In re John Q. Hammons Fall 2006, LLC

• Decision Date: 03 January 2020
• Docket Number: Case No. 16-21142-11 (Jointly Administered)
• Citation: 612 B.R. 779
• Parties: IN RE: JOHN Q. HAMMONS FALL 2006, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — District of Kansas

612 B.R. 779

IN RE: JOHN Q. HAMMONS FALL 2006, LLC, et al., Debtors.

Case No. 16-21142-11 (Jointly Administered)

United States Bankruptcy Court, D. Kansas.

Signed January 3, 2020

Mark S. Carder, Nicholas J. Zluticky, Stinson Leonard Street LLP, Bruce E. Strauss, Victor F Weber, Merrick, Baker, & Strauss, P.C., Kansas City, MO, Patrick R. Turner, Omaha, NE, Lee J. Viorel, Lowther Johnson, Attorneys at Law, LLC, Springfield, MO, for Debtors.

Memorandum Opinion and Order Overruling, in Part, and Granting, in Part, Joint Objection to "Chateau Lake Loan" Claim and Overruling in Part, and Granting, in Part, CMBS Lenders' Motion to Allow Claims

Robert D. Berger, United States Bankruptcy Judge

When an oversecured commercial lender contracts for post-petition default-upon-bankruptcy interest, is that loan agreement provision enforceable under bankruptcy law against a Chapter 11 debtor? Does the answer change when the debtor is paying all its creditors in full, via a full-payment Chapter 11 liquidating plan? The parties to this litigation have opposing views, and the Court spends a majority of this Order resolving this dispute. The Court also addresses pre-petition default interest, and various other disputed fees and costs claimed by the lender.

In this case, the lender's claim arises out of an unmatured loan. Since filing bankruptcy in 2016, the borrower on that loan has made all monthly payments, as authorized by this Court's cash collateral order. Nonetheless, the loan is in default under the terms of the loan: ipso facto default, as filing for bankruptcy constitutes an event of default under the applicable loan agreement, and guarantor default, as the borrower's guarantor is also part of these jointly administered cases. The Court first concludes that a third asserted basis for default—that funds were commingled by the borrower—has not been proven.

The Court next addresses whether—because of these bankruptcy filings—the lender is entitled to post-petition default interest, in addition to the regular interest it has received during the pendency of these cases. Under 11 U.S.C. § 506(b),¹ the holder of an oversecured claim is allowed "interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose." Section 506(b) thus allows an oversecured creditor to include post-petition interest in its claim to the extent of the debtor's "equity cushion" in the collateral.² The parties do not dispute that there is sufficient equity in the relevant collateral to make the creditor oversecured.

The Court then addresses whether a special servicing fee, a workout fee, and substantial attorneys' fees and costs have been supported as "reasonable" under § 506(b). And finally, the Court assesses the guarantor's liability on these claims.

Ultimately, the Court allows proofs of claim numbers 614 and 615 in the amount of $50,689,895.56 (consisting of $42,124,649.94 principal, $151,999.78 interest, $7,521,751.82 post-petition default interest, and $891,494.02 legal fees, expenses, and appraisal fees). The Court disallows pre-petition default interest of $3,554,981.98, a special servicing fee of $351,143.12, and a workout fee of $608,340.32. As a result, the parties' objections to claim and motion to allow claims are granted in part, and denied in part, as more fully set out herein.

I. Procedural Background

The parties' dispute has been convoluted. On April 16, 2018, the Jointly Administered Debtors³ and JD Holdings, LLC—the former foe of the Jointly Administered Debtors that has since acquired all of Debtors' real property assets through a purchase and sale agreement—filed objections to certain of the claims filed by certain secured creditors, called the CMBS Lenders.⁴ Namely, the so-called "Joint Objectors" filed an objection to proofs of claim 614 and 615, known as the Chateau Lake Loan and the guaranty thereon given by the Revocable Trust of John Q. Hammons.⁵ The Joint Objectors also filed an objection to proofs of claim 629 and 630, known as the G7 Loan and again, the guaranty given by the Revocable Trust of John Q. Hammons.⁶ The same date, the CMBS Lenders filed a motion to allow its claims in total, seeking allowance of proofs of claim 614 (Chateau Lake Loan), 624 (Nomura Portfolio), 626 (Euro-Hypo Portfolio), 627 (Barclays Portfolio), and 629 (G7 Loan).⁷ In total, the CMBS Lenders asserted a total amount due from the bankruptcy estate in excess of $750,000,000 (claims 614 through 616, and 624 through 630). The CMBS Lenders sought allowance of an array of monetary components (e.g., default interest, yield maintenance penalties, legal fees and other charges, assumption costs, etc.) in addition to recovery of principal.

The issues concerning the allowance of all the disputed claims were similar, and the parties briefed the issues jointly, culminating in oral argument on May 22, 2018, after which the Court took the matters under advisement. The Court was informed that all issues surrounding proof of claim 626 (Euro-Hypo Portfolio) had been settled, and were no longer at issue.⁸ Shortly thereafter, on July 5, 2018, the Court issued an Order indicating it needed additional argument and evidence from the CMBS Lenders before it could rule.⁹ The CMBS Lenders provided that information, and a subsequent round of briefing occurred, finally ending at the end of September, 2018.¹⁰ The Court conducted a status conference with the parties on October 3, 2018, and indicated that the Court could not render a final adjudication based upon the pleadings and documents filed because the Joint Objectors objected to the Court's consideration of an expert declaration submitted by the CMBS Lenders in support of their claims, without being given an opportunity to cross-examine or present their own testimony in response. The Court indicated that a limited evidentiary hearing would be required.

On November 29, 2018, however, the parties jointly asked that their matter be referred to mediation with Judge Barry Schermer of the United States Bankruptcy Court for the Eastern District of Missouri,¹¹ which this Court ordered.¹² Mediation was scheduled for December 17, 2018. Although the parties reported that the mediation concluded without a settlement, select parties to the dispute continued negotiations beyond the mediation, and ultimately, filed a motion to approve a settlement of all issues relating to claims 624 (Nomura Portfolio), 627 (Barclays Portfolio), and 629 (G7 Loan), and the guarantees thereon (claims 625, 628, and 630).¹³ That settlement was approved on March 8, 2019.¹⁴

As a result of the winnowing of the dispute discussed herein, the Court held a status conference with the parties on August 22, 2019 to determine what remained for trial and decision. The Court set a one-day trial on the Joint Objectors' objection to proofs of claim 614 and 615 (the Chateau Lake Loan and the guaranty thereon given by the Revocable Trust of John Q. Hammons), wherein the Court would accept testimony on the default interest rate sought to be applied by the CMBS Lender to that loan.

II. Factual Findings

On December 11, 2014, Chateau Lake, LLC (hereinafter, the Borrower) executed a promissory note to Prudential Mortgage Capital Company, LLC to evidence a loan for a principal amount of $46,000,000.¹⁵ Through a series of allonges, the note is now held by the Wells Fargo Commercial Mortgage Trust 2015-C26, Commercial Pass-Through Certificate, Series 2015-C26, with Wilmington Trust, National Association, serving as Trustee and Midland Loan Services, Inc. serving as Special Servicer.¹⁶ The note is secured by a valid and perfected first priority lien and security interest in a parcel of real property in Taney County, Missouri, along with all improvements, fixtures, interests, personalty, leases, rents, and proceeds thereon. The security interest was recorded on December 12, 2014. Again, through a series of assignments, the Wells Fargo Commercial Mortgage Trust is the current holder of the mortgage. The parties also executed an assignment of leases and rents and a revocable license to collect and use rents, and the security interest in all personal property assets was also properly perfected. Also on December 11, 2014, the Revocable Trust of John Q. Hammons executed an Indemnity and Guaranty Agreement.¹⁷

The Chateau Lake Loan was financed on the CMBS market.¹⁸ A CMBS is a "commercial mortgage-backed security." "In a typical CMBS transaction, multiple mortgages are sold to a trust qualified as a real estate mortgage conduit (‘REMIC’) for tax purposes. The REMIC [here, the Wells Fargo Commercial Mortgage Trust] in turn sells certificates entitling the holders to payments from principal and interest on this large pool of mortgages. The holders of the CMBS securities typically have different rights to the income stream and bear different interest rates; they may or may not have different control rights."¹⁹ In the typical transaction, the Wells Fargo Commercial Mortgage Trust would have been managed by a Master Servicer, who would handle the "day-to-day loan administration functions" and servicing of the loan.²⁰ Once the Jointly Administered Debtors filed bankruptcy however, the Special Servicer (here, Midland Loan Servicing, Inc.) took over management.²¹ A special servicer's fee for servicing a CMBS loan is higher than a master servicer's fee.

The Borrower, Chateau Lake, LLC, is a special purpose entity ("SPE"). An SPE is a borrowing structure designed to minimize the possibility of a bankruptcy filing and avoid the negative consequences of bankruptcy. The SPE's powers are restricted to the bare activities necessary for the transaction so that the risk of claims created by activities unrelated to the lending transaction are minimized.

The Jointly Administered Debtors filed bankruptcy petitions in late June and early July 2016. Their Plan, confirmed nearly two years later, in May 2018, specifies that all classes of creditors are...