PENSACOLA – The Bankruptcy Court of the Northern District of Florida recently decided to abstain from a disagreement stemming from the mortgage crisis of 2008.
The economic downturn proved to be challenging for Legendary Holdings Inc. (LHI), a real estate company owned by Peter Bos Jr., which has been serving the Florida Gulf coast community since 1976. Legendary Holdings became a profitable business for Bos leading up to the mortgage crisis, as it had accumulated hundreds of millions of dollars in property over the last several decades.
During the recession and after, Bos and his company struggled to repay $270 million in loans, but managed to reach loan restructuring agreements with 13 of the 14 lenders they borrowed from.
The one left over, SE Property Holdings LLC (SEPH), dug in its heels and, unwilling to reach a repayment agreement, took LHI to court and won $15 million in damages and court fees.
This was not the end of the dispute, however. When SEPH was attempting to collect what it was due, it realized LHI was giving favorable security to two of its insider creditors in the form of stipulated charging orders. In response, SEPH filed Chapter 7 involuntary bankruptcy charges against LHI, which is quite rare.
“A number of developers have filed bankruptcy petitions voluntarily, but involuntary petitions are quite rare,” Jeffrey Davis, a law professor at the University of Florida with an expertise in bankruptcy proceedings, told the Florida Record. “This is because if the court denies the involuntary petition, it is possible that the petitioner can suffer severe damages for attorney fees, and if filed in bad faith, sanctions.”
Involuntary bankruptcy allows creditors to seize assets of the debtor, where otherwise they would have to wait to receive payment.
In court, Bos argued that SEPH was not a qualified creditor, and the two sides disputed over the number of creditors LHI truly had. If LHI could prove they had more than 12 debtors, they would be ineligible for involuntary bankruptcy, thus the case would be dismissed.
After studying these claims in excruciating detail, the court found that LHI did have fewer than 12 debtors, and decided SEPH was a qualified creditor.
In order to be subject to involuntary bankruptcy, the court must find that the debtor was generally not paying their debts as they came due, as listed under Section 303 of Bankruptcy Code. This claim is essential in bankruptcy cases, and is heavily scrutinized and studied.
The court found that LHI was regularly paying its debts to other creditors, but not to SEPH. Because of this, they agreed this was nothing more than a two-party dispute, invoking Section 305 by abstaining from further proceedings.
“If a debtor is not paying only one of its many creditors, it is not obvious that it is generally not paying,” Davis said.
As this case shows, involuntary bankruptcy is tough to invoke, especially due to the number of debtors in a case this size.
If SEPH wishes to appeal the decision, it will be heard in federal district court. However, as the complexity of this case shows, they may be better off finding a solution with Bos and LHI.
“Clearly, the judge didn't want to grant the petition because of the harm it would cause the business, and also didn't want to award damages for filing the denied petition,” Davis said. “Since this case truly boiled down to a two-party dispute, it is best resolved under state law.”