In re Couture Hotel Corp.

• Decision Date: 02 September 2015
• Docket Number: CASE NO. 14–34874–BJH
• Citation: 536 B.R. 712
• Parties: In re: Couture Hotel Corporation a/k/a Hugh Black–St. Mary Enterprises, Inc., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Texas

536 B.R. 712

In re: Couture Hotel Corporation a/k/a Hugh Black–St. Mary Enterprises, Inc., Debtor.

CASE NO. 14–34874–BJH

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Signed September 2, 2015

Jason Patrick Kathman, Gerrit M. Pronske, Pronske Goolsby & Kathman, P.C., Addison, TX, Mark Sean Toronjo, Dallas, TX, for Debtor.

MEMORANDUM OPINION AND ORDER

BARBARA J. HOUSER, United States Bankruptcy Judge

On July 28, 29, 30, and 31, 2015, the Court conducted an evidentiary hearing (the “Confirmation Hearing” ) to consider both confirmation of the Debtor's Second Amended Plan of Reorganization [ECF No. 261] (the “Plan” )¹ filed by Couture Hotel Corporation (the “Debtor” ) and a motion to lift stay [ECF No. 156, as supplemented by ECF No. 285] (the “Motion to Lift Stay” ) filed by Mansa Capital, LLC (“Mansa” ). At the conclusion of the Confirmation Hearing, the Court requested briefing from the parties regarding the admissibility of certain expert testimony, which will be discussed below. The last of these briefs was filed on August 12, 2015, and these contested matters are now ripe for ruling. Having considered the Plan, the Debtor's brief in support of the Plan [ECF No. 309] (the “Debtor's Brief” ), Mansa's objection to confirmation of the Plan [ECF No. 305] (the “Objection” ), the Motion to Lift Stay and the Debtor's objection thereto, the evidence admitted into the record and the arguments of counsel, and the post-hearing briefs, the Court hereby enters this Memorandum Opinion and Order² denying confirmation of the Plan and granting the Motion to Lift Stay should the Debtor fail to timely comply with the requirements set forth at the end of this Memorandum Opinion and Order.

I. JURISDICTION AND VENUE

The United States District Court for the Northern District of Texas has subject matter jurisdiction over the Debtor's bankruptcy case pursuant to 28 U.S.C. § 1334. Although bankruptcy courts do not have independent subject matter jurisdiction over bankruptcy cases and proceedings, 28 U.S.C. § 151 grants bankruptcy courts the power to exercise certain “authority conferred” upon the district courts by title 28. Under 28 U.S.C. § 157, the district courts may refer bankruptcy cases and proceedings to the bankruptcy courts for either entry of a final judgment (core proceedings)or proposed findings and conclusions (noncore, related-to proceedings).

So, as relevant here, this Court exercises authority over the Debtor's Chapter 11 bankruptcy case pursuant to the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc adopted in this district on August 3, 1984. Venue is proper with this Court under 28 U.S.C. § 1409. Confirmation of the Plan is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (L), and (O), while the Motion to Lift Stay is a core proceeding under 28 U.S.C. § 157(b)(2)(G).

II. EVIDENTIARY OBJECTIONS

A. Mansa's Objection to the Debtor's Methodology for Calculating the Cramdown Interest Rate Under the Plan is Overruled.

Mansa is the sole creditor objecting to confirmation.³ Under the Plan, the Debtor proposes to repay Mansa with 59 equal monthly payments, culminating in a balloon payment at month 60.⁴ The monthly payments are to be calculated based upon a 30–year amortization period with a 4.25% interest rate (the “Cramdown Interest Rate” ).

To determine the Cramdown Interest Rate, the Debtor retained Christopher Lucas of ValueScope, Inc. (“Lucas” ) as its testifying expert.⁵ Lucas testified that he utilized the prime-plus formula set forth in Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004), as analyzed in Wells Fargo Bank, N.A. v. Texas Grand Prairie Hotel Realty, L.L.C. (In re Texas Grand Prairie Hotel Realty, L.L.C.), 710 F.3d 324 (5th Cir.2013). Hr'g Tr. 7/29/15 at 163:20–164:10. Soon after Lucas took the stand, Mansa's counsel objected to Lucas's testimony, alleging that Lucas had used an improper methodology to determine the Cramdown Interest Rate. The Court permitted the Debtor to continue Lucas's direct examination, and Mansa to cross examine Lucas, subject to Mansa's: (1) pending objection, and (2) oral motion to strike to be made at the conclusion of Lucas's testimony. Id. at 171:23–173:25. During both direct and cross examination, Lucas admitted that the national prime rate as of the commencement of the Confirmation Hearing (3.25%) was not his starting point in calculating the Cramdown Interest Rate. Id. at 190:22–191:10 (direct); 197:19–210:6 (cross). Instead, Lucas used what he deemed a market-based interest rate as his starting point, which he believes is the proper approach under both Till and Texas Grand Prairie. Id. Mansa's counsel argued that Lucas's use of a market-based interest rate is in direct contrast with Till and Texas Grand Prairie, and moved to have Lucas's testimony excluded. Id. at 211:13–212:19.

Since both parties rely on Till and Texas Grand Prairie in support of their positions, those cases will be the starting point of the Court's analysis. In Till, the Supreme Court addressed the proper methodology for calculating a cramdown rate of interest in the Chapter 13 context. With respect to the auto loan at issue in Till, the Supreme Court adopted a prime-plus formula approach, described as follows:

Taking its cue from ordinary lending practices, the [prime-plus] approach begins by looking to the national prime rate, reported daily in the press, which reflects the financial market's estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default. Because bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly. The appropriate size of that risk adjustment depends, of course, on such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan.

Till, 541 U.S. at 479, 124 S.Ct. 1951 (footnotes omitted). The Till opinion also contains what is referred to as the “efficient markets footnote,” which recognizes that the prime-plus formula may not be the optimal approach in the Chapter 11 context. Id. at 476 n. 14, 124 S.Ct. 1951 (“Thus, when picking a cramdown rate in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce”).

In Texas Grand Prairie, the Fifth Circuit applied the Till formula to determine the appropriate cramdown interest rate to be used in a Chapter 11 plan, but specifically acknowledged that it was applying Till because the parties stipulated that was the appropriate methodology. Texas Grand Prairie, 710 F.3d at 327. The Fifth Circuit, however, explicitly stated that it was not adopting Till in the Chapter 11 context. Id. at 337 (“However, we do not suggest that the prime-plus formula is the only—or even the optimal—method for calculating the Chapter 11 cramdown rate”). Instead, the Fifth Circuit reaffirmed its holding in Fin. Sec. Assurance Inc. v. T–H New Orleans Ltd. P'ship (In re T–H New Orleans Ltd. P'ship), 116 F.3d 790 (5th Cir.1997), stating that

In T–H New Orleans, we “[declined] to establish a particular formula for determining an appropriate cramdown interest rate” under Chapter 11, reviewing the bankruptcy court's entire § 1129(b) analysis for clear error. We reasoned that it would be imprudent to “tie the hands of the lower courts as they make the factual determination involved in establishing an appropriate interest rate.”

Id. at 330 (footnotes and internal citations omitted).

With this background in mind, the Court will turn to Lucas's testimony and his methodology, which he testified complies with his analysis and understanding of both Till and Texas Grand Prairie, to wit:

So the key documents that I reviewed were the Debtor's plan and disclosure statements, including the exhibits to the disclosure statement. To understand Mansa's position, I reviewed their motion to lift the automatic stay. I went—I read both the Till and Texas Grand Prairie decisions and analyzed the Debtor from the five different points that are enumerated in Texas Grand Prairie, including the quality of management; the owner's commitment to the business; the Debtor's health, and I can't remember the rest of that description; the quality of the collateral; and then also the feasibility and duration of the plan. And then finally, I looked at current market interest rates and made adjustments to current—and the current market interest rates on hotel loans, and then made adjustments to those based on my assessments of the five character—or the five characteristics described in Texas Grand Prairie.

Hr'g Tr. 7/29/15 at 163:20–164:10. Although Lucas testified that he did not believe an efficient market existed for the loan at issue in the Plan, he nonetheless looked to what he considered comparable loans to estimate the current market rate for hotel loans. Id. at 209:23–24. To do so, Lucas visited the websites for Commercial Loans Direct and United Financial Group to view the offered rates on hotel loans with a similar loan-to-value ratio. Id. at 190:22–191:10.

Thus, as opposed to beginning with the current prime rate of 3.25% and making adjustments based upon the Texas Grand Prairie factors, Lucas began with base rates that he testified account for the industry risk associated with hotel lending: 4.19% (based upon information obtained from Commercial Loans Direct) and 4.3% (based upon information obtained from United Financial Group). Id. at 190:18–191:10; 194:15–23; 198:3–16. Lucas then adjusted each of those rates based upon his analysis of the Texas Grand Prairie factors.

Although the Court agrees with Mansa that Lucas's methodology is not in strict compliance with Till, Texas Grand Prairie clarified that Till is merely instructive in determining cramdown rates in the Chapter 11 conte...