This document has been electronically entered in the records of the ...

This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: June 12, 2009
____________________________________________________________
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
FRITZSCH CUSTOM
BUILDERS, LLC
Debtor
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Case No. 09-10083
Chapter 11
Judge Hopkins
MEMORANDUM OF DECISION
ON ORDER CONVERTING CASE
Thomas and Suzanne Nies, creditors of this estate, have filed the instant
motion ("Motion") (Doc. 22) seeking to dismiss the chapter 11 case filed by the
Debtor, Fritzsch Custom Builders, LLC. The Motion is governed by 11 U.S.C. §
1112(b)(1), which states that "the court shall convert a case under this chapter to a
case under chapter 7 or dismiss a case under this chapter, whichever is in the best
interests of creditors and the estate, if the movant establishes cause." Under the
applicable law, dismissal is warranted if the movant has shown that "cause" exists
and that, in the bankruptcy judge's opinion, dismissal rather than conversion to
chapter 7 is in the best interest of creditors and the estate.

Case No. 09-10083
FACTS
The Debtor is a custom builder that possesses three assets: (1) a 2002 van with
a scheduled value of $2,500; (2) a newly constructed custom home overlooking the
Ohio River, appraised from $630,000 to $1,100,000 in its current condition; and (3)
state law claims for monetary relief against a surveyor and an insurance company.
The Debtor concedes that it no longer operates an ongoing construction business,
does not generate any income, and wants to use chapter 11 solely to liquidate the
assets of the estate rather than reorganize.
I. 3025 Ononta and the View Easement
The chapter 11 case was precipitated by a divisive and protracted lawsuit in
state court arising from the construction of the Debtor's custom home, located at
3025 Ononta Avenue, Cincinnati, Ohio. Mr. and Mrs. Nies own the home next
door. 3025 Ononta is subject to a view easement that benefits the Nies property.
The easement prohibits the owner of 3025 Ononta from occupying certain airspace
above the property so that the owner of the property where the Nieses currently
reside may enjoy an unobstructed view of the Ohio River. When the Debtor built
3025 Ononta, it inadvertently encroached upon the Nieses' property's easement.
II. State Court Litigation
The issue was litigated extensively in state court. An appeal has been lodged
by the Debtor from an adverse decision rendered against it. 1 There are three
principal components to the state court proceedings.
A. Vertical Encroachment
One of the issues was whether the easement applied only to airspace above
631.30 feet over sea level. If so, then two decks attached to the home below 631.30
would not have violated the easement. The trial court concluded that the easement
1 The Debtor also filed a motion, pursuant to 11 U.S.C. § 362(d), seeking to
modify the automatic stay (Doc. 39) so that the Debtor can pursue an appeal in
state court. Thomas Nies filed a response (Doc. 46) to the motion. By separate
order entered in this case, the motion to modify the stay will be granted.
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Case No. 09-10083
did not have a 631.30 floor, as argued by the Debtor, and ordered removal of the
decks and their footers. The decks and footers are no longer part of the home.
B. Horizontal Encroachment
Following the trial court's legal determination concerning the vertical
parameters of the easement, a jury awarded damages to the Nieses for a horizontal
encroachment of approximately 3.5 feet. The Debtor does not dispute the horizontal
encroachment or the amount of the jury award for $166,000 owed the Nieses.
C. Attorney's Fees
Lastly, the trial court ordered the Debtor to pay for the Nieses' attorney's
fees, being approximately $92,000.
III. Chapter 11 Strategy – Maximize Value Through Litigation
The Debtor concedes that this is a liquidating chapter 11. According to the
Debtor, its strongest motivation for filing this case is to maximize the dividend to
unsecured trade creditors it has done business with over the years. Of concern,
however, is that the Debtor intends to accomplish this through litigation, rather than
a reorganized home building business with restructured debt, a revamped business
plan and perhaps some new investors. Specifically, the Debtor wants to pursue four
lawsuits to fund a chapter 11 plan. Until the Debtor prevails in these various pieces
of litigation, there is no other money available to keep the Debtor afloat other than
the payments Robert Fritzsch, the Debtor's principal, is making on the quarterly
U.S. Trustee fees and utilities at 3025 Ononta.
A. Appeal of State Court Decision
First, and foremost, the Debtor has appealed the state court decision
concerning: (1) the finding of vertical encroachment; and (2) the award of attorney's
fees. If the state appellate court determines that the easement does not extend below
631.30 over sea level, the Debtor believes that the value of the property will be
greatly enhanced because: (1) the decks would be reinstalled; and (2) the owner
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Case No. 09-10083
would possess unrestricted use and enjoyment of the yard. 2 In addition, if the
appeals court reverses the attorney's fees award, the secured claims against the estate
will be reduced by $92,000.
B. Action Against Surveyor
The Debtor would also like to initiate a state court action against the
professional it hired to survey 3025 Ononta. The Debtor believes that the surveyor
should have discovered a second easement recorded in 1991 from public records and
notified the Debtor of it before construction began. Based on the surveyor's alleged
negligence, the Debtor contends that it will recover monetary damages for $166,000,
the amount the jury awarded to the Nieses for the horizontal encroachment.
According to the Debtor, once these funds are recovered they will become property
of the estate and used to repay creditors. The Debtor is, at best, uncertain how long
the litigation might take, and there is no guarantee that the Debtor will prevail.
C. Action Against Insurer
The Debtor also intends to file a state court action against its own insurance
carrier. The action would seek coverage for: (1) the encroachment of the horizontal
and vertical easements; and (2) the attorney's fees the Debtor incurred in defending
the Nies action in the trial court. The Debtor has identified an attorney who is
willing to pursue this action on a contingent fee, perhaps minimizing the
administrative costs to the estate. If the Debtor prevails in the litigation it once again
hopes to increase the dividend that the estate will pay unsecured creditors. At a
minimum, $146,313.60 or the amount the Debtor owes on the attorneys fees
incurred to defend against the Nies lawsuit could be recovered from the insurer.
Again, the Court is left to wonder about the duration of the litigation and whether
the Debtor will ultimately succeed.
D. Action to Avoid Nies Judgment Lien
Subsequent to their state court judgment, the Nieses obtained a judgment lien
2 Given the state trial court's construction of the easement, the Debtor contends that
the owner of 3025 Ononta cannot plant flowers or place a lawn chair in the
yardspace subject to the easement.
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Case No. 09-10083
against 3025 Ononta. Currently, the Nies lien is valued at $262,054.50 which
represents the judgment obtained on the horizontal easement violation in the amount
of $166,000 and the attorney's fees award for $92,000, plus accrued interest through
the petition date. 3 The Debtor hopes to file an adversary complaint to avoid the lien
as a preferential transfer under § 547(b). If the Debtor succeeds with this action, the
secured claims against 3025 Ononta would be reduced substantially, yielding a
greater return for the general unsecured creditors of the estate, including the Nieses.
IV. Secured Debt
3025 Ononta is subject to multiple encumbrances. The Hamilton County
Treasurer has filed a $21,517.49 claim for real estate taxes. The mortgagee, Stock
Building Supply, Inc., has filed a claim for "$775,000.00 plus interest." The Debtor
admits that it has not made any postpetition payments toward the property taxes or
the mortgage. Simply put, it is fair to say that the Debtor has no intentions of
making any payments on these obligations until all of the litigation terminates and
the estate is liquidated under a chapter 11 plan it hopes to have confirmed.
There is also a mechanic's lien on the property. The lienholder filed a claim
in the amount of $9,479.88.
Lastly, as noted, the Nieses currently hold a judgment lien for $262,054.50.
Again, the Debtor hopes to avoid the judgment lien as a preferential transfer. Given
the nature of this claim and that it would be tried in the bankruptcy forum, the Court
has fewer concerns over delay or the probabilities of success than with the state
court litigation previously discussed.
V. Value of 3025 Ononta
The vast majority of the evidentiary hearing on the Motion was devoted to
valuing 3025 Ononta, both with and without the removed decks.
The Nies' appraiser, David Wuest, testified that the property is currently
3 Debtor's Schedule F lists the Nieses' claim at $258,000. However, the Nieses
filed a proof of claim for $262,054.50 which includes the post-judgment interest
accrued through the date of the petition.
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Case No. 09-10083
worth $630,000 without the decks, but could be sold for $690,000 if the decks were
reinstalled.
The Debtor's appraiser, John McNally, testified that the property is currently
worth $1,100,000. 4 The Debtor also offered the expert testimony of a real estate
agent, Denise Guiducci, who specializes in the sale of Ohio River view properties.
Ms. Guiducci testified that the property is currently worth $1,115,000 without the
decks and $1,245,000 if the decks are rebuilt.
For tax purposes, the Hamilton County Auditor has valued the property at
$889,920.
ISSUE
The question presented for consideration concerns whether "cause" exists,
under § 1112(b)(1), which may require the Court, in the exercise of its sound
discretion, to convert the case to one under chapter 7 or to dismiss it altogether.
I. 11 U.S.C. § 1112(b)(4)(A)
ANALYSIS
Section 1112(b)(4)(A) defines "cause" to include "substantial or continuing
loss to or diminution of the estate and the absence of a reasonable likelihood of
rehabilitation."
This Court finds In re Original IFPC Shareholders, Inc., 317 B.R. 738
(Bankr. N.D. Ill. 2004) instructive on this point. Similar to here, the debtor in that
case had completely ceased its business operations before filing for chapter 11 relief.
It possessed only two assets, a $17,000 bank account and a cause of action for tradesecret-misappropriation.
The debtor had already litigated the misappropriation
claims in state trial court and lost. The debtor filed a chapter 11 petition and
4 Mr. McNally did not provide values with and without the decks. His report
references "3 composite decks" but his photographs clearly show that the two decks
deemed to have violated the easement had already been removed.
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Case No. 09-10083
liquidating plan pending the appeal of the state court judgment and, if it ultimately
prevailed on its cause of action, sought to use the proceeds of the suit to pay
creditors of the estate an enhanced dividend.
In her well-reasoned decision, Judge Cox concluded that cause for dismissal
or conversion existed due to "continuing loss to or diminution of the estate and
absence of a reasonable likelihood of rehabilitation." 5 In reaching this conclusion,
the court held that the first portion of the statute, loss or diminution, was satisfied
because the debtor had no income to pay even administrative expenses. Judge Cox
went on to hold that the second portion of the statute, absence of reasonable
likelihood of rehabilitation, was satisfied where the debtor's only strategy to generate
additional funds was through speculative litigation.
The facts of the case at bar resemble Original IFPC Shareholders, with the
exception that here, no plan has been filed. Although the basic utilities for 3025
Ononta and the quarterly U.S. Trustee fees are being paid by the Debtor's sole
member, Robert Fritzsch, no one is paying the postpetition installments on the
$775,000 mortgage or the administrative expenses accruing; in particular, the
attorney's fees for the estate, the property taxes and late payment penalties
presumably being assessed. 6 Nor has the Debtor suggested in statements to the
Court that any of these payments would be made while it pursues the various
lawsuits needed to fund the proposed chapter 11. Even if a chapter 11 plan had been
proposed, it is likely to meet with stiff resistence from the Nieses. Undoubtedly,
more administrative costs for payment of Debtor's attorney's fees will be incurred
5 Prior to B.A.P.C.P.A., this example of "cause" was set forth in § 1112(b)(1).
Under B.A.P.C.P.A., it is now set forth in § 1112(b)(4)(A). The only meaningful
difference between the two is that B.A.P.C.P.A. added the words "substantial or"
at the beginning of the subsection. Therefore, B.A.P.C.P.A. is broader, including
continuing or substantial loss etc.
6
As earlier noted, the Hamilton County, Ohio, Treasurer has already filed a
secured claim for $21,517.49 in this case related to a pre-petition tax lien imposed
against 3025 Ononta. 11 U.S.C. § 506(a) governs the amount that this secured tax
claim will eventually be paid. In addition to payment of the tax claim secured by
the property, the Debtor has an ongoing obligation to pay administrative expenses
including,"any tax... incurred by the estate . . . including property taxes" and any
"penalty." See 11 U.S.C. § 503(b)(1)(B) and (C).
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Case No. 09-10083
in an attempt to negotiate a consensual plan or to force a cram down over the
anticipated objection to confirmation by the Nieses, very plausibly on good faith or
feasibility grounds. See § 1129(a)(3) and (11).
Similar to Original IFPC Shareholders, also, the Debtor's sole proposal for
rehabilitation 7 is premised entirely upon the outcome of certain speculative litigation,
including the appeal of a lawsuit where a judge has already ruled against the Debtor.
At the very least, the Debtor faces an uphill battle that will be expensive, time
consuming, and which may ultimately be unsuccessful. This is not to say that the
Debtor's interpretation of the vertical aspect of the view easement is incorrect, nor
that the Debtor cannot prevail in any of the litigation it intends to pursue; it is simply
to say that creditors should not be made to bear the risk of any continuing losses to
the estate without a greater probability for a successful rehabilitation than that which
has been suggested.
Finally, and importantly, since the entry of the order of relief in this case, the
Debtor's failure to conduct any business activities has caused it to generate negative
cash flow resulting in a net decrease in the value of its assets. The assets of the estate
are losing value as the administrative expenses and the mortgage debt continue to
accrue. Moreover, if the litigation, the only asset of the estate that the Debtor is
counting on for payment of a proposed enhanced dividend to unsecured creditors in
a chapter 11 plan, ultimately proves unsuccessful, unsecured creditors will likely
receive less then they will now, and the secured creditors, the mortgagee and other
lien holders, will see the value of their claims further erode.
Under these circumstances, the Court concludes that "cause" exists pursuant
to § 1112(b)(4)(A) for the case to be dismissed or converted to chapter 7 because
there is an absence of any reasonable likelihood of rehabilitation and there is very
likely to be a substantial or continuing loss or diminution of the estate injurious to
creditors.
7 It is questionable whether "rehabilitation" can even occur in a liquidating chapter
11. See Loop Corp. v. United States Trustee, 379 F.3d 511, 516 (8 th Cir. 2004)
(liquidating debtor has no likelihood of rehabilitation).
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Case No. 09-10083
II.
Choice between Conversion and Dismissal
Having resolved that"cause" under § 1112(b)(4)(A) has been demonstrated
by the movant, the Court must now decide whether it would be in the best interest
of creditors and of the estate for the case to be converted to chapter 7 or dismissed.
The movant seeks to have the case dismissed on the grounds that it was filed in bad
faith, among other rationales. The movant is correct in noting that a bad faith filing
of a chapter 11 petition constitutes "cause" for dismissal in our circuit. See In re
Trident Assocs. Ltd. Partnership, 52 F.3d 127, 130 (6 th Cir. 1995).
However, the decision on whether a chapter 11 case should be dismissed rests
within the sound discretion of the bankruptcy judge based on the evidence presented.
In re Citi-Toledo Partners, 170 B.R. 602 (Bankr. N.D. Ohio 1994). "Where the
estate is not generating revenue but value exists to be maximized for creditor's
benefit, and where the creditor body will have more enhanced protection in the
federal bankruptcy forum than in noncollective state-court proceedings, conversion
to Chapter 7 rather than dismissal may be appropriate." Original IFPC
Shareholders, 317 B.R. at 753. A bankruptcy court need not give exhaustive
reasons for its decision to convert a case to chapter 7; it need only explain why
conversion is preferable to chapter 11. See Matter of Woodbrook Assocs., 19 F.3d
312, 317 (7 th Cir. 1994); Citi-Toledo Partners, 170 B.R. at 609.
For many of the reasons previously discussed the Court is persuaded that, at
this juncture, conversion rather than dismissal is in the best interests of the creditors
and the estate. In reaching this conclusion, the Court also relied upon the following
factors: 1) It is undisputed that the Debtor has abandoned any attempt to reorganize
and its construction business has completely ceased operations; 2) The record also
shows that the Debtor is suffering from a negative cash flow which is likely to
persist for an indefinite period; 3) The administrative costs of the estate continue to
accrue at a rapid pace from month to month and that trend is likely to continue for
an extended period; 4) It is uncertain, at best, whether the Debtor will be able to
formulate a chapter 11 plan in the face of the likely strenuous opposition it will
confront from the Nieses, and any attempt to cram down a plan may prove very time
consuming and expensive, with no guaranteed success; 5) The bankruptcy forum
offers a chapter 7 trustee the ability to pursue a preference action against the Nieses
that may increase the dividend for unsecured creditors over the non-collective state-
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Case No. 09-10083
court proceedings 8 ; 6) The appointment of a chapter 7 trustee will also eliminate the
expenses associated with an attempt to negotiate and confirm a plan; and 7) If causes
of action are important assets of the estate, the appointment of a chapter 7 trustee is
preferable because a trustee will be better equipped to expeditiously pursue the
bankruptcy and non-bankruptcy causes of action and to collect, liquidate and
distribute estate property in a manner consistent with the best interest of the creditors
over the more expensive and time consuming chapter 11 process.
What makes this case difficult is that the Debtor has a very strong and
enviable desire to repay trade creditors with whom the Debtor's principal has
probably done business with for many years. Perhaps, also, he might want to do
business with these same companies and individuals in the future. It is apparent to
the Court that the Debtor sincerely and honestly believes that a chapter 11 plan and
confirmation process is the best way this can be accomplished. If everything goes
according to script and the Debtor in short order is successful in each piece of
litigation enumerated, the unsecured creditors of the estate might possibly receive
a significant dividend in a chapter 11.
The problem with this approach lies in the fact that hardly anything is
predictable when it comes to handicapping the outcome of lawsuits and the multiple
appeals that can ensue. At bottom, litigation of any sort is an expensive and timeconsuming
undertaking fraught with unpredictability and uncertainties. It is not
surprising, therefore, that bankruptcy courts, when faced with this question, have
consistently held that attempts at solving financial problems through litigation, in the
context of a chapter 11 filing, is too speculative an adventure and more often than
not warrants conversion of the case. See In re Loop Corp., 379 F.3d 511 (8 th Cir.
2004)("Because such causes of action could be pursued by a trustee in chapter 7, no
advantage would be gained by remaining in Chapter 11; instead, time and resources
would be wasted during a confirmation process that may never even be successful.")
(citations omitted); Quarles v. U.S. Trustee, 194 B.R. 94, 97 (W.D.Va.
8 11 U.S.C. § 547 facilitates the prime bankruptcy policy of equality of
distribution among creditors of the debtor. A preference cannot be recovered
outside of bankruptcy. See Nostalgia Network, Inc. v. Leekwood, 315 F.3d 717,
719 (7 th Cir. 2002).
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Case No. 09-10083
1996)(conversion was appropriate where the debtor's only hope to improve his
financial problems through litigation was "pure speculation").
The purpose of § 1112(b) is to cut short the chapter 11 plan and confirmation
process where it would be pointless. See Woodbrook Assocs, 19 F.3d at 317. Given
the litigious history between the Debtor, its principal and the Nieses, undertaking a
chapter 11 plan and confirmation process will be arduous and prohibitively
expensive. Moreover, the Debtor lacks any ongoing operations or assets to pay
even post-petition expenses. Thus, a chapter 11 plan and confirmation attempt is not
likely to yield a better benefit to the estate or creditors than if the case was
converted. Citi-Toledo Partners, 170 B.R. at 609 ("[t]he fact that creditors will
likely enjoy greater rights in bankruptcy court than they would enjoy in state court
militates in favor of conversion").
A chapter 7 trustee is needed to preserve the preference action that would be
lost were the case dismissed, and to make an accurate assessment of the value to the
estate, if any, of the pending and contemplated state court litigation. Finally, a
chapter 7 trustee will also be able to determine the best way to liquidate the property
at 3025 Ononta (and the 2002 van) in a manner that maximizes the return for
creditors, thereby leading to the expeditious closing of the estate. Under the
circumstances, conversion of this case is in the best interest of the creditors and the
estate.
CONCLUSION
Based on the foregoing reasons, the Motion to dismiss will be DENIED and
the case will be CONVERTED to chapter 7.
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Case No. 09-10083
Copies to:
Fritzsch Custom Builders, LLC
c/o Robert Fritzsch
494 Stanley Avenue
Cincinnati, OH 45226
John A. Schuh, Esq.
jaschuhohecf@nuvox.net
Robert A. Goering, Esq.
bgoering@fuse.net
U.S. Trustee
ustpregion09.ci.ecf@usdoj.gov
# # #
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