In re 53 Stanhope LLC

• Decision Date: 18 February 2021
• Docket Number: Case No.: 19-23013-rdd
• Citation: In re 53 Stanhope LLC, 625 B.R. 573 (Bankr. S.D.N.Y. 2021)
• Parties: IN RE: 53 STANHOPE LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

625 B.R. 573

IN RE: 53 STANHOPE LLC, et al., Debtors.

Case No.: 19-23013-rdd

United States Bankruptcy Court, S.D. New York.

Signed February 18, 2021

BACKENROTH FRANKEL & KRINSKY, LLP, by Mark Frankel, Esq., for the debtors and debtors in possession

ABRAMS, FENSTERMAN, FENSTERMAN, EISMAN, FORMATO, FERRARA, WOLF & CARONE, LLP, by Andrea Caruso, Esq., for the debtors and debtors in possession

KASOWITZ BENSON TORRES LLP, by Jennifer Recine, Esq. and Andrew Glenn, Esq., for Brooklyn Lender, LLC

NORRIS MCLAUGHLIN, P.A., by Melissa Pena, Esq., for the Israeli Investors

MODIFIED BENCH RULING ON CONFIRMATION OF THE DEBTOR'S AMENDED JOINT CHAPTER 11 PLAN OF REORGANIZATION

HON. ROBERT D. DRAIN, United States Bankruptcy Judge

The Court gave a lengthy oral ruling on December 17, 2020 regarding the request of each of the 18 debtors and debtors in possession herein (the "Debtors") for confirmation of their amended joint chapter 11 plan of reorganization [Dkt. 93](the "Plan") and their related objection to a substantial portion of the proofs of claim filed in each of these cases by their primary secured creditor, Brooklyn Lender, LLC("Brooklyn Lender").In requesting confirmation of the Plan, the Debtors also sought a determination that the claims of the "Israeli Investors" -- which comprise claims filed against the Debtors by (a) what the parties have referred to as the "Israeli Investor LLCs" and (b) individual investors in the Investor LLCs (the "Individual Israeli Investors") -- should be subordinated under section 510(b) of the Bankruptcy Code,11 U.S.C. § 510(b), to the claims of the Debtors’ other creditors (except to the extent that certain of the Debtors’ other creditors have agreed to different treatment under the Plan).Class 6 of the Plan provides for such treatment.My bench ruling also addressed that issue, as well as other confirmation issues raised by the Israeli Investors.The Israeli Investors and the Debtors previously agreed, however, not to litigate at this time the merits of the Debtors’ objections to the Israeli Investors’ claims with the exception of the Plan's right to treat those claims as subject to mandatory subordination under section 510(b) of the Bankruptcy Code.My ruling therefore only addressed the merits of those claims to the extent they were relevant to the feasibility of the Plan under section 1129(a)(11) of the Bankruptcy Code,11 U.S.C. § 1129(a)(11).

It was important for the parties to receive a ruling promptly, as the Debtors had obtained exit financing for the Plan that was time sensitive.I informed the parties, though, that I might review the transcript and file a modified bench ruling, which of course would not at that point be a transcript, if the transcript warranted improvement in grammar or clarity for the benefit of the parties and any appellate court.I do so here; my underlying rulings on the Plan and confirmation-related issues, including the Debtors’ objections to Brooklyn Lender's claims, have not changed, however.

The foregoing issues were the subject of an evidentiary hearing held in July and August 2020, and this Modified Bench Ruling reflects the Court's assessment of the witnesses’ testimony and exhibits

admitted into evidence, as well as the parties’ post-trial briefing.

The Debtors propose to finance their exit from Chapter 11 with a loan from an entity known as Lightstone Capital.The exit loan proceeds would suffice to pay in full the claims of Brooklyn Lender in the amount that the Debtors contend those claims should be allowed, roughly $35.3 million.Indeed, after paying allowed administrative expenses and general unsecured claims that the Plan also provides will be paid in full on the Plan's effective date -- but not the payment of any cash on account of the Israeli Investors’ claims, which the Plan contemplates satisfying, to the extent allowed, with equity interests in the applicable reorganized Debtors -- the exit loan would leave the reorganized Debtors with approximately a $2 million cushion before consideration of Brooklyn Lender's claim for attorneys fees and expenses under section 506(b) of the Bankruptcy Code,11 U.S.C. § 506(b).Section 506(b)'s allowance of claims for attorneys fees and costs, as well as for allowance of postpetition interest notwithstanding the general rule, codified in section 502(b)(2) of the Bankruptcy Code,11 U.S.C. § 502(b), against the allowance of claims for postpetition interest, comes into play because the Debtors acknowledge that in each of their estates Brooklyn Lender is oversecured -- that is, the value of its collateral exceeds the amount of its claim against each Debtor for unpaid principal and prepetition interest.Under section 506(b), Brooklyn Lender would have an entitlement, up to the value of its collateral, not only to the allowance of any unpaid postpetition interest, but also to reasonable attorneys’ fees and expenses as provided in the various loan agreements that the Debtors entered into with Brooklyn Lender's assignor and the Debtors’ original lender, Signature Bank.Even with the payment of reasonable attorneys fees and expenses, however, the Debtors contend that they would have a small surplus left over, including for interest payments under the Lightstone Capital loan after a lengthy interest payment holiday thereunder, and could service that loan or reduce it by refinancing or selling various of their properties at agreed-to release prices.

Brooklyn Lender opposes the Debtors’ objections to its claims and confirmation of the Plan, as have the Israeli Investors.

The Plan is an unimpairment plan under section 1124(1) of the Bankruptcy Code because it provides for cash payment in full of the allowed claims against each Debtor's estate (except where a claimant has agreed to a lesser treatment).Section 1124(1) provides that a claim is impaired unless the plan "leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest."Section 1126(f) of the Bankruptcy Code,11 U.S.C. § 1126(f), provides that classes that are not impaired by a chapter 11 plan are deemed to have accepted it.

If, however, any Debtor lacks sufficient cash to pay Brooklyn Lender's ultimately allowed claims against it, the Plan cannot be confirmed with respect to such Debtor because Brooklyn Lender would be impaired and its votes in that Debtor's case would have to be counted, and, therefore, the Debtor would have to "cram down" the Plan over Brooklyn Lender's negative vote under section 1129(b) of the Bankruptcy Code,11 U.S.C. § 1129(b) -- something that the Debtors have not tried to do -- or the Plan would not be feasible as to such Debtor under section 1129(a)(11) of the Bankruptcy Code, which the Debtors appear to concede.

Even if Brooklyn Lender's allowed claims exceed the amount of cash available only at certain of the Debtors, moreover, the Plan cannot be confirmed, because the Plan is a joint plan for all of the Debtors and does not provide for the Debtors’ substantive consolidation.It also is the case that Lightstone Capital's exit financing cannot be disaggregated from all or substantially all of the Debtors.

If the Israeli Investors’ allowed claims cannot be subordinated under section 510(b) of the Bankruptcy Code and more cash is required to pay them than is provided for in the exit facility combined with the Debtors’ other sources of cash, the Plan also cannot be confirmed unless amended to provide for such claims’ impairment and cram down, again something that the Debtors have not sought.

I will first address the issues raised with respect to Brooklyn Lender's claims and then turn to the Israeli Investors.

Although Signature Bank made separate mortgage loans to each Debtor, the underlying loan documents are basically in the same form.Each Debtor has a substantially similar note and mortgage, which Signature Bank previously assigned to Brooklyn Lender.Thus references to a provision in a loan document can apply to the same provision in each loan document unless otherwise noted.

The fundamental dispute between the Debtors and Brooklyn Lender is over the amount of the interest component of Brooklyn Lender's claims, both with respect to claims for pre-bankruptcy, or prepetition interest and claims for postpetition, or pendency interest, i.e. interest accruing after the bankruptcy petition date and before confirmation and the effective date of the Plan.The Debtors contend that both pre- and postpetition interest should be allowed on Brooklyn Lender's claims at the non-default contract rate, which, because they have consistently paid that interest, would mean that any further claims by Brooklyn Lender for unpaid interest would be disallowed.Brooklyn Lender, to the contrary, contends that it has an allowed claim for a substantial amount of unpaid default rate interest, accrued both pre and postpetition.Brooklyn Lender's non-default rate varies among the Debtors, between 3.625 percent and 4.35 percent, whereas the default rate under the loan documents is 24 percent.Moreover, Brooklyn Lender has asserted certain defaults against each Debtor that the parties agree -- if default interest is enforceable -- would start the accrual of such interest from the making of each loan.The monetary spread between the parties’ positions therefore is huge; indeed, Brooklyn Lender's claims including its claims to default interest are more than double the amount that the Debtors assert.

The Bankruptcy Code and case law address claims to pre- and postpetition interest differently.One looks to applicable state law to determine the allowance of a creditor's claim for prepetition interest.Key Bank National Association v. Milham(In re Milham ) , 141 F.3d 420, 423(2d Cir.1998);In re Residential Capital LLC,508 B.R. 851, 858(Bankr. S.D.N.Y.2014).Under New York law, which governs here, given the location of the mortgaged properties and the parties, will generally enforce...