1994 #02A, Marshall Manor, Inc., 2-11-94

In re: MARSHALL MANOR, INCORPORATED, a/k/a MARSHALL MANOR, INC., Bankr. Case No. 93-10191, Chapter 11

MEMORANDUM OF DECISION RE: RTC'S MOTION TO DISMISS

The matter before the Court is the Amended Motion to Dismiss filed by Resolution Trust Corporation, the joinder in that Motion filed by American Centennial Insurance Company, and Debtor's resistance thereto. This is a core proceeding under 28 U.S.C. § 157(b)(2). This Memorandum and accompanying Order shall constitute findings and conclusions under F.R.Bankr.P. 7052.

I.

Marshall Manor, Inc., operates a nursing home in Britton, South Dakota. It has sold the property to Lake Region Development, Inc. (Lake Region), its sole shareholder, on a contract for deed and it leases the property back from Lake Region.

Marshall Manor filed a Chapter 11 petition with the United States Bankruptcy Court for the District of South Dakota [Bankr. No. 91-10112] on June 10, 1991 while a foreclosure action by Resolution Trust Corporation (RTC) was pending before the United States District Court for the District of South Dakota [Case No. 89-CV-1047]. On March 2, 1992, this Court ordered the bankruptcy case to be jointly administered with Lake Region's Chapter 11 case [Bankr. No. 91-10111].

Lake Region and Marshall Manor filed plans of reorganization and disclosure statements on December 11, 1991. Several objections were filed, confirmation was never obtained, and the cases did not move forward. The Court conducted a status conference on December 17, 1992. The Court ordered Lake Region and Marshall Manor to file amended plans and disclosure statements by December 21, 1992 if they decided not to pursue a sale of assets under 11 U.S.C. § 363. RTC filed a Motion to Dismiss both cases on December 29, 1992 because Lake Region and Marshall Manor had not met the Court's December 21, 1992 deadline. Lake Region and Marshall Manor filed amended plans on January 19, 1993 -- one day before the scheduled hearing on RTC's Motion to Dismiss -- but they did not serve or notice the plans for hearing.

Marshall Manor's financial status as set forth in its January 19, 1993 disclosure statement and plan may be summarized as follows:

1. priority creditors - none;

2. secured creditors - Plan says Marshall Manor has "no debt liability as a result of the debt priority stipulation agreement with creditors" and that it is in a position to pay rent and dividends to Lake Region and to help Lake Region more quickly pay its debts;

3. unsecured creditors - administrative expenses of $15,000.00; no insider claims; and United States Trustee fees of $1,250.00;

4. real property - nursing home with a liquidation value of $360,822.00; and

5. personal property - various, with a liquidation value of $143,000.00.

After discussions with counsel at the January 20, 1993 hearing on RTC's Motion to Dismiss, the Court continued the hearing for one month to give interested parties time to review Lake Region's and Marshall Manor's amended plans and disclosure statements.

RTC presented evidence in support of its Motion to Dismiss at the continued hearing on February 16, 1993. Lake Region and Marshall Manor presented little evidence in resistance. The Court ordered the parties to submit proposed findings and conclusions. The Court conducted a telephonic status conference on the proposed findings and conclusions on March 18, 1993. At that conference, counsel for Lake Region and Marshall Manor informed the Court that he had additional evidence to present in dispute of RTC's claim and he argued resolution of RTC's claim would affect the feasibility of Lake Region's and Marshall Manor's plans. By Order entered March 18, 1993, the Court gave Lake Region and Marshall Manor until March 23, 1993 to file an objection to RTC's proofs of claim and stated the cases would be dismissed without further hearing or notice if the deadline was missed. Lake Region and Marshall Manor missed the deadline and the Court dismissed both cases on March 31, 1993.

Lake Region and Marshall Manor appealed the dismissal order but the dismissal order was not stayed. The United States District Court for the District of South Dakota affirmed the Bankruptcy Court's dismissal by Order entered November 8, 1993.

On November 15, 1993, the day before another hearing was scheduled with the United States District Court on RTC's foreclosure action, Marshall Manor (hereafter Debtor) and Lake Region each filed second Chapter 11 petitions. Debtor filed its schedules on December 3, 1993. These schedules may be summarized as follows:

1. priority creditors - none;

2. secured creditors - RTC for $1,040,108.29 (fully secured and disputed) and American Centennial for $267,644.77 (fully secured and disputed);

3. unsecured claims - none;

4. real property - a contract for deed valued at $309,500.00; and

5. personal property - various, including a claim against the state for underpaid Medicare reimbursement, valued at $196,356.10.

Debtor stated it has assets totaling $505,856.10 and liabilities totaling $1,307,753.06.

RTC moved to dismiss both cases on November 15, 1993 and requested hearings on shortened notice. American Centennial joined RTC's dismissal motions on December 10, 1993. Debtor and Lake Region filed resistances on December 13, 1993.

On December 15, 1993, Marshall Manor and Lake Region appealed the District Court's affirmance of this Court's dismissal of the earlier Chapter 11 cases. That appeal is pending before the United States Court of Appeals for the Eighth Circuit.

The evidentiary hearing on RTC's Motions to Dismiss was held December 16, 1993.⁽¹⁾ Appearances included Curt R. Ewinger for Debtor and Lake Region, Roger W. Damgaard for RTC, Bruce J. Gering for the United States Trustee, Lee A. Magnuson for American Centennial, and Danny R. Smeins for Janelle Marx, one of Debtor's principals. At the conclusion of the hearing, the Court ordered the parties to file proposed findings and conclusions. Upon receipt, the matter was taken under advisement.

II.

There is no per se rule against successive filings except as provided under the Bankruptcy Code.⁽²⁾

Schuldies v. United States (In re Schuldies), 122 B.R. 100, 101 (D.S.D. 1990). Instead, a petition and a proposed plan of reorganization each must be filed in good faith. Id. at 102. "The bankruptcy court must be concerned whether or not there was a strategy behind the subsequent filings to frustrate statutory requirements and abuse the bankruptcy process." Id. (citing In re Chisum, 847 F.2d 597, 600 (9th Cir. 1988)). See also In re Henke, 127 B.R. 255 (Bankr. D. Mont. 1991); In re Miller, 122 B.R. 360 (Bankr. N.D. Iowa 1990).

Good faith is a factual determination. Schuldies, 122 B.R. at 102. Factors to consider include whether a final decree was entered in the previous case, the length of time between the discharge of one case and the filing of another, whether the filing was made to obtain the benefits of the automatic stay, the debtor's effort to comply with any previously confirmed plan, recognition that Congress intended a debtor to achieve the goals of bankruptcy through the filing of a single case, and other "relevant" facts. Id. at 102-103. "The court should examine the 'totality' of the circumstances surrounding the filing." Id. at 103 (citing In re Metz, 820 F.2d 1495, (9th Cir. 1987)). See also Euerle Farms, Inc. v. State Bank in Eden Valley (In re Euerle Farms, Inc.), 861 F.2d 1089, 1091-92 (8th Cir. 1988)(a "multiplicity of factors" may be considered in the aggregate to meet the cause requirement for dismissal; the filing of a bankruptcy petition without the intent or ability to reorganize properly renders a petition subject to dismissal).

This Court, following First National Bank v. Kerr (In re Kerr), 908 F.2d 400, 404 (8th Cir. 1990), has previously concluded that bad faith warranting dismissal of a reorganization case may include concealment, evasion, or direct violations of the Bankruptcy Code or a court order that clearly establishes an improper motive. In re Coones Ranch, Inc., 138 B.R. 251, 258 (Bankr. D.S.D. 1991). Violations of the Code or an order include self-dealing and asset manipulation without court approval. Id.

III.

Upon consideration of the statutes and case law discussed above, this Court concludes that Debtor's second Chapter 11 petition was not filed in good faith and must be dismissed. While bona fide changes in circumstance may justify a successive chance to reorganize, Schuldies, 122 B.R. at 101, Debtor has not shown any changes in its financial status nor any new problems since the first case was dismissed that would justify another attempt at a Chapter 11 reorganization. Several facts support this conclusion.

First, Debtor and Lake Region's financial picture has not changed appreciably since the first cases were dismissed a year ago. Debtor and Lake Region still have the same main creditors, RTC and American Centennial, and Debtor has done little this past year to settle those claims through litigation or settlement. For several years, Debtor has been able to force RTC and American Centennial to finance its operation at a cost only of making some adequate protection payments during the earlier case. Debtor ultimately must address RTC's and American Centennial's claims. However, a second Chapter 11 plan is not the appropriate avenue when Debtor did not wisely use its first reorganization opportunity.

Debtor's employment of new counsel is not a sufficient change in circumstance to warrant a second chance to reorganize. While the conduct of Debtor's counsel in the first case contributed greatly to the dismissal, Debtor's plan to employ a second attorney as co-counsel in this case was merely game playing. This case is not overly complicated; one attorney can handle it. Co-counsel was added as window dressing in an attempt to alleviate the Court's concern that the prior attorney would continue to represent Debtor, a tactic that speaks little of Debtor's good faith effort.⁽³⁾

Second, Debtor's and Lake Region's principals and other insiders removed substantial sums from the corporations between November 1992 and November 1993. Debtor's schedules show these payments from Debtor totaled at least $66,650.00, including $64,850.00 to Janelle Marx, Lake Region's sole shareholder, for salary, bonus, director fees, and an $11,000.00 dividend, and $1,800.00 to director Jason Marx.⁽⁴⁾ Debtor also paid $173,850.00 to Lake Region between November 1992 and November 1993 and it does not appear that Lake Region applied those funds to RTC's or American Centennial's claims. Instead, in 1993 Lake Region paid Janelle Marx a salary of $19,000.00, a dividend of $22,000.00, and director fees of $1,200.00. Lake Region also paid Jason Marx $1,200.00 in director fees and it paid $56,000.00 to Financial Services, Inc., a corporation held solely by Jason Marx, that was a creditor in the Lake Region's earlier case. These payments indicate Debtor and its insiders had little interest in paying claims against the corporations but instead wanted to maximize the insiders' profits while the corporations were outside the Bankruptcy Court's jurisdiction. As counsel for RTC aptly stated, Christmas came early and often for the Marx family in 1993 while they ignored the large claims against the corporations. In addition, salary payments to Janelle Marx as the assistant office manager are suspect since she spends little time in Britton and it appears her minimal services could easily be handled by the nursing home's regular office staff. Finally, the insiders' dissipation of assets while large claims remain unpaid establishes a poor history of trustworthiness. These questionable post-dismissal withdrawals, coupled with the lack of progress in the prior cases,⁽⁵⁾ give the Court and creditors little reason to believe that Debtor will fulfill timely its fiduciary duties in a second Chapter 11 case.

Third, Debtor's assets are essentially unchanged since the dismissal of the prior Chapter 11 cases. Although Debtor and Lake Region recently sold an option to purchase the nursing home to Prairie Hills Health Care, Debtor's argument that this sale must be consummated under the Bankruptcy Court's jurisdiction is not tenable.

Fourth, Debtor does not now have, nor did it have in its prior case, any unsecured claim holders that may benefit from a reorganization. Debtor continues to meet its operating expenses and tax obligations. It is clear that RTC's foreclosure action precipitated both the first and second filings. See Resolution Trust v. Lake Region Development, Inc., et al., Case no. 89-CV-1047 (D.S.D., commenced November 13, 1989). Debtor's filing of a bankruptcy petition on the eve of RTC's foreclosure alone is not indicative of bad faith. However, this is the second time Debtor has filed on the eve of foreclosure and RTC's and American Centennial's claims are little closer to being resolved than when Debtor first filed a Chapter 11 petition three years ago. Accordingly, this Court can only conclude that Debtor's second petition is just another stall tactic and that Debtor has never intended to resolve RTC's and American Centennial's claims within a reasonable time in this second case. If that were true, Debtor could have filed a plan with its second petition or shortly thereafter, since it has had almost a year since the dismissal of the last case to negotiate plan treatment with its two major creditors. Instead, Debtor's counsel stated a new plan and disclosure statement would not be ready until February 1994. Also, Debtor and Lake Region made adequate protection payments to RTC and American Centennial during the prior cases. Although Debtor and Lake Region had sufficient income during 1993 to make some good faith payments toward RTC's and American Centennial's claims, payments stopped when the first Chapter 11 cases were dismissed.⁽⁶⁾

Fifth, Debtor's second petition is inconsistent with its appeal to the Court of Appeals in the first Chapter 11 case. See Coones Ranch, 138 B.R. at 259. RTC and other creditors must respond to Debtor's appeal of the first case's dismissal while they are also addressing Debtor's second Chapter 11 filing. Debtor's prolonged, circuitous effort to avoid paying R.T.C. and American Centennial has been a waste of Debtor's and the creditors' time and money.

Finally, Debtor has argued in both of its Chapter 11 cases that the state of South Dakota has short-changed the nursing home on its Medicaid reimbursement rate. While the nursing home did receive one increase in its rate after the March 31, 1993 dismissal, Debtor still claims it is owed more. Debtor's efforts to resolve that problem have not been shown to the Court. Debtor did not provide the status of any litigation against the state. Debtor has not told the Court how more time and another Chapter 11 case will resolve the reimbursement rate problem. Further, Debtor has operated successfully for the past few years;⁽⁷⁾ there is no indication that any reorganization is dependent on receiving a higher reimbursement rate. The feasibility of a plan of reorganization has never been Debtor's and Lake Region's stumbling block. Instead, their problem is that they lack the intent to address properly the claims of RTC and American Centennial. See Euerle Farms, 861 F.2d at 1092. But for dilatory tactics, Debtor may have gotten a Chapter 11 plan confirmed in 1991.

An order will be entered dismissing the case.

Dated this 26th day of January, 1994.

1. At the beginning of the December 16, 1993 hearing, the Court advised counsel that Debtor's good faith in filing the second petition would be at issue, not whether F.R.Civ.P. 41(b) prohibited a refiling because the first case was dismissed with prejudice, as originally argued by RTC.

2. Some successive filings of bankruptcy petitions are specifically prohibited by 11 U.S.C. § 109. Section 109 does not apply in this case, including § 109(g) because that subsection does not apply to non farm corporations.

3. The Court denied Debtor's employment of Attorney Danny R. Smeins, who represented Debtor in the first case, because inter alia Mr. Smeins is not disinterested and he has represented adverse interests. See In re Marshall Manor, Inc., Bankr. No. 93-10191, bench decision (Bankr. D.S.D. Dec. 16, 1993)(findings and conclusions re: Debtor's application to employ Curt R. Ewinger and denying Debtor's application to employ Danny R. Smeins).

4. Kari Rhoads also received $1,800.00 in director's fees but it is not clear whether she is an insider of Debtor or Lake Region.

5. A litany of Debtor's poor performance in the prior case need not be repeated here. See Lake Region Development, Inc., v. Resolution Trust Corporation, Civ. 93-1014, slip op. (D.S.D. Nov. 8, 1993).

6. During his testimony, Danny R. Smeins, Debtor's first bankruptcy attorney, intimated that Debtor had continued to make payments to RTC and American Centennial after the first cases were dismissed. Wayne Jarrett, the nursing home's business manager, intimated payments had not continued. Debtor's present schedules do not state that any such payments were made.

7. The positive aspect of this case is that the nursing home has continued in operation with minimal problems. Management has adequately addressed some labor problems, necessary improvements have been made, and the state has continued the home's license. The Court trusts good management of the nursing home will continue although Debtor and Lake Region are no longer under its jurisdiction.