In re GAC Storage El Monte, LLC

• Decision Date: 19 March 2013
• Docket Number: Bankruptcy No. 11-40944
• Parties: In re: GAC STORAGE EL MONTE, LLC, et al., (Jointly Administered under Caption GAC Storage Lansing, LLC, et al.) Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

In re: GAC STORAGE EL MONTE, LLC, et al.,

(Jointly Administered under Caption GAC Storage Lansing, LLC, et al.) Debtor.

Bankruptcy No. 11-40944

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Dated: March 19, 2013

Chapter 11

(Jointly Administered)

Hon. Jacqueline P. Cox

Amended Memorandum Opinion Denying Confirmation of GAC El Monte, LLC's Third Amended Plan of Reorganization & Granting Relief from the Stay (dkt. nos. 552, 613)

I. Jurisdiction and Venue

Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409. These are core proceedings pursuant to 28 U.S.C. §§ 157(b)(2)(G) and (L). The Court has jurisdiction to determine these matters pursuant to 28 U.S.C. § 1334.

II. Facts and Background

These matters are before the Court for determination of Wells Fargo Bank, N.A.'s Motion to Lift Stay and Confirmation of the Third Amended Chapter 11 Plan of GAC Storage El Monte, LLC ("El Monte" or the "Debtor"), Bankruptcy Case No. 11-42638. (See dkt. no. 613.) The Debtor's case is being jointly administered with the Chapter 11 cases of GAC Storage Lansing, LLC (Case No. 11-40944), GAC Storage Copley Place, LLC (Case No. 11-40953), GAC Storage Anza, LLC (Case No. 11-48549), and San Tan Plaza, LLC (Case No. 11-48939) for administrative purposes under Lead Bankruptcy Case GAC Storage Lansing, LLC, No. 11-40944. This opinion is captioned as GAC Storage El Monte, LLC to distinguish it from the opinion entered herein on January 10, 2013 as to debtor GAC Storage Copley Place, LLC.

The Debtor, formed on or about June 1, 2006, is a California limited liability company whose principal place of business is located at 11310 Stewart St., El Monte, California (the "Property"). The Debtor is the owner and operator of a self-storage facility comprised of twobuildings containing 126,000 square feet of storage space. (See dkt. no. 447.)

In 2006, the Debtor obtained a construction loan in the amount of $ 11,900,000 from Lehman Brothers to finance construction of the Property. (See Debtor's Exhibit B, Section II, p. 2.) In February, 2008, the Debtor entered into a Loan Agreement with Wachovia Bank, N.A. ("Wachovia"), predecessor in interest to Wells Fargo Bank, N.A. ("the Bank"), in the amount of $12,650,000 (the "Loan") to refinance the original construction loan and to complete the construction and development of the Property. Id.

On September 8, 2010, Wachovia issued a Notice of Default and Election to Sell due to the Debtor's failure to pay the remaining balance of $12,041,222.25 by the Loan's maturity date. Id. Shortly thereafter, the Supreme Court of the State of California, County of Los Angeles appointed Trigild Inc. as the receiver for the Property ("Receiver").

On October 20, 2011, the Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code (the "Petition Date"). Since the Petition Date, the Debtor has remained in possession of the Property, and has continued to operate its business as a debtor in possession pursuant to Bankruptcy Code (the "Code") Sections 323, 1107, and 1108. Section 323 provides that the trustee is the representative of the bankruptcy estate and that he or she can sue and be sued. 11 U.S.C. §§ 323(a) and (b). Pursuant to Section 1107, the Debtor has all of the rights and powers of a trustee in bankruptcy. 11 U.S.C. § 1107(a). Section 1108 provides that the trustee may operate the debtor's business. 11 U.S.C. § 1108.

On June 28, 2012, the Bank filed its Proof of Claim in the amount of $12,436,929.19, which claim amount has been stipulated to by the parties. (See Bankruptcy Case No. 11-40944, Claim no. 3-3; dkt. no. 423, p. 2, ¶ C.)

III. The Debtor's Third Amended Plan

On September 27, 2012, the Debtor filed its Third Amended Chapter 11 Plan of Reorganization (the "Plan"). (See Debtor's Exhibit A, dkt. no. 613.)

A. The Bank's Claim

Class 2 of the Plan consists of the Bank Secured Claim in the amount of $8,000,000. The Plan further provides that:

(i) In the absence of the Bank making the Section 1111 (b) Election, in full satisfaction of the Allowed Bank Secured Claim, the Allowed Bank Secured Claim shall be reduced by the total amount of the adequate protection payments made by the Debtor to the Bank since the commencement of the Case (the "Adequate Protection Payment Reduction"), and the Reorganized Debtor shall pay to the Holder of the balance of the Allowed Bank Secured Claim (less the Adequate Protection Payment Reduction): (i) from and after the Effective Date for the first twelve months thereafter, monthly interest payments ("Monthly Interest Payments") on the unpaid balance of the Allowed Bank Secured Claim calculated at 4.9% per annum, which Monthly Payments shall commence to accrue on the Effective Date, become payable on the fifth (5 th) day of the first full month after the Effective Date (the "First Payment Date"), and continue to be paid on the same day of each month thereafter until the earlier of the date the Allowed Bank Secured Claim is paid in full or the First Anniversary Date; (ii) monthly principal and interest payments ("Monthly Payments") on the unpaid balance of the Allowed Bank Secured Claim, based on a thirty (30) year amortization, with interest calculated at 4.9% per annum, which Monthly Payments shall commence to accrue on the First Anniversary Date, become payable on the fifth (5 th) day of the first full month after the First Anniversary Date, and continue to be paid on the same day of each month thereafter until the earlier of the date the Allowed Bank . Secured Claim is paid in full or the Maturity Date; and (iii) a balloon payment ofthe unpaid balance of the Allowed Bank Secured Claim plus any accrued and unpaid interest, which balloon payment shall occur and shall be due and payable on the Maturity Date.

(ii) In the event of the Bank making the Section 1111 (b) Election, in addition to the treatment provided in subsection (i) immediately above, the Bank shall also receive (a) fixed monthly payments of $6,666 (the "1111(b) Payments"), which payments shall commence on the First Payment Date, and continue to be paid on the same day of each month thereafter until the Maturity Date, and (b) a balloon payment of the unpaid balance of the Allowed Bank Claim, less the Adequate Protection Payment Reduction and less all payments made to the Bank under any provision of this Plan, which balloon payment shall occur and shall be due and payable on the Maturity Date.

See dkt. no. 613, ¶ 2.2.2.

B. The Master Lease Agreement

The Plan also contemplates a 7-year Master Lease Agreement (the "Master Lease") which was executed on November 12, 2012. (See Debtor's Exhibit G, Master Lease Agreement.) Pursuant to the Master Lease, GAC Storage El Monte, LLC, as landlord, will lease its real estate and storage facility business to the tenant, SE El Monte Leasehold, LLC ("SE El Monte"), which will operate the storage facility. SE El Monte, an affiliate of Storage, Etc., is a special purpose entity formed to be a party to the Master Lease. The Master Lease requires that SE El Monte provide a $1 million letter of credit or a cash deposit in the amount of $1 million as security. Id.

The Master Lease provides that SE El Monte will pay the Debtor monthly rental payments equal to the amount of net operating income set forth in the Debtor's 7-year cash flow projections. In the first year, rent starts at $46,825 per month and increases annually to coincide with the anticipated increase of the Debtor's net operating income through the end of the 7-yearPlan term. (See Debtor's Exhibit G, Schedule 1(i) Minimum Monthly Rental, p. 22.) Rent from the storage facility's tenants would effectively flow through the SE El Monte entity to the Debtor to fund the Debtor's payments to the Bank. In the event that the storage facility does not meet the cash flow projections, SE El Monte would draw from its operating reserve, which would be funded at that entity's capitalization.

C. The Guarantors Injunction

The guarantors of the Loan Documents are: Noam Schwartz, Rachel Elmalam, the Noam Schwartz Living Trust, Yoel Iny, Tikva Iny, and the Y & T Iny Family Trust (the "Guarantors"). (See Debtor's Exhibit A, Article 1.1.42, p. 5; dkt. no. 613.) The Plan calls for a $146,000 new equity contribution by Ronnie Schwartz, the sole member of Newco, the Reorganized Debtor, and a contribution by the Guarantors of the original Loan in the amount of $100,000. In consideration of the contribution of the above funds the Confirmation Order will operate as an injunction against the commencement or continuation of claims against the Guarantors under the Bank Loan Documents. (See Disclosure Statement, Section 8.4, Exhibit B, p. 23, dkt. no. 487; Hearing Tr. Vol. V, 1004-05, Dec. 6, 2012).

D. The Debtor's Balloting Report

The Debtor's Report of Balloting reflects that, with respect to the Class 2 Bank Claim in the amount of $12,436,929.19, one vote rejected the Debtor's Plan. Three ballots were received in connection with Class 5 claims, in the amount of $754.11, accepting the Debtor's Plan. One ballot was received in connection with Class 7 claims, in the amount of $8,102, accepting the Debtor's Plan. (See Debtor's Exhibit E, Report of Balloting, dkt. no. 541.)

The Bank elected to treat its claim as fully secured pursuant to 11 U.S.C. § 1111(b). (See Statement of Section 1111(b) Election, dkt. no 414.) See In re Woodbrook Assocs., 19 F.3d 312, 317, n.2 (7th Cir. 1994) ("|a]n unsecured creditor has a secured claim up to the value of thecollateral and an unsecured claim for the deficiency. 11 U.S.C. §§ 506(a), 1111(b). An undersecured creditor, however, may waive its deficiency claim and elect, under § 1111 (b)(2) to have its claim treated as secured for the entire amount of the debt.").

IV. Discussion

A. Plan Confirmation

Code Section 1129 sets forth the requirements for confirmation of a Chapter 11 Plan. See In re 203 N. LaSalle St. P'ship, 126 F.3d 955, 960 (7th Cir. 1997), rev'd on other grounds, 526 U.S. 434...