In re Eternal Enter., Inc., Case No.: 14-20292 (AMN)
| Decision Date | 13 April 2017 |
| Docket Number | Case No.: 14-20292 (AMN) |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — District of Connecticut |
| Parties | In re: Eternal Enterprise, Inc., Debtor. |
In re: Eternal Enterprise, Inc., Debtor.
Case No.: 14-20292 (AMN)
UNITED STATES BANKRUPTCY COURT DISTRICT OF CONNECTICUT NEW HAVEN DIVISION
April 13, 2017
Chapter 11
Re: ECF Nos. 709, 966, 967
MEMORANDUM AND RULING CONFIRMING HARTFORD HOLDINGS, LLC'S SECOND MODIFIED FIFTH AMENDED CHAPTER 11 PLAN BUT STAYING THE CONFIRMATION ORDER TO NOT LATER THAN JULY 31, 2017
What is the value of the debtor's real property? The answer - and the key to the resolution of this three-year old chapter 11 case - is unknown with estimates varying between $14,240,000 and $4,360,000. When, as here, a plan is proposed that will divest an unwilling debtor of its ownership without an auction the bankruptcy court is required to value a chapter 11 estate's property to determine compliance with 11 U.S.C. § 1129(b)(1).
Any judicial determination of fair market value of real estate is, at most, a fixing of a hypothetical price "at which [the real estate] would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts." World Trade Center Props. LLC v. American Airlines, Inc. (In re September 11 Litig.), 802 F.3d 314, 335 (2d Cir. 2015) (citing United States v. Cartwright, 411 U.S. 546 (1973)). In light of the recognized subjectivity inherent in evaluating real estate, "courts have wide latitude in determining value." In re Barbieri, 2009 WL 5216963, Docket No. 00-22274-478, 2009 Bankr. LEXIS 4095, at *29
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(Bankr. E.D.N.Y. Dec. 29, 2009). "The Court is not bound by the experts' appraisals and may form its own opinion of a property's value." Menorah Congregation & Religious Ctr. v. Feldman (In re Menorah Congregation & Religious Ctr.), 554 B.R. 675, 692 (Bankr. S.D.N.Y. 2016).
Here, a creditor proposes to take title to the debtor's real property and certain other assets constituting its collateral in satisfaction of the debtor's obligation on multiple notes and mortgages. Having presented evidence that the real property is worth far less than its debt to support its claim that its plan is fair and equitable pursuant to 11 U.S.C. § 1129(b)(1), the creditor awaits the court's ruling on confirmation of its chapter 11 plan. The debtor, in a change in strategy and somewhat late in the case, now presents two offers to purchase the property for a sum that would render the estate solvent leaving a surplus for equity.
In the interim between the creditor's proposal of the chapter 11 plan and the debtor's proposed sales, much has happened, including the mid-stream disbarment of debtor's counsel and the debtor's recent receipt of fire insurance proceeds totaling $3,000,000. See, ECF No. 881.
For the reasons that follow, the court will confirm the plan with the condition that the debtor first be provided a period of time to sell the real property pursuant to further order of the court.
The debtor here, Eternal Enterprise, LLC ("EE"), filed a voluntary chapter 11 bankruptcy proceeding in early 2014 with Peter Ressler representing the debtor as bankruptcy counsel. Mr. Ressler resigned from the state and federal bars without leave
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to reapply in March 2016. The debtor obtained the present chapter 11 counsel in April 2016. Additional, relevant procedural history is detailed in ECF No. 881, and was discussed with counsel for the debtor EE and with counsel for the largest creditor participating in the administration of this case, Hartford Holdings, LLC ("HH"), during a hearing held on February 15, 2017. Both counsel indicated substantial agreement with the procedural history recited in ECF No. 881. The court notes that no committee of unsecured creditors was appointed in this case; the secured creditor's claim is estimated at approximately $9,569,593.701; and the unsecured creditor pool totals at most approximately $76,000. As a result, this case is best viewed as a two party dispute between EE and HH.
Presently pending before the court are three matters that are addressed in this Memorandum and Ruling: (1) HH's Second Modified Fifth Amended Chapter 11 Plan, ECF No. 709 (the "Plan"); (2) EE's objection to HH's proofs of claim, ECF No. 9662; and (3) EE's motion to sell real property pursuant to 11 U.S.C. § 363 (the "363 Motion"), ECF No. 967.3
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According to the debtor EE, its Real Property4 is now worth approximately $11,240,000 based on recent, contingent offers to purchase it. In addition, EE alleged that it now holds $3,000,0005 of fire insurance proceeds relating to 270 Laurel Street, Hartford, Connecticut in an escrow account.6 HH asserts liens on the Real Property, all accounts, proceeds, cash, receivables and the fire insurance proceeds ("HH's Collateral") to secure its claim of approximately $9,569,593.70. See, footnote 1. Based on these values, EE argues that HH's Collateral is worth substantially more than HH's claims if EE is able to sell the Real Property for $11,240,000. See Proofs of Claim 14 through 21, as amended; footnote 1.
If the Real Property is not sold through a § 363 sale, and HH's Plan is considered, there is vastly differing valuation information before the court. EE argued during a Confirmation Hearing (defined below) in early 2016 that the value of its real property was $9,800,000. On April 7, 2017, at the request of EE, the court approved a revised valuation of $6,681,040 for the Real Property with the City of Hartford for the 2015 Grand List (which EE argues is based on a 2011 City of Hartford revaluation). ECF No. 984. According to the City of Hartford's revaluation appraisals for its October 2016 Grand List, the Real
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Property is worth $8,872,500. And, according to HH's evidence presented during the Confirmation Hearing (defined below), the Real Property is worth a mere $4,360,000.7 Some of the valuation estimates contemplate the $3,000,000 fire insurance proceeds; others do not.
A fully contested, evidentiary confirmation hearing - in effect a trial on the value of the EE Property - was held over three days in January and February 2016 (the "Confirmation Hearing"). Peter Ressler represented the debtor EE during the Confirmation Hearing. For many reasons, the ruling on the Plan has been delayed and familiarity is assumed with the procedural and factual history of this chapter 11 case as set forth in the court's Scheduling Order, ECF No. 881.8
During the Confirmation Hearing, both EE and HH presented evidence of the fair market values of the Real Property. HH met its burden to establish that the Plan was fair and equitable under §1129(b)(1) by presenting testimony from Norman Benedict,9 a licensed real estate appraiser, and offered into evidence appraisal reports for the Real Property.10 Norman Benedict's appraisals, taken cumulatively, provide a fair market value
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of the Real Property, totaling $4,360,000.00. See, Exhibits C-J. Mr. Benedict's appraisals comported with well-established practices for valuing real estate for purposes of chapter 11 reorganization plans. For example, each appraisal included comparison of the subject property to similar properties, replacement costs and capitalized income as bases for evaluation. See Collier on Bankruptcy ¶ 1129.05[3][a][v].
In response, EE offered the testimony of Michael McDonald, PhD, an assistant professor of finance but Mr. McDonald's testimony failed to establish that the value of the Real Property would be sufficient to pay all allowed claims and leave a surplus for equity. Michael McDonald testified, as an expert in finance and business valuation, that it was his opinion that the Real Property should be valued, in the aggregate, closer to $9,800,000.00. ECF No. 348 at 01:01:40-01:02:30. Mr. McDonald's valuation approach did not follow well-established practices for valuing real estate when considering a chapter 11 plan and the court gives little weight to his opinion for this reason.
The debtor's two recent fires - one at 270 Laurel Street and one at 21 Evergreen Avenue - occurred after the Confirmation Hearing and so neither Mr. Benedict nor Mr. McDonald took the effect of the fires into account.
The court notes that in late 2015, represented by former attorney Peter Ressler, EE proposed a plan that was not confirmable because no impaired class voted in favor of the plan. See, 11 U.S.C. § 1129(a)(10); ECF Nos. 343; 344. Since April 2016, when debtor's present counsel first sought admission to represent EE, the debtor has failed to file a plan of reorganization and disclosure statement meeting the requirements of the Bankruptcy Code and Federal Rules of Procedure.
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Instead of pursuing reorganization through a chapter 11 plan the debtor EE recently filed the 363 Motion seeking authority to sell portions of the debtor's Real Property to two different buyers as follows:
• Offer One: $9,240,000
? Aria Legacy Group, LLC proposes to purchase 243-255 Laurel Street, 252 Laurel Street, 154-160A Collins Street, 21 Evergreen Avenue, 117-145 South Marshall Street, and 56 Webster Street, Hartford, Connecticut (the "Offer One Property") for $9,240,000.
• Offer Two: $2,000,000
? Onyx Investments, LLC proposes to purchase 270 Laurel Street and 360 Laurel Street, Hartford, Connecticut (the "Offer Two Property) for $2,000,000.
? Offer Two excludes $3,000,000 of fire insurance proceeds the debtor alleges it holds relating to 270 Laurel Street. This brings the value of Offer Two to $5,000,000, net of any commission allowed to a public insurance adjuster.
Neither Offer One or Offer Two is without contingencies. It is presently unknown whether the proposed transactions, or any higher competing bid, if approved by the court after notice and a hearing, will close.
The Second Circuit has noted that, "[c]onfirmation of a plan over the vote of a dissenting class requires that the plan be 'fair and...
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