In re Cottonwood Corners Phase V. LLC
| Decision Date | 17 February 2012 |
| Docket Number | No. 11-11-12663 JA,11-11-12663 JA |
| Parties | In re: COTTONWOOD CORNERS PHASE V, LLC, a New Mexico limited liability company, Debtor. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico |
THIS MATTER is before the Court on confirmation of the Amended Plan of Reorganization Dated October 7, 2011 (Docket No. 71), as modified by the Debtor's First Modification to Amended Plan of Reorganization Dated October 7, 2011 (Docket No. 89), and as modified by Debtor's Second Modification to Amended Plan of Reorganization Dated October 7, 2011 (Docket No. 99) (the "Plan") filed by Cottonwood Corners Phase V, LLC ("Cottonwood"). Jefferson-Pilot Investments, Inc. ("JPI"), Cottonwood's largest creditor, opposes confirmation. The Court conducted a two-day evidentiary hearing on confirmation and took the matter under advisement. After consideration of the evidence presented at the final hearing, and being otherwise sufficiently informed, the Court finds that the Plan, in its present form, is unconfirmable. In reaching this conclusion, the Court will address the arguments of the parties presented at the final hearing and in the simultaneous briefs submitted by counsel post-hearing. 1
Cottonwood is a New Mexico limited liability company owned 83% by RSF Land & Cattle Company, LLC ("RSF") and 17% by SED CAP. Its main asset is a pad within a larger shopping center in Albuquerque, New Mexico. On February 1, 2004, RSF entered into a ground lease with Circuit City Stores West Coast, Inc. ("Circuit City") under an arrangementin which Circuit City would construct a building and other improvements on the land owned by Cottonwood within the Cottonwood Corners Shopping Center. Circuit City would operate a retail electronics store from that site. The lease had an initial term of 15 years, and five consecutive five-year renewal options. The lease contained a Subordination, Non-disturbance and Attornment Agreement ("SNDA"). RSF subsequently assigned its interest in the lease to Cottonwood.
To prevent Circuit City from exercising an option to buy out the ground lease, Cottonwood exercised an option to purchase the building and improvements from Circuit City, and to lease the land and building to Circuit City. On January 30, 2007, Cottonwood borrowed $3.5 million from Jefferson Pilot-Life Insurance Company ("JPI-Insurance") to fund the option price and to create a reserve. On January 26, 2007, JPI-Insurance and Circuit City entered into an SNDA. At the time the loan was made, Circuit City's parent, a publicly traded corporation, was implementing a turnaround plan. The loan proceeds included $500,000 for a reserve to service debt and to have funds needed to re-let the premises, including for leasing commissions and tenant improvements, in the event Circuit City defaulted under the lease. The loan was evidenced by a promissory note made by Cottonwood in favor of JPI-Insurance (the "Note") and secured by a Mortgage and Security Agreement (the "Mortgage") (together, the Note and Mortgage and other loan documents are called the "Loan Documents") granting liens against the real property and improvements and certain personal property. JPI-Insurance's sole recourse under the Loan Documents in the event of default was against Cottonwood and its collateral. The loan was nonrecourse to the members of Cottonwood.
The Loan Documents do not contain a requirement on the part of Cottonwood to maintain any reserves, nor did Cottonwood grant JPI-Insurance a security interest in the $500,000 of loan proceeds held by Cottonwood as a reserve. The Note required equal monthly payments of principal and interest in the amount of $24,793.00 such that payment obligations under the Note would fully amortize over a period of twenty (20) years. The Note provides that the unpaid principal balance under the Note bears a fixed rate of interest at the rate 5.86% per annum; provided that, upon default, the interest rate increases by four (4) percentage points.
The Note prohibits prepayment prior to January 30, 2011, and permits prepayment thereafter subject to a prepayment premium. The Note provides that the prepayment premium is calculated as follows:
The Prepayment Premium shall be the greater of (a) one percent (1%) of the outstanding principal balance of his Note on the Prepayment rate, or (b) the result of (i) the sum of the present values (determined over the Remaining Term using periodic monthly intervals and a discount rate equal to the Treasury Yield divided by twelve (12) of all the then remaining unpaid Payments due from the Prepayment Date through the maturity ate minus (ii) the outstanding principal balance of this Note as of the prepayment Date.
The Note further provides that if, after an acceleration of the payments due under the Note but prior to a foreclosure sale or other sale of the property, a tender is made of the amount required to satisfy the entire indebtedness owed under the Note, such tender shall be conclusively deemed a deliberate evasion of the prepayment premium and shall be treated as a prepayment triggering Cottonwood's obligation to pay the prepayment premium. See ¶ 10.2 of the Note.
Circuit City filed a bankruptcy case, and in March of 2009 stopped paying rent under the lease. At that time, the real estate market was depressed. Cottonwood diligently searchedfor a tenant that would pay a rental rate necessary to service Cottonwood's debt, but to no avail. Cottonwood had substantially increased the $500,000 reserve during the period that Circuit City paid rent by not distributing accumulating funds to members. After Circuit City stopped paying rent, Cottonwood began using the reserve to service its debt to JPI-Insurance. In April 2010, when the balance in the reserve was approximately $530,000, and after Cottonwood's efforts to renegotiate loan terms with JPI-Insurance were unsuccessful, Cottonwood stopped making debt service to JPI-Insurance. Shortly thereafter, JPI-Insurance assigned its interests under the Loan Documents to JPI.
In April 2010, JPI sent Cottonwood a notice of default under the loan documents. The members of Cottonwood decided not to use funds in the reserve to cure the default or to make further debt service. Instead, in approximately May of 2010, Cottonwood distributed the amount remaining in the reserve to its two members in proportion to their membership interests to preserve the reserve in order to fund costs associating with re-letting the premises. The members deposited the distributed funds in segregated bank accounts. In June 2010, JPI exercised its option to accelerate the remaining balance due under the Note.
Subsequently, RSF used a portion of the distributed funds to pay operating expenses and taxes incurred by Cottonwood, and contributed a portion of the funds back to Cottonwood to build a demising wall in connection with a temporary lease. Currently, there remains approximately $325,000 in the RSF segregated account. All of the $85,000 distributed to SED CAP remains in its segregated account.
After Cottonwood had made substantial efforts over an extended period to re-let the property, it found two tenants for the property: Baillios, LLC ("Baillios") and Panera LLC ("Panera"). Cottonwood, as landlord, and Baillios, as tenant, entered into a lease forapproximately 29,234 square feet of the 34,000 square foot building. Cottonwood has negotiated a lease with Panera for $4,000 square feet of the building. Cottonwood's lease with Baillio's is for an initial term of ten years, with three 5-year renewal options. The lease with Panera provides for an initial term of ten years, with three 5-year extension options. However, the terms of the leases have not commenced.
On July 16, 2010, JPI filed a foreclosure action against Cottonwood in the Second Judicial District of the State of New Mexico, thereby commencing Case No. CV 2010-08639. Cottonwood filed a counterclaim, seeking injunctive relief to compel JPI to execute SNDAs in favor of Baillios and Panera. The State Court conducted an evidentiary hearing on January 11, 2011 and May 17, 2011. Cottonwood commenced its chapter 11 case on June 8, 2011. In August of 2011, the State Court denied Cottonwood's requested injunctive relief, finding, in part, that Cottonwood had not established any bad faith, misrepresentation, or inequitable conduct on the part of JPI, and finding further that Cottonwood's distribution of the funds in the reserve to its members instead of using those funds to cure the default to JPI was in bad faith.
Cottonwood's has stipulated that for purposes of confirmation, JPI's claim should be estimated in the amount of at least $ 3,890,116.30, consisting of:
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