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In re Packard Square LLC

United States District Court, E.D. Michigan, Southern Division

May 10, 2018

In Re PACKARD SQUARE, LLC, Debtor. PACKARD SQUARE, LLC, Appellant,
v.
CAN IV PACKARD SQUARE LLC, O'BRIEN CONSTRUCTION COMPANY, WOLFF NETWORKS, LLC, STARKY'S CONSTRUCTION, INC., GEORGETOWN OF ANN ARBOR CONDOMINIUM ASSOCIATION, and MCKINLEY, INC., Appellees.

         ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF MICHIGAN

          Hon. Thomas J. Tucker

          OPINION AND ORDER AFFIRMING UNITED STATES BANKRUPTCY JUDGE THOMAS J. TUCKER'S OCTOBER 13, 2017 OPINION AND ORDER AND DISMISSING THIS BANKRUPTCY APPEAL

          PAUL D. BORMAN, UNITED STATES DISTRICT JUDGE.

         In this bankruptcy appeal, the Court is called upon to determine whether United States Bankruptcy Judge Thomas J. Tucker erred in dismissing the Chapter 11 voluntary petition filed by Appellant/Debtor Packard Square LLC (“Packard Square, ” “Appellant, ” or “Debtor”) and barring the filing of any new bankruptcy case by or against Packard Square for a period of two years from the date of his October 13, 2017 ruling. Appellant argues that the Bankruptcy Court erred in finding that dismissal was in the best interests of both the Debtor and its creditors and abused its discretion in barring the filing of new bankruptcy proceedings by (or against) Packard Square, a first-time filer for protection under the bankruptcy code. Appellee CAN IV Packard Square LLC (“Canyon”) argues that neither the dismissal of Debtor's petition nor the two-year bar on new filings was an abuse of discretion and urges this Court to affirm the bankruptcy court in all respects. The matter has been fully briefed and the Court held a hearing on April 11, 2018. For the reasons that follow, the Court AFFIRMS the bankruptcy court and DISMISSES this appeal.

         I. BACKGROUND

         A. The Underlying Construction Loan, Foreclosure, and the Appointment of a State Court Receiver

         The bankruptcy court's comprehensive recitation of the factual background is repeated here as relevant to this appeal:

Pre-petition, in October 2014, the Debtor obtained a construction loan from Canyon in the maximum principal amount of $53, 783, 184, 00 (the “Construction Loan”) to finance the construction of “a 360, 000 square foot mixed-use development [project] on a six and a half acre site on Packard Street in Ann Arbor, Michigan, ” including “249 residential units with high-end amenities, nearly 30, 000 square feet of retail space and over 450 parking space[s] including an underground parking garage” (the “Project”). The Debtor signed a promissory note, and other loan documents, and granted Canyon a mortgage on the real property of the Project “together with the related easements, privileges and licenses, and the buildings, structures, improvements, fixtures and personal property located [on it]” to secure the Debtor's indebtedness for the Construction Loan. The Debtor also executed an assignment of leases and rents in favor of Canyon.

         In re Packard Square, 575 B.R. at 771. Judge Tucker continued:

On October 21, 2016, Canyon filed suit against the Debtor in Washtenaw County Circuit Court, in the case of CAN IV Packard Square LLC v. Packard Square, LLC, et al., No. 16-000990 CB (the “state court case”). In its verified complaint in the state court case, Canyon requested the appointment of a receiver over the property securing its debt, due to the Debtor's alleged failure “to fulfill its obligations to complete construction of improvements for which funds were provided in accordance with the relevant loan agreements” and “to maintain the [p]roperty is a suitable condition.” Canyon also sought foreclosure of its mortgage in the state court complaint.
On October 27, 2016, the state court held a hearing in which it heard oral argument regarding the appointment of a receiver. Counsel for Canyon and counsel for the Debtor both appeared at the hearing and argued their respective positions at length, for and against the appointment of a receiver. During the hearing, Canyon alleged, in relevant part, that there had been multiple material defaults by the Debtor, in the form of missing critical construction milestone dates under the terms of the Construction Loan and the mortgage, despite Canyon having granted some extensions of those dates. Canyon alleged that, among other defaults, the Debtor had defaulted by missing the “substantial completion date which was October 25[, 2016], ” and that the Debtor had defaulted on its obligation to enclose the building of the Project by July 1, 2016, which was “a critically important aspect of the [construction] schedule” to avoid damage to the building, from the inclement weather that had already occurred and that would be getting worse due to the approaching winter season. Canyon alleged that although it had worked with the Debtor and extended the original contractually-agreed date of July 1, 2016 to August 26, 2017, the Debtor had also defaulted on its promise to enclose the building by the extended date. According to Canyon, that default still had not been cured, and the building was “still open and exposed to the elements” at the time of the hearing. Canyon also alleged that Gaylor Electric Inc. d/b/a Gaylor, Inc. (“Gaylor”) and Jermor Plumbing & Heating, Inc. (“Jermor”), two subcontractors who had worked on the Project but had not been paid, had recorded construction liens against the property subject to its mortgage, and that more liens would soon be filed based on the Debtor's firing of Quandel Construction Group, Inc. (“Quandel”), the former general contractor for the Project. Canyon informed the Court that due to the Debtor's defaults, it had accelerated the promissory note and so the promissory note was due and owing in full. Canyon argued that “under either the [parties'] contract or the Construction Lien Act, the [c]ourt was authorized to appoint a receiver under the current existing circumstances” because the Project was only partially completed; the Debtor had defaulted on its obligations under its contract with Canyon; and the building was not enclosed and at risk of being damaged.
The Debtor argued that although there had been “technical defaults” due to missed construction milestone dates, the Debtor was entitled to an extension of the construction milestone dates of “up to 150 days” due to the force majeure clause in the parties' loan agreement. Debtor also argued that the “fundamental equities” of the case favored denying Canyon's request for the appointment of a receiver.
At the conclusion of the hearing, the state court gave a bench opinion in which it rejected the Debtor's arguments and ruled that it would “appoint McKinley, Incorporated [“McKinley”] as receiver for the [P]roject and that that [would] be done immediately.” On November 1, 2016, the state court entered an order appointing McKinley as the receiver (the “Receivership Order”).

         In re Packard Square, 575 B.R. at 771-72. The bankruptcy court observed:

In the Receivership Order, the state court made the following findings, among others:
C. [Debtor] has defaulted in the performance of its obligations under the Loan Documents identified and defined in the Complaint and [Canyon] has provided notice of such default.
D. Further, [Debtor] has failed or refused to pay necessary and immediate expenses to preserve and protect the Property, all of which constitutes waste and which jeopardizes the security interest of [Canyon] and other parties having an interest in the Property. In this circumstance, MCL 600.2927 as well as the provisions of the Loan Documents authorize this Court to appoint a receiver.
E. Additionally, the requirements under MCL 570.1122(1) are met in this case, namely:
(i) The improvements and construction to the Property are incomplete;
(ii) The Indebtedness due [Canyon] secured by the Mortgage is in default, and, therefore, the Mortgage is in default; and
(iii) [Canyon], the mortgagee, is likely to sustain substantial loss, if the improvements to the Property are not completed.

575 B.R. at 772-73. The bankruptcy court continued:

[T]he Receivership Order gave the Receiver broad authority over the Debtor's property and the Project, the purpose of which was “to protect the interests of all interested parties in the Property.” The Order gave the Receiver authority and direction not only to protect and preserve the Property, but also to complete construction of the Project:
[T]he Receiver is authorized and directed to take immediate possession and full control of the Receivership Property and to take any and all necessary and appropriate action to effectuate his possession and sole control over same in order to prevent waste and to preserve, secure, safeguard, winterize and complete construction of the Receivership Property.
To this end, the Receivership Order authorized the Receiver to “immediately enter into a loan agreement with [Canyon] to borrow funds to winterize, safeguard, and complete construction of the Receivership Property and to lease and potentially sell such property, in accord with the terms of MCL 570.1122, et seq.” The Order authorized the Receiver to borrow up to $19.7 million from Canyon “to, among other things, winterize, safeguard and complete construction of the Receivership Property.” Such loan was to be “subject to terms acceptable to [Canyon] and upon the approval of the Court, ” and was to be secured by a “super priority” lien, “senior to all other liens, ” on the Receivership Property.
Shortly after its appointment, the Receiver and Canyon jointly sought the state court's approval of proposed loan documents for the Receivership Loan. The Debtor objected, and the state court held a hearing on November 17, 2016, during which the court heard arguments and then granted the joint motion to approve the loan documents. Thereafter, the Receiver and Canyon entered into the ...

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