In re Civic Partners Sioux City, LLC
| Decision Date | 07 October 2013 |
| Docket Number | Bankruptcy No. 11-00829 |
| Parties | IN RE: CIVIC PARTNERS SIOUX CITY, LLC, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Iowa |
ORDER ON OBJECTIONS TO CONFIRMATION OF PLAN
This matter came before the Court at a hearing on Confirmation of Debtor's Second Amended and Substituted Plan of Reorganization and creditors' objections to it. The Court held a confirmation hearing on January 14-18, 2013. A. Frank Baron and Malcolm Misuraca appeared on behalf of Civic Partners Sioux City, LLC ("Civic"). Donald Molstad, Robert Marticello, and Autumn Spaeth appeared on behalf of Steven Semingson, individually. Jeff Wright and Lance Ehmcke appeared on behalf of the City of Sioux City (the "City"). Bernard (Jerry) Spaeth and G. Mark Rice appeared on behalf of First National Bank (the "Bank"). Richard Jefferies appeared for Main Street Theatres, Inc. ("Main Street") and William Barstow, Main Street's owner. After hearing the arguments of the parties, the Court took the matter under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).
STATEMENT OF THE CASE
Debtor seeks to confirm its Plan over the objection of the Bank and the City—key creditors—through a process that has come to be known as "cram down." The Plan seeks to significantly reduce the secured claim of its primary lender—the Bank—and to leave the City entirely unsecured. The Plan also seeks to satisfy in full smaller debt that the Semingsons personally owe as guarantors. The Semingsons, as the principals of Civic, also propose to retain an ownership interest (equity position) by a "new value" contribution. Semingson proposes contributing $150,000 in new value.1
The Bank and City object to confirmation on several grounds. They argue that the Plan fails to comply with key provisions of 11 U.S.C. § 1129(a). Most notably, they argue the Plan is not feasible. They argue that Civic bases Plan terms on an improperly low valuation of the building complex that serves as collateral. They assert that, when properly valued, there is insufficient cash flow to make Plan payments. In short, a higher valuation results in a larger secured claim for the Bank, which Civic must pay in full. The Bank and City argue that Civic will not be able to do so on the Plan and projections before the Court.
The Bank and City also argue the Plan fails to comply with key requirements of § 1129(b), which prevents a "cram down" in this case. They assert it fails thethreshold requirement of paying the full value of secured claims. They also argue Civic cannot satisfy the absolute priority rule and there is no "new value" exception in the Eighth Circuit. Even if a new value exception exists, they further assert that the "new value" Semingson offers is woefully insufficient. They ask the Court to deny confirmation and dismiss this case.
Civic resists all arguments against confirmation. Civic also asks that the Court deny the request for dismissal if it denies confirmation. For the reasons stated below, the Court denies confirmation.
FINDINGS OF FACT
The Court previously provided substantial relevant factual background in other written opinions on matters related to this confirmation issue. Those facts are incorporated by reference.
In 2000 and 2001, the City began efforts to revitalize its Historic Fourth Street District area. The City invited a few development groups, including Civic Partners, Inc., a California business owned by Semingson, to interview and submit proposals for a part of the project. Civic Partners, Inc., then formed Civic Partners Sioux City, LLC—Debtor in this case and hereinafter referred to simply as "Civic". Civic's proposal included a movie theater complex and a hotel complex adjacent to or as a part of the Historic Fourth Street District. The proposed movie complex included several retail spaces for complementary tenants—restaurants,bars, or other services. The City chose Civic's proposal. Civic entered into an agreement with the City. The City offered Civic cheap land and significant tax increment financing ("TIF") in order to complete the development.
As part of the financing and encouragement of lender participation, the City also promised to guarantee Civic's payments to its primary lenders for up to $300,000 per year.2 For its part of the arrangement, Civic agreed to tax assessments on a set, above-market property valuation for a set term.
Civic ended up building only the theater complex, known now as the Promenade property. Civic never developed the hotel complex on the other parcel of property. The City and Civic reached a settlement on Civic's failure to even begin the hotel development. Civic gave the City a $25,000 promissory note to compensate for Civic's failure to perform. Another developer put the property slated for the hotel to a different use. The movie theater and retail property (the "Promenade property") is Civic's only major asset. The future of the Promenade property is at the center of this bankruptcy.
Civic signed the original development agreement and promissory note with the City in 2001. Civic received its primary construction financing from the Bank. Civic and the Bank signed the construction financing agreement on February 21, 2003. The Bank took a first mortgage and assignment of rents on the property inthe amount of its loan—a principal sum of $5,625,000. Civic's loan transaction with the Bank specifically incorporated the City's guarantee of up to $300,000 per year in payments.
On the same day, Civic signed an additional loan agreement with the City borrowing $1,980,000. They agreed, and the Bank loan documents made clear, that the debt and mortgage between Civic and the City would be subordinate to Civic's obligations to the Bank. Thus, the City claimed a second mortgage on the Promenade property.
In April 2003, Civic signed an agreement with ALY Construction, Inc. as general contractor to build out the Promenade property. The Promenade property was designed and built to have an anchor tenant—a multi-screen movie theater—and additional retail space to lease to shops and/or restaurants. The development plan called for the theater and other spaces to complement and support each other.
In 2004, Civic reached a lease agreement with its current anchor tenant, Main Street. Main Street is a regional movie theater operator. That lease agreement provided that Main Street would pay several categories of payments totaling $1,200,000 in annual rent. It is undisputed that Civic promised Main Street that Civic would get complementary tenants into the vacant retail spaces as soon as possible.
The rental agreement between Civic and Main Street contained additional terms that resulted in Civic obtaining additional lending for the project. Civic agreed to finance the installation of some furniture, fixtures, and equipment. This loan has been referred in short hand throughout these proceedings as the FF&E ("Furniture, Fixtures, and Equipment") Loan. Civic borrowed part of the money for the improvements from Liberty State Bank, which filed an Article 9 security interest in the property. It borrowed the remainder from the Small Business Association ("SBA"). The Semingsons individually guaranteed these two loan payments.
Main Street's annual rental payment included the monthly payments on Civic's FF&E loan. The payment also included the common area maintenance ("CAM") for the whole project—not just Main Street's space. In fact, the evidence revealed that, unbeknownst to Main Street, its annual rental payment under the Original Lease covered virtually all of Civic's debt service payments to the Bank and the City. In other words, Main Street's rent was essentially financing the whole project.
Main Street opened the theater portion of the project in November 2004. Construction continued on the remainder of the Promenade property after Main Street opened. This continuing construction affected Main Street's ability to attract movie-goers. Shortly after Main Street started operating the theater, thePromenade facility began to experience significant water issues. This too significantly affected Main Street's ability to attract movie business. These problems made Main Street unable to make even one full annual rent payment.
Main Street repeatedly complained to Civic that Civic failed to provide a sound, water-tight building, sufficient maintenance, and the complementary tenants for the retail space. To date, Civic has only leased one small part of the retail space. It is rented to a small dress shop, 6 South Designs. This is not the type of complementary tenant Civic described or Main Street envisioned.
The vacant retail space has never been occupied or even finished to a rentable condition, with mostly bare studs (no drywall), dirt floors (referred to as "granular fill"), and no ceiling. There is limited electrical service to some spaces. The vacant spaces will require significant expenditures to finish to a "vanilla shell" or "vanilla box" condition—a standard, ready to rent, condition. These spaces also suffer from many of the same significant water drainage issues about which Main Street has complained. During a large rain or when the snow melts, water pools on the sidewalk in front of the theater, inside the theater, and inside some of the vacant retail space.
These water problems allegedly result from improper design or construction of the building. One such problem results in improper drainage (towards instead of away from the building) resulting in water incursions during snow melt or heavyrain. Another problem comes from defects in the walls or wall and roof junction of the building itself, or both. Some of these problems are serious enough that they could make the building structurally unsound if not fixed immediately. These wall or roof junction defects also have allowed water incursions. Those incursions have aggravated the water problems inside the theater in addition to eroding the structural...
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