Opinion
Case No. 95-11924-AM (Jointly Administered), Contested Matter No. 95-628
November 26, 1995
MEMORANDUM OPINION
I.
This matter is before the court on the amended motion of Principal Mutual Life Insurance Company ("Principal Mutual") filed June 2, 1995, for relief from the automatic stay in order to foreclose on the debtor's principal asset, a shopping center and office building known as Gunston Plaza located in Fairfax County, Virginia. An evidentiary hearing was held on October 12, 13, and 26, 1995. At the conclusion of the hearing, the court took the matter under advisement and subsequently made findings of fact and conclusions of law orally on the record in open court on November 3, 1995, reserving, however, the right to supplement those findings of fact and conclusions of law in a written opinion. Since many of the factual issues and some of the legal issues determined by the court will have an impact on confirmation, the court issues this memorandum opinion in order to explicate more fully the basis for its ruling.
II. A.
The debtor, Gunston Plaza Associates, L.P., filed a voluntary chapter 11 petition in this court on May 16, 1995, three days before a scheduled foreclosure sale. Gunston Plaza Associates is one of fourteen related cases all filed within a short period of each other by developers Robert and Marilyn DeLuca and thirteen partnerships or limited liability companies owned or controlled by them. Gunston Plaza Associates technically remains in possession of its estate as debtor in possession, although as a practical matter its control over its sole asset is limited because Principal Mutual is collecting the rents and controlling the payment of operating expenses.
The major asset of Gunston Plaza Associates is an approximately 187,000 square foot community shopping center called Gunston Plaza and an adjacent office building located on U.S. Route 1 in the Lorton area of Fairfax County. The shopping center opened in 1989 and was quickly leased up. Within the last year, however, it lost both of its "anchor" tenants: a Basics grocery store and a Jamesway department store. Prior to the pull-outs, the center was 100% leased. The Basics space has since been re-let for a Food Lion at a lower rent than Basics was paying. The debtor, however, has negotiated a lease buy-out agreement, conditioned on approval by this court, under which the debtor would receive a lump sum payment of $1,100,000.00, which is approximately the present value of the difference between the rent under the Basics lease and the Food Lion rent. A large portion of the space formerly occupied by Jamesway has been leased to Regal Cinema for a multiplex movie theater. Although the term of the lease is 10 years, with 4 five-year renewal options, the lease contains a provision giving Regal an absolute right to terminate the lease at the end of the 5th year. If it exercises this right, it is entitled to recoup 50% of its stated $1.4 million capital investment. The landlord may elect to cash out the tenant's right of recoupment by paying it a lump sum of $700,000. If the landlord does not do so, the tenant has the right to occupy the premises rent free for the last 4 months of the 5th year and all of a 6th year, for a total of 16 months, which would amount to approximately $400,000 free rent.
B.
Principal Mutual's claim arises from a $22,100,000.00 loan made on October 4, 1989, secured by a properly recorded deed of trust and assignment of rents against the Gunston Plaza real estate. Principal's note provides for an interest rate of 8.875% per annum, a 30-year amortization, monthly payments of $175,837.52, and a balloon payment on October 1, 1995. The note first went into default in April, 1994, when the debtor failed to make the monthly payment due for that month, and on June 9, 1994, the lender formally declared the loan to be in default. On July 25, 1994, Principal Mutual notified the debtor that it was revoking the debtor's right to collect rents and directed the tenants to make future rent payments to Principal Mutual. Principal Mutual did not immediately move to foreclose, however, and entered into a forbearance agreement dated July 29, 1994, which expired on September 29, 1994. On April 18, 1995, Principal sent the debtor a new default letter. When the default was not cured, Principal Mutual sent the debtor a notice of acceleration on April 26, 1995 and scheduled a foreclosure sale for May 19, 1995.
III. A.
Principal Mutual seeks relief from the automatic stay on two different grounds. The first ground, relying on § 362(d)(2) of the Bankruptcy Code, is that there is no equity in the property and the property is not necessary for an effective reorganization because the debtor is factually and legally unable to propose a confirmable plan. The second ground — which essentially reiterates a portion of the first argument — is that the debtor's factual and legal inability to obtain confirmation over Principal Mutual's objection independently constitutes "cause" under § 362(d)(1), Bankruptcy Code, and furthermore justifies dismissal of the debtor's case under § 1112(b)(2), Bankruptcy Code, based on the debtor's "inability to effectuate a plan."
"(d) On request of a party in interest, and after notice and a hearing, the court shall grant relief from the stay . . ., such as by terminating, annulling, modifying, or conditioning such stay —
* * *
(2) with respect to an act against property . . ., if —
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization."
An "effective" reorganization requires "a reasonable possibility of a successful reorganization within a reasonable time." United Savings Assn v. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365, 376, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). See, Sun Valley Newspapers, Inc. v. Sun World Corp. (In re Sun Valley Newspapers, Inc.), 171 B.R. 71 (9th Cir. BAP, 1994) (Relief from stay properly granted where debtor unable to propose confirmable plan).
B.
The threshold factual issue is whether the debtor has equity in the property securing Principal Mutual's claim. The resolution of this issue in turn requires the court to determine (1) how much Principal Mutual is owed on account of its note, and (2) the value of its collateral. Each of these will be addressed in turn.
C.
Principal Mutual introduced testimony to show that its claim on the date the debtor filed its chapter 11 petition was $23,815,826.85, and that unpaid post-petition had accrued in the amount of $511,858.64 as of September 30, 1995, for a total due on that date of $24,327,685.49. The debtor, however, attacks two components of Principal Mutual's claim, namely the inclusion of "default" interest and a $719,897.60 prepayment penalty.
1. Default Interest
The note carries a fixed rate of interest of 8.875%. The note also provides, however, that in the event of default,
"the entire principal balance and interest then accrued and unpaid and any other sums due hereunder shall, at the option of the noteholder, become immediately due and payable without further demand or notice . . . and, whether or not the principal balance has been accelerated, interest shall accrue on the entire principal balance then outstanding and interest then accrued and any other sums due and payable hereunder for the duration of such default at a rate which is the greater of (i) two percent (2%) in excess of the rate of interest then in effect hereunder, or (ii) two percent (2%) in excess of the prime rate of interest as announced from time to time being in effect at the Chase Manhattan Bank, N.A. Failure to exercise this option in any one or more instances shall not constitute a waiver of the right to exercise the same in the event of any subsequent default."
The debtor first argues that default interest should not be allowed in any event, since the rate specified is "punitive." However, the court accepts the testimony of Principal Mutual's witness that the purpose of the two percentage point spread was solely to compensate the lender for the increased risk inherent in a non-performing loan, and the court does not find the 10.875% rate due and owing by contract in the event of default to be punitive or otherwise unallowable.
The real issue is the date from which the default interest properly runs. Principal Mutual's claim calculates default interest from March 1, 1994, the last date to which interest was paid prior to the failure to make the April 1, 1994, payment. However, neither the default letter of June 9, 1994, nor the default letter of April 18, 1995, asserts any claim for default interest, and the reinstatement figures in both letters affirmatively state that the defaults may be cured by payment of the missed debt service payments, late charges, and funds advanced with no mention whatsoever of default interest. Additionally, the default letter of April 18, 1995, states that the debt service payments are in default from November 1, 1994. Significantly, Principal Mutual's own contemporaneous internal accounting records reflect interest accruing and payments being applied through the period after April 1994 at the note rate, not the default rate. The first positive act by Principal Mutual assessing default interest — and even then, only from October 1, 1994 — is the acceleration notice of April 26, 1995. The promissory note itself specifically refers to default interest as an "option" which the lender may elect to "exercise," and Principal Mutual's witness admitted on cross-examination that Principal Mutual did not always assert claims for default interest. Accordingly, the court finds that Principal Mutual by its actions in this case waived its claim to default interest based on the first default, and the court finds its belated assessment in the context of this proceeding to be, in effect, an attempt to re-write history contrary to its own internal accounting records. The court does find, however, that when the second default letter was sent on April 18, 1995, and the default was not cured within the time specified, Principal Mutual could properly assess default interest from the date of the default specified in the letter.
The defaults specified were two: failure to make the November 1, 1994, and subsequent note payments and failure to pay the 1994 real estate taxes. No evidence was presented as to when the 1994 real estate taxes were due, but the court takes judicial notice that the last date for payment of annual real estate taxes without penalty in Fairfax County, Virginia, is December 5th. Accordingly, the earliest default specified is the non-payment of the November 1, 1994, payment. The court therefore concludes that November 1, 1994, is the earliest date from which default interest may be claimed.
2. The Prepayment Penalty
The note includes a provision that allows prepayment, after November 1, 1992, but prior to maturity, upon 30 days notice and the payment of a "prepayment premium." Under the terms of the note, the prepayment premium is calculated as the greater of 1% of the outstanding principal balance or an "Amount" calculated as the difference between the present value of mortgage payments still due and the yield on a specified U.S. Treasury Bond.
The calculation of the "Amount" is set forth in the note as follows:
(a) Determine the "Reinvestment Yield". The Reinvestment Yield will be equal to the yield on the November, 1996 seven and one-quarter percent (7.25%) U.S. Treasury Bond, Bill or Note issue ("Primary Issue") as published in the financial press such as "The Wall Street Journal" or "The New York Times" two (2) weeks prior to the date of prepayment, and converted to an equivalent monthly compounded nominal yield. . . .
(b) Calculate the "Present Value of the Mortgage". The Present Value of the Mortgage is the present value of the regularly scheduled payments to be made under the note, including all regular debt service payments and/or any balloon payment, discounted at the Reinvestment Yield for the number of months remaining from the date of prepayment until October 1, 1996.
(c) Subtract the amount of the prepaid proceeds from the Present Value of the Mortgage as of the date of prepayment. The resulting differential shall be the Amount.
Principal Mutual's evidence was that the applicable Treasury rate on April 12, 1995 was 6.510%, the "Reinvestment Yield" was 6.423%, and the present value of the remaining Gunston Plaza mortgage payments, discounted at that rate, was $22,420,796.77.
The note also provides that in the event the noteholder exercises its right to accelerate upon a default, "there shall be due and payable in addition to the unpaid principal balance, accrued interest, late charges, and all other sums due and payable," the greater of 1% of the outstanding principal balance or "the Amount calculated as aforesaid" — that is, the prepayment premium — "as of the date of such Acceleration."
Principal Mutual offered testimony, which has not been rebutted, and which the court accepts, showing that the calculated "Amount" referred to in the note as due on prepayment or acceleration is $719,897.60. There remains, however, the question of whether such amount, even though provided for under the terms of the note, is allowable as part of Principal Mutual's claim.
No testimony was offered concerning the economic purpose served by the prepayment premium. However, as noted by Judge Sellers in In re Ridgewood Apartment of Dekalb County, Ltd. 174 B.R. 712, 720-721 (Bankr. S.D.Ohio 1994),
The clear purpose for a prepayment penalty is to compensate the lender for the risk that market rates of interest at the time of prepayment might be lower than the rate of the loan being prepaid. Such a provision would compensate the lender for anticipated interest that would not be received if the loan were paid prematurely. `Among other things, a prepayment premium insures the lender against loss of his bargain if interest rates decline.'
In Ridgewood, the court found a prepayment premium to be in the nature of unmatured interest. Under § 502(b)(2), Bankruptcy Code, unmatured interest is not an allowable claim in bankruptcy. This statutory provision, however, must be read in conjunction with § 506(b), which allows an over-secured creditor, as part of its claim, "interest on such claim, and any fees, costs, or charges provided for under the agreement under which such claim arose." Thus, the question of whether the prepayment premium is allowable depends on the value of Principal Mutual's collateral.
In the Ridgewood Apartments case, the lender was under-secured, and the court therefore did not allow the prepayment premium as part of the creditor's claim. Additionally, the language of the note in Ridgewood Apartments did not clearly allow the premium to be collected on acceleration as opposed to a voluntary prepayment. The note in the present case, unlike that in Ridgewood Apartments, is quite explicit, and, as will be discussed below, the value of the property is sufficient to support collection of the prepayment premium. The court notes, however, that there remains a question as to the ultimate allowability of the prepayment premium as a portion of Principal Mutual's claim, in light of the debtor's clear right under § 1124(2), as part of a plan of reorganization, to "de-accelerate" the note by curing any default and reinstating the terms of the note. Whether the prepayment premium should be allowed as a component of a secured lender's claim where the claim is to be paid over time (particularly if paid at an interest rate no lower than the note rate) is an issue that need not be decided in the context of the present motion, and the court expressly makes no ruling.
3. Calculation of Principal Mutual's Claim
Based on the court's rulings concerning default interest and the premium due on acceleration, and accepting those portions of Principal Mutual's calculations that are not affected by such ruling, the court fixes Principal Mutual's claim on the date of filing at $22,879,901.39 and its claim on September 30, 1995, at $23,655,657.54 based on the following calculation:
Principal $21,700,899.17 Other amounts due: Late fees 45,717.75 Funds advanced 23,254.88 Pre-petition interest 3/1/94 to 11/1/94 @ 8.875% 1,286,983.88 11/1/94 to 5/16/94 @ 10.875% 1,284.874.07
Sub-total $24,341,729.75 Amount applied from funds collected (1.461.828.45)
Due on filing date 22,879,901.30 Pre-payment Premium 719,897.60 Accrued Post-petition interest through 9/30/95 net of collection and reserve for taxes 55.858.64
Due 9/30/95 $23,655,657.54
D. Value of The Real Estate
The court heard testimony from two appraisers, one called by the lender and one by the debtor. Both appraisers were well-qualified and highly experienced. They nevertheless reached widely differing estimates of fair market value.
Dennis Duffy, testifying for the lender, performed both a sales comparison and a discounted cash flow analysis. For each approach, he valued the shopping center and the office building separately. His estimate of value by the sales comparison approach was $20,500,000 and by discounted cash flow analysis was $19,800,000. His discounted cash flow analysis was significantly influenced by an assumed $1.4 million charge in year 6, based on the hypothesis that Regal Cinema would exercise its option to terminate at the end of the 5th year. His final estimate of value, ignoring what the court found to be an improper deduction for the delinquent real estate taxes, was $19,800,000.
Steven D. Clauson, testifying for the debtor, used a cost approach, sales comparison approach, direct capitalization analysis, and discounted cash flow or "yield capitalization" analysis. His estimate of value by the cost approach was $25,300,000, by the sales comparison approach $24,500,000, by direct capitalization $24,300,000, and by discounted cash flow $24,300,000. Unlike Mr. Duffy, he did not separately analyze the office building and the shopping center, and he did not make any specific allowance for the possibility that Regal Cinema might exercise its option to terminate at the end of five years. His final estimate of value was $24,300,000.
The court is unable to accept in its entirety either appraiser's opinion of value. First, the court believes that Mr. Duffy gives too much weight to the effect of the early termination provision in the Regal Cinema lease while Mr. Clauson gives it too little weight. The Regal Cinema lease is such a significant component of the property's value that a knowledgeable buyer would certainly make substantial additional inquiries into the factual likelihood that the termination option would actually be exercised. Based on the evidence presented with respect to the demographics and economic vitality of the area, the court concludes, and finds that a knowledgeable purchaser would also conclude, that the likelihood of Regal Cinema leaving after 5 years is small. At the same time, the risk is not zero, and a prudent buyer would certainly have to give it some weight. The court also does not find persuasive the adjustments made by Mr. Duffy to his rental comparables to arrive at a market rent for the property.
In any event, having heard both appraisers testify and having carefully reviewed their written reports, the court is inclined to give somewhat more weight to Mr. Clauson's opinion of value. The court accordingly fixes the fair market value of the real estate at $23,000,000.
E.
In reaching a determination as to whether the debtor has equity in the property, it is necessary to consider the total value of the lender's collateral and the total amount of the liens against the property.
In addition to the real estate, Principal Mutual has, as the debtor concedes, a security interest in any payment due from Basics as a result of the early termination of its lease. Although the negotiated buy-out agreement is conditioned on approval by this court — and although the debtor has so far not sought such approval — the court finds for the purpose of ruling on this motion that such payment has a value of $1,100,000.00. Adding the value of the Basics settlement to the value of the real estate gives a total collateral value of $24,100,000.00.
As noted above, the court has fixed the amount of the debt as of September 30, 1995, at $23,655,657.54. To this must be added the $223,675.77 real estate tax claim of Fairfax County, which has been assigned to Principal Mutual and which also constitutes a lien against the property. The aggregate of the liens against the collateral is therefore $23,879,315.31.
This leaves a minuscule equity of no more than $220,666.69, or only slightly more than one month's debt service. The result is that Principal Mutual's claim is fully secured, but only barely, and the debtor has equity, but only barely, the loan to value ratio (taking into account that the real estate tax lien is senior to the deed of trust) being approximately 99 percent. Whether such minimal excess of value over debt constitutes "equity" in any real sense is debatable. In re Bell Partners, Ltd., 82 B.R. 593 (Bankr.M.D.Fla. 1988), for example, a debtor was found not to have equity where the value of the real property was to be $5,872,000 and the mortgage debt was $5,846,279. In that case, however, no payments were being made, and accruing interest would have fully eroded the remaining equity in less than two weeks. Here, by contrast, the lender is collecting rents, albeit in an amount less than the scheduled debt service payments. For example, during the three month period of June, July, and August, 1995 — which were the last full months for which figures were introduced — Principal Mutual collected on the average $149,276 per month in rents and paid on the average $28,070 per month in operating expenses. Consequently, in the short term its equity position is eroding, although the situation may have improved somewhat since McDonald's started paying rent. On the other hand, it will probably be May 1996 at the earliest before Regal Cinema starts paying rent, and therefore not until then that the property would be able to carry the debt service as specified in the note.
In its oral ruling, the court gave the figure as 98 percent, but that figure was incorrectly calculated, since it was based solely on the debt due under the deed of trust without taking into account the tax lien.
Rent does not commence until 120 days after issuance of a building permit. The testimony of the debtor's witnesses was that the building permit is expected to be issued in early to mid-December.
In any event, as the issues have been framed in this particular case, it makes no difference whether technically a 1 percent excess of value over debt constitutes "equity" within the meaning of § 362(d)(2)(B). If there is no equity, the burden then shifts to the debtor to demonstrate that the property is necessary for an effective reorganization. But even if there is equity, the debtor still has the burden of proof on "cause," which in the case before the court essentially comes down to the same issue — namely, whether the debtor can obtain confirmation of a plan of reorganization within a realistic period of time. The court now turns to that issue.
In hearing . . . concerning relief from the stay . . . — (1) the party requesting such relief has such relief has the burden of proof on all other issues." § 362(g), Bankruptcy Code.
In its oral findings and conclusions, the court ruled that the secured creditor had the burden of proof on the issue of cause. However, that statement was in error, as § 362(g) clearly places on "the party opposing . . . relief" — here, the debtor in possession — the burden of proof on all issues other than equity in the property.
IV.
The debtor has filed a proposed plan of reorganization on October 18, 1995. The plan would use approximately $500,000 of the Basic buy-out to construct tenant leasehold improvements and the remaining $600,000 to pay down the Principal Mutual debt. Administrative claims would be paid in full, priority tax claims would be paid over 5 years with interest at 7%, security deposit claimants would receive payment in the ordinary course and are unimpaired, general unsecured creditors would be paid 100% over some unspecified period of time, insider unsecured claims would be converted to equity, and the equity interest holders would retain their interests in the debtor. Principal Mutual's claim, including all arrearages, would be reamortized over 30 years at 8% interest, and paid in monthly installments beginning 60 days after confirmation with a balloon payment due at the end of 7 years.
The plan apparently treats the 1994 Fairfax County real estate taxes as a priority unsecured claim rather than as a secured claim.
Principal Mutual makes three arguments. First, that the proposed plan is not confirmable because 8% interest is not adequate to compensate it for the use of its money. Second, that the debtor's projected cash flow is insufficient to service Principal Mutual's debt at any reasonable interest rate. And third, that the debtor can never achieve confirmation because there can be no non-artificial, non-insider impaired class that can vote in favor of the plan.
A.
As noted, the plan proposes to pay interest on the restructured Principal Mutual claim at 8% per annum. Principal Mutual offered expert testimony that, applying the "Mortgage-Equity/Band of Investment Analysis" approach approved by this court in In re Birdneck Apartment Assocs. II, L.P., 156 B.R. 499, 509 (Bankr.E.D.Va. 1993) (Tice, J.), the appropriate loan would be 10 3/8%. This testimony was unrebutted, and the court finds that an interest rate of 8% would not satisfy the requirement of § 1129(b)(2)(A) that Principal Mutual receive on account of its claim deferred cash payments totalling at least the allowed amount of its claim, and that there is therefore no likelihood that the plan presently proposed by the debtor can be confirmed.
B.
Principal Mutual further argues that there is no non-artificially impaired class that can accept the plan, which is a necessary predicate before the debtor can proceed under the "cram-down" provision of § 1129(b) of the Bankruptcy Code. Since the court has found that Principal Mutual's claim is fully, if tenuously, secured, the court is not faced with the situation, which arises in many cases, of the secured creditor whose large deficiency claim would allow it to control the class of unsecured creditors and whose claim the therefore attempts to separately classify. See e.g., LW-SP2, L.P. v. Krisch Realty Assocs., L.P. (In re Krisch Realty Assocs. L.P.), 174 B.R. 914 (Bankr.W.D.Va. 1994); In re North Washington Center L.P., 165 B.R. 805 (Bankr.D.Md. 1994). Instead, Principal Mutual points to the fact that the class of non-insider unsecured claims totals only approximately $116,000.00, and the debtor will have available to it sufficient cash from the $1,100,000 Basics buy-out to pay such claims in full at confirmation. See, In re North Washington Center Ltd. Partnership, supra (payment of trade creditors over time when debtor had funds to pay them in full at confirmation was artificial impairment); In re Investors Florida Aggressive Growth Fund, Ltd., 168 B.R. 760 (Bankr.N.D.Fla. 1994) (since debtor had sufficient unencumbered funds to pay trade creditors immediately); Windsor on the River Assocs., Ltd v. Balcor Real Estate Finance, Inc. (In re Windsor on the River Assocs., Ltd), 7 F.3d 127 (8th Cir. 1993) (By lowering payment to mortgagee, debtor could have paid unsecured creditors in full on confirmation date). Of course, at the time the plan was drafted, the debtor did not in a realistic sense have the funds available for such purpose, since the Basics buyout payment would have been subject when received to Principal Mutual's assignment of rents. However, at the hearing on relief from the stay, Principal Mutual offered on the record to allow the debtor to use a sufficient portion of the Basics buy-out to pay the class of non-insider unsecured creditors in full at confirmation. This concession, the court concludes, would eliminate any business necessity for the debtor to impair the class, thereby preventing the debtor from relying on the acceptance of such class to satisfy the requirement of § 1129(a)(10) that at least one non-insider impaired class has accepted the plan. Accordingly the present plan would not be confirmable for that reason as well.
Under § 1129(a)(8), Bankruptcy Code, a plan must ordinarily be accepted by every impaired class. Section 1129(b), however, creates an exception (commonly referred to as "cramdown") under which a plan can be confirmed over the rejection of one or more dissenting classes as long as at least one impaired class has accepted the plan and the court determines that the plan "does not discriminate unfairly, and is fair and equitable" to the dissenting classes. As one court has aptly observed, § 1129(a)(10) operates as a "statutory gatekeeper" to protect the integrity of confirmation process:
Cramdown is a powerful remedy available to plan proponents under which dissenting classes are compelled to rely on difficult judicial valuations, judgments, and determinations. The policy underlying § cramdown in compelling the target of cramdown to shoulder the risks of error necessarily associated with a forced confirmation, there must be some other properly classified group that is also hurt and nonetheless favors the plan.
In re 500 Fifth Avenue Assocs. See, In re W.C. Peeler Co., Inc. 182 B.R. 435 (Bankr.D.S.C. 1995) (confirmation denied where only accepting impaired class was single creditor holding small claim who was to be paid over six months class was single creditor holding small claim who was to be paid over six months even though rent surplus would have allowed immediate payment).
C.
The determinative issue, and the crux of the matter currently before the court, is this: notwithstanding the non-confirmability of the current plan, is there any reasonable possibility that the debtor can propose a confirmable plan within a reasonable period of time, or, as Principal Mutual contends, is confirmation a factual and legal impossibility? Principal Mutual presented expert testimony showing that, even using the debtor's own cash flow projections, and taking into account the conceded fact that payments on the Regal Cinema lease will not likely commence before May, 1996, the debtor could not fully service the restructured debt at any reasonable interest rate during the first year, although, depending on the interest rate, it might do so in the subsequent years. Principal Mutual argues further that its continuing offer to allow a sufficient portion of the $1,100,000 Basics lease buyout payment to be used to pay non-insider unsecured creditors means that the debtor can never have a non-artificially impaired class to satisfy the requirement of § 1129(a)(10). Thus, it is argued, reorganization is objectively futile.
This raises the possibility that the debtor might propose a plan providing for less than full payment of interest sometimes referred to as "negative amortization" — in the early months. As noted by Judge Tice in In re Carlton, 186 B.R. 644, 649 (Bankr.E.D.Va. 1994), most courts, although hesitant to confirm plans that rely on negative amortization, have been reluctant to adopt a per se rule against negative amortization and review the fairness of such plans on a case by case basis.
Additionally, it is urged, the debtor's pre-petition and post-petition behavior has been such as to demonstrate subjective bad faith. In particular, from the time the debtor first fell behind in its payments until it filed its chapter 11 petition in this case, Robert R. DeLuca, one of its general partners, personally withdrew at least $408,700.00 from the debtor. More appallingly, after Principal Mutual revoked the debtor's right to collect rents, the debtor collected and deposited at least $71,061.44 in rents into its own account. Most egregiously, $47,195.44 of these rents — $28,500.00 of which represented a pre-payment of one tenant's rent — were in the form of checks which the tenant had made payable to Principal Mutual and which the debtor simply misappropriated by depositing them into its own operating account.
Bad conduct is certainly a significant factor to be taken into account in assessing whether a debtor's chapter 11 petition or plan is filed in bad faith. However, the court must also look to whether the chapter 11 petition was filed solely to hinder or delay creditors in the legitimate exercise of their rights or whether the debtor sought chapter 11 protection for its intended purpose of rescuing a financially-troubled business enterprise. As the Fourth Circuit has noted in the chapter 13 context, "a . . . plan may be confirmed despite even the most egregious pre-filing conduct where other factors suggest that the plan represents a good faith effort by the debtor to satisfy his creditors' claims." Neufeld v. Freeman, 794 F.2d 149, 153 (4th Cir. 1986). Here, there is abundant evidence that in the past the debtor was able to service its debt; that the loss of the two anchor tenants was an unexpected event that was not the debtor's own fault or reflective of a weakness in the rental market; and that the debtor has moved aggressively and responsibly to re-lease the space and to restore the property's cash flow.
Having carefully considered the debtor's financial projections and debt structure, the court is reluctant to conclude that the debtor is wholly unable to propose a confirmable plan, although it would appear to the court that any confirmable plan would probably require a considerable outside cash infusion. Since Mr. and Mrs. DeLuca are themselves chapter 11 debtors, it seems highly unlikely that they could be the direct source of any such cash infusion, but they may be able to locate other investors who would be willing to invest the necessary cash. Mindful that the goal of chapter 11 is to promote the rehabilitation of financially troubled debtors, the court concludes In re Krisch, supra, 174 B.R. at 922 (although plan was unconfirmable and exclusivity period had expired, automatic stay continued to allow debtor to file an amended plan). This case has been pending for slightly less than six months. During that time the debtor has been active in attempting to stabilize the property by obtaining new tenants to replace the departed anchors and to fill other vacancies. Principal Mutual is collecting the rents and is receiving the benefit of the net cash flow after payment of operating expenses, and there is no indication that either the rent stream or the value of the underlying real estate is declining. At the same time, the secured creditor, particularly given its tenuous position in terms of loan to value ratio, should not be held hostage for an excessive period of time to reorganization efforts that ultimately may not bear fruit. An appropriate balancing of the prejudice to the secured creditor from continuing the stay against the benefit to the bankruptcy estate from giving the debtor additional time to propose a confirmable plan is to condition the stay on the debtor's achieving confirmation of a modified plan within a reasonably prompt time-frame, which the court determines (taking into account the 25 day notice periods under Fed.Bankr.P. 2002(b) for both the hearing on approval of the disclosure statement and the hearing on confirmation, as well as the intervening Christmas and New Year holidays) to be not later than January 31, 1996.
In particular, since there does not seem to be any apparent way the debtor can get past the § 1129(a)(10) "gatekeeper" if Principal Mutual continues to agree to allow the Basics buyout payment to be used to pay the class of non-insider unsecured creditors, the debtor would be limited to proposing a plan that did not impair Principal Mutual, so that there would be no need to resort to cramdown at all. For Principal Mutual not to be impaired, the debtor would have to cure defaults and reinstate the maturity of the Principal Mutual note, as permitted by § 1124(2), Bankruptcy Code, which could only be done with a cash infusion.
For the foregoing reasons, which, together with those reasons stated orally on the record, constitute the court's findings of fact and conclusions of law under Fed.Bankr.P. 7052, the court concludes that the motion for relief from the automatic should be denied to the extent it seeks immediate termination of the stay, but that continuation of the stay should be conditioned upon the debtor achieving confirmation of a plan of reorganization not later than January 31, 1996.