In re Brice Road Developments, L.L.C.

Decision Date14 August 2008
Docket NumberBAP No. 06-8093.
PartiesIn re BRICE ROAD DEVELOPMENTS, L.L.C., Debtor. General Electric Credit Equities, Inc., Appellant, v. Brice Road Developments, L.L.C. and Sir Kensington Associates, LLC, Appellees.
CourtBankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Sixth Circuit
392 B.R. 274
General Electric Credit Equities, Inc., Appellant,
Brice Road Developments, L.L.C. and Sir Kensington Associates, LLC, Appellees.
BAP No. 06-8093.
United States Bankruptcy Appellate Panel of the Sixth Circuit.
Argued: May 13, 2008.
Decided and Filed: August 14, 2008.

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G. Christopher Meyer, Squire Sanders & Dempsey LLP, Cleveland, OH, William M. Mattes, Donald W. Mallory, Dinsmore & Shohl LLP, Columbus, Ohio, argued and on brief, for Appellant.

Yvette A. Cox, Bailey Cavalieri LLC, Columbus, OH, Richard K. Stovall, Allen Kuehnle Stovall & Neuman LLP, Columbus, OH, argued and on brief, for Appellees.

Before: GREGG, PARSONS, and SCOTT, Bankruptcy Appellate Panel Judges.



General Electric Credit Equities, Inc. ("GE") appeals an order of the bankruptcy court confirming the chapter 11 reorganization plan of Brice Road Developments, L.L.C. ("Debtor"). GE objected to confirmation of the plan on the basis that the plan was not feasible as required by 11 U.S.C. § 1129(a)(11) and the plan was not fair and equitable as required by 11 U.S.C. § 1129(b)(2) because it provided for an improper interest rate on GE's secured claim, undervalued GE's collateral, and failed to accord GE its rights as an electing secured creditor under 11 U.S.C. § 1111(b)(2).1 For the reasons that follow, we affirm the bankruptcy court in all respects, with the exception of the conclusion that the plan accords GE the full rights of an electing § 1111(b) secured creditor. On this issue, this case will be remanded for further action by the bankruptcy court.


The issues presented by this appeal are: (1) whether the bankruptcy court erred in assigning a 6% present value rate to GE's claim; (2) whether the bankruptcy court erred in its valuation of GE's collateral; (3) whether the plan is feasible as contemplated by § 1129(a)(11); and (4) whether the plan provides GE its proper rights as an electing secured creditor under § 1111(b)(2).


We have jurisdiction to decide this appeal. The United States District Court for the Southern District of Ohio has authorized appeals to the Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. §§ 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, a final order "ends the litigation on the merits and leaves nothing for the court to do

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but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). The bankruptcy court's order overruling GE's objection and confirming the Debtor's reorganization plan is a final order. G.E. Cattle Co. v. United Producers, Inc. (In re United Producers, Inc.), 353 B.R. 507, 508 (6th Cir. BAP 2006), aff'd, 526 F.3d 942 (6th Cir. 2008).

The bankruptcy court's conclusions of law are reviewed de novo. Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 944 (6th Cir. 2007). "Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court's determination." Menninger v. Accredited Home Lenders (In re Morgeson), 371 B.R. 798, 800 (6th Cir. BAP 2007). Whether a chapter 11 reorganization plan correctly applies an undersecured creditor's election pursuant to § 1111(b)(2) involves interpretation and application of the Bankruptcy Code which is a question of law reviewed de novo. First Fed. Bank of Cal. v. Weinstein (In re Weinstein), 227 B.R. 284, 289 (9th Cir. BAP 1998); see also Cluxton v. Fifth Third Bank (In re Cluxton), 327 B.R. 612, 613 (6th Cir. BAP 2005) ("The determination whether a plan provision violates the Bankruptcy Code is a legal conclusion reviewed de novo.")

The court's findings of fact are reviewed under the clearly erroneous standard. In re DSC, Ltd., 486 F.3d at 944. "A finding of fact is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence 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)).


The Debtor is the owner of a partially completed 264 unit apartment complex known as Kensington Commons ("Kensington Property"). Construction of the complex began in 2001. The Debtor began renting units in 2003.

In January 2001, Armstrong Mortgage Company ("Armstrong Mortgage") provided the Debtor financing for the purchase of real estate and construction of the Kensington Property through a U.S. Department of Housing and Urban Development ("HUD") program whereby HUD guaranteed payment. The Debtor executed and delivered to Armstrong Mortgage a non-recourse mortgage note ("Note") in `the original principal amount of $15,444,400, and a mortgage deed ("Mortgage") granting liens on substantially all of the Debtor's assets, including the Kensington Property. The Note provided for interest to accrue at the rate of 7.75%. Payments of interest were to begin on February 2, 2001. Monthly payments of principal and interest in the amount of $104,500 were to begin on March 1, 2003. Prepayments prior to March 1, 2013, were prohibited. The Mortgage granted the mortgagee the right to "the estate, title and interest of said Mortgagor either in law or equity in and to [the Kensington Property]." (Appellees' App. at 291.) The Debtor exhausted its commitment for the construction loan, and 24 units remain unfinished.

The Debtor defaulted on the payment due in March 2004, and made no further payments. Armstrong Mortgage invoked its HUD guarantee and assigned the Note and Mortgage to HUD. GE subsequently purchased the Note, Mortgage and related loan documents as one loan in a bundle of six loans at a HUD auction sale. GE allocated approximately $10.7 million of

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the total purchase price to the Kensington Property.

The Debtor failed to commence making payments as required by the Note. GE filed a state court foreclosure action on July 7, 2005. In response, on September 2, 2005, the Debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. On November 3, 2005, GE filed a proof of secured claim in the amount of $16,453,965.74 ("Claim"). On January 27, 2006, GE filed its election under § 1111(b)(2) to have its Claim treated as fully secured. GE then filed a motion requesting valuation of its collateral. Following a lengthy hearing on the motion, the bankruptcy court concluded in an order entered June 22, 2006, that the "as is" value of the Kensington Property was $10.5 million. After deduction of outstanding real estate taxes, GE's interest in the value of the Kensington Property was $10,258,000. (Appellee's App. at 166 n. 3).2

The Debtor and SIR Kensington Associates, LLC (SIR Kensington)3 filed a first amended joint plan of reorganization on January 27, 2006, along with an amended disclosure statement that was approved by the bankruptcy court on March 20, 2006. Additional modifications to the first amended joint plan of reorganization were filed on June 18 and 20, 2006 (collectively the "Plan"), by the Debtor and SIR Kensington ("Plan Proponents").

The Plan is premised first on a $2.5 million cash infusion of equity and subordinated debt by SIR Kensington, which will be partially allocated to fund the Plan and to provide capital. Implementation of the Plan will be augmented by the Debtor's future income, which will be enhanced by completion and rental of the 24 unfinished units. In satisfaction of the Debtor's liability to SIR Kensington for money previously loaned, SIR Kensington will be issued all the member interest in the Debtor.

The Plan classifies creditors and equity security holders into eight classes. GE is the sole creditor in Class 2. Pursuant to the Plan, GE has an allowed secured claim that will be paid at the rate of 6% per annum in equal monthly installments based on an amortization period of 40 years, with a balloon payment of unpaid interest and principal on February 1, 2043. GE retains its lien to the extent of the allowed amount of the Claim. All other terms and conditions contained in the Note and Mortgage remain in full force and effect. The plain language of the Plan does not provide GE a restructured Note.

All classes except for GE accepted the Plan. GE filed an objection to confirmation on June 5, 2006. A confirmation hearing was held on June 19 and 20, 2006, at which the Debtor and SIR Kensington requested that the bankruptcy court confirm the Plan pursuant to the "cramdown" provisions of § 1129(b). The bankruptcy court issued a memorandum opinion on September 29, 2006, overruling GE's objection. An order confirming the Plan was issued on October 24, 2006. GE timely filed this appeal.


A. The Bankruptcy Court Did Not Err in Finding a 6% Interest Rate.

After hearing extensive testimony and considering the Sixth Circuit Court of Appeals' opinion in Bank of Montreal v. Official

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Committee of Unsecured Creditors (In re American HomePatient, Inc.), 420 F.3d 559 (6th Cir.2005), the bankruptcy court found that the Plan's "proposed interest rate of 6% is within the range of the rates in an efficient market for a long-term loan secured by a first mortgage on multi-family real estate with a long useful life, of the size of the Debtor's loan held by GE Credit." (Appellee's App. at 169-70.) GE argues that, at a minimum, a market rate loan must be established based upon terms similar to those proposed by the Plan Proponents, including the particular circumstances of the Debtor as to the risk factor. GE further argues that the testimony of its expert,...

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