In re Cella III, LLC
| Citation | 625 B.R. 19 |
| Decision Date | 06 January 2020 |
| Docket Number | Case No. 19-11528 |
| Parties | IN RE CELLA III, LLC, Debtor. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Eastern District of Louisiana |
U.S. Trustee, New Orleans, LA, for Debtor.
This Court held a virtual evidentiary hearing on November 10, 2020 (the "Hearing"), to consider Girod LoanCo, LLC's Application for Allowance of Post-Petition Interest and Attorney's Fees as Oversecured Creditor Pursuant to 11 U.S.C. § 506(b) (the " § 506(b) Motion"), [ECF Doc. 209]; the response thereto filed by Cella III, LLC (the "Response"), [ECF Doc. 227]; and the reply brief (the "Reply"), [ECF Doc. 234], filed by Girod Loan Co LLC ("Girod") in support of the § 506(b) Motion. After considering the pleadings, the evidence presented at the Hearing, the record in this case, and applicable law, the Court GRANTS IN PART and DENIES IN PART the relief sought in the § 506(b) Motion. The Court finds that Girod became oversecured in January 2020, thus allowing post-petition interest to the extent described herein, but denies Girod's request for attorneys' fees and costs.
This Court has jurisdiction to grant the relief provided for herein pursuant to 28 U.S.C. § 1334. The matters presently before the Court constitute core proceedings that this Court may hear and determine on a final basis under 28 U.S.C. § 157(b)(2)(A), (B) & (O). The venue of the Debtor's chapter 11 case is proper under 28 U.S.C. §§ 1408 and 1409(a).
Cella III, LLC (the "Debtor" or "Cella") is a Louisiana limited liability company with a sole member, George Cella. See Hr'g Tr. 63:12–22 (Sept. 18, 2020). The Debtor owns property located at 4531 and 4545 Veterans Boulevard in Metairie, Louisiana (the "Property"), on which sit three buildings. See Hr'g Tr. 67:8–19 (Sept. 18, 2020). The Debtor leases parts of the Property to a Hertz car rental business, a Smoothie King franchise, and to East Jefferson General Hospital ("EJGH") (or its successor),2 and the Debtor operates a mini-storage and vault business in another part of the Property. See Response, ¶ 5–6; [ECF Doc. 160, at 11 (approved Disclosure Statement)]. The Debtor asserts that it consistently receives gross income of approximately $72,000 from the leases and its own business operations. See Response, § 5; [ECF Doc. 160, at 11].
In the years prior to Cella's decision to file for bankruptcy protection, First NBC Bank ("FNBC") held notes owed by Cella and affiliated companies, including Wild Horse of Old Military Road, LLC ("Wild Horse"). Those notes are secured inter alia by a mortgage on the Property and an assignment of rents therefrom, as well as by a mortgage on George Cella's personal residence. See Response, § 3; [ECF Doc. 160, at 7–8]. On Friday, April 28, 2017, the Louisiana Office of Financial Institutions closed FNBC and the Federal Deposit Insurance Corporation ("FDIC") was named Receiver. See Failed Bank Information , FED. DEPOSIT INS. CORP. , https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/firstnbc.html (last visited Dec. 30, 2020). Thereafter in 2017, Girod acquired Cella's notes, as well as other notes owed by Cella affiliates, from the FDIC. See Response, ¶ 3.
In January 2019, Girod made demand for payment on Wild Horse's matured note secured by George Cella's home. In March 2019, Girod then notified Cella that its notes were in default and the indebtedness accelerated as a result of Wild Horse's default, claiming that Girod's interest in Cella's assets was cross-collateralized with notes and other security interests owed to Girod by Cella affiliates and George Cella, See Response, ¶ 7; [ECF Doc. 160, at 7–8]. On May 24, 2019, Girod commenced a foreclosure action in a Louisiana state court against Cella, seeking, in part, to foreclose on the Property. See Response, ¶ 7; [Adv. No. 19-1129, ECF Doc. 1, ¶ 21].
On June 5, 2019, the Debtor filed for bankruptcy relief under chapter 11 of the Bankruptcy Code, which stayed Girod's foreclosure action. [ECF Doc. 1]. The Debtor continues to operate its business as a debtor-in-possession, and no committee has been constituted.
On June 14, 2019, the Debtor filed a Motion for Interim and Final Orders: (i) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. § 363, (ii) Granting Adequate Protection of Prepetition Secured Party Pursuant to 11 U.S.C. §§ 361, 362 and 363, and (iii) Scheduling Final Hearing Pursuant to Bankruptcy Rule 4001(b) (the "Cash Collateral Motion"). [ECF Doc. 12]. Through the Cash Collateral Motion, the Debtor sought to use Girod's cash collateral to pay for the Debtor's operations, an insider's salary, and professional fees pursuant to an attached budget. . Assuming that Girod held a claim against the estate for $7.76 million, the Debtor pointed to a 2012 appraisal valuing the Property at $10.1 million to assert that "Girod enjoys a comfortable equity cushion in its collateral." [ECF Doc. 12, ¶ 14]. The Debtor offered post-petition replacement liens in the Property and proceeds, however, to the extent that payment of adequate protection was required. [ECF Doc. 12, ¶ 21].
At the interim hearing on the Cash Collateral Motion, counsel for the Debtor announced that an agreement for adequate protection had been reached between the Debtor and Girod, whereby the Debtor would pay three monthly payments of $20,000 in adequate protection to Girod beginning in July 2019, until a final hearing on the matter could be held in September. Hr'g Tr. Min.14:19:08–:24 (June 20, 2019). The Court issued an Order approving the Cash Collateral Motion on an interim basis, reflecting that agreement. [ECF Doc. 27].
At the final hearing on September 4, 2019, the Debtor represented to the Court that Girod enjoys an "enormous" equity cushion as the value of the Property exceeds $10 million and Girod's secured claim was "at most" $8 million. Hr'g Tr. Min. 17:04:25–08:06 (Sept. 4, 2019). The parties stipulated to the Property's value of $10.1 million for the sole purpose of resolving the Cash Collateral Motion. Hr'g Tr. Min. 15:32:58; 17:08:06 (Sept. 4, 2019). Accordingly, The Court issued an Order on September 12, 2019, that modified its Interim Order to remove the requirement to pay adequate protection for the month of September 2019 and declined to require the Debtor to make adequate protection payments going forward. [ECF Doc. 72]. That Order reserved the Debtor's right to challenge the extent, validity, and priority of Girod's security interest or assert claims against Girod under any other theory of liability, as well as Girod's right to seek adequate protection at a later time or seek an Order entitling it to post-petition interest and attorneys' fees under § 506 of the Bankruptcy Code. [ECF Doc. 72].
Shortly before, on August 21, 2019, Girod filed Proof of Claim No. 4 against the Cella estate, asserting a secured claim in the amount of $7,999,333.72. On September 4, 2019, Cella initiated an adversary proceeding against Girod, alleging a claim under the Louisiana Unfair Trade Practices Act, as well as claims for forfeiture of usurious interest, wrongful seizure, breach of contract, redemption of litigious rights, and avoidance under § 547 of the Bankruptcy Code, among others. [Adv. No. 19-1129, ECF Doc. 1]. The parties eventually stipulated that Girod would not seek prepetition default interest, but, after a trial on Cella's remaining claims, the Court dismissed the entirety of Cella's Complaint. [ECF Doc. 154, ¶ 49; Adv. No. 19-1129, ECF Doc. 58, 62 & 64]. On May 15, 2020, Girod amended its proof of claim to reduce its asserted secured claim to $7,750,751.42, removing approximately $248,000 in prepetition default interest. See Proof of Claim 4-2. The Debtor does not dispute that Girod's claim is $7,750,751.42 as of June 5, 2019, the Petition Date. See Response, ¶ 1.
On November 10, 2020, this Court held the Hearing to consider Girod's § 506(b) Motion. The Court considered documentary evidence and heard testimony from Michael Truax, the Debtor's appraiser of the Property; Denis Stratford, a representative of Girod; George Cella, the principal of the Debtor; and Robert Foley, an expert who provided testimony regarding costs of renovating the Property.
Mr. Truax authenticated and provided testimony regarding his expert report, valuing the property at $7,695,000 as of January 20, 2020. See Hr'g Tr. Min. 13:43:04–:54 (Nov. 10, 2020). Girod stipulates to that value for the Property—as a "starting point." See § 506(b) Motion, § 3 & Ex. A; Reply, at 1. Mr. Truax testified that he valued the property using an income-capitalization approach, a type of real estate appraisal method whereby he valued the Property through the lens of a hypothetical investor based on the income the Property generates. See Hr'g Tr. Min. 13:42:13–:58 (Nov. 10, 2020). Mr. Truax did not incorporate a value for the current lease with EJGH into his appraisal; rather, he assumed for valuation purposes that EJGH would not be in the space, that the space would be vacant for months, and that a landlord would incur costs for placing a new tenant. See Hr'g Tr. Min. 13:46:31–14:00:49 (Nov. 10, 2020). He factored a lower rental fee per square footage than the rate EJGH is paying now. Id .
Girod asserts that the valuation would be higher if Mr. Truax factored the EJGH lease in his analysis because EJGH is locked into higher lease payments than a new tenant would pay in the current economic climate. [ECF Doc. 234, at 2]. But the testimony revealed that countervailing factors exist to justify the lower appraised estimate even if EJGH's higher rents were accounted for, including the pandemic's general, negative effect on the economy and the fact that one of the other tenants on the Property has filed for bankruptcy...
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