FOR THE NORTHERN DISTRICT OF CALIFORNIA
TMI GROWTH PROPERTIES - '82 No. 1-88-01073
Debtor. R.S. No. 89-6
Memorandum of Decision
Debtor TMI Growth Properties - '82 owns and operates a Sheraton Hotel in Santa Rosa,
California. Since the hotel began operating in 1984, it has never made a profit and has always
had a negative cash flow. Even while in Chapter 11 and relieved of the need to pay prepetition
debt, TMI has not been able to make ends meet.
Movant Great Western Bank now seeks relief from the automatic stay in order to foreclose
on its first priority deed of trust to
1the hotel property. Great Western is now owed about $14.5 million; the
property is worth only $12.3 million. The Court denied a similar motion brought in August,
1988, when the case was only two months old, finding that a reorganization of the debtor was
feasible notwithstanding the lack of equity in the property. Now, nine months after TMI filed
its Chapter 11 petition, the Court must reexamine the facts and determine if cause now exists to
modify the stay.
The parties are in agreement that relief from the stay is not appropriate if the property is
necessary to an effective reorganization, notwithstanding lack of
equity, and that the burden of proof is on TMI. United Savings Assn. of Texas v. Timbers of
Inwood Forest Assoc., Ltd.
(1988) 108 S.Ct. 626; 11 U.S.C. section 362(g)(2). The only
dispute over the applicable law involves the meaning of the phrase "necessary to an effective
reorganization." Great Western argues that it means necessary to a plan of reorganization with
a reasonable possibility of success within a reasonable time, citing Timbers
at page 362. TMI
argues for a lesser standard, that there can be no effective reorganization without the property.
The Court believes that Great Western has stated the law correctly.
It is clear from the evidence that reorganization of the debtor is problematical, to say the
least. Any reorganization will require an influx of new capital from a new partner, additional
funds from the limited partners of TMI, and restructuring of the Great Western obligation.
Obtaining a new partner is difficult for TMI because of threatened RICO litigation by the debtor's
former management company, which has already queered one deal. There has been no call for
additional funds from the limited partners, even though TMI has been in serious financial trouble
for almost two years. Great Western has expressed a disinterest in negotiating at all with present
TMI management. While none of these problems is by itself insurmountable, taking them all into
account it appears that while reorganization is possible, it is more likely than not that the effort
to reorganize will fail unless TMI quickly starts making all the right moves. So far, TMI has not
demonstrated this ability.
The Bankruptcy Code does not restrict the court to an all-or- nothing approach to automatic
stay litigation. Even where relief is mandated, section 362(d) gives the court discretion to
terminate, annul, modify, or condition the stay. Since each case is different, the court has wide
discretion to fashion an appropriate order. 2 Collier on Bankruptcy
(15th Ed.), p. 362-54.
In this case, it appears that if reorganization is going to happen at all, it will happen in the next
few months. If no reorganization is forthcoming within that time, the chances for reorganization
thereafter are too remote to justify continuance of the automatic stay. The Court will base its
order on this finding.
The automatic stay will be modified on September 15, 1989, so as to permit Great Western
to enforce its security interest in the debtor's property unless, on or before that date, an order
confirming a plan of reorganization has been entered. This ruling will be without prejudice to
Great Western's right to seek such relief at an earlier date if TMI's attempts to reorganize have
clearly collapsed or if TMI fails to promptly pay any secured real property tax which first became
due after the petition date.
Counsel for Great Western shall submit an appropriate form of order which counsel for TMI
has approved as to form.
Dated: March 21, 1989 _______________________
U.S. Bankruptcy Judge
1. This figure includes postpetition interest and charges not allowable to undersecured
creditors. It appears that Great Western has a secured claim for $12.3 million and an unsecured
claim for about $1.3 million, subject to 1111(b) ri