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Section 1129 Confirmation of Plan

In re Patriot Place/In re Three Legged Monkey (January 11, 2013)
Issues: Unusual factual setting in which one Chapter 11 Debtor (owner and lessor of shopping center) and a separate Chapter 11 debtor (owner of sports restaurant/bar and lessee in shopping center) litigated numerous issues, including: (1) Whether Debtor-lessee could assume a shopping center lease under §365 with Debtor-lessor in Debtor-lessee’s bankruptcy case; (2) Whether Debtor-lessee could confirm a competing Plan of Reorganization in Debtor-lessor’s bankruptcy case; (3) Whether Debtor-lessor could confirm its Plan of Reorganization in Debtor-lessor’s bankruptcy case that proposed the sale of a shopping center to the City of El Paso under §363(f) free and clear of the leasehold interest of Debtor-lessee. Holdings: (1) Debtor-lessee’s Motion to assume shopping center lease with Debtor-lessor was granted in Debtor-lessee’s bankruptcy case because Debtor-lessee complied with the requirements of §365(b), including: (a) cure of monetary defaults under the shopping center lease; (b) performance of incurable nonmonetary obligations under real property lease at the time of assumption; and (c) providing adequate assurance of future performance; (2) Confirmation of Debtor-lessee’s competing Plan of Reorganization in Debtor-lessor’s bankruptcy case was denied because such competing Plan: (a) was not currently feasible under §1129(a)(11); (b) litigation trust proposed in competing Plan was wasteful, not proposed in good faith, and did not provide adequate means for its implementation under §1129(a)(3), (5); and (c) deemed assumption of Debtor-lessor’s ground lease with the City of El Paso under the competing Plan was procedurally and substantively improper under the circumstances of the case; and (3) Confirmation of Debtor-lessor’s Plan of Reorganization in Debtor-lessor’s bankruptcy case was denied because such Plan: (a) did not satisfy any of the statutory conditions of §363(f) to permit the sale of the shopping center under the Plan free and clear of the leasehold interest of Debtor-lessee; and (b) contained undefined, non-consensual, non-debtor releases and exculpations prohibited by Fifth Circuit precedent.
In re LMR, LLC d/b/a Baymont Inn & Suites (May 24, 2013)
Issues: LMR, LLC (Debtor) owns and operates the Baymont Inn & Suites, a limited service hotel. As a result of decreased revenues due in part to a temporary loss of its initial franchise, and the inability to refinance its secured loan, Debtor filed Chapter 11 bankruptcy to preserve the hotel. During the Chapter 11 case, Debtor’s revenue and profitability increased. The Debtor’s reorganization plan (Plan) proposed to continue hotel operations and pay off unsecured creditors in full with 6% interest over five years through revenues generated by the hotel and restaurant leases on the hotel property. Additionally, the Plan proposed to pay the secured claim of its lender (Lender) over five years with a 25-year amortization at 6% interest with a 5-year maturity. The Plan proposed to pay the unsecured claim of Lender in full over 5 years at 6% interest in equal monthly installments. The Plan also provided for Debtor’s partners to make a cash equity infusion into Debtor at confirmation, which was funded and held in escrow. All creditors voted to accept the Debtor’s Plan, other than the Lender—which voted to reject the Plan and filed objections to the Plan. In general, Lender contended that the Plan did not satisfy the cramdown requirement of Section 1129(b)(2) of the Bankruptcy Code, was not feasible, and was not proposed in good faith. Holdings: The Court confirmed the Debtor’s Plan and denied the objections to confirmation by Lender, based on a substantial evidentiary record and independent statistics that demonstrated an increasing value of the hotel and its revenues and a rising Austin hotel market. (1) The Court determined that current value of the Debtor’s hotel was $3.2 million, and that Lender was owed about $3.8 million as of the filing date. Therefore, the Court held that Lender had an allowed secured claim equal to the value of its collateral (about $3.2 million) and an unsecured claim for about $500,000 (total amount of claim as of filing date minus $95,000 in adequate protection payments minus amount of  secured claim). (2) In determining whether the proposed 6% interest rate was an appropriate cramdown interest rate, the Court examined the recent Fifth Circuit decision in In re Texas Grand Prairie Hotel Reality, L.L.C., which provides guidance on applying the Till formula approach in Chapter 11 cases. After finding no efficient market existed, the Court employed Till’s formula approach by starting with the national prime rate of 3.25% and then added a 2.75% risk adjustment for the secured claim of Lender. The Court noted that the risk adjustment for the secured claim could have been slightly lower given the circumstances, and therefore held that the Debtor’s proposed 6% interest rate on Lender’s secured claim was sufficient under §1129(b)(2)(A)(i)(II). The Court also held that the 6% cram down interest rate was sufficient for the unsecured creditor class (including Lender’s unsecured claim) under §1129(b)(2)(B)(i), based on the facts and circumstances of this particular case, including the increasing value  of the Lender’s collateral (the hotel), a full payout of the unsecured claim in 5 years, and a Plan provision that provided that the Lender’s unsecured claim would continue to be secured by a lien on the hotel.  (3) The Court found that the Plan was feasible, based in part on the competence of its management, the cash equity infusion and support of its partners, the Debtor’s demonstrated and increasing revenues due to a rising Austin hotel market, and the Debtor’s credible Plan projections. (4) Finally, the Court held that Debtor’s Plan did not place undue risk on Lender and that the Plan was proposed in good faith.
In re SCC Kyle Partners, Ltd. (June 14, 2013)
Issues: SCC Kyle Partners, Ltd. (Debtor) entered into a loan with a group of lenders (Lender) to fund the purchase and development of commercial real property located in Kyle, Texas. Debtor purchased the real property with funds from Lender and a cash contribution of about $11 million from its partners. Following the collapse of the commercial real estate market, Lender ceased advancing development and construction funds to Debtor. Without loan funding, Debtor became a seller of tracts of the remaining land with only infrastructure type improvements. Following maturity of the loan, Debtor filed Chapter 11 bankruptcy in a “single asset real estate” (SARE) case. Debtor filed a plan of reorganization with modifications (Plan) which, in general, proposed to (1) sell the remaining property tracts over 5 years; (2) permit Lender to retain its liens on the property, (3) pay Lender in full over 5 years at 4% interest (or an interest rate determined by the Court not to exceed 8%) as property tracts were sold at minimum release prices from the sale proceeds, less closing costs and one year’s operating expenses placed in a rolling reserve account to be held by Lender, and (4) pay interest to Lender on a monthly basis, and pay down principal to Lender as the remaining tracts were sold. Lender voted to reject the Plan. Lender also objected to confirmation of the Plan on numerous grounds (including that the Plan was not fair and equitable, the Plan did not have an impaired accepting class, the Plan violated the terms of a prior Court order which had res judiciata effect, the Plan was not feasible, and the Plan was not proposed in good faith) and moved to lift the automatic stay and dismiss or convert the Debtor’s Chapter 11 case. Debtor moved to “cramdown” Lender under section 1129(b)(2), contending that the Plan satisfied the cramdown standard of section 1129(b)(2)(A)(i), or in the alternative, the “indubitable equivalent” standard of section 1129(b)(2)(A)(iii). Holdings: The Court confirmed the Debtor’s Plan and denied the objections to confirmation by Lender, based largely on a substantial evidentiary record, the significant equity in the remaining property, and the Debtor’s proven track record in selling tracts of the remaining property prior to and during the Chapter 11 case. (1) The Court first determined that Lender was significantly oversecured because the remaining property tracts were valued at about $25 million and Lender was owed a little more than $13 million. (2) The Court then held that Lender would retain their liens on the tracts and would be granted a lien on the reserve account, which satisfied the lien retention requirement of §1129(b)(2)(A)(i)(I). (3) The Court followed the Fifth Circuit’s recent guidance in Texas Grand Prairie, and the Court applied the Till formula approach to cramdown interest rates—which begins with the national prime rate and then makes upward adjustments for various risk factors. After the Court found no efficient market existed for the loan, the Court started with the national prime rate (3.25%) and assessed and made upward adjustments for various risk factors, including that the Debtor had no regular source of income (other than some incentive payments), the Debtor was essentially a land seller, the Plan did not include a timetable by which the Debtor must make principal payments to Creditor (other than by the end of 5 years), and the Plan was predicated on future land sales to pay Lender and property taxes on time. The Court held that Debtor’s Plan could be confirmed, although at an interest rate on Lender’s claim of 7% (a 3.75% risk adjustment based on the facts and circumstances of the case)—which was greater than the 4% interest rate sought by the Debtor. The Court also found that the Plan provided Lender with the “indubitable equivalent” of its secured claim under §1129(b)(2)(A)(iii) as Lender would remain oversecured for the duration of the Plan, its risk would not increase, and 7% interest would adequately compensate the creditor. (4) The Court determined that the Debtor could apply a portion of the sale proceeds from a sale the Court previously approved to pre-pay interest for a limited period of time, as the prior sale Order did not specify how the sales proceeds would be credited and applied by Lender and did not run afoul of res judicata. (5) The Court found that an impaired class (unsecured creditors) had accepted the Plan, because no party had filed an objection to the claim of the Debtor’s largest unsecured creditor (which voted to accept the Plan) as of the plan voting deadline. (6) The Court determined that the Plan was tight but feasible, in part because both experts testified that the remaining property would be sold out within four years, the Debtor had successfully sold several tracts of land within the preceding months and paid down the Lender significantly, and the Debtor’s Plan projections and management were credible. (7) The Court also found that the Plan was proposed in good faith with the legitimate and honest purpose of finishing the sale of the remaining property and paying off Lender in full. (8) The Court also denied Lender’s motion for relief from stay and denied Lender’s motion to dismiss or convert Debtor’s Chapter 11 case.