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In re Mann Realty Associates, Inc.

United States District Court, M.D. Pennsylvania

September 30, 2019

ANDREW R. VARA, Acting United States Trustee, Appellee ROBERT M. MUMMA, II, Appellant


          Christopher C. Conner, Chief Judge

         Appellant Robert M. Mumma, II (“Mumma”), on behalf of Mann Realty Associates (“Mann Realty” or “debtor”), filed a voluntary petition for Chapter 11 bankruptcy. The United States Trustee (“Trustee”) filed a motion for conversion or dismissal under 11 U.S.C. § 1112, and a hearing took place on January 25, 2018. During the hearing, the Bankruptcy Court limited Mann Realty’s testimony and converted the case to Chapter 7 rather than appoint a Chapter 11 trustee. Mumma appeals the Bankruptcy Court’s decision.

         I. Factual Background & Procedural History[1]

         A. Background

         Mumma is Mann Realty’s president and a 37.5% shareholder in the company. (Doc. 26-2 at ¶ 357). Mann Realty owns 12 pieces of property-mainly commercial real estate and one quarry. (Id. at ¶ 362-64). The most valuable and most important property here is the quarry, known as Fiddler’s Elbow, which Mann Realty valued at $12 million. (Id. at ¶ 303, A407).

         As part of its Chapter 11 duties, Mann Realty submitted disclosure statements and a reorganization plan. (Id. at ¶ 245-432). These filings documented Mann Realty’s intention to sell some of its properties, to continue to generate income on others, and to use the proceeds to pay its creditors. (See, e.g., id. at ¶ 314-45). Both disclosure statements, however, noted that “[c]urrently, the quarry cannot be mined due to its flooding.” (Id. at ¶ 257, A358). The statements also flagged Mann Realty’s struggles to generate cashflow: “With several vacancies in its commercial properties and the inability to generate significant revenue from the limestone quarry, Debtor was unable to maintain adequate cash flow to address its mortgage obligations and real estate taxes.” (Id.) The disclosure statement also explained that Mann Realty planned to “commence litigation” against the quarry’s holdover tenant, Pennsy Supply, Inc., to compel payment of overdue rent and to drain the quarry so it can be mined. (Id. at ¶ 362).

         Mann Realty also submitted monthly operating reports for April through December 2017. (See Doc. 26-1 at ¶ 97-222; Doc. 26-2 at 223-33). Together, these reports showed net operating losses. (Id.) Mann Realty amended its November 2017 report to lower its net operating loss by over $125, 000, but still reported a net loss. (Hr’g Tr. 54:10-22).

         The Trustee moved for conversion or dismissal under 11 U.S.C. § 1112. (Doc. 26-2 at ¶ 234-41). The Trustee argued in its motion that Mann Realty had suffered “substantial or continuing loss to or diminution of the bankruptcy estate” and had “fail[ed] to timely provide information reasonably requested.” (Id. at ¶ 237).

         B. Conversion Hearing

         Chief Bankruptcy Judge Robert N. Opel, II, held the conversion hearing on January 25, 2018. (Id. at ¶ 433). Mumma, the Trustee, and representatives from four creditors (S&T Bank, Santander Bank, Double M Real Estate LLC, and McCormick 108, LLC) attended the hearing. (Id. at ¶ 433-34). Each creditor has outstanding debts owed to them by Mann Realty and interests in Mann Realty’s properties. (Id. at ¶ 360, A367-69, A401).

         At the beginning of the hearing, the Trustee and Mann Realty informed Judge Opel that they had agreed to appoint a Chapter 11 trustee rather than seek conversion or dismissal. (Hr’g Tr. 6:6-15, 6:19-21). Three of the four creditors objected and favored conversion, and the fourth did not object to conversion. (Id. at 12:7-13:23, 13:25-19:17, 22:16-21). Mann Realty objected to conversion: “I’m not sure it makes sense to shut the debtor down and do a fire sale in Chapter 7, whereas a Chapter 11 trustee may be able to sell certain of the debtor’s properties, pay off the creditors, and have a viable business remaining.” (Id. at 7:22-8:1). The Trustee also pointed out that some properties had significant equity, a sign that conversion may be inappropriate. (Id. at 8:4-7).

         The hearing continued with an exploration of Mann Realty’s ongoing activities. According to Mumma, only two properties were generating income, (id. at 24:9-17), and one of those properties was scheduled for a sheriff’s sale in April 2017 to satisfy a debt owed to Santander Bank, (id. at 12:21-13:18, 22:22-23:1). Mann Realty, through Mumma, had otherwise consented to liquidating its properties, except the quarry. (Id. at 24:18-21, 28:15-22; see also Doc. 26-2 at ¶ 366).

         Mann Realty valued the quarry at roughly $12 million. (Doc. 26-2 at ¶ 303, A407). Yet Mumma testified that it was not generating income and had not since 2015. (Hr’g Tr. 34:9-12). Instead, the valuation included a potential “contract … that would have generated $20, 000 a month for parking trucks” on the quarry’s property. (Id. at 31:17-32:7). Mumma did not identify the prospective party to the contract or present evidence of this contract. He also testified that he had the necessary permits to operate and mine the quarry through another company he owned, Rocky Licensing. (Id. at 26:9-12). Mumma did not physically have the permits at the hearing. (Id. at 35:9-18). The quarry was also partially flooded, (id. at 40:23-41:10), had a holdover tenant, (Doc. 26-2 at ¶ 358), and required roughly $200, 000 of unidentified funds to become operational. (Hr’g Tr. 25:22-28:25).

         Mumma testified that Pennsy Supply, the holdover tenant, owed roughly $1.5 million in rent, (id. at 33:15-21), that Mumma intended to pursue through litigation, (Doc. 26-2 at ¶ 362). As for the $200, 000, Mumma testified that he would personally provide the money, (Hr’g Tr. 29:1-7), despite the “multiple confessed judgments entered against [him] in excess of $5, 000, 000.00, ” (Doc. 26-2 at ¶ 363). As to Mann Realty’s other assets, Mumma could not identify specific assets that made up a $5 million line-item for “buildings” in its financial reports, (Hr’g Tr. 37:8-38:8), or an $8 million line-item for “Mortgages/Real Estate Loans, ” (Id. at 38:9-24).

         Mann Realty sought to offer testimony from two witnesses in opposition to the creditors’ request to convert: Mumma and the real estate agent listing Mann Realty’s property. (Id. at 49:13-21). Mann Realty and Mumma wanted the agent to testify about the “valuation and his efforts in regard[] to marketing the properties.” (Id. at 49:13-21). Judge Opel did not permit this testimony because he did not view “valuation testimony as helpful at this stage.” (Id. at 49:22-23). Each of the creditors agreed. (Id. at 49:23-52:2). Judge Opel explained that “we’re at a narrow issue here, ” (Id. at 51:5), and confined his decision to “door one, appointment of a Chapter 11 trustee, or door two, conversion to Chapter 7.” (Id. at 52:18-53:3).

         C. Bankruptcy Court’s Ruling

         Judge Opel began with “cause” to convert, noting Mann Realty’s consistent operating losses. Mann Realty’s monthly operating reports showed net operating losses for several months before the conversion hearing. (Id. at 54:17-55:8). This alone cast doubt on the likelihood that Mann Realty could operate as a going concern: “[O]ne wonders … what good will or what going concern value there is for an entity that, best case, using the debtor’s numbers, is showing an operating loss.” (Id. at 55:2-5). Judge Opel also expressed concern and skepticism of Mann Realty’s amended operating report for November 2017, which showed decreased losses, but losses all the same. (Id. at 54:10-55:2).

         Judge Opel also addressed Mann Realty’s “gross mismanagement.” Judge Opel found that Mann Realty incorrectly reported its finances and “either erroneously or purposely, has inflated its … equity and its balance sheet value by over $8.3 million. That is at least evidence of gross mismanagement ….” (Id. at 55:18-23). That the company’s president had “basically no information as to what mortgages are held by” the company troubled Judge Opel. (Id. at 55:15-18). This, in his view, is “not anything like candor to creditors or financial transparency.” (Id. at 55:23-25). As more evidence of gross mismanagement, Mumma also made unauthorized payments to, and took unauthorized loans from, Mann Realty. (Id. at 56:13-57:2). Judge Opel also acknowledged that the company had been unable to confirm a Chapter 11 plan of reorganization. (Id. at 52:11-12).

         Judge Opel then explained why conversion, and not appointment of a Chapter 11 trustee, was in the best interests of the creditors and the estate. (See Id . at 57:3-12, 62:16-18). He found Mumma’s testimony about the quarry’s going-concern value lacked credibility: “Mumma had an opportunity to testify in an effort to convince the Court that appointment of the Chapter 11 trustee is in the best interest of creditors. His – in his testimony, he first said that the quarry is operational; then said there’s no equipment there; and later admitted that it has received no income since September of 2015.” (Id. at 58:16-21). Mumma did not produce evidence that an entity was permitted to operate the quarry, so Judge Opel discounted the suggestion that there is “some operational value or going concern value to the quarry.” (Id. at 59:5-13). The purported agreement with Rocky Licensing was insufficient. (Id. at 59:14-60:3).

         Judge Opel was also concerned that a Chapter 11 trustee “would lack the funds to pay the most basic expenses” and operate Mann Realty as a going concern. (Id. at 61:9-22). To Judge Opel, Mumma’s assurance that he would personally provide the $200, 000 to revive the quarry was not persuasive. (Id.) On the other hand, that there was some rental property favors Chapter 11. (Id. at 60:14-24). But that property was spoken for; it was scheduled for a sheriff’s sale and would be liquidated even if a trustee were appointed. (Id. at 60:21-24).

         Mumma’s credibility was important to Judge Opel. Mumma testified that the quarry could be mined, but the disclosure statements said that it could not. (Id. at 51:23-52:6). Judge Opel found that “those two statements … are irreconcilable. And it suggests that Mr. Mumma has been purposely overly optimistic in his testimony, or that the disclosure statement was false in suggesting that there is no operational capacity.” (Id. at 62:6-10). Judge Opel concluded with this observation:

All of these -- this accumulation of inaccuracies or falsehoods, you choose the pronoun, tell me that it is time for a Chapter 7 trustee to be appointed to take control of these assets, try to figure out what is really owned, and what is truly owed by this corporation, and that management -- current management be ousted. I find that it would be in the best interest of creditors that the ...

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