In re: Brice Road v. ( 2008 )

ELECTRONIC CITATION: 2008 FED App. 0012P (6th Cir.)
File Name: 08b0012p.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: BRICE ROAD DEVELOPMENTS, L.L.C., )
)
Debtor. )
__________________________________________ )
)
GENERAL ELECTRIC CREDIT EQUITIES, INC., )
)
Appellant, )
)
v. ) No. 06-8093
)
BRICE ROAD DEVELOPMENTS, L.L.C. and )
SIR KENSINGTON ASSOCIATES, LLC, )
)
Appellees. )
)
Appeal from the United States Bankruptcy Court
for the Southern District of Ohio, Eastern Division.
Case No. 05-66007.
Argued: May 13, 2008
Decided and Filed: August 14, 2008
Before: GREGG, PARSONS, and SCOTT, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ARGUED: G. Christopher Meyer, SQUIRE SANDERS & DEMPSEY LLP, Cleveland, Ohio, for
Appellant. Yvette A. Cox, BAILEY CAVALIERI LLC, Columbus, Ohio, for Appellees. ON
BRIEF: G. Christopher Meyer, SQUIRE SANDERS & DEMPSEY LLP, Cleveland, Ohio, William
M. Mattes, Donald W. Mallory, DINSMORE & SHOHL LLP, Columbus, Ohio, for Appellant.
Yvette A. Cox, BAILEY CAVALIERI LLC, Columbus, Ohio, Richard K. Stovall, ALLEN
KUEHNLE STOVALL & NEUMAN LLP, Columbus, Ohio, for Appellees.
____________________
OPINION
____________________
MARCIA PHILLIPS PARSONS, Chief Bankruptcy Appellate Panel Judge. General Electric
Credit Equities, Inc. (“GE”) appeals an order of the bankruptcy court confirming the chapter 11
reorganization plan of Brice Road Developments, L.L.C. (“Debtor”). GE objected to confirmation
of the plan on the basis that the plan was not feasible as required by 11 U.S.C. § 1129(a)(11) and the
plan was not fair and equitable as required by 11 U.S.C. § 1129(b)(2) because it provided for an
improper interest rate on GE’s secured claim, undervalued GE’s collateral, and failed to accord GE
its rights as an electing secured creditor under 11 U.S.C. § 1111(b)(2).1 For the reasons that follow,
we affirm the bankruptcy court in all respects, with the exception of the conclusion that the plan
accords GE the full rights of an electing § 1111(b) secured creditor. On this issue, this case will be
remanded for further action by the bankruptcy court.
I. ISSUES ON APPEAL
The issues presented by this appeal are: (1) whether the bankruptcy court erred in assigning
a 6% present value rate to GE’s claim; (2) whether the bankruptcy court erred in its valuation of
GE’s collateral; (3) whether the plan is feasible as contemplated by § 1129(a)(11); and (4) whether
the plan provides GE its proper rights as an electing secured creditor under § 1111(b)(2).
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction to decide this appeal. The United States District Court for the Southern
District of Ohio has authorized appeals to the Panel, and neither party has timely elected to have this
appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A final order of the bankruptcy
court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final
order “ends the litigation on the merits and leaves nothing for the court to do but execute the
1
The Debtor’s bankruptcy case was filed before October 17, 2005. All references to the
Bankruptcy Code, 11 U.S.C. § 101-1330, herein “§ ___,” are to the pre-BAPCPA version. See
Bankruptcy Abuse and Consumer Protection Act of 2005, Pub. Law No. 109-8, § 1501(b)(1), 119
Stat. 23, 216 (stating that, unless otherwise provided, the BAPCPA amendments do not apply to
cases pending before the effective date of BAPCPA).
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judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S. Ct. 1494, 1497
(1989) (citations omitted). The bankruptcy court’s order overruling GE’s objection and confirming
the Debtor’s reorganization plan is a final order. G.E. Cattle Co. v. United Producers, Inc. (In re
United Producers, Inc.), 353 B.R. 507, 508 (B.A.P. 6th Cir. 2006), aff’d, 526 F.3d 942 (6th Cir.
2008).
The bankruptcy court’s conclusions of law are reviewed de novo. Riverview Trenton R.R.
Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir. 2007). “Under a de novo standard
of review, the reviewing court decides an issue independently of, and without deference to, the trial
court’s determination.” Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798,
800 (B.A.P. 6th Cir. 2007). Whether a chapter 11 reorganization plan correctly applies an
undersecured creditor’s election pursuant to § 1111(b)(2) involves interpretation and application of
the Bankruptcy Code which is a question of law reviewed de novo. First Fed. Bank of Cal. v.
Weinstein (In re Weinstein), 227 B.R. 284, 289 (B.A.P. 9th Cir. 1998); see also Cluxton v. Fifth
Third Bank (In re Cluxton), 327 B.R. 612, 613 (B.A.P. 6th Cir. 2005) (“The determination whether
a plan provision violates the Bankruptcy Code is a legal conclusion reviewed de novo.”)
The court’s findings of fact are reviewed under the clearly erroneous standard. In re DSC,
Ltd., 486 F.3d at 944. “A finding of fact is clearly erroneous ‘when although there is evidence to
support it, the reviewing court on the entire evidence is left with the definite and firm conviction that
a mistake has been committed.’” Id. (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573,
105 S. Ct. 1504 (1985)).
III. FACTS
The Debtor is the owner of a partially completed 264 unit apartment complex known as
Kensington Commons (“Kensington Property”). Construction of the complex began in 2001. The
Debtor began renting units in 2003.
In January 2001, Armstrong Mortgage Company (“Armstrong Mortgage”) provided the
Debtor financing for the purchase of real estate and construction of the Kensington Property through
a U.S. Department of Housing and Urban Development (“HUD”) program whereby HUD guaranteed
payment. The Debtor executed and delivered to Armstrong Mortgage a non-recourse mortgage note
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(“Note”) in the original principal amount of $15,444,400, and a mortgage deed (“Mortgage”)
granting liens on substantially all of the Debtor’s assets, including the Kensington Property. The
Note provided for interest to accrue at the rate of 7.75%. Payments of interest were to begin on
February 2, 2001. Monthly payments of principal and interest in the amount of $104,500 were to
begin on March 1, 2003. Prepayments prior to March 1, 2013, were prohibited. The Mortgage
granted the mortgagee the right to “the estate, title and interest of said Mortgagor either in law or
equity in and to [the Kensington Property].” (Appellees’ App. at 291.) The Debtor exhausted its
commitment for the construction loan, and 24 units remain unfinished.
The Debtor defaulted on the payment due in March 2004, and made no further payments.
Armstrong Mortgage invoked its HUD guarantee and assigned the Note and Mortgage to HUD. GE
subsequently purchased the Note, Mortgage and related loan documents as one loan in a bundle of
six loans at a HUD auction sale. GE allocated approximately $10.7 million of the total purchase
price to the Kensington Property.
The Debtor failed to commence making payments as required by the Note. GE filed a state
court foreclosure action on July 7, 2005. In response, on September 2, 2005, the Debtor filed a
voluntary petition for relief under chapter 11 of the Bankruptcy Code. On November 3, 2005, GE
filed a proof of secured claim in the amount of $16,453,965.74 (“Claim”). On January 27, 2006, GE
filed its election under § 1111(b)(2) to have its Claim treated as fully secured. GE then filed a
motion requesting valuation of its collateral. Following a lengthy hearing on the motion, the
bankruptcy court concluded in an order entered June 22, 2006, that the “as is” value of the
Kensington Property was $10.5 million. After deduction of outstanding real estate taxes, GE’s
interest in the value of the Kensington Property was $10,258,000. (Appellee’s App. at 166 n.3).2
The Debtor and SIR Kensington Associates, LLC (SIR Kensington)3 filed a first amended
joint plan of reorganization on January 27, 2006, along with an amended disclosure statement that
was approved by the bankruptcy court on March 20, 2006. Additional modifications to the first
2
GE did not appeal the valuation order at that time.
3
SIR Kensington is a single purpose entity owned by Sound View Real Estate Partners,
L.L.C., a real estate investment firm. SIR Kensington provided postpetition financing to the Debtor
to support its cash flow needs.
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amended joint plan of reorganization were filed on June 18 and 20, 2006 (collectively the “Plan”),
by the Debtor and SIR Kensington (“Plan Proponents”).
The Plan is premised first on a $2.5 million cash infusion of equity and subordinated debt
by SIR Kensington, which will be partially allocated to fund the Plan and to provide capital.
Implementation of the Plan will be augmented by the Debtor’s future income, which will be
enhanced by completion and rental of the 24 unfinished units. In satisfaction of the Debtor’s liability
to SIR Kensington for money previously loaned, SIR Kensington will be issued all the member
interest in the Debtor.
The Plan classifies creditors and equity security holders into eight classes. GE is the sole
creditor in Class 2. Pursuant to the Plan, GE has an allowed secured claim that will be paid at the
rate of 6% per annum in equal monthly installments based on an amortization period of 40 years,
with a balloon payment of unpaid interest and principal on February 1, 2043. GE retains its lien to
the extent of the allowed amount of the Claim. All other terms and conditions contained in the Note
and Mortgage remain in full force and effect. The plain language of the Plan does not provide GE
a restructured Note.
All classes except for GE accepted the Plan. GE filed an objection to confirmation on June
5, 2006. A confirmation hearing was held on June 19 and 20, 2006, at which the Debtor and SIR
Kensington requested that the bankruptcy court confirm the Plan pursuant to the “cramdown”
provisions of § 1129(b). The bankruptcy court issued a memorandum opinion on September 29,
2006, overruling GE’s objection. An order confirming the Plan was issued on October 24, 2006.
GE timely filed this appeal.
IV. DISCUSSION
A. The Bankruptcy Court Did Not Err in Finding a 6% Interest Rate.
After hearing extensive testimony and considering the Sixth Circuit Court of Appeals’
opinion in Bank of Montreal v. Official Committee of Unsecured Creditors (In re American
Homepatient, Inc.), 420 F.3d 559 (6th Cir. 2005), the bankruptcy court found that the Plan’s
“proposed interest rate of 6% is within the range of the rates in an efficient market for a long-term
loan secured by a first mortgage on multi-family real estate with a long useful life, of the size of the
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Debtor’s loan held by GE Credit.” (Appellee’s App. at 169-70.) GE argues that, at a minimum, a
market rate loan must be established based upon terms similar to those proposed by the Plan
Proponents, including the particular circumstances of the Debtor as to the risk factor. GE further
argues that the testimony of its expert, Jeffery Morris, CEO of Morris, Smith & Fay, supports an
interest rate of 8.0182%.
Citing to Household Automotive Finance Corp. v. Burden (In re Kidd), 315 F.3d 671 (6th
Cir. 2003), GE asserts that we must review the bankruptcy court’s decision on the market rate of
interest de novo. We reject this argument. This Panel is not a fact finder. In Kidd, the Sixth Circuit
held that the selection of the appropriate interest rate involved a legal determination that required de
novo review because the court was establishing for the circuit the methodology under which the
cramdown rate in a chapter 13 case is to be determined. Id. at 675. As both parties acknowledge,
the Sixth Circuit has already established the methodology by which the cramdown rate in a chapter
11 case is to be calculated. In re Am. Homepatient, Inc., 420 F.3d at 568. Because the methodology
has already been established, the bankruptcy court’s determination of the appropriate interest rate
is reviewed for clear error. Fin. Sec. Assurance, Inc. v. T-H New Orleans Ltd. P’Ship (In re T-H New
Orleans P’ship), 116 F.3d 790, 800 (5th Cir. 1997); see also In re Grand Traverse Dev. Co. Ltd.
P’ship, Inc., 151 B.R. 792, 797 (W.D. Mich. 1993).
The cramdown provisions in § 1129(b) do not specify how a bankruptcy court should
calculate the appropriate cramdown interest rate. However, in this circuit, in a chapter 11 case where
an “efficient market” exists, the market rate should be applied, and where no “efficient market”
exists, the formula approach endorsed by the Supreme Court in Till v. SCS Credit Corp., 541 U.S.
465, 124 S. Ct. 1951 (2004), should be employed. In re Am. Homepatient, Inc., 420 F.3d at 568.
It is GE’s burden to demonstrate that a higher rate than that proposed by the Debtor is appropriate.
See Till, 541 U.S. at 484.
As the bankruptcy court noted, the term “efficient market” was not defined in Till or
American Homepatient and neither case offers “much guidance in determining how to ascertain the
efficient market rate, nor . . . suggest[s] whether the rate may vary based on loan criteria.”
(Appellee’s App. at 166.) Concluding that the typical criteria for establishing an interest rate in the
commercial lending market is in effect the “coerced loan” approach that was rejected by the Supreme
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Court in Till, and recognizing that both Till and American Homepatient “embrace the use of
generally applicable interest rates rather than loan-specific interest rates,” the bankruptcy court set
forth the following criteria for evaluating a proposed efficient market rate:
the priority of the lien securing the loan; whether there exists an open, well-
developed market for loans of the kind between the debtor and secured creditor; the
type of collateral involved; the quality, age, and life expectancy of the collateral;
short or long term nature of the proposed term of the loan; and the amount financed.
(Appellee’s App. at 167.)
The bankruptcy court heard the testimony of two witnesses on behalf of the Plan Proponents:
Brad Armstrong, a principal of Armstrong Mortgage, the original lender to the Debtor, who has
extensive experience in HUD lending, and Nicholas Newman, a witness with significant experience
in the field of real estate finance. Armstrong testified regarding various options for first mortgage
financing with respect to multi-family housing, including options offered through HUD programs.
He opined that the prevailing interest rate for such loans range between 5.5% and 6.25%. Newman
testified that, based upon the interest rate on 10-year Treasury bonds plus a spread of 1%, the
appropriate interest rate is 6.01%.
GE presented the testimony of Jeffrey Morris, president of a mortgage brokerage firm.
Morris testified that his only experience with HUD lending was in the “early 90’s” for approximately
two years. According to Morris, the Debtor would not be able to obtain the same terms as the
proposed note to GE. The only market available, according to Morris, would be a complete
refinancing under tiered financing. This tiered financing would have a blended interest rate of 8%.
Morris further testified that under an existing approved loan application pertaining to a comparable,
but significantly older, property in the same area, the interest rate would be the 10-year Treasury rate
of 5.15% on the date of the hearing, plus a spread of 1.11%, for a total interest rate of 6.26%. The
tiered financing suggested by Morris was rejected by the bankruptcy court based on the Sixth
Circuit’s rejection of similar testimony in American Homepatient, wherein the court stated:
The lenders’ argument, on the other hand, is centered on the composite interest rate
that a new loan (including “mezzanine” debt and equity) would command in the
market, not what their loan to American (which was all senior debt) would require.
But as the bankruptcy court properly noted:
‘The Lenders’ argument that the debtor could not obtain a
“new loan” in the market place so highly leveraged might be so, but
in actuality no new loan is being made here at all. Instead, the court
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is sanctioning the workout between the debtor and the Lenders. New
funds are not being advanced without the consent of the claimants.’
Indeed, the only type of debt contemplated by American’s reorganization plan was
senior secured debt. The inclusion of other types of financing-mezzanine debt and
equity-is a pure hypothetical suggested by the lenders.
In re Am. Homepatient, Inc., 420 F.3d at 568-69 (quoting In re Am. Homepatient, Inc., 298 B.R. 152,
184 (Bankr. M.D. Tenn. 2003)).
Based on the testimony and evidence presented at the confirmation hearing, GE did not
satisfy its burden to demonstrate that a higher rate than that proposed by the Plan Proponents is
required. The bankruptcy court’s finding that the proposed interest rate of 6% was appropriate is not
clearly erroneous.
B. The Bankruptcy Court Did Not Err in its Valuation of the Property.
Following a two-day valuation hearing, the bankruptcy court valued the Kensington Property
at $10.5 million. GE asserts that the bankruptcy court erred in the valuation because of its “refusal
to give sufficient weight to the most relevant possible evidence, a recent arms-length offer [of
$13.1 million] to purchase the Kensington Property.” (Appellant’s Br. at 36.) GE also argues that
the bankruptcy court’s valuation of the property was inconsistent with a $13.5 million valuation by
the Franklin County Auditor, and the HUD approved value of the project of $17.5 million.
Additionally, at the valuation hearing the Debtor claimed the property had a value of $13.968
million.4
4
The Plan Proponents argue that GE waived its objection to the valuation of the property by
failing to raise it at the confirmation hearing or immediately appealing the valuation order. We reject
this argument. The bankruptcy court’s order determining the value of the property is a final order
that may have been appealed immediately. Chase Manhattan Mortgage Corp. v. Rodriguez (In re
Rodriguez), 272 B.R. 54, 58 (D. Conn. 2002); see also Lindsey v. O’Brien, Tanski, Tanzer & Young
Health Care Providers of Conn. (In re Dow Corning Corp.), 86 F.3d 482, 488 (6th Cir. 1996) (an
order that finally disposes of discrete disputes within a larger case may be appealed immediately).
The right to immediately appeal an order under § 506(a) does not preclude appeal of that order from
plan confirmation. In re Rodriguez, 272 B.R. at 58 (renewal of a creditor’s objection to valuation
at the confirmation hearing is not necessary to preserve the right to appeal the valuation so long as
the objection was clearly made and fully litigated at some point in the litigation). Moreover, the
bankruptcy court incorporated many of its findings at the valuation hearing into its memorandum
opinion from which GE now appeals.
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Valuation of collateral is a question of fact reviewed under the clearly erroneous standard.
In re Am. Homepatient, Inc., 420 F.3d at 570. At the valuation hearing, the court heard the testimony
of two expert witnesses and several lay witnesses, and reviewed hundreds of pages of appraisal
reports and other documents. GE’s expert opined that the as-is value of the property was
$12.9 million based on a fair market value of $13.9 million. The Debtor’s expert opined that the as-
is value of the property was $8.9 million based on a stabilized fair market value of $11.9 million.
Both experts testified that the income approach is the most appropriate methodology for valuing the
property. Therefore, starting with the income approach and reaching a stabilized fair market value
of $12,675,387, the bankruptcy court deducted various costs derived from the testimony and
documents introduced into evidence, and concluded that the value of the property was $10.5 million.
GE argues that the bankruptcy court failed to give sufficient weight to an arms-length offer
of Sound View Real Estate Partners, L.L.C. (“Sound View Partners”), the Franklin County Tax
Auditor, and the HUD approved value of the project. However, the bankruptcy court specifically
stated that it considered this information. (Appellees’ App. at 229.) (“The Court did consider all
relevant information presented, including the offer of Sound View Partners to purchase the property,
the Franklin County Tax Auditor’s assessment and GE’s underwriter’s valuation, but did not find
any other indicia of value of the property to be persuasive in the face of the appraisals in evidence.”)
The bankruptcy court’s findings are not clearly erroneous.
C. The Bankruptcy Court Did Not Err in Finding that the Plan is Feasible.
GE asserts that the bankruptcy court erred in confirming the Plan over its objection because
the Plan does not satisfy the “feasibility test” under § 1129(a)(11). Pursuant to 11 U.S.C. §
1129(a)(11):
(a) The court shall confirm a plan only if all of the following requirements are met:
....
(11) Confirmation of the plan is not likely to be followed by the liquidation,
or the need for further financial reorganization, of the debtor or any successor
to the debtor under the plan, unless such liquidation or reorganization is
proposed by the plan.
“Feasibility is fundamentally a factual question since it necessarily depends upon a
determination of the reasonable probability of payment.” In re Howard, 212 B.R. 864, 878 (Bankr.
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E.D. Tenn. 1997) (citing In re Foertsch, 167 B.R. 555, 566 (Bankr. D.N.D. 1994)). In order to be
feasible pursuant to § 1129(a)(11), “[t]he plan does not need to guarantee success, but it must present
reasonable assurance of success.” In re Made in Detroit, Inc., 299 B.R. 170, 176 (Bankr. E.D. Mich.
2003) (citing Kane v. Johns-Manville Corp., 843 F.2d 636, 649 (2nd Cir. 1988)), aff’d, 414 F.3d 576
(6th Cir. 2005)). In order to sufficiently establish such reasonable assurance, “a plan must provide
a realistic and workable framework for reorganization.” Id. (citing Crestar Bank v. Walker (In re
Walker), 165 B.R. 994, 1004 (E.D. Va. 1994)). Relevant to a finding of feasibility is:
(1) the adequacy of the capital structure; (2) the earning power of the business; (3)
economic conditions; (4) the ability of management; (5) the probability of the
continuation of the same management; and (6) any other related matter which
determines the prospects of a sufficiently successful operation to enable performance
of the provisions of the plan.
Teamsters Nat’l Freight Indus. Negotiating Comm. v. U.S. Truck Co., Inc. (In re U.S. Truck Co.,
Inc.), 800 F.2d 581, 589 (6th Cir. 1986). Importantly, “[t]he Code does not require the debtor to
prove that success is inevitable, and a relatively low threshold of proof will satisfy § 1129(a)(11) so
long as adequate evidence supports a finding of feasibility.” 7 Collier on Bankruptcy ¶ 1129.03[11]
(15th ed. rev. 2006) (quoting Computer Task Group, Inc. v. Brotby (In re Brotby), 303 B.R. 177, 191
(B.A.P. 9th Cir. 2003)).
At the valuation hearing, in addition to determining the present value of the Property, the
bankruptcy court made other findings with respect to the Debtor’s financial prospects.5 The
bankruptcy court found the Plan Proponents’ use of these findings and their other assumptions to
be reasonable, noting that the assumptions were more conservative than those of even GE’s appraisal
expert. In regard to the above-quoted factors for determining feasibility, the bankruptcy court
concluded, among others, the following: that the Debtor’s cash-flow short-fall during the first three
calendar quarters post-confirmation will be covered by the interest reserve to be set aside from the
5
These findings included the following: (1) stabilized gross potential income ($2,169,360
annually); (2) annual ancillary income ($90,000); (3) stabilized occupancy (88%); (4) stabilized
operating expenses, including real estate taxes and reserves ($970,750 annually); (5) the reasonable
absorption rate of the rental units during construction (2.2 units) and upon completion of
construction (4.4 units), resulting in the Property reaching stabilization in 19 months; (6) total
stabilization costs ($550,000); (7) costs of completion of construction including mold remediation
and ancillary site work ($827,659); and (8) total costs to fix flooding problems including
construction of a retention pond and storm sewer and site grading ($834,500).
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$2.5 million contribution by SIR Kensington; that the demands of the Plan will be met from the
$2.5 million infusion as well as completion of the Property; that beginning in the second full year
post-confirmation, the Debtor will realize a positive cash flow in excess of $300,000 per year; that
the Debtor has had positive cash flow most months and for the entire post-petition period when
taken in the aggregate; that capitalization is quite adequate; that in light of the oversight by SIR
Kensington and Sound View Partners, management of the Property will be experienced and
competent, with a plan to operate the Property in a manner consistent with a goal of optimal
performance; that the economic conditions in the area of the Property are at least fair, with no
evidence to indicate a downswing; and that the Property has a life span of fifty to sixty years.
Based on ample evidence in the record, the bankruptcy court’s finding that the Plan satisfies
the feasibility test under 11 U.S.C. § 1129(a)(11) is not clearly erroneous.
D. The Plan Does Not Accord GE its Rights as an Electing Secured Creditor under § 1111(b)(2).
A chapter 11 reorganization plan may be confirmed if each class of impaired claims accepts
the plan, or at least one class of impaired claims accepts the plan. § 1129(a)(8), (a)(10). If not all
classes of impaired claims accept the plan, the Debtor may utilize the so-called “cramdown”
procedure.6 Under a cramdown, a plan must meet all of the requirements set forth in § 1129(a),
except for § 1129(a)(8), and also satisfy § 1129(b).
Section 1129(b)(1) of the Bankruptcy Code permits the bankruptcy court to confirm a plan
over the objection of a secured creditor “if the plan does not discriminate unfairly, and is fair and
equitable, with respect to each class of claims . . . that is impaired under, and has not accepted, the
plan.” GE asserts that the Plan is not fair and equitable, in part, because it fails to properly recognize
6
“Cramdown” is a bankruptcy term used when a plan is confirmed over a claim holder’s
objection. Kenneth N. Klee, All You Ever Wanted to Know About Cram Down Under the New
Bankruptcy Code, 53 Am. Bankr. L.J. 133 (1979); Till v. SCS Credit Corp., 541 U.S. 465, 468-69,
124 S. Ct. 1951, 1954 (2004). The Sixth Circuit BAP has previously discussed “cramdown” in a
chapter 13 context in Tidewater Fin. Co. v. Curry (In re Curry), 347 B.R. 596 (B.A.P. 6th Cir.
2006), aff’d, 509 F.3d 735 (6th Cir. 2007).
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rights as an electing secured creditor under § 1111(b)(2).7 To qualify as fair and equitable under this
subsection as to a class of secured claims, a plan must provide:
(I) that the holders of such claims retain the liens securing such claims, whether the
property subject to such liens is retained by the debtor or transferred to another
entity, to the extent of the allowed amount of such claims [the “lien retention”
provision]; and
(II) that each holder of a claim of such class receive on account of such claim
deferred cash payments totaling at least the allowed amount of such claim, of a value,
as of the effective date of the plan, of at least the value of such holder’s interest in
the estate’s interest in such property [the “present value” or “interest” provision][.]
§ 1129(b)(2)(A)(i).
The Bankruptcy Appellate Panel for the Ninth Circuit has succinctly explained the process
once the § 1111(b)(2) election occurs:
In order for a reorganization plan to now comply with the cram down requirements
of § 1129(b)(2)(A)(i)(I), the electing creditor must retain a lien equal to the total
amount of its claim. The lien is not stripped down by § 506(d). Subsection (II) of
§ 1129(b)(2)(A)(i) guarantees an electing creditor a stream of payments equal to its
total claim. However, the stream of payments need only have a present value “of at
least the value of such holder’s interest in the estate’s interest in such property,” i.e.,
the value of the collateral. 11 U.S.C. § 1129(b)(2)(A)(i)(II). In other words, the
present value of the electing creditor’s stream of payments need only equal the
present value of the collateral, which is the same amount that must be received by the
nonelecting creditor, but the sum of the payments must be in an amount equal [to]
at least the creditor’s total claim.
First Fed. Bank of Cal. v. Weinstein (In re Weinstein), 227 B.R. 284, 294 (B.A.P. 9th Cir. 1998)
(citations omitted).
7
The Debtor contends that GE has raised this issue for the first time on appeal, and has,
therefore, waived this argument. GE did specifically object to the Plan on the basis that the Plan was
not fair and equitable, although in the context of interest rate, proposed Plan term and whether as an
electing secured creditor under § 1111(b)(2) GE is entitled to a due-on-sale clause in the restructured
Note. (This last issue was raised initially on appeal by GE, but counsel for GE announced at oral
argument that GE was conceding this issue.) More importantly, the bankruptcy court specifically
addressed the rights of an electing secured creditor under § 1111(b)(2) in determining that the Plan
was fair and equitable. Accordingly, the issue is properly before this Panel. See Nicely v McBrayer,
McGinnis, Leslie & Kirkland, 163 F.3d 376, 381 (6th Cir. 1998) (Appellate courts have declined to
consider arguments that were not properly raised before the trial court; however, it would be
inappropriate not to consider argument where statute was clear on point at issue and where relevant
information was clearly before the trial court so that it should not have needed specific presentation
of the argument in order to be aware of the proper result.).
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Applying the foregoing principles to the case at hand, in order to properly accord GE its
rights as an electing secured creditor under § 1111(b)(2), the Plan must provide for the following:
(1) retention of GE’s lien on the Kensington Property to the extent of the allowed amount of GE’s
claim, $16,453,965.74 according to GE’s proof of claim; (2) deferred cash payments to GE with a
present value of $10,258,000 (“the value of such holder’s interest in the estate’s interest in such
property,” which in this case is the value of the Kensington Property, $10.5 million, minus
outstanding real estate taxes of $242,000); and (3) deferred cash payments to GE totaling at least the
allowed amount of GE’s total claim, i.e., the $16,453,965.74 sum. See In re Weinstein, 227 B.R.
at 292-94. Our review of the Plan indicates that the first two requirements are clearly met; the third
is less clear.
In pertinent part, the Plan provides for the following treatment of Class 2, comprised solely
of GE:
The Allowed Secured Claim of GE Credit shall be satisfied in full by the Debtor
amortizing the amount thereof with interest as follows: i) commencing the first day
of the month following the month in which the Effective Date falls and continuing
on the first day of each month thereafter, the Debtor shall pay GE Credit the amount
of the Allowed Secured Claim of GE Credit, with interest at the rate of six percent
(6.0%) per annum, in equal consecutive monthly installments calculated based upon
an amortization period of four hundred eighty months from and after the Effective
Date. Notwithstanding such amortization period, any unpaid accrued interest and
principal shall be due and payable, in full, on February 1, 2043. GE Credit shall
retain its lien on Kensington Commons and on any other of Debtor’s property
securing its Allowed Claim, to the extent of the allowed amount of such Claim;
otherwise, the lien shall be void and of no force and effect. . . . [T]he provisions of
that certain Mortgage Note and Rider to Mortgage Note dated January 19, 2001, and
executed and delivered by Debtor to Armstrong Mortgage Company, shall remain
in full force and effect subsequent to the Effective Date. . . . In the event of any
inconsistencies between the terms and provisions of this Joint Plan and the terms and
provisions of any agreements, instruments or other documents evidencing or
otherwise relating to the Allowed Secured Claim of GE Credit, the terms and
provision of this Joint Plan, as modified herein, shall control.
(Appellees’ App. at 210-11.)
In the definition section of the Plan, “Allowed Claim” is defined as “a claim against Debtor
determined as of the Effective Date . . . in respect of which a proof of claim has been filed with the
Court . . . as to which no objection to the allowance thereof has been interposed . . . or as to which
any such objection has been determined by a Final Order.” (Appellees’ App. at 180.) “Allowed
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Secured Claim” means “an Allowed Claim secured by a lien on property in which Debtor has an
interest . . . to the extent of the value (determined in accordance with § 506(a) of the Code) of such
creditor’s interest in Debtor’s interest in such property . . . .” (Appellees’ App. at 180-81.)
Applying these definitions to GE’s Plan provision, it is clear that GE will receive deferred
cash payments with a present value of $10,258,000, since “Allowed Secured Claim” is defined as
a claim “secured by a lien on property . . . to the extent of value.” The lien retention requirement
is satisfied by the third sentence of the quoted Plan provision providing that GE will retain its lien
to the extent of its “Allowed Claim,” which under the definition section is GE’s total allowed claim
as set forth in its proof of claim, i.e., $16,453,965.74 or such amount determined by the bankruptcy
court after objection. Nothing in the Plan, however, provides that the deferred cash payments to GE
will total this same allowed amount.
The Plan Proponents argue that payment in full of GE’s “Allowed Claim” is provided by the
lien retention statement and cite the amortization schedule presented at trial which shows that by the
24th year of the restructured Note’s 36-year term the stream of payments to GE will have totaled
$16,453,965.74. The Plan Proponents also assert that because GE will retain its lien until the
payments accumulate to this amount, if the Debtor attempts to cash out GE at any earlier time, it
must pay GE a “§ 1111(b) premium.” (Appellees’ Br. at 19.) According to the Plan Proponents,
this premium is the difference between GE’s total “Allowed Claim” and the outstanding principal
balance remaining due under the Note, plus the payments made to the present. Thus, argue the Plan
Proponents, “[t]he deferred cash payments that GE receives under the Plan always will total at least
the amount of GE’s allowed claim, even if the Debtor cashes out GE before the final balloon
payment is due under the Plan.” (Appellees’ Br. at 20-21.)
The problem with this argument is that the Debtor’s obligation to pay GE this § 1111(b)
premium is not evidenced in either the Plan or the Note. Cf. IPC Atlanta Ltd. P’ship v. Fed. Home
Loan Mortgage Corp. (Matter of IPC Atlanta Ltd. P’ship), 163 B.R. 396, 398 (Bankr. N.D. Ga.
1994) (plan note specifically providing that in event of prepayment, electing secured creditor will
receive a premium calculated to ensure full payment of creditor’s total claim). We are not confident,
nor apparently is GE, that this payment is guaranteed by the Plan’s lien retention statement. The
restructured Note will be in the principal amount of GE’s allowed secured claim, $10,258,000, but
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the lien is to secure GE’s allowed claim of $16,453,965.74. If the restructured Note is paid off early,
we question how the lien can continue thereafter to stand for the full $16,453,965.74 since the
obligation underlying the lien, the restructured Note, will have been satisfied. See Chase Manhattan
Mortgage Corp. v. Shapiro (In re Lee), 530 F.3d 458, 472 (6th Cir. 2008) (observing that once the
debt underlying the mortgage is discharged, the creditor no longer holds a perfected lien interest,
even though the mortgage is still of record).
In order to insure that GE will receive payments totaling its allowed claim and that its lien
will remain in place until full payment has been received, it is necessary for the Note to be
restructured in one of two ways. The first is to specifically provide in the Note for payment of the
so-called § 1111(b) premium, as previously discussed. The second is to provide for a Note in the
face amount of the electing creditor’s allowed claim, in this case $16,453,965.74, but with a below-
market rate of interest such that the present value of the Note would still only be the present value
of the collateral, i.e., the $10, 258,000 sum. See 7 Collier on Bankruptcy ¶ 1111.03[6][b].8 In the
instant case, neither of these options nor any other means for ensuring that GE will receive payment
in full of its total allowed claim is provided for in the Plan.9 Without such a provision, the Plan fails
to guarantee that GE will receive the full benefits promised an electing secured creditor under
§ 1111(b)(2). As explained by the court in Weinstein:
8
This very observation was made by the bankruptcy court in a footnote in its memorandum
opinion. As astutely stated therein:
In those instances in which the plan proponent contemplates issuance of a note to the
secured creditor who elected § 1111(b) treatment, in an amount equivalent to the
creditor’s claim, § 1129 may not mandate that the interest rate be based on a market
rate or the formulaic rate espoused by Till. Because application of § 1111(b) requires
that the present value of such a note equal only the value of the creditor’s collateral,
the solution lies in a below-market rate of interest. See Collier ¶ 1111.03[6][b] at p.
1111-37.
(Appellees’ App. at 166.)
9
Remand and subsequent modification of the Plan in accordance with this opinion may not
result in GE ultimately receiving a greater distribution than it would have otherwise under the Plan.
Mr. Newman testified on behalf of the Plan Proponents that it was the intent of the Plan Proponents
that GE would receive payments totaling its allowed claim, regardless of whether GE was paid over
the life of the Plan or cashed out early. Thus, while remand will solidify in writing the benefits GE
will receive as an electing secured creditor, the financial or practical effort of remand may be a
pyrrhic victory.
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The real benefit of the election is that it protects the creditor against a quick sale of
its collateral. The amount of the creditor's secured claim may be determined at a
time when the value of the collateral is temporarily depressed. Without the election,
the debtor could sell the collateral when its value quickly rebounds and net a
considerable gain. By making the election, the creditor guards against such an
opportunistic sale because it retains a lien on the collateral equal to the full amount
of its claim, albeit without interest. If there is a quick sale, the creditor is entitled to
payment on its full claim. Similarly, an electing creditor benefits if there is an
appreciation in the value of the collateral and the debtor defaults on its plan
payments.
In re Weinstein, 227 B.R. at 295 n.12. Based on the foregoing, the bankruptcy court erred in finding
that the Plan is fair and equitable relative to GE’s § 1111(b) election and remand is necessary.
Before leaving this subject we must point out that, contrary to the arguments of GE, the
interest payments made to provide present value of the collateral must be applied to reduce GE’s
total allowed claim. See James A. Pusateri, et al., Section 1111(b) of the Bankruptcy Code: How
Much Does the Debtor Have to Pay and When Should the Creditor Elect?, 58 Am. Bankr. L.J. 129,
136-41 (1984); Klee, 53 Am. Bankr. L.J. at 158. It should be also noted that “the debtor does not
have to pay the entire secured claim in the same manner as if it were fully collateralized. If that were
not so, every holder of an undersecured claim would make the election.” In re S. Mo. Towing Serv.,
Inc., 35 B.R. 313, 314 (Bankr. W.D. Mo. 1983).
This result [applying interest payments to reduce the entire claim] gives effect to the
plain language of § 1129(b)(2)(A)(I) which merely requires that in a cram down, the
creditor making the § 1111(b)(2) election receive a stream of payments equal to its
total claim and with a present value equal to the value of the collateral. Requiring
anything more would be an unwarranted and unsupportable extension of the statutory
requirements of § 1129(b)(2)(A).
In re Weinstein, 227 B.R. at 295 n.13.
V. CONCLUSION
The bankruptcy court’s order is AFFIRMED except as to the finding that the Plan is fair and
equitable in according GE its rights as an electing secured creditor under § 1111(b)(2). In this
respect, the order is VACATED in part and REMANDED for proceedings not inconsistent with this
opinion.
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