Fin Sec Assu Inc v. T-H New Orleans Ltd ( 1997 )

  •                     United States Court of Appeals,
                                 Fifth Circuit.
                                 No. 95-31233.
      In the Matter of T-H NEW ORLEANS LIMITED PARTNERSHIP, Debtor.
      FINANCIAL SECURITY ASSURANCE INC., Appellant-Cross-Appellee,
     T-H NEW ORLEANS LIMITED PARTNERSHIP, Appellee-Cross-Appellant.
                                 July 9, 1997.
    Appeals from the United States District Court for the Eastern
    District of Louisiana.
    Before WISDOM, SMITH and PARKER, Circuit Judges.
         ROBERT M. PARKER, Circuit Judge:
         This   Court   visits   this   case   for   a   second   time.1   The
    Appellant, Financial Security Assurance, Inc. ("FSA"), appeals the
    bankruptcy court's ruling that it was not entitled to postpetition
    preconfirmation interest from the petition date notwithstanding
    FSA's overcollateralization at confirmation; the value assigned to
    the collateral;     the appropriate confirmation interest rate;        and
    confirmation of the bankrupt's Chapter 11 plan.           On appeal, FSA
    asserts a myriad of errors by the bankruptcy court.                T-H New
    Orleans Limited Partnership ("T-H NOLP") asserts two cross-issues.
    Finding no reversible error, we affirm.
                         FACTS AND PROCEDURAL HISTORY
         In June of 1988, T-H NOLP acquired a Days Inn Hotel (the
          This Court has already heard a previous appeal between the
    two parties to this appeal.     See In re T-H New Orleans Ltd.
    10 F.3d 1099
     (5th Cir.1993) ("T-H NOLP I").
    "Hotel") in New Orleans, Louisiana and has operated the Hotel
    continuously since that date.       T-H NOLP is a limited partnership
    with a corporate general partner, Tollman-Hundley New Orleans
    Corp., and five individual limited partners.                  The day-to-day
    management and operations of the Hotel property are carried out by
    the individuals employed by T-H NOLP. T-H NOLP is also a member of
    the Tollman-Hundley Hotels group of companies.
          In   February   1989,   T-H   NOLP   sought   to    restructure      the
    under-lying mortgage debt on the Hotel through a mortgage bond
    financing transaction involving T-H NOLP and six other hotels owned
    by   separate   Tollman-Hundley     partnerships.        As    part   of   the
    refinancing, T-H NOLP and the six other hotel partnerships, all
    controlled by Monty Hundley and Stanley Tollman, obtained separate
    but cross-collateralized and cross-guaranteed first mortgage loans,
    which were secured by the Hotel and other hotels as well as the
    revenues generated therefrom, in the amount of $87,000,000 from a
    newly created business trust (the "Issuer").             T-H NOLP executed
    various agreements including a Mortgage Note and Loan Agreement,
    and a Collateral Mortgage Note.
          To raise the necessary money to make the mortgage loans to T-H
    NOLP and the other hotels, the Issuer issued $87,000,000 in bonds,
    the payment of which was guaranteed by a surety bond issued by FSA.
    In return, the Issuer of the bonds assigned to FSA all its rights
    and interest in the security agreements, and authorized FSA to be
    its attorney-in-fact in order to take whatever actions FSA deemed
    necessary to exercise its rights under the mortgage loans and
    related collateral.
         By 1990, T-H NOLP and the six other partnerships were in
    default on the loans, and FSA stepped into the shoes of the bond
    Issuer.    After the parties were unable to reach a settlement, FSA
    accelerated the mortgage note and demanded payment of all amounts
    due under the loan agreement and guarantee.      On February 25, 1991,
    T-H NOLP filed for bankruptcy under Chapter 11 of the Bankruptcy
    Code;   the other six hotel partnerships also filed for bankruptcy.
    At the time T-H NOLP filed bankruptcy, FSA's allowed claim was
    $18.424 million.
         Subsequent to the bankruptcy filing, FSA filed a motion for
    adequate   protection   or   segregation   of   hotel   receipts.   The
    bankruptcy court granted FSA's motion, finding that it had a
    security interest in the Hotel's prepetition and postpetition
    revenues from its operations, and ordered that the Hotel's business
    revenues be segregated.      The bankruptcy court also entered a cash
    collateral order (dated May 1, 1992) which provided that T-H NOLP
    make payments from the Hotel's net revenues in order to reduce its
    obligation to FSA.
         On appeal, this Court in In re T-H New Orleans Limited
    10 F.3d 1099
     (5th Cir.1993) ("T-H NOLP I") held that
    T-H NOLP's postpetition Hotel revenues were "rents" under Louisiana
    law and, therefore, were subject to FSA's prepetition security
    agreement under § 552(b) of the Bankruptcy Code and must be
    segregated.    The Court remanded the case with instructions for
    further proceedings consistent with its opinion.
         On February 24, 1994 T-H NOLP filed its amended disclosure
    statement and amended plan of reorganization. The bankruptcy court
    approved the amended disclosure statement in June 1994.      On July
    15, 1994, FSA filed an objection to plan confirmation, and T-H NOLP
    filed an objection to FSA's claim.
         The bankruptcy court, early in the case, found that the
    appraised value of the Hotel was $12.2 million;   this valuation was
    based upon an appraisal report as of July 1, 1991 which was
    commissioned by FSA. FSA's motion for adequate protection was based
    upon this appraised value. Subsequently, the bankruptcy court held
    a hearing to determine the fair value of the Hotel and found, after
    considering the evidence presented by T-H NOLP and FSA, that, as of
    July 14, 1994, the fair value of the Hotel was $13.7 million.2
    Accordingly, the bankruptcy court found that the value of FSA's
    security interest in the Hotel was $13.7 million.     The bankruptcy
    court also found that based on the uncontroverted testimony, the
    fair value of the Hotel would increase over the two year period
    following confirmation of T-H NOLP's proposed amended plan.
         The bankruptcy court also held a hearing on FSA's allowed
    claim.       FSA stipulated for purposes of the confirmation hearing
    that its allowed claim as of the petition date was $18,424,000.   T-
           FSA provided an appraisal valuing the Hotel at a greater
    value. However, that appraisal did not include adjustments for a
    yearly corporate overhead allocation which the bankruptcy court
    found, based on the evidence presented, to be a necessary expense
    and should be accounted for in determining the fair value of the
    Hotel. FSA's appraiser testified that if the corporate overhead
    allocation charge was considered, his opinion as to the appraised
    value of the Hotel would decrease by the amount of the allocation
    and the Hotel's fair value would be $13.7 million.
    H NOLP presented evidence showing that it had made postpetition
    cash       collateral    payments   of    $4,675,945   through    the   end    of
    September, 1994.3 Thus, the bankruptcy court, after accounting for
    the postpetition rent payments (pursuant to the May 1, 1992 cash
    collateral order) on FSA's claim and not including any potential
    entitlement to postpetition preconfirmation interest, found that
    FSA's claim amounted to $13,748,055 as of September 30, 1994.4
           The bankruptcy court therefore found that because FSA's claim
    of $13,748,055 was greater than the fair value of the Hotel ($13.7
    million),      thus     making   FSA's   claim   undersecured,    FSA   was   not
    entitled to postpetition, preconfirmation interest on its claim
    under § 506(b) of the Bankruptcy Code until the time when the value
    of its collateral exceeded the amount of its claim.              At that point,
    FSA would be entitled to interest at the contract rate on its claim
    to the extent that the value of the collateral exceeds its allowed
    claim, i.e. the equity cushion, and that any postpetition interest
    was limited to the equity cushion created by the monthly accrual of
         A representative of FSA testified that FSA had received cash
    collateral from T-H NOLP in the amount of $4,770,666 as of
    September 23, 1994;    however, FSA's representative failed to
    present any supporting evidence to support FSA's position.
           The bankruptcy court applied the cash collateral payments
    against the unsecured portion of FSA's claim, following the
    bankruptcy court in In re 354 East 66th Street Realty Corp., 
    177 B.R. 776
     (Bankr.E.D.N.Y.1995).     In reaching its decision, the
    bankruptcy court analyzed the two line of cases that have addressed
    this issue, i.e., the addition cases and the subtraction cases.
    See, e.g. In re Union Meeting Partners, 
    178 B.R. 664
    (Bankr.E.D.Pa.1995). However, we do not answer today the question
    of whether the bankruptcy court's reduction of the unsecured
    portion of FSA's claim was proper, as that issue was not raised on
    net rents generated by the Hotel.
         Finally,     with   respect   to   T-H   NOLP's   amended   plan   of
    reorganization (the "Plan"), FSA was the only creditor to object to
    confirmation of the Plan and to vote to reject the amended Plan.5
    FSA argued against Plan confirmation on several grounds which are
    addressed in each of its issues on appeal.         All other classes of
    creditors either voted affirmatively to accept the amended Plan or
    were deemed to have accepted the amended Plan. Thus, T-H NOLP
    sought confirmation of its amended Plan under the "cramdown"
    provisions of Chapter 11 of the Bankruptcy Code.         Following three
    days of confirmation hearings, the bankruptcy court on March 27,
    1995, entered an order denying Plan confirmation.6
         On March 30, 1995, the bankruptcy court entered an order
    confirming T-H NOLP's amended Plan under the cramdown provisions of
    Chapter 11.     The bankruptcy court also determined that the proper
    postconfirmation interest rate was 11.5 percent. On June 27, 1995,
         FSA's claim was a Class 4 claim in the amended plan which was
    to be treated as follows: (a) reduction of FSA's claim from the
    prepetition amount of $18.242 million by application of
    postpetition, preconfirmation payments made to FSA under the
    bankruptcy court's May 1, 1992 cash collateral order; (b) payment
    of the remaining amount of the FSA claim through twenty-four
    monthly payments of principal and post-confirmation interest, based
    on a twenty-year principal amortization at 8% interest or such
    other cramdown rate approved by the bankruptcy court, with a
    balloon payment of all remaining principal and interest at the end
    of two years;   and (c) payment of the remaining balance, after
    application of all prior payments, in one of three ways (1)
    refinancing with another lender; (2) sale of the Hotel; or (3) a
    dation en paiement transferring ownership of the Hotel.
            The bankruptcy court denied plan confirmation based on
    language in Section X.2 of the plan which it considered overly
    broad and ambiguous. T-H NOLP agreed to delete this language.
    the bankruptcy court denied FSA's motion for reconsideration or new
           Both FSA and T-H NOLP appealed to the district court for a
    review of the bankruptcy court's decisions.                    The district court
    affirmed.      This appeal ensued.       We now address FSA's and T-H NOLP's
    arguments raised before this Court.
               This Court, acting as a second review court, reviews the
    bankruptcy court's findings of fact under the clearly erroneous
    standard, and the bankruptcy court's conclusions of law de novo.
    In    re    United   States    Abatement       Corp.,    
    79 F.3d 393
    ,    397   (5th
    Cir.1996).       We also note that while FSA listed in its brief
    fourteen issues on appeal, FSA only discusses six of them in the
    corpus of its brief.          Federal Rule of Appellate Procedure 28(a)(6)
    provides that "[t]he argument must contain the contentions of the
    appellant on the issues presented, and the reasons therefor...."
    Pursuant to Rule 28, this Court has found "that contentions not
    briefed are waived and will not be considered on appeal."                          Trust
    Co.    of    Louisiana   v.    N.N.P.,   Inc.,     
    104 F.3d 1478
    ,      1485   (5th
    Cir.1997) (citing Zeno v. Great Atlantic & Pacific Tea Co., 
    803 F.2d 178
     (5th Cir.1986)).          Thus, the only issues that this Court
    will consider on appeal are those that were actually briefed by the
    parties in accordance with Rule 28.
    1. FSA's Entitlement to Postpetition Interest
           FSA asserts that the value of the Hotel was increasing during
    the bankruptcy proceedings, and that its claim was decreasing due
    to the monthly cash collateral payments.                  Thus, at some point
    between September 1994 and the March 30, 1995 confirmation order
    the   value    of    the    property     became    greater   than    its   claim.
    There-fore, FSA argues that since the collateral's value exceeded
    its claim on the day the Chapter 11 plan was confirmed or became
    effective, it was entitled to postpetition interest under § 506(b)
    to the extent of its contract rate for the entire postpetition
    period.       FSA also argues that it should have been paid the
    postpetition interest monthly instead of at confirmation.                      In
    response, T-H NOLP relies on the bankruptcy court's conclusion, and
    objects   to   the    allowance    of    any   postpetition     preconfirmation
    interest on FSA's claim until that point in time when the Hotel's
    value was greater than FSA's claim.                T-H NOLP also asserts on
    cross-appeal that the bankruptcy court erred by requiring it to
    make postpetition          preconfirmation     interest   payments    while   FSA
    appealed the bankruptcy court's order confirming T-H NOLP's Plan.
          The parties' arguments raise the following questions for our
    consideration.       First, where a secured creditor is receiving cash
    collateral payments which reduce the creditor's allowed claim such
    that at some point in time prior to plan confirmation the creditor
    may   become   oversecured,       is    that   creditor   entitled    to   accrue
    interest under § 506(b)?               Second, when, under § 506(b), does
    interest begin to accrue, and the extent to which a creditor is
    entitled to postpetition interest?
           There    is    no    question    that   a   creditor's   entitlement    to
    postpetition interest on its claim is determined under § 506(b) of
    the Bankruptcy Code. Section 506(b) states in relevant part that
    "[t]o the extent that an allowed secured claim is secured by
    property, the value of which ... is greater than the amount of such
    claim, there shall be allowed to the holder of such claim interest
    on such claim...."    11 U.S.C. § 506(b).    The United States Supreme
    Court in United States v. Ron Pair Enter., Inc., 
    489 U.S. 235
    109 S. Ct. 1026
    103 L. Ed. 2d 290
     (1989) made clear that under § 506(b)
    a creditor is unqualifiedly entitled to postpetition interest on
    its oversecured claim.     Id. at 241, 109 S.Ct. at 1030;    see In re
    952 F.2d 82
     (5th Cir.1992);    In re Sublett, 
    895 F.2d 1381
    (11th Cir.1990).     However, § 506(b) applies only from the date of
    filing through the confirmation date.       Rake v. Wade, 
    508 U.S. 464
    113 S. Ct. 2187
    , 2190, 
    124 L. Ed. 2d 424
     (1993) (overruled on
    other grounds by 11 U.S.C. § 1322(e)).
         Under § 506(b), the creditor's entitlement to postpetition
    interest is clearly predicated on the threshold establishment of
    the two values to be compared, that of the property and the claim.
    Thus, the first inquiry under § 506(b) is usually a finding of
    whether the creditor is oversecured and thus entitled to accrue
    postpetition interest on its claim.    In arguing that at some point
    between the time the petition was filed and confirmation of the
    Plan, the value of the Hotel became greater than the value of FSA's
    claim thus entitling FSA to postpetition interest, FSA invites us
    to consider when valuation should occur for purposes of determining
    a creditor's entitlement to postpetition interest.
         With respect to the first question, the parties in their
    argument cite this Court to United Sav. Ass'n. of Texas v. Timbers
    of Inwood Forest Assoc., Ltd. (In re Timbers of Inwood Forest
    Assoc., Ltd.), 
    793 F.2d 1380
     (5th Cir.1986), on reh'g, 
    808 F.2d 363
    (5th Cir.1987) (en banc court reinstating panel opinion), aff'd,
    484 U.S. 365
    108 S. Ct. 626
    98 L. Ed. 2d 740
     (1988).         In Timbers, an
    undersecured creditor sought postpetition interest representing
    lost "opportunity costs" on the amount of its secured claim under
    § 362(d) of the Bankruptcy Code. This Court declined the creditor's
    request and held that an undersecured creditor was not entitled to
    postpetition interest on the value of its collateral as an element
    of adequate protection.    In reaching its ruling, the Timbers court
    examined other Bankruptcy Code provisions that bore "indirectly" on
    the question considered.      In considering § 506(b) and (c), the
    Court noted that:
         [t]he timing of the payment of accrued interest to an
         oversecured creditor (at the conclusion of the proceeding) is
         doubtless based on the fact that it is not possible to compute
         the amount of § 506(c) recovery (and, accordingly the net
         allowed secured claim on which interest is computed ) until
         the termination of the proceeding.
    Timbers, 793 F.2d at 1407. (emphasis added).
         Although   beneficial,   this      language   does   not    answer   the
    question we are presented with in the instant case.             In addition,
    the Timbers Court was not confronted with the question we are
    presented   today.   We   note   that    the   creditor   in    Timbers   was
    undersecured at the time of the adequate protection hearing and its
    appeal to this Court, and the value of the collateral was not
    increasing and there was no evidence that future appreciation would
    provide for post-petition interest.7
         Under § 506, valuations are to be made in light of the purpose
    of the valuation.        In     re Landing Assoc., Ltd. 
    122 B.R. 288
    (Bankr.W.D.Tex.1990).      We recognize that the value of a debtor's
    collateral and the amount of a creditor's claim are among the most
    important issues between the debtor and the secured claimholder.
    Valuation issues can arise in various contexts throughout the
    entire   bankruptcy     case.      See    In   re    Stanley,   
    185 B.R. 417
    (Bankr.D.Conn.1995).          Establishing      equity,     allowing    claims,
    adequate protection, and plan confirmation are only a few examples
    of when the issue of valuation can be raised.             Id. at 423.   Neither
    Bankruptcy   Code   §   506(b)    nor    the   Bankruptcy    Rules    define    or
    establish the time for determining valuation of collateral for
    purposes of § 506(b).         In re Fox, 
    142 B.R. 206
    1992).   The legislative history to § 506(b) is also silent on this
    point.    This   Court's      research   has   not    disclosed   any   circuit
          We also note that In re Delta Resources, Inc., 
    54 F.3d 722
    (11th Cir.), cert. denied, sub nom. Orix Credit Alliance, Inc. v.
    Delta Resources, Inc., --- U.S. ----, 
    116 S. Ct. 488
    133 L. Ed. 2d 415
     (1995), addressed the narrow issue of whether a purportedly
    oversecured creditor was entitled to receive periodic cash payments
    for accruing postpetition interest as part of adequate protection
    in order to preserve the value of its equity cushion. We are not
    confronted with this question.
              In comparing when adequate protection is measured versus
         interest under § 506(b), the Delta Resources court held that
         a creditor's claim is measured as it existed at the time of
         the petition date because postpetition interest is limited to
         the amount by which the claim was oversecured at that time.
         We agree with this general proposition in the ordinary
         "underwater" asset case; however, in the context where the
         collateral is rising and the creditor's claim is decreasing
         (as in the present case), we find this ruling to be
         inappropriately narrow.
    authority     which   has   discussed     the    question       before     us    today,
    although we note that the lower courts that have faced this
    circumstance have selected a single valuation date.                  See, e.g., In
    re    Hulen   Park    Place,   Ltd.,    
    130 B.R. 39
    ,    43   (N.D.Tex.1991)
    (determining     whether     creditor's      claim     is    oversecured        must   be
    determined as of the petition date);             In re Landing Assoc., Ltd.,
    122 B.R. 288
    ,    297   (Bankr.W.D.Tex.1990)            (measurement    date       is
    confirmation date).8
            We decline to follow such a narrow path.                    Therefore, we
    conclude that for purposes of determining whether a creditor is
    entitled to accrue interest under § 506(b) in the circumstance
    where the collateral's value is increasing and/or the creditor's
    allowed claim has been or is being reduced by cash collateral
    payments, such that at some point in time prior to confirmation of
    the debtor's plan the creditor may become oversecured, valuation of
    the collateral and the creditor's claim should be flexible and not
    limited to a single point in time, such as the petition date or
    confirmation date.          We further hold that, notwithstanding the
    bankruptcy court's determination of a creditor's secured status as
    of the petition date (if such a finding is made), the party who
    contends that there is a dispute as to whether a creditor is
           Although not controlling, we also recognize that there is
    ample discussion on the valuation issue in the context of adequate
    protection.      See,   e.g.,   In   re  Cason,   
    190 B.R. 917
    (Bankr.N.D.Ala.1995) (discussing three valuation approaches); In
    re   Addison   Properties   Ltd.   Partnership,   
    185 B.R. 766
    (Bankr.N.D.Ill.1995) (same); see also Craig H. Averch et al., The
    Treatment of Net Rents in Bankruptcy—Adequate Protection, Payments
    of Interest, Return of Collateral, or Reduction of Debt, 48 U.
    Miami L.Rev. 691 (1994).
    entitled to interest under § 506(b) must motion the bankruptcy
    court to make such a determination.                  The creditor though bears the
    ultimate burden       to    prove      by   a      preponderance        of   evidence     its
    entitlement to postpetition interest, that is, that its claim was
    oversecured, to what extent, and for what period of time.                              In re
    Grabill Corp., 
    121 B.R. 983
    , 991-92 (Bankr.N.D.Ill.1990).                                This
    ruling recognizes the discretionary nature of bankruptcy courts as
    courts of equity.          However, bankruptcy courts are not precluded
    from     fashioning       remedies       to        prevent       unwarranted        multiple
           A flexible approach recognizes the fact that a creditor's
    allowed claim,      which       is    being      reduced        over   time,   may    become
    entitled to accrue postpetition interest, and that under the plain
    language of § 506(b) there is nothing limiting that right.                                See
    United States v. Ron Pair Enter., Inc., 
    489 U.S. 235
    109 S. Ct. 1026
    103 L. Ed. 2d 290
     (1989) (employing a plain meaning reading of
    § 506(b)).      A flexible approach also recognizes that any increase
    over the judicially determined valuation during bankruptcy rightly
    accrues to the benefit of the creditor, and not to the debtor.
    Moreover, as the bankruptcy court in In re Addison Properties
    noted,    the   single     valuation        approach         generally       balances     the
    bankruptcy      process    in    favor      of      the    debtor.        In   re     Addison
    Properties        Ltd.       Partnership,                 
    185 B.R. 766
    ,      772
    (Bankr.N.D.Ill.1995).                Because       of     the    equitable      nature     of
    bankruptcy in seeking a balance between debtors and creditors
    (debtor's right to a fresh start versus the creditor's right to the
    value of its claim), we reject the single valuation approach under
    the particular facts of this case.
             Thus, applying this ruling to the instant case, if FSA
    believed that under § 506(b) it was entitled to accrue postpetition
    interest on its claim during the period following the confirmation
    hearing, then absent agreement between the parties as to the point
    in time when FSA's claim became oversecured, FSA was required to
    motion the bankruptcy court for a redetermination of its secured
    status.    The bankruptcy court in this case was presented with the
    unusual fact situation where FSA's claim was being reduced and the
    Hotel's value was appreciating during the time from the petition
    date to the confirmation hearing.      However, the bankruptcy court
    found that, for the period from the confirmation hearings to Plan
    confirmation, FSA's claim went from being undersecured to being
    oversecured and that this would probably occur in October 1994.
    Because the bankruptcy court made the factual finding as to when
    FSA would become oversecured, under the particular facts of this
    case we cannot say that the bankruptcy court was clearly erroneous
    in its decision.9
             We next address the accrual of interest under § 506(b) and
    the extent to which a creditor is entitled to interest under §
    506(b).     We find this question to be relatively straightforward.
    The measuring date on which the status of a creditor's collateral
          We note that the bankruptcy court found that FSA "probably"
    would become oversecured sometime in October 1994. Although we
    find it to be a close question, we are persuaded that the
    bankruptcy court's finding is supported by the evidence in this
    and claim are compared is determinative of a creditor's right to
    accrue interest    under    §   506(b).   Thus,   a   secured   creditor's
    entitlement to accrue interest under § 506(b) matures at that point
    in time where the creditor's claim becomes oversecured.10         However,
    as Timbers dictates, accrued interest under § 506(b) is not paid to
    an oversecured creditor until the plan's confirmation or its
    effective date, whichever is later. United Sav. Ass'n. of Texas v.
    Timbers of Inwood Forest Assoc., Ltd. (In re Timbers of Inwood
    Forest Assoc., Ltd.), 
    793 F.2d 1380
    , 1381, 1407 (5th Cir.1986), on
    808 F.2d 363
     (5th Cir.1987 (en banc court reinstating panel
    opinion)), aff'd, 
    484 U.S. 365
    108 S. Ct. 626
    98 L. Ed. 2d 740
    (1988). Thus, to the extent that the bankruptcy court's order does
    violence to the teachings of Timbers by ordering the payment of
    interest pending confirmation as opposed to ordering interest to
    accrue, it was error.      However, because of the particular facts of
    this case, we are not inclined to set aside the bankruptcy court's
    ruling.    On the effective date of the Plan's confirmation T-H NOLP
    would be receiving a credit for the interest paid during this time.
             FSA also asserts that it was entitled to the postpetition
    interest that would have accrued during the entire postpetition
    preconfirmation period on its claim since the petition date.            We
    disagree.    The Supreme Court has made it clear that an oversecured
    creditor is entitled to postpetition interest on its claim only "to
          In the instant case, the parties agreed that FSA could accrue
    interest under § 506(b) when its claim became oversecured. Thus,
    the parties agreement comports with our reading of the law under §
    the extent that such interest, when added to the principal amount
    of the claim, [does not] exceed the value of the collateral."
    Timbers, 484 U.S. at 372, 108 S.Ct. at 631;                  see also Landmark
    Financial Serv. v. Hall, 
    918 F.2d 1150
    , 1155 (4th Cir.1990) (an
    oversecured creditor's claim may include interest up to the value
    of the collateral).      Thus, the amount of interest allowed under §
    506(b) is limited to that amount of interest which, when added to
    the amount of FSA's allowed claim, will not exceed the value of its
         Finally, we address FSA's assertion that the bankruptcy court
    erred in valuing the Hotel at $13.7 million at the confirmation
    hearing.      The Bankruptcy Code does not prescribe any particular
    method   of    valuing   collateral,      but    instead     leaves     valuation
    questions to judges on a case-by-case basis.           See House Rep. No 95-
    595, 95th Cong. 1st Sess. 216, 356 (1977), reprinted in 1978
    U.S.S.C.A.N. 5963, 6176, 6312.           Valuation is a mixed question of
    law and fact, the factual premises being subject to review on a
    clearly erroneous standard, and the legal conclusion being subject
    to de novo review.       In re Clark Pipe & Supply Co., Inc., 
    893 F.2d 693
    , 697-98 (5th Cir.1990).        Value under § 506 is to be determined
    in light of the purpose of the valuation and of the proposed
    disposition or use of the property. Associates Commercial Corp. v.
    Rash, No. 96-454, 
    1997 WL 321231
    , at *5, --- U.S. ----, ----, ---
    S.Ct. ----, ----, --- L.Ed.2d ---- (U.S. June 16, 1997);                      In re
    Sandy Ridge Dev. Corp., 
    881 F.2d 1346
     (5th Cir.1989).                    In this
    particular     case,   valuation   was    made   for   the    purpose    of    plan
    confirmation.    We note that FSA's appraisal expert agreed with T-H
    NOLP's expert regarding the Hotel's value once FSA's appraisal
    incorporated the overhead allocation charge, which the bankruptcy
    court found to be a necessary expense.          Therefore, based on our
    review of the record, we concluded that the bankruptcy court did
    not err in its valuation of the Hotel.             We find FSA's remaining
    arguments to be without merit.
    2. The Postconfirmation Interest Rate
           The   bankruptcy    court's      calculation       of   an   appropriate
    "cramdown"   interest     rate   for    purposes     of    Chapter    11   plan
    confirmation is reviewed for clear error.            In re Briscoe Enter.,
    Ltd., II, 
    994 F.2d 1160
    , 1169 (5th Cir.1993);                  see also In re
    Bryson Properties, XVIII, 
    961 F.2d 496
    , 500 n. 4 (4th Cir.1992).
    T-H NOLP urges this Court to establish a particular formula for
    determining an appropriate cramdown interest rate. We decline. As
    we recognized in Briscoe, "[c]ourts have used a wide variety of
    different rates as benchmarks in computing the appropriate interest
    rate (or discount rate as it is frequently termed) for the specific
    risk level in their cases."      Id. We will not tie the hands of the
    lower courts as they make the factual determination involved in
    establishing an appropriate interest rate;            they have the job of
    weighing the witness' testimony, demeanor and credibility.                 Thus,
    absent clear error, we will not disturb the bankruptcy court's
         In the instant case, the bond financing documents provided for
    an interest rate of 11.5% per annum.            During the confirmation
    hearing, the bankruptcy court heard testimony from T-H NOLP's and
    FSA's financing experts.            T-H NOLP's hotel financing expert, Joel
    Ross, stated that in his opinion the appropriate interest rate that
    T-H    NOLP     should   pay   to    FSA    under   the   Plan   was   8.45%.11   On
    cross-examination, however, Ross admitted that he did not know of
    any lender to whom he would recommend making this loan at an 8.45%
    interest rate. FSA's interest rate expert, John Keeling, testified
    that the appropriate interest rate under the Plan would be 13.6% if
    the Hotel were valued at $13.7 million, and 14.6% if the Hotel were
    valued at $15.4 million. Keeling's opinion regarding this interest
    rate range was based on a lender having the same loan documentation
    as FSA. Keeling's methodology was to break down the loan into
    components, and to fix a rate dependent upon how much debt service
    would be available for each component.12
           The bankruptcy court, after considering Ross' and Keeling's
    testimony, concluded that neither interest rate proposed was an
    appropriate interest rate.                 The court found that as to Ross'
    proposed interest rate of 8.45%, this interest rate would not
            Ross determined this by adding 210 basis points to the
    two-year U.S. Treasury rate, resulting in an interest rate under
    the Plan of 8.45% as of September 21, 1994.
          According to Keeling's methodology, the first component would
    comprise 60-70% of the debt and would carry a 9.75% interest rate
    because a debt service ratio of 1.4 would be available.        This
    component was determined by adding 3.25% to two-year treasuries
    which were 6.7% as of October 3, 1994.       The second component,
    comprising 10% of the debt (described as mezzanine financing),
    would carry a 12.75% interest rate. The third component would be
    serviced as to interest only, no amortization, and would carry a
    16.25% interest rate.     The fourth component would not receive
    current interest or amortization and would carry a 25% interest
    adequately compensate FSA for not receiving its money on the Plan's
    effective date.       With respect to Keeling's proposed interest rate
    of 13.6%, the bankruptcy court found this rate too high, given that
    there was expert testimony that the value of the Hotel would
    increase over the next two years, and evidence that T-H NOLP would
    be able to make its payments under the Plan. Based on these
    findings, the bankruptcy court determined that the appropriate
    cramdown interest rate under 11 U.S.C. § 1129(b)(2)(A)(i)(II)
    should be the contract rate of 11.5%. We find no reason to
         Bankruptcy Code § 1129(b)(2)(A)(i)(II) has been interpreted to
    require that the total deferred payments have a present value equal
    to the amount of the secured claim.              In re Bryson Properties,
    961 F.2d 496
    , 500 (4th Cir.1992).              T-H NOLP argues that the
    postconfirmation interest rate should be 8.45% which would allow
    FSA to recover the allowed amount of its claim.               T-H NOLP relies on
    footnote    47   in   Briscoe   as    support   for    its    argument   that    in
    determining the appropriate cramdown interest rate to a secured
    creditor's claim, this Court should refer to the Treasury rate and
    add a case-specific risk premium.            On the other hand, FSA argues
    that the interest rate Keeling proffered should be used in the
    Plan. We decline both suggestions.
         Our review discloses that the bankruptcy court's use of the
    contract rate     reflects      the   present   value    of    FSA's   claim    and
    accounts for the specific risk level in this case.              We explained in
    Briscoe that "[o]ften the contract rate will be an appropriate
    rate," Id., and that "[n]umerous courts have chosen the contract
    rate if it seemed to be a good estimate as to the appropriate
    discount rate," Id. (citing In re Monnier Bros., 
    755 F.2d 1336
    Cir.1985)).   In Briscoe the risk premium was more than 50% of the
    riskless rate, whereas in the instant case, the contract rate of
    11.5% was more than 1.7 times that of the riskless two-year
    Treasury rate.   The bankruptcy court concluded that the contract
    rate of 11.5% included a risk premium to account for the increased
    risk FSA would bear as a claimant under the Plan and for not
    receiving its money today.   In other words, the contract rate was
    a reasonable rate that adequately compensated for risk.    See Id.
    Accordingly, we hold that the bankruptcy court was not clearly
    erroneous in its determination of the appropriate cramdown interest
    rate in T-H NOLP's amended Plan.
    3. T-H NOLP's Amended Plan of Reorganization
         We now turn to FSA's arguments regarding T-H NOLP's amended
    Plan and the bankruptcy court's confirmation of the amended Plan.
    On appeal, FSA contends that T-H NOLP's Plan was not feasible under
    Bankruptcy Code § 1129(a)(11), that the Plan was not proposed in
    good faith under § 1129(a)(3), and that the Plan was a liquidating
    Plan under § 1141(d)(3).   We address each of these in turn.
     A. The § 1129(a)(11) Feasibility Requirement
          Section 1129(a)(11) codifies the feasibility requirement and
    requires that confirmation of the plan is not likely to be followed
    by liquidation or the need for further financial reorganization,
    unless such liquidation or reorganization is proposed in the plan.
    11 U.S.C. § 1129(a)(11).              To allow confirmation, the bankruptcy
    court must make a specific finding that the plan as proposed is
    feasible.        In    re   M    &    S    Assoc.,      Ltd.,   
    138 B.R. 845
    ,      848
    (Bankr.W.D.Tex.1992). The standard of proof required by the debtor
    to prove a Chapter 11 plan's feasibility is by a preponderance of
    the   evidence,       Briscoe,       994   F.2d    at   1165,    and   we     review       the
    bankruptcy court's finding that a debtor's plan is feasible under
    the clearly erroneous standard.                  Id. at 1166.
             In   determining       whether      a    debtor's      Chapter     11      plan   of
    reorganization        is    feasible,       we     noted   in    Briscoe      that      "the
    [bankruptcy] court need not require a guarantee of success ...,
    [o]nly a reasonable assurance of commercial viability is required."
    Id. at 1165-66;        see also Kane v. Johns-Manville Corp., 
    843 F.2d 636
     (2nd Cir.1988).         All the bankruptcy court must find is that the
    plan offer "a reasonable probability of success."                         In re Landing
    Assoc., Ltd., 
    157 B.R. 791
    , 820 (Bankr.W.D.Tex.1993).
          The bankruptcy court found that the Plan was feasible based on
    the following:        (1) that T-H NOLP would be able to service the debt
    at an 11.5% interest rate with an infusion of capital by the
    principals as modified in the Plan;                  (2) the earning power of T-H
    NOLP after the reorganization;                (3) the past performance of T-H
    NOLP's   business       operations;          (4)     the   ability     of     T-H    NOLP's
    management;       and (5) the economic picture for hotels in New
    Orleans.      Based on these findings, the bankruptcy court found that
    T-H NOLP's Plan had a reasonable assurance of commercial viability.
          FSA argues that the Plan does not satisfy the feasibility
    requirement of § 1129(a)(11) because T-H NOLP cannot fulfill its
    commitments during the initial two years under the Plan. FSA
    primarily contends that T-H NOLP erred by using higher revenue
    projections for showing feasibility while using lower projections
    for collateral valuations, that there was no basis to believe that
    T-H NOLP's revenue projections would be obtained, and that the
    Hotel's value would have to appreciate in order to satisfy the
              FSA has not asserted any "clear error" basis that would
    warrant reversal of the bankruptcy court's feasibility finding.
    With respect to FSA's contention regarding how the projections were
    utilized and that the revenues projected could not be obtained, we
    cannot conclude that the bankruptcy court erred in determining that
    T-H NOLP's Plan was feasible.              We agree with the notion that
    "[w]here the projections are credible, based upon the balancing of
    all testimony, evidence, and documentation, even if the projections
    are aggressive, the court may find the plan feasible."              In re
    Lakeside      Global   II,    Ltd.,    
    116 B.R. 499
    ,   508   n.   20
    (Bankr.S.D.Tex.1989).        Debtors are not required to view business
    and economic prospects in the worst possible light.          In re Western
    Real Estate Fund, Inc., 
    75 B.R. 580
    , 585 (Bankr.W.D.Okla.1987).
    The factors set forth by the bankruptcy court as to the feasibility
    of T-H NOLP's Plan are not untenable nor unreasonable.         Our review
           FSA also asserts that if the Hotel is sold under the Plan,
    there is no credit worthiness test for the new purchaser. However,
    we note that FSA does not disclose how this affects the Plan's
    feasibility, and we refuse to speculate on this point without
    references to the record or legal authority.
    of the evidence discloses that actual net revenues increased by
    over eight percent from 1993 to 1994, and that for the year 1994
    the actual net operating cash flow was greater than the amount
    projected for that year.             Moreover, as stated previously, the
    Hotel's revenue stream has enabled T-H NOLP to reduce the amount of
    FSA's claim considerably since the petition date. In addition, the
    evidence   reflects      a   reasonable       expectation    that   the   payments
    required to be made during the term of the Plan will be made.
    Thus, we find no clear error regarding feasibility on this point.
           Regarding FSA's argument that the Hotel's value will have to
    appreciate in order the satisfy the Plan, the bankruptcy court
    found that T-H NOLP could pay off FSA's claim.                 As stated above,
    the Plan included several alternatives which could reasonably
    result in the full payment of FSA's claim;                     for example, by
    refinancing, a balloon payment at the end of twenty-four months,
    the sale of the Hotel to a third party, or a dation en paiement.
    In In re Nite Lite Inns, 
    17 B.R. 367
    , 369-70 (Bankr.S.D.Cal.1982),
    the bankruptcy court found feasible a plan which contemplated
    liquidation     in     the   event     the    debtor   defaulted,    since    such
    liquidation was proposed in the plan.              See also In re Sandy Ridge
    Dev.   Corp.,    
    881 F.2d 1346
         (5th    Cir.1989)    (finding     that   a
    liquidating reorganization under Chapter 11 did not violate §
    1129(a)(11)).        We agree with the bankruptcy court in Nite Lite
    Inns, that a debtor's plan is feasible where at least one of the
    alternative proposals is feasible.              Therefore, because T-H NOLP's
    Plan included several alternatives which would fully satisfy FSA's
    claim, we conclude that the bankruptcy court did not err in finding
    that the Plan was feasible under § 1129(a)(11).
     B. The § 1129(a)(3) Good Faith Requirement
            Section 1129(a)(3) requires that a debtor's plan be proposed
    in good faith and not by any means forbidden by law.      11 U.S.C. §
    1129(a)(3).    The requirement of good faith must be viewed in light
    of the totality of the circumstances surrounding establishment of
    a Chapter 11 plan, keeping in mind the purpose of the Bankruptcy
    Code is to give debtors a reasonable opportunity to make a fresh
    start.    In re Sun Country Dev., Inc., 
    764 F.2d 406
    , 408 (5th
    Cir.1985).    "Where the plan is proposed with the legitimate and
    honest purpose to reorganize and has a reasonable hope of success,
    the good faith requirement of § 1129(a)(3) is satisfied."      Id. A
    debtor's plan may satisfy the good faith requirement even though
    the plan may not be one which the creditors would themselves design
    and indeed may not be confirmable.    In re Briscoe Enter., Ltd., II,
    994 F.2d 1160
    , 1167 (5th Cir.1993).   The standard of proof required
    by the debtor to prove a Chapter 11 plan was proposed in good faith
    is by a preponderance of the evidence.     Id. at 1165.
         The Plan in this case provided that T-H NOLP would make
    payments for twenty-four months commencing on the Plan's effective
    date.    In addition, the Plan proposed various time lines during
    which the classes of claim would be extinguished, including FSA's
    claim.    The bankruptcy court found that the Plan was proposed in
    good faith.
         FSA contends that the Plan was not proposed in good faith for
    two reasons.     First, FSA argues that under the Plan, T-H NOLP is
    required to actively market the Hotel for the highest possible
    price and, although FSA bid its full claim at the confirmation
    hearing, T-H NOLP did not sell.           Thus, FSA contends that T-H NOLP's
    refusal to sell amounts to a lack of good faith.               We disagree with
    FSA's assertion.
           This Court's review of the amended Plan disclosed that if T-H
    NOLP received an offer to purchase the Hotel, the Trustee (FSA) had
    a right of first refusal.            Amended Plan Article 5(E).            If FSA
    elected to acquire the Hotel pursuant to its right of first
    refusal, FSA had the right to credit bid an amount up to the
    allowed amount of its final allowed claim.               Amended Plan Article
    5(F).    During the confirmation hearing, FSA's counsel asked Maria
    Cheng, FSA's Vice President, "if the Debtor were to put the hotel
    up for sale today, is FSA ready, willing and able to ... credit bid
    [the    amount   of   its   claim]."       Cheng     responded    affirmatively.
    (Confirmation Hearing Transcript p. 107).               However, we note that
    there were no other parties present at the hearing which offered to
    purchase the Hotel and, thus, based on the plain language of the
    Plan, FSA's right of first refusal never matured.                See, e.g., In re
    Table Talk, Inc., 
    53 B.R. 937
     (Bankr.D.Mass.1985) (right of first
    refusal    granted    to    bidder   by    trustee     was   exercisable    after
    competitive bid was proffered).            Consequently, we find that FSA's
    argument on this point must fail.
             Secondly,    FSA   argues     that    T-H    NOLP's   control   persons
    commenced bankruptcy proceedings for all six partnerships in four
    different courts, and that because T-H NOLP resisted FSA's efforts
    to consolidate the instant case with the other bankruptcy cases
    taking place in other jurisdictions, T-H NOLP's Plan was not
    proposed in good faith. The bankruptcy court denied FSA's requests
    to consolidate or change venue.          We find FSA's argument meritless.
    We cannot see any nexus between the "good faith" requirement and T-
    H NOLP's resisting consolidation of the instant case which would
    preclude a      debtor's   plan   from   being      proposed   in   good   faith.
    Accordingly, we refuse to read into the statutory requirement of
    "good faith" a mandate that the debtor is precluded from resisting
    any attempt by a creditor, such as FSA, to consolidate bankruptcy
    proceedings.      FSA's contention has no bearing on whether the
    proposed plan will result in reorganization of T-H NOLP or whether
    the Plan has a reasonable hope of success.             Based on the above, we
    find that the bankruptcy court did not err in determining that T-H
    NOLP's Plan was proposed in good faith.
     C. § 1141(d)(3) & Liquidating Plans
          Generally, under § 1141(d)(1)(A) of the Bankruptcy Code,
    confirmation of a plan of reorganization grants the Chapter 11
    debtor a discharge of all debts arising prior to confirmation.                11
    U.S.C. § 1141(d)(1)(A).      However, § 1141(d)(3) provides that in a
    Chapter    11   case   the   debtor      may   be    denied    discharge    upon
    confirmation of the plan if the following three requirements are
    present:     (1) the plan provides for the liquidation of all or
    substantially all of the property of the estate (§ 1141(d)(3)(A));
    (2) the debtor does not engage in business after consummation of
    the plan (§ 1141(d)(3)(B));     and (3) the debtor would be denied a
    discharge under § 727(a) of this title if the case were a case
    under chapter 7 of this title (§ 1141(d)(3)(C)).         11 U.S.C. §
         The bankruptcy court and the district court found that the
    Plan was not a liquidation plan because the Plan did not satisfy
    the three nondischarge requirements of § 1141(d)(3).       On appeal,
    FSA argues that the Plan was a liquidation plan since under the
    Plan, T-H NOLP will operate the Hotel for only twenty four months
    or until the Hotel is sold or otherwise disposed of, whichever
    occurs first. In addition, FSA asserts that the bankruptcy court's
    reasoning was erroneous.      We disagree, and affirm the bankruptcy
    court's reading of § 1141(d)(3).
          Under the first requirement, the plan must "provide[ ] for
    the liquidation of all or substantially all of the property of the
    estate."      11 U.S.C. § 1141(d)(3)(A).14   According to T-H NOLP's
              The legislative history to § 1141(d) states:
                 Paragraph (3) specifies that the debtor is not discharged
                 by the confirmation of a plan if the plan is a
                 liquidating plan and if the debtor would be denied a
                 discharge in a liquidation case under Section 727.
                 Specifically, if all or substantially all of the
                 distribution under the plan is of all or substantially
                 all of the property of the estate or the proceeds of it,
                 if the business, if any, of the debtor does not continue,
                 and if the debtor would be denied a discharge under
                 section 727 (such as if the debtor were not an individual
                 or if he had committed an act that would lead to denial
                 of discharge), then the Chapter 11 discharge is not
         House Rep. No. 95-595, 95th Cong. 1st Sess. 418-19 (1977),
         reprinted in, 1978 U.S.C.C.A.N. 5963, 6374-75.
    Plan, there are three options with respect to the Hotel:          (1) the
    refinancing of FSA's debt and paying FSA in full;         (2) the sale of
    the Hotel;   or (3) the transfer of the Hotel to FSA in satisfaction
    of its nonrecourse debt.       The first option proposed by T-H NOLP
    does not result in liquidation of the property, but instead results
    in liquidation of FSA's claim, and obviously is the one preferred
    by T-H NOLP. Moreover, if T-H NOLP is successful in refinancing the
    debt, its business operations will continue.       The record discloses
    that during the two-year period following the effective date of the
    Plan,15 T-H NOLP will pursue the refinancing option simultaneously
    with its efforts to market the Hotel under the second option.
    However, no   evidence   was   presented   to   support   the   fact   that
    refinancing within two years was so unlikely that sale of the Hotel
    (option two under the Plan) or dation en paiement (option three
    under the Plan) were the only viable options.        We also note that
    FSA fails to cite any authority for the proposition that where one
    alternative of a Plan is liquidation of the property two years
    after a plan's effective date, it constitutes a liquidation under
    1141(d)(3)(A).   We refuse to so hold.     Because requirement (A) of
    § 1141(d)(3) is not met and this section requires that all three
    requirements be present in order to deny the debtor a discharge, we
    conclude that the bankruptcy court was correct in finding that T-H
          T-H NOLP's conducting business for two years following Plan
    confirmation satisfies § 1141(d)(3)(B). Compare In re Wood Family
    Interests, Ltd., 
    135 B.R. 407
     (Bankr.D.Colo.1989) (holding that
    partnership debtor was not entitled to a discharge where its
    reorganization plan provided for discontinuation of its business
    upon confirmation).
    NOLP's Plan was not a liquidation plan.      FSA's remaining arguments
    that T-H NOLP's Plan is a liquidating plan are meritless.
         Based   on   the   foregoing   discussion,   the   district   court's
    judgment affirming the bankruptcy court's judgment is AFFIRMED.

Document Info

DocketNumber: 95-31233

Filed Date: 7/9/1997

Precedential Status: Precedential

Modified Date: 12/21/2014

Authorities (36)

Trust Company of LA v. N N P Incorporated , 104 F.3d 1478 ( 1997 )

United Sav. Assn. of Tex. v. Timbers of Inwood Forest ... , 484 U.S. 365 ( 1988 )

United States v. Ron Pair Enterprises, Inc. , 489 U.S. 235 ( 1989 )

Rake v. Wade , 508 U.S. 464 ( 1993 )

12-collier-bankrcas2d-323-bankr-l-rep-p-70286-in-re-monnier , 755 F.2d 1336 ( 1985 )

bankr-l-rep-p-70633-in-the-matter-of-sun-country-development-inc , 764 F.2d 406 ( 1985 )

in-re-timbers-of-inwood-forest-associates-ltd-debtor-united-savings , 793 F.2d 1380 ( 1986 )

Bertha Jolivette Zeno v. The Great Atlantic and Pacific Tea ... , 803 F.2d 178 ( 1986 )

in-re-timbers-of-inwood-forest-associates-ltd-debtor-united-savings , 808 F.2d 363 ( 1987 )

lawrence-kane-a-class-4-creditor-and-asbestos-health-on-his-own-behalf-and , 843 F.2d 636 ( 1988 )

In the Matter of Sandy Ridge Development Corporation, ... , 881 F.2d 1346 ( 1989 )

in-the-matter-of-clark-pipe-and-supply-co-inc-debtor-claude-r-smith , 893 F.2d 693 ( 1990 )

22-collier-bankrcas2d-868-bankr-l-rep-p-73279-in-re-robert-l , 895 F.2d 1381 ( 1990 )

landmark-financial-services-v-marvin-junior-hall-linda-marie-hall , 918 F.2d 1150 ( 1990 )

In the Matter of Martha Jo Pointer, Debtor. City of Farmers ... , 952 F.2d 82 ( 1992 )

In Re Bryson Properties, Xviii, Debtor. Travelers Insurance ... , 961 F.2d 496 ( 1992 )

in-the-matter-of-briscoe-enterprises-ltd-ii-dba-regalridge , 994 F.2d 1160 ( 1993 )

in-the-matter-of-t-h-new-orleans-limited-partnership-debtor-t-h-new , 10 F.3d 1099 ( 1993 )

In Re Delta Resources, Inc., Debtor. Orix Credit Alliance, ... , 54 F.3d 722 ( 1995 )

in-the-matter-of-united-states-abatement-corporation-aka-usa , 79 F.3d 393 ( 1996 )

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