HTML Document View

Full title: Adversary case 21-03025. 31 (Approval of sale of property of estate and of a co-owner - 363(h)), 91 (Declaratory judgment) Complaint by PROFESSIONAL FINANCIAL INVESTORS, INC., Professional Investors 41, LLC against Louis F. and Diane E Parente, Daniel Forest Levy. Fee Amount $350. (Attachments: # 1 AP Cover Sheet) (Marum, J.) (Entered: 07/16/2021)

Document posted on Jul 15, 2021 in the bankruptcy, 22 pages and 0 tables.

Bankrupt11 Summary (Automatically Generated)

This is an adversary proceeding for (1) the approval of the sale of co-owners’ 11 interests in property held as tenants in common with PFI and LLC 41 pursuant to 11 U.S.C. § 12 363(h), and (2) a determination and declaration pursuant to Rule 7001(9) of the Federal Rules of 13 Bankruptcy Procedure (the “Bankruptcy Rules”) of the co-owners’ respective ownership interests14 in such property and entitlement to a distribution from the net proceeds from a sale of said 15 property based on such ownership interests according to 11 U.S.C. § 363(j).Meanwhile, certain parties with membership 26 interests in the LLCs formed and controlled by PFI formed an ad hoc committee of LLC member27 (the “Ad Hoc Committee of LLC Members”), and certain lenders to the Debtors who are secured 1 holders (the “Ad Hoc Committee of DOT Holders,” and collectively with the OCUC and the Ad 2 Pursuant to 11 U.S.C. § 363(h), a trustee or debtor in possession may sell both the 27 estate’s interest and the interest of any co-owner in property in which the debtor had, at the time o 1 by the entirety, if: (i) partition in kind of such property among the estate and such co-owners is 2 impracticable; (ii) sale of the estate’s undivided interest in such property would realize 3 significantly less for the estate than sale of such property free of the interests of such co-owners; 4 (iii) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs5 the detriment, if any, to such co-owners; and (iv) such property is not used in the production, 6 transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, 7 light, or power.However, pursuant to the Stalking Horse Asset 17 Purchase Agreement entered into between the Stalking Horse Bidder and the Debtors, there will 18 be a reduction in the proposed purchase price for the Portfolio sale should PFI and LLC 41 be 19 authorized to sell only their tenants in common interests in the Property rather than the Property a20 a whole, free and clear of the Defendants’ Interests. Pursuant to 11 U.S.C. § 363(j), after a sale of property to which 11 U.S.C. § 363(h13 applies, a trustee or debtor in possession shall distribute to the co-owners of such property and to 14 the estate, the proceeds of such sale, less the costs and expenses, not including any compensation 15 to the trustee or debtor in possession, of such sale, according to the interests of such co-owners 16 and of the estate.

List of Tables

Document Contents

1 SHEPPARD, MULLIN, RICHTER & HAMPTON LLP A Limited Liability Partnership 2 Including Professional Corporations ORI KATZ, Cal. Bar No. 209561 3 J. BARRETT MARUM, Cal. Bar No. 228628 JEANNIE KIM, Cal. Bar No. 270713 4 MATT KLINGER, Cal. Bar No. 307362 GIANNA SEGRETTI, Cal. Bar No. 323645 5 Four Embarcadero Center, 17th Floor San Francisco, California 94111-4109 6 Telephone: 415.434.9100 Facsimile: 415.434.3947 7 E mail okatz@sheppardmullin.com bmarum@sheppardmullin.com 8 jekim@sheppardmullin.com mklinger@sheppardmullin.com 9 gsegretti@sheppardmullin.com 10 Counsel for the Debtors 11 UNITED STATES BANKRUPTCY COURT 12 NORTHERN DISTRICT OF CALIFORNIA, SAN FRANCISCO DIVISION 13 In re Case No. 20-30604 14 (Jointly Administered) PROFESSIONAL FINANCIAL 15 INVESTORS, INC., et al.,1 Chapter 11 16 Debtors. Adv No. 17 COMPLAINT FOR SALE OF CO- PROFESSIONAL FINANCIAL OWNERS’ INTERESTS IN PROPERTY 18 INVESTORS, INC. and PROFESSIONAL PURSUANT TO 11 U.S.C. § 363(h) INVESTORS 41, LLC, 19 Plaintiffs, The Hon. Hannah L. Blumenstiel 20 v. 21 LOUIS F. PARENTE AND DIANE E. 22 PARENTE, TRUSTEES OF THE LOUIS F. PARENTE AND DIANE E. PARENTE 2011 23 TRUST and DANIEL FOREST LEVY, 24 Defendants. 25 26 1 A complete list of the Debtors and their respective chapter 11 case numbers may be found at 27 www.donlinrecano.com/Clients/pfi/index. The federal tax identification numbers of each of the Debtors is also available in the bankruptcy petitions of each Debtor, also available at the Donlin

1

1 Professional Financial Investors, Inc. (“PFI”) and Professional Investors 41, LLC (“LLC 2 41,” and together with PFI, the “Plaintiffs,” and collectively with PFI and the other debtors in the 3 above-captioned jointly administered bankruptcy cases, the “Debtors”) in this Complaint for Sale 4 of Co-Owners’ Interests in Property Pursuant to 11 U.S.C. § 363(h) (the “Complaint”) against 5 Louis F. Parente and Diane E. Parente, Trustees of The Louis F. Parente and Diane E. Parente 6 2011 Trust (the “Parente Trust”) and Daniel Forest Levy (“Levy,” and together with the Parente 7 Trust, the “Defendants”) hereby allege and state as follows: 8 I. 9 JURISDICTION AND VENUE 10 1. This is an adversary proceeding for (1) the approval of the sale of co-owners’ 11 interests in property held as tenants in common with PFI and LLC 41 pursuant to 11 U.S.C. § 12 363(h), and (2) a determination and declaration pursuant to Rule 7001(9) of the Federal Rules of 13 Bankruptcy Procedure (the “Bankruptcy Rules”) of the co-owners’ respective ownership interests14 in such property and entitlement to a distribution from the net proceeds from a sale of said 15 property based on such ownership interests according to 11 U.S.C. § 363(j). This Court has 16 jurisdiction over this adversary proceeding and its subject matter pursuant to 28 U.S.C. §§ 157 an17 1334, 11 U.S.C. §§ 363(f), (h) and (j), and Bankruptcy Rules 7001(3) and (9). 18 2. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). 19 3. Venue in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409. 20 4. PFI and LLC 41 consent, to the extent such consent is necessary, to the entry of 21 final orders and judgments by this Court in this proceeding. 22 II. 23 FACTUAL ALLEGATIONS 24 5. Kenneth Casey founded PFI and related entity, Professional Investors Security 25 Fund, Inc. (“PISF”), as real estate investment and management firms specializing in multi-unit 26 residential and commercial properties in Northern California, and ran them, along with several 27 other PFI affiliated entities (together with PFI and PISF, the “PFI Enterprise”), up until his death

2

1 6. In total, the Debtors own, either directly or indirectly, approximately 70 real 2 properties in Northern California (Marin and Sonoma Counties), consisting mostly of apartment 3 buildings and office buildings. 4 7. Following Mr. Casey’s death, it was uncovered that the PFI Enterprise was in 5 actuality a Ponzi scheme, and on July 16, 2020, certain asserted creditors of PISF, commenced an6 involuntary chapter 11 bankruptcy action against PISF, Case No. 20-30579 (the “PISF Case”). O7 July 26, 2020, PISF filed a consent to the entry of an order for relief in the PISF Case, which the 8 Court entered on July 27, 2020. 9 8. On July 26, 2020 (the “Petition Date”), PFI commenced its bankruptcy case by 10 filing a voluntary chapter 11 petition. Subsequently PFI commenced involuntary petitions against11 all but two of its affiliated limited liability companies (the “LLCs”) and limited partnerships (the 12 “LPs”), as follows: 13 a. On November 20, 2020, under authority granted by the Bankruptcy Court, 14 PFI commenced involuntary petitions against twenty-nine LLCs (including LLC 41) and 15 LPs (collectively, the “LLC/LP Debtors”), and on December 11, 2020, PFI consented to 16 such involuntary petitions and the Court entered orders for relief. 17 b. On February 3, 2021, and February 4, 2021, PFI commenced involuntary 18 petitions against ten additional LLC affiliates of PFI (together, the “New Debtors”). On 19 February 17, 2021, PFI consented to the ten additional involuntary petitions, and on 20 February 18, 2021, the Court entered orders for relief. 21 9. The Debtors’ chapter 11 cases are jointly administered under Case No. 20-30604. 22 10. The Debtors, including PFI and LLC 41, continue to operate as debtors in 23 possession pursuant to sections 1101(a), 1107(a) and 1108 of the Bankruptcy Code. 24 11. On August 19, 2020, the Office of the United States Trustee appointed the Official25 Committee of Unsecured Creditors (the “OCUC”). Meanwhile, certain parties with membership 26 interests in the LLCs formed and controlled by PFI formed an ad hoc committee of LLC member27 (the “Ad Hoc Committee of LLC Members”), and certain lenders to the Debtors who are secured

3

1 holders (the “Ad Hoc Committee of DOT Holders,” and collectively with the OCUC and the Ad 2 Hoc Committee of LLC Members, the “Committees”). 3 12. On the Petition Date, PFI, LLC 41, and the Defendants were co-owners as tenants 4 in common of certain real estate located in Marin County, California commonly known as the 5 Marin Heights Apartments, which is located at 19 Merrydale Road, San Rafael, California 94903 6 (the “Property”). 7 13. The legal description of the Property is as follows: 8 Order No.: 01180-291147 Escrow No.: 01180-291147 9 The land referred to herein is situated in the State of California, 10 County of Marin, City of San Rafael and described as follows: 11 PARCEL ONE: 12 Beginning at a point on the Southwesterly line of Merrydale Road, distant thereon North 57° 40' West 85.0 feet from the most Easterly 13 corner of the parcel of land described in the Deed from Carolyn E. Van Buren to the First Congregational Church of San Rafael, a 14 corporation, recorded April 3, 1956 in Book 1018 of Official Records at Page 212, Marin County records; thence along said 15 Southwesterly line, South 57° 40' East 85.0 feet and thence leaving said line of Merrydale Road and running along the Southeasterly and 16 Southwesterly lines of the parcel of land above referred to, South 32° 18' 10" West 219.65 feet, North 45° 41' 30" West 56.5 feet and 17 Northwesterly on the arc of a curve to the left with a radius of 890.836 feet, a distance of 30 feet, more or less, to a point which 18 bears South 32° 28' 10" West from the point of beginning; then North 32° 28' 10" East 200 feet, more or less to the point of 19 beginning. 20 PARCEL TWO: 21 An easement for sewer purposes across a strip of land, 3 feet wide, lying Southwesterly of and adjacent to the Southwesterly line of 22 Merrydale Road, extending from the Northwesterly boundary line of parcel of land described in the Deed from The First 23 Congregational Church of San Rafael to Carl F. Stranzl, et al, recorded January 6, 1961 in Book 1427 of Official Records at Page 24 151, to the Northwesterly boundary line of the parcel of land described in the Deed from the First Congregational Church of San 25 Rafael to Boris D. Schulz, et al, recorded April 11, 1961 in Book 1451 of Official Records at Page 514, Marin County Records. 26 APN: 179-222-17 27

4

1 14. Pursuant to that certain Marin Heights Apartments Tenancy in Common 2 Agreement dated January 1, 2018 (the “TIC Agreement”), PFI owns an undivided 30% interest in3 the Property, LLC 41 owns an undivided 47.3% interest in the Property, the Parente Trust owns a4 undivided 14.8% interest in the Property (the “Parente Trust’s Interest”), and Levy owns an 5 undivided 7.9% interest in the Property (“Levy’s Interest,” and together with the Parente Trust’s 6 interest, the “Defendants’ Interests”). A true and correct copy of the TIC Agreement signed by th7 trustees of the Parente Trust is attached hereto as Exhibit A, and a true and correct copy of the 8 TIC Agreement signed by Levy is attached hereto as Exhibit B. 9 15. An outstanding debt is secured by the Property as a whole. 10 16. On July 9, 2021, the Court entered an order approving and confirming the Second 11 Amended Joint Chapter 11 Plan of Professional Financial Investors, Inc. and Its Affiliated 12 Debtors Proposed by the Debtors and Official Committee of Unsecured Creditors and Supported 13 by the Ad Hoc LLC Members and the Ad Hoc DOT Noteholders Committee (Dated May 20, 202114 (the “Plan”). The Plan has yet to go effective. 15 17. In the meantime, the Debtors’ have engaged in the marketing of their portfolio of 16 assets and real property to potential interested purchasers, which has resulted in an offer by 17 Hamilton Zanze & Company (the “Stalking Horse Bidder”) for the purchase of approximately 60 18 real properties owned in whole or in part by the Debtors (collectively, the “Portfolio”), including 19 the Property held as tenants in common by PFI and LLC 41 with the Defendants. 20 18. To effectuate the proposed sale of the Property, PFI and LLC 41 therefore now 21 seek authority to sell it free and clear of the Defendants’ Interests. 22 FIRST CLAIM FOR RELIEF (Authority to Sell Co-Owners’ Interest in Property Pursuant to 11 U.S.C. § 363(h)) 23 (All Plaintiffs Against All Defendants) 24 19. PFI and LLC 41 hereby restate, reallege, and incorporate by reference paragraphs 25 through 18 of the Complaint in their entirety. 26 20. Pursuant to 11 U.S.C. § 363(h), a trustee or debtor in possession may sell both the 27 estate’s interest and the interest of any co-owner in property in which the debtor had, at the time o

5

1 by the entirety, if: (i) partition in kind of such property among the estate and such co-owners is 2 impracticable; (ii) sale of the estate’s undivided interest in such property would realize 3 significantly less for the estate than sale of such property free of the interests of such co-owners; 4 (iii) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs5 the detriment, if any, to such co-owners; and (iv) such property is not used in the production, 6 transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, 7 light, or power. 8 21. Partition in kind of the Property between the Plaintiffs and the Defendants is 9 impracticable because the Property is considered one continuous unit and because PFI, LLC 41, 10 and the Defendants are each liable on a debt secured by the entire Property. As such, it would be 11 particularly impracticable to partition the Property between the Plaintiffs and the Defendants. 12 22. The sale of only the Plaintiffs’ undivided interests in the Property would realize 13 significantly less for the Debtors’ bankruptcy estates (collectively, the “Bankruptcy Estate”) than 14 sale of the Property free and clear of the Defendants’ Interests. Indeed, the Stalking Horse Bidder15 has offered to purchase the Portfolio at a purchase price that reflects that multiple properties are t16 be included in the proposed sale in their entirety. However, pursuant to the Stalking Horse Asset 17 Purchase Agreement entered into between the Stalking Horse Bidder and the Debtors, there will 18 be a reduction in the proposed purchase price for the Portfolio sale should PFI and LLC 41 be 19 authorized to sell only their tenants in common interests in the Property rather than the Property a20 a whole, free and clear of the Defendants’ Interests. Moreover, the Stalking Horse Bidder could 21 elect to forego purchasing Plaintiffs’ tenants in common interests in the Property, which, in turn, 22 would further reduce the proposed purchase price for the Portfolio to the detriment of the 23 Bankruptcy Estate. 24 23. The benefit to the Bankruptcy Estate of a sale of the Property free of the 25 Defendants’ Interests outweighs the detriment, if any, to the Defendants. Indeed, the Defendants 26 merely hold their interest in the Property as an investment and will receive their proportionate 27 share from the net proceeds of its sale. Thus, because the Property is held by PFI, LLC 41, and

6

1 the Defendants as an investment property, the proposed sale of the Property, should it close, 2 should be a net benefit to the Defendants rather than a detriment. 3 24. The Property is not used in the production, transmission, or distribution, for sale, o4 electric energy or of natural or synthetic gas for heat, light, or power. 5 25. Accordingly, Plaintiffs seek authority pursuant to 11 U.S.C. § 363(h) to sell the 6 entirety of the Property free and clear of the Defendants’ Interests. 7 SECOND CLAIM FOR RELIEF (Declaratory Relief Pursuant to Bankruptcy Rule 7001(9) and 11 U.S.C. § 363(j) 8 Determining Co-Owners’ Ownership Interests in Property and Directing Debtors to Distribute Net Proceeds from Sale of Property Pursuant to Such Ownership Interests) 9 (All Plaintiffs Against All Defendants) 10 26. PFI and LLC 41 hereby restate, reallege, and incorporate by reference paragraphs 11 through 25 of the Complaint in their entirety. 12 27. Pursuant to 11 U.S.C. § 363(j), after a sale of property to which 11 U.S.C. § 363(h13 applies, a trustee or debtor in possession shall distribute to the co-owners of such property and to 14 the estate, the proceeds of such sale, less the costs and expenses, not including any compensation 15 to the trustee or debtor in possession, of such sale, according to the interests of such co-owners 16 and of the estate. 17 28. According to that certain TIC Agreement as executed by the trustees to the Parente18 Trust on February 1, 2018, and attached hereto as Exhibit A, the Parente Trust agreed to and hold19 an undivided 14.8% ownership interest in the Property. Furthermore, according to that certain 20 TIC Agreement as executed by Levy on February 20, 2018, and attached hereto as Exhibit B, 21 Levy agreed to and holds an undivided 7.9% ownership interest in the Property. 22 29. A judicial determination of the Defendants’ respective ownership interests in the 23 Property is necessary and appropriate to determine their respective entitlements to the net proceed24 from any sale of the Property under 11 U.S.C. § 363(j). 25 30. Accordingly, the Plaintiffs seek a declaration from the Court pursuant to 26 Bankruptcy Rule 7001(9) determining the Defendants’ respective ownership interests in the 27 Property and directing the Plaintiffs to distribute the net proceeds from any such sale of the

7

1 Property, less the costs and expenses, according to those respective ownership interests pursuant t2 11 U.S.C. § 363(j). 3 PRAYER FOR RELIEF 4 WHEREFORE, PFI and LLC 41 respectfully request that the Court enter judgment agains5 the Defendants pursuant to 11 U.S.C. §§ 363(h) and (j) and Bankruptcy Rule 7001: 6 1. Authorizing PFI and LLC 41 to take sole possession of the Property; 7 2. Authorizing PFI and LLC 41 to sell the entirety of the Property free of the 8 Defendants’ Interests; 9 3. Determining and declaring, pursuant to Bankruptcy Rule 7001(9), that the 10 Defendants’ respective ownership interests in the Property are as follows: 11 (a) The Parente Trust’s interest in the Property is 14.8%, and 12 (b) Levy’s interest in the Property is 7.9%; 13 4. Authorizing and directing PFI and LLC 41 to, pursuant to 11 U.S.C. § 363(j), 14 distribute a proportionate share of the net proceeds from the sale of the Property to the Defendant15 equal to their respective ownership interests in the Property; and 16 5. Providing for all other just and proper relief. 17 Dated: July 16, 2021 18 SHEPPARD, MULLIN, RICHTER & HAMPTON LLP 19 20 By /s/ J. Barrett Marum ORI KATZ 21 J. BARRETT MARUM 22 JEANNIE KIM MATT KLINGER 23 GIANNA SEGRETTI 24 Counsel for the Debtors 25 26 27

8

EXHIBIT A EXHIBIT A

9

10

11

12

13

14

15

EXHIBIT B EXHIBIT B

16

17

18

19

20

21

22