ROBERT E. NUGENT, Chief Judge.
This single asset real estate case came before the Court on June 29, 2010 for evidentiary hearing on the motion of Textron Financial Corporation for relief from the automatic stay.
Stay relief motions are core proceedings under 28 U.S.C. § 157(b)(2)(G) over which this Court has subject matter jurisdiction pursuant to 28 U.S.C. § 157(b)(1) and § 1334(b).
RIM Development, LLC ("RIM") filed its chapter 11 petition on January 22, 2010. RIM owns and is engaged in developing approximately 500 acres in Ogden, Riley County, Kansas, consisting of both planned residential and commercial development. The Court has discussed the nature of RIM's development at length in previous orders and there is no reason to add to or repeat that discussion here.
The two largest secured creditors are CoreFirst Bank & Trust (CFB) and Textron Financial Corporation (TFC).
TFC filed this motion for relief from stay, its second, on May 4, 2010.
A summary of the historical dealings between RIM and TFC supplies some context for the current posture of this case and the instant motion. RIM borrowed some $10.2 million from TFC through a series of loans evidenced by 9 notes, the first being made February 20, 2008 and the last being made on April 15, 2008. The parties contemplated that this financing would be short term loans with the loan proceeds used to finance construction of the 72 town home units and that RIM would obtain permanent financing when construction was completed. The loans were secured by 11 mortgages on RIM property, including a first mortgage on the 4 acre tract upon which the 72 town homes are situated. The corporate members of RIM and the individual owners of the members also guaranteed the TFC debt. As of the petition date, TFC's claim exceeds $9.4 million.
Under the loan terms and conditions, RIM was prohibited from leasing the 72 units. According to RIM, it has not been able to sell the 72 units because the loan documents also prohibited individual sales of the 72 units and difficult investor credit markets and the worsening economy hindered RIM's ability to sell the town homes as a unit. Nonetheless, RIM contends that it was able to timely make its interest payments to TFC. When it became difficult to maintain cash flow RIM began to lease the 72 units in March of 2008. The parties dispute when TFC learned of RIM's leasing of the 72 units.
Beginning on May 16, 2008, RIM and TFC entered into a series of four forbearance agreements.
On September 9, 2009, TFC filed its foreclosure action in Riley County District Court. KDOT filed an eminent domain petition on November 6, 2009 in Riley County District Court, seeking to acquire rights-of-way and flowage easements in conjunction with the K-18 Highway interchange project. The district court granted the condemnation petition on December 3, 2009, leaving the amount of damages for the "taking" to be determined. On January 22, 2010, prior to the appraisers' award in the condemnation case, RIM filed its chapter 11 petition as a single asset real estate case. Three days later, RIM amended its petition to change the case from single asset real estate. On February 8, TFC filed a motion to determine single asset real estate status
The debtor has filed three sets of plans and disclosure statements, including the current one filed after the hearing on this motion. As of the June 29 hearing, RIM had filed two plans and disclosure statements, the first dated April 23, 2010
At the evidentiary hearing, RIM introduced Exhibit 8—an unfiled draft second amended disclosure statement (no plan).
While the sale process went forward, TFC was to receive interest-only payments at a reduced rate of 4.75 percent as opposed to its 12 percent contract default rate.
The draft disclosure statement referenced a liquidation analysis but did not contain one per se. The Court questions whether the debtor can effectively prepare such a document without taking a concrete position on the relative priority of the secured creditors' interests.
The draft disclosure statement also contemplates that the three members of the debtor LLC will retain their interests in the debtor in exchange for a $5,000 "substantial contribution" to be made by each member. This contribution would be effected by reducing each member's annual draw of $72,000 from the debtor by $1,000 for five years. The projections attached to the draft indicate that the members will takeout around $480,000 during the reorganization period before TFC or the other secured creditors receive full payment.
The sale-ability of the 72 town home units to owner-occupants is questionable. The debtor's representatives and their real estate broker, Sterling Scott, testified that the USDA's low-interest rural housing loan programs would enable tenants to reduce their housing costs by purchasing, as opposed to renting, their town homes. Scott acknowledged that selling the 72 town homes to an investor group would be difficult given the credit and capital markets, but he opined that the units could be sold individually because guarantied financing is available. Scott had not yet listed any of the town homes but suggested a listing price in the range of $125,000-$155,000 was attainable. Nevertheless, the Court questions the debtor's projection that, even though there will be few or no sales in the first two years, the town homes' value will increase by five percent per year and that all will be sold in the latter four years of the plan.
Marty Fortney testified that he purchased 24 town home lots from RIM in 2007, built his own town homes and sold 8 of them (with a sales price in the range of $155,0004180,000) to investors as opposed to occupant end-users. His last sale of a town home occurred in early 2009. Of the 16 town homes that he still owns, all are leased. Cutting against the idea that these town homes will be attractive to end-user
There was also disputed evidence that suggests on one hand that two brigades of troops may be deployed from Fort Riley in 2011, reducing the housing demand and number of service personnel available to rent or purchase these homes. At the same time, RIM contends that as a brigade is deployed, a deployed brigade returns to Fort Riley.
TFC's appraiser, Larry Witt, contended that RIM's sales projections were too aggressive and unrealistic and did not adequately account for the construction interruption on the K-18 interchange project. Mr. Witt testified that KDOT's engineer estimated a completion date of December 2012, compared to Mr. Scott's projection of February 2011. As acknowledged by Mr. Scott, there is some credence to Witt's concern regarding the marketability of the RIM property until the K-18 construction project is completed and good access to commercial properties exists. Witt also indicated that the annual 5 per cent sales price increase of the 72 units is unwarranted, suggesting that such a price increase assumes the units are new or like new when in fact they are not and sales of the 72 units would be deferred the first 2 years of the plan and continue to be rented.
The Court's conclusion is that the sale of these units to owner-occupants is, as RIM projects, unlikely to occur in a short time. These units are more suitable for purchase by investors, but, as noted by the witnesses, the credit environment makes such purchases very speculative in the near term particularly given the continuation of road construction in the area that will tamp down commercial and multi-family development.
After the June 29 evidentiary hearing, RIM filed its second amended plan and disclosure statement dated July 1, 2010.
In the current plan, the debtor has changed its approach to the sale of the non-town home property. After the first year, the debtor projects sales income that includes $1.5 million from non-town home property sales to be paid to the secured creditors. Textron, by far the largest creditor, will receive very little payment until the third year (when town home sales accelerate). Under the plan, the debtor proposes that CFB receive two-thirds of all non-town home proceeds until its claims
Since the June 29, 2010 hearing on this motion, the debtor has sought the extension of the stay to the principals of RIM under § 105(a) by motion and by the filing of an adversary proceeding for injunctive relief on August 2, 2010. In addition, TFC has sought to terminate RIM's use of its cash collateral and RIM has sought leave to use eminent domain proceeds to pay its professionals. Those matters are set for later hearing.
Section 362(d)(3) provides that as to single asset debtors, the stay terminates 90 days after the latter of the petition date or the date the Court determines that the debtor is a single-asset debtor unless one of two conditions is met. The stay may continue in effect if the debtor has filed a plan "that has a reasonable possibility of being confirmed in a reasonable time" or if the debtor has commenced monthly payments equal to interest at the applicable non-default contract interest rate on the value of the debtor's real estate. RIM has not commenced interest payments that would meet the requirements of § 362(d)(3)(B). Therefore, in order for the stay to remain in force, the debtor was required to demonstrate that its plan has a reasonable possibility of being confirmed in a reasonable time. This is a broad standard that requires the court to consider how the current plan stacks up against the confirmation requirements in § 1129. The debtor is not obliged to prove it will confirm the plan it has filed; instead the test is whether the plan is confirmable. The debtor has the burden to demonstrate this by a preponderance of the evidence.
The precursor of § 362(d)(3)'s language is found in the Supreme Court's 1988 Timbers case in which the court held that in order to defeat a stay relief motion predicated on the debtor's property not being necessary to an effective reorganization under § 362(d)(2)(B), the debtor had to demonstrate that there "must be `a reasonable possibility of a successful reorganization within a reasonable time.'"
To determine whether this plan has a reasonable possibility of being confirmed, the Court looks to § 1129(a) which lists sixteen requirements to be met. If all of these requirements except the unanimous acceptance of the plan by all the classes of claims or interests referenced in § 1129(a)(8) are met, the debtor may seek to cram down the plan by demonstrating that it is "fair and equitable" as that term is defined in § 1129(b).
Even under the lighter scrutiny that is to applied in determining "reasonable possibility," this plan does not realistically appear to meet several of the requirements in § 1129(a). The first one is § 1129(a)(3), that the plan has been proposed in good faith. Both the debtor's pre-petition and post-petition conduct have suggested a "merry chase." The shifting approaches and positions of the debtor pre-petition have been detailed at length in the facts section above. The plan currently being balloted is the third one filed. Each plan has successively diminished the treatment provided to TFC. Initially, the debtor proposed to refinance $7.0 million of TFC's debt while permitting the debtor to use the rents as part of its operating revenue and repay the remainder of TFC's claim over time. RIM was to continue developing its assets and selling real estate, rock, and dirt while servicing debt with the proceeds of the eminent domain award. RIM's first amended plan abandoned the refinancing proposal, instead offering to surrender the town homes that the Court has valued at $7.1 million to TFC and pay an additional $900,000 of the eminent domain award to TFC in full satisfaction of its $9.4 million dollar oversecured claim. The current plan contemplates the debtor retaining the town homes, collecting the rents, and marketing the homes while paying TFC a discounted interest rate on its oversecured claim. Each of these treatments would be patently unconfirmable in the face of TFC's persistent objections. Nevertheless, RIM has garnered four additional months of bankruptcy protection without paying full contract interest as required by § 362(d)(3)(B). At the same time, the Court has had to resolve fairly straightforward cash collateral and adequate protection issues like the payment of insurance on the property by RIM. RIM's three principals continue to receive substantial money ($6,000/month each) for their services. RIM's ever-changing approach to this reorganization hints at the obfuscation of the creditors' reasonable efforts to protect their interests in the hope that something good will happen.
Section 1129(a)(11) requires that the plan be feasible.
Even if RIM were to satisfy the Court at confirmation that its motives are pure and that all other requirements of § 1129(a) can be met, in the absence of TFC's consent, § 1129(a)(8) requires that each class of debt or interest either accept the plan or be unimpaired. If TFC were to reject the plan and all of the other requirements of § 1129(a) were met, the debtor could seek to cram down its treatment of TFC under § 1129(b)(1) and (2). This would require a showing that the plan is fair and equitable. Section 1129(b)(2)(A) sets out three permissible alternative treatments of allowed secured claims. Section 1129(b)(2)(B) sets out the parameters for dealing with interest-holders and defines the absolute priority rule. Applying these provisions to the debtor's plan casts considerable doubt on the possibility of its confirmation because TFC's claim cannot be crammed down as RIM proposes.
Section 1129(b)(2)(A)(i) treatment requires that the creditor retain its lien securing the claim and that the creditor receive on account of its claim a series of deferred cash payments that have a present value as of the effective date of the plan equal to the value of its security. In this case, that would mean that TFC would be entitled to receive a series of payments that equal at least $9.4 million, the amount of TFC's pre-petition claim, plus any contract interest that has accrued since the petition date, but net of any adequate protection that TFC has received and applied. The Court found TFC to be oversecured in its prior order of April 21, 2010. The debtor's plan instead provides for TFC to receive interest only at the rate of 4.75 percent, unless and until the town homes begin to sell. When that occurs, TFC would receive all of the proceeds. The debtor projects minimal sales in the first year. Meanwhile, the eminent domain award as well as the sale proceeds of the other real estate in which TFC claims a lien will be distributed to creditors who may hold lesser priority in it. This proposed treatment is unlikely to satisfy the payment option in § 1129(b)(2)(A)(i).
Section 1129(b)(2)(A)(iii) allows plan proponents to provide secured creditors an indubitable equivalent. In other words, through a combination of the approaches outlined in the prior two subsections or by fashioning some other treatment, the plan must provide a secured creditor what it had in the first place. The concept of "indubitable equivalent" may be traced back to the decision of Judge Learned Hand in In re Murel Holding Corp.
The Tenth Circuit Bankruptcy Appellate Panel has stated that "[e]vidence of the requisite indubitable equivalent is present if, under the treatment proposed in the Plan, there is no reasonable doubt that [the lender] will receive the full value of what it bargained for when it made its contract with Debtor."
To be "fair and equitable," a plan must also provide that the interest holders, here the three member companies of RIM, receive nothing unless the unsecured creditors are paid in full or agree to less favorable
At day's end, even under the lighter scrutiny to be applied in deciding a motion under § 362(d)(3), the Court cannot conclude that RIM's plan has a reasonable possibility of being confirmed within a reasonable time over the persistent objections of TFC. The Court has attempted to extend some benefit of the doubt here, but cannot see how this debtor will be able to fulfill the statutory requirements of § 1129. This renders the plan patently unconfirmable and requires the Court to modify the stay in these circumstances. The Court grants TFC relief from the automatic stay and leave to proceed with the realization of its contractual rights and claims in any appropriate forum, provided, however, that so long as the debtor remains in bankruptcy before this Court, TFC be required to report to the Court and all other parties concerning any relief it secures in another forum and any surplus it receives upon commencement and completion of any foreclosure or other collection proceeding. TFC's Motion is GRANTED.
