ANN M. NEVINS, Bankruptcy Judge.
What is the value of the debtor's real property? The answer — and the key to the resolution of this three-year old chapter 11 case — is unknown with estimates varying between $14,240,000 and $4,360,000. When, as here, a plan is proposed that will divest an unwilling debtor of its ownership without an auction the bankruptcy court is required to value a chapter 11 estate's property to determine compliance with 11 U.S.C. § 1129(b)(1).
Any judicial determination of fair market value of real estate is, at most, a fixing of a hypothetical price "at which [the real estate] would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." World Trade Center Props. LLC v. American Airlines, Inc. (In re September 11 Litig.), 802 F.3d 314, 335 (2d Cir. 2015) (citing United States v. Cartwright, 411 U.S. 546 (1973)). In light of the recognized subjectivity inherent in evaluating real estate, "courts have wide latitude in determining value." In re Barbieri, 2009 WL 5216963, Docket No. 00-22274-478, 2009 Bankr. LEXIS 4095, at *29 (Bankr. E.D.N.Y. Dec. 29, 2009). "The Court is not bound by the experts' appraisals and may form its own opinion of a property's value." Menorah Congregation & Religious Ctr. v. Feldman (In re Menorah Congregation & Religious Ctr.), 554 B.R. 675, 692 (Bankr. S.D.N.Y. 2016).
Here, a creditor proposes to take title to the debtor's real property and certain other assets constituting its collateral in satisfaction of the debtor's obligation on multiple notes and mortgages. Having presented evidence that the real property is worth far less than its debt to support its claim that its plan is fair and equitable pursuant to 11 U.S.C. § 1129(b)(1), the creditor awaits the court's ruling on confirmation of its chapter 11 plan. The debtor, in a change in strategy and somewhat late in the case, now presents two offers to purchase the property for a sum that would render the estate solvent leaving a surplus for equity.
In the interim between the creditor's proposal of the chapter 11 plan and the debtor's proposed sales, much has happened, including the mid-stream disbarment of debtor's counsel and the debtor's recent receipt of fire insurance proceeds totaling $3,000,000. See, ECF No. 881.
For the reasons that follow, the court will confirm the plan with the condition that the debtor first be provided a period of time to sell the real property pursuant to further order of the court.
The debtor here, Eternal Enterprise, LLC ("EE"), filed a voluntary chapter 11 bankruptcy proceeding in early 2014 with Peter Ressler representing the debtor as bankruptcy counsel. Mr. Ressler resigned from the state and federal bars without leave to reapply in March 2016. The debtor obtained the present chapter 11 counsel in April 2016. Additional, relevant procedural history is detailed in ECF No. 881, and was discussed with counsel for the debtor EE and with counsel for the largest creditor participating in the administration of this case, Hartford Holdings, LLC ("HH"), during a hearing held on February 15, 2017. Both counsel indicated substantial agreement with the procedural history recited in ECF No. 881. The court notes that no committee of unsecured creditors was appointed in this case; the secured creditor's claim is estimated at approximately $9,569,593.70
Presently pending before the court are three matters that are addressed in this Memorandum and Ruling: (1) HH's Second Modified Fifth Amended Chapter 11 Plan, ECF No. 709 (the "Plan"); (2) EE's objection to HH's proofs of claim, ECF No. 966
According to the debtor EE, its Real Property
If the Real Property is not sold through a § 363 sale, and HH's Plan is considered, there is vastly differing valuation information before the court. EE argued during a Confirmation Hearing (defined below) in early 2016 that the value of its real property was $9,800,000. On April 7, 2017, at the request of EE, the court approved a revised valuation of $6,681,040 for the Real Property with the City of Hartford for the 2015 Grand List (which EE argues is based on a 2011 City of Hartford revaluation). ECF No. 984. According to the City of Hartford's revaluation appraisals for its October 2016 Grand List, the Real Property is worth $8,872,500. And, according to HH's evidence presented during the Confirmation Hearing (defined below), the Real Property is worth a mere $4,360,000.
A fully contested, evidentiary confirmation hearing — in effect a trial on the value of the EE Property — was held over three days in January and February 2016 (the "Confirmation Hearing"). Peter Ressler represented the debtor EE during the Confirmation Hearing. For many reasons, the ruling on the Plan has been delayed and familiarity is assumed with the procedural and factual history of this chapter 11 case as set forth in the court's Scheduling Order, ECF No. 881.
During the Confirmation Hearing, both EE and HH presented evidence of the fair market values of the Real Property. HH met its burden to establish that the Plan was fair and equitable under §1129(b)(1) by presenting testimony from Norman Benedict,
In response, EE offered the testimony of Michael McDonald, PhD, an assistant professor of finance but Mr. McDonald's testimony failed to establish that the value of the Real Property would be sufficient to pay all allowed claims and leave a surplus for equity. Michael McDonald testified, as an expert in finance and business valuation, that it was his opinion that the Real Property should be valued, in the aggregate, closer to $9,800,000.00. ECF No. 348 at 01:01:40-01:02:30. Mr. McDonald's valuation approach did not follow well-established practices for valuing real estate when considering a chapter 11 plan and the court gives little weight to his opinion for this reason.
The debtor's two recent fires — one at 270 Laurel Street and one at 21 Evergreen Avenue — occurred after the Confirmation Hearing and so neither Mr. Benedict nor Mr. McDonald took the effect of the fires into account.
The court notes that in late 2015, represented by former attorney Peter Ressler, EE proposed a plan that was not confirmable because no impaired class voted in favor of the plan. See, 11 U.S.C. § 1129(a)(10); ECF Nos. 343; 344. Since April 2016, when debtor's present counsel first sought admission to represent EE, the debtor has failed to file a plan of reorganization and disclosure statement meeting the requirements of the Bankruptcy Code and Federal Rules of Procedure.
Instead of pursuing reorganization through a chapter 11 plan the debtor EE recently filed the 363 Motion seeking authority to sell portions of the debtor's Real Property to two different buyers as follows:
Neither Offer One or Offer Two is without contingencies. It is presently unknown whether the proposed transactions, or any higher competing bid, if approved by the court after notice and a hearing, will close.
The Second Circuit has noted that, "[c]onfirmation of a plan over the vote of a dissenting class requires that the plan be `fair and equitable, with respect to each class of claims or interest that is impaired under, and has not accepted, the plan.' 11 U.S.C. § 1129(b)(1)." Ahuja v. LightSquared Inc., 644 F. App'x 24, 29 (2d Cir. 2016), cert. denied sub nom. Sanjiv Ahuja v. LightSquared Inc., 137 S.Ct. 335, 196 L. Ed. 2d 262 (2016). The fair and equitable requirement "protects the Equity as a dissenting class. It's undisputed that the `fair and equitable' requirement encompasses a rule that a senior class cannot receive more than full compensation for its claims. Courts will deny confirmation if a plan undervalues a debtor and therefore would have resulted in paying senior creditors more than full compensation for their allowed claims." In re Chemtura Corp., 439 B.R. 561, 592 (Bankr. S.D.N.Y. 2010); see also LightSquared Inc. at 29 (concluding that bankruptcy court had properly valued the debtor, therefore senior creditors had not been overpaid). "The reason for this rule is obvious, and goes back to the basic understanding between debt and equity. Holders of debt traditionally contract for repayment of principal and interest, but no more; after that, the residual goes to equity. ... This component of the fair and equitable rule will require valuation of the debtor in every case in which the plan proposes to eliminate equity or any junior class of creditors. Eliminated classes may then insist on compliance with the fair and equitable requirement, which will necessitate an evidentiary showing that there is insufficient reorganization value for the eliminated class after payment to the senior classes." Collier on Bankruptcy, ¶ 1129.03 (16
To credit EE's estimate of value of approximately $14,240,000 in considering the application of 11 U.S.C. § 1129(b) to HH's Plan, the court must consider whether the purchase prices proposed in Offer One and Offer Two are indicative of an accurate value of the real estate. If the Offers are never consummated, the proposed purchase prices are irrelevant. The court recognizes that "[v]aluation outside the actual market place is inherently inexact." Wright v. Chase (In re Wright), 460 B.R. 581, 584 (Bankr. E.D.N.Y. 2011)(citing Rushton v. Commissioner, 498 F.2d 88, 95 (5th Cir. 1974)).
The parties are in rare agreement, through counsel, that a reasonable course in this unusual case would be to provide a limited period of time for EE to seek court approval for the 363 Motion and then to attempt to consummate sales of all of the Property, followed by immediate consummation of HH's Plan if the sales effort is unsuccessful.
The court notes that this is a single asset real estate case as defined in 11 U.S.C. § 101. Pursuant to 11 U.S.C. § 362(d)(3), a single asset real estate debtor must file a plan that has a reasonable possibility of being confirmed within a reasonable time, or commence monthly adequate protection payments, within thirty (30) days after the petition date. If it does not, the court must grant relief from stay if requested by a secured creditor. The debtor commenced monthly adequate protection payments during the case, but the payments substantially ceased in July 2016 following the fire at 270 Laurel Street. The necessity of resolving single asset real estate cases in chapter 11 with celerity, embodied by Congress's enactment of § 362(d)(3) in 2005, provides further justification for the court's decision to proceed with the case on dual tracks thereby ensuring that either a § 363 sale or confirmation of the Plan occurs on or before July 31, 2017.
The court must value the Real Property in case there is no sale that can be consummated. After carefully considering the sources of valuation information before it, including the Norman Benedict appraisals and testimony, testimony from Michael McDonald, municipal tax assessor valuations and the $3,000,000 fire insurance proceeds relating to the 270 Laurel Street property, the court finds that the municipal tax assessor valuations from the City of Hartford's 2016 revaluation are the most probative.
With regard to the evidence and testimony submitted during the Confirmation Hearing more than a year ago, the court finds that Norman Benedict and his appraisal reports provide a more credible estimation of fair market value based upon recognized valuation methodologies than the evidence and testimony provided by Michael McDonald. See, See Collier on Bankruptcy ¶ 1129.05[3][a][v]. However, the court notes that recent events including Offer Two and the City of Hartford's 2016 property revaluation appraisals indicated the weight to be given to Norman Benedict's appraised values must be tempered by subsequent events. For example, Offer Two proposes to purchase two properties — 270 Laurel Street and 360 Laurel Street — for $2,000,000 in as is condition, leaving the debtor EE with $3,000,000 of insurance proceeds, for a total value of $5,000,000 to EE, subject to HH's liens. According to Norman Benedict's appraisals, the value of these two buildings is just $1,200,000; according to the City of Hartford's 2016 appraisals the value is $2,530,000.
The court has also considered matters of public record regarding EE's Real Property. The State of Connecticut provides guidelines for periodic revaluation of real property in a municipality in its general statutes, including Gen. Stat. § 12-63b(a). Regarding income producing property similar to EE's Real Property, section 12-63b(a) provides that, "[t]he [tax] assessor or board of assessors in any town, at any time, when determining the present true and actual value of real property as provided in section 12-63, which property is used primarily for the purpose of producing rental income . . . shall determine such value on the basis of an appraisal which shall include to the extent applicable with respect to such property, consideration of each of the following methods of appraisal: (1) Replacement cost less depreciation, plus the market value of the land, (2) capitalization of net income based on market rent for similar property, and (3) a sales comparison approach based on current bona fide sales of comparable property." Conn. Gen. Stat. § 12-63b(a). This three-pronged approach to valuation is identical to the generally accepted analysis for valuation of rental-producing real estate in the context of chapter 11 plans of reorganization. See Collier on Bankruptcy ¶ 1129.05[3][a][v]. Moreover, the City of Hartford assessor undertook a city-wide revaluation within the past 12 months that was not performed in anticipation of litigation between the two parties here.
After careful consideration the court adopts the City of Hartford's 2016 valuation appraisals as the fair market value of the Real Property for purposes of confirmation of HH's Plan with the following values for each of the properties:
Neither the evidence presented during the Confirmation Hearing nor the City of Hartford's 2016 valuation appraisals adopted as the fair market value by the court demonstrates with requisite certainty that there is enough value in the Real Property to provide a recovery to EE's equity holder. This is because even assuming the Real Property could be sold for the highest of the values before the court — EE's $9,800,000 estimate of value during the Confirmation Hearing — this sum would be insufficient to pay HH's claims totaling approximately $9,569,593.70, plus a capital gains tax
The potential for greater recovery embodied by the Offers, however, requires the delayed confirmation of HH's Plan.
Before the court may approve a sale of the Real Property pursuant to 11 U.S.C. § 363 rather than through a chapter 11 plan with the substantive and procedural due process protections inherent in that process, the sale proponent must demonstrate that all costs of sale, as well as allowed administrative claims, secured claims and unsecured claims will be paid at least as much as they would be paid under a chapter 11 plan. Pursuant to the Second Circuit's seminal Lionel decision, "a debtor applying under § 363(b) carries the burden of demonstrating that a use, sale or lease out of the ordinary course of business will aid the debtor's reorganization, [while] an objectant . . . is required to produce some evidence respecting its objections." In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983). A bankruptcy judge considering a sale under § 363 must consider "all salient factors pertaining to the proceeding and, accordingly, act to further the diverse interests of the debtor, creditors and equity holders, alike." Id.
More recently, the Second Circuit has articulated its "concern . . . that a quick, plenary sale of assets outside the ordinary course of business risked circumventing key features of the Chapter 11 process, which afford debt and equity holders the opportunity to vote on a proposed plan of reorganization after receiving meaningful information. ... Pushed by a bullying [party in interest], a § 363(b) sale might evade such requirements as disclosure, solicitation, acceptance, and confirmation of a plan." In re Chrysler LLC, 576 F.3d 108, 114 (2d Cir. 2009), cert. granted, judgment vacated as moot sub nom. Indiana State Police Pension Trust v. Chrysler LLC, 558 U.S. 1087, 130 S.Ct. 1015, 175 L. Ed. 2d 614 (2009). In its recent decision in Czyzewski v. Jevic Holding Corp., the United States Supreme Court compared the structured dismissal it disapproved with "transactions that lower courts have refused to allow on the ground that they circumvent the Code's procedural safeguards" citing, among others, the Lionel decision. Czyzewski v. Jevic Holding Corp., ___ U.S. ___, 137 S.Ct. 973, 986, 63 Bankr.Ct.Dec. 242 (2017).
In this case, among the salient factors the bankruptcy court must consider are the fact that HH's Plan proposes to pay all allowed claims but takes away equity's potential recovery, the proposed Offers One and Two, and the possibility that the proposed Offers may not close even if approved by the court. The court must also consider that the § 363 sale proponent must demonstrate that a sale will pay the costs and expenses of the sale, including the secured claims of HH, the cost of a realtor commission, a capital gains tax, and other administrative and pre-petition claims as summarized in the table below, at a minimum.
Even if the court adopts the EE evidence of a $9,800,000 value submitted during the Confirmation Hearing and adds the $3,000,000 in cash from the fire insurance proceeds, the estimate of value does not provide the requisite certainty that all claims would be paid and a surplus would then be available for the the equity holder Vera Mladen. Among other considerations, the property at 270 Laurel Street sustained substantial fire damage after Mr. McDonald's testimony and that certainly would have impacted his estimate of $9,800,000. The court therefore concludes that the value of the property that would be transferred to HH under its Plan is not worth more than the sum of the items summarized in the table above.
Because the court believes the most efficient and fair resolution under the circumstances here is to provide the debtor, EE, with the opportunity to satisfy the Lionel criteria and to sell the Real Property — if it can — to the highest bidder, the court will confirm HH's Second Modified Fifth Amended Chapter 11 Plan (the "Plan"), ECF No. 709, with a stay of the implementation of the confirmation order (which will enter separately) that will automatically terminate not later than July 31, 2017. During the interim period of time, the debtor EE will have an opportunity to sell its Real Property pursuant to 11 U.S.C. §§ 363(b) and (f).
If EE is unable to obtain an order authorizing a sale of the Real Property pursuant to 11 U.S.C. §§ 363(b) and 363(f) on or before July 14, 2017, or if an approved buyer(s) is unable to consummate a purchase on or before July 28, 2017, then the stay of the confirmation order will terminate. To monitor the progress of any potential sale process, the court will hold hearings on July 14, 2017, and July 28, 2017, at 10:00 a.m. If it is demonstrated that there is cause to terminate the stay of the confirmation order during either of those hearings, the court will immediately do so.
If only one of either the Offer One Property or the Offer Two Property is sold pursuant to a possible, future court order, then the court shall schedule a status conference to address whether all or any portion of the HH Plan should proceed to be implemented.
Other than the question of value of EE's Real Property, the court finds and concludes that HH's Plan satisfies the requirements of 11 U.S.C. §§ 1129(a) and (b) based on the record of the Confirmation Hearing and the record of the case since that time. If the debtor is unable to sell the Real Property on or before July 28, 2017 — a date that is more than the 90 days requested by debtor's counsel during the hearing on April 5, 2017 — the record will support a conclusion that HH's Plan is not unfair or inequitable.
ACCORDINGLY, it is hereby
ORDERED, that the Second Modified Fifth Amended Plan, ECF No. 709, of Hartford Holdings, LLC shall be confirmed (and a separate order shall enter); and it is further
ORDERED, that the confirmation order shall be stayed pursuant to the terms and conditions set forth in this Memorandum and Ruling, subject to further order of this court, or until July 31, 2017; and it is further
ORDERED, that a scheduling conference to address the 363 Motion and the debtor's objection to HH's claims shall be held on Monday, April 17, 2017, at 4:00 p.m. (unless otherwise ordered due to counsel's schedules, if necessary); and it is further
ORDERED, that further hearings consistent with this Memorandum and Ruling shall be held on July 14, 2017 at 10:00 a.m. and on July 28, 2017 at 10:00 a.m.
