Jeff Bohm, United States Bankruptcy Judge.
In this single asset real estate case, a dispute has arisen over whether a portion of the estate's sole asset — a tract of raw land — should be sold pursuant to an emergency motion rather than through a plan of reorganization.
On November 27, 2017, 9 Houston LLC, the debtor-in-possession (the "
On December 7, 2017, this Court held a hearing on the Motion. The Debtor appeared through its attorney of record. Additionally, CC3 appeared through its attorneys of record. In its case-in-chief, the Debtor introduced four exhibits into the record, and adduced testimony from two witnesses. In its case-in-chief, CC3 introduced seventeen exhibits into the record, and adduced testimony from one witness. The Court then listened to closing arguments from counsel, and took the matter under advisement.
The Court now issues these findings of fact and conclusions of law setting forth why it has decided to grant the Motion. The Court issues these findings and conclusions pursuant Bankruptcy Rules 7052
Three witnesses testified at the hearing on December 7, 2017. First, David Schmidt ("
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a). Section 1334(b) provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11 [the Bankruptcy Code], or arising in or related to cases under title 11." District courts may, in turn, refer these proceedings to the bankruptcy judges for that district. 28 U.S.C. § 157(a). In the Southern District of Texas, General Order 2012-6 (entitled General Order of Reference) automatically refers all eligible cases and proceedings to the bankruptcy courts.
This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) because its resolution affects the administration of the Debtor's Chapter 11 bankruptcy estate. Further, it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(N) because it involves a proposed sale of property of the estate — i.e., the Property. This dispute is also a core proceeding under 28 U.S.C. § 157(b)(2)(0) because the sale of the Property will necessarily adjust the relationship between the Debtor and its creditors: the sale proceeds will be used to pay some, if not all, of the creditors. Finally, this dispute is a core proceeding under the general "catch-all" language of 28 U.S.C. § 157(b)(2). See Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925, 930 (5th Cir. 1999) ("[A] proceeding is core under § 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a
Venue is proper pursuant to 28 U.S.C. § 1408(1) because the Debtor's only asset (i.e., the Entire Tract) was located in the Southern District of Texas for the 180 days preceding the Petition Date.
In the wake of the Supreme Court's issuance of Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this Court is required to determine whether it has the constitutional authority to enter a final order in any matter brought before it. In Stern, which involved a core proceeding brought by the debtor under 28 U.S.C. § 157(b)(2)(C), the Supreme Court held that a bankruptcy court "lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." Id. at 503, 131 S.Ct. 2594. As already noted above, the pending matter before this Court is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (N), and (O). Because Stern is replete with language emphasizing that the ruling is limited to the one specific type of core proceeding involved in that dispute, this Court concludes that the limitation imposed by Stern does not prohibit this Court from entering a final order here. Core proceedings under 28 U.S.C. §§ 157(b)(2)(A), (N), and (O) are entirely different than a core proceeding under 28 U.S.C. § 157(b)(2)(C). See, e.g., Badami v. Sears (In re AFY, Inc.), 461 B.R. 541, 547-48 (8th Cir. BAP 2012) ("Unless and until the Supreme Court visits other provisions of Section 157(b)(2), we take the Supreme Court at its word and hold that the balance of the authority granted to bankruptcy judges by Congress in 28 U.S.C. § 157(b)(2) is constitutional."); Tanguy v. West (In re Davis), 538 Fed. Appx. 440, 443 (5th Cir. 2013) cert. denied sub nom. Tanguy v. West., ___ U.S. ___, 134 S.Ct. 1002, 187 L.Ed.2d 851 (2014) ("[W]hile it is true that Stern invalidated 28 U.S.C. § 157(b)(2)(C) with respect to `counterclaims by the estate against persons filing claims against the estate,' Stern expressly provides that its limited holding applies only in that `one isolated respect.'... We decline to extend Stern's limited holding herein.").
Alternatively, even if Stern applies to all of the categories of core proceedings brought under 28 U.S.C. § 157(b)(2), see First Nat'l Bank v. Crescent Elec. Supply Co. (In re Renaissance Hosp Grand Prairie Inc.), 713 F.3d 285, 294 n.12 (5th Cir. 2013) ("Stern's `in one isolated respect' language may understate the totality of the encroachment upon the Judicial Branch posed by Section 157(b)(2)...."), this Court still concludes that the limitation imposed by Stern does not prohibit this Court from entering a final order in the dispute at bar. In Stern, the debtor filed a counterclaim based solely on state law; whereas, here, this dispute (whether the sale of the Property should be approved) is governed by an express provision of the Code (i.e., § 363) and Bankruptcy Rule 6004, as well as judicially-created law from federal courts about the appropriate interpretation and application of § 363. There is simply no state law involved in the matter before this Court. Rather, the matter before the Court involves solely bankruptcy law. For all of these reasons, the Court concludes that it has the constitutional authority to enter a final order on the Motion. See, e.g., In re Junk, 566 B.R. 897, 904 (Bankr. S.D. Ohio
Finally, in the alternative, this Court has the constitutional authority to enter a final order because the parties have consented to adjudication of this matter by this Court. Wellness Int'l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 1947, 191 L.Ed.2d 911 (2015) ("Sharif contends that to the extent litigants may validly consent to adjudication by a bankruptcy court, such consent must be expressed. We disagree. Nothing in the Constitution requires that consent to adjudication by a bankruptcy court be expressed. Nor does the relevant statute, 28 U.S.C. § 157, mandate express consent...."). Indeed, the Debtor filed the Motion; CC3 filed a limited objection to the Motion; CC3 then filed an amended limited objection to the Motion; the Debtor thereafter filed a supplement to the Motion; CC3 filed yet another amended objection to the Motion; the parties appeared and participated at the hearing on the Motion held on December 7, 2017; and at no time did the Debtor or CC3 ever object to this Court's constitutional authority to enter a final order on the Motion. Indeed, in the Motion, the Debtor consented [Doc. No. 18, para. 3, p. 2 of 8]; and in its amended objection, CC3 did as well [Doc. No. 33, para. 20, p. 6 of 8]. If these circumstances do not constitute consent, nothing does.
For all of the reasons set forth above, this Court concludes that it has constitutional authority to enter a final order on the Motion.
1.
Although CC3 vehemently opposes the Motion, CC3 agrees with the Debtor on one issue: the case that governs this dispute is Institutional Creditors of Cont'l Air Lines, Inc. v. Cont'l Air Lines, Inc. (In Re Continental Airlines, Inc.), 780 F.2d 1223 (5th Cir. 1986). In this case, the Fifth Circuit held that a sale of estate property outside the ordinary course of business is allowable but not simply because a debtor requests approval. Rather, the debtor must articulate a sound business reason for the proposed sale and prove that the sale is in the best interest of the estate. Id. at 1226.
Continental Airlines also holds that in determining whether the debtor's business justification is sufficient this Court
Id. at 1226 (quoting Comm. of Equity Security Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983)).
Analysis of the Continental factors in the case at bar leads this Court to find that the Motion should be approved:
The purchase price under the PSA is $19,865,000.00, and this purchase, if consummated, will be in cash. [Findings of Fact Nos. 11 & 15]. The Debtor accurately projects that as of March 7, 2018 (a plausible date for closing to take place given the 90-day due diligence period in the PSA), CC3's lien on the Entire Tract will be $18,262,615.84.
Under these circumstances, this Court finds that there is a sound business reason for selling the Property at this time. Stated differently, the pending sale of the Property is in the best interest of the estate. Indeed, payment of all claims is the quintessential definition of what is in the best interest of any bankruptcy estate. In re Sasso, 572 B.R. 331, 338 (Bankr. D. N.M. 2017) (approving a § 363(b) sale by holding that "[t]he Trustee's intent to sell the estate's interest in the Condo to provide creditor's with a meaningful distribution on their claims is a sound business reason justifying the sale.").
The Property is proposed to be sold for $19,865,000.00. [Finding of Fact No. 15]. The value of the Entire Tract is $29,398,000.00. [Finding of Fact No. 6]. Thus, the Property's value is approximately 67.6% of the Entire Tract's value. Given that the sale of the Property will retire most, if not all, of the liens on the Entire Tract and leave the Debtor with a remaining asset (i.e., the other 2.019 acres of the Entire Tract) that has more than enough value to pay all other debts, the fact that the Property's value is 67.6% of the Entire Tract's value does not weigh against the Motion. If anything, it weighs in favor of approving the Motion.
The Debtor retained a very reputable broker (i.e., JLL) in August of 2017 (i.e., before the Petition Date); JLL proceeded to do its job and generate three offers for the Property during the ensuing three months [Finding of Fact No. 8]; and then the Debtor proceeded to conduct arm's length negotiations [Finding of Fact No. 14], resulting in the execution of the PSA and the filing of the Motion on November 27, 2017. [Finding of Fact No. 11]. Under these circumstances, there is nothing suspicious or unsatisfactory about the timing of the proposed sale of the Property. This factor therefore weighs in favor of granting the Motion.
There is no question that this case is a so-called single asset real estate case and, therefore, that § 362(d)(3) applies. Under this provision, it is mandatory that this Court terminate, annul, modify, or condition the automatic stay unless the Debtor, by no later than the 90th day after the Petition Date, takes one of two actions: (a) files a plan of reorganization "that has a reasonable possibility of being confirmed within a reasonable time;" or (b) commences making monthly payments to the lienholder "in an amount equal to interest at the then applicable nondefault contract rate of interest." 11 U.S.C. § 362(d). Here, based upon the testimony given and arguments made at the hearing on the Motion and this Court's review of the Debtor's schedules, it appears unlikely that the Debtor will commence making monthly payments — as it has no cash to do so. However, it appears very likely that the Debtor will file a proposed plan of reorganization by December 29, 2017 (i.e., the 90th day after the Petition Date) — as the Debtor assuredly does not want to risk this Court's terminating, annulling, modifying or conditioning the automatic stay as to the Entire Tract. The question is whether this proposed plan will have a reasonable possibility of being confirmed within a reasonable time.
There is no question that if the Debtor files a proposed plan on or before December
Under these circumstances, this factor weighs in favor of granting the Motion.
At the hearing on the Motion, neither the Debtor nor CC3 introduced any appraisals on either the Entire Tract or the Property. Accordingly, the Court finds that this particular factor is inapplicable in the dispute at bar.
Here, a portion of the Entire Tract — i.e., the Property — is being sold outright to MFI. [Finding of Fact No. 11]. Meanwhile, the other portion of the Entire Tract — i.e., the 2.019 acres — will be used by the Debtor to assist it in obtaining a loan to pay off all claims that are not retired through the sale of the Property. [Finding of Fact No. 20].
Under these circumstances, the Court finds that the Debtor's sale of the Property and use of the remaining 2.019 acres is appropriate; therefore, this factor weighs in favor of granting the Motion.
At the hearing on the Motion, neither the Debtor nor CC3 introduced any evidence as to whether the Entire Tract is increasing or decreasing in value. Accordingly, this Court finds that this particular factor is inapplicable in the dispute at bar.
In sum, of the seven factors identified in Continental, five weigh in favor of approving the Motion and two are inapplicable. Under all of these circumstances, this Court finds that the Motion should be approved.
In their pleadings and at the hearing on December 7, 2017, the parties cited various cases to this Court in support of their respective positions. However, one case that neither party cited is an opinion written by one of the undersigned judge's former colleagues, the Honorable Wesley W. Steen (who is now retired). In In re Gulf Coast Oil Corp., 404 B.R. 407 (Bankr. S.D. Tex. 2009), Judge Steen reviewed the history of Fifth Circuit case law on selling assets through a motion instead of through a plan, and he articulated numerous factors
Gulf Coast notes that not every sale is an emergency and that evidence of "a need for speed" should be taken into account when determining the suitability of a § 363(b) sale. Id. at 423. Here, the record reflects that the per diem interest accruing at the non-default rate is $4,865.64, and that the per diem interest accruing at the default rate is $7,077.29. [Finding of Fact No. 2]. The record is also clear that the Debtor wants to pay off the Note as quickly as possible to stop the significant interest accrual. Indeed, CC3 asserts that it is entitled to a per diem interest amount at the default rate — i.e., a per diem interest totaling $7,077.29.
Here, the Debtor retained a very reputable broker, who marketed the Entire Tract and received three offers on the Property. [Findings of Fact Nos. 7 & 8]. The broker then submitted these offers to the Debtor, who then conducted substantive negotiations with MFI through legal counsel — resulting in the drafting and execution of the PSA and the deposit by MFI of earnest money of $150,000. [Findings of Fact Nos. 11 & 14]. The Court finds that these circumstances reflect that the Debtor facilitated competitive bidding. This is not an instance where the Debtor's efforts to market the Entire Tract — to use one court's phrase — "have been informal and incomplete." In re Angel Fire Water Co. LLC, No. 13-10868 tall, 2015 WL 251570, at *3 (Bankr. D. N.M. Jan. 20, 2015) (denying the proposed § 363(b) sale). This factor therefore weighs in favor of granting the Motion.
As noted in the paragraph immediately above, the Debtor chose a very reputable broker to market the Entire Tract, and the broker proceeded to pursue an aggressive marketing strategy as evidenced by the fact that three bona fide offers were generated, one of which has resulted in the PSA. [Findings of Fact Nos. 7, 8, 9 & 11]. This is not an instance where the Debtor
An entity that the debtor controls, or that the debtor's principal controls, must not benefit from the sale of the asset. Gulf Coast, 404 B.R. at 424. These circumstances are not present here, as they have been in other cases where courts have denied the proposed sales. See, e.g., In re Cloverleaf Enters., Inc., No. 09-20056, 2010 WL 1445487, at *3 (Bankr. D. Md. Apr. 2, 2010) (denying proposed sale where "[t]he only beneficiary of this transaction is [the debtor's] sole stockholder"); In re Flour City Bagels, LLC, 557 B.R. 53, 82 (Bankr. W.D.N.Y. 2016) (denying proposed sale because "[t]his is a situation where the insider was both the buyer and the entity in complete control of the seller."). Here, the Debtor is not proposing to sell the Property to any insider or affiliate. Indeed, the testimony is clear that the Debtor and MFI have never done business in the past and were brought together solely through the efforts of the broker. [Finding of Fact No. 14]. This factor therefore weighs in favor of granting the Motion.
The immediate beneficiaries of the proposed sale of the Property are CC3 and the taxing authorities, as they will be paid at the closing. [Finding of Fact No. 15]. Although unsecured creditors will not be paid at the closing, the proposed sale of the Property indirectly benefits them because it allows the Debtor, who will still own 2.019 acres after the closing, to more easily obtain financing to completely pay off the unsecured creditors. [Finding of Fact No. 20]. This factor therefore weighs in favor of granting the Motion.
If a § 363(b) motion is brought too early in a case or is unopposed, the Court should look more carefully at the appropriateness of the proposed sale. Gulf Coast, 404 B.R. at 427. Here, the Motion was not brought too early; rather, it was brought almost two months after the Petition Date and only after the broker had aggressively marketed the Entire Tract for three months. [Findings of Fact Nos. 5, 7 & 8]. Moreover, CC3 filed pleadings strongly opposing the Motion; this Court held a hearing, at which time both the Debtor and CC3 introduced exhibits and adduced testimony from the representatives of the Debtor, MFI, and CC3; and this Court then took the matter under advisement to reflect upon the record that was made and the arguments lodged by counsel. Under these circumstances, there is no question that due process has been accomplished and that a truly contested hearing took
When determining whether to grant a § 363(b) sale, the burden of selling the asset pursuant to a plan should be taken into account. Id. at 424. Here, there is no doubt that the Debtor could file a plan that proposes to sell the Property to MFI — and, indeed, the plan that the Debtor will likely file by December 29, 2017 will set forth that CC3's claim will be paid from the sale of the Property.
Gulf Coast noted that "[e]ach case is unique. There may be other factors that tip the balance or that overweigh the evaluative factors set forth above." Id. at 427. Here, there are four other factors to consider. First, has the Debtor disclosed all of the terms of the proposed transaction? In Flour City, the debtor did not disclose that releases would be executed, or the reasons for the releases; nor did the debtor disclose that an extra $300,000 would be paid to the debtor's counsel. 557 B.R. at 83. Here, the Motion makes complete disclosure by attaching the PSA as an exhibit; and the PSA is a 23-page single-spaced document that describes in detail all of the terms and conditions of the proposed sale. [Finding of Fact No. 11]. There is no hidden agenda.
Second, can CC3, as the objecting party, defeat any plan of reorganization proposed by the Debtor that contains the provisions
Third, the very credible testimony from Schmidt and Fein is that the parties did in fact negotiate at arm's length. For example, MFI submitted an initial offer of $110 per square foot and requested a due diligence period of 150 days. [Finding of Fact No. 14]. The Debtor clearly rejected this offer, as the final terms set forth in the PSA reflect a per square foot price of $135 and a due diligence period of 90 days. [Finding of Fact No. 14]. Moreover, both MFI and the Debtor retained very seasoned, extremely competent real estate attorneys to represent them and assist in the negotiations. [Finding of Fact No. 14]. Indeed, these attorneys drafted a very detailed, 23-page single-spaced PSA setting forth the terms and conditions of the proposed sale. [Finding of Fact No. 11]. Finally, the Debtor and MFI are two completely independent unrelated and unaffiliated parties who have never done business with one another. [Finding of Fact No. 14]. Under all of these circumstances, this Court finds that the parties conducted arm's length negotiations. This factor therefore favors approval of the Motion.
Finally, MFI has been proceeding in good faith. It retained its longstanding outside real estate counsel to negotiate and help draft the PSA [Finding of Fact No. 14], and has therefore spent its own good money on very capable counsel. MFI has also deposited $150,000.00 of earnest money [Finding of Fact No. 11]. Further, MFI has retained a seasoned and very capable bankruptcy attorney (Julia Cook) to represent it at the hearing on the Motion (and at all future hearings in this Court), and therefore MFI has also paid more money from its own pockets to another attorney with specific expertise to represent its interests. Finally, MFI has lined up numerous engineers and consultants who will immediately begin their assignments if this Court approves the Motion. [Finding of Fact No. 18]. These facts, taken collectively, reflect that MFI has been proceeding in
In sum, the Court finds that eleven of the factors identified in Gulf Coast weigh in favor of approving the Motion. These circumstances, combined with the numerous Continental factors that weigh in favor of granting the Motion, lead this Court to conclude that the Debtor has carried his burden and that the Motion should be approved.
In its pleadings, as well as during closing arguments made at the hearing on the Motion, CC3 has made several arguments opposing the Motion. The Court now addresses these arguments in turn, and finds that none of them are persuasive.
First, CC3 argues that in bankruptcy, sales made outside of the ordinary course of business must be done through an auction process where bid procedures and a "stalking horse" bidder are established. There is no question that one approach to selling assets out of bankruptcy is to establish bid procedures in a written order and then hold an auction — either in open court or at a private office (such as a law firm) — with the highest bid to then be approved at a subsequent hearing on a motion to sell. However, there is no provision in the Code that requires such an approach to be taken. In fact, Rule 6004(f)(1) expressly allows sales outside the ordinary course of business to be done through either a public auction or a private sale. This particular Rule, which is entitled "Conduct of Sale Not in the Ordinary Course of Business," expressly sets forth, in pertinent part, the following: "All sales not in the ordinary course of business may be
Third, CC3 contends that the Debtor is not fulfilling its fiduciary duty to creditors by prosecuting the Motion. The Court is at a loss to understand this particular argument. The Debtor certainly has a fiduciary duty to use reasonable care in making decisions, but once those decisions are made the Debtor is protected by the business judgment rule. LaSalle Nat'l Bank v. Perelman, 82 F.Supp.2d 279, 292 (D. Del. 2000). "On the issue of the exercise of a debtor-in-possession's business decision and judgment, a debtor-in-possession's business decision `should be approved by the court unless it is shown to be so manifestly unreasonable that it could not be based upon sound business judgment, but only on bad faith, or whim or caprice.'" G-I Holdings, Inc. v. Those Parties Listed on Ex. A (In re G-1 Holdings, Inc.), 313 B.R. 612, 657 (Bankr. D. N.J. 2004) (citation omitted). Here, the Debtor wants to sell the Property so that it can pay off all tax liens and pay down all, or a substantial portion of, the debt owed to CC3 — and then refinance the 2.019 acres so that all unsecured debts can be paid in full. The Debtor's objectives are certainly not "manifestly unreasonable" or pursued due to bad faith, whim or caprice. Id. Contrary to CC3's contention, this Court finds that the Debtor's prosecution of the Motion very much represents an attempt to fulfill its fiduciary duty to creditors by actually paying their claims in full as soon as possible. This is not an instance where — as this Court has seen from time
Fourth, CC3 argues that the Motion "constitutes an impermissible sub rosa plan which cannot be approved absent the approval of a disclosure statement and voting as indicated in In re Braniff" [Docket No. 33, ¶ 16, p. 5 of 8]. This Court disagrees. In Braniff, the Fifth Circuit reversed the approval of the transaction because: (1) the Court found that the transaction established the terms of a Chapter 11 plan sub rosa; (2) the transaction required secured creditors to vote a portion of their deficiency claim in favor of a plan supported by the unsecured creditor's committee; and (3) the transaction required all parties to release claims against the debtor. Pension Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 939-40 (5th Cir. 1983). In the case at bar, the transaction memorialized by the PSA contains none of these requirements. The Debtor is simply requesting approval to sell a portion of the Entire Tract, and to have the sale proceeds immediately distributed to pay liens, including CC3's lien. Indeed, here, the Debtor has not yet filed a plan, nor does the Motion request that any of the lienholders vote in favor of any future plan that the Debtor files. Moreover, the Motion does not request that CC3 release its lien against the Entire Tract; rather, CC3's lien on the Property will attach to the sale proceeds (and be paid immediately at closing), and CC3 will keep its lien on the remaining 2.019 acres that the Debtor will still own. The facts here are simply completely distinguishable from the facts in Braniff. Moreover, in Continental, the Fifth Circuit stated the following:...we hold that when an objector to a proposed transaction under § 363(b) claims that it is being denied certain protection because approval is sought pursuant to § 363(b) instead of as part of a reorganization plan, the objector must specify exactly what protection is being denied. If the court concludes that there has in actuality been such a denial, it may then consider fashioning appropriate protective measures modeled on those which would attend a reorganization plan.
Continental, 780 F.2d at 1227.
Here, CC3 has failed to specify just exactly what protections it is being denied
Finally, to the extent that CC3 suggests that the Motion should be denied on the grounds that the Braniff holding bars the sale of the Property because it represents a sale of substantially all of the Debtor's assets, this argument is also off the mark. In Braniff, the Fifth Circuit expressly declined to hold that the sale of all estate property was per se improper; it simply listed the problems in the transaction at issue in that case that improperly interfered with "the Code's carefully crafted scheme for creditor enfranchisement where plans of reorganization are concerned." 700 F.2d at 940. In fact, in opinions issued since Braniff, the Fifth Circuit has given its blessing to the disposition of substantially all of estate assets through a motion so long as the Code's plan provisions are not gutted by the transaction. See, e.g., Official Comm. of Unsecured Creditors v. Cajun Elec. Power Coop., Inc. (In re Cajon Elec. Power Co-op., Inc.), 119 F.3d 349 (5th Cir. 1997).
In sum, none of CC3's arguments opposing the Motion are persuasive, and this Court rejects all of them.
In the first instance, CC3's amended objection requests this Court to simply deny the Motion based upon the arguments discussed above. However, CC3 requests alternative relief if this Court grants the Motion. Citing § 363(e), CC3 requests the Court to condition the sale of the Property by requiring the Debtor to provide adequate protection under § 361. Specifically, CC3 argues that the form of adequate protection should be to require the Debtor: (1) to immediately pay in full all of the taxes owed on the Entire Tract (i.e., $1,038,365.29); and (2) to immediately begin making monthly payments to CC3 in the amount of $210,000 (representing the amount of default interest that accrues each month under the Note).
The Court declines to award this form and amount of adequate protection. The uncontroverted evidence is that the value of the Entire Tract is $29,398,000.00 and that the amount owed to CC3 as of December 1, 2017, is $17,774,853.09. [Findings of Fact Nos. 6 & 12]. Thus, CC3 is oversecured by approximately $11.5 million. There is ample case law holding that adequate protection already exists when there is a substantial equity cushion. In re Shivshankar P'ship LLC, 517 B.R. 812, 817 (Bankr. E.D. Tenn. 2014) ("In addition to the statutory forms found in § 361, adequate protection may also be accomplished through the existence of an equity cushion, or `value in the property, above the amount owed to the secured creditors... that will shield that interest from loss due to a decrease in the property's value during the time the automatic stay remains in effect.'") (citation omitted); In re Johnson, 90 B.R. 973, 979 (Bankr. D. Minn 1988) ("The primary factor in determining the existence of adequate protection in this case is the existence of an adequate equity cushion .... Many courts find that a creditor's interest is adequately protected if
To emphasize just how much adequate protection CC3 presently has, this Court has analyzed what it understands CC3 contends — without any evidence — is likely to happen if this Court approves the Motion. Specifically, CC3 contends that MFI will not only use the entire 90-day due diligence period, but will also invoke the PSA's provisions allowing it to obtain two 30-day extensions.
Sale Proceeds: $19,865,000 Less: Tax Liens for 2015, 2016 and 2017: $1,038,365 Prorated Taxes for 2018 through May 11, 2018 (educated guess assuming that Less: the Debtor fails in its suit to lower the taxes from past years) (estimated 4.5 months/12 months × $600,000): $225,000 Less: CC3's lien as of December 1, 2017 (at the non-default rate): $17,774,853 Less: ILL Commission: $397,294 Less: Title Fee and Closing Costs: $74,690Amount of Proceeds Available to Pay CC3's Post-Petition Interest and Reasonable Attorneys' Fees: $354,798 Additional interest from the Petition Date up to December 1, 2017 (assuming the default rate Less: is used) ($2,211.65 × 62 days): $137,122 Accrued Interest at the Default Rate, plus Service Fees from Less: December I, 2017 to May 11, 2018 (162 days × the per diem of $7,133.74): $1,155,666 Less: Estimated Attorneys' Fees: $10,000Amount of Shortfall: $947,990
The chart above reflects that the sale of the Property under the PSA will be sufficient to pay all tax liens and a substantial portion, but not all, of the debt owed to CC3. Viewed in a vacuum, these figures reflect that the proposed sale does not adequately protect CC3. Indeed, CC3 argues as such.
However, this argument fails to recognize that after the sale of the Property, the Debtor will still own the other 2.019 acres of the Entire Tract — and there is no question that CC3 has a first lien on these 2.019 acres. The only evidence introduced at the hearing on the Motion as to the value of these 2.019 acres came from the Debtor's representative, who testified that these acres have a value of $11,755,000. CC3 did not controvert this testimony, and given that this Court has found that the Debtor's representative is a very credible witness, the Court finds that the 2.019 acres has a value of $11,755,000. Thus, the shortfall of $947,990 from the sale of the Property will be secured by the 2.019 acres. Indeed, a quick calculation shows that CC3 will be adequately protected by more than 12 times the amount that will still be owed under the Note.
The credible testimony from the Debtor's representative is that once the sale of the Property is completed, the Debtor will pay off CC3's balance (if any exists) and the unsecured creditors by obtaining refinancing on the 2.019 acres and/or by receiving cash infusions from equity. Given that the 2.019 acres has a value of $11,755,000, the Court finds that there is a reasonable likelihood that the Debtor will be able to obtain refinancing at a 25% loan to value ratio, which means that the Debtor will be able to obtain a loan of approximately $2.9 million. [Finding of Fact No. 20]. A loan of $2.9 million is more than sufficient to pay off the shortfall of $947,990 owed to CC3 and also to retire all of the unsecured claims, which total $685,325.00. [Finding of Fact No. 19]. Thus, the Court finds that there is a reasonable likelihood that the Debtor will be able to pay the remaining balance owed to CC3, any administrative claims (which primarily will be attorneys' fees owed to counsel for the Debtor), and all unsecured claims. Finally, even assuming that the Debtor is unable to obtain refinancing to pay CC3's remaining balance, CC3 will have the right to foreclose its lien on the 2.019 acreage that has a value greatly in excess of the remaining balance. As already noted above, such significant equity itself constitutes adequate protection.
Analysis of the Continental and Gulf Coast factors overwhelmingly indicates that the Debtor has met its burden to show that the proposed sale of the Property to MFI for $19,865,000 is entirely appropriate and in the best interests of the estate. Therefore, the Court grants the Motion.
Finally, the Court finds it telling that CC3's representative, when testifying, stated that a major reason that CC3 opposes the Motion is that it typically only extends financing for no more than two years. This is hardly a convincing basis for opposing the Motion. Indeed, the very nature of the Chapter 11 process includes stretching out repayment of loans. Nor does the fact that the Debtor has not made a payment to CC3 since April of this year provide a sound basis for objecting to the Motion. Whether CC3 likes it or not, it is the envy of most secured creditors throughout this country insofar as there is substantial equity in CC3's collateral. This fact, combined with the fact that the chances of MFI closing on the sale of the Property are very high, means that it is very likely that in 2018, CC3 will be paid in full. Indeed, by granting the Motion, this Court believes that the chances of the Debtor paying not only CC3 in full, but all creditors in full, are maximized.
A separate order approving the Motion has already been entered on the docket.
