ORDER GRANTING TRAVELER'S MOTION TO DISMISS
FRANK J. OTTE, Bankruptcy Judge.
This matter came before the Court upon the Motion to Dismiss Debtor's Bankruptcy, or, in the Alternative, for Relief from the Automatic Stay and for Permission to Foreclose Mortgage ("the Motion") filed by Traveler's Insurance Company ("Travelers"). Evidentiary hearings on the dismissal portion of the motion were held on September 12th, 15th and 21st. The parties were given the opportunity to present oral argument on October 6, 1989. Present at all three evidentiary hearings and the oral argument were James Carr, Jay Jaffe and Martha Lehman, for the Debtors; Wayne Ponader and David Day for Travelers; and Jo Ann Mason for the United States Trustee.
The Court took ruling on the matter under advisement at the completion of the evidence on September 21, 1989. The parties were directed to file post-hearing briefs and have complied with that directive. The Court also has the benefit of extensive pre-hearing briefs, memoranda, and proposed findings of fact and conclusions of law. In addition, the United States Trustee has filed its recommendations and supports dismissal of this chapter 11 proceeding.
Castleton Associates Partnership was formed in 1985 for the exclusive purpose of purchasing an apartment project located in northeast Indianapolis known as Lake Castleton Arms Apartments. Its general partners were Claremont Castleton Limited Partnership ("Claremont") and Castleton Investors Limited Partnership ("Castleton Investors"). The general partner of Castleton Investors in turn was Winthrop Financial Associates and 200 investor limited partners. Castleton Investors is also a Debtor in this bankruptcy court under cause number IP 89-6547 RA B.
Winthrop Financial Associates purchased most of Claremont's general partner interest in Castleton Associates Partnership which then became known as Castleton Associates Limited Partnership, ("Castleton Associates") the debtor here. Before the purchase of Claremont's interest, Castleton Associates Partnership in November, 1985, purchased for $35 million the 1265 unit Lake Castleton Arms Apartments complex. The complex had been appraised at $40 million.
Travelers provided the majority of the financing to purchase the project and loaned Castleton Associates Partnership $28,650,000.00. The balance was funded by 200 various investors that bought limited partnership interests in the project at a cost of $55,500.00 per investment unit.
First Winthrop Properties, Inc. ("First Winthrop") assumed the management duties of the project in March, 1987, succeeding the prior management company which had been Claremont Management Company.
The market for apartment rentals on the northeast side of Indianapolis slackened after purchase by Castleton Associates due to the affordability of single family dwellings and competitive rental packages being offered by other apartment projects. The decline in the rental market affected Castleton
As of the petition date, Castleton Associates listed unsecured debt of $283,000.00, of which approximately $60,000.00 is a claim by a former tenant which appears to be covered by insurance, and of which over $117,000.00 consists of management fees due First Winthrop. The evidence in the hearings showed that Castleton Associates had a right to call on its general partner, Winthrop Financial Associates, to release a reserve account of $1.5 million for repairs. Castleton Associates listed priority unsecured debt of nearly $300,000.00 in unpaid real estate and personal property taxes. The amount needed for repairs as of the time of the filing was estimated at $1.7 million. Finally, Travelers in the hearings established that the outstanding balance on Castleton Associate's mortgage was in excess of $30 million. In the Joint Plan of Reorganization filed by Castleton Associates and Castleton Investors on September 11, 1989, it was proposed that Travelers would be paid its secured claim which was the value of the project, estimated at $24 million, leaving Travelers with an approximate $6 million unsecured deficiency. Travelers was to receive under the plan a 5% payment ($300,000.00) on its deficiency. And, even though $24 million was subject to speculation as it was the Debtor's value of the project, the parties stipulated that the project's value was less than the amount owed to Travelers on its mortgage. The evidence at the hearings also established that, although the project had declined in value over the last four years, its value was actually on a slight upswing due to improvements made after the filing of the chapter 11 and favorable market conditions.
In its motion, Travelers seeks dismissal of the chapter 11 as it was not filed in good faith since the Debtor here is not an entity that is a true business seeking to reorganize.
Section 1112(b) of the Bankruptcy Code provides:
A chapter 11 proceeding can be dismissed "for cause". Because the Code imposes an implicit requirement that a chapter 11 proceeding be filed in "good faith", courts have determined that "cause" for
Central to the "aims and objectives of bankruptcy philosophy" is whether the debtor has an ongoing business which it intends to reorganize. See, Matter of Winshall Settlor's Trust, 758 F.2d 1136, 1137 (6th Cir.1985). What business form does the debtor take? What are the assets of the estate? What income does the debtor produce? Is the income sufficient to sustain operations? What is the debtor's business? How many employees does the debtor have? What is preserved if the debtor is allowed to reorganize? "Resort to the protection of the bankruptcy laws is not proper . . . [where] there is no going concern to preserve, there are no employees to protect, and there is no hope of rehabilitation, except according to the debtor's `terminal euphoria'" Matter of Little Creek Development Co., 779 F.2d 1068, 1073 (5th Cir.1986).
Here, the Debtor is a limited partnership. The only asset of Castleton Associates is the 1265 unit apartment complex. The income produced by the Debtor is the rental income derived by tenants of Lake Castleton Arms Apartments which flows through the management company of First Winthrop and returns to the Debtor in the form of profits, if the income is sufficient. The Debtor does not produce a product. The Debtor did not build and develop the apartment project; rather, the Debtor arrived on the scene after construction was completed, as an investor. The operating income has not been sufficient to pay real estate and personal property taxes due. Repairs and improvements to the complex are estimated at the low end to be $1.7 million. The Debtor itself really has no business; rather, it has contracted out to First Winthrop the everyday duties of maintaining and managing the apartments. So, the Debtor's business is to "keep tabs" on the investments made by the investors while First Winthrop does the actual managing, maintaining, hiring and firing. The Debtor has no employees. All the employees maintaining and managing the complex are First Winthrop employees.
What is preserved if the Debtor here is allowed to reorganize? A reorganization here would not spell preservation of Debtor's employees' jobs. It would provide a "soft landing" for disgruntled investors who now face the reality that their investment has gone sour. Those investors made an informed business judgment and chose to invest their funds on the belief that the apartments would appreciate in value, thus yielding a return on their investment. Also attractive were the tax benefits available to investors at that time. It should be noted that the only economic good produced by this limited partnership has been a 30% tax write-off for its limited partners.
We are dealing with an investment vehicle that was totally disclosed to the investors through the strong statement of potential risks set out in Creditor's Exhibit "R", the prospectus. The investors were totally aware that this project could fail. They were also advised that it could be a success worth over 90 million dollars. Applying the factors considered in whether good faith exists, it is apparent that:
The effect of the chapter 11 filing here is an attempt to shift the risk to the secured creditor, and as stated before, to give the risk-takers a soft landing on a bad business or investment decision and that has never been the purpose of a chapter 11 reorganization. Chapter 11, whether under the Old Act or under the Code, was not designed to eliminate the pain of risk-taking.
The Castleton Associates acknowledges that had this project been the $90 million success as set forth in the Prospectus, it would have joyfully reaped all the benefits and Travelers would have received only the benefit of its initial bargain, the repayment of its secured indebtedness, with interest.
Now the Debtor is coming to this Court asking that Travelers bear the risk. Travelers would not have shared in the appreciative share but has lost considerably in the depreciation that has taken place due to market conditions.
In reviewing cases of this nature at this stage, it is important that the Court not only consider the position of the Debtor but that the Court consider the consequences to a creditor in a single asset case if the case were allowed to proceed. Travelers bargained for the right to foreclose. Now the Debtors ask that Travelers be forced to forego that right and be required to share in the risk that was accepted by the investors when the investors made a decision to participate in this investment vehicle. The Debtor wants to avoid the consequences of bad judgment and pass the loss on to Travelers.
The evidence showed that, while the 1265 unit apartment project has depreciated in value, it appears that the decline in value has bottomed out and that the value and the occupancy rate is on the rise. The consequence of the chapter 11 filings and the plan proposal is to renegotiate this nonrecourse loan at the low end of the value scale. Where a chapter 11 debtor has few unsecured creditors, none of which are significant, and one valuable asset on the upswing after bottoming out in value secured by its one major creditor, the filing of the chapter 11 is not within the "aims and objectives of bankruptcy philosophy". It is an attempt to soften the blow of bad business judgment. The purpose of a chapter 11, whether under the Old Act or under the Bankruptcy Code has never been designed to absorb the consequences of risk-taking. And, even though there are no subjective "bad acts" that the Debtor has engaged in, "bad faith is shown if the purpose of a Chapter 11 debtor is to hold a single asset `hostage' in order to speculate that such asset may increase in value [leading] to recovery of the original investment at the creditor's risk". Carolin Corporation v. Miller, 886 F.2d 693, 705 (4th Cir.1989).
Travelers in the alternative asks for relief from the automatic stay in its motion. Because the Court finds that this chapter 11 proceeding should be dismissed, the relief from stay portion of Travelers motion is moot.
Accordingly, the Court GRANTS Travelers' motion IN PART and ORDERS that this chapter 11 proceeding be DISMISSED.