Anderson v. Commonwealth Renewable Energy, Inc. (In re Commonwealth Renewable Energy, Inc.)

• Decision Date: 04 November 2015
• Docket Number: Case No. 14–22724–GLT
• Citation: 540 B.R. 173
• Parties: In re: Commonwealth Renewable Energy, Inc., Ruth F. Anderson, and Kathy L. Anderson, as executor of the Estate of William E. Anderson, Movants, v. Commonwealth Renewable Energy, Inc., Respondent.
• Court: U.S. Bankruptcy Court — Western District of Pennsylvania

540 B.R. 173

In re: Commonwealth Renewable Energy, Inc.,Ruth F. Anderson, and Kathy L. Anderson, as executor of the Estate of William E. Anderson, Movants,

v.Commonwealth Renewable Energy, Inc., Respondent.

Case No. 14–22724–GLT

United States Bankruptcy Court, W.D. Pennsylvania.

Signed November 4, 2015

Douglas A. Campbell, Esq., Paul J. Cordaro, Esq., and Frederick D. Rapone, Jr.of Campbell & Levine, LLC for the Debtor, Commonwealth Renewable Energy, Inc.

Robert O Lampl, Esq. of the Law Offices of Robert O Lampl, and Karen Y. Bonvalot, Esq. of Sherrard, German & Kelly, P.C. for Ruth F. Anderson and Kathy L. Anderson as the executor of the Estate of William E. Anderson

Kirk B. Burkley, Esq., Arthur W. Zamosky, Esq., and Daniel R. Schimizzi, Esq. of Bernstein–Burkley, P.C. for Stephen C. Frobouck and Steven Savor, Jr.

MEMORANDUM OPINION

GREGORY L. TADDONIO, UNITED STATES BANKRUPTCY JUDGE

In November 2006, Bill and Ruth Anderson advanced over $7 million to Commonwealth Renewable Energy, Inc., a venture created by Bill Anderson and his colleagues, Steven Savor and Stephen Frobouck, to develop an ethanol production facility in Western Pennsylvania. After the project failed to materialize, the Andersons¹pursued an action in mortgage foreclosure to recover the amounts due under a judgment note, prompting Commonwealth to file this bankruptcy case. The Andersons now seek relief from the automatic stay.

This Court must decide whether the advance constitutes a loan or an equity contribution. Because the parties originally intended the transaction to be a loan and the Court finds no credible evidence that Bill Anderson agreed to modify the obligation prior to his death, the Court concludes that the Andersons hold a secured claim against the bankruptcy estate. In the absence of any grounds to equitably subordinate the claim and without sufficient proof that the Property (as defined below) is necessary for an effective reorganization, the Andersons are granted relief from the automatic stay.

I.

Anderson, Savor, and Frobouck were business associates with a long history of doing business together. In the early 1990s, Anderson and Savor formed the Anderson Group of Companies, Inc. (“AGC”) to serve as a holding company for the various business enterprises in which they might invest. Frobouck became a shareholder in 1998 and, by that time, Anderson, Savor, and Frobouck each held a 1/3 interest in AGC. Under the AGC business model, Anderson, Frobouck, and Savor made capital contributions to AGC which, in turn, were invested by the company in various business opportunities. Through this investment vehicle, Frobouck and Savor claim their intent, together with Anderson, was to share the financial burdens and risk equally.

In August 2006, Anderson, Savor, and Frobouck embarked upon a new enterprise to develop an ethanol treatment facility on a 133.662–acre industrial site located in New Stanton, Pennsylvania (the “Property”). The site was owned by the Pennsylvania Industrial Development Authority (“PIDA”) and formerly housed the Sony American Video Glass manufacturing facility.

Commonwealth was formed to acquire Sony's leasehold interest in the Property, together with an option to purchase the Property from PIDA. In a departure from their prior transactions, AGC was not used to acquire the equity interests in Commonwealth. Instead, Anderson, Frobouck, and Savor each controlled 1/3 of the voting shares. Frobouck's and Savor's shares are held in their individual names, while the remaining third is owned by Anderson Energy Investments, LP (“AEI”), an entity controlled by Anderson. Prior to Anderson's death, Anderson, Frobouck, and Savor were the directors of Commonwealth. After Anderson's passing, Frobouck and Savor remained the sole directors.

Commonwealth's initial interest in the Property was acquired for $17 million. Part of the purchase price was financed through Commonwealth's assumption of certain loan obligations owed to PIDA and the Pennsylvania Infrastructure Investment Authority. Commonwealth also entered into an Indenture of Lease dated November 21, 2006 with PIDA. To cover the remaining balance of the purchase price and closing costs, Commonwealth obtained an advance of $7,022,423.37 from the Andersons.

Commonwealth executed a Judgment Notein the amount of $20 million (the “Anderson Note”) to evidence its obligations to the Andersons for the cash advance. Although the amount advanced by the Andersons was substantially less than the face amount of the note, the parties wanted flexibility in the event additional advances were made in the future.²The Anderson Note required Commonwealth to make monthly “interest-only” payments during a six-month term. The obligations under the Anderson Note matured on May 21, 2007, at which time all principal and accrued interest was due and payable to the Andersons.

To secure the obligations under the Anderson Note, Commonwealth executed an Open–End Leasehold Mortgage and Security Agreementdated November 20, 2006 (the “Mortgage”), which granted the Andersons a mortgage lien upon its leasehold interest in the Property. In the event that Commonwealth acquired fee simple title to the Property, the liens and security interests granted under the Mortgage would automatically attach to the fee interest. The Mortgage was duly recorded in the public records. Both the Anderson Note and Mortgage were signed by Frobouck (as president) and Savor (as secretary) on behalf of Commonwealth.

Each month, Kathy Anderson invoiced Commonwealth for the interest payments due under the Anderson Note. Commonwealth paid the six monthly interest payments according to the terms of the note, although the last payment (billed on June 6), was not made until August 6, 2007. It is undisputed that no further interest payments were made after August 6, 2007, and there was never a payment made on the principal.

After the Maturity Date, Kathy Anderson continued to send the invoices to Commonwealth each month through February 2010. Upon receipt of the invoices, Commonwealth recorded the interest accruals. Erin Henninger, Commonwealth's office manager, testified that she was responsible for maintaining Commonwealth's books and records and would enter the interest accruals from the Anderson Note into Commonwealth's books long after the maturity date had passed.³She also continued to list the obligations under the Anderson Note as a debt liability on Commonwealth's balance sheet through 2012.⁴

Anderson, Frobouck, and Savor utilized two lines of credit from PNC Bank in connection with their projects. An initial $5 million line of credit was used for business which predated the Commonwealth transaction. When Commonwealth's cash requirements exceeded the remaining availability under the $5 million line, Anderson, Frobouck and Savor obtained an additional $10 million line of credit from PNC. Ruth Anderson was not a borrower on either one of the PNC credit lines, but she pledged certain securities jointly owned by her and Bill Anderson as collateral for the $10 million line of credit.

In its early stages, the ethanol treatment facility project was highly promising. Savor negotiated a five-year out-take agreement with BP Products North America, Inc. (“BP”) by which BP would purchase all of the project's output of ethanol, including a pass through of the main input costs of natural gas and corn. Projected profits were estimated at as much as $0.22 per gallon for 127 million annual gallons produced.⁵

To achieve these projections, Anderson, Frobouck, and Savor recognized that development of the ethanol treatment project would require considerable outside investment. Once the Property rights were secured, Commonwealth engaged prominent Wall Street legal counsel to explore the bond financing market, and enlisted a well-known investment bank to solicit investors and handle investment inquiries. Through these efforts, the parties hoped to raise in excess of $40 million to convert the Property into a fully-functional facility.⁶

Despite its promise, Commonwealth was ravaged by the credit crunch in May 2007 which effectively dried up credit sources and eliminated any interest in the project by third-party investors. This development caused Anderson, Frobouck, and Savor to revisit the business plan by considering a much smaller project than originally conceived.

During this time, Anderson met weekly with his financial advisor Mohammad A. Samad and Frobouck for lunch at Franco's Restaurant. At one particular meeting in June 2007, Frobouck and Savor claim that Anderson agreed to cancel the Anderson Note and consider the indebtedness to be part of Anderson's equity investment in Commonwealth. The discussion appears to have been prompted by Frobouck's suggestion that the Mortgage be modified to add Frobouck and Savor as mortgagees. There is nothing in the record to support that Anderson ever agreed in writing to cancel the Anderson Note or add Frobouck and Savor as mortgagees to the Mortgage.

Anderson died on October 16, 2008. Two months later, Ruth and Kathy Anderson filed a Complaint in Confession of Judgmentagainst Commonwealth in the U.S. District Court for the Western District of Pennsylvania, arguing that the Anderson Note was in default and seeking payment of $7,881,969.67 plus late charges, interest, and attorney's fees. Judgment was entered on December 17, 2008. The district court subsequently voided the judgment on April 19, 2010 because it lacked subject matter jurisdiction (lack of diversity).

CRE eventually paid off the PIDA loan and acquired title to the Property in 2010. Upon the transfer of ownership, the liens and security interests granted under the Mortgage automatically attached to the fee interest and became the first-priority liens against the Property.

On April 10, 2010, Commonwealth (by Frobouck and Savor) leased a ten-acre portion of the Property to RES, a company in which Frobouck and Savor held controlling membership interests (Savor 27 percent,...