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Full title: Adversary case 21-03035. 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 45, LLC against Carol Sue Sproule, Felix Arts. Fee Amount $350. (Attachments: # 1 AP Cover Sheet) (Marum, J.) (Entered: 08/05/2021)

Document posted on Aug 4, 2021 in the bankruptcy, 14 pages and 0 tables.

Bankrupt11 Summary (Automatically Generated)

This is an adversary proceeding for (1) the approval of the sale of a co-owner’s 7 interest in property held as tenant in common with PFI and LLC 45 pursuant to 11 U.S.C. § 8 363(h), and (2) a determination and declaration pursuant to Rule 7001(9) of the Federal Rules of 9 Bankruptcy Procedure (the “Bankruptcy Rules”) of the co-owner’s respective ownership interest 10 in such property and entitlement to a distribution from the net proceeds from a sale of said 11 property based on such ownership interest according to 11 U.S.C. § 363(j).Meanwhile, certain parties with membership 23 interests in the LLCs formed and controlled by PFI formed an ad hoc committee of LLC member24 (the “Ad Hoc Committee of LLC Members”), and certain lenders to the Debtors who are secured 25 by deeds of trust on property owned by the Debtors formed into an ad hoc committee of DOT 26 holders (the “Ad Hoc Committee of DOT Holders,” and collectively with the OCUC and the Ad 27 Pursuant to 11 U.S.C. § 363(h), a trustee or debtor in possession may sell both the 4 estate’s interest and the interest of any co-owner in property in which the debtor had, at the time o5 the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenan6 by the entirety, if: (i) partition in kind of such property among the estate and such co-owners is 7 impracticable; (ii) sale of the estate’s undivided interest in such property would realize 8 significantly less for the estate than sale of such property free of the interests of such co-owners; 9 (iii) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs10 the detriment, if any, to such co-owners; and (iv) such property is not used in the production, 11 transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, 12 light, or power.(Declaratory Relief Pursuant to Bankruptcy Rule 7001(9) and 11 U.S.C. § 363(j) 4 Determining Co-Owner’s Ownership Interest in Property and Directing Debtors to Distribute Net Proceeds from Sale of Property Pursuant to Such Ownership Interest) 5 Pursuant to 11 U.S.C. § 363(j), after a sale of property to which 11 U.S.C. § 363(h9 applies, a trustee or debtor in possession shall distribute to the co-owners of such property and to 10 the estate, the proceeds of such sale, less the costs and expenses, not including any compensation 11 to the trustee or debtor in possession, of such sale, according to the interests of such co-owners 12 and of the estate.

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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 (Jointly Administered) 14 PROFESSIONAL FINANCIAL INVESTORS, INC., et al.,1 Chapter 11 15 Debtors. Adv No. 16 COMPLAINT FOR SALE OF CO- 17 PROFESSIONAL FINANCIAL OWNER’S INTEREST IN PROPERTY INVESTORS, INC. and PROFESSIONAL PURSUANT TO 11 U.S.C. § 363(h) 18 INVESTORS 45, LLC, 19 Plaintiffs, The Hon. Hannah L. Blumenstiel 20 v. 21 CAROL SUE SPROULE AND FELIX ARTS, 22 Defendants. 23 Professional Financial Investors, Inc. (“PFI”) and Professional Investors 44, LLC (“LLC 24 45,” and together with PFI, the “Plaintiffs,” and collectively with PFI and the other debtors in the 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 28

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1 above-captioned jointly administered bankruptcy cases, the “Debtors”) in this Complaint for Sale 2 of Co-Owner’s Interest in Property Pursuant to 11 U.S.C. § 363(h) (the “Complaint”) against 3 Carol Sue Sproule and Felix Arts (the “Defendants”) hereby allege and state as follows: 4 I. 5 JURISDICTION AND VENUE 6 1. This is an adversary proceeding for (1) the approval of the sale of a co-owner’s 7 interest in property held as tenant in common with PFI and LLC 45 pursuant to 11 U.S.C. § 8 363(h), and (2) a determination and declaration pursuant to Rule 7001(9) of the Federal Rules of 9 Bankruptcy Procedure (the “Bankruptcy Rules”) of the co-owner’s respective ownership interest 10 in such property and entitlement to a distribution from the net proceeds from a sale of said 11 property based on such ownership interest according to 11 U.S.C. § 363(j). This Court has 12 jurisdiction over this adversary proceeding and its subject matter pursuant to 28 U.S.C. §§ 157 an13 1334, 11 U.S.C. §§ 363(f), (h) and (j), and Bankruptcy Rules 7001(3) and (9). 14 2. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). 15 3. Venue in this district is proper pursuant to 28 U.S.C. §§ 1408 and 1409. 16 4. PFI and LLC 45 consent, to the extent such consent is necessary, to the entry of 17 final orders and judgments by this Court in this proceeding. 18 II. 19 FACTUAL ALLEGATIONS 20 5. Kenneth Casey founded PFI and related entity, Professional Investors Security 21 Fund, Inc. (“PISF”), as real estate investment and management firms specializing in multi-unit 22 residential and commercial properties in Northern California, and ran them, along with several 23 other PFI affiliated entities (together with PFI and PISF, the “PFI Enterprise”), up until his death 24 on May 6, 2020. 25 6. In total, the Debtors own, either directly or indirectly, approximately 70 real 26 properties in Northern California (Marin and Sonoma Counties), consisting mostly of apartment 27 buildings and office buildings. 28

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1 7. Following Mr. Casey’s death, it was uncovered that the PFI Enterprise was in 2 actuality a Ponzi scheme, and on July 16, 2020, certain asserted creditors of PISF, commenced an3 involuntary chapter 11 bankruptcy action against PISF, Case No. 20-30579 (the “PISF Case”). O4 July 26, 2020, PISF filed a consent to the entry of an order for relief in the PISF Case, which the 5 Court entered on July 27, 2020. 6 8. On July 26, 2020 (the “Petition Date”), PFI commenced its bankruptcy case by 7 filing a voluntary chapter 11 petition. Subsequently PFI commenced involuntary petitions against8 all but two of its affiliated limited liability companies (the “LLCs”) and limited partnerships (the 9 “LPs”), as follows: 10 a. On November 20, 2020, under authority granted by the Bankruptcy Court, 11 PFI commenced involuntary petitions against twenty-nine LLCs and LPs (collectively, the12 “LLC/LP Debtors”), and on December 11, 2020, PFI consented to such involuntary 13 petitions and the Court entered orders for relief. 14 b. On February 3, 2021, and February 4, 2021, PFI commenced involuntary 15 petitions against ten additional LLC affiliates of PFI, including LLC 45 (collectively, the 16 “New Debtors”). On February 17, 2021, PFI consented to the ten additional involuntary 17 petitions, and on February 18, 2021, the Court entered orders for relief. 18 9. The Debtors’ chapter 11 cases are jointly administered under Case No. 20-30604. 19 10. The Debtors, including PFI and LLC 45, continue to operate as debtors in 20 possession pursuant to sections 1101(a), 1107(a) and 1108 of the Bankruptcy Code. 21 11. On August 19, 2020, the Office of the United States Trustee appointed the Official22 Committee of Unsecured Creditors (the “OCUC”). Meanwhile, certain parties with membership 23 interests in the LLCs formed and controlled by PFI formed an ad hoc committee of LLC member24 (the “Ad Hoc Committee of LLC Members”), and certain lenders to the Debtors who are secured 25 by deeds of trust on property owned by the Debtors formed into an ad hoc committee of DOT 26 holders (the “Ad Hoc Committee of DOT Holders,” and collectively with the OCUC and the Ad 27 Hoc Committee of LLC Members, the “Committees”). 28

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1 12. On the Petition Date, PFI, LLC 45, and the Defendants were co-owners as tenants 2 in common of certain real estate located in Marin County, California commonly known as The 3 American Building, which is located at 1099 D Street, San Rafael, California 94901 (the 4 “Property”). 5 13. The legal description of the Property is as follows: 6 Parcel A, as shown upon that certain Parcel Map entitled “Parcel Map Lands of the American Building Lot Line Deletions of a 7 Portion of Block 12 of Townsite of San Rafael, Rack 1 Pull 4, page 2, San Rafael, Marin County, California”, filed for record February 8 19, 1980 in Book 17 of Parcel Maps, at Page 79, Marin County Records. 9 14. Pursuant to that certain The American Building Tenancy in Common Agreement 10 dated June 15, 2019 (the “TIC Agreement”), PFI owns an undivided 30% interest in the Property,11 LLC 45 owns an undivided 56% in the Property, and Defendants own an undivided 14% interest 12 in the Property (the “Defendants’ Interest”). A true and correct copy of the TIC Agreement signe13 by Defendants on June 21, 2019, is attached hereto as Exhibit A. 14 15. An outstanding debt is secured by the Property as a whole. 15 16. On June 9, 2021, the Court entered an order approving and confirming the Second 16 Amended Joint Chapter 11 Plan of Professional Financial Investors, Inc. and Its Affiliated 17 Debtors Proposed by the Debtors and Official Committee of Unsecured Creditors and Supported 18 by the Ad Hoc LLC Members and the Ad Hoc DOT Noteholders Committee (Dated May 20, 202119 (the “Plan”). The Plan has yet to go effective. 20 17. In the meantime, the Debtors have engaged in the marketing of their portfolio of 21 assets and real property to potential interested purchasers, which has resulted in an offer by a 22 “Stalking Horse Bidder” for the purchase of the Property. 23 18. To effectuate the proposed sale of the Property, PFI and LLC 45 therefore now 24 seek authority to sell it free and clear of the Defendants’ Interest. 25 FIRST CLAIM FOR RELIEF 26 (Authority to Sell Co-Owner’s Interest in Property Pursuant to 11 U.S.C. § 363(h)) (All Plaintiffs Against Defendants) 27 28

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1 19. PFI and LLC 45 hereby restate, reallege, and incorporate by reference paragraphs 2 through 18 of the Complaint in their entirety. 3 20. Pursuant to 11 U.S.C. § 363(h), a trustee or debtor in possession may sell both the 4 estate’s interest and the interest of any co-owner in property in which the debtor had, at the time o5 the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenan6 by the entirety, if: (i) partition in kind of such property among the estate and such co-owners is 7 impracticable; (ii) sale of the estate’s undivided interest in such property would realize 8 significantly less for the estate than sale of such property free of the interests of such co-owners; 9 (iii) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs10 the detriment, if any, to such co-owners; and (iv) such property is not used in the production, 11 transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, 12 light, or power. 13 21. Partition in kind of the Property between the Plaintiffs and the Defendants is 14 impracticable because the Property is considered one continuous unit and because PFI, LLC 45, 15 and the Defendants are each liable on a debt secured by the entire Property. Thus, it would be 16 particularly impracticable to partition the Property between the Plaintiffs and the Defendants. 17 22. The sale of only the Plaintiffs’ undivided interests in the Property would realize 18 significantly less for the Debtors’ bankruptcy estates (collectively, the “Bankruptcy Estate”) than 19 sale of the Property free and clear of the Defendants’ Interest. In fact, the Stalking Horse Bidder 20 has advised Plaintiffs that it will not buy only Plaintiffs’ interests in the Property. 21 23. The benefit to the Bankruptcy Estate of a sale of the Property free of the 22 Defendants’ Interest outweighs the detriment, if any, to the Defendants. Indeed, the Defendants 23 merely hold its interest in the Property as an investment and will receive their proportionate share 24 from the net proceeds of its sale. Thus, because the Property is held by PFI, LLC 45, and the 25 Defendants as an investment property, the proposed sale of the Property, should it close, should b26 a net benefit to the Defendants rather than a detriment. 27 24. The Property is not used in the production, transmission, or distribution, for sale, o28 electric energy or of natural or synthetic gas for heat, light, or power.

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1 25. Accordingly, Plaintiffs seek authority pursuant to 11 U.S.C. § 363(h) to sell the 2 entirety of the Property free and clear of the Defendants’ Interest. 3 SECOND CLAIM FOR RELIEF (Declaratory Relief Pursuant to Bankruptcy Rule 7001(9) and 11 U.S.C. § 363(j) 4 Determining Co-Owner’s Ownership Interest in Property and Directing Debtors to Distribute Net Proceeds from Sale of Property Pursuant to Such Ownership Interest) 5 (All Plaintiffs Against All Defendants) 6 26. PFI and LLC 45 hereby restate, reallege, and incorporate by reference paragraphs 7 through 25 of the Complaint in their entirety. 8 27. Pursuant to 11 U.S.C. § 363(j), after a sale of property to which 11 U.S.C. § 363(h9 applies, a trustee or debtor in possession shall distribute to the co-owners of such property and to 10 the estate, the proceeds of such sale, less the costs and expenses, not including any compensation 11 to the trustee or debtor in possession, of such sale, according to the interests of such co-owners 12 and of the estate. 13 28. According to that certain TIC Agreement as executed by the Defendants on June 14 21, 2019, and attached hereto as Exhibit A, the Defendants agreed to and holds an undivided 14%15 ownership interest in the Property. 16 29. A judicial determination of the Defendants’ respective ownership interest in the 17 Property is necessary and appropriate to determine its respective entitlement from the net proceed18 from any sale of the Property under 11 U.S.C. § 363(j). 19 30. Accordingly, the Plaintiffs seek a declaration from the Court pursuant to 20 Bankruptcy Rule 7001(9) determining the Defendants’ respective ownership interest in the 21 Property and directing the Plaintiffs to distribute the net proceeds from any such sale of the 22 Property, less the costs and expenses, according to such respective ownership interest pursuant to 23 11 U.S.C. § 363(j). 24 PRAYER FOR RELIEF 25 WHEREFORE, PFI and LLC 45 respectfully request that the Court enter judgment agains26 the Defendants pursuant to 11 U.S.C. §§ 363(h) and (j) and Bankruptcy Rule 7001: 27 1. Authorizing PFI and LLC 45 to take sole possession of the Property; 28

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1 2. Authorizing PFI and LLC 45 to sell the entirety of the Property free of the 2 Defendants’ Interest; 3 3. Determining and declaring, pursuant to Bankruptcy Rule 7001(9), that the 4 Defendants hold an undivided 14% ownership interest in the Property; 5 4. Authorizing and directing PFI and LLC 45 to, pursuant to 11 U.S.C. § 363(j), 6 distribute a proportionate share of the net proceeds from the sale of the Property to the Defendant7 equal to their respective ownership interest in the Property; and 8 5. Providing for all other just and proper relief. 9 Dated: August 5, 2021 10 SHEPPARD, MULLIN, RICHTER & HAMPTON LLP 11 12 By /s/ J. Barrett Marum ORI KATZ 13 J. BARRETT MARUM 14 JEANNIE KIM MATT KLINGER 15 GIANNA SEGRETTI 16 Counsel for the Debtors 17 18 19 20 21 22 23 24 25 26 27 28

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EXHIBIT A

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