Bryson Properties, XVIII, In re

• Decision Date: 20 April 1992
• Docket Number: No. 91-2614,91-2614
• Citation: 961 F.2d 496,22 BCD 1391
• Parties: 26 Collier Bankr.Cas.2d 1290, 22 Bankr.Ct.Dec. 1391, Bankr. L. Rep. P 74,545 In re BRYSON PROPERTIES, XVIII, Debtor. TRAVELERS INSURANCE COMPANY, Plaintiff-Appellant, v. BRYSON PROPERTIES, XVIII, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 496

961 F.2d 496

26 Collier Bankr.Cas.2d 1290, 22 Bankr.Ct.Dec. 1391,

Bankr. L. Rep. P 74,545

In re BRYSON PROPERTIES, XVIII, Debtor TRAVELERS INSURANCE COMPANY, Plaintiff-Appellant, v. BRYSON PROPERTIES, XVIII, Defendant-Appellee.

No. 91-2614.

United States Court of Appeals Fourth Circuit.

Argued Oct. 28, 1991.

Decided April 20, 1992.

Thomas B. Henson and Allen Keith Robertson, Robinson, Bradshaw & Hinson, P.A., Charlotte, N.C., argued, for plaintiff-appellant.

John A. Northen, Northen, Blue, Little, Rooks, Thibaut & Anderson, Chapel Hill, N.C., argued. (Joann Ragazzo Woods, Northen, Blue, Little, Rooks, Thibaut & Anderson, Chapel Hill, N.C. and William P. Miller, Roberson, Haworth & Reese, High Point, N.C., on brief), for defendant-appellee.

Before WIDENER and LUTTIG, Circuit Judges, and RESTANI, Judge, United States Court of International Trade, sitting by designation.

OPINION

RESTANI, Judge:

Travelers Insurance Company ("Travelers") appeals from the decision of the district court, 129 B.R. 440, that upheld the bankruptcy court's order confirming a reorganization plan filed by the debtor, Bryson Properties XVIII ("Bryson"). We reverse and remand on the grounds that the reorganization plan is not fair and equitable to Travelers.

The debtor, Bryson, is a limited partnership organized under Illinois law; the principal place of business of its general partner is Durham, North Carolina. Bryson's sole asset is a complex of three commercial buildings in Omaha, Nebraska, known as "Mid-America Plaza."

Bryson purchased Mid-America Plaza on November 14, 1986, subject to a first mortgage in favor of Travelers, and assumed the seller's obligations under a ten-year nonrecourse note in the face amount of $10.8 million. Bryson made payments on the note for approximately three years, then defaulted. On September 27, 1989, Bryson filed a voluntary petition to reorganize under Chapter 11 of the Bankruptcy Code.

Bryson filed for relief under Chapter 11 for several reasons: loss of an anchor tenant; discovery of asbestos in all three of its buildings; a "soft" real estate market for commercial buildings; and notice from Travelers of its intent to commence foreclosure proceedings. At the time of filing, the amount due on the note was $11,234,306. Travelers' claim against the debtor consists of (1) a secured claim equal to the value of the debtor's interest in Mid America Plaza--$7,905,068; and (2) an unsecured deficiency claim in the amount of $3,329,238. ¹

On June 18, 1990, the debtor filed the Third Amended Plan of Reorganization ("Plan"). ² The Plan divides claims and interests into eight classes:

(1) administrative expenses; (2) tenant security deposits; (3) secured tax claims; (4) Travelers' secured claim; (5) the unsecured claim of Continental Bank; (6) the unsecured claims of trade creditors; (7) Travelers' unsecured claim; and (8) equity interests of the Debtor's partners.

Appellant's Brief at 5; see Joint Appendix ("J.A.") at 123-24. The Plan provides that the debtor's partners will make a cash contribution to the debtor of $625,000 and extend a line of credit of $850,000. In consideration for their contribution, the partners will retain their interest in the partnership. The Plan treats Travelers' secured claim as follows:

(1) interest only at the rate of 9.25 percent during years one through three; (2) interest only at the rate of 9.5 percent for years four and five; (3) interest only at the rate of 10 percent for years six and seven; (4) interest only at the rate of 10.5 percent for years eight through ten; (5) a final balloon payment of all remaining principal and interest at the end of ten years.

Appellant's Brief at 10, see J.A. at 130-31. Total payments equal $16,010,590. J.A. at 131.

As for Travelers' Class seven unsecured claim, the Plan provides that Travelers will receive 3.5 percent of its claim in full satisfaction of the debt. The Class five and six unsecured claims also receive 3.5 percent of their claims; however, outside of bankruptcy, the general partner remains liable for the balance of the Class six claims under general partnership law, and certain partners have personally guaranteed the Class five claim.

In the event the property is sold or refinanced within ten years, the Plan provides for the proceeds to be paid as follows:

$7,905,068 to Travelers, as the outstanding amount on the secured claim; payment of the [$850,000] line of credit provided by the partners; payment of the new cash contribution of the partners ... in the amount of $625,000; payment to Travelers of any difference in the amount of principal balance shown on the amortization schedule (amortizing the original loan amount of 10.8 million at 5.25 percent) and the principal balance of the secured claim of $7,905,068; and Travelers shares in any net profit thereafter in an amount equal to 33.3 percent.

Appellee's Brief at 5; see J.A. 128-29. The Bankruptcy court approved the Plan, and the district court affirmed. This appeal followed.

STANDARD OF REVIEW

The district court's decision is reviewed de novo. In re Camino Real Landscape Maintenance Contractors, 818 F.2d 1503, 1505 (9th Cir.1987). The bankruptcy court's findings of fact are reviewed under the clearly erroneous standard (Fed.R.Bankr.P. 8013; Willemain v. Kivitz, 764 F.2d 1019, 1022 (4th Cir.1985)); its conclusions of law are reviewed de novo. Quinn Wholesale, Inc. v. Northern, 100 B.R. 271, 273, (M.D.N.C.1988), aff'd, 873 F.2d 77 (4th Cir.), cert. denied, 493 U.S. 851, 110 S.Ct. 151, 107 L.Ed.2d 109 (1989).

DISCUSSION

1. Secured Claim

Travelers argues the Plan is not fair and equitable because Travelers does not receive the present value of its secured claim.

Before a reorganization plan is confirmed, it must be accepted by all impaired classes of claims. See 11 U.S.C. § 1129(a)(8) (1988). If a class rejects the plan, the court may nevertheless confirm over the objection of impaired classes so long as the plan "does not discriminate unfairly, ... is fair and equitable" with respect to each impaired class of claims, and the other requirements of confirmation are met. 11 U.S.C. § 1129(b)(1) (1988). ³

The "fair and equitable" requirement is not satisfied with respect to a secured claim unless the claimholder: (1) retains its lien; and (2) receives "deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property." 11 U.S.C. § 1129(b)(2)(A)(i)(I)-(II) (1988). The first requirement is not at issue in this case. Under the second requirement, total deferred payments must have a "present value" equal to the amount of the allowed secured claim. ⁴ In re Century Inv. Fund VII Ltd. Partnership, 96 B.R. 884, 889 (Bankr.E.D.Wis.1989) (citations omitted). Here, Travelers asserts that total deferred payments under the Plan are less than the present value of the claim. ⁵ Travelers makes three arguments.

First, Travelers argues that the debtor's expert, Gary Rifkin, admitted that a loan with the terms required by the Second Amended Plan of Reorganization would not be made under current market conditions. Since no market for the loan exists, Travelers argues present value is not protected. This argument is without merit. Rifkin's testimony pertained to loan terms set forth under the Second Amended Plan; this plan was not approved by the Bankruptcy Court.

Second, Travelers argues the Plan's interest rates are below market rates for similar loans. Evidence presented by the debtor in support of the Second Amended Plan is to the contrary. Rifkin testified that a loan on property like Mid-America Plaza would have a term of three to five or seven to ten years, and an interest rate that was fixed or adjusted at certain intervals. He testified that the market rate for ten-year loans made by insurance companies over the three years prior to June 1990 ranged from 9.25 to 11 percent; for the one year period prior to June 1990, rates ranged between 8.5 percent and 10.25 percent. Rifkin further testified that the market rate of interest for the loan made by Travelers would be between 9.875 and 10.25 percent, and that participation rights might reduce this percentage by between one-eighth and one-quarter of a percent. ⁶ Finally, he testified that the rate on Treasury bills was 8.74 percent, and that rates for ten-year loans would be about one to two percent higher.

Here, the interest rates under the Plan begin at 9.25 percent, then increase at two or three year intervals to 10.5 percent. These figures correspond to Rifkin's testimony concerning the range of interest rates for the previous three-year period. In addition, allowing for an adjustment due to greater participation rights under the Third Amended Plan, these figures are also supported by Rifkin's testimony on the market interest rate for the loan made by Travelers. ⁷

Third, Travelers argues that the best evidence of the appropriate discount rate is the contract rate, which was 11.875 percent for five years, then 12.875 percent. Travelers relies on In re Monnier Bros., 755 F.2d 1336 (8th Cir.1985), a case in which the reorganization plan called for deferred debt payments. In that case, the district court reversed the bankruptcy court's decision insofar as it fixed the interest rate at a rate below the contract rate, and reinstated the contract rate. The Eighth Circuit affirmed, finding that neither party provided the bankruptcy court with sufficient evidence to enable it to determine the present value of the creditor's money. Under these circumstances, the court held, the contract rate, negotiated only twenty months earlier, reflected present value. Id. at 1339. This case is distinguishable from the case at bar in which the debtor introduced evidence of the present value of the debt. This evidence was a more reliable indicator than the contract rate.

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