Wells Fargo Bank National Association et al v. Texas Grand Prairie Hotel Realty LLC et al
Filing
27
Memorandum Opinion and Order: The court ORDERS that the rulings made by the bankruptcy court in the two April 28, 2011 orders from which Lender has appealed be, and are hereby, affirmed. (Ordered by Judge John McBryde on 11/8/2011) (dnc)
IN THE UNITED STATES DISTRI
NORTHERN DISTRICT OF TE
FORT WORTH DIVISION
IN RE:
TEXAS GRAND PRAIRIE HOTEL
REALTY, LLC, ET AL.,
Debtors.
-------------------------------
WELLS FARGO BANK, NATIONAL
ASSOCIATION, AS TRUSTEE FOR
THE MORGAN STANLEY CAPITAL
I INC. COMMERCIAL MORTGAGE
PASS-THROUGH CERTIFICATES
TRUST, SERIES 2007-XLF9,
ACTING BY AND THROUGH ITS
SPECIAL SERVICER, BERKADIA
COMMERCIAL MORTGAGE LLC,
Appellant,
VS.
TEXAS GRAND PRAIRIE HOTEL
REALTY, LLC, ET AL.,
Appellees.
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Bankruptty No. 10-43242-rfn11
District Court Case
No. 4:11-CV-390-A
(consolidated with
No. 4:11-CV-401-A)
MEMORANDUM OPINION
and
ORDER
Before the court for decision are the above-referenced
consolidated appeals by Wells Fargo Bank, National Association,
as Trustee for the Morgan Stanley Capital I Inc. Commercial
Mortgage Pass-Through Certificates Trust, Series 2007-XLF9,
acting by and through its special servicer, Berkadia Commercial
Mortgage LLC ("Lender" or "Appellant"), from (1) the order signed
by the bankruptcy court April 28, 2011, confirming the modified
amended joint plan of reorganization ("Plan") of Texas Grand
Prairie Hotel Realty, LLC, Texas Austin Hotel Realty, LLC, Texas
Houston Hotel Realty, LLC, and Texas San Antonio Hotel Realty,
LLC ("Debtors" or "Appellees"), and (2) the order signed by the
bankruptcy court on April 28, 2011, denying the motion of Lender
objecting to, and to strike, the designation by Debtors of Lewis
E. Robichaux IV ("Robichaux") as an expert witness.
the appellees in the consolidated appeals.
Debtors are
The court has
concluded that the rulings of which Appellant complains should be
affirmed.!
1.
Nature of the Case and Background
Lender's predecessor-in-interest loaned $49,000,000 to
Debtors in 2007 for use by Debtors to acquire and renovate four
hotels in Texas.
The loan was secured by deeds of trust and
security agreements that encumbered the hotels and substantially
all of Debtors' other assets.
maturity in April 2010.
The loan was not repaid upon its
Debtors filed their bankruptcy petitions
in May 2010, which were ordered jointly administered.
Lender's appraiser valued the real and personal property
that was serving as security for the indebtedness at $39,080,000.
Debtors agreed to the valuationi and, the parties stipulated that
Lender would have a secured claim in bankruptcy in the amount of
$39,080,000, plus the value of the cash collateral to be
determined by the bankruptcy court.
The balance of Lender's
lDebtors, as appellees, filed a motion to dismiss the consolidated appeals for equitable mootness.
Because of the court's decision to affirm the rulings of the bankruptcy court, the issues raised by the
motion to dismiss need not be addressed by the court. In effect, the motion to dismiss for equitable
mootness is, itself, moot.
2
claim-approximately $12,000,000 before consideration of the cash
collateral--was treated as an unsecured claim.
The Plan divided creditors and interest holders into
classes, and specified the treatment of each class.
The Plan's
class provisions relevant to the issues in the instant appeal are
as follows:
Class 2 consisted of the secured claim of Lender, other than
its interest in cash collateral.
Debtors were to pay Lender
$39,080,000 on Lender's secured claim over a seven-year period,
with the first eighty-three paYments being made monthly based on
principal and interest amortized over a twenty-year period, and
with the eighty-fourth paYment being a balloon paYment of the
unpaid principal amount and accrued and unpaid interest.
Lender
was to earn interest on the unpaid balance of that indebtedness
at the rate of 5% per annum.
Class 4 was a secured claim of LodgeNet Interactive
Corporation.
The Plan provided that this claim, amounting to
$10,231.78, would be paid within ten days after the effective
date of the Plan.
LodgeNet was impaired under the Plan, making
it eligible to vote on the Plan.
Class 5 included secured claims for ad valorem taxes.
The
plan provided for paYment of the tax claims in two installments,
one within ten business days after the Plan became effective, and
the other no later than June 30, 2011.
The taxing authorities
were impaired under the Plan, making them eligible to vote on the
Plan.
3
On February 17 and 18, 2011, Bankruptcy Judge Russell F.
Nelms held a two-day hearing on confirmation of the Plan, at
which he also received evidence bearing on Lender's motion
objecting to, and to strike, the designation by Debtors of
R. at 3460-3731; 3764-4006. 3
Robichaux as an expert witness. 2
Debtors called a number of witnesses who, directly or indirectly,
supported Debtors' contention that the Plan was feasible and
proposed in good faith and that the interest rate of five percent
proposed to be paid to Lender under the Plan was an appropriate
rate.
Testifying on behalf of Lender was an expert, Richard
Frrell ("Ferrell"), who supported Lender's contentions that the
Plan was not feasible and that the five-percent rate of interest
was insufficient, considering all of the factors that determine
an appropriate cramdown rate.
On February 22, 2011, Judge Nelms devoted most of an
afternoon to hearing argument of counsel for Debtors and Lender
in support of their respective positions on, inter alia,
feasibility of the Plan, Debtors' good faith in proposing the
Plan, appropriateness of the five-percent interest rate, and
whether Robichaux's expert opinion as to an appropriate interest
rate should be considered by the judge.
R. at 12262-12310.
Judge Nelms conducted a status conference by telephone on
April 18, 2011, during which he informed the parties that he
2Judge Nelms was new to the case in February 2011, having inherited it, at least temporarily,
from the other active bankruptcy judge in the Fort Worth Division.
3The "R. at _ _" references are to the fifty-one-volume record filed June 10, 2011, in the
district court as the record on appeal in No.4: ll-CV-390-A before consolidation.
4
would require certain modifications to be made in the Plan, as
then proposed, before he would be willing to confirm it, and that
if the changes were not made he would deny the Plan.
12311-19.
R. at
Debtors thereafter informed Judge Nelms that the
modifications he required in the Plan had been made. 4
At a hearing conducted telephonically by Judge Nelms on
April 28, 2011, he announced his findings and conclusions as to,
and rUlings on, feasibility of the Plan, the issue of whether the
Plan was proposed by Debtors in good faith, appropriateness of
the five-percent interest rate, the qualifications of Robichaux
to provide an expert opinion as to the appropriate rate, and the
propriety of the equity sale.
R. at 3424-59.
Judge Nelms's
findings and conclusions were detailed, and, to the extent
pertinent to these appeals, will be mentioned again at a later
point in this memorandum opinion.
On April 28, 2011, Judge Nelms signed his order confirming
the Plan, R. at 9-17, and his order denying Lender's objection
to, and motion to strike, Debtors' designation of Robichaux as an
expect witness, R. at 3196-97.
Particularly pertinent to the
issues presented by the consolidated appeals are the following
findings and conclusions contained in the order confirming the
Plan.
5.
The Debtors have proposed the Plan in good
faith and the Plan is not forbidden by any applicable
bankruptcy or nonbankruptcy law.
The Plan complies
4The modifications made by Debtors at the direction of Judge Nelms were discussed during a
hearing held by Judge Nelms telephonically on April 22, 2011. Tr. of Apr. 22, 2011 Hr'g, Docket Entry
368 in Bankr. No. 10-43242-rfnl1.
5
with all applicable provisions of the Bankruptcy Code,
and the Debtors have complied with all applicable
provisions of the Bankruptcy Code . . . .
9.
with respect to each Class that has rejected
the Plan, the Court finds that the Plan does not
discriminate unfairly and that the Plan is fair and
equitable, with respect to such Class, and that all
requirements for confirmation of the Plan under Section
1129(b) of the Bankruptcy Code with respect to such
Class are met. Accordingly, the Court may confirm the
Plan notwithstanding the rejection of the Plan by
certain Classes.
10. All requirements for the confirmation of the
Plan imposed by the Bankruptcy Code, including
specifically Sections 1129(a) and 1129(b) of the
Bankruptcy Code, have been satisfied and met. All
factual and legal requirements for the confirmation of
the Plan have been satisfied and met.
R. at 12-13.
The order denying Lender's motion pertaining to
Robichaux recited that the motion was being denied" [f]or the
reasons stated on the record by the Court on April 28, 2011
"
R. at 3196.
II.
Issues Presented on Appeals
Appellant described in its opening brief its
characterization of the issues presented on the consolidated
appeals as follows:
1.
Under the Supreme Court's decision in Till v. SCS
Credit Services. Inc., 541 U.S. 465 (2004), maya
bankruptcy court approve the restructuring of a
secured creditor's claim at an interest rate of 5%
where undisputed evidence demonstrates that the
market rate of interest for much less risky loans
is significantly higher?
2.
Did the Bankruptcy Court properly permit Robichaux
to present expert testimony on interest rates that
ignored market evidence and took the form of a
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sUbjective "mosaic" analysis that could not be
duplicated?
3.
Did the Debtors satisfy their burden to demonstrate
that they proposed their reorganization plan in good
faith where the Debtors:
(a)
requested that a creditor with no security
interest in their assets amend its unsecured
proofs of claim to assert secured claims;
(b)
reserved funds for the paYment of ad valorem
taxes but then refused to pay the taxes when
due, so that the taxing authorities were
"impaired" creditors entitled to vote on the
Debtors' plan; and
(c)
conducted a sale process for the membership
interests in the Debtors' restructured
business that involved contacting only 19
potentially interested parties, with no
advertising?
Br. of Appellant at 1-2.
Appellees recharacterized in their brief the issues
presented by the appeals as follows:
First, did the Bankruptcy Court commit clear error in
concluding, through multiple and extensive findings of
fact, and after an extensive evidentiary hearing
including expert witnesses, that the Debtors met their
burden to confirm their Plan: (i) as having been
proposed in good faith; and (ii) as containing an
appropriate cramdown rate of interest of 5%? Second,
did the Bankruptcy Court abuse its discretion by
finding Robichaux was qualified to offer an expert
opinion in connection with the appropriate rate of
interest to be paid to the Appellant under the
Bankruptcy Code?
Br. of Appellees at 1.
The court considers that the issues to be decided are:
First Issue:
Did the bankruptcy court commit
clear error in finding that Debtors met their burden to
show that the Plan should be confirmed as having been
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proposed in good faith and as containing an appropriate
cramdown rate of interest of 5%?
Second Issue:
Did the bankruptcy court abuse its
discretion by permitting Robichaux to provide an expert
opinion that the interest rate contained in the Plan
was an appropriate rate to be paid to Lender?
III.
Analysis
A.
Standard of Review
To the extent the appeal presents questions of law, the
bankruptcy court's judgment is sUbject to de novo review.
Pierson & Gaylen v. Creel & Atwood (In re Consolidated
Bancshares, Inc.), 785 F.2d 1249, 1252 (5th Cir. 1986).
Findings
of fact, however, will not be set aside unless clearly erroneous.
Bankr. R. 8013.
A finding is clearly erroneous, although there
is evidence to support it, when the reviewing court on the entire
evidence is left with a definite and firm conviction that a
mistake has been committed.
Memphis-Shelby County Airport
Authority v. Braniff Airways, Inc.
(In re Braniff Airways, Inc.),
783 F.2d 1283, 1287 (5th Cir. 1986).
The mere fact that this
court would have weighed the evidence differently if sitting as
the trier of fact is not sufficient to set aside the bankruptcy
court's order if that court's account of the evidence is
plausible in light of the record viewed in its entirety.
Anderson v. City of Bessemer City, 470 U.S. 564, 573-74 (1985).
In evaluating whether a finding of the bankruptcy court is
8
clearly erroneous, "due regard shall be given to the opportunity
of the bankruptcy court to judge the credibility of the
witnesses."
B.
Bankr. R. 8013.
The Five Percent Interest and Robichaux Issues
The majority of Appellant's brief on appeal is devoted to
the proposition that the five-percent rate of interest
contemplated by the Plan does not comply with the "fair and
equitable" requirement of 11 U.S.C.
§
1129(b) (1).
Woven into the
arguments on that point is Lender's contention that the
bankruptcy court abused its discretion by permitting Robichaux to
provide expert witness evidence as to the interest rate that
would satisfy the "fair and equitable" requirement.
In addition to the findings inherent in the findings and
conclusions expressed by the bankruptcy court in the order
confirming the Plan, supra at 5-6, Judge Nelms made very specific
findings and conclusions on those subjects at the April 28, 2011,
hearing.
R. at 3441-47.
Included were the following:
Mr. Robichaux is qualified to testify on the topics of
interest rates and the adjustment of interest rates to
address additional risk factors.
R. at 3442.
Robichaux properly interpreted Tills and properly
applied it.
R. at 3446 (footnote reference added) .
[T]he Robichaux 0plnlon is more consistent with [the
court's] own understanding of Till, and . . . the
STill v. SCS Credit Servs., Inc., 541 U.S. 465 (2004).
9
Debtors' rate is fair and equitable under section
1129(b) (2).
R. at 3447.
The findings and conclusions set forth immediately above
were a part of a lengthy discussion by Judge Nelms of the reasons
why he thought Robichaux was qualified to give the opinions he
gave, why he was unwilling to rely on Ferrell's opinion, and why
he concluded that the five-percent interest rate contemplated by
the Plan was fair and equitable.
While the evidence considered
by the bankruptcy court provided basis for plausible arguments on
both sides of the five percent/Robichaux issues, the court
concludes that the bankruptcy court did not make any legal error
in its findings, conclusions, and rulings on those issues.
And,
after reviewing the evidence, this court is unable to conclude
that any of the bankruptcy court's findings of fact as to the
sUbjects being discussed under this subheading were clearly
erroneous.
C.
The Bankruptcy Court's Findings and Conclusions That
the Plan Was Proposed in Good Faith
Lender's arguments that the Plan was not proposed by Debtors
in good faith has three aspects:
First, that Debtors improperly caused a creditor by the
name of LodgeNet to be treated in the Plan as a secured
creditor to be paid at a future date, rather than to assume
the contract between Debtors and LodgeNet, thus causing
LodgeNet to have the right to vote on the Plan;
10
Second/ that Debtors intentionally withheld payment to
tax creditors/ instead providing in the Plan that the pastdue tax obligations were to be paid in two installments/ the
second payment to be made months after confirmation of the
plan/ thus causing the tax creditors to be impaired/
meaning/ in turn/ that they would have a right to vote on
the Plan; and
Third/ that the equity-sale process that led to
Debtors' successful equity purchase was not a meaningful
attempt to maximize the equity value for the benefit of the
bankruptcy estate.
As previously noted/ the bankruptcy court found in the order
confirming the Plan that Debtors "proposed the Plan in good
faith" and that the "Plan complies with all applicable provisions
of the Bankruptcy Code/ and the Debtors have complied with all
applicable provisions of the Bankruptcy Code."
Supra at 5-6.
Judge Nelms elaborated at length on the good-faith issue
when he announced his findings and conclusions on April 28/ 2011.
R. at 3428-38/ 3447-53.
The bankruptcy court did not find
necessary to deal specifically with the LodgeNet issue inasmuch
as the LodgeNet claims in Class 4 were subject to a pending claim
objection filed by Lender.
R. at 3428.
As to the Class 5 claims
of the property tax creditors/ the bankruptcy court found that
the six-month delay in the payment of a $350/000 part of that
claim was a meaningful impairment/ R. at 3430/ and that "Debtors
had a valid business justification in proposing to defer payment
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of some of the tax claims in Class 5," R. at 3433.
The
bankruptcy court found credible Debtors' explanation as to why
the full amount of the tax claim could not be paid at an earlier
date.
Id.
Also, the bankruptcy court found that "Debtors'
proposal to delay one-half of the paYment to Class 5 is not
motivated by bad faith, but instead a good faith desire to
reorganize and continue operating the hotels in the interest of
paying creditors."
R. at 3437-38.
The bankruptcy court disagreed with the contention of Lender
that the equity interest was not sufficiently marketed.
3447-52.
R. at
The thrust of Judge Nelms's April 28, 2011 remarks on
the sUbject of the sale of the equity was that the procedures
that were followed resulted in a fair and equitable new value
contribution, reasonably equivalent to the value received in
return, when considered together with the increase to
approximately $2,700,000 by reason of the modifications required
by Judge Nelms.
Id.
JUdge Nelms found that Bridge "developed a
logical and reasonable strategy for reaching . . . parties most
likely to be interested in the deal" and "exercised reasonable
discretion in marketing the asset."
R. at 3450.
JUdge Nelms's thorough, and well-reasoned, analysis and
disposition of the aspect of Lender's contention that Debtors did
not satisfy their burden to demonstrate that they proposed the
Plan in good faith is amply supported by the evidentiary record
upon which the bankruptcy court acted.
Therefore, there is no
basis for a conclusion by this court that any of the findings of
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the bankruptcy court on the subjects being discussed under this
sUbheading were clearly erroneous; and, the court is not
persuaded that the bankruptcy court committed any error of law in
the conclusions it reached and rUlings it made on those subjects.
D.
Conclusion and Order
For the reasons given above, the court cannot conclude that
the bankruptcy court committed clear error in finding that
Debtors met their burden to show that the Plan should be
confirmed as having been proposed in good faith and as containing
an appropriate interest rate of five percent, and cannot conclude
that the bankruptcy court abused its discretion by permitting
Robichaux to provide an expert opinion that the interest rate
contained in the Plan was an appropriate rate to be paid to
Lender or committed any error of law in entering the orders from
which Lender has appealed.
Therefore,
The court ORDERS that the rulings made by the bankruptcy
court in the two April 28, 2011 orders from which Lender has
appealed be, and are hereby, affirmed.
SIGNED November
~,
2011.
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