In re Charles St. African Methodist Episcopal Church of Bos.

• Decision Date: 02 October 2013
• Docket Number: No. 12–12292–FJB.,12–12292–FJB.
• Citation: 499 B.R. 66
• Parties: In re CHARLES STREET AFRICAN METHODIST EPISCOPAL CHURCH OF BOSTON, Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

499 B.R. 66

In re CHARLES STREET AFRICAN METHODIST EPISCOPAL CHURCH OF BOSTON, Debtor.

No. 12–12292–FJB.

United States Bankruptcy Court,

D. Massachusetts,

Eastern Division.

Oct. 2, 2013.

Eric K. Bradford, Office of the United States Trustee, Boston, MA, for John Fitzgerald, Office of the US Trustee, Assistant U.S. Trustee.

Gregory L. Demers, Jonathan Lackow, William L. Roberts, Ropes & Gray LLP, Boston, MA, for Debtor.

MEMORANDUM OF DECISION ON (1) CONFIRMATION OF DEBTOR'S SEVENTH MODIFIED FIRST AMENDED PLAN OF REORGANIZATION AND ON (2) MOTION OF ONEUNITED BANK TO DISMISS CHAPTER 11 CASE FOR CAUSE

FRANK J. BAILEY, Bankruptcy Judge.

The matters before the court are the proposed confirmation of the Seventh Modified First Amended Plan of Reorganization of debtor Charles Street African Methodist Episcopal Church of Boston (“CSAME”) and the Motion of OneUnited Bank (“OneUnited”) to Dismiss Chapter 11 Case for Cause. OneUnited objects to confirmation and CSAME to dismissal. For the reasons set forth below, including principally that the Plan would release a third-party guaranty without justification, the Court will deny confirmation; the court will also deny dismissal but order the appointment of an examiner.

PROCEDURAL HISTORYa. The Petition

CSAME is an incorporated congregation of the African Methodist Episcopal Church (the “AME Church”). OneUnited is CSAME's largest creditor, having extended to it two loans that, as of January 2012, were in default. On March 20, 2012, facing foreclosure on its church building and two other properties, CSAME filed a petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). OneUnited moved to dismiss the case, arguing that CSAME was not eligible to be a debtor. By order of September 11, 2012, the court ruled that CSAME was eligible and denied dismissal. OneUnited appealed from that order; on September 30, 2013, the District Court affirmed, but that affirmance remains subject to possible further appeal.

b. Claims of OneUnited

OneUnited filed a proof of claim, asserting secured claims based on two loans made by OneUnited to CSAME on October 3, 2006: the “Church Loan,” through which CSAME refinanced an earlier mortgage, under which CSAME borrowed $1,115,000, with principal and unpaid interestdue in full on December 1, 2011; and the “Construction Loan” (together with the Church Loan, “the Loans”), an 18–month non-revolving line of credit of up to $3,652,000 for the purpose of constructing a community center, the Roxbury Renaissance Center (“RRC”). OneUnited claims that the balances on the petition date were $1,188,562.90 on the Church Loan and $3,815,795.70 on the Construction Loan, including “default/maturity interest” of $792,425.92 on the Construction Loan and $58,416 on the Church Loan. In addition to the prepetition balances, OneUnited also asserts entitlement to “post-petition interest, attorney's fees and costs, pursuant to 11 U.S.C. § 506(b).” CSAME objected to the default/maturity interest component of OneUnited's claim. After an evidentiary hearing, the Court sustained that objection; OneUnited appealed, and on September 30, 2013, the District Court affirmed, but that affirmance remains subject to possible further appeal. The OneUnited Claims are also subject to other challenges in state court litigation between CSAME and OneUnited, which litigation was automatically stayed upon CSAME's bankruptcy filing.

The Loans are secured by CSAME's real property. The Church Loan is secured by mortgages on 551 and 553–565 Warren Street, Roxbury, Massachusetts and on 70 Summer Street, Milton, Massachusetts (the “Milton Parsonage”). The property at 551 Warren Street is the church building itself. CSAME and OneUnited agree that the current value of the properties securing the Church Loan exceeds the amount of OneUnited's claim on the Church Loan as of the date of the bankruptcy filing. The Construction Loan is secured by mortgages on 567–575 Warren Street, which is the site of the RRC, and on 5–15 Elm Hill Avenue, Roxbury, known as the Old Parsonage and an adjoining parking lot. CSAME and OneUnited agree that the current fair market value of the properties securing the Construction Loan is less than the amount of OneUnited's Claim on the Construction Loan as of the date of the bankruptcy filing. The Construction Loan was also originally secured by an $850,000 cash deposit of CSAME at OneUnited, but no one contends that a cash deposit continues to secure the loan.

c. Claim of FEDAME

In order to help CSAME obtain the Construction Loan, the First Episcopal District of the African Methodist Episcopal Church (“FEDAME”), of which CSAME is a member church, guaranteed CSAME's obligation to OneUnited on the Construction Loan (but not the Church Loan). Facing potential liability on the guaranty, FEDAME filed a proof of claim against CSAME in this case for rights of subrogation and contribution arising from the guaranty. OneUnited has objected to that proof of claim on two grounds: that FEDAME has waived any right of recourse it may otherwise have had against CSAME for liability arising from the guaranty; and that FEDAME's claim remains only a contingent claim—FEDAME disputes liability on the guaranty and to date has made no payment on it—which, for its contingency, must be denied. For the reasons set forth in a separate memorandum of decision issued today, the objection to claim has been overruled without prejudice as moot.

d. Motion Regarding Designation, Subordination, and Fees

Early in the case, OneUnited moved to prematurely terminate the period in which a debtor enjoys the exclusive right to file a plan (the “Exclusivity Motion”). More to the point, OneUnited described in that motion, and attached to the motion a copy of, a proposed plan (the “OneUnited Plan”) that it stood ready to file should its motion be granted. CSAME opposed the Exclusivity Motion, and the Court denied it. However, arguing that OneUnited had, through the filing of the Exclusivity Motion, violated CSAME's rights of exclusivity by publishing a competing plan, CSAME further responded by filing a motion for (i) designation under § 1126(e) of the votes of OneUnited Bank and (ii) costs and attorney's fees and, in the same document, a statement in support of the equitable subordination of the claims of OneUnited Bank to those of unsecured creditors (the “Designation, Subordination, and Fee Motion”). ¹ By order of September 11, 2012, the Court denied so much of this motion as sought designation of the votes of OneUnited. In the memorandum of decision issued in support of that order, the Court indicated that it would address costs and attorney's fees separately, “when it addresses the issue of subordination in conjunction with confirmation of the plan.” As set forth below, the plan presently under consideration would, if the Court agrees that the acts in question warrant equitable subordination, subordinate the claims of OneUnited to the claims in Classes 3 and 5. In a separate memorandum issued today on the Designation, Subordination, and Fee Motion, the Court concludes that, although OneUnited's conduct warrants fee relief, that conduct is not cause for equitable subordination.

e. The Plan

With its bankruptcy petition, CSAME filed a plan of reorganization, then later an amended plan and a series of modified versions thereof. With respect to its Second Modified First Amended Plan, CSAME filed and, on June 11, 2012, the Court approved an Amended Disclosure Statement (the “Disclosure Statement”). Pursuant to approved solicitation procedures, CSAME solicited votes on the plan and obtained the acceptance of two of the plan's four impaired classes; OneUnited, the holder of the sole claim in each other impaired class, voted to reject as to both and objected to the plan's confirmation. No other creditor has opposed confirmation.

The court held an evidentiary hearing on confirmation of the Second Modified First Amended Plan, as further modified from time to time, on seven days over a period of ten months, commencing on August 15, 2012 and ending on June 28, 2013.² The evidentiary hearing included a judicial site visit of CSAME's properties. On September 28, 2012, which was to be the fifth day of the evidentiary hearing, CSAME's counsel indicated that the Disclosure Statement contained inaccuracies in its presentation of certain historical financial information, inaccuracies that he had just discovered and that pertained to the ability of CSAME to make plan payments to OneUnited and Tremont Credit Union. This occasioned further discovery and eventually a motion by CSAME to approve a supplement to the Disclosure Statement (the “Supplemental Disclosure”) and certainresolicitation procedures that would afford OneUnited and Tremont Credit Union an opportunity to change their votes. Over the objection of OneUnited, the Court approved the Supplemental Disclosure and resolicitation procedures. The resolicitation resulted in no change of vote.

After approval of the Disclosure Statement as to the Second Modified First Amended Plan, CSAME moved repeatedly to make “nonmaterial” modifications to the plan, nonmaterial in the sense of requiring no resolicitation of votes or further disclosure. The Court granted these motions in part, resulting in the plan presently under consideration, CSAME's Seventh Modified First Amended Plan of Reorganization (“the Plan”). Its features are as follows.

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                ¦Class ¦Name                          ¦Description                            ¦
                +------+------------------------------+---------------------------------------¦
                ¦Class ¦                              ¦All priority claims (if any) that are  ¦
                ¦1     ¦Other Priority Claims         ¦not administrative claims or priority  ¦
                ¦      ¦                              ¦tax claims.                            ¦

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