In re A & B Assocs., L.P.

• Decision Date: 29 March 2019
• Docket Number: Number 17-40185-EJC
• Court: U.S. Bankruptcy Court — Southern District of Georgia
• Parties: In re: A & B Associates, L.P., Debtor.

In re: A & B Associates, L.P., Debtor.

Number 17-40185-EJC

United States Bankruptcy Court for the Southern District of Georgia Savannah Division

March 29, 2019

Chapter 11

OPINION ON CONFIRMATION OF DEBTOR'S AMENDED CHAPTER 11 PLAN

I. INTRODUCTION

Pending before the Court is the Amended Chapter 11 Plan (the "Amended Plan") (dckt. 374) filed by A & B Associates, L.P. (the "Debtor"), which was scheduled for confirmation on October 1, 2018. The Debtor, a limited partnership organized under the laws of the State of Georgia, filed this Chapter 11 reorganization case on February 3, 2017. (Dckt. 1). The Debtor owns and operates a 96-unit apartment complex in Beaufort County, South Carolina, known as August on Southside (the "Property"). The Debtor's principal creditor is FCRE REL, LLC ("FCRE"), which holds a first priority lien in the Property.

On the eve of the confirmation hearing, the Court entered an Opinion (dckt. 509) and Order (dckt. 510) denying, in part, FCRE's Motion Pursuant to 11 U.S.C. § 1112(b) to Convert this Case to a Case under Chapter 7 and for the Appointment of a Chapter 7 Trustee (the "Motion to Convert"). (Dckt. 161). In its Motion to Convert, FCRE argued that the debtor was ineligible to file for reorganization under Chapter 11 based on the administrative dissolution in 2005 of its former general partner, ABGP, Inc. The Court held that the Debtor was a properly formed limited partnership, still in good standing, with a valid corporate general partner. (Dckt. 509, p. 71).

Unresolved at the time of the confirmation hearing was the Debtor's Objection to Claim #2 of FCRE REL, LLC (the "Claim Objection") (dckt. 208), as well as the remaining grounds asserted by FCRE in its Motion to Convert. (Dckt. 161).¹ Additionally, FCRE filed a Motion for Post-Petition Attorney's Fees Pursuant to 11 U.S.C. § 506(b) (the "§ 506(b) Motion"). (Dckt. 491). The total amount sought by FCRE in the § 506(b) Motion was $1,207,042.14 (including default interest). On December 28, 2018, FCRE filed its Supplemental Motion for Post-Petition Fees (dckt. 566), claiming a total of $1,457,471.52 through December 28, 2018.² (Dckt. 566, pp. 2-3).

The confirmation hearing took place on October 1, 2018. The Court heard testimony from three witnesses: (1) Sharan Sheppard Kettles ("Mrs. Kettles"), the widow of L. Christopher Kettles ("Mr. Kettles"); (2) Jerry McNair ("Mr. McNair"), an expert for the Debtor who offered his opinion on the feasibility of the Debtor's plan of reorganization; and (3) Mary F. Davenport ("Ms. Davenport"), a representative of FCRE who offered a contrary analysis of feasibility. Ms. Davenport also testified about the appropriate interest rate to be applied to its secured claim pursuant to Till v. SCS Credit Corp., 541 U.S. 465 (2004). At the conclusion of the confirmation hearing, the Court took the matter under advisement.³

Based on the testimony and evidence presented at the October 1, 2018 hearing, as well as a review of the evidence in the record from prior hearings, the Court finds that the Debtor has not met its burden of proof on all the requirements of 11 U.S.C. § 1129 necessary to confirm this cramdown plan. Among other shortcomings, the plan failed to provide for the "fair and equitable" treatment of FCRE's claim. Most importantly, the Court finds that the plan is not feasible. The lack of feasibility is, in turn, based on four primary factors. First, the Debtor proposed to pay FCRE's secured claim at the non-default contract interest rate of 4.04% as opposed to what the Court finds to be the appropriate Till rate of 7.25%. Second, the management of the Debtor was handled for decades by Mr. Kettles, but he passed away on June 7, 2018. The Court finds that the current management lacks the requisite skills and experience to manage the Debtor's operations. Third, although there was a substantial equity cushion in the Property as of the petition date, FCRE is entitled to post-petition fees,expenses, and default interest exceeding $1,100,000.00 as an oversecured creditor pursuant to 11 U.S.C. § 506(b) and this additional debt would further argue against feasibility. Fourth, the Debtor's expert did not present a persuasive analysis of feasibility.

For these reasons, and others addressed below, the Court will deny confirmation. Additionally, the Court will resolve the Debtor's Claim Objection (dckt. 208, dckt. 387) by estimating the disputed portion of FCRE's claim, and will grant in part FCRE's § 506(b) Motion. (Dckt. 491, dckt. 566). The Court will schedule a continued hearing on the remaining grounds for conversion asserted in FCRE's Motion to Convert⁴ (dckt. 161), and at that hearing the Court will determine whether this case should be dismissed, converted to Chapter 7, or subject to some other disposition.

This Opinion constitutes the Court's Findings of Fact and Conclusions of Law. To the extent that any findings of fact herein are construed to be conclusions of law, they are hereby adopted as such. To the extent that any conclusions of law herein are construed to be findings of fact, they are hereby adopted as such.

II. JURISDICTION

This Court has subject-matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and the Standing Order of Reference signed by then Chief Judge Anthony A. Alaimo on July 13, 1984. This is a "core proceeding" within the meaning of 28 U.S.C. § 157(b)(2)(L).

III. FINDINGS OF FACT

A. Introduction

This case involves a two-party dispute between the owner of an apartment complex and its lender. The Debtor's principal, Mr. Kettles, a certified public accountant by training, had ably managed the Property through various entities controlled by him since 1990. When FCRE agreed to refinance the Property, the apartment complex had an appraised value of $5,375,000.00. The original loan from FCRE was $3,900,000.00. Thus, there was a substantial equity cushion. Since April 15, 2015, when the loan closed, the Debtor never failed to make a single principal and interest payment to FCRE. As a result, the principal loan balance at the time of the confirmation hearing on October 1, 2018, had been reduced to approximately $3,670,000.00. (10/1/18 Transcript⁵ pp. 164, 170, 224; 10/1/18 Ex.⁶ "FCRE-166"; 10/1/18 Ex. "D-1" p. 2). As of the confirmation hearing, occupancy rates were good, rental rates had been increased, and monthly revenues appeared consistent and sufficient to service the original principal debt as well as operating expenses; the Debtor was also setting aside sums to meet larger repairs and maintenance expenses. Based on these metrics, FCRE's prospects for having its debt repaid in full would seem assured.

But what actually transpired between these parties after the loan closing is,frankly, a long story. Put simply, FCRE intended all along to sell its loan through a securitization process. The loan documents reflected that intention. (1/10/18 Ex. "C-105" p. 56). That securitization process failed, according to FCRE, due to undisclosed conditions of the Property that scared away prospective investors. Unable to sell the loan, FCRE declared certain non-monetary defaults under the loan agreement. Immediately thereafter, on July 20, 2016, FCRE exercised its claimed self-help remedies and, with the assistance of local law enforcement, removed the Debtor's management team from the Property, installed a new third-party managing entity, took control of all the rents, and barred the Debtor and its agents from the Property.

The Debtor responded by filing suit in state court in South Carolina, where it obtained an injunction restoring it to possession and management of the apartment complex. In September and October of 2016, FCRE filed appeals⁷, which remain pending 30 months later, of both the injunction and a contempt order issued by the South Carolina court. By the time the Debtor filed this bankruptcy case on February 3, 2017, FCRE claimed $894,853.63 in pre-petition attorneys' fees, expenses, default interest, hedge losses on its failed securitization, and sums that the South Carolina court had ordered FCRE to return to the Debtor and attorneys' fees FCRE paid pursuant to that court's contempt order. (Claim 2-2, p. 3). FCRE filed a proof of claim for $4,696,401.78. (Claim 2-2, p. 2).

Two years in Chapter 11 have only made things worse for the Debtor. As anoversecured creditor, FCRE now seeks an additional $1,457,471.52 in post-petition attorneys' fees, expenses, and default interest pursuant to 11 U.S.C. § 506(b). (Dckt. 566). As of the confirmation hearing, FCRE claimed a total debt of more than $6,000,000.00. The Debtor's plan proposes to pay FCRE only about $3,700,000.00 and at only the 4.04% contract rate of interest; any additional portion of its claim based on pre-petition fees and expenses would be paid as a balloon payment in seven years. Notwithstanding the fact that the Debtor has never missed a principal or interest payment, however, its plan is not feasible. That is, in part, because the Court finds the appropriate cramdown rate of interest to be 7.25% and because the debt owed to FCRE has grown substantially by virtue of its entitlement to post-petition fees and expenses under § 506(b).⁸

This Opinion sets forth the many disputes between the parties in some detail, which in turn informs the Court's treatment of FCRE's claims for pre-petition attorneys' fees and expenses, as well as its claims for post-petition fees and expenses under § 506(b). While the Court finds unreasonable some of FCRE's legal positions and the resulting attorneys' fees, most of FCRE's efforts in this bankruptcy case have been necessary and reasonable. The Debtor's proposed plan of reorganization has other defects precluding confirmation, which the Court will address. Finally, the Court must determine the next step in this process: conversion to Chapter 7, dismissal, or something else.

B. Formation and Financing of the Debtor's Limited Partnership

On November 1, 1976, the Debtor was organized...