Indian Palms Associates, Ltd., In re, 94-5265

Citation61 F.3d 197
Decision Date25 July 1995
Docket NumberNo. 94-5265,94-5265
PartiesBankr. L. Rep. P 76,575 In re INDIAN PALMS ASSOCIATES, LTD., B.C. 90-25765 (WFT). NANTUCKET INVESTORS II v. CALIFORNIA FEDERAL BANK; Indian Palms Associates, Ltd. Office of United States Trustee * Argo Loan Limited Partnership, Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)
*

Jonathan E. Polonsky (Argued), Thomas P. Higgins, Thelen, Marrin, Johnson & Bridges, New York City, for appellee.

Paul Kizel (Argued), Ravin, Sarasohn, Cook, Baumgarten, Fisch & Baime, Roseland, NJ, for appellant.

Before: STAPLETON, ROTH and LEWIS, Circuit Judges.

OPINION OF THE COURT

STAPLETON, Circuit Judge:

Creditor California Federal Bank ("CalFed"), holder of a first mortgage against the debtor partnership's primary asset ("the property"), seeks relief from the automatic stay in a Chapter 11 bankruptcy proceeding in order to initiate foreclosure proceedings. 1 Nantucket Investors II ("Nantucket Investors"), who holds a second mortgage against the property, opposes the lifting of the stay.

The bankruptcy court granted CalFed relief from the stay under 11 U.S.C. Sec. 362(d)(1), finding that CalFed's interest in the property was not being adequately protected during the pendency of the bankruptcy proceedings. The district court reversed, finding that CalFed's current claim, having been reduced by post-petition payments, was less than the bankruptcy court had determined and was adequately protected. The district court also found that the debtor retained equity in the property and that relief from the automatic stay would therefore be unavailable under 11 U.S.C. Sec. 362(d)(2) as well. 2 We will reverse the order of the district court and remand with instructions to return this matter to the bankruptcy court for further proceedings consistent with this opinion.

I.

Indian Palms Associates, the debtor partnership, was formed to acquire a 176-unit garden apartment complex located in Florida. The debtor purchased that property from Nantucket Investors in 1983, and it is the debtor's primary asset. In 1984 the debtor executed a promissory note of $3.9 million in favor of CalFed, and a mortgage and security agreement to secure payment of the note. Pursuant to the mortgage and note, CalFed also received an assignment of the property's leases, rents, and income.

On December 13, 1990, the debtor filed for relief under Chapter 11 of the Bankruptcy Code, triggering the automatic stay imposed by 11 U.S.C. Sec. 362(a). At that time, CalFed held a first mortgage against the property, which, with accrued interest and late charges, totalled approximately $4.5 million. Nantucket Investors held a second mortgage on the property of approximately $500,000, and a third mortgage was held by FEC Mortgage Company ("FEC") in the amount of $1.6 million. FEC was, and remains, an affiliate of the debtor. At the time of the bankruptcy filing, there was also a property tax lien against the property of between $92,000 and $300,000. 3 The parties agree that the tax lien has priority over CalFed's first mortgage. At the time of the bankruptcy filing, the value of the property was between $4.65 and $5.25 million.

During the course of the bankruptcy proceedings, the debtor filed a series of plans of reorganization which were not confirmed. CalFed consented to both the second and third amended plans, but the debtor withdrew the third amended plan when CalFed refused to agree to certain amendments that were necessary to ensure the plan's confirmation. CalFed then moved for relief from the automatic stay under sections 362(d)(1) and (d)(2) of the Bankruptcy Code so that it could institute foreclosure proceedings against the property. In opposition to that motion, the debtor submitted a letter memorandum with a proposed fourth amended plan of reorganization.

The debtor's fourth amended plan proposed the following: (1) the continuance of CalFed's lien on the property in the full amount of its claim with annual interest payments based on an interest rate of 7.75%, plus payments of excess cash flow after the first two years, and a balloon payment for the remaining mortgage balance five years after confirmation, (2) the payment in full of all real estate taxes and arrearages, (3) an initial $50,000 payment to Nantucket Investors on its second mortgage with various payments to follow, and (4) the infusion of $425,000 in new capital by the debtor's partners for capital improvements on and maintenance of the property.

The bankruptcy court held a hearing on CalFed's motion to vacate the stay. At the hearing, Nantucket Investors joined the debtor in actively opposing the proposed lifting of the stay. The bankruptcy court granted CalFed's motion. In its oral ruling, the bankruptcy court explained that the debtor had failed to show that CalFed's interest in the property was adequately protected because the value of the property had been steadily declining since the bankruptcy petition was filed and the debtor had submitted no evidence to demonstrate that the value would not continue to decline if the stay were not lifted. The bankruptcy court thus found that the lifting of the stay could be granted under section 362(d)(1) which provides that "the court shall grant relief from the [automatic] stay ... for cause, including the lack of adequate protection of an interest in property of such party in interest." 11 U.S.C. Sec. 362(d)(1).

Based on what it understood to be a concession by the debtor, the bankruptcy court determined that the $1.1 million in post-petition payments made by the debtor to CalFed had been interest payments rather than payments on the principal debt. Thus, in reaching the conclusion that CalFed was inadequately protected, the bankruptcy court did not reduce the principal debt by the amount of these post-petition payments and concluded that CalFed was owed just over $4.5 million. As a result, the debtor's secured indebtedness to CalFed was found to be slightly greater than the property's value at the time of the hearing, which was stipulated to be $4.5 million.

The bankruptcy court's discussion of the liens outstanding against the property led to an implicit finding that the total liens exceeded the current stipulated value of the property and that the debtor therefore had no equity in the property--a factor supporting relief from the stay under section 362(d)(2). Although the court noted that its resolution of the issues under section 362(d)(1) meant that it need not consider the factors necessary for relief from the stay under section 362(d)(2), the court went on to discuss the second section 362(d)(2) factor--whether the property is necessary to an effective reorganization. The court concluded that the proposed fourth plan would not be confirmable without CalFed's consent because it improperly extended the original maturity date of CalFed's loan. According to the bankruptcy court, section 362(d)(2) thus provided an alternate basis for granting relief from the automatic stay. The court entered an order lifting the stay and allowing CalFed to institute a foreclosure action against the debtor.

Nantucket Investors appealed to the district court. 4 Thereafter, CalFed filed a motion to strike certain documents that Nantucket Investors had designated as part of the record on appeal. The district court denied CalFed's motion to strike the documents and reversed the bankruptcy court's order lifting the stay.

With respect to CalFed's motion to strike, the district court concluded that the documents, while not submitted to or reviewed by the bankruptcy court, had all been filed with the bankruptcy court as part of the debtor's Chapter 11 proceeding, and were therefore part of the bankruptcy court record. The district court found it immaterial whether the bankruptcy court had actually considered any of these documents because they had all been available to the bankruptcy court for its consideration. As to Nantucket's appeal, the district court found clearly erroneous the bankruptcy court's finding of an agreement among the parties that the post-petition payments of $1.1 million represented interest payments. First, the district court noted that the debtor had argued to the contrary in the hearing before the bankruptcy court. 5 Second, the district court determined that of the $1.1 million post-petition payments made by the debtor to CalFed, at least $955,000 should have been attributed to payments on principal rather than interest. Relying on United Savings Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988), the district court concluded that section 506(b) of the Bankruptcy Code limits post-petition interest to oversecured claims and only to the extent of their oversecurity at the time the bankruptcy petition is filed. 6 Based on the parties's appraisals, the district court estimated that the value of the property at the time of filing was approximately $4.75 million. It further found that CalFed's claim at that time was approximately $4.513 million subordinated to tax liens of $92,000.00. 7 As a result, CalFed was only oversecured by approximately $145,000 and thus, under 11 U.S.C. Sec. 506(b), the full $1.1 million in post-petition payments could not have represented payments on interest. Rather, at most, only $145,000 of the post-petition payments were payments of interest. Allocating the balance of these payments to payments on principal left CalFed with a claim of approximately $3.558 million. Comparing this figure to the current value of the property (which for purposes of this motion the parties stipulated to be $4.5 million), less the outstanding value of the senior tax lien ($250,000), left CalFed with a $700,000 "equity cushion." The district court determined that this difference was sufficient to protect CalFed's interest, and held that CalFed was therefore not entitled to relief under section 362(d)(...

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