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July 18, 2022 – The Court hearing the WC Braker Portfolio case denied a motion filed by ATX Braker SR, LLC (“ATX" or “Mortgage Lender”) seeking dismissal of the Debtor’s Chapter 11 case [Docket No. 120].
On May 13th, ATX filed a motion seeking dismissal of the Debtor’s Chapter 11 case [Docket No. 24] arguing that the Debtor appeared to lack corporate authority for the Chapter 11 filing and, that even if that gating authority issue was overcome, that the Debtor's bad faith Chapter 11 filing "simply has no place in bankruptcy and is only the latest chapter in Mr. Paul’s continuing saga of using litigation to stymie creditors’ legitimate state law and contractual rights more generally."
In its order denying the dismissal motion (at least for now), the Court notes that the Debtor has remedied the Petition date deficiencies. Tackling the broader accusations of bad faith, the Court, after making clear that it has some sympathy with ATX's arguments, notes the appointment of a Chapter 11 trustee and the input of a creditor who urged the Court to stay the Chapter 11 course before ruling that: "on balance the Court does not find cause to dismiss the case or grant relief from the automatic stay and finds that retaining the case is in the best interest of creditors. The Court also finds that ATX is, at this time, adequately protected by a substantial equity cushion."
The Court Order
In delivering its ruling, the Court provides: "In its motion, ATX first argues that the case must be dismissed because it was filed without authority. Specifically, ATX contends that under the LLC agreement, approval by two independent managers was required before the Debtor could file bankruptcy. The Debtor
admits that no independent managers approved the filing but argues that such a deficiency can be ratified. And the Debtor later filed a notice that its independent managers ratified the bankruptcy filing on June 28, 2022. The bankruptcy filing here has been ratified and is now authorized.
ATX also argues that this case should be dismissed, or the automatic stay lifted, because it was filed in bad faith. During the hearing on the motion, one of the Debtor’s unsecured creditors appeared and argued against dismissal because if the case were dismissed or the stay lifted, recovery for creditors, other than the secured lender, is questionable. At this point, a chapter 11 trustee has been appointed and the case is being administered. Some of the factors that were enunciated by the Fifth Circuit in its Little Creek3 opinion are present here, but on balance the Court does not find cause to dismiss
the case or grant relief from the automatic stay and finds that retaining the case is in the best interest of creditors. The Court also finds that ATX is, at this time, adequately protected by a substantial equity cushion."
Background on Dismissal Motion
The dismissal motion [Docket No. 24] states, “The Debtor is in default under the Mortgage Loan Agreement and commenced this Chapter 11 Case with no viable restructuring plan and a single objective: to stall Mortgage Lender’s legitimate efforts to foreclose on the Properties through a public sale that was scheduled for the day immediately following the Petition Date. This Chapter 11 Case is only one of more than 30 bankruptcy cases commenced in the past three years as part of an elaborate scheme orchestrated by Mr. Nate Paul, the beneficial owner of the Debtor and guarantor of the Debtor’s Mortgage Obligations, to hinder and delay creditors’ enforcement of their state law rights and remedies. In fact, this Court has recognized what can only be characterized as Mr. Paul’s abuse of the protections afforded by the Bankruptcy Code and has appointed a chapter 11 trustee in each of the Affiliated Cases that are currently pending before this Court.
As a gating issue, the Debtor’s face sheet filing contains no evidence of the Debtor’s authority to file for bankruptcy protection, likely because the Debtor has not obtained such authority. Under the limited liability company agreement that governs the Debtor, authority to file for bankruptcy protection requires the unanimous consent of the Debtor’s sole member and two independent managers. The Debtor failed to abide by the United States Trustee guidelines requiring the filing of resolutions authorizing a bankruptcy filing, likely because no such resolutions were ever obtained. Unless the Debtor can show that the bankruptcy filing was authorized, dismissal of this Chapter 11 Case is mandatory and the Court need not perform any further analysis.
Even if the Debtor overcomes the authorization hurdle, the circumstances of this Chapter 11 Case and Mr. Paul’s track record of bad faith bankruptcy filings — including before this Court and in the District of Delaware — evidence a lack of good faith here, which provides an independent basis for dismissal. The commencement of this Chapter 11 Case is just like all of the others filed by Mr. Paul — purely a delay tactic, with no other legitimate or rehabilitative purpose under the Bankruptcy Code. This tactic constitutes a repeated and ongoing abuse of the judicial process and the reorganization provisions of the Bankruptcy Code that should not be countenanced by this Court. As courts in this Circuit have uniformly held, the lack of good faith evident from the circumstances leading up to the Debtor’s face sheet bankruptcy filing mandates either dismissal of the Chapter 11 Case or relief from the automatic stay for ‘cause’ pursuant to sections 1112(b) and 362(d)(1) of the Bankruptcy Code, respectively.
To the extent the Court does not dismiss this Chapter 11 Case as a bad faith filing, ‘cause’ nevertheless exists to grant Mortgage Lender relief from the automatic stay based on the lack of adequate protection of its security interests in the Properties. Given the Debtor’s historical negative cash flow based on monthly rental income generated from the Properties, which has been insufficient to satisfy the Debtor’s debt service obligations under the Mortgage Loan Agreement for at least the past three months, and the deterioration of the Properties while Mr. Paul continues to abuse the bankruptcy system purely as a litigation tactic, the Debtor will almost certainly be unable to provide adequate protection, which warrants relief from the automatic stay for ‘cause.’
This Chapter 11 Case simply has no place in bankruptcy and is only the latest chapter in Mr. Paul’s continuing saga of using litigation to stymie creditors’ legitimate state law and contractual rights. Accordingly, Mortgage Lender respectfully requests that the Court grant the Motion and enter an order dismissing this Chapter 11 Case or, alternatively, granting relief from the automatic stay to allow Mortgage Lender to proceed with its scheduled foreclosure sale and to otherwise exercise its rights and remedies with respect to the Properties.”
On May 2, 2022, WC Braker Portfolio, LLC (“WC Braker” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Western District of Texas, lead case number 22-10293 (Judge Tony M. Davis). At filing, the Debtor noted estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $50.0mn and $100.0mn.
The Petition is signed by Natin (“Nate”) Paul, the Austin, Texas-based developer/investor who last week won a reprieve from foreclosure efforts when a New York County Supreme Court judge issued a preliminary injunction to keep ATX Braker, a shell company that Los Angeles-based Karlin Real Estate owns, from proceeding with a scheduled April 14th UCC foreclosure sale of the Braker portfolio. Documents filed in respect of the New York case note that the Debtor owes ATX Braker $29.0mn in respect of mezzanine loan and also has an approximately $63.0mn mortgage loan with JP Morgan. The Debtor, which allegedly defaulted on the mezzanine loan upon occurrence of a March 9th maturity date, claimed in the New York proceeding that it wasn’t properly notified of the foreclosure action. This is not an unfamiliar pattern for those who have watched Mr. Paul’s frequent use of the bankruptcy courts, including in respect of the GVS cases (defined just below) where he also dodged foreclosure efforts launched by mezzanine lenders by putting his GVS assets into bankruptcy.
As reported, Mr. Paul is looking to rebuild his once considerable property portfolio following better than expected results in a section 363 sale of his GVS self-storage properties.
On March 22, 2022, entities controlled* by Mr. Paul (GVS Texas Holdings I, LLC and 13 affiliated Debtors, or “GVS,” see list of affiliated cases below) notified the Court that as of that date (i) their Plan of Reorganization had become effective and (ii) their $580.0mn sale of substantially all of their assets to stalking horse CBRE WWG Storage Partners JV III, LLC had closed [Docket No. 882]. Confirmation (and effectiveness) of the Debtors’ Plan followed a March 15th “Stipulation and Agreed Order with World Class Holdings I, LLC” (the “WCH Order”) [Docket No. 852] which could see the the much maligned Natin Paul “as the sole officer and director of the Debtors” and sitting on over $100.0mn of asset sale proceeds (see our seprate coverage of GVS).
*Mr. Paul’s return to GVS continues to hinge on the outcome of an ongoing investigation relating to alleged post-petition improprieties that ultimately led to a November 2021 “Governance Order” that saw Mr. Paul removed entirely from any involvement with, or management of, GVS.
The fact of the Governance Order pretty much summed up the universally shared (and low) opinion of Mr. Paul and followed multiple calls for the Debtors’ cases to be converted to Chapter 7. That opinion, however, was largely rendered moot by the GVS asset sale proceeds that are comfortably more than enough to pay off everyone and effectively make Mr. Paul’s accumulated shade (at least as to the GVS debtors) go away. If Mr. Paul can overcome the 549 Investigation and behave himself for 120 days (from March 22nd), in all likelihood he will soon be comfortably reinsconced as the Debtors’ sole officer (albeit minus his sold business). More importantly for him, he may also be in control of almost $100.0mn (even after accounting for reserves, see table below).
Braker Portfolio Properties
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