BARBARA J. HOUSER, United States Bankruptcy Judge
On July 28, 29, 30, and 31, 2015, the Court conducted an evidentiary hearing (the "
The United States District Court for the Northern District of Texas has subject matter jurisdiction over the Debtor's bankruptcy case pursuant to 28 U.S.C. § 1334. Although bankruptcy courts do not have independent subject matter jurisdiction over bankruptcy cases and proceedings, 28 U.S.C. § 151 grants bankruptcy courts the power to exercise certain "authority conferred" upon the district courts by title 28. Under 28 U.S.C. § 157, the district courts may refer bankruptcy cases and proceedings to the bankruptcy courts for either entry of a final judgment (core proceedings)
So, as relevant here, this Court exercises authority over the Debtor's Chapter 11 bankruptcy case pursuant to the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc adopted in this district on August 3, 1984. Venue is proper with this Court under 28 U.S.C. § 1409. Confirmation of the Plan is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (L), and (O), while the Motion to Lift Stay is a core proceeding under 28 U.S.C. § 157(b)(2)(G).
Mansa is the sole creditor objecting to confirmation.
To determine the Cramdown Interest Rate, the Debtor retained Christopher Lucas of ValueScope, Inc. ("
Till, 541 U.S. at 479, 124 S.Ct. 1951 (footnotes omitted). The Till opinion also contains what is referred to as the "efficient markets footnote," which recognizes that the prime-plus formula may not be the optimal approach in the Chapter 11 context. Id. at 476 n. 14, 124 S.Ct. 1951 ("Thus, when picking a cramdown rate in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce").
In Texas Grand Prairie, the Fifth Circuit applied the Till formula to determine the appropriate cramdown interest rate to be used in a Chapter 11 plan, but specifically acknowledged that it was applying Till because the parties stipulated that was the appropriate methodology. Texas Grand Prairie, 710 F.3d at 327. The Fifth Circuit, however, explicitly stated that it was not adopting Till in the Chapter 11 context. Id. at 337 ("However, we do not suggest that the prime-plus formula is the only — or even the optimal — method for calculating the Chapter 11 cramdown rate"). Instead, the Fifth Circuit reaffirmed its holding in Fin. Sec. Assurance Inc. v. T-H New Orleans Ltd. P'ship (In re T-H New Orleans Ltd. P'ship), 116 F.3d 790 (5th Cir.1997), stating that
Id. at 330 (footnotes and internal citations omitted).
With this background in mind, the Court will turn to Lucas's testimony and his methodology, which he testified complies with his analysis and understanding of both Till and Texas Grand Prairie, to wit:
Hr'g Tr. 7/29/15 at 163:20-164:10. Although Lucas testified that he did not believe an efficient market existed for the loan at issue in the Plan, he nonetheless looked to what he considered comparable loans to estimate the current market rate for hotel loans. Id. at 209:23-24. To do so, Lucas visited the websites for Commercial Loans Direct and United Financial Group to view the offered rates on hotel loans with a similar loan-to-value ratio. Id. at 190:22-191:10.
Thus, as opposed to beginning with the current prime rate of 3.25% and making adjustments based upon the Texas Grand Prairie factors, Lucas began with base rates that he testified account for the industry risk associated with hotel lending: 4.19% (based upon information obtained from Commercial Loans Direct) and 4.3% (based upon information obtained from United Financial Group). Id. at 190:18-191:10; 194:15-23; 198:3-16. Lucas then adjusted each of those rates based upon his analysis of the Texas Grand Prairie factors.
Although the Court agrees with Mansa that Lucas's methodology is not in strict compliance with Till, Texas Grand Prairie clarified that Till is merely instructive in determining cramdown rates in the Chapter 11 context. Moreover, in contrast to Texas Grand Prairie, the parties here have not stipulated that a strict, prime-plus formula should be used. Indeed, although both experts rely on Till and Texas Grand Prairie, they interpret and apply the cases differently. Thus, under binding Fifth Circuit precedent, this Court is not required to follow a formulaic prime-plus approach when evaluating the Cramdown Interest Rate. Texas Grand Prairie, 710 F.3d at 331, 337. Instead, the Court has the discretion to consider additional factors in determining a proper cramdown interest rate, including industry risk.
For these reasons, the Court overrules Mansa's objection and will consider Lucas's testimony about what rate should be set as the Cramdown Interest Rate.
At the Confirmation Hearing, Mansa called John Keeling of The Keeling Consultancy, LLC ("
Id. at 35. Keeling was not the subject of a Daubert challenge, and no party has questioned
Prior to the Confirmation Hearing, the parties exchanged expert reports. After receiving the Keeling Report, the Debtor informed Mansa that it would agree to stipulate that the current fair market value of the Dallas Hotel is $8.6 million. Mansa, however, chose not to accept that stipulation in lieu of calling Keeling as a witness at the Confirmation Hearing, and instead sought to put on evidence as to the value of the Dallas Hotel, including Keeling's analysis and conclusions.
After Mansa called Keeling to the stand at the Confirmation Hearing, the Debtor objected to Keeling being permitted to testify regarding the predicate opinions and process he utilized to reach his ultimate conclusion of value, arguing that the testimony was irrelevant because it will not have any tendency to make the Dallas Hotel's value more or less probable (as the Debtor had agreed to the $8.6 million value determined by Keeling). See Fed. R. Evid. 401. The Debtor further objected alleging that it was not given notice that Mansa intended to call Keeling to testify regarding the predicate conclusions (or sub-opinions) allegedly contained within the Keeling Report, and that the sub-opinions are not expressed as independent opinions within the Keeling Report.
Mansa countered by arguing that: (1) it never agreed to rely on the Debtor's proposed stipulation to the value of the Dallas Hotel as determined by Keeling, (2) it is entitled to present its case as it sees fit, and (3) Keeling's ultimate conclusion regarding the value of the Dallas Hotel is built upon various sub-opinions, which are relevant both to his ultimate conclusion of value and other confirmation requirements like feasibility of the Plan. In short, Mansa argued that the Court needed to hear Keeling's testimony at the Confirmation Hearing to understand things like the market conditions in which the Dallas Hotel operates and what hotels Keeling believes are a part of its competitive set. And, while those items were considered by Keeling in coming to his ultimate conclusion regarding the current value of the Dallas Hotel, they are also relevant to whether the Plan is feasible. According to Mansa, the Debtor should not be permitted, to circumvent Keeling's testimony on these underlying issues by stipulating to Keeling's ultimate conclusion of value.
To clarify this issue, the Court asked Mansa's counsel to identify the sub-opinions that he wanted Keeling to testify to at the Confirmation Hearing, which were delineated as follows (collectively, the "
Hr'g Tr. 7/30/15 at 35-38.
With the Sub-Opinions identified, the Court permitted Mansa to elicit Keeling's testimony, and the Debtor to cross examine Keeling, all subject to the Debtor's objection and subsequent oral motion to
In its post-hearing brief [ECF No. 355] (the "
The Debtor complains that the Sub-Opinions were not sufficiently disclosed in the Keeling Report, in violation of Fed. R. Civ. P. 26(a)(2). Mansa, however, correctly points out that a hearing to consider confirmation of a plan of reorganization is a contested matter, not an adversary proceeding. And, pursuant to Fed. R. Bankr. P. 9014, Rule 26(a)(2) is among the provisions that "shall not apply in a contested matter unless the court directs otherwise." Fed. R. Bankr.P. 9014(c); see In re Minh Vu, 2013 WL 4804822, *12 (D.Md. Sept. 6, 2013), aff'd, 556 Fed.Appx. 262 (4th Cir.2014) (unless the court orders, disclosures under Rule 26(a)(2) are not applicable to contested matters); In re Atlas Computers, Inc., 2012 WL 3018256, *5 (Bankr.N.D.Okla. July 24, 2012), aff'd, 2014 WL 1267007 (N.D.Okla. Mar. 26, 2014) (same).
Here, the parties apparently agreed to voluntarily exchange expert reports. Debtor's Post-Hearing Reply Brief [ECF No. 358] ¶ 5. The Debtor argues that this voluntary exchange reflects Mansa's implied agreement to comply with the disclosure requirements of Rule 26(a)(2). Id. However, Bankruptcy Rule 9014(c) expressly states that Rule 26(a)(2) shall not apply to contested matters "unless the Court directs otherwise," which it has not, as the parties did not ask the Court to (1) apply Rule 26(a)(2) to this contested Confirmation Hearing, or (2) approve any agreement to do so. Thus, the Court finds and concludes that the parties' voluntary exchange of expert reports is insufficient, standing alone, to overcome application of Bankruptcy Rule 9014(c), and that Mansa was not required to disclose the Sub-Opinions under Rule 26(a)(2).
Undeterred, the Debtor further argues that under Fed. R. Civ. P. 37(c), which does apply to contested matters, "[i]f a party fails to provide information or identify a witness as required by Rule 26(a) ..., the party is not allowed to use that information or witness to supply evidence... at a hearing, or at trial, unless the failure was substantially justified or is harmless." Fed. R. Civ. P. 37(c); Fed. R. Bankr.P. 7037. Basically, the Debtor argues that, even if a party is excused from the application of Rule 26(a)(2), it should nonetheless be sanctioned for failing to comply with Rule 26(a)(2).
Mansa disagrees, as does this Court. Rule 37 generally addresses a party's failure to make required disclosures or participate in discovery. See generally Fed. R. Civ. P. 37; Fed. R. Bankr.P. 7037. Bankruptcy Rule 9014, however, expressly states that Rule 26(a)(2) does not apply to a contested proceeding, unless otherwise
Finally, it appears that the Debtor had the opportunity to discover the Sub-Opinions when it took Keeling's deposition, which was scheduled. But, the Court understands that the Debtor elected to cancel Keeling's deposition. Thus, it appears that if the Debtor was surprised by the Sub-Opinions, it only has itself to blame.
For all of these reasons, the Debtor's objection is overruled.
Under the Federal Rules of Evidence, "[e]vidence is relevant if: (a) if has any tendency to make a fact more or less probable than it would be without the evidence; and (b) the fact is of consequence in determining the action." Fed. R. Evid. 401. The Debtor argues that the Sub-Opinions are irrelevant because it has stipulated to the value of the Dallas Hotel. And, to the extent the Sub-Opinions are relevant, they should nonetheless be excluded because their value is substantially outweighed by the risk of unfair prejudice. See Fed. R. Evid. 403. Mansa counters with the arguments that Keeling's testimony is relevant to matters other than valuation, such as feasibility; and, in any event, this Court should not permit the Debtor to unilaterally "stipulate" how Mansa should be permitted to present its case. Both parties rely on Old Chief v. United States, 519 U.S. 172, 117 S.Ct. 644, 136 L.Ed.2d 574 (1997) in support of their respective positions.
In Old Chief, the defendant was convicted of, among other things, being a felon in possession of a firearm. Id. at 174, 117 S.Ct. 644. In relation to trial, the defendant offered to stipulate to the fact that he was a convicted felon within the meaning of the relevant statute, but the Assistant U.S. Attorney refused to join in the stipulation, insisting on the government's right to prove the case as it saw fit. Id. at 177, 117 S.Ct. 644. The district court agreed with the government, and the court records regarding the prior felony conviction were admitted at trial. Id. On appeal, the Ninth Circuit affirmed, holding that the district court did not abuse its discretion. Id. The defendant appealed the ruling to the Supreme Court. Id.
On appeal, the Supreme Court acknowledged the general rule that a party has the right to prosecute its case as it sees fit. Id. at 189, 117 S.Ct. 644. The Court, however, also acknowledged that this rule has "virtually no application when the point at issue is a defendant's legal status, dependent on some judgment rendered wholly and independently of the concrete event of later criminal behavior charged against him." Id. In Old Chief, the defendant fell under the statute by virtue of a past conviction for a qualifying offense, and that was the most the jury needed to know. Id. In summary, the Court held:
Id. at 191, 117 S.Ct. 644 (footnote omitted).
Here, the Debtor argues that both its offered stipulation of value and the Sub-Opinions lead to the same conclusion — that the Dallas Hotel has a fair market value of $8.6 million as of July 1, 2015;
The Keeling Report contains facially relevant statements that are potentially harmful to the Debtor's case, not only as to valuation but also as to Plan feasibility.
Finally, the Debtor argues that the Sub-Opinions are not Keeling's expert opinion; instead, they are charts and data derived from third-party sources or, alternatively, mere "stepping stones" used by Keeling to arrive at his ultimate opinion regarding the value of the Dallas Hotel. Debtor's Post-Hearing Brief [ECF No. 355] ¶¶ 10-15, 22. According to the Debtor, for such information to come into the record, it must be independently admissible.
Mansa counters that, although the Sub-Opinions were "certainly derived from hearsay data in the Hotel Horizons and STR reports, the sub-opinions themselves are the product of Mr. Keeling's expert analysis synthesizing data from the Dallas Hotel, comparing it with similar data relating to the Dallas Hotel's competitive set, and projecting future performance based upon, and informed by, Mr. Keeling's years of experience in the hotel industry." Mansa's Post-Hearing Reply Brief [ECF No. 357] ¶ 13. According to Mansa:
Id. ¶ 14.
The Court finds Mansa's argument on this point persuasive, as it will now explain.
Fed. R. Evid. 703. The purpose of Rule 703 is largely practical — experts generally base their opinions on information which, to be admissible in court, would entail "the expenditure of substantial time in producing and examining various authenticating witnesses." Factory Mut. Ins. Co. v. Alon USA L.P., 705 F.3d 518, 524 (5th Cir.2013) (quoting Fed. R. Evid. 703, advisory committee's note). "Because experts may use their past experience and professional judgment to make critical decisions on the basis of such information outside of court, Rule 703 was intended `to bring the judicial practice into line with the practice of the experts themselves when not in court.'" Id. at 524 (quoting Fed. R. Evid. 703, advisory committee's note). Courts nevertheless must serve a gate-keeping function with respect to Rule 703 opinions to ensure "the expert isn't being used as a vehicle for circumventing the rules of evidence." Id. (quoting In re James Wilson Assocs., 965 F.2d 160, 173 (7th Cir.1992)). Further, the Fifth Circuit has made clear that "[a]n expert is permitted to disclose hearsay for the limited purpose of explaining the basis of his expert opinion, Fed. R. Evid. 703, but not as general proof of the truth of the underlying matter, Fed. R. Evid. 802." Fox v. Taylor Diving & Salvage Co., 694 F.2d 1349, 1356 (5th Cir. 1983).
It appears to the Court that the Debtor is confusing the information underlying the Sub-Opinions and the Sub-Opinions themselves. For example, in support of Keeling's testimony regarding Sub-Opinions (1) through (3),
As to Sub-Opinion (4),
As to Sub-Opinion (5),
As to the final Sub-Opinion,
The Debtor is a closely-held Montana corporation headquartered in Dallas, Texas that currently owns and operates two hotels: (1) a limited-service hotel located in Corpus Christi, Texas that is currently operated as a Howard Johnson (the "
The Debtor began its operations approximately 60 years ago with the ownership of a few cabins located at the entrance to Glacier National Park. Hugh Black, the forest ranger who started the Debtor, grew the company such that, by 2007, the Debtor owned a number of other real estate projects, including a 125 room resort. Blomfield, along with a partner, purchased the Debtor's stock in 2008, and ultimately sold the Montana assets in 2011. Thereafter, the Debtor purchased and remodeled various hotel properties that, as of the Petition Date, consisted of: (1) a 110 room hotel in Las Vegas, Nevada operating as a Howard Johnson (the "
In September 2011, the Debtor entered into a number of loan documents with Armed Forces Bank, N.A. ("
In June 2013, the Debtor entered into a Promissory Note and Loan Agreement
After purchasing the Dallas Hotel, the Debtor took steps to brand it as a Wyndham Night Hotel. In order to facilitate the associated renovation and construction, the Debtor entered into a loan agreement with Mansa. The documents associated with this loan include: (1) a Loan Agreement dated July 3, 2013 between the Debtor, as borrower, Blomfield and Weaver, as guarantors, and Mansa, as lender, in the original principal amount of $8,870,000 [Ex. M-3] (the "
The Night brand was ultimately an unsuccessful concept, and the Debtor worked with Wyndham Hotels and Resorts, LLC ("
The Court entered multiple interim cash collateral orders in the Debtor's bankruptcy case, culminating in the Amended Final Cash Collateral Order entered on December 8, 2014 [Ex. D16] (the "
The Plan contains the following classes of claims:
Class Class Description Class 1 The Plan does not contain a Class 1. Class 2.1 Secured Claims of Propel Financial Services, LLC — Arising from Propel's payment of prepetition ad valorem tax claims against the Corpus Hotel. Class 2.2 Secured Claims of Propel Financial Services, LLC — Arising from Propel's payment of prepetition ad valorem tax claims against the Dallas Hotel. Class 2.3 Secured Claims of Propel Financial Services, LLC — Arising from Propel's purchase of the 2014 ad valorem tax claims against the Corpus Hotel. Class 2.4 Secured Claims of Propel Financial Services, LLC — Arising from Propel's purchase of the 2014 ad valorem tax claims against the Dallas Hotel. Class 3 Secured Claims of Ford Motor Credit Company LLC Class 4 Secured Claims of Ability Insurance Company Class 5 Secured Claims of Mansa Capital, LLC Class 6.1 Secured Claim of Shaun Collins (M&M lien claimant) Class 6.2 Secured Claim of Sherwin Williams Company (M&M lien claimant) Class 7.1 Unsecured Claims of HoJo Class 7.2 Unsecured Claims of WHR Related to Cure Claim Class 7.3 Unsecured Claims of WHR Related to Notes Class 8 Administrative Convenience Claims Class 9 General Unsecured Claims Class 10 Subordinated Claims of Insiders Class 11 Equity Interests
The Plan proposes to pay Classes 2 through 9 in full with interest, over a period of between the Effective Date and 60 months post-Effective Date, depending upon the class at issue. The Class 10 subordinated claims, which are held by Blomfield, Weaver, and Brittany, are fully subordinated to payment in full of all other claims. Class 11 equity interests will retain their interests in the Debtor; however, they are not entitled to any distributions on account of their interests until all
As reflected in the Declaration of Sandra Meiners, Balloting Agent [ECF No. 313], Classes 2.1, 2.2, 4, 6.1, 6.2, 7.1, 7.2, 7.3, 8, and 10 voted in favor of the Plan. Class 3 (Ford Motor Credit Company LLC ("
During the Confirmation Hearing, the Debtor filed a motion [ECF No. 335] requesting authority for Ford (Class 3) and Value Place (Class 9) to change their respective votes to accept the Plan based upon agreements reflected in two written Plan modifications [ECF Nos. 308 and 330] (the "
Ford [ECF No. 283], Value Place [ECF No. 290], various taxing authorities [ECF No. 291], Oracle America, Inc. [ECF No. 292], and Mansa [ECF No. 305] objected to confirmation of the Plan. Although the Debtor was able to reach consensual resolutions of their respective objections with all other parties, it has been unable to do so with Mansa, which objected to confirmation on the grounds that the Plan: (1) provides disparate treatment to similarly situated creditors in violation of 11 U.S.C. § 1122 and/or § 1123(a)(4); (2) was not proposed in good faith, in violation of § 1129(a)(3); (3) is not in the best interests of creditors, in violation of § 1129(a)(7); (4) is not feasible, in violation of § 1129(a)(11); and (5) discriminates unfairly and is not fair and equitable with respect to Mansa's claim, in violation of § 1129(b)(2).
With this background in mind, the Court will now turn its analysis to whether the Plan satisfies all of the requirements for confirmation.
After the Plan voting deadline passed, the Debtor made multiple written and oral modifications to the Plan that the Court must consider. In this regard, Bankruptcy Rule 3019 provides that:
With the exception of the proposed subordination of Brittany's claim (explained below), each written Plan Modification reflects agreements reached between the Debtor and individual creditors that do not adversely change the treatment of any creditor or interest holder who has not accepted the modification. Thus, other than Britany, all creditors and interest holders are deemed to have accepted the
The Second Plan Modification amended the Plan so that Class 10 insider claims are fully subordinated to payment in full of all other creditors. After the modification docketed, a notice was filed on behalf of Blomfield and Weaver [ECF No. 339] indicating their acceptance of the modified treatment. Class 10, however, also includes Brittany, and a review of the Debtor's Schedule E [Ex. D-13, page 13 of 47] reflects that Brittany holds a priority unsecured claim of $11,800. Brittany, however, was not included in the Notice filed on behalf of Blomfield and Weaver accepting the proposed modified treatment, and there is nothing in the record indicating that she has agreed to fully subordinate her claim to all other creditors. Thus, the Second Plan Modification does not comply with the requirements of Bankruptcy Rule 3019 as to Brittany.
In addition to the written Plan Modifications, the Debtor also made an oral Plan modification at the Confirmation hearing to address Mansa's objection that the Plan failed to meet the requirements of 11 U.S.C. § 1129(a)(5)(B) (the "
Thus, with the exception of the proposed subordination of Brittany's claim, the Court finds and concludes that the Written Modifications and the Oral Modification meet the requirements of Bankruptcy Rule 3019, and do not require additional disclosure under 11 U.S.C. § 1125 or re-solicitation of votes under 11 U.S.C. § 1126, nor do the modifications require that holders of claims or equity interests be afforded an opportunity to change previously cast votes.
To confirm the Plan, the Debtor must also demonstrate that the Plan satisfies the applicable provisions of 11 U.S.C. § 1129 by a preponderance of the evidence. T-H New Orleans, 116 F.3d at 801. If all of the requirements of § 1129(a) are met, with the exception of subsection (a)(8), the Court may confirm the Plan if the requirements of 11 U.S.C. § 1129(b) are satisfied. Since Mansa has objected to the Plan on limited grounds, the Court will limit its written analysis in this Memorandum Opinion and Order to: (1) the contested confirmation requirements, and (2) the confirmation requirements
A principal objective of § 1129(a)(1) is to ensure compliance with the sections of the Bankruptcy Code governing classification of claims and interests and the contents of a plan of reorganization. In re Mirant Corp., 2007 WL 1258932, at *7 (Bankr. N.D.Tex. Apr. 27, 2007). Accordingly, to determine whether the Plan complies with § 1129(a)(1), the Court must analyze 11 U.S.C. §§ 1122 and 1123(a). As discussed in more detail below, the Plan meets the requirements of these sections.
Section 1122 requires that all claims placed in the same class be substantially similar to one another, but does not require that all substantially similar claims be placed in the same class. See Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (Matter of Greystone III Joint Venture), 995 F.2d 1274, 1279 (5th Cir. 1991). The Fifth Circuit has recognized that, under § 1122, a plan proponent has broad discretion to place similar claims into different classes, provided there is a good business reason to do so other than the motivation to secure the vote of an impaired, assenting class of claims. Id. In turn, § 1123(a)(4) requires a Plan to "provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest." 11 U.S.C. § 1123(a)(4).
In the Objection, Mansa appears
As recognized by the Fifth Circuit, "substantially similar claims" are "those which share common priority and rights against the debtor's estate." See Greystone, 995 F.2d at 1278. Here, each
As noted previously, Ability has the first lien on the Corpus Hotel, although its first lien has been primed by the tax claims now held by Propel, and Mansa has the first lien on the Dallas Hotel, although its first lien has been primed by the tax claims now held by Propel. Mansa has a second lien on the personal property at the Corpus Hotel, although that property has de minimis value. Generally, secured creditors with liens on different collateral or of different priority on the same collateral are separately classified. See In re Cypresswood Land Partners, I, 409 B.R. 396, 435 (Bankr.S.D.Tex.2009) ("[S]ecured creditors can, and usually must, be classified separately because each creditor has unique collateral, requires different monthly payments, and charges different interest rates This is because they have different legal rights to their respective collateral.") (internal quotations omitted); In re Buttonwood Partners, Ltd., 111 B.R. 57, 63 (Bankr.S.D.N.Y.1990) ("Unlike unsecured claims, every secured claim is different. Secured claims usually are secured by different collateral and usually have different priorities even if secured by the same collateral. This fact leads to the permissibility of individualized treatment based on the particularities of each secured claim.").
Thus, Mansa is properly classified in Class 5, while Ability is properly classified in Class 4 and Propel is properly classified in Class 2. Because Mansa is the sole creditor in Class 5, the Plan also satisfies the requirements of § 1123(a)(4). For these reasons, the Plan complies with the requirements of § 1129(a)(1). Mansa's objection is overruled.
The Fifth Circuit has stated that good faith under § 1129(a)(3) "should be evaluated `in light of the totality of the circumstances surrounding establishment of [the] plan,' mindful of the purposes underlying the Bankruptcy Code." See Western Real Estate Equities, EEC. v. Village at Camp Bowie I, L.P. (In re Village at Camp Bowie I, L.P.), 710 F.3d 239, 246 (5th Cir.2013) (quoting In re Cajun Elec. Power Co-op., Inc., 150 F.3d 503, 519 (5th Cir.1998)). With this guidance in mind, the Court turns to the Objection, which couches the majority of its complaints under the ambit of lack of good faith. See generally Objection [ECF No. 305] ¶¶ 19-30.
Moreover, the Plan seeks to achieve the rehabilitative and reorganizational goals of the Bankruptcy Code by restructuring the Debtor's obligations and providing the means through which the Debtor may continue to operate as a viable enterprise. Attendant to the continued operation of the enterprise is the Debtor's ability to preserve jobs and continue business operations, all while seeking to pay creditors in full, with interest.
Overall, the Plan is the result of arm's length discussions and negotiations among the Debtor, Ability, Propel, the various hotel franchisors, taxing authorities, the Debtor's shareholders, and other creditors. The Plan, with its compromises and proposed treatments, clearly promotes the objectives and purposes of the Bankruptcy Code and is being proposed in good faith. Mansa's objection is overruled.
Section 1129(a)(5) requires that the plan proponent disclose the identity and affiliations of the proposed officers, directors, or voting trustee of the debtor after confirmation of the plan; that the appointment or continuance of such officers, directors, or voting trustee be consistent with the interests of creditors and equity interest holders and with public policy; and that there be disclosure of the identity and compensation of any insiders to be retained or employed by the reorganized debtors. The Plan, based on the Oral Modification, complies with these requirements.
Post-confirmation, Blomfield shall continue as the Reorganized Debtor's Secretary and Treasurer, while continuing to oversee management of the Hotels; Weaver shall continue as the Reorganized Debtor's President and to provide accounting and bookkeeping services; and Brittany shall continue as the Reorganized Debtor's Vice President. Any compensation paid to these individuals will be in accordance with §§ 6.4 and 6.5 of the Plan and be subsumed within the Management Fee. Thus, the Plan satisfies the requirements of 11 U.S.C. § 1129(a)(5). Mansa's objection is overruled.
Pursuant to 11 U.S.C. § 1129(a)(7),
First, Mansa misstates the best interests of creditors test. It is not whether creditors will receive more "up front" or more overall, but whether creditors will receive at least as much as they would in a chapter 7 liquidation. Here, the Plan seeks to pay all creditors in full with interest, which is all creditors are legally entitled to receive. By definition, the Plan cannot fail the best interests test of § 1129(a)(7).
Second, there is nothing in the Confirmation Hearing record reflecting why rejection damages and insider claims should not be paid on par with other general unsecured claimants, as Mansa suggests in making its more timely payment argument. Of course, if those claims are included, as they must be, Mansa's argument is simply wrong — both legally and factually.
Finally, the Objection overlooks the substantial compromises and settlements reflected in the Plan and the franchisor stipulations that will be lost if the Debtor's assets are liquidated under Chapter 7.
Based on the record before it, the Court finds and concludes that the Plan satisfies 11 U.S.C. § 1129(a)(7). Mansa's objection is overruled.
The feasibility test set forth in § 1129(a)(11) requires the Court to determine whether the Plan has a reasonable likelihood of success. As explained by the Fifth Circuit:
T-H New Orleans, 116 F.3d at 801; see In re M & S Assocs., 138 B.R. 845, 848-49 (Bankr.N.D.Tex.1992). To meet this burden, the debtor must present proof through reasonable projections that there will be sufficient cash flow to fund the
Courts have considered the following factors in determining whether a plan is feasible: (1) the debtor's capital structure, (2) the earning power of the business, (3) economic conditions, (4) the ability of debtor's management, (5) the probability of continuation of management, and (6) any other related matter. See, e.g., In re Friendship Dairies, 2014 WL 29081, *10 (Bankr.N.D.Tex. Jan. 3, 2014). The test is discretionary, and a court may apply or ignore the various factors as it sees fit. Id.; see, e.g., In re Am. Solar King Corp., 90 B.R. 808, 832-33 (Bankr.W.D.Tex.1988) (finding courts do not need to "check off" factors); Save Our Springs (S.O.S.) Alliance, Inc. v. WSI (II)-COS, L.L.C. (In re Save Our Springs (S.O.S.) Alliance, Inc.), 632 F.3d 168, 173 (5th Cir.2011) (noting the lower court did not need to analyze each of the six factors in finding the plan infeasible).
The Debtor's projections, which were admitted into evidence as Ex. D-4 (the "
Warren also prepared the Debtor's cash collateral budgets during the case. Although there were issues with the Debtor's performance under the November and December 2014 cash collateral budgets, Warren testified that those budgets were inaccurate because, when preparing them, he relied on revenue numbers supplied by the Dallas Hotel's former General Manager. In hindsight, Warren realized that was a mistake and it caused the Debtor to miss the projections by a material amount. Id. at 86:16-87:4. Since Warren has corrected that issue, the Debtor has performed to budget, or very close to budget, from January 2015 forward. In fact, Warren testified that for 2015, the Debtor was off by less than 1% of its projected total revenue, id. at 97:13-17, and that the Debtor beat its net income from operations projections by 40% for both Hotels combined, id. at 92:10-21. Based upon the Debtor's performance compared to its 2015 cash collateral budgets, the Court is confident in both Warren's methodology and his ability to prepare operating budgets and revenue projections for the Hotels. Moreover, the Court found Warren to be a very credible witness; he was candid, forthcoming, and accepted responsibility for prior mistakes and then accounted for those mistakes on a going-forward basis.
Notably, Warren used the same method to prepare the Projections that he used to prepare the highly-accurate 2015 cash collateral budgets. Id. at 97:9-10. In summary, Warren and Blomfield reviewed the Hotels' historical performance and the performance of comparable hotels in the market, looking at both income and expenses, then extrapolated future performance. Although this procedure has proven accurate during the case, Warren testified that he nonetheless reduced various income and expense line items in the Projections by approximately 7.5% "to give us a little buffer zone to make sure that [the budgets] were achievable." Id. at 97:10-99:6.
Mansa also elicited testimony regarding Plan feasibility from Keeling, its appraisal expert. Keeling's testimony was comprised of the following six Sub-Opinions (previously discussed in § II.B, supra): (1) on a going forward basis, the Dallas Hotel is not going to perform against its competitive set, (2) the Farmers Branch market, where the Dallas Hotel is located, is declining and that, as a result of the limits on penetration, the Dallas Hotel's value and performance are going to continue to decline, (3) the rates charged by the Debtor at the Dallas Hotel will lag behind those of its competitive set and be lower than its competition in the marketplace, (4) the Dallas Hotel's anticipated year of stabilization will be 2018, (5) there are less than 10 years of economic life remaining for the Dallas Hotel, as configured, and (6) the value of the Dallas Hotel is declining. Although the Court found Keeling to be a credible witness, his testimony in the context of Plan feasibility was unpersuasive.
For example, Keeling testified that the value and performance of the Dallas Hotel will decline in the future. See Sub-Opinions (1) through (3) and (6). The Confirmation Hearing record, however, contains no credible evidence regarding the materiality of such decline or the effect it will have on the Plan's feasibility. Keeling's failure to quantify the extent of the decline makes his testimony of limited value, and is insufficient to persuade the Court that the Plan is not feasible.
Similarly, Keeling testified that the Dallas Hotel has less than 10 years of economic life remaining, as it is currently configured. See Sub-Opinion (5). Undoubtedly, the age and economic life of the Dallas Hotel will be considered by others when the Debtor seeks to refinance or sell the Dallas Hotel to repay Mansa, but there was no evidence adduced at the Confirmation Hearing indicating that the hotel's age or remaining economic life makes the Plan not feasible. Although Keeling did testify that, with a "strong economic downturn," the Dallas Hotel may not be profitable within the 10-year projection period of the Keeling Report,
Conly was retained by Mansa to testify as to the proper Cramdown Interest Rate under the Plan. As part of his analysis, Conly considered the Till factors, which include circumstances of the estate, nature of the security, Plan feasibility, and Plan duration. Conly Report [Ex. M-27] at 8; see § IV.B.6.a), infra. As part of its Plan feasibility analysis, the Conly Report quotes from and relies upon the Keeling Report regarding the Dallas Hotel's physical condition and remaining economic life. See Conly Report [Ex. M-27] at 12-15. After specifically considering the Keeling Report, the Conly Report states that "the [Debtor's] Plan bears moderate feasibility risk, resulting in an additional risk adjustment of 150 to 250 basis points (1.5% to 2.5%) to the Prime Rate." Id. at 15. Neither the Keeling Report nor the Conly Report states that the age or remaining economic life of the Dallas Hotel makes the Plan not feasible.
Based upon the record before it, the Court finds that the Projections are reasonable and based upon a sound methodology. Thus, the issue becomes whether the Plan is feasible based on the Projections. For purposes of its feasibility analysis, the Court will consider feasibility at three separate points in time: (1) the Effective Date, (2) during the life of the Plan, and (3) when the proposed balloon payments to Ability and Mansa come due.
First, the Court finds that the Reorganized Debtor will have sufficient means to pay the $572,074 in obligations due on or soon after the Effective Date, as the Debtor projects to have approximately $700,000 of accumulated cash available on the Effective Date. The Court notes, however, that the full $572,074 is not actually due on the Effective Date. For example, that figure includes (1) significant attorneys' fees that will not be due until fee applications are filed and Court approval is received, which is typically 45-60 days post-Effective Date, and (2) $25,682.20 due to Class 6 Claimants and $24,701.03 due to Class 8 Convenience Claims, which are not due until 60 days post-Effective Date. Plan at §§ 5.10, 5.11, and 5.16. Thus, the Reorganized Debtor will have approximately two months of operations between the Effective Date and the date when the last of the "Effective Date" payments are due.
Second, Warren's testimony regarding the Projections, along with the Projections themselves, clearly show that the Reorganized Debtor will have sufficient funds to make the monthly payments due over the life of the Plan. Indeed, as shown by the Projections, the Reorganized Debtor will generate sufficient revenue to make Plan payments from net operating profits in virtually every month of the Plan. For the few months where sufficient monthly net revenue will not be generated, the Reorganized Debtor will have accumulated more than sufficient cash reserves to fund the payments. See generally Projections [Ex. D-4].
Finally, the Court must determine whether the Reorganized Debtor will have the ability to either pay or refinance the balloon payments due to Ability at month 36 and Mansa at month 60. When considering balloon payments proposed under a plan, a court should consider whether the value of the creditor's collateral is sufficient to ensure that its outstanding debt
As to Ability, the Plan proposes 35 monthly payments of $19,967.06, with a balloon payment in the 36th month of $3,428,619.09. Although the Reorganized Debtor will not have sufficient funds to make the Ability balloon payment from excess cash flow, the Confirmation Hearing evidence shows that there will be approximately $2.7 million of equity in the Corpus Hotel as of the Effective Date. Hr'g Tr. 7/31/15 at 47:3-6. While no evidence regarding the estimated value of the Corpus Hotel in three years was adduced at the Confirmation Hearing, it is reasonable to infer from the evidentiary record that the Corpus Hotel will not decrease in value. This is particularly true since the undisputed evidence at the Confirmation Hearing shows that the Corpus Hotel is stable and revenues are increasing by approximately 5% per year. Hr'g Tr. 7/29/15 at 120:9-16. As such, the Confirmation Hearing record establishes that the Reorganized Debtor has two viable alternatives to satisfy the Ability balloon payment — the Corpus Hotel may either be refinanced or sold. Thus, the Plan's balloon payment to Ability is feasible.
As to Mansa, Debtor's counsel estimated that, in a "worst case" scenario where Mansa's claim is allowed in full, the balloon payment due at month 60 would be approximately $8,461,561. Hr'g Tr. 7/31/15 35:16-19 (Mansa's counsel did not object to this estimate). Under the Plan, this claim will be secured primarily by the Dallas Hotel. As with the Corpus Hotel, the Confirmation Hearing record contains no evidence regarding the value of the Dallas Hotel in five years. Although Keeling, Mansa's appraiser, testified that the Dallas Hotel is declining in value, he did not quantify the decline over that time frame.
As additional collateral in support of the Plan, Blomfield has agreed to pledge the Guarantor Joint Proponent Property
In addition to the collateral pledged to Mansa, the Debtor will have substantial other assets to assist in funding the Mansa balloon payment at month 60. For example, at the end of five years, the Reorganized Debtor will have substantial equity in the Corpus Hotel (as noted above, it will have $2.7 million in equity as of the Effective Date) or will have cash on hand from the sale of the Corpus Hotel (if the Debtor elected to sell the Corpus Hotel in order to satisfy the Ability balloon payment), as no monies can be paid out of the Debtor to the interest holders until all creditors have been paid under the Plan. Plan [Ex. D-1] § 6.3. And, depending on the Cramdown Interest Rate utilized under the Plan, the Reorganized Debtor will have between $2.5 million (assuming a Cramdown Interest Rate of 9.88%)
Overall, the Confirmation Hearing record shows that, at the end of five years, Mansa will be owed a maximum balloon payment of $8,461,561, and will have a collateral package with a value of at least $9.6 million. Even assuming for argument's sake that the value of the Dallas Hotel is declining, the Debtor will have significant equity in the Corpus Hotel (assuming that the Debtor elects to refinance the Ability debt at month 36 of the Plan) and between $2.5 million and $4.5 million in excess cash flow with which to attract a re-financier for the Dallas Hotel. Thus, the Court finds that there is a reasonable likelihood that the Debtor will be able to pay off the balance of the Mansa debt when that debt matures at month 60 of the Plan, and that the Plan, overall, has a reasonable probability of success.
For all of these reasons, the Court finds the Plan feasible and § 1129(a)(11) satisfied. Mansa's objection is overruled.
The Court must also determine whether the Plan's proposed treatment of Mansa's claim is fair and equitable under 11 U.S.C. § 1129(b)(2).
The Plan, as modified by the Second Plan Modification, proposes the following treatment of Mansa's claim:
Whether this proposed treatment complies with the requirements of § 1129(b)(2)(A) requires analysis of Mansa's different types of collateral — its interests in real and personal property and its interests in the cash held in the Debtor's operating accounts
Before beginning that analysis, however, the Court notes that Mansa elected to have its claim treated as fully secured under 11 U.S.C. § 1111(b). See Secured Creditor's Election Pursuant to Section 1111(b) of the Bankruptcy Code and Bankruptcy Rule 3014 [ECF No. 306] (the "
In light of the Election, to be confirmable, the Plan must provide that Mansa has a continuing lien against its collateral to secure the outstanding balance of its allowed claim (assumed to be $9,318,644) and have the right to receive, over time, cash payments equal to the allowed amount of its claim. The cash payments, however, need only have a present value equal to the value of the Debtor's interest in the collateral less the amount of senior claims against the same collateral, or approximately $8,948,307.12.
So, the question becomes what interest rate must the Plan provide to Mansa to ensure that the Plan satisfies § 1129(b)? Both parties agree that a formula-based approach is the proper method to determine the appropriate Cramdown Interest Rate. Here, each party's expert started his analysis with a base rate, the Debtor starting at a market-based rate of interest and Mansa at the prime rate, and then adjusted the rate to reflect the "risk adjustment" factors discussed in Till and/or Texas Grand Prairie.
The Debtor's expert began his analysis based upon a range of interest rates that he felt accounted for the industry risk associated with hotel-based lending. To determine these base rates, Lucas visited the websites for Commercial Loans Direct and United Financial Group to view the currently-offered rates on hotel loans with loan-to-value ratios similar to the proposed Mansa restructuring. Hr'g Tr. 7/29/15 at 190:22-191:10. Thus, as opposed to beginning with the prime rate of 3.25% and making adjustments based upon the Texas Grand Prairie factors, Lucas began with the following base rates: 4.19% (based upon information from Commercial Loans Direct) and 4.3%, (based upon information from United Financial Group). With those rates in hand, Lucas made the following "risk adjustments" under Texas Grand Prairie,
Factor Debtor's Risk
Adjustment Range
Low High
Quality of the Debtor's Management -0.25% 0.00%
Commitment of the Debtor's Owners -0.10% 0.00%
Health and Future Prospects of the Debtor's Business 0.00% 0.50%
Quality of the Collateral -0.10% 0.00%
Feasibility and Duration of the Plan 0.00% 0.00%
Adjusted Rate Mid-Point (Commercial Loans Direct) 4.21%
Adjusted Rate Mid-Point (United Financial Group) 4.33%
Proposed Cramdown Rate of Interest 4.25%
Conly served as Mansa's testifying expert on the appropriate Cramdown Rate of Interest for the Plan. Conly followed a strict Till analysis, beginning with the prime rate of 3.25%. He then adjusted the prime rate for each of the factors discussed in Till, giving both a low and high range adjustment for each factor. Conly then settled on a mid-range of 10.38%, as follows:
Factor Mansa's Risk Adjustment Range Low High Circumstances of the Estate 1.00% 2.00% Nature of the Security 1.50% 2.00% Plan Feasibility 1.50% 2.50% Plan Duration 1.75% 2.00% Range 9.00% 11.75% Proposed Cramdown Rate of Interest 10.38%
The Court disagrees with each expert's allocation of risk, finding Lucas's analysis too lenient and Conly's too harsh. For example, the only upward risk adjustment given by Lucas is .5% related to the "health and future prospects of the Debtor's business." See Interest Rate Analysis — Hotel Loan Restructuring [Ex. D-26] (the "
Lucas Report [Ex. D-26] at 9. The Court is not persuaded by Lucas's dismissal of Blomfield's shortcomings on this point, and finds that a risk adjustment of 1.0% appropriate.
The Court also found Lucas's failure to allocate any risk adjustment to the quality of Mansa's collateral troubling. In fact, the Lucas Report overstates Mansa's collateral package by valuing the Dallas Hotel at $9.3 million (versus the agreed $8.6 million) and failing to account for Propel's liens against the Dallas Hotel of approximately $351,692.88. The Lucas Report also states that Blomfield's net equity in Guarantor Joint Proponent Property is $2.92 million; however, it gives no consideration to the fact that the property is located in a foreign jurisdiction and the potential impediments to foreclosing on that collateral. Based upon the record before it, the Court finds that a risk adjustment of 1.75% would adequately account for any risk placed upon Mansa due to the quality of its collateral.
Finally, although the Court has found that the Projections are reasonable, it does recognize that there is a risk that the Debtor could be unable to fund Mansa's balloon payment at the end of five years. To account for this risk, the Court finds it would be appropriate to assign an upward
On the other end of the spectrum, the Court finds that Conly's testimony was overly critical. One of Conly's adjustments, 1.0%-2.0% for "circumstances of the estate," is based primarily on the Receiver's Report, discussed in § III.A, supra. Conly testified that he reviewed the Receiver's Report, Hr' Tr. 7/29/15 at 163:18-164:5, and its finding are clearly relied upon in the Conly Report, Conly Report [Ex. M-27] at 9-10. Conly, however, did not visit the Las Vegas Hotels nor did he speak with the Receiver or Blomfield regarding the findings in the Receiver's Report. Hr'g Tr. 7/29/15 at 199:24-2001:14. The Court appreciates that the Receiver's Report was prepared by a court-appointed professional; however, it is troubled by Conly's blind reliance on the report without any independent investigation. Indeed, while on the stand, Blomfield was able to clarify many of the findings set forth in the Receiver's Report. For example, Conly cites to the Receiver's finding that approximately 12 rooms in the Las Vegas Hotels were out of service because of bed bugs, failed health inspections, and other failure to repair damage. Blomfield, however, clarified that although 12 rooms were out of service, bed bugs were found in only two rooms. According to Blomfield's uncontroverted testimony, health regulations require that, when bed bugs are discovered, the hotel close the rooms above, below, and across from the room at issue, resulting in 12 rooms being out of service. Hr'g Tr. 7/28/15 at 63:6-21. Further, Blomfield testified that he is not aware of the Las Vegas Hotels having failed any health inspections. Id. at 63:24-64:2. Blomfield went on to persuasively explain away many other findings from the Receiver Report that Conly relied upon. Id. 64:4-69:23.
Moreover, Conly's upward adjustment of between 1.5% to 2.5% based on Plan feasibility is overstated. As discussed in § IV.B.5, supra, the Court specifically finds that the Plan is feasible. Moreover, Conly's substantial risk adjustment for Plan feasibility is not credible in light of the Conly's Report's specific finding that the "financial projections contained in the disclosure statement filed in connection with the [Debtor's] Plan, including the underlying assumptions and computations, are reasonable and supportable." Conly Report [Ex. M-27] at 5.
Finally, the Court finds an upward adjustment of between 1.75%-2.0% for the duration of the Plan unreasonably high. Notably, the Conly Report assumes a balloon payment to Mansa at the end of seven years. The Plan, however, was subsequently modified so that Mansa will be paid in full at the end of five years, substantially reducing the risk associated with the duration of the Plan.
Although Mansa's proposed Cramdown Interest Rate is too high, based upon the record before it, the Court finds and concludes that the Cramdown Interest Rate proposed by the Debtor (4.25%) is insufficient to provide Mansa with the deferred cash payments it is entitled to receive under 11 U.S.C. § 1129(b)(2)(A)(II) in light of its election under § 1111(b).
Mansa's interest in cash collateral as of the Effective Date requires a separate
Here, the Court finds that the Plan adequately protects Mansa's interest in, and gives it the indubitable equivalent of, its pre-confirmation cash collateral. First, it is undisputed that the Corpus Hotel is stable, its revenues are increasing by 5% each year, and it generates significant excess cash flow. And, although Mansa's loan is secured mainly by the Dallas Hotel, the Plan payments are an obligation of the Debtor. As such, Mansa benefits not only from the cash flow generated by the Dallas Hotel but from the net cash flow generated by the Corpus Hotel. These funds, along with those generated by the Dallas Hotel, will be used to fund the Plan, purchase insurance, pay liens against the Dallas Hotel senior to Mansa, pay fees due under the Wyndham franchise agreement, and pay for the upkeep and maintenance of the Dallas Hotel. Second, the Debtor has a substantial equity cushion in the Corpus Hotel, and will have between $2.5 and $4.5 million in cash at the end of the Plan (depending on the Cramdown Interest Rate utilized). These additional assets adequately protect Mansa's interests under
Thus, the Court finds and concludes that the Plan gives Mansa the indubitable equivalent of its lien on the pre-confirmation cash collateral and meets the requirements of 11 U.S.C. § 1129(b)(2)(A)(iii).
While not raised by Mansa, the Court notes two additional problems with the Plan that prevent its confirmation. First, § 1123(a)(6) of the Bankruptcy Code requires, among other things, that the Plan provide for the inclusion in the Debtor's charter of a provision prohibiting the issuance of nonvoting equity securities. Based upon its review of the Plan, the Court finds that the Debtor has failed to comply with § 1123(a)(6). Second, the Plan does not require that all fees due under 28 U.S.C. § 1930 be paid on or before the Effective Date, as required by § 1129(a)(12).
Section 12.9 of the Plan seeks to impose a temporary injunction prohibiting creditor collection efforts against third parties while the Debtor is performing under the Plan. More specifically, the relevant portions of Section 12.9 state:
Plan [Ex. D-1] § 12.9 (emphasis added). The proposed temporary injunction was orally modified at the Confirmation Hearing when Debtor's counsel stated, on the record, that Blomfield and Weaver had each agreed to not transfer their personal assets outside the ordinary course of business while the temporary injunction was in place.
Mansa objects to § 12.9 on the grounds that plans generally cannot enjoin creditors from pursuing remedies against non-debtors. See Objection [ECF No. 305] ¶ 26 (citing In re Prussia Assoc., 322 B.R. 572, 603 (Bankr.E.D.Pa.2005) (denying confirmation of the plan where the inclusion of injunctive provisions to last for seven years was "clearly invalid under any standard"); In re Wool Growers Cent. Storage Co., 371 B.R. 768, 781 (Bankr. N.D.Tex.2007) (rejecting a proposed plan because it included a nonconsensual third party release and the court could find no authority in the Code or case law that would allow for that provision)). Mansa further argues that, although third party injunctions may be entered in "unusual circumstances," they are issued very sparingly and not under the facts of this case. Id. ¶ 27 (citing In re Bernhard Steiner Pianos, USA, Inc., 292 B.R. 109, 116 (Bankr.N.D.Tex.2002); In re Seatco, Inc., 257 B.R. 469, 477 (Bankr.N.D.Tex.2001)). According to Mansa, such unusual circumstances exist when the debtor and non-debtor parties enjoy "such an identity of interest that the suit against the non-debtor is essentially a suit against the debtor and when the third-party action will have an adverse impact on the debtor's ability to accomplish reorganization." Id. Although not raised in the Objection, at the Confirmation Hearing, Mansa also questioned the Court's authority to enter the third-party injunction, citing to Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475(2011).
The Debtor argues that the proposed temporary injunction is both appropriate and necessary to ensure the orderly administration of the Debtor's estate and to prevent disruption to the Debtor's reorganization efforts. Debtor's Brief ¶ 64 (citing to In re Zale Corp., 62 F.3d 746, 761 (5th Cir.1995); Bernhard Steiner, 292 B.R. at 116; Seatco, 257 B.R. 469 (Bankr. N.D.Tex.2001)). As conceded by the parties, the propriety of the proposed temporary injunction is governed by the standards set forth in Seatco and Bernard Steiner,
Both Seatco and Bernhard Steiner involved 100% plans under which collection actions against third parties were temporarily enjoined. Seatco, the earlier-decided opinion, established the standard under which plan-related third party injunctions are considered. The Seatco court first
Zale, 62 F.3d at 761. Although dicta, the Zale court clearly recognized that circumstances may arise in a bankruptcy case warranting the issuance of a temporary injunction of third party actions as a part of confirmation. If the Zale factors are met, the Court must also consider the traditional factors governing the issuance of temporary injunctions. Seatco, 257 B.R. at 477 (listing the factors as (1) a substantial likelihood that the movant will prevail on the merits, (2) a substantial threat that the movant will suffer irreparable injury if the injunction is not granted, (3) that the threatened injury to the movant outweighs the threatened harm an injunction may cause to the party opposing the injunction, and (4) that the granting of the injunction will not disserve the public interest).
Based upon the record before it, the Court finds that the Debtor has not met the two-factor test of Zale. First, the Debtor has not shown that it, on the one hand, and Blomfield and Weaver,
Seatco, 257 B.R. at 476. Similarly, the Bernhard Steiner court found:
Bernhard Steiner, 292 B.R. at 117. Each of these cases indisputably involved individuals who, for all intents and purposes, were the debtor, and where the debtor's reorganization would rise or fall with that individual. The record established at the Confirmation Hearing does not support such a finding in this case.
In support of the identify-of-interests factor, the Debtor argues that: (1) Blomfield and Weaver hold and control 100% of the Debtor's stock and the basis of any enjoined suit would be specifically addressed under the plan; "[c]onsequently, any lawsuit against the Guarantors is practically a suit against the Debtor,"
First, the Court disagrees that ownership coupled with a guaranty is sufficient to satisfy the identity of interest discussed in Zale. See Zale, 62 F.3d at 761. Indeed, this type of overlap between shareholders and guarantors exists in a significant number of bankruptcy cases involving closely-held corporations. Granting an injunction on those grounds would make third party plan injunctions commonplace, which is clearly the incorrect outcome under Fifth Circuit precedent.
Second, although cancellation of either franchise agreement would likely have an adverse effect on the Debtor's ability to reorganize, this scenario is simply too attenuated to be grounds to grant the third-party Plan injunction. Not only would Mansa have to be successful on its suit under the Blomfield and Weaver guarantees, it would then have to execute on the Debtor's stock held by Blomfield and Weaver. Further, although each franchise agreement states that the rights under the agreement are not freely transferable,
Third, the only evidence before the Court regarding NOLs is that the Debtor has NOLs. The Confirmation Hearing record is devoid of any evidence regarding their amount or significance. Thus, the Court has no basis upon which to find that the potential loss of the NOLs would have an "adverse impact on the debtor's ability to accomplish reorganization." See Zale, 62 F.3d at 761.
Simply put, there is nothing in the record indicating that the Debtor, on the one hand, and Blomfield and Weaver, on the other, share the type of identity of interest that existed in Seatco and Bernhard Steiner. With regard to Blomfield, the record reflects that he lives and works on-premises at the Dallas Hotel. Warren, the General Manager of the Dallas Hotel, testified that having Blomfield in such close proximity made it easier to communicate, obtain approvals, and discuss operations than it would be if management were located off-premises. Warren also testified that Blomfield is a highly motivated individual who motivates those around him. There is nothing in the record, however, showing that: (1) Blomfield would no longer work with the Debtor if Mansa executed on his stock interests in the Debtor, and (2) if Blomfield did leave, his services could not be adequately performed by a newly-appointed Secretary and Treasurer and/or property manager. Overall, the record shows that Blomfield is a highly motivated, involved, and intelligent man who works well with and is respected by those around him; however, the record does not support a finding that Blomfield is irreplaceable and that his resignation as the Debtor's Secretary and Treasurer or property manager would be a death knell, as was the case in both Seatco and Bernhard Steiner.
The identity of interest is even more lacking with Weaver, who is not involved in the day-to-day management of business operations. Instead, Weaver handles the accounting and bookkeeping functions for the Debtor, primarily from Anchorage, Alaska. Weaver's actions during the case have certainly helped the Debtor's accounting functions get back on track, but there is nothing in the record indicating that the Debtor could not successfully reorganize utilizing the services of another accounting professional.
Because the Debtor has failed to satisfy the Zale factors, this Court need not address the additional factors considered by courts when granting a third-party plan injunction. Accordingly, based on the record before it, the Court finds and concludes that the Debtor has failed to carry its burden of proof with respect to the proposed third party injunction, and that the Plan, as drafted, may not be confirmed.
Mansa filed its Motion to Lift Stay on February 2, 2015, and a preliminary hearing on the motion was held March 3, 2015. The Court denied Mansa preliminary relief, and Mansa was directed to set the Motion to Lift Stay for final hearing. At Mansa's request, the Motion to Lift Stay was heard concurrently with the Plan at the Confirmation Hearing.
The Motion to Lift Stay requests relief from the automatic stay under 11 U.S.C. § 362(d)(1) and (d)(2), which provide in relevant part that:
11 U.S.C. § 362(d).
Mansa alleges that cause exists to lift the automatic stay under § 362(d)(1) because: (1) the Debtor is unable to pay its ad valorem taxes, which is giving rise to priming liens and further decreasing Mansa's interests, and (2) operations at the Dallas Hotel are declining and there is no evidence that operations will improve. The Court finds each of these arguments unpersuasive.
First, the 2013 taxes were paid with a prepetition loan obtained from Propel, which also purchased the 2014 ad valorem tax claims from various taxing authorities. And, as reflected in the Plan, the Debtor and Propel have reached consensual repayment terms. As to future taxes, the Projections clearly show that the Debtor will have sufficient funds on hand to pay ad valorem taxes arising during the life of the plan. See generally Projections [Ex. D-4].
Second, nearly six months passed between the date the Motion to Lift Stay was filed and the Confirmation Hearing. The record shows that, since the motion was filed, the Debtor's operations have significantly improved, including operations at the Dallas Hotel.
The Court, however, finds Mansa's arguments under § 362(d)(2) somewhat more persuasive. In this regard, Mansa alleges that the Debtor has no equity in the Dallas Hotel and that the Dallas Hotel is not necessary for an effective reorganization. Mansa has the burden to establish the lack of equity in the property, which it has done,
For the reasons set forth above, the Court finds and concludes that the Plan, as drafted, may not be confirmed. The Plan's infirmities, however, may be corrected and it may be possible to consider confirmation of an Amended Plan within a reasonable timeframe. Specifically, an Amended Plan must:
The Debtor shall have 20 days from the entry of this Memorandum Opinion and Order on the Court's docket to file an Amended Plan and any other required documents. If the Debtor timely files an Amended Plan and any other required documents, the automatic stay imposed by 11 U.S.C. § 362(a) shall remain in effect until such time as the Court considers confirmation of an Amended Plan. The Debtor shall seek prompt settings from the Court's Courtroom Deputy. Alternatively, if an Amended Plan and any other required documents are not filed within 20 days of the entry of this Memorandum Opinion and Order on the Court's docket, the Motion to Lift Stay shall be granted.
Accordingly, it is hereby:
ORDERED that confirmation of the Plan is denied. It is further
ORDERED that any objection to confirmation not expressly addressed in this Memorandum Opinion and Order is overruled. It is further
ORDERED that the Debtor shall have 20 days following the entry of this Memorandum Opinion and Order on the Court's docket to file an Amended Plan and any other required documents. It is further
ORDERED that if an Amended Plan and any other required documents are timely filed, the automatic stay imposed by 11 U.S.C. § 362(a) shall remain in effect
ORDERED that if an Amended Plan and any other required documents are not timely filed, Mansa shall file a Certification of Counsel stating that the deadline has passed without such documents being filed and upload a proposed form of order lifting the automatic stay.
Briscoe Enters., 994 F.2d at 1169.
