K. Rodney May, United States Bankruptcy Judge.
The Court has before it contested matters in five bankruptcy cases, including: (1) the contested confirmation of the Joint Plan filed by Resorts Management, Inc. ("RMI"), Colony Beach and Tennis Club, Inc. ("CBTC"), and Colony Beach, Inc. ("CBI");
For more than 30 years, the 18-acre Colony Beach & Tennis Club Resort on Longboat Key was a world famous destination for Gulf Coast and tennis vacations. In the last ten years, however, its physical condition has deteriorated, while disputes among its divided owners led to its closing in 2010.
Ordinarily, debtors like RMI, CBTC and CBI would find it impossible to survive in a Chapter 11, much less achieve confirmation of a Chapter 11 plan. They have no active businesses, no income, no employees, and no equity in the real property they own — an undivided 80% interest (CBTC, 45%; CBI, 35%) as tenants-in-common in the 3-acre "Rec. Lease Property" (as described below). Their Joint Plan is not supported by the principal secured creditor, Colony Lender, which is owed nearly $14 million. The Joint Plan is premised on either a third-party purchaser coming forward or funding over five years by the Association, which must obtain a 75% Unit Owners' vote to authorize special assessments.
The three Chapter 11 debtors, however, are at the center of a struggle for control of the 18-acre Resort property. Fifteen acres are controlled, for the time being, by the Unit Owners and the Association. Colony Lender owns outright a 15% undivided interest in the Rec. Lease Property and is pushing to acquire the debtors' 80% interest through a foreclosure sale.
The Joint Plan proposed by debtors RMI, CBTC and CBI is dependent on approval of the Settlement Agreement. Together, the Joint Plan and the Settlement Agreement would: cause debtors CBTC and CBI to convey to the Association their respective 45% and 35% undivided interests in the "Rec. Lease Property," on which interests Colony Lender holds a mortgage, and compel Colony Lender to transfer its own 15% undivided interest in the Rec. Lease Property to the Association; resolve pending disputes among the Association and the Partnership, RMI, CBTC and CBI, and Dr. Klauber and Ms. Moulton; and obligate the Association to pay about $5.3 million to the Partnership trustee, the Chapter 11 debtors and Dr. Klauber; and obligate the Association to propose a Plan of Termination of the condominium, including a judicial valuation of the entire 18 acres, and then pay (or cause a designated third party to pay) Colony Lender and the other co-owners amounts equal to their proportionate interests in the Rec. Lease Property.
If Colony Lender can acquire 100% of the Rec. Lease Property, it can assert, or threaten to assert, rent collection claims, under Article 4.4 of the Declaration to achieve ownership of the Unit Owners' interests in the other 15 acres.
Confirmation of the Joint Plan and approval of the Settlement Agreement are opposed by Colony Lender and the Field Trust. For the reasons set forth below, the Court will deny confirmation of the Joint Plan, deny approval of the Settlement Agreement and grant partial summary judgment in AP 196 in favor of the Association and Colony Lender.
The Colony Resort was formed in 1973 on 18 acres on the Gulf of Mexico in the Town of Longboat Key. The land was acquired from Mr. and Mrs. Field who had owned the land since 1952. Dr. Klauber formed the Partnership to operate the Resort, with debtor RMI as its general partner.
About 15 acres were put into a condominium, consisting of 232 guest units, 7 accessory units (Units "A"-"G") and common area. The Resort was capitalized by the sale of the guest units to the public. The Unit Owners hold legal title to their units, but they were required to contribute them to the Resort for 11 months a year; in return, they were entitled to one month's free use of their unit, subject to reservation policies. The Unit Owners are members of the Association. Approximately 59 of the guest units are now owned by the Association's past president, Mr. Andy Adams and members of his family.
The remaining 3 acres of the Resort — a swimming pool, 12 tennis courts, and certain ancillary buildings — were kept out of the condominium. This property, together with the "spa" and "clubhouse" units within the condominium, were leased to the Association for 99 years and are known collectively as the "Rec. Lease Property."
The divided ownership of the entire 18 acres can be summarized as follows:
Beginning in 2005, the Partnership sought to finance a major restoration of the Resort by having the Association specially assess Unit Owners in excess of $12 million. The Unit Owners rejected that proposal, twice. In May 2007, the Partnership sued the Association in state court for damages and requested injunctive relief to compel the special assessment. In response, the Association filed a Chapter 11 petition on October 29, 2008, and then removed to this Court the Partnership's lawsuit, which became an adversary proceeding
On July 27, 2011, the District Court reversed and remanded AP 567 with instructions. On October 24, 2012, this Court submitted its Report and Recommendation to the District Court that a judgment in favor of the Partnership be entered against the Association in the amount of $23,146,503.25.
When the Colony Resort was formed, the Association was required to enter into a 99-year lease (the "Rec. Lease") of the Rec. Lease Property. The Association rejected the Rec. Lease in its Chapter 11 case, effective November 10, 2008.
The Association objected to the four Rejection Damages Claims and filed a lawsuit for a declaratory judgment that the Lease was unconscionable and unenforceable. That lawsuit was removed to this Court and became an adversary proceeding ("AP 568").
By orders dated September 25, 2009 and October 26, 2009, this Court confirmed the Association's Chapter 11 plan, which requires the Association to pay allowed claims of the Partnership, CBTC, CBI, RMI, the Lessors, and Dr. Klauber, in quarterly installments over 5 years, with 6% interest, after exhaustion of all of the Association's appeal rights in AP 567 and AP 568.
On November 12, 2009, this Court entered an order denying the Partnership's administrative expense claim for $261,459 in the Association's case.
On October 5, 2009, the Partnership filed its own Chapter 11 petition after having closed the Resort on September 23, 2009.
The Association and Unit Owners have filed claims in the Chapter 7 case for damages totaling more than $15 million. Other general unsecured claims total about $1.25 million.
In March 2010, Colony Lender paid $4.5 million, through an affiliate, to Bank of America to acquire outstanding loans to (and claims against) CBTC, CBI, the Partnership and other Klauber entities.
As a result, Colony Lender acquired Bank of America's mortgage on the 80% undivided interests of CBTC and CBI in the Rec. Lease Property. In March, 2010, Colony Lender filed an amendment to Bank of America's October 13, 2005 financing statement, but did not continue the financing statement beyond its original five-year effectiveness.
In 2011, Colony Lender acquired an undivided 15% interest in the Rec. Lease Property from the Field Trust; the Field Trust, retained, however, its proof of claim for lease rejection damages (Claim No. 20) in the Association's Chapter 11 case. Mrs. Field has declined to join the Settlement Agreement. Mrs. Field became a shareholder of Colony Lender in 2011 and is aligned with Colony Lender in all of the matters before the Court.
Colony Lender's stated purpose in 2010 was to partner with a hedge fund, York Capital, to acquire and redevelop the Resort. That effort ended in April or May of 2010 when York Capital withdrew from further discussions with the Association.
Colony Lender also succeeded to the pending state court foreclosure action that Bank of America had previously filed in
Colony Lender is a secured creditor in the CBTC and CBI cases by reason of its mortgage lien on their interests in the Rec. Lease Property. Colony Lender's appraisal, dated July 22, 2013, concludes that the 80% interests in the Rec Lease Property are worth $10,630,000 on an "as is" basis.
In recent years, the fractional interests in the Rec. Lease Property have themselves been traded. Colony Lender bought the Field Trust's 15% interest in 2011 for $766,350 ($51,090 per each 1%). BreakPointe acquired its 5% interest from the Merrill Trust for $350,000 ($70,000 per each 1%). These sales would suggest a value of the debtors' combined 80% interest at between $4.1 million and $5.6 million. By any of these measures, it is evident that CBTC and CBI have no equity in the Rec. Lease Property.
Colony Lender has frequently referred to the leverage inherent to owning the Rec. Lease Property, specifically a possible claim under Article 4.4 of the Declaration of Condominium against the Unit Owners for Rec. Lease rents. The issue of whether individual Unit Owners remain liable, or whether their units are subject to liens, is not before the Court.
CBI, CBTC and RMI (collectively, the "Klauber Entities") filed their petitions for relief under Chapter 11 on January 11, 2013. The following is a snapshot of each case:
Colony Lender has asserted identical claims in all three cases in the amount of its foreclosure judgment, $13,612,775.71, $6,396,220.00 of which is said to be secured by a lien on all assets, except Units C and E.
The Partnership owns no real estate. Its principal asset is a possible recovery in the pending AP 567. In December 2009, Bank of America timely filed a proof of claim in the Partnership's case (Claim No. 136) in the amount of $3,742,080.25, asserting that it is secured by a lien on all assets of the Partnership. On October 29, 2012, Colony Lender filed an "amended" Claim No. 136 in the amount of $13,383,708.40, also asserting that it is secured by a lien on assets of the Partnership.
On March 7, 2013, the Association filed AP 196 to determine the validity and extent of Colony Lender's secured claim in the Partnership Chapter 7.
The Court previously made a bench ruling that Colony Lender's amended claim is time-barred. For the reasons stated on the record, Colony Lender will be limited to a claim of no more than the amount of Bank of America's timely filed
The Association argues that the change in Article 9 of the Uniform Commercial Code in 2001 — that removed the provision that tolled the five-year period of a financing statement's effectiveness during a pending bankruptcy case — means that, upon lapse of perfection, Colony Lender's claim becomes unsecured and the collateral is free of the lien.
The Court announced, at a bench ruling on February 26, 2014, its preliminary decision that the 2001 changes in the UCC Article 9 would render Colony Lender's claim to be unsecured upon lapse of the financing statement. In preparing this memorandum opinion, however, the Court has been compelled to reconsider its initial view.
The effect of a lapsed financing statement is expressly addressed in Section 679.515(3), Florida Statutes, which provides:
There is a seductive appeal to the notion that the lapse of a financing statement and the loss of perfection has the dire consequence of extinguishing the lien. A more precise examination of the statutory language, however, leads to the ironical conclusion reached by Bankruptcy Judge Robert Mayer: "When is a financing statement that is no longer effective, still effective? When it lapses, of course!"
The cessation of perfection is a priorities issue — meaning that the security interest becomes vulnerable, from then on, to a loss of priority. As long as the bankruptcy case is pending, however, the automatic stay of 11 U.S.C. § 362(a) will prevent holders of unperfected security interests and general unsecured creditors from filing or recording anything to jump ahead in priority.
In a pending bankruptcy case, a perfected secured claim on the petition date can later become "unsecured" in one of four ways: (1) if the underlying claim is later invalidated, the lien securing it can be avoided by 11 U.S.C. § 506(d); (2) if the value of the collateral, as of the petition date, is determined to be less than the amount of the underlying claim, then the secured claim can be "stripped down" or completely "stripped off" by 11 U.S.C § 506(a) and an unsecured claim for the deficiency; (3) if the lien impairs an exemption a secured claim may be "avoided" by an individual debtor, by 11 U.S.C. § 522(f); or (4) a lien may be "avoided" by a bankruptcy trustee (or a debtor-in-possession armed with a trustee's powers), by the provisions of 11 U.S.C. § 544-549.
It may prove to be, as the Association has alleged in AP 196, that Colony Lender's underlying claim against the Partnership is invalid and that 11 U.S.C. § 506(d) can then be employed to extinguish (avoid) the lien. At this stage, however, the contention is only that Colony Lender's security interest is avoidable under 11 U.S.C. § 544(a). Under that provision, a trustee in bankruptcy acquires, by operation of law, the status of a judicial lien creditor as of the petition date.
In 2012, a North Carolina bankruptcy court adopted the view urged by the Association and held that the post-petition lapse of a financing statement permitted the debtor-in-possession, having the strong-arm powers of a trustee under 11 U.S.C. § 544(a)(1), to take priority over a creditor that had a properly perfected security interest on the petition date.
But, that ruling was reversed.
Consequently, the debtor-in-possession obtained no benefit from the "deemed never to have been perfected" language in UCC Section 9-515(c), the cognate of Florida's Section 9-515(3). Thus, "even upon lapse, [the creditor] retains priority over the DIP's judicial lien."
More recently, the bankruptcy court in Virginia employed a similarly careful analysis to reach the same conclusion: a debtor-in-possession cannot avoid the lien of a secured creditor whose security interest was perfected on the petition date, but whose financing statement lapsed post-petition:
The lapse of a financing statement does not mean that the creditor's security interest is extinguished. It means only that the security interest becomes vulnerable to later — perfected security interests and judicial liens, which are not going to arise as long as the automatic stay is in effect.
Accordingly, the Court is compelled to conclude that Colony Lender's secured claim against the property of the Partnership's estate did not become "unsecured" upon the post-petition lapse of its financing statement. The claim remains subject, however, to the Association's objection contesting its validity.
The Joint Plan provides a skeletal framework for distributions to creditors, including the discharge and release of the debtors and certain non-debtors (the "Released Parties," as they are identified in the Settlement Agreement). The Joint Plan is not self-executing, but is to be implemented by the transactions contemplated by the Settlement Agreement.
Together, the Joint Plan and Settlement Agreement propose to settle all disputes surrounding the Resort, except for those involving Colony Lender and the Field Trust. The debtors emphasize the lengthy and difficult effort required to achieve the agreement among the settling parties.
On the eve of the confirmation hearing, the Association conducted a duly noticed Unit Owners meeting to consider approval of the Settlement Agreement.
The Plan provides for the transfer of all of the Rec. Lease Property to the "appropriate designated party pursuant to Sections 105, 363 and 1123(a)(5) of the Bankruptcy Code free and clear of any and all liens, claims, encumbrances and interests of any kind except as otherwise expressly stated in this Plan."
In consideration for the interdependent transactions, the Association will pay cash and deliver notes, payable from special assessments of the Unit Owners, as follows:
Attached to the Settlement Agreement are schedules which list the claims to be paid in the Chapter 11 cases and the Partnership Chapter 7. The overall effects of the Joint Plan and Settlement Agreement can be summarized, as follows:
At the conclusion of the third day of hearings, on December 3, 2013, debtors' counsel announced that the Joint Plan and Settlement Agreement needed to be amended to: (1) extend the Closing Date to the end of March, 2014; (2) provide for a separate $75,000 payment to the Field Trust for its Rejection Damages Claim; (3) provide for the acquisition of Break-Pointe's 5% interest in the Rec. Lease Property and designate BreakPointe as an
On December 13, 2013, Colony Lender filed a "Section 1111(b) election" effectively choosing not to participate as an unsecured creditor to the extent of any deficiency between its claim amount and the value of its collateral.
The Court will not strike Colony Lender's Section 1111(b)(2) election. The deadline set by this Court's order (Chapter 11 Case, Doc. No. 176) was the conclusion of the confirmation hearing. Evidence was taken on November 22 and 25 and December 3, 2013. At the conclusion of the December 3 hearing, the Court requested briefs by December 23, 2013, and continued the confirmation hearing to January 27, 2014, for consideration of the post-trial briefs and other matters. Colony Lender made the election before the post-trial briefs were due, and while the debtors' proposed amendments to the Joint Plan were outstanding. Thus, the election was made timely. The debtors carefully avoid saying that the proposed transfer to the Association is a "sale." The Section 1111(b)(2) election may now be moot, however, given the ruling on confirmation below, but Colony Lender's election will not be stricken.
Generally, a bankruptcy court may confirm a Chapter 11 plan only if each class of creditors that is affected by the plan consents. See 11 U.S.C. § 1129(a)(8). Bankruptcy Code Section 1129(b) creates an exception to that general rule, permitting confirmation of a nonconsensual plan — commonly known as a "cramdown" plan — if "the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan."
Bankruptcy Code Section 1129(b)(2)(A) establishes three criteria for determining whether a cramdown plan is "fair and equitable" with respect to the holder of a secured claim, like Colony Lender: under clause (i), the secured creditor retains its lien on the property and receives deferred cash payments with a present value at least equal to the collateral's value; under clause (ii), the property is sold free and clear of the lien, "subject to section 363(k)," and the creditor receives a lien on the proceeds of the sale;
These justifications are plausible and have some support in the record, but they are insufficient to overcome the sufficient reasons to deny confirmation of the Joint Plan. Colony Lender holds a $14 million foreclosure judgment. The Joint Plan would cause a transfer (sale) to the Association of Colony Lender's collateral, CBTC's and CBI's 80% interest in the Rec. Lease Property, and of Colony Lender's 15% interest, with the price unstated and payment deferred until after Unit Owners approve a plan of termination of the condominium, a judicial valuation proceeding is concluded, and a funding source obtained. The Joint Plan provides that the conveyance to the Association will be "free and clear" of all liens, except as expressly stated in the Joint Plan. But, the treatment of Colony Lender's mortgage (Section 6.1) includes no such exception.
The proponents urge the Court to confirm the Joint Plan on a ruling that it provides Colony Lender with the "indubitable equivalent" of its secured claim because ultimately Colony Lender will be paid or will receive its collateral back.
There is no equity cushion here to protect Colony Lender during the deferral period. And, there is no proposed payment to compensate it for the one-year wait for the surrender of its collateral. The proposed treatment does not specify a value to be paid to Colony Lender, a time for such value to be paid, a time for determining the value to be paid, a method of payment of the value determined at some point in the future, or any interim payments to insure that the present value of the Rec. Lease Property is preserved. Real estate taxes will continue to accrue on the property and there are risks inherent to having the Association or a subsequent designee speculate in the use and zoning of the collateral before its reconveyance on default.
The Joint Plan, however, proposes more than a deferral of payment or surrender of the property. It would result in a transfer (sale) of the real estate to the Association. The debtors acknowledge that their assets are to be sold in their motion to strike Colony Lender's Section 1111(b) election.
In 2012, the Supreme Court ruled that a Chapter 11 plan that calls for the sale of a secured creditor's property, "free and clear," cannot be confirmed over the creditor's objection under the general standard of indubitable equivalence, but must satisfy the more specific requirement of clause (ii) and the mandatory right to allow the mortgagee to credit-bid.
Finally, the Joint Plan is vague with respect to the terms of the Section 363(h) transfer of the 15% of the Rec. Lease Property that Colony Lender now owns. There is no provision to value that interest, no time for the acquisition to occur or how payment is to be made and no opportunity for Colony Lender to match the price, as required by 11 U.S.C. § 363(i).
The release and discharge provisions of the Joint Plan raise serious questions, as well. Under Article 7 of the Joint Plan, the Released Parties under the Settlement Agreement (see definition of "Parties" on page 8 of the Settlement Agreement) will be discharged and released from all claims and causes of action by "all Holders of Claims" and the discharge will be enforced by an injunction. Among other things, the scope of the discharge, release and channeling injunction is any claim "based upon any act, omission, document, instrument, transaction or any other activity ... that occurs in connection with implementation of the ... Plan."
Although Paragraph 12 of the Settlement Agreement provides for a "carve out" of sorts, it does not cover matters in the Joint Plan:
In the future, reasonable people — and courts — may conclude that the discharge and release provisions in the Joint Plan and the anticipated court-ordered injunction would operate to release: (a) Dr. Klauber and Colony Investors, Inc., from their guarantees of obligations to Colony Lender; and (b) Unit Owners from obligations (if there are any) to the owners of the Rec. Lease Property under Article 4.4 of the Declaration. Such effects are likely beyond the jurisdiction of this Court and are not fair and equitable.
Colony Lender's other objections to the Joint Plan, however, are not decisive.
In deciding whether to approve or disapprove a proposed settlement, this Court must consider the four factors set forth by the Eleventh Circuit in In re Justice Oaks II, Ltd.
A settlement agreement may be approved so long as it does not "fall below the lowest point in the range of reasonableness."
Here, the Settlement Agreement does not satisfy the Justice Oaks requirements. Although the Settlement Agreement would resolve complex and expensive litigation, it is premised on an overbroad and inequitable channeling injunction and claims bar against Colony Lender, as discussed above. The Settlement Agreement makes no provision or reserve for Colony Lender having a security interest in property of the Partnership's estate, particularly any recovery in, or payment to settle, AP 567. Finally, the Settlement Agreement is conditioned on confirmation of the Joint Plan, which will not occur. Thus, the Settlement Agreement cannot be implemented and approval must be denied.
The Joint Plan and Settlement Agreement seek the understandable goals of consolidating ownership of the entire 18 acres of the Colony Resort in the Association to facilitate a sale and ending more than seven years of complex and costly litigation. Even though Colony Lender has been characterized in the negative as a "claims buyer," it is legally entitled to seek recovery of the nearly $14 million that was awarded in state court. The Joint Plan's proposal that Colony Lender's collateral would be sold to the Association, "free and clear" of the lien, but without complying with the mandatory credit-bid requirement of Section 1129(b)(2)(A)(ii), prohibits confirmation over Colony Lender's objection. In addition, the forced sale of Colony Lender's 15% interest, without provision for payment or a Section 363(i) buy-out, is not permitted. The overbroad "release and discharge" and channeling provisions, proposed by the Joint Plan and Settlement Agreement are not "fair and equitable." For these reasons, the Joint Plan cannot
ACCORDINGLY, by separate orders,
