In re Cardinal Industries, Inc.

Cardinal Industries, Inc. (CII) (debtor) manufactured modular housing units that CII and its subsidiaries (collectively, Cardinal) used in residential and commercial real estate developments. Cardinal financed the development projects with loans secured by first mortgages on the properties. Cardinal set up limited partnerships to develop the projects and made loans to some of the partnerships secured by second mortgages on the properties. Cardinal planned to syndicate the partnerships by selling limited-partnership interests to investors to raise money that Cardinal could use to pay off the second mortgages. However, the syndication was largely unsuccessful, and Cardinal found itself in financial trouble. Further adding to Cardinal’s troubles, Cardinal’s real estate developments were not generating enough rent to cover Cardinal’s first-mortgage obligations, and Cardinal had imprudently loaned $11 million to some of the partnerships to appease investors. The unsyndicated partnerships eventually defaulted on their first mortgages, and Cardinal’s financial troubles increased because of further poor decision making by CII. CII and its subsidiary Cardinal Industries of Florida (CIF) (debtor) filed for Chapter 11 bankruptcy. Despite cutting back on personnel and other obligations after their bankruptcy filings, CII and CIF continued to lose money. CII’s and CIF’s proposed reorganizations required restructuring the secured loans, altering the partnership structure, and delaying distributions to unsecured creditors. These proposals were based on CII’s and CIF’s representations about the valuation of the partnership properties, but CII’s and CIF’s financial records were unreliable, and CII and CIF were not providing accurate and timely financial information to the creditors’ committees. CII and CIF had also fired their lawyers just as progress was being made in negotiations with the partnerships’ secured lenders. CII’s and CIF’s creditors’ committees moved under 11 U.SC. § 1104(a) for the appointment of trustees in the bankruptcy cases.