APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA (D.C. Civil No. 78-1098 sur Bankruptcy No. 76-0154)
Before Gibbons and Weis, Circuit Judges and Bechtle*fn*, District Judge.
The debtor in this bankruptcy proceeding contends that the cram down provisions in the Act could have been utilized to make a Chapter XII arrangement digestible.*fn1 Furthermore, because the district court misconstrued the statutory remedy and did not hold a hearing on its plan, says the debtor, a continuation of the automatic stay against foreclosure was improperly denied. We conclude that the district court did not err in determining that an arrangement was not feasible and that foreclosure should not be delayed.
Union Deposit Center Equities Limited Partnership, the owner of a shopping center, filed a petition for reorganization under Chapter XII in February 1976. Industrial National Mortgage Company, holder of first and second mortgages on the premises, asked the court to lift the automatic stay against foreclosure proceedings. After hearings, the bankruptcy judge granted the request on September 21, 1978, and the district court affirmed. We denied a stay of the district court's order pending this appeal.
Union Deposit is a limited partnership that was formed for the purpose of constructing and operating a shopping center in Harrisburg, Pennsylvania. In December 1973, it borrowed $6,700,000 from Industrial National, with interest at 3% over prime, repayable in two years. The loan is secured by first and second mortgages on the shopping center. Union Deposit defaulted, and on February 2, 1976, Industrial National instituted foreclosure proceedings in the Court of Common Pleas of Dauphin County, Pennsylvania. Eight days later, Union Deposit filed its petition under Chapter XII of the Bankruptcy Act, which automatically stayed the foreclosure proceedings. Fed.R.Bankr.P. 12-43(d).
Union Deposit filed its proposed plan of arrangement on November 15, 1976. In December, Industrial National filed a complaint to modify the stay and permit foreclosure. Union Deposit filed a modified arrangement plan in February, a further amendment in June, and a final, modified version in November 1977. Hearings began on the complaint to lift the stay in August 1977 and continued intermittently through February 1978.
The bankruptcy judge found that the shopping center was the debtor's only asset, and that the total amount owing as of January 19, 1978 was $7,500,000, consisting of the principal sum of $6,700,000, accrued interest, and other fees and expenses. By the time his opinion was filed, the debt had increased.
The fair market value of the shopping center, as accepted by the bankruptcy judge, was $7,070,000. He found the space leased to first floor retail merchants to be decreasing, thus leading to a diminution in the value of the property. The mall had only one magnet store, of doubtful drawing power, and the layout and design were "wanting." The earnings record was unimpressive, and while current expenses were being met, there was insufficient income to pay the ground rent. Moreover, the debtor did not have the ability to attract necessary resources.
Noting that three years had already elapsed, the bankruptcy judge concluded an arrangement could not be reached within a reasonable time. He therefore ruled that the debtor had failed to justify a continuation of the stay and authorized the plaintiff to proceed with foreclosure.
On appeal, the district court concluded that the "period of unreasonable delay (had to be) stopped," because no plan of arrangement "(would) ever be possible," and irreparable harm would be visited on Industrial National if the stay continued. It also approved the bankruptcy judge's use of the capitalization of prospective earnings method to determine the value of the mall. The court also found no error in the bankruptcy judge lifting the stay before holding hearings on the latest plan of arrangement, since it was fatally flawed by the debtor's inability to secure additional capital. The order of the bankruptcy judge, therefore, was affirmed.
The debtor has appealed that order, together with several others whose effect necessarily depends upon disposition of that dissolving the stay.
Chapter XII of the Bankruptcy Act, 11 U.S.C. §§ 801-926 (1976), provides a method for alleviating the financial difficulties of individuals or partnerships whose principal assets are real estate. To provide the distressed debtor time to devise a method for meeting its obligations, the bankruptcy rules provide for an automatic stay of all proceedings against him. Fed.R.Bankr.P. 12-43(a). The imposition of this stay, however, may work a hardship on secured creditors if diminution in the value of the collateral results. The creditor's remedy is to file a complaint to terminate, modify, or condition the stay. In such a proceeding, ...