## Facts

- Newark Airport/Hotel Limited Partnership owned and operated the Newark Sheraton Hotel in Elizabeth, New Jersey under a Sheraton franchise.
- The debtor financed purchase and renovation partly through a $15,250,000 loan from FGH Realty Credit Corporation, secured by a first mortgage on the hotel and a security interest in the debtor’s assets.
- The debtor stopped making mortgage payments after June 1, 1990.
- FGH began a New Jersey foreclosure action on February 20, 1991.
- The state court entered final judgment of foreclosure on February 18, 1992, fixing the debtor’s liability to FGH at $19,440,352.21 as of January 31, 1992.
- A sheriff’s sale was scheduled and adjourned multiple times; the debtor filed a Chapter 11 petition on July 7, 1992, staying the sale.
- The debtor remained in possession and continued operating the hotel, asserting that hotel revenue covered operating expenses and supported ongoing payments intended to protect FGH’s secured position.
- The debtor asserted ongoing business activity and relationships (including airline crew lodging and event bookings), employment exceeding 100 employees, and pursuit of potential financing and state-court litigation that could affect FGH’s claim amount.
- The bankruptcy court held multi-day evidentiary hearings in December 1992, receiving testimony from seven witnesses and numerous exhibits.

## Issues

1. Whether “cause” existed to grant relief from the automatic stay under 11 U.S.C. § 362(d)(1), including based on alleged lack of adequate protection.
2. Whether relief from stay was required under 11 U.S.C. § 362(d)(2) because the debtor lacked equity in the hotel and the hotel was not necessary to an effective reorganization.
3. Whether the Chapter 11 case should be dismissed under 11 U.S.C. § 1112(b) for bad-faith filing, including filing on the eve of foreclosure and allegedly presenting a two-party dispute.
4. Whether “cause” existed under 11 U.S.C. § 1121(d) to extend the debtor’s exclusivity period to file a plan.

## Decision

- The bankruptcy court denied FGH’s motion for relief from the automatic stay.
- The bankruptcy court denied FGH’s motion to dismiss the Chapter 11 case for bad faith.
- The bankruptcy court granted the debtor’s first motion to extend the exclusivity period to propose a Chapter 11 plan.
- The court found that, notwithstanding minimal or no equity, the hotel was necessary to an effective reorganization and the debtor showed a reasonable possibility of a confirmable plan within a reasonable time.
- The court found the petition was not filed in bad faith under the totality of circumstances, including the debtor’s status as an operating business and evidence of reorganization efforts.
- The court found “cause” to extend exclusivity based on the case’s early stage and the need for valuation, creditor-committee functioning, and resolution or clarification of litigation affecting claims and financing.

## Legal Principles

- Under 11 U.S.C. § 362(d)(2), a secured creditor must show the debtor lacks equity; the debtor must then show the property is “necessary to an effective reorganization,” meaning a reasonable possibility of a successful reorganization within a reasonable time.
- “Necessary to an effective reorganization” may be satisfied where the asset is a going-concern business whose continued operation (employees, contracts, and revenue generation) is tied to reorganization feasibility.
- A Chapter 11 filing on the eve of foreclosure is not, by itself, bad faith; good faith is evaluated under the totality of circumstances, including whether the debtor is an operating enterprise, the presence of stakeholders beyond a single creditor, and concrete reorganization activity.
- An extension of exclusivity under 11 U.S.C. § 1121(d) is discretionary and may be granted for “cause,” including early case posture, delays in committee formation, need for appraisal/valuation, pending litigation affecting claim amounts, and ongoing plan development and creditor negotiations.

## Conclusion

The bankruptcy court refused to permit immediate foreclosure or dismissal where the debtor operated a functioning hotel business and showed a plausible path to confirm a plan, and it extended exclusivity to allow additional time for valuation, negotiations, and litigation developments relevant to reorganization.


In re Newark Airport/Hotel Ltd. P'ship, 156 B.R. 444 (Bankr. D.N.J. 1993)