## Facts

- Walter Ascher owned All-American Laundry Service, Inc. (All-American).
- In 1988, All-American acquired the assets of Royal Laundry Systems (Royal) and began operating Royal’s commercial laundry facility (the laundry) in Illinois.
- The Commercial National Bank of Berwyn (the bank) lent All-American $668,000 to finance the acquisition.
- To secure the loan, the bank took liens on Royal’s real and personal property used in the laundry business.
- As additional collateral, Ascher pledged stock in All-American, and several other individuals (the movants) pledged stock in United Parcel Service (UPS).
- All-American later defaulted on the bank loan, and the bank attempted to sell the pledged UPS stock.
- After learning of the attempted sale, the movants paid the remaining balance due to the bank and, in exchange, received an assignment of the original note and the bank’s liens.
- Following the assignment, the movants ousted Ascher from the laundry and took physical possession and control of the premises and operations.
- Ascher then filed a Chapter 11 bankruptcy case.
- At the time of the bankruptcy filing, the secured debt owed to the movants was either $855,774.12 or $1,018,553.43, depending on the interest calculation.
- The movants moved for relief from the automatic stay under 11 U.S.C. § 362(d) so they could remain in possession and sell the laundry to realize the value of their collateral.
- At the time of the motion, Ascher and the Chapter 11 trustee had not shown a reasonable prospect of confirming a reorganization plan or that the laundry was necessary to a successful reorganization.
- In connection with the stay-relief request, the court received valuation evidence about the laundry’s going-concern value, including that net profits for the first half of 1992 were $90,732 and that income was not likely to increase while operating expenses were not likely to decrease.
- The court also heard evidence of business risks, including environmental and regulatory risks affecting continued operation.
- Expert testimony stated that a buyer financing an acquisition with 55% equity would seek a 25% return, and a lender financing 45% debt would seek a 12% return; the court used those figures to compute an overall capitalization rate of about 19% to 19.5%.

## Issues

1. Whether the movants, as assignees of the bank’s note and liens and creditors in possession, were entitled to relief from the automatic stay under 11 U.S.C. § 362(d) to retain possession and sell the laundry collateral.
2. Whether the estate had equity in the laundry property and, if not, whether the laundry was necessary to an effective reorganization within the meaning of § 362(d)(2).
3. What valuation method and capitalization rate appropriately measured the laundry’s going-concern value for purposes of deciding stay relief.

## Decision

- The court granted the movants relief from the automatic stay.
- The court determined the laundry’s value as a going concern using an income-capitalization approach and a capitalization rate of approximately 19% to 19.5%, based on the required rates of return for debt and equity financing described in the testimony.
- Comparing the resulting value to the movants’ secured claim (between roughly $855,774 and $1,018,553 depending on interest), the court found the estate had little or no equity in the collateral.
- The court found Ascher and the trustee had not shown that an effective Chapter 11 reorganization was reasonably in prospect or that keeping the laundry in the estate was necessary to such a reorganization.
- Because the requirements for continued stay protection were not met, the movants were permitted to proceed to realize on their security interests, including by selling the laundry.

## Legal Principles

- Under 11 U.S.C. § 362(d)(2), a secured creditor is entitled to stay relief if the debtor has no equity in the property and the debtor cannot show the property is necessary to an effective reorganization.
- “Necessary to an effective reorganization” requires more than a statement of hope; it requires a showing that a confirmable plan is reasonably possible within a reasonable time.
- For stay-relief litigation involving an operating business, the court may value collateral as a going concern using an income-capitalization method, capitalizing earnings to estimate what a willing buyer would pay.
- A capitalization rate may be derived from market-required returns for the mix of acquisition financing (debt and equity), and it may reflect operational risks, including environmental and regulatory exposure.
- When valuation shows little or no equity cushion and the debtor cannot show a realistic path to reorganization, maintaining the automatic stay is not justified under § 362(d).

## Conclusion

In re Ascher granted stay relief to secured creditors who had taken assignment of a bank’s note and liens and were in possession of a commercial laundry facility, because the court’s earnings-capitalization valuation showed little or no equity above the secured debt and the debtor and trustee failed to demonstrate that an effective Chapter 11 reorganization was reasonably in prospect or depended on keeping the laundry in the estate.


In re Ascher, 146 B.R. 764 (1992)