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UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF NEW YORK ---------------------------------------------------------IN RE: VWP, INC.

Hearing Date: April 25, 2013 Hearing Time: 10:30 a.m. Hearing Location: Utica, NY

Case No. 13-60282 Chapter 11

Debtor. ----------------------------------------------------------UNITED STATES TRUSTEE=S MOTION PURSUANT TO 11 U.S.C. ' 1112(b) FOR DISMISSAL OF THIS CASE OR CONVERSION TO CHAPTER 7 TO THE HONORABLE DIANE DAVIS, UNITED STATES BANKRUPTCY JUDGE: The United States Trustee for Region 2 (the AUnited States Trustee@), in furtherance of her duties and responsibilities set forth in 28 U.S.C. ' 586(a)(3),(5), hereby submits this application for an order converting this Chapter 11 case to a Chapter 7 case or, in the alternative, dismissing this case, pursuant to 11 U.S.C. ' 1112(b)(4)(A), (C) and (E). In support of the relief requested, the United States Trustee represents and alleges as follows: 1. Pursuant to 28 U.S.C. § 586(a)(3), the United States Trustee is charged with the

duty of supervising the administration of cases filed under Chapter 11. 2. Section 586(a)(8) of title 28 states that “in any case in which the United States

Trustee finds material grounds for relief under section 1112 of title 11, the United States Trustee shall apply promptly after making that finding to the court for relief.” 3. According to 11 U.S.C. § 307, the United States Trustee has standing to be heard

on any issue, in any bankruptcy case or proceeding. 4. This Court has jurisdiction over this matter, pursuant to 28 U.S.C. § 157(b)(2)(A).


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BACKGROUND 5. VWP, Inc. (hereinafter “Debtor”) commenced this case by filing a voluntary

petition under Chapter 11 on February 26, 2013. 6. The Debtor is a real estate holding company that holds title to two (2) commercial

properties located in the Village of Fleischmanns, County of Delaware in the State of New York. One property is located at 102 Depot Street, Fleischmanns, NY (“Depot Street”) and the other one is located at 717 Wagner Avenue, Fleischmanns, NY (“Wagner Ave”), collectively known as the “Properties”. 7. The Debtor has only one tenant, VW Parts, Inc. (“VW Parts”). VW Parts leases

both commercial properties pursuant to a month to month tenancy. There is no written lease agreement. 8. Upon information and belief, the Debtor is 100 % owned by William Hrazanek VW Parts is jointly owned by Mr. Hrazanek and his spouse, Larissa

(“Mr. Hrazanek”).

Hrazanek. The Debtor has five (5) other affiliates through common ownership. Each is a real estate holding company and has, according to statements made at the Initial Debtor Interview (“IDI”), no business interaction with VW Parts or the Debtor. 9. None of the other affiliates referenced in paragraph 8 have filed a case under any

chapter of Title 11 of the United States Code. 10. This case was commenced to forestall a foreclosure action that was commenced

by Kenneth Pasternak (“Pasternak”), who is the mortgagee on both parcels of real property owned by the Debtor. On March 22, 2013, Pasternak filed a Motion for Relief from the

Automatic Stay. Thereafter, on March 25, 2013, Pasternak supplemented his application for stay relief with a Motion for Adequate Protection. As his basis for relief, Pasternak asserts that his 2

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security interest is not adequately protected, pursuant to 11 U.S.C. § 362(d)(1). 11. Upon information and belief, neither the Debtor nor the sole tenant, VW Parts,

derive any current income. VW Parts has not operated since July of 2011 nor has it paid any rent since that time. Upon information and belief, the Debtor and its tenant were effectively put out of business due to damage caused by Hurricane Irene in 2011. 12. At the Initial Debtor Interview and 341 Meeting of Creditors, the Debtor was

instructed on the requirements for being a Debtor-in-Possession and was provided with a list of informational and filing deficiencies. Specifically, the Debtor was advised of its duty to open Debtor-in-Possession bank accounts and provide proof of same, file a statement pursuant to L.R. 2015-2, file a statement pursuant to 11 U.S.C. § 1116(1)(B) , and obtain insurance on the real property. At the 341 Meeting of Creditors, the Debtor did provide proof of insurance. However, the remaining requirements have not been satisfied. ARGUMENT POINT I THE CASE MUST BE DISMISSED AS IT IS A BAD FAITH FILING 13. Section 1112(b) of title 11 states in relevant part 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.” 14. Although Section 1112(b)(4) provides a listing of events that are defined as

“cause” the list is illustrative but not exhaustive. “The Court will be able to consider other factors as they arise, and to use its equitable powers to reach an appropriate result in individual cases.” See In re C-Tc 9th Avenue Partnership, 113 F3d 1304,1311 (2d. Cir., 1997) citing House Report No. 95-595 95th Cong., 1st Sess. at 405-6 3

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“…inherent in the statute and clearly inferred in 11 U.S.C. § 1112(b) is the

requirement of good faith on the part of a debtor to file and maintain a Chapter 11 case. This implicit good faith Chapter 11 prerequisite has been consistently upheld by the courts”. In re HBA East, Inc. 87 B.R. 248 Bkrtcy. E.D.N.Y., 1988. 16. Courts have held that the broad language of § 1112(b) “supports the construction

that a debtor's lack of “good faith” may constitute cause for dismissal of a petition.” Albany Partners, 749 F.2d at 674. See also Little Creek, 779 F.2d at 1072 (lack of good faith constitutes “cause” for dismissal under § 1112(b)) 17. “The hallmark of bad faith is the attempt to abuse the judicial process. The bad

faith inquiry focuses on the debtor's “honesty of intention,” and requires the bankruptcy court to determine whether the debtor misrepresented facts in its submissions, unfairly manipulated the Bankruptcy Code, or otherwise proposed a plan in an inequitable manner. Bad faith exists where the debtor lacks any realistic possibility of reorganization, and files the petition for the sole purpose of frustrating and delaying its secured creditor's efforts to enforce its legitimate rights.” In re Spectee Group, Inc. 185B.R. 146, 155 Bkrtcy .S.D.N.Y., 1995. (citations omitted) 18. Courts have identified the following recurrent factors that circumstantially bear on

whether subjective bad faith in filing and/or objective futility in legitimately reorganizing exists: (1) the debtor has few or no unsecured creditors; … (4) the petition effectively allows the debtor to evade court orders; (5) there are few debts to non-moving creditors; …


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(7) the foreclosed property is the sole or major asset of the debtor; (8) the debtor has no ongoing business or employees; (9) there is no possibility of reorganization; (10) the debtor's income is not sufficient to operate; … (12) reorganization essentially involves the resolution of a two-party dispute; … (14) the debtor filed solely to create the automatic stay In re SB Properties, Inc. 185 B.R. 198, 205 E .D. Pa., 1995. 19. Although no list is intended to be exhaustive, bad faith has been found by Courts

when the case is considered in the totality of the circumstances. Id at 188. 20. Here, the totality of the circumstances supports that the case was filed in bad faith.

Specifically, bad faith can be inferred from the following factors: (a) minimal unsecured creditors, including the principal and his spouse; (b) the filing of the case allowed the Debtor to put off the State’s Court’s judgment order and the relief sought by the Pasternak in a foreclosure; (c) the petition was filed as the foreclosure drew near ; (d) the properties that are the subject of foreclosure are the sole assets of the Debtor; (e) the debtor has never had any employees; (f) the Debtor has never operated (g) the Debtor generates no income and therefore has no possibility of reorganization; and (h) the petition was filed solely to invoke the automatic stay. 5

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Upon information and belief, the Debtor filed this case for the sole purpose of

stopping or circumventing the legitimate actions of its secured creditor. There are no unsecured creditors. The Debtor generates no income to pay its obligations under the mortgage and its property taxes. It is evident that the case was filed for the very purpose of invoking the automatic stay. Therefore, the United States Trustee submits that cause exists pursuant to 11 U.S.C. § 1112(b) to dismiss this case along with any other relief that the court deems just and proper.

POINT II CONVERSION OR DISMISSAL IS WARRANTED PURSUANT TO 11 U.S.C. § 1112(b)(4)(A) 22. Pursuant to 11 U.S.C. § 1112(b)(4)(A), cause for conversion or dismissal of a

debtor’s Chapter 11 case may be grounded in a “substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation.” 23. The language of § 1112(b)(4)(A) is nearly identical to the pre-BAPCPA language

in § 1112(b)(1), which referred to “continuing loss to or diminution of the estate and absence of reasonable likelihood of rehabilitation.” See In re Gateway Access Solutions, Inc. 374 B.R. 556, 562 (Bankr. M.D. Pa. 2007). Consequently, the analyses employed prior to the enactment of the BAPCPA, with regard to 11 U.S.C. § 1112(b)(1), remain relevant when considering a motion to dismiss or convert based on 11 U.S.C. § 1112(b)(4)(A). See id. 24. Courts have held that a negative cash flow post-petition and an inability to pay

current expenses constitute a loss to or diminution of the estate. See In re AdBrite Corp., 290 B.R. 209, 215 (Bankr. S.D.N.Y. 2003) (citations omitted); In re Motel Properties, Inc., 314 B.R. 6

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889, 894 (Bankr. S.D. Ga. 2004). 25. The Debtor admits to being nearly two years behind on the mortgages on both

parcels of real property. However, the Debtor relies on the potential reimbursement through Delaware County’s participation in a Federal Emergency Management Administration (“FEMA”) claim arising out of the damage wrought by Hurricane Irene. Upon information and belief, the Depot Street Property has been approved for inclusion and the Wagner Street property is eligible for acquisition in the claim, but it has not yet been approved. However, it is expected that it will take at least another 8 to 12 months after approval for the first payment to be dispersed. Therefore, the Debtor will have no income until September of 2013 at the earliest. 26. Furthermore, upon information and belief, the Debtor is delinquent on Village,

County and School Taxes in the amount of $72,746.69. The taxes owed to the Town, County and School District date back to 2010. The Village property taxes, which represent $44,454.73 of the above referenced total, go back to 2008. The dates of the delinquent taxes predate Hurricane Irene of 2011. 27. Interest continues to accrue at the rate of 10% on the outstanding principal

balances of each note. Taxes can be estimated at approximately $15,000 per year for both properties. The United States Trustee estimates that the Debtor will accrue an additional $67,125 in interest charges through September, 2013. 28. The United States Trustee estimates that the Debtor will incur a net loss of at least

$82,125 through September 30, 2013 and that the anticipated loss will grow to $104,500 if initial payment from FEMA is not received until December 31, 2013. 29. At the present time, Debtor has no cash and no resources to pay the mortgage

payments or property taxes. 7

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30. taxes. 31.

Debtor’s tenant also has no ability to make any payments towards rent, interest or

Upon information and belief, the Debtor’s principal, Mr. Hrazanek does not have

the resources to make the requisite payments. 32. As indicated above, the Debtor has no income, and the financial obligations Consequently, the Debtor has no reasonable

associated with the property are ongoing.

expectation of rehabilitation, and the continuation of this case will only serve to further diminish the value of the estate. 33. Therefore, the United States Trustee submits that grounds exist for the Court to

dismiss or convert this case to Chapter 7 pursuant to 11 U.S.C. § 1112(b)(4)(A).

POINT III CONVERSION OR DISMISSAL IS WARRANTED PURSUANT TO 11 U.S.C. § 1112(b)(4)(H) 34. Pursuant to 11 U.S.C. § 1112(b)(4)(H), cause for conversion or dismissal of a

debtor’s Chapter 11 case may be grounded in a “failure timely to provide information or attend meetings reasonably requested by the United States trustee…” 35. On March 11, 2013 the OUST conducted its IDI. During the course of the IDI,

the Debtor was requested to provide the United States Trustee with the following items of information: (a) (b) The Affidavit pursuant to L.R. 2015-2; The information required pursuant to 11 U.S.C. § 1116(1)(A) or the

affidavit required under (B) that some or none of these items have been prepared or filed. 8

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Information that the Debtor has complied with the United States Trustee’s

guidelines for Chapter 11 Debtor’s in Possession which require that the Debtor close all pre-petition bank accounts; and to open new accounts with an authorized depository bearing the additional title “Debtor in Possession”. (d) A list of the related corporations and a statement that there are and have

been no intercompany debts or other financial transactions within one (1) year. (e) Proof of insurance for the Properties. At the time of the IDI, the

Properties were uninsured. Proof of insurance was provided prior to the 341 hearing. 36. As of the date of this motion, the information items under (a), (b), (c) & (d) have

not been provided to the United States Trustee. 37. Therefore, the Debtor’s failure to provide the information reasonably requested by

the United States Trustee despite having ample time to do so, presents cause to convert this case, or in the alternative, dismiss the case under 11 U.S.C. §1112(b)(4)(H).


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WHEREFORE, the United States Trustee respectfully requests that the Court enter an order converting this case from Chapter 11 to Chapter 7, or dismissing this case, pursuant to 11 U.S.C. ' 1112(b), and granting such other and further relief as may be deemed just and proper.

Dated: Utica, New York April 3, 2013 Respectfully submitted, TRACY HOPE DAVIS UNITED STATES TRUSTEE FOR REGION 2

/s/ Erin P. Champion ERIN P. CHAMPION TRIAL ATTORNEY 10 Broad Street Suite 105 Utica, New York 13501 Tel: No. (315) 793-8191 Fax: No. (315) 793-8133