The opinion of the court was delivered by: Norma L. Shapiro, S.J.
This matter is before the court on the emergency motions of debtors Goose Marsh, L.L.C. and DCNC North Carolina I, L.L.C. for stay pending appeal and for expedited consideration. Because the Chapter 11 petitions below were jointly administered, they shall be treated together. The debtors appeal from the Order of the bankruptcy court, entered on July 13, 2009, following a hearing, which dismissed the debtors' Chapter 11 petitions for cause. For the reasons set forth below, the debtors' motions have been denied.
I. JURISDICTION AND STANDARD OF REVIEW
This court has jurisdiction to hear appeals of the final judgments and orders of the bankruptcy court under 28 U.S.C. § 158(a)(1). The decision to dismiss a Chapter 11 petition is committed to the sound discretion of the bankruptcy court and review is for abuse of discretion. Official Comm. of Unsecured Creditors v. Nucor Corp. (In re SGL Carbon Corp.), 200 F.3d 154, 159 (3d Cir. 1999). "Mindful that an abuse of discretion exists where the [bankruptcy] court's decision rests upon a clearly erroneous finding of fact, an errant conclusion of law, or an improper application of law to fact," this court reviews the findings of fact leading to the decision for clear error and conclusions of law de novo. In re SGL Carbon Corp., 200 F.3d at 159 (internal citations and quotations omitted); accord In re American Pad & Paper Co., 478 F.3d 546, 551 (3d Cir. 2007).
Federal Rule of Bankruptcy Procedure 8005 enables the bankruptcy court and the district court to adapt relief to the unique circumstances of a case by making "any appropriate order during the pendency of an appeal on such terms as will protect the rights of all parties in interest." In re Trans World Airlines, Inc., 18 F.3d 208, 212 (3d Cir. 1994). Rule 8005 provides, in pertinent part,
A motion for a stay of the judgment, order, or decree of a bankruptcy judge... pending appeal must ordinarily be presented to the bankruptcy judge in the first instance.... The district court or the bankruptcy appellate panel may condition the relief it grants under this rule on the filing of a bond or other appropriate security with the bankruptcy court....
A party seeking a stay pending appeal must prove, by clear and satisfactory evidence, that
(a) it is likely to prevail on the merits of its appeal; (b) it will suffer irreparable injury absent a stay; (c) a stay will not cause substantial harm to other interested parties; and (d) a stay will not harm the public interest. See Republic of the Philippines v. Westinghouse Elec. Corp., 949 F.2d 653, 658 (3d Cir. 1991). In applying this four-part test it should be noted that a stay will be issued only if each of the conditions is satisfied.
After consideration of the record before the court below there was no adequate basis to issue a stay pending disposition of this appeal.
II. FACTS AND PROCEDURAL HISTORY
DCNC North Carolina I, L.L.C. ("DCNC") and Goose Marsh, L.L.C. ("Goose Marsh") are related but separately organized entities formed for the purpose of purchasing and developing property in North Carolina for residential communities. On April 12, 2006, Goose Marsh entered into a loan with Wachovia Bank, N.A. ("Wachovia") in the amount of $10,000,000 to fund the purchase and initial phases of construction at the Goose Marsh residential project; the loan was secured by the entire Goose Marsh property. On July 11, 2006, DCNC entered into a similar loan with Wachovia in the amount of $5,300,000 to fund the purchase of property and phases one and two of construction at DCNC's residential project at Turtle Creek, North Carolina. This loan was also secured by the entire purchased property. Approximately one year later, Wachovia made an additional loan to DCNC in the amount of $2,700,000 to fund construction of a clubhouse at Turtle Creek.
Lot sales were virtually non-existent at Goose Marsh, and only a single home has been sold. DCNC fared better, with approximately twenty-four lots sold during the initial phases of the project. On or about March 10, 2008, Goose Marsh obtained a $1.5 million modification of its loan, under which it agreed to pay accelerated amounts. The financing arrangements for the Goose Marsh and DCNC properties were "cross-collateralized;" as a result, default under one agreement would trigger a default under the other agreement. DCNC and Goose Marsh asserted it was clear from the loan documents that the company would not be able to repay the initial loan until sales of later phases of construction were completed and sold. DCNC and Goose Marsh alleged that Wachovia knowingly misrepresented that it would continue to finance both projects. During the summer of 2008, DCNC requested that Wachovia extend additional credit to finance the next phase of development for the DCNC property; Wachovia rejected the request, and Goose Marsh found itself without sufficient sales income to remain current on its accelerated obligations. Default was declared on both loans.
DCNC and Goose Marsh first sought relief in Pennsylvania state court where, by complaint filed August 11, 2008, they sought to compel Wachovia to provide the additional funding for the DCNC project. After Wachovia declared default on both entities' loans, the complaint was amended to include a request for injunctive relief to restrain Wachovia from exercising its default remedies. In January of 2009, the Pennsylvania state court denied preliminary injunctive relief, and Wachovia then initiated non-judicial foreclosure proceedings against both properties in North Carolina state court.
In an effort to prevent the impending foreclosure proceedings and reorganize, DCNC and Goose Marsh each filed a voluntary petition under Chapter 11 of the Bankruptcy Code on March 16, 2009. The cases were consolidated under No. 09-11825 by order of the bankruptcy court. On March 31, 2009, Wachovia moved for an order dismissing the bankruptcy cases or, in the alternative, for relief from the automatic stay to pursue foreclosure proceedings.
The bankruptcy court ordered briefing and an evidentiary hearing on Wachovia's motion. The evidence presented to the bankruptcy court demonstrated that Goose Marsh possessed no assets other than the North Carolina real property (appraised at $9.12 million) and a bank account with deposits of $1,262. Goose Marsh owes $12 million to Wachovia on its loans, and has approximately twenty other unsecured creditors whose claims total $329,647.86. The evidence also demonstrated that DCNC had no assets other than its North Carolina property (appraised at $4.68 million) and a bank account with deposits of $122,664. DCNC owes $5.9 million to Wachovia on its loans, and has approximately forty other unsecured creditors whose claims total $739,688.82.
The debtors' vice-president testified that neither debtor has any employees, and neither has operated nor generated income since the bankruptcy filings. Attempts to secure third party financing had been unsuccessful, and the debtors did not introduce any concrete evidence regarding the status of their negotiations with potential investors or even the terms of refinancing sought. During the bankruptcy court's consideration of Wachovia's motion to dismiss, the debtors' state court complaint was dismissed on the merits on April 23, 2009.
The bankruptcy court determined that both cases were filed in good faith; but that Wachovia had demonstrated that the debtors lacked a reasonable prospect of achieving a confirmed Chapter 11 plan. The bankruptcy court found that, even assuming the proceeds of pending litigation could provide the means to effectuate a Chapter 11 plan, the debtors could not demonstrate a sufficient likelihood of success in the state court action especially in view of the state court's dismissal of their claims on the merits. The bankruptcy court further concluded that debtors' claim of defensive promissory estoppel as a means to reduce Wachovia's claim in the bankruptcy action would be unsuccessful under North Carolina law. The bankruptcy court noted a North Carolina Supreme Court case which "held unequivocally that a post-contractual promise cannot be invoked to reduce the indebtedness on a note absent further consideration and that promissory estoppel cannot substitute for actual consideration." Memorandum and Opinion, p. 29.
Because the inequitable conduct the debtors contend should reduce Wachovia's claims occurred after they were already indebted under the loan agreements, the bankruptcy court decided such conduct would not reduce Wachovia's allowed secured claims. The bankruptcy court also decided that, on the "meager record," the debtors' assertion that they could obtain sufficient financing to reorganize even without reducing Wachovia's claims was unconvincing.
The bankruptcy court granted Wachovia's motion to dismiss both debtors' petitions on July 13, 2009. The bankruptcy court denied the debtors' motion for stay pending appeal without opinion on August 26, 2009. DCNC and Goose Marsh have appealed the dismissal, and move for a stay pending disposition of their appeals.
DCNC and Goose Marsh bear the burden of proving, by clear and satisfactory evidence, that (a) they are likely to prevail on the merits of its appeal; (b) they will suffer irreparable injury absent a stay; (c) a stay will not cause substantial harm to other interested parties; and (d) a stay will ...