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					Case 11-42042-dml11         Doc 119 Filed 06/10/11 Entered 06/10/11 14:30:35                    Desc
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Office of the United States Trustee
1100 Commerce Street, Room 976
Dallas, TX 75242
(214) 767-1079
Meredyth A. Kippes, Trial Attorney
State Bar No. 24007882

                    IN THE UNITED STATES BANKRUPTCY COURT
                      FOR THE NORTHERN DISTRICT OF TEXAS
                              FORT WORTH DIVISION

IN RE:                                           §
                                                 §
FRE Real Estate, Inc.,                           §   Case No.        11-42042-DML-11
                                                 §
Debtor-in-Possession                             §   Hearing Date: July 14, 2011
                                                 §   Hearing Time: 11:00 a.m.

United States Trustee’s Motion to Dismiss this Case, or, in the Alternative, to Convert this
        Case to a Case Under Chapter 7 in Accordance with 11 U.S.C. § 1112(b)

TO THE HONORABLE D. MICHAEL LYNN,
UNITED STATES BANKRUPTCY JUDGE:

       The United States Trustee for Region 6 moves to dismiss this case, or in the alternative to

convert this case to a case under Chapter 7, under 11 U.S.C. § 1112(b). The United States

Trustee would show:

                                            Summary

       FRE Real Estate, Inc. (the “Debtor”) is debtor whose primary assets and source of

income is real property. On June 6, 2011, the Court entered the Memorandum Opinion and

Order, which provided, inter alia, that if the Debtor’s former parent, and/or one or more of the

former parent’s affiliates, did not deposit $800,000 with the registry of the Court by 10:00 a.m.

on June 7, 2011, the automatic stay would lift to permit Highland Capital Management, LP

(“Highland”) to foreclose upon the Debtor’s real property. The $800,000 deposit into the

registry of the Court was not made, the stay lifted, and Highland foreclosed on the real property.




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Additionally, the Debtor has failed to file its April 2011 monthly operating report and Debtor’s

proof of insurance on file with the United States Trustee expired on May 31, 2011, which facts

form additional grounds for dismissal or conversion of this case. Accordingly, the Debtor has no

prospect of reorganizing and the case should be dismissed.

                                                    Background

         1.       On April 4, 2011, the Debtor filed a voluntary petition for relief under chapter 11.

         2.       The Debtor continues to operate as a debtor-in-possession pursuant to §§ 1107(a)

and 1108 of the Bankruptcy Code.

         3.       To date, no committee of unsecured creditors has been appointed.

         4.       This proceeding is the Debtor’s second bankruptcy filing this year. On January 4,

2011, the Debtor initiated Case No. 11-30210-BJH-11, which was dismissed on March 1, 2011

(the “Previous Case”).1

         5.       The Debtor was in the business of owning and operating real property in the

Dallas/Fort Worth area. Specifically, the Debtor operated the Fenton Centre, consisting of two

office buildings with a total of approximately 700,000 square feet of office space and the

Thermalloy Building, which is currently vacant. [Schedule A] The Debtor valued the Fenton

Centre in the amount of $67 million and valued the Thermalloy Building in the amount of $1.79

million. The Debtor also owned 6.60 acres of vacant land in Farmers Branch known at Three

Hickory, which the Debtor valued at $1.25 million.

         6.       Debtor’s schedule D reflects a total of $62,028,322.44 the bulk of which is

reflected at owing to NexBank and secured by Fenton Centre.



1 The Previous Case was dismissed by Judge Barbara Houser for, among other reasons, the fact that immediately
prior to filing, the Debtor’s former parent transferred several affiliated businesses into the Debtor, thus essentially
effectuating substantial consolidation, which the Judge found did not reflect a proper exercise of business judgment
and which amounted to bad faith. [transcript of ruling, attached to the Debtor’s petition at Docket 1]


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         7.    Debtor’s Schedule B reflects five bank accounts at Bank of America with an

aggregate value of $8,306.03; a $1,300 deposit with the City of Farmers Branch; an interest in

Park West Two Association, Inc., the property management association for Fenton Centre,

valued at $1.00; $551,702.20 in accounts receivable relating to Fenton Centre; at 1995 GMC

Sonoma valued at $1,000; office furnishings valued at $2,613.00; and tools and machinery

valued at $30,885.00.

         8.    Debtor’s Schedule F reflects general unsecured debt in the amount of

$4,859,191.23, approximately $1.6 million of which is owed to the Debtor’s former parent,

Transcontinental Realty Investors, Inc. (“TCI”).

         9.    The Debtor was previously owned by TCI. See Application to Approve

Employment of Debtor’s Counsel, para. 11 [Docket Entry No. 49].

         10.   On its Statement of Financial Affairs, the Debtor describes numerous transfers in

response to question 10. Specifically, the Debtor lists total “TCI Sweeps” from April 4, 2009 to

April 4, 2011 in the amount of $2,783,349.99. [SOFA question 10]

         11.   On April 21, 2011, the Debtor filed an application to employ Barlow, Garsek and

Simon, LLP (“BGS”) (“Applicant”). [Docket Entry No. 49]

         12.   In his affidavit, BGS partner Robert Simon testified that BGS has previously

represented TCI in numerous matters unrelated to the Debtor for the past seven (7) years,

although all representation of TCI ended in approximately December of 2010. Simon Affidavit ¶

20-21.

         13.   BGS is a current tenant of Fenton Centre. [Simon Affidavit, footnote 6, Schedule

B]




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        14.      Although the lease is dated September 1, 2010, by agreement, BGS was not

paying rent on that lease. At the hearing on the Debtor’s use of cash collateral, the court

directed BGS to pay market rent for the lease.2

        15.      On April 26, 2011 Highland filed its Motion for Relief from the Automatic Stay

(the “Lift Stay Motion”) [Docket Entry No. 54]. Highland asserted an undersecured debt in

excess of $60 million secured by Fenton Centre, the Thermalloy Building and Three Hickory

(the “Properties”). Highland asserted that it was undersecured in the approximate amount of at

least $15 million, based upon the appraised value of the Properties. Highland also asserted an

absolute assignment of rents relating to Fenton Centre.

        16.      The Court held a six-day hearing on Highland’s Lift Stay Motion (on May 11, 19,

20, 23, 25, and 31, 2011).

        17.      On June 6, 2011, the Court entered the Memorandum Opinion and Order

regarding Highland’s Lift Stay Motion (the “Lift Stay Order”), which provided, inter alia, that

the automatic stay would terminate at 10:00 a.m. local time on June 7, 2011 to permit Highland

to conduct a foreclosure sale of the Properties unless, prior to such time, TCI and/or one or more

of its affiliates deposits $800,000 into the registry of the Court.

        18.      Neither TCI, nor one or more of its affiliates, nor the Debtor, deposited the

$800,000 into the Court’s registry as required under the Lift Stay Order, and the stay lifted.

Highland foreclosed on the real property on June 7, 2011.



        2
            The United States Trustee filed his Objection to Application to Approve Employment of Debtor’s
Counsel [Docket Entry No.86] on May 16, 2011 asserting that BGS had an actual conflict of interest (a) due to the
landlord/tenant relationship with Fenton Center and (b) because BGS has a long-standing relationship with the
Debtor’s former parent and has acknowledged that it would be prohibited from pursuing any actions to recover
transfers under chapter 5, although the Debtor admits there may be potential chapter 5 causes of action against TCI.
Highland has also objected to the Application. The Application and the objections thereto are still pending before
this Court.



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       19.     Additionally, the Debtor has failed to meet administrative obligations.             The

Debtor has failed to file its April 2011 monthly operating report. Also, the Debtor’s proof of

general liability, property, automobile, worker’s compensation, and excess liability insurance on

file with the United States Trustee expired on May 31, 2011. These conditions form additional

grounds for dismissal or conversion of this case.

       20.     Finally, the United States Trustee’s records reflect that the Debtor will owe an

estimated $325 in United States Trustee fees for the second quarter of 2011.

                                            Argument

             General discussion of burdens when dismissal or conversion is sought

       21.     Under section 1112(b), the Court “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.” 11 U.S.C. § 1112(b)(1).

       22.     If cause is established, the burden shifts to the Debtor to prove that he falls within

the § 1112(b)(2) "unusual circumstances" exception to § 1112(b)(1)'s mandatory conversion. Id.

at § 1112(b)(2). The Legislative History explains that the exception applies only if: “(1) the

debtor or a party in interest objects and establishes that there is a reasonable likelihood that a

plan will be confirmed within the time periods set forth in section 1121(e) and 1129(e), or if

these provisions are inapplicable, within a reasonable period of time; (2) the grounds for

granting such relief include an act or omission of the debtor for which there exists a reasonable

justification for such act or omission; and (3) such act or omission will be cured within a

reasonable period of time.” H.R. Rep. No. 109-31(1) at 94 (April 8, 2005), reprinted in 2005

U.S.C.C.A.N. 88, 2005 WL 832198, reprinted in, In re Gateway Access Solutions, Inc., 374

B.R. 556, 561 (Bankr. M.D. Pa. 2007).




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The Debtor has no reasonable prospect of reorganization.

       23.     With the foreclosure of the Properties by Highland, the Debtor lost its primary

assets around which it might reorganize and its only possible source of money to fund a plan, the

Fenton Centre rents.    Accordingly, there is no reasonable likelihood of rehabilitation, and

remaining in chapter 11 would only serve to further diminish any assets that remain in the estate.

Accordingly, the Court should dismiss this case in accordance with 11 U.S.C. § 1112(b)(4)(A).

Failure to file Monthly Operating Report

       24.     Section 704(a)(7) and (8) of the Bankruptcy Code, made applicable in the

Chapter 11 context by 11 U.S.C. § 1106(a)(1) and 1107(a) and Fed. R. Bankr. P. 2015(a),

impose upon Chapter 11 debtors the duty to file periodic financial reports. “[U]nexcused failure

to satisfy timely any filing or reporting requirement established by [the Bankruptcy Code] or by

any rule applicable to a case under” chapter 11 of the Bankruptcy Code constitutes cause for

conversion or dismissal of a bankruptcy case under 11 U.S.C. § 1112(b)(1). Additionally,

failure to file timely Monthly Operating Reports has been found to constitute unreasonable delay

warranting conversion or dismissal. In re Moore Const. Inc., 206 B.R. 436, 438 (Bankr. N.D.

Tex. 1997). Accordingly, the Debtor’s failure to file its April 2011 monthly operating report

warrants dismissal of this bankruptcy case.

Failure to Provide Proof of Insurance

       25.     A Debtor’s “failure to maintain appropriate insurance that poses a risk to the

estate or the public” constitutes cause for dismissal or conversion. 11 U.S.C. §1112(b)(4)(C).

Prior to the foreclosure, the Debtor owned real property, which might have posed a nuisance or

other unsafe condition to the public. It appears that the Debtor may have operated without

insurance for at least six days prior to the lift of stay. Additionally, the Chapter 11 Guidelines




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for Region 6 require that all debtors-in-possession must provide the United States Trustee with

proof of insurance. Debtor failed to provide proof of insurance to the United States Trustee

warranting dismissal of this case.

Dismissal is in the creditors’ best interest.

        26.     Under 11 U.S.C. § 1112(b), the Court determines whether dismissal or

conversion is in “the best interest of creditors.” 11 U.S.C. §1112(b). Under the facts of this

case, dismissal is in the best interest of creditors.

        27.     Should the Court determine to convert this case to a case under chapter 7,

Debtor’s schedule B reflects personal property that may be administered by a chapter 7 trustee

and there remain possible chapter 5 causes of action that may be pursued. However, it appears

that the assets left in the estate may not be worth the administrative burden to administer.

        Wherefore, the United States Trustee respectfully requests that the Court dismiss this

case and grant such other and further relief as is just and proper.

Dated: June 10, 2011
                                                        Respectfully Submitted,

                                                        WILLIAM T. NEARY
                                                        UNITED STATES TRUSTEE

                                                        /s/ Meredyth A. Kippes
                                                        Meredyth A. Kippes
                                                        Trial Attorney, TX 24007882
                                                        Office of the United States Trustee
                                                        1100 Commerce St. Room 976
                                                        Dallas, Texas 75242
                                                        (214) 767-1079
                                                        meredyth.a.kippes@usdoj.gov




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                                  Certificate of Conference

    Under Local Bankruptcy Rule 9013.1 and Local District Rule 7.1, no conference is required
for this motion.

                                           /s/ Meredyth A. Kippes
                                           Meredyth A. Kippes

                                      Certificate of Service

      I certify that I sent copies of the foregoing document on June 10, 2011 to the following
via ECF or U.S. Mail, first class postage prepaid.

FRE Real Estate, Inc.                              Michael D. Warner
6731 Bridge Street                                 Cole Schotz Meisel Forman & Leonard PA
Suite 373                                          1700 City Center Tower II
Fort Worth, TX 76112                               301 Commerce St.
                                                   Fort Worth, TX 76102
Robert A. Simon
Spencer D. Solomon                                 Douglas James Buncher
Barlow Garsek & Simon, LLP                         Neligan Foley LLP
3815 Lisbon Street                                 325 N. St. Paul, Suite 3600
Fort Worth, TX 76107                               Dallas, TX 75201

Andrea Sheehan                                     Elizabeth Banda Calvo
Law Offices of Robert E. Luna, P.C.                Perdue, Brandon, Fielder, Collins & Mott
4411 N. Central Expwy.                             P.O. Box 13430
Dallas, TX 75205                                   Arlington, TX 76094-0430

Laurie Spindler Huffman                            Jason A. Starks
Linebarger Goggan Blair & Sampson, LLP            Assistant Attorney General
2323 Bryan St., Suite 1600                        Bankruptcy & Collection Division
Dallas, TX 75201                                  P. O. Box 12548
                                                  Austin, TX 78711-2548


                                               /s/ Meredyth A. Kippes
                                               Meredyth A. Kippes




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