In re 28™ Legislative Dist. Cmty. Dev. Corp., No. 10-14804

CourtU.S. Bankruptcy Court — Eastern District of Tennessee
Writing for the CourtShelley D. Rucker
Docket NumberNo. 10-14804
Decision Date09 November 2011


No. 10-14804


Dated: November 9, 2011

Shelley D. Rucker


Kyle R. Weems, Weems & Ronan, P.C., Chattanooga, Tennessee, and Whitney Durand, Chattanooga, Tennessee, for the debtor, The 28th Legislative District Community Development Corporation

Harry R. Cash, Grant, Konvalinka & Harrison, P.C., Chattanooga, Tennessee, for Chattanooga Community Development Financial Institution, Inc.

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Andrea Campbell , Arent Fox, LLP, Washington, DC, for Seedco Financial Services, Inc.

Shelley D. Rucker, United States Bankruptcy Judge


The confirmation hearing on the Plan of Reorganization ("Plan") of the debtor was conducted on October 27, 2011. Counsel for the debtor, for the United States Trustee, and for the creditors, Chattanooga Community Development Financial Institution ("CCFDI") and Seedco Financial Services, Inc. ("Seedco") appeared. CCFDI and Seedco objected to the confirmation on identical bases. They alleged that the Plan cannot be confirmed because the Plan does not comply with the requirements of 11 U.S.C. § 1129(a). Specifically they allege that (a) the debtor fails to offer the creditors more than they would receive in a Chapter 7; (b) no impaired class of creditors has accepted the Plan; (c) the Plan discriminates unfairly; and, (d) the Plan violates the absolute priority rule.

Based on the arguments of counsel, the testimony of Mr. Joelander Wheeler, the executive director for the debtor, the exhibits and briefs filed, and the record in this case, the court makes the following findings of fact and conclusions of law pursuant to Fed. R.Bankr.P. 7052, made applicable to contested matters pursuant to Fed.R.Bankr. P. 9014(c).

The primary point of contention is whether the real property owned by the debtor and purchased with grant proceeds is property that would be available to distribute to creditors. The parties agree that there are no liens, restrictions or security agreements of record that would put a bona fide purchaser on notice that the debtor has no equitable interest in 14 of the 15 tracts. The debtor contends that there does not have to be any such notice on the deeds. It contends that these properties are trust fund proceeds which are not available for creditors based on the terms and conditions under which the funds were provided to the debtor. If the court finds that these real properties are available for creditors, then the debtor's plan does not comply with the Bankruptcy Code and confirmation should be denied. If the court agrees with the debtor then it must address the other objections raised by CCDFI and Seedco. Based on the following findings of fact and conclusions of law, the court finds that 13 tracts and the debtor's headquarters are not assets available for creditors; and, subject to disposal of one tract for the benefit of creditors, the plan is confirmable.

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The debtor is a not-for-profit general welfare Tennessee corporation. It describes itself as a private, locally initiated non-profit community-focused organization created to improve the quality of life for all residents of the community. It is "to act as a catalyst for economic and community development for the Chattanooga neighborhoods that comprise the 28th Legislative District.1 Second Amended Disclosure Statement, p. 3 (Docket Entry No. 168). One of its primary functions is to buy distressed residential properties in the district and rehabilitate them. Those properties are then sold to individuals with low to marginal incomes. At the date of confirmation the debtor had 15 properties titled in its name. The status of the properties ranged from ready-to-sell, to under-construction, to vacant lots.

HOME Program

Thirteen properties were purchased with grant money from three different sources. The first source is the HOME program. The HOME Investment Partnerships Program ("HOME") is codified at 24 C.F.R. § 92.1 (2010). In implementing the HOME Investment Partnerships Act ("The Act"), the Department of Housing and Urban Development ("HUD") allocates funds to eligible state and local governments to provide safe, decent, and affordable housing for very low-income and low-income families. Sub-Part K of the HOME provisions outlines the requirements for administration of the program. 24 C.F.R. § 92.500. HUD establishes a HOME Investment Trust Fund United States Treasury account for each participating jurisdiction which may, in turn, either use a separate local trust fund account or a subsidiary account within its general fund (or other appropriate fund) as the local HOME Investment Trust Fund account. 24 C.F.R § 92.500(a). The local account includes deposits of HOME funds disbursed from the United States Treasury account; any state funds; local funds that enable the jurisdiction to meet a participating threshold amount described in 24 C.F.R. § 92.102(b)(2); any program income (from allocated funds and matching contributions); and any repayment or recaptured funds. 24 C.F.R. § 92.500(c)(1). The income from the HOME Program must be used in accordance with the requirements set forth in the HOME Investments Partnership Act, and the funds must be deposited in the HOME Investment Trust Fund local account "unless the

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participating jurisdiction permits the State recipient or subrecipient to retain the program income for additional HOME projects" in accordance with the terms of a written agreement required by 24 C.F.R. § 92.504. 24 C.F.R. § 92.503(a)(1). Eligible activities for which HOME funds may be used are set forth in section 92.205:

a. Eligible activities.

1. HOME funds may be used by a participating jurisdiction to provide incentives to develop and support affordable rental housing and homeownership affordability through the acquisition (including assistance to homebuyers), new construction, reconstruction, or rehabilitation of non-luxury housing with suitable amenities, including real property acquisition, site improvements, conversion, demolition, and other expenses, including financing costs, relocation expenses of any displaced persons, families, businesses, or organizations; to provide tenant-based rental assistance, including security deposits; to provide payment of reasonable administrative and planning costs; and to provide for the payment of operating expenses of community housing development organizations. The housing must be permanent or transitional housing....
2. Acquisition of vacant land or demolition must be undertaken only with respect to a particular housing project intended to provide affordable housing.
3. Conversion of existing structure to affordable housing is rehabilitation, . . .

24 C.F.R. § 92.205(a)(1)-(3)(2010).

HOME funds must be repaid to HUD if they are invested in housing that does not meet the requirements of the HOME program, or if a project in which HOME funds are invested is terminated before completion. 24 C.F.R. § 92.503(b)(1), (2). If the HOME funds housing provided to the qualifying homeowner ceases to be the principal residence of the family for the duration of the period of affordability, then there is a provision for "recapture" of th HOME funds, in part or in whole, from the homebuyer. 24 C.F.R. 92.254(a)(5)(ii). Funds that are "recaptured" in accordance with 92.254(a)(5)(ii) must be used

in accordance with the requirements of this part. Recaptured funds must be deposited in the participating jurisdiction's HOME Investment Trust Fund local account unless the participating jurisdiction permits the . . . community housing development organization to retain the recaptured funds for additional HOME projects pursuant to the written agreement required by § 92.504. If the jurisdiction is not a participating jurisdiction when the recaptured funds are received, the funds must be remitted to HUD and reallocated in accordance with § 92.454 [Reallocations by Formula].

24 C.F.R. § 92.503(c)(2010).

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The City of Chattanooga ("City") is the recipient of HOME funds and contracts with the debtor to provide funds from the HOME grants to assist the debtor in providing affordable home ownership housing activities to eligible recipients. The agreements between the City and the debtor refer to and incorporate 24 C.F.R. Part 92. The agreements also provide that the debtor must have a written project development agreement with the City prior to undertaking a project, and the project development agreement also refers to 24 C.F.R. Part 92.

According to the agreements between the debtor and the City attached as various exhibits to memoranda submitted by the debtor, unexpended grant funds are retained by the City of Chattanooga but "[u]pon written request, the City may consider the reallocation of unexpended funds to eligible projects proposed by Subrecipient." Agreement between 28th Legislative District Community Development Corporation and the City of Chattanooga in the amount of $300,000 for Fiscal Year 2009-2010, Article IV.I, p. 6 ("2009-10 HOME Agreement").2 The 2009-10 HOME Agreement further provides for excess proceeds from resold properties:

[The debtor] may retain proceeds generated from HOME-assisted projects for which it is not considered a subrecipient. A subrecipient means a

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