UNITED STATES BANKRUPTCY COURT
WESTERN DISTRICT OF TENNESSEE
WESTERN DIVISION
In Re:
CORNERSTONE-CAMERON &
STONEGATE, INC.,
Debtor.
)
)
)
)
)
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Case No. 07-27849
Chapter 11
OBJECTION OF THE BANK OF NEW YORK TRUST COMPANY, AS
INDENTURE TRUSTEE, TO DEBTOR’S DISCLOSURE STATEMENT
IN CONNECTION WITH THE PLAN OF REORGANIZATION
John C. Tishler TN BPR #013441
Eric B. Schultenover TN BPR #020981
WALLER LANSDEN DORTCH & DAVIS, LLP
511 Union Street, Suite 2700
Nashville, TN 37219
Telephone: 615-244-6380
Facsimile: 615-244-6804
[email protected]
[email protected]
and
Eric A. Schaffer (pro hac vice)
REED SMITH LLP
435 Sixth Avenue
Pittsburgh, PA 15219
Telephone: 412-288-4202
Facsimile: 412-288-3063
[email protected]
Counsel for The Bank of New York Trust
Company, N.A., as indenture trustee
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TABLE OF CONTENTS
Page
I.
THE DISCLOSURE STATEMENT DOES NOT PROVIDE CREDITORS
WITH ADEQUATE INFORMATION……………………………………………………3
A.
The Standard for Approval of the Disclosure Statement…………………………..3
B.
The Disclosure Statement Does Not Contain Adequate Information Regarding
The Debtor’s Prepetition Debt Structure…………………………………………..4
C.
The Disclosure Statement Does Not Contain Adequate Information Regarding
The 2005 Change in Management and Grant of the Option………………………5
D.
The Disclosure Statement Does Not Contain Adequate Information Regarding
The Debtor’s Prepetition Defaults and Workout Efforts.........................................7
E.
The Disclosure Statement Does Not Contain Adequate Information Regarding
The Use of the Debtor’s Properties……………………………………………......8
F.
The Disclosure Statement Does Not Contain Adequate Information Regarding
Events in the Bankruptcy Case................................................................................9
G.
The Disclosure Statement Does Not Contain Adequate Information Regarding
The Existence, Classification, and Treatment of Claims.......................................11
H.
The Disclosure Statement Fails to Provide Adequate Information Regarding the
The Extent or Value of the Debtor’s Interests in Property.....................................14
I.
The Disclosure Statement Fails to Provide Adequate Information Regarding
Assumption of Leases and Executory Contracts....................................................15
J.
The Disclosure Statement Fails to Provide Adequate Information Regarding
Tax Issues...............................................................................................................17
K.
The Disclosure Statement Does Not Contain Adequate Information Regarding
Feasibility...............................................................................................................17
L.
The Disclosure Statement Fails to Provide Adequate Information Regarding
Risks to Creditors if the Plan is Confirmed...........................................................19
M.
The Disclosure Statement Does Not Contain Adequate Information Regarding
Avoidance Actions............................................................................................….20
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N.
The Disclosure Statement Does Not Contain Adequate Information Regarding
Insider Transactions, Conflicts of Interest, and Releases...................................…20
O.
The Disclosure Statement Fails to Provide an Adequate Liquidation Analysis.…25
II.
THE COURT SHOULD NOT APPROVE A DISCLOSURE STATEMENT FOR AN
UNCONFIRMABLE PLAN..............................................................................................25
III.
THE PLAN IS NOT CONFIRMABLE.............................................................................26
IV.
A.
The Plan Does Not Satisfy the Requirements of Section 1129(a)(1, 2) Regarding
Compliance with Title 11.......................................................................................26
B.
The Plan Does Not Satisfy the Requirement of Section 1129(a)(3) that the
Plan Be Proposed in Good Faith and Not by Any Means Forbidden by Law.......29
C.
The Plan Cannot Satisfy the Requirements of Section 1129(a)(7, 8) that the
Plan Be Accepted by Holders and Classes.............................................................31
D.
The Plan Cannot Satisfy Requirements of Section 1129(a)(10) Regarding
Acceptance by an Impaired Class..........................................................................32
E.
The Plan Does Not Satisfy the Feasibility Requirement of Section
1129(a)(11)............................................................................................................32
F.
The Plan Does Not Satisfy the Requirements of Section 1129(b) that the Plan
Be Fair and Equitable and Not Discriminate Unfairly..........................................34
G.
The Plan Does Not Satisfy the Requirements of Section 1129(b) Regarding
the Absolute Priority Rule.....................................................................................37
CONCLUSION.................................................................................................................39
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The Bank of New York Trust Company, N.A. as indenture trustee (the “Bank”), hereby
files its Objection to the Debtor’s Disclosure Statement in Connection with the Plan of
Reorganization (the “Disclosure Statement”) filed by Debtor Cornerstone-Cameron & Stonegate,
Inc. (the “Debtor”). It also renews its request that the Court terminate or condition the automatic
stay of 11 U.S.C. § 362(d) on the basis that “cause” exists and that a sale process is much more
likely to result in a better return to all creditors.
1.
The Disclosure Statement is replete with gaps and inadequacies. Because it does
not contain “adequate information” as required by Section 1125 of the Bankruptcy Code, it
cannot be approved. As discussed below, the Disclosure Statement does not contain adequate
information regarding:
•
•
•
•
•
•
•
•
•
•
•
•
•
the Debtor’s prepetition debt structure;
prepetition management changes and grant of the “MCAP Option”;
the Debtor’s prepetition defaults and workout efforts;
the Debtor’s use of its Properties;
events in the Debtor’s bankruptcy case;
the existence, classification, and treatment of claims;
the extent and value of the Debtor’s interests in property;
the assumption of leases and executory contracts;
tax issues;
avoidance actions;
insider transactions, conflicts of interest, and releases;
feasibility and risks to creditors if the plan is confirmed; and
liquidation of the Debtor’s estate.
2.
Beyond that, the Debtor’s proposed Plan of Reorganization (the “Plan”) is
unconfirmable. As discussed below, the Plan contravenes numerous sections of the Bankruptcy
Code. For this additional reason, the Disclosure Statement should not be approved. Approval
would be, at best, a costly exercise in futility that serves only to delay recovery by the secured
creditor and, if the case is dismissed and a receiver is appointed, payment in full of unsecured
creditors.
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3.
Most importantly, the deep and fatal flaws in the Plan and in the post-petition
operation of the Debtor (as set forth in more detail in the Response to the application to employ
Equity Management, Inc. (“EMI”)) lead to only one logical conclusion: rather than pursue the
Plan and the attendant costs with soliciting the Plan and a contested confirmation hearing, the
Court should require the Debtor to pursue the sale. Should the Debtor be able to obtain consent
from all bondholder classes for a Plan, the Plan can be put back on track and the sale can be
postponed. However, where the only party benefited by the Plan is a for-profit entity which has
paid for an option to purchase the apartment complexes, the Court should do what is in the best
interest of the secured creditors.
4.
As shown by the objections filed by the Class A and Class C bondholders, the
secured creditors are unanimously opposed to pursuit of this “dead on arrival” Plan (after all, it is
their funds or collateral that is being used to pay for the solicitation and effort at confirming the
Plan, not that of the true beneficiary of the Plan). For these reasons and the additional reasons
set forth herein, the Court should deny approval of the Disclosure Statement.
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I.
THE DISCLOSURE STATEMENT DOES NOT PROVIDE CREDITORS WITH
ADEQUATE INFORMATION
A.
The Standard for Approval of the Disclosure Statement
5.
The primary purpose of a disclosure statement is to give creditors the information
necessary for them to decide whether or not to accept the debtor’s plan. Tenn-Fla Partners v.
First Union Nat'l Bank of Fla., 229 B.R. 720 (W.D. Tenn. 1999); In re Scioto Valley Mortgage
Co., 88 B.R. 168 (Bankr. S.D. Ohio 1988). Section 1125 obligates a plan proponent to submit a
disclosure statement with “adequate information,” defined as:
information of a kind, and in sufficient detail, as far as is reasonably
practicable in light of the nature and history of the debtor and the
condition of the debtor’s books and records, that would enable a
hypothetical reasonable investor typical of holders of claims or interests of
the relevant class to make an informed judgment about the plan.
11 U.S.C. § 1125(a)(1). Approval of a disclosure statement should be denied when it does not
contain adequate information. See Menard Sanford v. Mebey (In re A.H. Robins Co.), 880 F.2d
694, 696 (4th Cir. 1989).
6.
While a majority of the principal amount of the bonds are held by institutions,
there also are a number of individual holders. See, e.g., Transcript of Deposition of Douglas
Margerum (“Margerum Deposition”) at p. 0023 at 25, p. 0024 at 1-13. Accordingly, in this case,
“adequate information” must enable individual investors, as well as institutional investors, to
make an informed judgment about the Plan.
7.
A disclosure statement should contain “[a]ll factors presently known to the plan
proponent that bear upon the success or failure of the proposals contained in the plan.” In re
Microwave Products of America, Inc., 100 B.R. 376, 377 (Bankr. W.D. Tenn. 1989) (internal
quotations omitted). Among the types of information that generally must be included are the
following:
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•
•
•
•
•
•
•
•
•
a description of the available assets and their value;
the anticipated future of the company;
the present condition of the debtor while in Chapter 11;
the estimated return to creditors under a Chapter 7 liquidation;
the estimated administrative expenses, including attorneys’ and accountants’
fees;
financial information, data, valuations, or projections relevant to the creditors’
decision to accept or reject the Chapter 11 plan;
information relevant to the risks imposed on creditors under the plan;
the actual or projected realizable value from recovery of preferential or
otherwise voidable transfers; and
the relationship of the debtor with any affiliates.
See also In re United States Brass Corp., 194 B.R. 420 (Bankr. E.D. Tex. 1996); In re Dakota
Rail, Inc., 104 B.R. 138, 142 (Bankr. D. Minn. 1989). Disclosure of all the factors listed above,
however, may still be insufficient to permit creditors to evaluate a plan. See In re Dakota Rail,
Inc., 104 B.R. at 143 (citing In re Scioto Valley Mortgage Co., 88 B.R. at 171).
8.
As discussed below, the Disclosure Statement fails to satisfy the requirements of
Section 1125 with regard to almost every one of these necessary elements. Because the
Disclosure Statement does not provide creditors with adequate information, enabling them to
make an informed judgment about the Plan, approval should be denied.
B.
The Disclosure Statement Does Not Contain Adequate Information
Regarding the Debtor’s Prepetition Debt Structure
9.
All of the Debtor’s secured debt and the overwhelming majority of its total debt
arose through the issuance of the bonds for which the Bank serves as indenture trustee (the
“Bonds”). While the Disclosure Statement references this transaction, the terms of the governing
documents – including the Indenture, Lease, and Deeds of Trust (collectively, the “Bond
Documents”) – are critical to understanding the limitations on Debtor’s rights, the full scope of
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the Debtor’s obligations, and the rights of individual classes of creditors.1 Without attempting
to address all of the information required here:
a.
The Lease defines the Debtor’s leasehold interest and sets forth specific
limitations on the Debtor’s interest in the Properties. Among other things, it,
obligates the Debtor to comply with the terms of the Indenture, Lease §§ 2.2(s),
2.3(c)); prohibits the Debtor from pledging or assigning any interest in the
Properties or incurring any debt senior to the Bonds, Lease §§ 2.2(x, gg), 5.2; and
mandates that all Revenues are held in “express trust” for the Bank, Lease § 4.2.
b.
The Indenture governs the priority of rights in Revenues between and among the
Bank, holders of the Series A Bonds, and holders of the Series C Bonds, and the
process for distributions to any of them.
c.
The Deeds of Trust grant liens and security interests in all of the Debtor’s assets,
including all management contracts. The Deeds of Trust, inter alia, restrict the
Debtor’s right to grant an interest in or encumbrance upon the Properties and
prohibit any conveyance of any legal or equitable interest in the Properties.
Deeds of Trust, § 2.3(b), 2.3(c)(i).
It is critical for creditors to understand how the Plan seeks to alter or affect the foregoing and
other rights and obligations created in the Bond Documents. Section 1125 requires the
Disclosure Statement to address all of these and other relevant provisions of the governing
documents.
C.
The Disclosure Statement Does Not Contain Adequate Information
Regarding the 2005 Change in Management and Grant of the Option
10.
On April 25, 2005, the Debtor entered into a series of inter-related agreements
(together, the “2005 Agreement”) in which it (a) appointed AFAHCamgate LLC
(“AFAHCamgate”) as “asset manager;” (b) appointed the principals of AFAHCamgate’s parent,
1
As explained previously, the Bank serves as indenture trustee for two series of bonds,
Series A and Series C. The Series A bonds are contractually senior to the Series C bonds,
inter alia, in right of payment. The Debtor sometimes refers to the former as the “Series
A Bonds” and sometimes as the “Senior Bonds.” Similarly, the Debtor sometimes refers
to the latter as the “Series C Bonds” and sometimes as the “Subordinated Bonds.” For
consistency, this Objection refers to the Bonds only as the Series A Bonds and Series C
Bonds.
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American Foundation for Affordable Housing (“AFAH”), as the Debtors directors; (c) entered
into a management agreement (the “Management Agreement”) with Equity Management, Inc.
(“EMI”); and (d) gave Municipal Capital Appreciation Partners III, L.P. (“MCAP”), a New York
investment fund, an option to acquire the Debtor’s leasehold interest in the two properties (the
“Properties”) leased by the Debtor.2
11.
In the Contribution Agreement, AFAH agreed to obtain $250,000 from MCAP,
which AFAH would contribute to AFAHCamgate. AFAHCamgate agreed to pay these funds to
the Debtor’s prior property manager to pay certain expenses.
12.
In the Option Agreement, the Debtor gave MCAP a right of first refusal and an
option to acquire the Debtor’s leasehold interest in the Properties at a fixed price.3
13.
The sole principal of the Debtor, Hunt Whitbeck, also serves as a director of
Cornerstone-Cameron and Stonegate, Inc. (“CCSI”) and AFAHCamgate.
14.
EMI receives a management fee of four percent (4%) of gross revenues monthly
among other reimbursed expenses and costs, for its management (the “Management Fee”) of the
apartment complexes (herein, also, the “Facilities” or “Properties”). EMI also receives a
“construction management” fee of $7,000.00 per month. Also under the Management
Agreement, AFAHC receives a one percent (1%) fee of gross revenues. Pursuant to the terms of
2
As noted above, the Debtor’s agreements with AFAHCamgate and EMI have been
assigned to the Bank. The Bank reserves all rights, including the right to terminate either
or both agreements in accordance with the applicable documents.
3
The Disclosure Statement makes no reference to the Option granted by the Debtor to
MCAP on April 25, 2005. The Plan makes a passing reference to it only with regard to
$50,000 payable by MCAP in 2007 in consideration of the June 2007 extension of the
Option. For reasons discussed below, further disclosure is required.
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the Trust Indenture, the AFAHC fee is supposed to accrue only. Notwithstanding that, EMI has
paid the cumulative fee, most recently in the past few months.
15.
The Management Fee is subordinated to the repayment of the Bonds, but has been
paid contrary to the Bond Documents and Management Agreement.
D.
The Disclosure Statement Does Not Contain Adequate Information
Regarding the Debtor’s Prepetition Defaults and Workout Efforts
16.
The Disclosure Statement fails to provide adequate information regarding the
Debtor’s informal workout efforts during the 2 1/2 years prior to bankruptcy. While
AFAHCamgate and EMI did not serve, respectively, as asset manager and property manager
prior to April 25, 2005, the Debtor is obligated to provide adequate information with regard to
events predating its agreements with AFAHCamgate and EMI. For example, the Disclosure
Statement must provide adequate information regarding the Debtor’s operating problems, the
Debtor’s defaults under the Bond Documents, and the Bank’s declaration of Events of Default
prior to April 2005.
17.
The statement that the Debtor adopted a “completely new strategy” in April 2005,
Disclosure Statement at ¶ C. 2. (2005 Events and Background) is not correct. In fact, the Debtor
continued a strategy proposed and adopted by prior management.
18.
The statement that the Bank approved “a multi-year program of catch-up
maintenance,” Disclosure Statement at ¶ C. 2. (2005 Events and Background), is inaccurate. The
Bank did not approve any plan, nor did not agree to forbear for any fixed period. The Bank
agreed to use of rents for a limited period of time, so that the Debtor could make certain critical
repairs, after which the Bank would consider a sale of the Properties. The Disclosure Statement
should explain that the maintenance and repair program now proposed by the Debtor goes far
beyond what was presented in September 2005.
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19.
The Disclosure Statement should explain that, in the first several months of 2007,
the Debtor delivered to the Bank (i) operating reports that showed declining revenues and
increased expenses; (ii) a certified financial statement that contained a going concern
qualification; and (iii) information that EMI had only completed 58% of the roof repairs that
were to have been completed promptly following the 2005 bondholder meeting. In May 2007,
the Bank reported to bondholders that it believed further forbearance was unwarranted and
proposed to seek appointment of a receiver to market and sell the Properties. Bondholders
responding to the Bank’s report supported this action.
20.
The Disclosure Statement also should explain that, in May 2007, the Bank asked
the Debtor whether it would consent to the appointment of a receiver. In July 2007, having
received no response from the Debtor, the Bank filed its Complaint seeking appointment of a
receiver. Thereafter, the Bank requested the Debtor to consent to the appointment of a receiver.
No response was made by the Debtor. As more fully set forth in Bank’s Motion to Dismiss or in
the Alternative to Grant Stay Relief, or Abstain, the Debtor filed its bankruptcy petition less than
an hour before a hearing in the receivership action for the express purpose of staying the
receivership. Deposition of B. Hunt Whitbeck (“Whitbeck Deposition”) p. 0019 at 10-25.
E.
The Disclosure Statement Does Not Contain Adequate
Information Regarding the Use of the Debtor’s Properties
21.
The Debtor does not identify the basis for its conclusory statements regarding the
Memphis housing market. If it has statistical or other independent information supporting these
statements, it should be identified. If not, the Debtor should explain that it has no foundation for
these statements.
22.
The Debtor’s review of occupancy rates is misleading because it does not
reference the high delinquency rates. See Disclosure Statement at 13.
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23.
The citation in the Disclosure Statement regarding the Debtor’s “mission” of
providing affordable housing, is misleading or wrong. First, as noted above, the Debtor has
taken no action to ensure that it actually provides housing to low or moderate income residents.
Second, the Debtor previously testified that its “mission” was to provide affordable housing for
senior citizens. Whitbeck Deposition, p. 0091 at 16-25. This testimony is significant because
the Debtor’s garden apartments are ill-suited for senior citizens.
24.
The Disclosure Statement provides no support for its statement that EMI has
extensive experience managing affordable housing projects. See Disclosure Statement at 14.
The Disclosure Statement should contain information relative to EMI’s actual experience with
such projects.
F.
The Disclosure Statement Does Not Contain Adequate
Information Regarding Events in the Bankruptcy Case
25.
The Disclosure Statement does not contain adequate information regarding the
Bank’s motion for relief from stay, dismissal, or abstention, the Bank’s challenge to the Debtor’s
claim that rents constitute cash collateral, or the evidence presented by the Bank in support of its
position. As more fully set forth in the summary transcripts of the Whitbeck Deposition,
Douglas Margerum (“Margerum Deposition”) and Equity Management, Inc (“EMI Deposition”):
•
AFAHCamgate is a shell entity that has its “office” in the living room of its
principal. It provides essentially no value to the Debtor or its estate.
•
The Debtor’s financial condition has been deteriorating as a result of increased
crime, decreased tenant interest, and increased security costs. The Debtor’s revenues
have declined since 2005. Vacancies are above budget and cash flow is substantially
worse than budget with resulting deferral of necessary capital expenditures. The
Properties are cash flow negative even without paying any debt service.
•
The Properties require additional capital improvements that cannot be completed in
the near future. When AFAHCamgate took over in April 2005, the Debtor
anticipated that all necessary capital improvements and repairs could be funded and
completed if the Bank deferred debt service through the end of 2007. This estimate
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proved to be overly optimistic, as the Debtor now believes that presently identified
capital improvements and repairs will take between $4.5 million and $5.0 million
over an additional four years. Capital expenditures are below budget because the
Debtor does not have revenues sufficient to cover budgeted improvements. Given
the current shortfall between gross revenue and operating expenses, there is no
assurance there will be funds sufficient to fund necessary capital improvements and
repairs in the next two years.
•
The Debtor has no equity in its properties. The value of the Properties is not
“anywhere near the book value.” Liabilities exceed assets by several million dollars
and Debtor cannot pay its obligations on a current basis.
•
No one is prepared to invest new money in the Debtor in connection with a plan of
reorganization and the Debtor cannot cure existing defaults in payment of debt
service.
•
The Debtor has made no attempt to sell the Properties.
26.
The Disclosure Statement should explain that the Court authorized use of cash on
a limit basis and subject, inter alia, to the Bank’s claim that the Debtor has no interest in rents
and there is no cash collateral.
27.
The Disclosure Statement should discuss the Agreed Order Modifying the
Automatic Stay pursuant to which, inter alia, the Debtor is required to engage a broker to market
the Properties for sale, and the Bank will be granted stay relief in the event a plan is not
confirmed expeditiously.
28.
The Disclosure Statement does not contain adequate disclosure regarding the
Court’s Order requiring the Debtor to engage a broker to market the Debtor’s Properties for sale
or that the broker will engage in a dual track of attempting to find a buyer or buyers for the
Properties at the same time the Plan would be solicited.
29.
The Disclosure Statement does not contain adequate disclosure regarding the
Debtor’s post-petition decision to commingle tenant security deposits and operating funds, or the
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fact that the Debtor has apparently paid pre-petition claims including those of Memphis Gas
Light & Water, with post-petition revenues, in direct violation of the Bankruptcy Code.
G.
The Disclosure Statement Does Not Contain Adequate Information
Regarding the Existence, Classification, and Treatment of Claims
30.
The Debtor’s classification and treatment of claims presents several problems.
Although the Disclosure Statement refers creditors to its amended schedules of assets and
liabilities, the schedules are incomplete. The Debtor states that it has $46,000 in unscheduled
claims, but does not explain or identify them. See Disclosure Statement at 8. Additionally, the
Debtor’s schedules contain inaccuracies. For example, although the Schedules value the
Properties at $0, Disclosure Statement at 3, the Debtor testified that this represents only the value
of the Debtor’s equity interest. Whitbeck Deposition, pp. 0044 at 9-13, 0066 at 3-14. In
accordance with Section 521 of the Bankruptcy Code and Fed. R. Bankr. P. 1007, the Debtor
must provide complete and accurate schedules.
31.
The class of Allowed Administrative Claims is problematic insofar as it provides
for payment for unidentified professionals whose engagement has not been approved in
accordance with Section 327-329 of the Bankruptcy Code. The class includes an appraiser,
accountants, bond counsel, and tax counsel. This issue is not theoretical, as the Debtor states that
it will engage bond counsel to draft and/or opine on new bond documents, but fails to identify
such counsel or the terms of the proposed engagement. Even assuming secured creditors consent
to use of their property/collateral for this purpose, the Debtor must file appropriate applications
before any professionals may be paid.
32.
Class 1 (Other Priority Claims) present a disclosure problem only insofar as the
Debtor has not identified any such claims in its schedules.
33.
Class 2 (Series A Bond Holders) presents several problems:
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a.
There is insufficient disclosure of the terms of the new proposed bond
documents. The Debtor apparently intends to modify provisions of the
Bond Documents, but fails to identify those provisions that are to be
modified. Any proposed modifications of covenants, lien priorities,
subordinations of claims, or other terms must be disclosed.
b.
There is no disclosure with regard to the election of treatment under
Section 1111(b). The Plan and Disclosure Statement improperly assume
that the Bank, as indenture trustee, makes an election on behalf of the
beneficial owners of the Bonds. See Disclosure Statement at 7, 8. As
discussed below, this is not correct as a matter of law. As set forth in the
Agreed Order Modifying the Automatic Stay, it is the beneficial holders,
not the Bank, that makes any election under Section 1111(b). The Plan
and Disclosure Statement need to provide a mechanism for the beneficial
owners of the Bonds to vote on the plan and to exercise any rights under
Section 1111(b). The Disclosure Statement must provide individual
beneficial holders with adequate information regarding the procedure for
and effect of such an election.
c.
The Disclosure Statement assumes that bondholders will elect treatment
under Section 1111(b), but fails to say what happens if holders do not
affirmatively make such an election. The Disclosure Statement should
explain the consequences of bondholders’ failure to make such an
election.
d.
The Disclosure Statement does not contain adequate information regarding
the Forbearance Agreement. The proposed Forbearance Agreement is a
focal point of the Plan, yet it is not attached and its terms are not
described. See Disclosure Statement at 4, 25. The Plan provides only that
the Forbearance Agreement will be served at least 24 hours prior to the
confirmation hearing, after which creditors will have ten days to
“comment on its terms,” Plan at 7, after which an “agreement” may be
imposed on creditors. Obviously, there is a problem if confirmation can
occur before the Forbearance Agreement is finalized. The absence of
disclosure on this point not only contravenes Section 1125, it offends due
process.
e.
Other critical documents, such as the opinion of bond counsel and any
new Bond Documents, also are missing. Will the existing Series A Bonds
be cancelled? See Plan at 13. Does the Debtor propose to cancel the
Indenture? Id. Will new or revised bonds be marketable? Is the IRS
bound by the statement that new or revised bonds will be tax exempt? See
Plan at 7. All this information is essential if creditors are to make an
informed judgment about the Plan. Although the reference to payment of
interest at the “applicable rates” presumably means the rates required
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under the Bond Documents, see Disclosure Statement at 4, this should be
confirmed.
f.
The proposed use of the Debt Service Reserve Fund to make payments to
bondholders is inadequate. Either these funds belong to the Bank or they
are subject to the Bank’s security interests and rights of setoff. In any
event, the Debtor has no right to use these funds and promising to give
bondholders funds to which they already are entitled is misleading.
g.
The discussion of distributions to bondholders is inaccurate. See
Disclosure Statement at 22. Under the Indenture, all distributions are
made to the Bank, for further distribution in accordance with the
Indenture.
34.
Class 3 (The Health, Educational and Housing Facility Board of the County of
Shelby, Tennessee, as Issuer) (the “Issuer”) should not exist because the Issuer, having been paid
all amounts to which it currently is entitled, is not a creditor.
35.
Class 4 (The Bank of New York Trust Company, N.A., as Successor Indenture
Trustee) is misclassified because the Bank’s claim for fees and expenses is secured on a first
priority basis. See, e.g., Indenture at §§7.03, 8.06.
36.
Class 5 (General Unsecured Claims) presents several disclosure problems:
a.
As noted above, the Debtor admits having failed to identify about 40% of
the claims held by persons other than the Bank and bondholders.
b.
Class 5 also should include the deficiency claims of the Series A
Bondholders and Series C Bondholders unless they affirmatively elect
treatment under Section 1111(b).
c.
The Plan does not address the MCAP Option. If the Option is executory
and is rejected, MCAP may have a rejection claim. The Debtor needs to
quantify any such claim.
37.
Class 6 (Unsecured Management Fees) should not exist because all prepetition
management fees have been paid and, therefore, no claims exist.
38.
Class 7 (Series C Bondholders) presents many of the same infirmities discussed
above with regard to Class 2. Adding insult to injury, the proposal to pay Series C bondholders
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2% of what they are owed means that they may receive less than the amounts held in the Series
C Debt Service reserve Fund. Restated, the Debtor proposes that the Series C holders pay
themselves with their own money, and give the balance to the Debtor or other creditors. The
Debtor must explain that Class 7 holders may receive less than they would in a Chapter 7
liquidation.
39.
Class 8 (Ownership Interest) misidentifies the holder of the Interest. Although the
Disclosure Statement identifies AFAHCamgate as an asset manager, with a Class 6 claim for
fees, Class 8 refers to AFAHCamgate’s “ownership interest.” Cf. Disclosure Statement at 5, 9,
19. However, it appears from the underlying documents that AFAHCamgate does not have any
ownership interest in the Properties. Although the Disclosure Statement states that
AFAHCamgate is the Debtor’s sole member, the Debtor states in the Lease that it is a
nonmember corporation. Lease § 2.2(a). If AFAHCamgate nonetheless asserts an equity
interest, the Debtor must disclose the consideration given by AFAHCamgate for the acquisition
and/or retention of such interest.
40.
The Disclosure Statement and Plan fail to address treatment of insider claims. The
Disclosure Statement should identify all insiders and their claims, explain whether or not such
claims will be subordinated, and, if not, set forth the reasons therefor.
H.
The Disclosure Statement Fails to Provide Adequate Information
Regarding the Extent or Value of the Debtor’s Interests in Property.
41.
The Disclosure Statement states that the Debtor makes no representations
regarding the value of its assets. Disclosure Statement at 2. This is problematic because asset
valuation is critical to determination of the extent of bondholders’ secured claims, election of
treatment under Section 1111(b), consideration of alternatives to the Plan (including liquidation
1770779.1
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and/or sale of the Properties), and satisfaction of the cramdown requirements of Section 1129(b).
Absent such information, the Disclosure Statement does not contain adequate information.
42.
The Disclosure Statement also states that the Debtor cannot represent that
information presented is accurate, complete, or correct. Disclosure Statement at 2. This
disclaimer is a prima facie admission that the Disclosure Statement does not contain adequate
information.
43.
Ownership of the tenant rents is an integral part of valuation. The Bank contends
that, under the Lease, all tenant rents are held in “express trust” for the Bank. The Disclosure
Statement fails to address the issue of ownership or the effect on valuation (and, as discussed
below, feasibility) if the Bank is correct.
I.
The Disclosure Statement Fails to Provide Adequate Information
Regarding Assumption of Leases and Executory Contracts.
44.
The Disclosure Statement provides limited information with regard to the leases
and executory contracts that are to be assumed. Some agreements are simply not referenced.
There is no discussion of the business reasons for assumption or rejection of leases and contracts.
45.
Inexplicably, the Debtor’s schedule of leases and contracts to be assumed does
not include the Lease. See Plan, Schedule 5.1. If the Lease is a true lease, failure to assume the
Lease will mean that the Debtor has no interest in the Properties. If the Lease is treated as a
financing agreement, the Debtor has no right to receive any advances from the Bank. Further, if
the Lease is treated as a financing agreement, the Debtor’s Plan is likely infeasible, as set forth
below.
46.
Moreover, the Debtor should confirm that, if the Lease is assumed, the Debtor
will comply with all of its terms. If the Debtor assumes the Lease, it must promptly cure the
1770779.1
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existing defaults (including payment defaults of more than $3,400,000).4 Additionally, the
Debtor must provide reasonable assurance of future performance in accordance with the terms of
the Lease.
47.
The Debtor needs to explain why the Debtor should assume an agreement
pursuant to which AFAHCamgate would get 1% of the gross revenues on a priority basis. As
noted above, AFAHCamgate is a shell entity that provides essentially no value to the Debtor or
its estate.5 No one from AFAHCamgate has visited the Properties in several years. No tax
return was prepared for 2006. AFAHCamgate diverted consideration paid by MCAP for
extension of the MCAP Option. Moreover, under the governing documents, any fee payable to
AFAHCamgate is subordinated to the claims of the Bondholders and the Bank. The Disclosure
Statement does not explain that the Plan would eliminate this right.
48.
Unless the Debtor proposes to eliminate the Bank’s security interest in
management agreements, the Debtor should explain that the management and asset management
agreements are assigned to the Bank and may be terminated on a day’s notice.
4
Additionally, the Lease (i) obligates the Debtor to comply with the Indenture. §§ 2.2(s),
5.9. Relevant provisions of the Indenture include the strict hierarchy for payments out of
Revenues, Section 5.04: the absence of any obligation to make any distributions to the
Debtor following the occurrence of an Event of Default, 5.04; and the prohibition on
payment on the Series C bonds unless and until current obligations to the Series A Bonds
are paid in full. Section. See also 7.01, 7.09. Terms of the Indenture relating to
payments and time of payments or priority of liens cannot be modified without consent.
9.01, 9.02. The Lease also prohibits the Debtor from incurring any debt senior to the
Bonds. The proposed $250,000 superpriority loan contravenes this provision. Lease
2.2(x). In addition, the Lease requires the Debtor to hold all rents in express trust for the
Bank, § 4.2 and prohibits any pledge or assignment of any interest in the Projects, § 5.2..
5
Most courts apply a “business judgment” test to decisions to assume or reject contracts or
leases. See Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures
Corp.), 4 F.3d 1095, 1098 (2d Cir. 1993).
1770779.1
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49.
The Disclosure Statement does not explain why the MCAP Option agreement is
being assumed. The Debtor should be required to set forth the business justification for doing so.
J.
The Disclosure Statement Fails to Provide
Adequate Information Regarding Tax Issues
50.
Section 1125(a)(1) expressly requires a discussion of the potential material
Federal tax consequences of the plan to investors. The Debtor’s disclaimer with regard to tax
consequences does not satisfy the requirement of Section 1125 in this case because the Plan
would materially alter the terms of bonds that currently are tax exempt. The Debtor’s statement
that it intends to engage yet-unidentified nationally recognized tax counsel to deal with the
treatment of the bonds under the Internal Revenue Code (Disclosure Statement at 4, 16, 28) does
not satisfy the requirements for disclosure. Disclosure must include the effect of the proposed
plan on the taxability of bonds, the nature or magnitude of any deductions, and the specific
timing and amount of distributions of tax exempt income.
K.
The Disclosure Statement Does Not Contain
Adequate Information Regarding Feasibility
51.
Although the Debtor’s Plan assumes that it receives a $250,000 loan, the
Disclosure Statement fails to provide adequate information regarding this loan. It does not
identify the lender, the terms, efforts to find alternative financing, or the Debtor’s relationship
with the proposed lender.
52.
The Disclosure Statement also fails to disclose the manner in which the loan is to
be authorized. If it is to be authorized prior to confirmation, the Debtor must provide adequate
information as to how the Debtor will satisfy the requirements of Section 364. If the loan is to be
authorized post-confirmation, after the Debtor has been revested with its property, see Disclosure
Statement at 24, the Debtor must provide adequate information with regard to the basis for
1770779.1
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giving the lender liens superior to the liens held by the Bank (in violation of the Bond
Documents, see supra).
53.
The Debtor’s statement that it is confident the plan is feasible, Disclosure
Statement at 26, is inadequate because the Debtor’s assumptions are not based on objective
evidence. The Debtor’s own deposition testimony undermines any sense of confidence.
54.
The Disclosure Statement should explain how the Debtor proposes to increase
occupancy, rents, and Revenues sufficiently to cure the existing $3.5 million shortfall and pay
principal and interest accruing through 2028. This is critical, given the Debtor’s historic
shortfalls in budgeted revenues and difficulty increasing occupancy at the Autumnwood
property. No less important, the Debtor has no ability to increase revenues from the Stonegate
property, where occupancy has been around 93% or 94%.6
55.
Additional disclosure is required with regard to the Debtor’s cash flow
assumptions. For example:
6
a.
The Plan proposes to pay $300,000 in legal and administrative expenses out of
tenant rents. Assuming that the Debtor has the right to use these funds for this
purpose, notwithstanding the Lease and Indenture, what is the effect of this
payment on the Debtor’s operations and capital repairs?
b.
The Debtor assumes capital expenditures for the period June 2007 through
December 2009 aggregating $3.2 million. How can this be reconciled with EMI’s
testimony that required capital expenditures will be in $4.5 to $5.0 million range?
See Margerum Deposition at 34.
c.
What is the basis for using a 9% capitalization rate for the Properties? How does
this compare with the capitalization rates proposed by the broker engaged by the
Debtor to market the Properties for sale?
d.
What is the basis for the assumption that the applicable discount rate for the
Series A Bonds equals the interest rate on those bonds?
Although the Disclosure Statement references 84% occupancy at Autumnwood,
Disclosure Statement at 13, the Bank understands that the present rate is about 78% .
1770779.1
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L.
The Disclosure Statement Fails to Provide Adequate Information
Regarding Risks to Creditors if the Plan is Confirmed
56.
The Disclosure Statement does not provide adequate information regarding risks
that it will be unable to perform under the Plan and that, 21 years from now, bondholders will be
forced to foreclose on the Properties. Whatever risks and delays might be associated with
liquidation are far less than the risks and delays attendant to the Debtor’s plan to force
bondholders to wait until 2028 to see what the Properties may be worth. Immediate liquidation,
by contrast, would result in a prompt distribution to creditors.
57.
The Debtor provides no assurance whatsoever that it will be able to make future
payments. The statement that amounts unpaid as of July 1, 2028 will be paid through sale,
refinance, or foreclosure (Disclosure Statement at 17) is a stark admission that the Debtor (or
MCAP, the option holder) gets all the potential upside, while putting nothing at risk, and the
bondholders get all the risk and no upside. In effect, the Debtor gets a lottery ticket, for which it
pays nothing. If the Properties somehow appreciate, the Debtor gets a windfall, all paid for with
the Bondholders’ money.
58.
The Disclosure Statement should explain that there may be no need for chapter 7
trustee because the case may be dismissed, in which case a receiver will be appointed to have the
Properties sold, while assuring that all amounts properly due to unsecured creditors are paid in
full.
59.
Contrary to the Debtor’s suggestion, this is hardly an “efficient mechanism for
prompt … distributions.” See Disclosure Statement at 27.
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M.
The Disclosure Statement Does Not Contain
Adequate Information Regarding Avoidance Actions
60.
Although the Debtor states that there are no avoidance actions, the Debtor has
done no investigation. In fact, there may be several avoidance actions relating to insiders.7
a.
These claims include diversion to AFAHCamgate of trust funds paid to EMI for
specific purposes; breach of subordination agreements relating to management
fees; and granting an alleged option to a related third party, in direct contravention
of the Bond Documents, with proceeds of the option being used by
AFAHCamgate for purposes unrelated to the Debtor or its Properties.
b.
The MCAP Option may be voidable as a fraudulent transfer, made in violation of
the Lease, the Deeds of Trust, and the Indenture, and without any consideration
being paid to the Debtor for the option or the extension.
N.
The Disclosure Statement Does Not Contain Adequate Information
Regarding Insider Transactions, Conflicts of Interest, and Releases.
61.
The Disclosure Statement provides no information regarding insider transactions
or conflicts of interest. For instance, disclosure is required with regard to the Debtor’s
relationship with AFAHCamgate. Does it have an equity interest, in addition to an asset
management agreement? The Disclosure Statement does not discuss claims against
AFAHCamgate, as referenced above. Assumption of the AFAHCamgate agreement clearly
would be contrary to the interests of the estate unless the Debtor expressly reserves the right to
pursue claims against AFAHCamgate.
62.
Further disclosure is required with regard to the Debtor’s relationship with EMI.
The Disclosure Statement does not discuss amounts EMI has been receiving in addition to its 4%
management fee, such as the construction management fee of $7,000/month.
7
The Bank reserves claims for conversion of trust funds or cash collateral, as the case may
be, and any other claims against the Debtor or third parties.
1770779.1
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63.
Disclosure is required with regard to the Debtor’s relationship with MCAP.
MCAP and its affiliates (together, “MCAP”) are insiders within the definition of section 101(31)
of the Code. Based on information gathered in earlier discovery and public sources, the Bank
believes that the following occurred:8
a.
MCAP and its Managing Partner, Richard Corey, orchestrated the 2005
transaction in which AFAH created AFAHCamgate, AFAHCamgate’s
principal took control of the Debtor’s board, AFAHCamgate was
appointed as asset manager, and MCAP received the MCAP Option.9
b.
MCAP had prior dealings with AFAH and its principal, Hunt Whitbeck.
Whitbeck Deposition pp. 0012-13. Corey introduced Whitbeck to these
properties because he needed an entity that was exempt from federal
taxation under I.R.C. § 501(c)(3) entity to take nominal control of the
Debtor. Whitbeck Deposition p. 0078 at 7-25 and Exhibit 15 (option is
means for MCAP to “control” the Properties).
c.
At the same time, MCAP recommended EMI as property manager.
Whitbeck Deposition, Exhibit 16. EMI and its principal had a close
relationship with MCAP. For example, about one-third of EMI’s business
is managing properties for MCAP. Margerum Deposition, p. 0023 at 316. Corey also had nominated EMI’s CEO for election as a director of a
public company in which MCAP had an interest. See
http://www.sec.gov/Archives/edgar/data/1175167/000089457907000105/afaisch
ed14a.txt.10
d.
The 2005 Transaction was documented by MCAP’s counsel. AFAH and
EMI were not represented by counsel in this transaction.
e.
Since then, Mr. Corey has functioned as an advisor to AFAH,
AFAHCamgate, and the Debtor. In particular, MCAP advised
8
The Bank does not know all the details of these transactions. At minimum, substantially
more disclosure is mandated. The Bank reserves the right to pursue further discovery as
appropriate.
9
Although the Contribution Agreement recites payment of $250,000 (that payment
apparently did not go to the Debtor), Mr. Whitbeck testified that no cash was paid by
anyone in connection with the 2005 transaction. Whitbeck Deposition at 0034. The
Bank believes funds went to the Debtor’s manager; the Debtor received nothing.
10
EMI communicates with Corey about the Debtor’s operations “on an on-going basis.”
Margerum Deposition, pp. 19-20.
1770779.1
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AFAHCamgate on filing a bankruptcy petition, and found bankruptcy
counsel for AFAHCamgate. Whitbeck Deposition, pp. 15, 75-76. After
the Court ordered the Debtor to engage a broker, Mr. Corey advised
AFAHCamgate on selection of a broker.
f.
In mid-2007, MCAP apparently recognized that the MCAP Option might
not be “in the money” before the MCAP Option expired in 2010.
Accordingly, MCAP requested and AFAHCamgate caused the Debtor to
extend the MCAP Option from 2010 to 2015. The agreement was
executed on the eve of this bankruptcy case being filed.11
g.
MCAP agreed to pay $100,000 for the extension. After learning that the
Bank was considering a receivership action, MCAP and AFAH agreed
that MCAP would pay only $50,000 in 2007, and defer the remaining
$50,000 until sometime in 2008.
h.
The Debtor never received the $50,000 paid for extending the MCAP
Option. Rather, it was used by AFAH to cover expenses from another
project in which MCAP was an investor. The Debtor received no
benefit.12
MCAP’s interest in the Debtor is motivated by a desire to profit from its control of the
Properties. Far from having a “mission” of providing affordable housing, MCAP is in the
business of investing in such projections for a profit. As explained on its website, MCAP makes
money from acquiring projects for the purpose of selling tax credits or re-selling the properties at
a profit. MCAP’s mission is to make money for its investors, many of whom are “high net worth
families.” See http://zephyrmanagement.com. More specifically, MCAP states:
11
AFAHCamgate extended the Option in 2007 because “Dick [Corey] wanted to extend the
control of the option period,” and because Mr. Whitbeck wanted to use the $50,000
option fee for an unrelated project. Whitbeck Deposition, p. 81. There is no evidence
that the Debtor considered the adequacy of the price paid for the extension, or indeed,
whether the money should be paid to the Debtor. “[T]his was a nice way for Dick to
control two properties’ in flux while passing liquidity to AFAH.” Whitbeck Deposition,
pp. 88.
12
The $50,000 was used for AFAH’s Bowling Green project, where MCAP is an investor
and EMI is the property manager. D. Margerum Deposition p. 9.
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MCAP invests in distressed, defaulted and non-rated municipal revenue
bonds (and related investments) secured by real estate, such as low-tomoderate income housing, senior housing and retirement facilities,
assisted living facilities, healthcare facilities and commercial facilities. …
MCAP’s strategy targets properties that will benefit from financial
restructuring, including facilities that are experiencing financial
challenges (such as too much debt) rather than problems in their
operations. The Manager’s goal is to enhance significantly the value of
MCAP investments by taking a proactive role in achieving financial
restructurings.
MCAP seeks control positions in investments to minimize delays in
executing its investment strategy.
http://zephyrmanagement.com/funds/private-equity/mcap/ (emphasis added.)
64.
While there is nothing per se improper in seeking to profit from an investment in
the Debtor, disclosure is relevant because it belies the claim that the Plan is motivated solely by a
desire to serve low income tenants. Further, it sheds light on whether those controlling the
equity of the Debtor are truly not-for-profit, or are actually engaged in a for-profit operation.
65.
Additionally, the grant of the MCAP Option in contravention of the Bond
Documents and without disclosure of the interlocking relationships goes to the issue of good
faith. Specifically:
a.
In the course of its business, MCAP has been involved in a number of
lawsuits relating to its investments in affordable housing. In such
litigation, MCAP has acknowledged that sale of a property without
exposing it to public sale can greatly reduce the price. See Municipal
Capital Appreciation Partners II, L.P. v. Sierra Note Fund, LLC, No.
603607/06 (filed November 8, 2006 Sup. Ct. NY, NY), in which MCAP
sought recovery of damages resulting from defendants’ grant of an
exclusive purchase option to a third party without first exploring possible
sales to other parties ….” This is particularly noteworthy in this case,
where MCAP has obtained such an option and the Debtor’s Plan avoids
any public sale.
b.
In Cambridge Walnut Park LLC v. Municipal Capital Appreciation
Partners I, L.P., et al., No. 001102 (filed October 9, 2007 Phila. Cty., Pa.),
holder of certain bonds issued for the purpose of financing an affordable
housing project in Pennsylvania alleged that MCAP and its affiliates
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engaged in fraudulent transfers and other wrongful conduct in taking
control of the project, selling low-income housing credits, and depriving
plaintiff of the value of its interest in the project.
c.
66.
As noted above, the Disclosure Statement references a post-confirmation
loan of $250,000, but does not identify the lender. If MCAP or an affiliate
is the lender, that fact must be disclosed.
In light of the foregoing, it is reasonable for creditors to ask, for whose benefit has
the bankruptcy petition been filed and for whose benefit has this plan been proposed? Why
would a nonprofit entity, admittedly insolvent, facing extraordinary problems and having no
ability to find new equity, file bankruptcy? See Stipulation, para. 15-17. Who benefits from a
plan in which the senior secured creditors receive little or nothing for up to 20 years while their
property is used to increase the value of the Debtor’s Properties and the MCAP Option, and the
secured creditors receive only the funds already held for them in debt service reserve? The
Disclosure Statement does not provide adequate information on these issues.
67.
The Disclosure Statement references broad releases. Disclosure Statement at 23,
25. The Debtor should explain whether this language is intended to shield AFAH,
AFAHCamgate, MCAP, or others from claims by the estate or creditors. If releases are
intended, the Debtor must provide adequate information regarding the extent of the proposed
release, the claims against such parties and the reasons therefore, including analysis of the
applicability of the seven factors set forth in Lacy v Dow Corning Corp. (In re Dow Corning
Corp.), 280 F.3d 648 (6th Cir. 2002). The Disclosure Statement also should confirm that the
proposed discharge of the Debtor will not discharge or release any claims under the Lease.
1770779.1
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O.
The Disclosure Statement Fails to Provide
an Adequate Liquidation Analysis
68.
The Disclosure Statement fails to provide any meaningful liquidation analysis.
Disclosure Statement at 27. This is not surprising, given the Debtor’s unwillingness to provide
any information regarding the value of its Properties, but it is mandatory. Its proposal to pay
Series C bondholders a miniscule amount on account of their claims mandates that a liquidation
analysis be provided.
69.
The Disclosure Statement says that unsecureds and interest holders do better
under the Plan than they would in a Chapter 7. Disclosure Statement at 5. There is no reference
to secured creditors. If this is intentional, it is admission that the Plan clearly violates the
absolute priority rule and 1129(b).
II.
THE COURT SHOULD NOT APPROVE A DISCLOSURE
STATEMENT FOR AN UNCONFIRMABLE PLAN
70.
If a plan of reorganization on its face is not confirmable as a matter of law, it is
appropriate for a court to disapprove the disclosure statement. Although the hearing on approval
of a disclosure statement is not a substitute for a hearing on plan confirmation, a disclosure
statement should be disapproved where a plan is not capable of being confirmed. Indeed, the
bankruptcy court’s approval of a disclosure statement is an early step in the confirmation
process, followed by time-consuming and expensive solicitation procedures and confirmation
hearings. 13 Such expense is being borne solely by the Bondholders and not those who stand to
benefit the most from the Plan as proposed.
13
This rule has been applied in many jurisdictions. See, e.g., In re John Hancock Mut. Life
Ins. Co. v. Rte. 37 Bus. Park Assoc’s., 987 F.2d 154, 159 (3d Cir. 1993); In re Criimi
Mae, Inc., 251 B.R. 796, 799 (Bankr. D. Md. 2000); In re Main Street AC, Inc., 234 B.R.
771, 775 (Bankr. N.D. Cal. 1999); In re Hillside Park Apartments, L.P., 205 B.R. 177,
189-90 (Bankr. W.D. Mo. 1997); In re Market Square Inn, Inc., 163 B.R. 64, 68 (Bankr.
Continued on following page
1770779.1
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71.
For reasons set forth below, the Debtor’s Plan is not confirmable. As a matter of
public policy and judicial economy, approval of the Disclosure Statement will only harm the
estate and its creditors. The Bankruptcy Court should not allow the solicitation process to
proceed when it is clear that the only possible result is further delay and expense because the
Plan cannot be confirmed.
III.
THE PLAN IS NOT CONFIRMABLE
72.
Section 1129 sets forth the requirements for confirmation of a plan of
reorganization. As discussed below, the Debtor’s Plan contravenes multiple provisions of
Sections 1129(a) and (b).
A.
The Plan Does Not Satisfy the Requirements of
Section 1129(a)(1, 2) Regarding Compliance With Title 11
73.
Section 1129(a)(1, 2) requires that the plan and the plan proponent comply with
the requirements of the Bankruptcy Code.
74.
The Plan contravenes Section 1111(b) of the Bankruptcy Code.
a.
The Plan improperly assumes that the Bank makes the election. Disclosure
Statement at 7-8, 10, 17-18; Plan at 3.2. Under Section 1111(b), any election is
made by the beneficial holders of the Series A Bonds and, separately, the Series C
Bonds.14
b.
The Plan fails to provide for the very real possibility that Class 2, Class 7, or both
classes of bondholders may decline to make such an election. The Debtor may
_____________________
Continued from previous page
W.D. Pa. 1994); In re 266 Washington Assocs., 141 B.R. 275, 288 (Bankr. E.D.N.Y.
1992); In re Copy Crafters Quickprint, Inc., 92 B.R. 973, 980 (Bankr. N.D.N.Y. 1988); In
re S.E.T. Income Properties, III, 83 B.R. 791, 792 (Bankr. N.D. Okla. 1988); In re Pecht,
57 B.R. 137 (Bankr. E.D. Va. 1986).
14
See In re Tenn-Fla Partners, 170 B.R. 946, 950 (Bankr. W.D. Tenn. 1994), aff’d, 226
F.3d 746 (6th Cir. 2000). In re Shilo Inn, Diamond Bar, 285 B.R. 726, 730 (Bankr. D.
Ore. 2002); In re Pioneer Finance Corp., 246 B.R. 676 (Bankr. D. Nev. 2000); In re The
Southland Corp., 124 B.R. 211 (Bankr. N.D. Tex. 1991)
1770779.1
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not, through its conclusory presumption, deny bondholders their rights under
Section 1111(b).
75.
The Plan contravenes Section 510(a) of the Bankruptcy Code. This section
provides that a subordination agreement is enforceable in accordance with applicable
nonbankruptcy law.
a.
The Plan impermissibly provides for distributions to holders of the Series C
Bonds prior to payment in full of the Series A Bonds.
b.
The Plan impermissibly provides for payment of management fees to EMI and
AFAHCamgate in contravention of the subordination provisions of their
agreements and the Indenture.15
76.
The Plan violates Sections 365(a) and 1123(b, d) by permitting assumption of the
Lease without requiring the Debtor to cure the existing defaults and without providing adequate
assurance of future performance.
a.
As established at the hearing on the Bank’s motion for relief from stay, the
current default is greater than $3,400,000. Because the Debtor does not propose
to cure the default upon the effective date of the Plan, it may not assume the
Lease.
b.
Additionally, the Debtor may not assume the Lease without providing adequate
assurance of future performance. Far from complying with this requirement of
the Bankruptcy Code, the Plan provides that the Debtor will not make payments
in accordance with the terms of the Lease.
77.
The Plan does not comply with Sections 1122(a) and 1123(a) regarding the
classification of claims and interests. Section 1122(a) provides that a plan may place a claim in a
particular class only if such claim is substantially similar to the other claims of such class.
Section 1123(a) provides that a plan must designate classes in compliance with Section 1122.
a.
15
If either the Series A Bonds or the Subordinate Bonds declines to elect treatment
under Section 1111(b), either non-electing series of bonds will be entitled to have
The management agreements have been assigned to the Bank. The Bank reserves the
right to terminate either or both agreements in accordance with their terms.
1770779.1
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the undersecured portion of its claim treated as an unsecured claim, thereby
raising additional feasibility issues.
b.
One or both series of bonds may not elect Section 1111(b) treatment because the
Plan proposes to make an immediate 95% distribution to unsecured creditors.
c.
Additionally, one or both series of bonds may decline to elect such treatment in
order to prevent confirmation of the Plan. Absent such elections, their unsecured
deficiency claims will represent the overwhelming majority of the unsecured
claims and, absent their support, the Debtor will be unable to obtain an impaired
accepting class and, accordingly, the Plan will not satisfy the requirement of 11
U.S.C. §1129(a).16
d.
There is no reason to have classes to whom nothing is owed, such as Classes 1
and 8, voting. Depending on AFAHCamgate’s interests (claimholder or equity), it
should not be allowed to vote.
A plan that fails to classify claims properly is unconfirmable under section 1129(a)(11). In re
Hardt, 65 B.R. 697, 700-01 (Bankr. E.D. Pa. 1986).
78.
The Plan does not comply with Section 1123(a)(5) because it fails to provide
adequate means for the plan’s implementation. Further, as noted below, there are significant
issues related to feasibility, the cure of defaults, and redrafting of the governing agreements
among the parties.
79.
The Plan does not comply with Section 1123 regarding assumption of leases and
contracts. Section 1123(b) permits assumption of contracts and leases only in accordance with
Section 365, requiring cure and adequate assurance. Section 1123(d) states that cure payments
16
The Debtor may not defeat the bondholders’ rights by attempting to classify their
unsecured deficiency claims separately. The unsecured claim cannot be classified
separately in order to obtain an accepting impaired class. See In re Greystone III Joint
Venture, 948 F.2d 134, 139 (5th Cir. 1991) (“Thou shalt not classify similar claims
differently in order to gerrymander an affirmative vote on the reorganization plan ….”);
Boston Post Road, 21 F.3d 477; John Hancock, 987 F.2d 154; In re Bryson Properties,
961 F.2d 496.
1770779.1
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must be determined in accordance with the underlying agreement and applicable nonbankruptcy
law.
80.
The Plan does not comply with Section 1126 regarding acceptance of the Plan.
The Plan improperly assumes that the Bank, rather than the beneficial holders of the Series A
Bonds and the Series C Bonds, votes on the Plan. As a matter of law, however, it is the
beneficial holders who must vote. In re Tenn-Fla Partners, 170 B.R. 946, 950 (Bankr. W.D.
Tenn. 1994). The Plan does not provide any mechanism for soliciting the beneficial holders.
81.
If the Debtor is seeking to release any third parties from any liabilities, the Plan
violates Section 524(e) of the Bankruptcy Code. See Lacy v Dow Corning Corp. (In re Dow
Corning Corp.), 280 F.3d 648 (6th Cir. 2002). See also In re Fred Lowenschuss, 67 F.3d 1394,
1401 (9th Cir. 1995), cert. denied, 517 U.S. 1243, 116 S.Ct. 2497, 135 L.Ed2d 189 (1996)
(“without exception, §524(e) precludes bankruptcy courts from discharging the liabilities of nondebtors”); In re Zale Corp., 62 F.3d 746, 760 (5th Cir. 1995) (bankruptcy court lacks authority
to approve settlement agreement containing permanent injunction that constituted an
impermissible discharge of a non-debtor).
B.
The Plan Does Not Satisfy the Requirement Of Section 1129(a)(3) that the
Plan be Proposed in Good Faith and Not by any Means Forbidden by Law
82.
The Debtor’s proposal to use reserve funds held by an indenture trustee for
purposes other than those expressly permitted under the indenture contravenes state law. In re
Central Medical Center, Inc., 122 B.R. 568 (Bankr. E.D. Mo. 1990) (Debtor may not divest
bondholders of their interest in such funds in contravention of the indenture). Indeed, by
depriving Series C Bondholders of their rights in the Debt Service Reserve Funds, the Debtor
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seeks an improper taking of property rights in violation of the United States and Tennessee
Constitutions. See U.S. Const. amend V; Tenn. Const. Art. I, §§ 8, 21.17
83.
The Debtor’s proposal to use Revenues generated from the Properties contravenes
state law because, as discussed elsewhere, such funds are held in trust for the Bank and the
bondholders and are not property of the estate. Permitting the Debtor to use such funds also
would be an unconstitutional taking.
84.
Similarly, the Debtor may not, by assuming agreements with EMI and
AFAHCamgate, deprive the Bank of its security interests in those agreements or the benefit of
agreements in which EMI and AFAHCamgate subordinate their fees to debt service payments.
85.
Additionally, the Plan has not been proposed in good faith. The “central inquiry”
for purposes of Section 1129(a)(3) “is whether the plan will fairly achieve a result consistent
with the objectives and purposes of the Code.” In re Rusty Jones, Inc., 110 B.R. 362, 375
(Bankr. E.D. Ill. 1990). “The fundamental purpose of Chapter 11 is to enable a distressed
business operation to reorganize its affairs in order to prevent the loss of jobs and the adverse
17
This constitutional protection extends to lien holders. See Mennonite Bd. of Missions v.
Adams, 462 U.S. 791, 103 S.Ct. 2706, 77 L.Ed. 2d 180 (1983); Consistent with these
constitutional mandates, a secured creditor is entitled to compensation for any taking of
its collateral. See e.g. Wright v. Union Cent. Life Ins. Co., 311 U.S. 273, 85 L. Ed. 184,
61 S. Ct. 196 (1940) (mortgage lien constitutes property interest under the Fifth
Amendment); Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S. Ct. 854,
79 L. Ed 1593 (1935) (mortgagee entitled to compensation for the relinquishment of its
lien); In re Lansing Clarion Ltd. Partnership, 132 B.R. 845 (Bankr. W.D. Mich. 1991). In
Wright v. Union Cent. Life Ins. Co., 311 U.S. 273, 279 (1940), the Supreme Court
recognized that a mortgagee can be denied the right to realize upon his security “only in
case he is paid the full amount of what he can constitutionally claim.” Similarly, in
Louisville, supra, Justice Brandeis wrote that the “right of the mortgagee to insist upon
full payment before giving up his security has been deemed the essence of a mortgage,”
and the Court held that depriving a mortgagee of the right to retain its lien until the
secured indebtedness is paid constitutes a taking in violation of the Fifth Amendment.
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economic effects associated with disposing of assets at their liquidation value.” Id. (citing
NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984).
a.
Preliminarily, the entire bankruptcy case is tainted by the Debtor’s bad faith filing
of its petition.18
b.
In the present case, where the Debtor has no employees, it cannot lose jobs.
Secured creditors have determined that a sale is superior to the Debtor’s plan, and
the few trade creditors may be paid in a receivership.
c.
Where the Plan “serves as a vehicle for the personal profit of ‘investors,’” the
requirement good faith clearly is not satisfied. See Rusty Jones, supra. As
discussed above, the principal beneficiaries of the Plan are the Debtor’s insiders
and advisors, including AFAHCamgate and MCAP. In such circumstances, the
good faith requirement of Section 1129(a)(3) is not satisfied. See also In re
Coram Healthcare Corp., 271 B.R. 228 (Bankr. D. Del. 2001) (management’s ties
to one creditor created a conflict of interest, precluding a finding of good faith); In
re Bidermann Industries, U.S.A., Inc., 203 B.R. 547 (Bankr. S.D. N.Y.) (finding
“manifest self-dealing” where the debtor failed to test the marketplace for other
expressions of interest.”).
d.
These and other features of the Plan, such as attempts to gerrymander
classification in order to permit cramdown for the benefit of AFAHCamgate and
insiders, contravene subordination agreements, and permit the Debtor to pursue a
speculative venture in which creditors bear the entire risk, further support this
conclusion.19
C.
The Plan Cannot Satisfy the Requirements Of Section 1129(a)(7, 8)
that the Plan be Accepted by Holders and Classes
18
See Bank’s stay relief motion. The Court has neither granted nor denied the stay relief
motion.
19
See, e.g., Marsch v. Marsch (In re Marsch). 36 F.3d 825, 829 (9th Cir. 1994) (rejecting
plan where petition case filed avoid posting an appeal bond); Epic Metals Corp. v.
Condec, Inc., 232 B.R. 806, 808-09 (M.D. Fla. 1999) (same); Sandy Ridge Dev. Corp. v.
Louisiana Nat'l Bank (In re Sandy Ridge Dev. Corp.), 881 F.2d 1346 (5th Cir. 1989)
(gerrymandering of classes); In re Rusty Jones, Inc., 110 B.R. 362, 375 (Bankr. N.D. Ill.
1990) (debtor engaged in arbitrage with regard to contingent asset).
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86.
If the Court were to approve the Disclosure Statement, Class 2 and Class 7 would
vote against the Plan. Holders of a majority of both classes have confirmed that they oppose the
plan and support prompt sale of the Properties.
D.
The Plan Cannot Satisfy Requirement Of Section 1129(a)(10)
Regarding Acceptance By An Impaired Class
87.
The Plan proposes to satisfy the requirement of Section 1129(a)(10) by paying
unsecured creditors 95% of their claims, presumably thereby assuring their affirmative vote.
88.
As discussed above, if bondholders do not affirmatively elect treatment under
Section 1111(b), these holders will comprise the overwhelming majority of the class of
unsecured creditors. Based on bondholders’ statements that they will not support the Plan, their
negative votes will prevent the Debtor from satisfying Section 1129(a)(10).
89.
Alternatively, if the bondholders do not elect treatment under Section 1111(b) and
they do vote for the Plan, the Debtor will be required to pay them at confirmation 95% of their
unsecured claims. Because the Debtor clearly cannot do so, the Plan becomes unconfirmable for
lack of feasibility. See Section 1129(a)(11).
E.
The Plan Does Not Satisfy the Feasibility Requirement Of Section
1129(a)(11)
90.
Section 1129(a)(11) requires the Debtor to demonstrate that confirmation of the
Plan is “not likely to be followed by the liquidation, or the need for further financial
reorganization, of the debtor . . . unless such liquidation or reorganization is proposed in the
plan.” The purpose § 1129(a)(11) is to prevent confirmation of visionary schemes which
promise creditors and equity security holders more under a proposed plan than the debtor can
possibly provide after confirmation.” In re Haardt, 65 B.R. 697, 701-2 (Bankr. E.D. Pa. 1986)
(citations omitted); Berkley Nat'l Bank & Trust v. Sea Garden Motel & Apartments (In re Seal
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Garden Motel & Apartments), 195 B.R. 294, 304 (D.N.J. 1996). To satisfy the feasibility
requirement of section 1129(a)(11) of the Bankruptcy Code, the Debtor must “show concrete
evidence of a sufficient cash flow to fund and maintain both its operations and obligation under
the Plan.” See generally, 7 COLLIER ON BANKRUPTCY, ¶ 1129.03[11] (15th ed., Lawrence P.
King, ed. 2000).
91.
As set forth above, the Plan provides multiple feasibility problems. Even if the
Lease did not provide that rents are held in express trust for the Bank, the Debtor has no ability
to pay 95% of bondholders’ deficiency claims. The Debtor has no ability to cure Lease defaults,
so it cannot assume the Lease. Were the Lease assumed, the Debtor could not provide
reasonable assurance of future performance under the Lease.
92.
The proposed $250,000 loan presents several problems. Because it is to be made
post-confirmation, there is no jurisdictional basis to give the lender priority over the Bank’s liens
and security interests. Even were the loan to be made pre-confirmation, the Debtor’s proposal
would not satisfy the requirements of section 364 of the Bankruptcy Code, including the
requirement of adequate protection.
93.
A plan based on the promise of some future refinancing does not satisfy
1129(a)(11) unless there is credible evidence that the plan is feasible. Hardt, 65 B.R. at 702.
The Debtor must provide hard evidence “as to the value of the properties, potential sources for
refinancing, and the steps Debtor will take to accomplish the refinancing.” Id. Moreover, a
debtor must explain how it will be able to accomplish what it failed to accomplish in previous
years. Id. A vague promise of financing from an unnamed source, on unstated terms, is not
sufficient. Where the debtor’s track record does not support projections, a plan is not feasible.
Id. at 702. See also In re Stuart Motel, Inc., 8 B.R. 48 (Bankr. S.D.Fla. 1980) (confirmation
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denied due to speculative nature of Debtor's projection of increased income). A fallback plan to
liquidate the estate does not satisfy the feasibility requirements of § 1129(a)(11). Hardt, 65 B.R.
at 702 n. 10.
F.
The Plan Does Not Satisfy the Requirements Of Section 1129(b)
that the Plan Be Fair And Equitable and Not Discriminate Unfairly
94.
Because a majority of holders of the Series A Bonds and Series C Bonds have
confirmed that they will vote against the Plan, the Plan can only be confirmed over their
objection if this Court determines the Plan does not “discriminate unfairly, and is fair and
equitable, with respect to each class of claims or interests” that is impaired and has not accepted
the Plan. See 11 U.S.C. § 1129(b)(1). It is clear from reviewing the Plan that the Debtor cannot
satisfy this burden.
95.
Section 1129(b)(2) delineates “fair and equitable” treatment in the context of
secured creditors. Section 1129(b)(2)(A) gives a debtor three possible options for seeking to
cram-down the chapter 11 plan on a dissenting secured creditor. First, the secured creditor may
be allowed to retain its lien securing the claim and receive deferred payments totaling at least the
amount of such claim, of a value, as of the effective date of the plan, of at least the value of such
holder’s interest in the estate’s interest in such property. Second, the secured creditor may be
granted a lien that attaches to the proceeds of any collateral sold. Third, the secured creditor
must be given the “indubitable equivalent” of its claim. See 11 U.S.C. § 1129(b)(2); In re
Greate Bay Hotel & Casino, Inc., 251 B.R. 213, 232 (Bankr. N.J. 2000). The Plan satisfies none
of these options.
96.
Assuming that only Class 2 is secured, the Plan nonetheless fails to pay Class 2
claimants deferred payments of at least the value of such holder’s secured claim. The proposal
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to accrue interest at the existing interest rate and to pay interest only when and if cash becomes
available, does not satisfy the requirements of Section 1129.
97.
a.
In Till v SCS Credit Corp., 541 U.S. 465; 124 S. Ct. 1951; 158 L. Ed. 2d
787 (2004), the Supreme Court held that the cramdown interest rate
applicable in Chapter 13 must be adjusted to reflect the “greater risk of
nonpayment” typically posed by bankrupt debtors.20
b.
The rationale of Till has been applied in Chapter 11 cases, most notably in
Bank of Montreal v. Official Committee of Unsecured Creditors (In re
American Homepatient, Inc.), 420 F.3d 559 (6th Cir. 2005). In In re
American Homepatient, Inc., 420 F.3d 559 (6th Cir. 2006), the Court
applied Till in the context of a Chapter 11 case. Where an efficient market
exists, the cram down rate should represent the market rate for similar
loans. Id. at 568. Where no efficient market exists, the bankruptcy court
should apply an interest rate that objectively reflects the risks of
nonpayment. Id. at 566, 568. If “the likelihood of default is so high as to
necessitate an ‘eye-popping’ interest rate, the plan probably should not be
confirmed.” Id. at 569 (quoting Till at 480-81). Here, the likelihood of
default is not only high, it is almost a certainty.
The proposal to sell the Properties in 2028, if the Debtor cannot then pay the
Series A holders in full, does not satisfy Section 1129(b)(2)(A)(ii). A plan that requires negative
amortization, with the lender bearing the risk that the debtor’s projections may fail, generally is
not fair and equitable for purposes of Section 1129(b)(2)(A) (or feasible for purposes of
1129(a)(11)). As explained in In re Anderson Oaks (Phase I) Limited Partnership, 77 B.R. 108
(Bankr. W.D. Tex. 1987):
The Debtors’ proposal would shift virtually all risk of failure onto the
secured creditor. In order for this plan to work without perpetrating a
monstrous injustice on [the lender], Debtors would have to virtually
guarantee their projections for at least twelve years, as the principal would
remain unamortized for at least that long. This, of course, Debtors cannot
do, nor will this Court. Considering the substantial risk of loss that [the
20
The appropriate size of the adjustment depends on such factors as the circumstances of
the case, the nature of the security, and the duration and feasibility of the reorganization
plan. Additionally, the court may not approve a plan unless the judge is persuaded that
the debtor will be able to make all payments under the plan and to comply with the plan.
1770779.1
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lender] would have to bear during that period as compared to the Debtors,
the Court is compelled to be very cautious when it comes to speculating
about the future.
As explained in Federal Savings & Loan Ins. Corp. v. D&F Constr., Inc. (In the Matter of D & F
Constr., Inc., 865 F.2d 673 (5th Cir. 1989), negative amortization effectively forces a secured
creditor to make a post-confirmation loan, increasing its exposure and forcing it to assume a
worse position than it had at the time of confirmation. While negative amortization may not be
per se improper, a plan is not fair and equitable where the plan is based on speculation about
long term increases in property values. Accord, In re Spanish Lakes Associates, 92 B.R. 875
(Bankr. E.D. Mo. 1988) (rejecting plan requiring seven years of negative amortization and
projecting a balloon payment after eleven years); In re Edgewater Motel, Inc., 85 B.R. 989, 998999 (Bankr. E.D. Tenn. 1988) (plan requiring substantial deferment of payments not “fair and
equitable”); Matter of 8th Street Village Limited Partnership, 88 B.R. 853 (Bankr. N.D. Ill. 1988)
(proposal to sell property to an unknown buyer after nine years was not an effective
reorganization; granting relief from stay).21
97.
The Debtor also cannot demonstrate that the Bank will receive the indubitable
equivalent of its secured claim. “Indubitable equivalence” was first defined by Judge Learned
Hand in In re Murel Holding Corp., 75 F.2d 941 (2d Cir. 1935).
It is plain that “adequate protection” must be completely compensatory;
and that payment ten years hence is not generally the equivalent of
payment now. Interest is indeed the common measure of the difference,
but a creditor who fears the safety of his principal will scarcely be content
with that; he wishes to get his money or at least the property. We see no
21
The Court in D&F explained that “technical compliance with all the requirements of
Section 1129(b)(2) does not assure that the plan is “fair and equitable.” 5 Collier on
Bankruptcy ¶ 1129.03 at 1129-52 (15th ed. 1988).” “Section 1129(b)(2) merely states
that "the condition that a plan be fair and equitable with respect to a class includes the
following requirements...."” 865 F.2d at 675.
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reason to suppose that the statute was intended to deprive him of that in
the interest of junior holders, unless by a substitute of the most indubitable
equivalence. Id. at 942.
Deferral of interest for years, with the hope of catching up on interest and principal later, is not
satisfactory. See, e.g., In the Matter of Mason and Dixon Lines, 71 B.R. 300 (Bankr. M.D. N.C.
1987). Payment of the “indubitable equivalent” requires full payment of the present value of the
secured creditors’ claims over a reasonable period of time; an appropriate amount of interest; and
the plan must not be speculative and must ensure the safety of the amounts owed to the creditor.
In re James Wilson Assoc., 965 F.2d 160, 172 (7th Cir. 1992). Clearly, this is not what the Plan
proposes.
98.
In the present case, where Series A bondholders get paid only after other classes
receive their distributions, and only if and to the extent the Properties become cash positive in
the future, Class 2 claimants assume all of the risks associated with equity, without any of the
upside – thereby providing the Series A Bonds with the worst of both worlds. Clearly, this is not
fair and equitable, and unfairly discriminatory. Such treatment will not satisfy Section 1129(b).
G.
The Plan Does Not Satisfy the Requirements of Section
1129(b) Regarding the Absolute Priority Rule
99.
The Plan violates the absolute priority rule. The Plan provides a 95% distribution
to unsecured creditors, while giving holders of the Series C secured bonds only a 2%
distribution. The Plan provides for distributions to unsecured creditors and the Series C holders
prior to payment in full of the Series A Bonds.
100.
To the extent the Bank is deemed to have an unsecured claim, the Plan cannot be
confirmed because it violates section 1129(b)(2)(B)(ii) of the Bankruptcy Code by providing that
the equity holders will retain their interest in the reorganized Debtor, without making full
payments to senior creditors. Section 1129(a)(1) provides that a chapter 11 plan of
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reorganization will be confirmed only if the plan complies with all of the applicable sections of
the Bankruptcy Code. Section 1129(b)(2)(B)(ii) provides that “the holder of any claim or
interest that is junior to the claims of such [unsecured] class will not receive or retain under that
plan on account of such junior claim or interest any property”. 11 U.S.C. 1129(a)(ii). The
Supreme Court noted that section 1129(a)(ii) codifies the absolute priority rule, which “provides
that a dissenting class of unsecured creditors must be provided for in full before any junior class
can receive or retain any property [under a reorganization] plan.” Northwest Bank Worthington,
v. Ahlers, 485 U.S. 197, 108 S.Ct. 963; 99 L. Ed. 2d 169 (1988). The Court held that “there is
little doubt that a reorganization plan in which [current equity holders] retain an equity interest in
the [reorganized debtor] is contrary to the absolute priority rule.” Id. at 966.
101.
The Plan contains multiple violations of the absolute priority rule. Even assuming
that the Debtor is claiming that the “new value” exception to the absolute priority rule applies,
the granting of new equity to AFAHCamgate without the appropriate “market test” for equity
constitutes a violation of the Supreme Court’s ruling in Bank of America Nat'l Trust & Sav.
Ass'n. v. 203 N. LaSalle St. Part., 526 U.S. 434; 119 S. Ct. 1411; 143 L. Ed. 2d 607 (1999)
(holding that a plan that provides a debtor’s prebankruptcy equity holders with ownership
interests in the reorganized debtor free from competition and without the benefit of a market
22
valuation is prohibited by section 1129(b)(2)(B)(ii) of the Bankruptcy Code).
According to the
Supreme Court in 203 N. LaSalle, all creditors as well as the market generally, must be given an
22
It is questionable whether the “new value” exception to the absolute priority rule
continues to apply. See, e.g., Travelers Ins. Co. v. Bryson Properties, XVIII (In re
Bryson Properties, XVIII), 961 F.2d 496, 504 (4th Cir.), cert. denied, 113 S.Ct. 191
(1992); Coltex Loop Central Three Partners, L.P. v. BT/SAP Pool C Associates, L.P. (In
re Coltex Central Three Partners, L.P.), 138 F.3d 39 (2d Cir. 1998); In re Winters, 99
B.R. 658 (Bankr. W.D. Pa. 1989).
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opportunity to invest in the ownership of the Reorganized Debtor. Under the Plan, however,
there is no marketing whatsoever and insiders keep the equity interests.
102.
Based upon the foregoing analysis, the Debtor cannot meet its burden of showing
the Bank will receive a distribution under the Plan which is equal to or better than it would
receive in a chapter 7 liquidation. See In re Dow Corning Corp., 456 F.3d 668, 678 (6th Cir.
2006).
103.
On a related note, if assumption of the MCAP Option would have the effect of
circumventing the mandate of 203 North LaSalle Street P'ship, assumption of the MCAP Option
would preclude confirmation.
IV.
CONCLUSION
104.
The Debtor may not reserve a right to amend the Plan. See Disclosure Statement
at 26. Amendment would be inconsistent with the Debtor’s request for “one chance” to show it
can reorganize. The Disclosure Statement should note that the Bank and its holders oppose any
amendment that may result in any delay in the liquidation of the Debtor’s Properties.
105.
For all of the reasons set forth above, the Court should deny approval of the
Disclosure Statement.
1770779.1
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Respectfully submitted:
/s/ Eric B. Schultenover
John C. Tishler TN BPR #013441
Eric B. Schultenover TN BPR #020981
WALLER LANSDEN DORTCH & DAVIS, LLP
511 Union Street, Suite 2700
Nashville, TN 37219
Telephone: 615-244-6380
Facsimile: 615-244-6804
[email protected]
[email protected]
and
Eric A. Schaffer (pro hac vice)
REED SMITH LLP
435 Sixth Avenue
Pittsburgh, PA 15219
Telephone: 412-288-4202
Facsimile: 412-288-3063
[email protected]
Counsel for The Bank of New York Trust
Company, N.A., as indenture trustee
1770779.1
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CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the foregoing was served either the Court’s
CM/ECF electronic noticing system or via first class U.S. Mail, postage prepaid, as specified
below, upon the following this 29th day of October, 2007.
Via CM/ECF noticing:
Stephanie Cole:
Steven N. Douglass:
Eric Schaffer:
U.S. Trustee:
Elizabeth Weller:
[email protected]
[email protected]
[email protected], [email protected]
[email protected], [email protected]
[email protected]
Via U.S. Mail, Postage prepaid:
Cornerstone-Cameron and Stonegate, Inc.
c/o Equity Management, Inc.
14504 Greenview Drive, Suite 510
Laurel, MD 20708
The Winchester Law Firm
(Attn: Stephen L. Anderson)
6060 Poplar Avenue, Suite 295
P.O. Box 17236
Memphis, Tennessee 38187
The Health, Educational and
Housing Facility Board of the County of
Shelby, Tennessee (“Issuer”)
c/o Donnie Wilson, County Attorney
160 North Main Street, Suite 801
Memphis, TN 38103
Bridget M. Schessler
The Bank of New York Trust Company
Default Administration Group
One Oxford Center
301 Grant Street, Suite 1100
Pittsburgh, PA 15219
AFAM Camgate LLC
53 East 66th Street
New York, NY 10065-6148
Doug Margerum
Equity Management, Inc.
14504 Greenview Drive, Suite 510
Laurel, MD 20708
Hunt Whitbeck
c/o Equity Management, Inc.
14504 Greenview Drive, Suite 510
Laurel, MD 20708
/s/ Eric B. Schultenover
Eric B. Schultenover
1770779.1
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