re Humble Place Joint Venture v. Fory (In re Humble Place Join 13 Venture), 936 F. 2d 814 (5" Cir. 1991); Carolin Corp. v. Miller, 886 F. 2d 69 14 Cir. 1989); Trident Assocs. Ltd. Partenership v. Metro. Life Ins. Co. dn r Trident Assocs. Ltd. Partnership), 52 F. 3d 127 (6° Cir. 1995); NMUSBPCSLDHB 15 L.P. v. Integrated Telecom Express, Inc. (In re Integrated Telecom Express, Inc.), 384 F.3d 108 Bn Cir. 2004); In re Albany Partners, Ltd., 749 F. 2d 670 (1 1" Cir] 16 1984). The First Circuit has not decided whether lack of good faith (or bad faith) in the filing of a Chapter 11 bankruptcy petition constitutes “cause” under 11 17 U.S.C. $1112(b). See Fields Station LLC v. Capitol Food Corp. (In re Capito 18 Food Corp.), 490 F. 3d 21, 24 (1* Cir. 2007). One court declined the propositio that 11 U.S.C. §1112(b) imposes a good faith filing requirement in a SARE case, 19 See In re Victoria Ltd. Partnership, 187 B.R. 54, (Bankr. D. Mass. 1995). 20 The First Circuit has determined that if 11 U.S.C. §1112(b) imposes good faith filing requirement, then it is the movant that must establish prima faci 21 that the petition was filed in bad faith before the burden shifts to the debtor. Se 22 In re Capitol Food Corp., 490 F. 3d at 24 (“Although the bankruptcy court hel that subsection 1112(b) imposes no good faith filing requirement, we need no 23 address this matter in the present case. Even the courts which have found a goo faith filing requirement would demand that Fields Station first make a prima faci 24 showing that Capital Food filed its petition in bad faith.”); Farnsworth v. Mors (In re Farnsworth), 2009 Bankr. Lexis 3699, *18, (B.A.P. 1 Cir. 2009); In r 25 Miller, 2009 Bankr. Lexis 3351, *4 (Bankr. D. Mass. 2009). The First Circui 26 noted that, “[c]atastrophic business events, such as an imminent or threatene foreclosure on the debtor’s interests in real property essential to successfu 27 -12-

1 reorganization efforts, are precisely the sort of imminent financial distress fo 5 which debtors routinely seek chapter 11 protection.”_In re Capitol Food Corp. 490 F. 3d at 25 citing In re Liberate Techs., 314 B.R. 206, 216 (Bankr. N.D. Cal. 3 2004). The First Circuit also observed that a good faith petition must seek t preserve or create some value that would otherwise be lost outside of bankruptc 4 and that it is not bad faith to seek to gain an advantage from declaring bankruptcy, Id. at 25. 5 é The determination of whether the movant has established prima facie tha there is a lack of good faith (or bad faith) in the filing of a bankruptcy petition is 7 fact intensive inquiry in which the court analyzes the totality of the circumstances, See In re Farnsworth, 2009 Bankr. Lexis 3699, *20 citing Marrama v. Citizen 8 Bank of Mass. (In re Marrama), 430 F. 3d. 474, 482 (1“ Cir. 2005) aff’d, 549 U.S| 365 (2007). Lack of good faith or bad faith is atypical conduct that constitutes a 3 abuse of the bankruptcy process. See Marrama v. Citizens Bank, 549 U.S. 365 10 375, fn. 11 (U.S. 2007); Berliner v. Pappalardo (In re Puffer), 674 F. 3d 78, 82 (1° Cir. 2012). Good faith is driven by the congressional intent of Chapter 11 relief, 11 “Chapter 11 is designed to offer greater recovery for creditors and equity owner than liquidation in a Chapter 7 case by providing a means by which financiall 12 distressed businesses or individuals may restructure their finances by obtainin confirmation of a plan which provides either a continuation of the business, o 13 retention or orderly sale of assets, and exiting bankruptcy relieved of burdensom 14 debts and obligations.” Hon. Nancy C. Dreher & Hon. Joan N. Feeney Bankruptcy Law Manual, $11.1 6" ed. 2011). 15 The totality of the circumstances test cannot be reduced to a mechanica 16 checklist (irrespective of the chapter or whether it is in the filing of the petitio and/or the confirmation of the plan). See In re Puffer, 674 F. 3d at 81 (“Th 1 totality of the circumstances test cannot be reduced to a mechanical checklist, an 18 we do not endeavor here to canvass the field and catalogue the factors that mus be weighed when determining whether a debtor has submitted a Chapter 13 pla 19 in good faith’). The First Circuit has determined that, “in all events, good faith i a concept not a construct. Importantly, it is a concept that derives from equity, 20 This matters because equitable concepts are particularly insusceptible to per s rules.” In re Puffer, 674 F. 3d 78, 82. Thus, this court, in conformity with th 21 determinations of the First Circuit in In re Puffer rejects the mechanical checklis 22 approach for a determination of lack of good faith (or bad faith) for all cases irrespective of whether they are SARE cases. Good faith is an abstract ide 23 generalized from particular circumstances and not a working assumption.” Id. 47 B.R. at 39-40. 24 25 Island Holdings alleges that the Debtor filed its bankruptcy petition in bad faith becaus 26 || all of the six (6) Picadilly factors as set forth in the case of In re Phoenix Piccadilly, Ltd., 849 F, 27 -13-

1 |} 2d 1393 (1 1" Cir. 1988) are met. The six (6) factors, as applied to this case, are the following: (1) 2 the Debtor has only one asset which is Plaza Antillana; (11) the Debtor has very few unsecure creditors whose claims total $4,875 as evidenced from Schedule F (Creditors Holding Unsecure Nonpriority Claims); (iii) the Debtor has no employees, no officers and no directors; (iv) th

é foreclosure of the commercial property was consented by the Debtor on August 12, 2011; (v) this

7 ||is a two party dispute between the Debtor and secured creditor Island Holdings and there is n 8 || viable business operation and no benefit to unsecured creditors. This two party dispute can b ° |! resolved in the pending state court action; and (vi) the timing of the Debtor’s filing was an inten to delay or frustrate the efforts of the secured creditor to enforce its rights because th foreclosure was scheduled for December 3, 2013 and the Debtor filed for bankruptcy o December 2, 2013. 13 14 The fact that the Debtor is a SARE case is not by itself indicia of a bad faith filing. Th 15 that there was a pending foreclosure of Debtor’s property in state court by its secure 16 creditor and that Debtor probably filed the instant case to benefit from the provisions of th 17 automatic stay to prevent Island Holdings from foreclosing on its property and exercising its remedies is generally the main reason as to why debtors in financial distress seek Chapter 11 protection. See In re Capitol Food Corp., 490 F. 3d at 25; See also; H. Miles Cohn, Good Fait. 20 and the Single Asset Debtor, 62 Am. Bankr. L.J. 131 (1988). The Piccadilly factors enumerate

42 || by Island Holdings are the “mechanical checklist” to which SARE cases, by their very nature, 23 been circumscribed to by some Circuits. Although this court in In re Costa Bonita Beac 24 || Resort, Inc., rejected the application of a “mechanical checklist” and adopted the totality of th 2° || circumstances standard, such rejection does not mean that the Piccadilly factors are not relevant. In fact, they are, and should be considered under the totality of the circumstances. 27 -14-

1 The total current value of Debtor’s real estate is $3,500,000.00 as disclosed in Schedul 2 A- Real Property (Docket No. 1). Island Holdings has a first mortgage over Debtor’s commercia ° property (Docket No. 1, Schedule A). Island Holdings is the Debtor’s only secured creditor an has a mortgage claim which amounts to $8,842,881.91 of which $5,342,881.91, the Debtor list

(fas the unsecured portion of the claim (Docket No.1, Schedule D). The Debtor lists four (4 + |{unsecured priority claim holders and assigns for only one (1) claim a dollar figure, th 8 || Workmen’s Compensation claim in the amount of $79,000. (Docket No. 1, Schedule E-Creditors ° || Holding Unsecured Priority Claims). Island Holdings is the only secured creditor and also th largest unsecured creditor, as the Debtor so admits by listing Island Holdings as having a unsecured claim in the amount of $5,342,881.91. The uncontested facts clearly show that there is no equity for the benefit of the estate,

14 The most recent appraisal dated March 17, 2011 valued the commercial property under the thre 15 ||(3) following scenarios: (i) upon completion $3 million; (ii) $4.5 million prospective marke 16 || value upon stabilized occupancy; and (ili) as is, $2.7 million. At this juncture, in order for th 17 commercial property to be leasable, certain improvements need to be made to the property, Moreover, Plaza Antillana currently does not have the necessary use permits to operate th 19 commercial property. 20 The court finds that even under the best scenario, with stabilized occupancy and

2 || Prospective market value of $4.5 million, there are insufficient funds available to satisfy th 23 secured creditor’s debt. Thus, unfortunately, in this case there is really no asset maximization o 24 || preservation of value to benefit the unsecured creditors, and even if there was, the liste 2° |! unsecured creditors’ claims total only $4,875. Moreover, there is no on-going business operatio that generates cash or income for the Debtor to pay its secured creditor, or to adequately protec 27 -15-

1 secured creditor, or to pay the Debtor’s operational expenses, such as the insurance policy fo ? the property and the security services. Debtor’s reasons for filing its Chapter 11 petition do no ° align with the First Circuit’s view that the “[t]wo primary purposes of chapter 11 relief are th preservation of businesses as going concerns, and the maximization of the assets recoverable t

é satisfy unsecured claims.” In re Capitol Food Corp., 490 F. 3d at 25.

7 The court concludes that Island Holdings has established prima facie that Debtor filed it 8 || bankruptcy petition in bad faith. The desperate resort to filing for bankruptcy on the eve of ° || consented foreclosure, without ongoing operations and inability to service the secured debt, i atypical conduct which constitutes an abuse of the bankruptcy process. U.S.C. §1112(b)(4)(A) Island Holdings also requests dismissal of the this case based upon 11 U.S.C

14 §1112(b)(4)(A). Section 1112(b)(4)(A) provides that cause includes, “substantial or continuin 15 ||loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.’ 16 |} 11 U.S.C. §1112(b)(4)(A); See In re DCNC N.C. I, LLC, 407 B.R. 651, 664 (Bankr. E.D. Pa! 17 112009). This particular “cause” consists of two (2) requirements which must be satisfied. “First, i tests whether, after the commencement of the case, the debtor has suffered or continued t experience a negative cash flow, or, alternatively declining asset values. Second, it tests whethe 20 there is any reasonable likelihood that the debtor, or some other party, will be able to stem th

42 debtor’s losses and place the debtor’s enterprise back on a solid financial footing within 23 ||reasonable amount of time.” Alan N. Resnick & Henry J. Sommer, 7 Collier on Bankruptc 24 |191112.04[6][a] (16" ed. 2013). 25 The court finds that the first prong under Section 1112(b)(4)(A) has been satisfied, as Debtor generates no income because there is no on-going business and thus, is unable to pay fo 27 -16-

1 ||the commercial property’s expenses, such as the property insurance policy and the securit 2 services. At this juncture, it is uncertain the amount of time it would take to get the commercia ° property ready to commence operations, given that it does not have the use permits to operat and improvements on the property are necessary to commence operations. In addition, there ar

letters of intent from prospective tenants.

7 The second prong under Section 1112(b)(4) is whether the debtor has a reasonabl 8 || likelihood of rehabilitation. Rehabilitation has been defined as whether the debtor will be able t ? || reestablish its business. “‘...the standard under section 1112(b)(4)(A) is not the technical one o whether the debtor can confirm a plan, but, rather, whether the debtor’s business prospects justify continuance of the reorganization effort. Rehabilitation is not another word fo reorganization. Rehabilitation means to reestablish a business. Whereas, confirmation of a pla

14 could include a liquidation plan, rehabilitation does not include liquidation.” Alan N. Resnick 15 ||Henry J. Sommer, 7 Collier on Bankruptcy §1112.04[6][a][1i] 6" ed. 2013). “Instead, 16 |/rehabilitation signifies something more, with it being described as ‘to put back in goo 17 condition; re-establish on a firm, sound basis.’” In re Creekside Senior Apts., L.P., 489 B.R. 51, 61 (B.AP. 6" Cir. 2013) citing In re Westgate Props., Ltd., 432 B.R. 720, 723 (Bankr. N.D. Ohi 2010) (quoting In re V. Cos., 274 B.R. 721, 725 (Bankr. N.D. Ohio 2002)). “Rehabilitation is th 20 restoration of a business’ vitality and depends on whether the debtor can formulate within

42 ||reasonable amount of time a reasonably detailed business plan.” In re 221-06 Merrick Blvd, 23 || Assocs. LLC, 2010 Bankr. Lexis 4431, *5 (Bankr. E.D.N.Y. 2010). The purpose of Sectio 24 1112(b)(1) is to “preserve estate assets by preventing the debtor in possession from gambling o 2° || the enterprise at the creditors’ expense when there is no hope of rehabilitation.” Loop Corp. v. 26 27 -|7-

1 || United States Tr., 379 F. 3d 511, 516 (gt Cir. 2004) (quoting In re Lizeric Realty Corp., 18 || B.R. 499, 503 (Bankr. S.D.N.Y. 1995)). The court finds that in this case it is not about reestablishing a business, but rathe establishing one; namely the business of a commercial property that generates rental income. As

é stated before, it is uncertain the amount of time it would take to get the Debtor to commenc

+ business operations, as the Debtor does not have the necessary use permits to operate th 8 |}commercial property and some improvements are necessary on the property. In addition, ther ° no letters of intent from prospective tenants. The court finds that the second prong unde section 1112(b)(4)(A) has been satisfied because Plaza Antillana’s business prospects do no justify continuance of the reorganization effort since there is no business or operations t reestablish. The Debtor is simply devoid of a business operation that serves as the basis t

14, || Structure its reorganization effort. Thus, it is unlikely that the Debtor will be able to generat 15 || sufficient cash flow to service its debt to Island Holdings. “A debtor who is unable to service it 16 || debt at the outset of the case and remains unable to do so for the foreseeable future does not hav: 17 reasonable likelihood of rehabilitation.” See In re Creekside Senior Apts., L.P., 489 B.R at 6 (quoting In re Fall, 405 B.R. 863, 869 (Bankr. N.D. Ohio 2009)). Moreover, there are no “unusual circumstances” in this case that evince that conversion or dismissal is not in the bes 20 interest of creditors and the estate. Thus, the court finds that there is cause for dismissal of th

42 chapter 11 case under 11 U.S.C. §1112(b)(4)(A). 23 Conclusion 24 In view of the foregoing, the court grants Island Holdings’ motion to dismiss the instant 25 |! case for cause pursuant to 11 U.S.C. $1112(b)(4)(A) and for the Debtor’s lack of good faith (or bad faith) in the filing of this bankruptcy petition. 27 -18-

1 SO ORDERED. 2 In San Juan, Puerto Rico, this 14" day of February, 2014. 3 4

6 United States Bankruptcy Judge 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 -19-