Beal Bank, SSB v. Waters Edge Limited Partnership
| Decision Date | 11 April 2000 |
| Docket Number | Civ.A. 98-40211PBS-28,No. Civ.A. 98-40185PBS-39,Civ.A. 98-40160PBS-27.,Civ.A. 98-40099PBS-20,Civ.A. 98-40185PBS-39 |
| Citation | 248 BR 668 |
| Parties | BEAL BANK, S.S.B., Appellant, v. WATERS EDGE LIMITED PARTNERSHIP, Appellee. |
| Court | U.S. District Court — District of Massachusetts |
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Charles R. Gibbs, Akin, Gump, Strauss, Hauer & Feld, Dallas, TX, Andrew E. Jillson, Susan D. Frieze, Jenkens & Gilchrist, Dallas, TX, William V. Sopp, Finnegan, Hickey, Dinsmoor & Johnson, P.C., Boston, MA, for Beal Bank, S.S.B., appellant.
William R. Baldiga, Brown, Rudnick, Boston, MA, Michael R. Pinta, Rappaport, Freeman & Pinta, Boston, MA, Kara J. Lane, Mark S. Baldwin, Brown, Rudnick, Freed & Gesmer, Hartford, CT, for Water's Edge Limited Partnership, appellee.
Steven D. Pohl, Brown, Rudnick, Boston, MA, for Water's Edge Limited Partnership, debtor.
Appellant, Beal Bank S.S.B. ("Beal"), challenges the Chapter 11 reorganization of the appellee, Water's Edge Limited Partnership ("WELP"), which owns three apartment buildings in Revere, Massachusetts. Among other things, Beal claims that the bankruptcy court erred by: 1) confirming the cramdown reorganization plan which permitted the private sale of the equity in the single asset real estate partnership to an insider plan sponsor; 2) authorizing WELP to use post-petition rent to make payments to Beal, an undersecured creditor, which were subtracted from Beal's secured claim; 3) denying Beal's motion to disqualify WELP's counsel because the firm represented both the plan sponsor and the debtor; and 4) authorizing WELP to pay pre-petition legal fees without adequate scrutiny. The Court has jurisdiction over this consolidated appeal pursuant to 28 U.S.C. § 158(a).
After hearing, and a review of the extensive record, the court AFFIRMS all the bankruptcy court's orders save two. First, the Court REVERSES the bankruptcy court's valuation of Beal's secured claim on the ground that the cash collateral (the post-petition rents) should have been added to the value of the secured claim. The Court also REMANDS the case to reassess the plan's feasibility based on the secured claim's new value. Second, because the bankruptcy court did not expressly consider the appearance of conflict in his analysis of the motion to disqualify WELP'S counsel, the Court REMANDS that appeal to the bankruptcy court for further consideration.
The appellee, the Water's Edge Limited Partnership, is a single asset limited real estate partnership formed under Massachusetts partnership law. It has three partners. Carabetta Enterprises, Inc. ("CEI") and Joseph Carabetta are its general partners. They own 97.5% and 2%, respectively, of the partnership. At the time WELP was formed, Joseph Carabetta was CEI's sole shareholder.1 The third partner, Ralph Carabetta, is a limited partner who owns .5% of the partnership.
The Water's Edge Complex, located in Revere, Massachusetts, consists of six apartment buildings. WELP owns buildings one, two, and five (the "Property"). Buildings three and four were sold off as individually owned condominiums. Building six was originally owned by CEI, but in 1997, it was acquired by First Tower Funding, LLC ("First Tower"). First Tower's sole shareholder is Parham Pouladdej, the plan sponsor. The entire complex is managed by the Carabetta Management Company ("CMC"). Joseph Carabetta is CMC's sole shareholder. His daughter Evelyn works for CMC as the complex's on-site property manager. She is also Pouladdej's wife.
In 1996, Beal purchased a package of loans from the Department of Housing and Urban Development that included $29,480,495.30 in loans to WELP. Those loans are secured by first and second mortgages against the property as well as the rental income generated by the property (the "rents").
The complex was built in the late 1980s. Shortly after construction was completed, the real estate market collapsed and the partnership began to struggle. The property has never generated enough rental income to service its heavy debt. On several occasions, WELP tried to restructure its debt with Beal, but the parties never reached an agreement.
In July 1997, Pouladdej, having already acquired building six, met with Beal representatives to purchase the Water's Edge notes. He was represented by Brown, Rudnick, Freed & Gesmer ("BRF & G") at this meeting. Again, the parties could not reach an agreement. The next month, WELP stopped making payments on the loans, and began to use its operating income to build a retainer with BRF & G for use in the imminent bankruptcy proceedings. In the months preceding bankruptcy, WELP transferred $510,000 to BRF & G.
On March 3, 1998, WELP filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. The next month it filed a motion seeking permission to use its net rents (rental income less operating expenses) to make payments against Beal's principal. Beal opposed the motion. Without a hearing, the court allowed the motion (the "Rents Order").
WELP filed its reorganization plan on March 23, 1998.2 The plan provided that it would be funded by an equity investment from Pouladdej, the plan's sponsor. He would become WELP's sole general partner in exchange for a $1 million investment, and would have the right to designate additional general and limited partners of the reorganized debtor.3 The plan also contained a provision providing that none of the partners of the reorganized debtor would be the debtor, or its existing partners or affiliates.
The plan proposed to split Beal's debt into a secured claim and an unsecured claim. The secured claim, representing the value of Beal's security as determined by a bankruptcy judge pursuant to 11 U.S.C. § 506(a), would be paid in full over ten years.4 The unsecured claim consisted of Beal's deficiency claim (the balance of the loan minus the present value of the secured claim). The plan provides for cash payments equal to .1% of the unsecured claim on the day the plan becomes effective, and a 1% interest in the entity formed by the plan sponsor.
Several creditor classes supported the plan, but Beal and another creditor, CEI,5 objected. This objection by an impaired class of creditors blocked confirmation of the plan on a consensual basis. See 11 U.S.C. § 1129(a)(8).
On June 29, 1998, Judge Queenan, of the United States Bankruptcy Court, began a three-day evidentiary hearing to determine whether the plan should be confirmed on a cramdown basis. At the close of the hearing, on July 2, 1998, he made oral findings of fact and law. Judge Queenan found that the plan contemplated a sale of equity, and not the sale of an asset. Therefore, Beal did not have the right to "credit bid" against Pouladdej for control of the property. He also valued Beal's secured claim at $16.6 million. The judge arrived at that figure by determining that the property's market value was $17 million and then deducting $400,000 for superior municipal liens and post-petition payments to Beal. This left Beal with a deficiency claim for approximately $12.9 million, which the plan proposed to pay .1%, roughly $12,900.
Based on those figures, the court projected that WELP's debt obligations would exceed its estimated revenues by $328,000 over the first two years. Through WELP's counsel, Pouladdej offered to increase his investment to $1,328,000 to cover the deficit. On the basis of that offer, the court confirmed the plan (the "Confirmation Order"). This appeal followed.
Beal filed four separate appeals in connection with WELP's reorganization, challenging: 1) the Confirmation Order; 2) the Rents Order; 3) the denial of Beal's motion to disqualify BRF & G; and 4) the authorization of BRF & G's fees and expenses. These appeals have been consolidated.
There are three standards of review in appeals of bankruptcy court decisions. Findings of fact are reviewed under the clearly erroneous standard. See Fed. Bankr.R. 8013; In re G.S.F. Corp., 938 F.2d 1467, 1474 (1st Cir.1991). A finding of fact is clearly erroneous when, after reviewing the evidence, the court "`is left with the definite and firm conviction that a mistake has been committed.'" Id. (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985)). Conclusions of law are reviewed de novo. See id. Discretionary matters are reviewed for abuse. See Patriot Portfolio, LLC v. Weinstein (In re Weinstein), 164 F.3d 677, 687 (1st Cir. 1999), cert. denied, ___ U.S. ___, 119 S.Ct. 2394, 144 L.Ed.2d 794 (1999).
Beal raises multiple challenges to the confirmation of the reorganization plan under sections 1129(a) and (b) of the Bankruptcy Code. The main thrust of its multi-pronged attack is that the plan is an insider driven scheme that is a "perversion of the process contemplated by Congress in enacting the Chapter 11 cramdown provisions." (Appellant Br. at 17.) An understanding of the cramdown provision in § 1129(b)(1) of the Bankruptcy Code is necessary to evaluate Beal's claims.
Section 1129 of the Bankruptcy Code governs the confirmation of Chapter 11 reorganization plans. 11 U.S.C. § 1129. A plan must be confirmed if it meets the thirteen general requirements listed in § 1129(a). One of those requirements is that each class of impaired creditors must vote to accept the plan.6 See id. §§ 1129(a)(8), 1126(c). Two classes of impaired creditors, Beal and CEI, rejected this plan. But, their rejection is not necessarily fatal, if the Plan meets two conditions for the "cramdown" in § 1129(b)(1).7 First, the plan must comply with all other general...
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