In re Baptist Home of Phila.

• Decision Date: 31 December 2014
• Docket Number: Bankruptcy No. 14–13305 ELF.
• Parties: In re THE BAPTIST HOME OF PHILADELPHIA d/b/a Deer Meadows Retirement Community, et al., Debtors.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

525 B.R. 236

In re THE BAPTIST HOME OF PHILADELPHIA d/b/a Deer Meadows Retirement Community, et al.,¹ Debtors.

Bankruptcy No. 14–13305 ELF.

United States Bankruptcy Court, E.D. Pennsylvania.

Signed Dec. 31, 2014

Ordered accordingly. John T. Carroll, III, Cozen O'Connor, Wilmington, DE, for Debtor.

Dave P. Adams, United States Trustee, Philadelphia, PA, for U.S. Trustee.

Donald J. Detweiler, Francis J. Lawall, John Henry Schanne, II, Pepper Hamilton LLP, Wilmington, DE, Aris J. Karalis, Robert W. Seitzer, Maschmeyer Karalis P.C., Philadelphia, PA, for Creditor Committee.

MEMORANDUM

ERIC L. FRANK, Chief Judge.

I. INTRODUCTION

The Baptist Home of Philadelphia (“the Debtor”), a nonprofit corporation, filed this chapter 11 bankruptcy case on April 25, 2014. At the time, the Debtor operated a senior care facility with 206 licensed skilled nursing beds and 126 independent living and personal care units in the northeast section of the City of Philadelphia.

In its bankruptcy schedules, the Debtor disclosed two (2) secured debts—approximately $24 million owed to U.S. Bank, N.A., Indenture Trustee (“the Bond Trustee”) ² and approximately $6.4 million owed to Beneficial Mutual Savings Bank (“Beneficial”). Based on the filed claims, the Debtor also has approximately $6.3 million in general unsecured debt and $260,000 in priority debt.³ On May 6, 2014, the U.S. Trustee appointed an official committee of unsecured creditors (“the Committee”). The Committee has actively participated in the case.

Presently before the court is the Joint Motion of the Debtor and the Bond Trustee for Relief from the Automatic Stay (“the Motion”) (Doc. # 399). In the Motion, the Debtor and the Bond Trustee seek authorization for a pre-confirmation distribution on account of the Bond Trustee's claim. All interested parties, including the Committee, agree that a pre-confirmation distribution to the Bond Trustee is in the best interests of the estate and creditors and that a complete payoff of the Bond Trustee's claim is desirable. Interest on the Bond Trustee's claim is running at the rate of more than $3,000 per day. Confirmation of the Debtor's proposed chapter 11 plan is not likely to occur until at least February 2015. A pre-confirmation payoff of the Bond Trustee's claim prior to confirmation would eliminate the interest running on the bond debt as well as terminate ongoing legal expenses that are part of the Bond Trustee's secured claim. These potential savings are substantial and would inure to the benefit of the unsecured creditors.

Before a complete distribution to the Bond Trustee may be made, a dispute must be resolved regarding the appropriate amount of the distribution necessary to pay off the Bond Trustee's claim. The dispute arises from divergent interpretations of a settlement agreement (“the Settlement Agreement” or “the Agreement”) approved by this court in June 2014. The parties refer to the dispute as “the Carve–Out Dispute” (the nature of which is discussed below) and the parties report that the amount at issue is approximately $460,000.00. Resolution of the Carve–Out Dispute is important to all parties because once the extent of the Bond Trustee's distribution entitlement is known, the court can authorize distribution of the balance of the Bond Trustee's claim, thereby terminating the accrual of interest and expenses.

By order dated December 18, 2014, I granted the Motion in part and entered an interim order authorizing the Debtor to pay the Bond Trustee's claim less the roughly $460,000.00 at issue in the Carve–Out Dispute (“the Holdback”). (Doc. # 188). The specific issue before the court is whether the Bond Trustee or the Committee has the superior claim to the Holdback in the event that the ultimate distribution in the case is insufficient to pay in full both the Bond Trustee's claim and the allowed unsecured claims.

For the reasons explained below, I conclude that the Bond Trustee has the superior claim to the Holdback based on the plain meaning of the Settlement Agreement. Therefore, I will enter an order authorizing the Debtor to distribute the Holdback to the Bond Trustee.

II. THE “CARVE–OUT” DISPUTE

A.

In the early stages of the case, a number of disputes arose among the parties in interest concerning, inter alia, the: (1) terms for use of cash collateral; (2) validity and relative priority of Beneficial's asserted security interest in certain assets; and (3) procedures for a proposed sale of substantially all of the Debtor's assets, including the terms for retention of a financial advisor and investment banker. The parties reached a global settlement of these disputes. After notice and hearing the Settlement Agreement was approved by the court on June 27, 2014. (Doc. # 188).

The Settlement included provisions that resolved the dispute over Beneficial's lien status and provided for certain “carve-outs” from secured property for the benefit of unsecured creditors.

Several components of the Settlement Agreement bear upon the present dispute.

Sections 6 and 7 of the Settlement Agreement resolved the dispute concerning Beneficial's lien position by:

(1) validating Beneficial's lien against some, but not all, of its claimed collateral;

(2) allowing Beneficial to liquidate and set off its claim against that agreed upon collateral; ⁴

(2) requiring Beneficial to “carve-out” $625,000.00 from the proceeds of its collateral for the benefit of unsecured creditors (“the Beneficial Carve–Out”); ⁵ and

(3) allowing Beneficial an unsecured claim to the extent that its entire claim was not satisfied by the liquidation of the collateral.⁶

Section 7 of the Settlement Agreement also provided for a carve-out from the proceeds of the Bond Trustee's collateral for the benefit of unsecured creditors. The parties included Beneficial within the class of unsecured creditor to the extent it was undersecured, but subject to certain limitations on Beneficial's. This carve-out from the Bond Trustee's collateral ⁷ consisted of two (2) separate funds (collectively, “the Bond Trustee Carve–Out”): ⁸

(1) a flat $125,000.00 (“the Sale Proceeds Carve–Out”) shared by all unsecured creditors other than Beneficial; ⁹

(2) a percentage of the gross sales proceeds from the collateral, ranging from 5% and increasing up to 7% as the gross sales proceeds increased (“the Percentage Sharing Carve–Out”), with Beneficial splitting the Percentage Sharing Carve–Out with the other unsecured creditors on a 35%–65% basis. ¹⁰

Third, the Settlement Agreement imposed two (2) conditions subsequent with respect to the Bond Trustee Carve–Out. The Bond Trustee Carve–Out would be voided if the Committee or any Committee members (other than Beneficial) supported or did not oppose a plan of reorganization that did not provide for full payment of the Bond Trustee's allowed claim in full.¹¹ Also, the unsecured creditors could not receive any interest on their claims until the claims of the Bond Trustee and Beneficial were paid in full. ¹²

B.

After the Settlement Agreement was approved, the Debtor conducted, and the court later approved, a sale of virtually all of the Debtor's assets to a third party. The sale has closed and resulted in net proceeds in excess of $31 million. The parties are cautiously optimistic that the sale proceeds will be enough to pay all claims in full, but there is some uncertainty. The dispute arises from that uncertainty and involves the allocation of the risk of nonpayment. The question is whether the Bond Trustee or the unsecured creditors should bear the risk of nonpayment if the distribution is insufficient to pay all creditors in full. For example, if the shortfall is $460,000.00 (the amount of the Holdback), which constituency should be paid in full and which constituency should receive a distribution with a $460,000.00 shortfall?

The Debtor and the Bond Trustee assert that the Bond Trustee Carve–Out, entered into before the parties knew how successful the asset sale would be, constituted only “down-side” protection to the unsecured creditors in the event that the sale price was less than the Bond Trustee's allowed secured claim; in effect, the Bond Trustee Carve–Out provided a guaranteed minimum distribution derived from proceeds of the Bond Trustee's collateral that, in the absence of the Settlement Agreement, would have been distributed to the Bond Trustee, not the unsecured creditors. According to the Debtor and the Bond Trustee, once the sale proceeds exceeded the minimum distribution guaranteed by the Settlement Agreement ( i.e., the Bond Trustee Carve–Out of $460,000.00), the balance of the sale proceeds should be distributed according to ordinary principles of priority (meaning, paid first to satisfy the Bond Trustee's lien). In their view, if there are insufficient funds to pay unsecured creditors in full, after satisfaction of the Bond Trustee's allowed secured claim, the unsecured creditors must bear the loss.

The Committee and Beneficial contend that the Bond Trustee Carve–Out was a transfer of its right to full payment of its claim—in effect, either a conditional reduction of its allowed secured claim in the amount of the carve-out, or a subordination of a portion of the Bond Trustee's claim to a position junior to the unsecured claims.¹³

Interestingly, the parties on both sides of the question contend that there is no ambiguity in the Settlement Agreement and that their respective positions are supported by the plain language and meaning of the Settlement Agreement.

III. APPLICABLE LEGAL PRINCIPLES

The legal principles to be applied in this matter are well settled.

A settlement agreement is treated as a contract and its meaning is determined by employed general rules of contract interpretation. See, e.g., Blunt v. Lower Merion School Dist., 767 F.3d 247, 282 n. 50 (3d Cir.2014). In re Cendant Corp. Prides Litig., 233 F.3d 188, 193 (3d Cir.2000). “The fundamental rule in interpreting the meaning of a...