In re KAR Development Associates, LP
| Decision Date | 05 August 1994 |
| Docket Number | Bankruptcy No. 93-22056-11. |
| Citation | 180 BR 597 |
| Parties | In re KAR DEVELOPMENT ASSOCIATES, L.P., Debtor. |
| Court | U.S. Bankruptcy Court — District of Kansas |
R. Pete Smith and Jonathan A. Margolies of McDowell, Rice & Smith, Kansas City, MO, for debtor KAR Development Associates, L.P.
Mark A. Shaiken, Irvin C. Ness and Cindi S. Woolery of Stinson, Mag & Fizzell, Kansas City, MO, for Alchemedes/Olathe Inn Ltd. Partnership, City of Olathe, Kan., and Sec. Bank of Kansas City.
David W. Queen of Gilmore & Bell, Kansas City, MO, for City of Olathe, Kan.
The Kansas Economic Development Revenue Bond Act1 empowers a city "to issue revenue bonds, the proceeds of which shall be used for the purpose of paying all or part of the cost of purchasing . . . facilities for . . . commercial development"2 and "to enter into leases or lease-purchase agreements with any person, firm or corporation for such facilities."3 A city exercises the power by ordinance,4 but it cannot "contract or . . . incur any obligation of any kind or nature except such as shall be evidenced by the issuance of revenue bonds payable solely out of the rentals received from such facilities."5 The statute requires a city to file a statement with the Board of Tax Appeals of such a proposed bond issue containing "the name of the city . . . proposing to issue the revenue bonds, the lessee, the guarantor, if any, the paying or fiscal agent, the underwriter, if any, and all attorneys retained to render an opinion on the issue."6 If a city has issued revenue bonds under the statute, it "may issue refunding revenue bonds, in the manner prescribed by . . . K.S.A. 10-116a, to refund any previous issue. . . . "7
Typically, a city and a developer agree upon the facility to be constructed. The developer agrees to pay for part of the cost of the project. The city passes an ordinance issuing the revenue bonds, which are sold to an institutional investor rather than to the public at large. The developer's investment and the bond proceeds are used to purchase the required land and improvements for the planned facility. The developer conveys the land to the city which leases the facility back to the developer until the bonds are paid, at which time the tenant can exercise an option to purchase the property for a nominal amount. In this way, the project stands as security for the repayment of the bonds. The ordinance appoints a fiscal agent for the bondholder who for a fee agrees to receive and pay the rental income to the bondholder, keep records, and hold any collateral that might be involved. Often a third party agrees with the tenant/developer to pledge property as collateral for the bonds in return for a fee. This general pattern was followed in this case.
KAR Development Associates, L.P. ("KAR" or "debtor"), a Kansas limited partnership, operates a Holiday Inn Hotel on the south side of the City of Olathe, Kansas. The City of Olathe ("City") issued industrial revenue bonds to finance part of the construction of the hotel. Merrill Lynch purchased the bonds. The City took title to the hotel and leased it to KAR as the IRB statute requires.
Security Bank of Kansas City ("Security") is the fiscal agent for the bondholder.
Anchor Savings Association ("Anchor"), a local Kansas savings and loan, pledged certain securities as collateral for the bonds under an agreement with the debtor. The agreement made the pledged securities the primary collateral for the bond debt, putting them ahead of the hotel property.
Alchemedes/Olathe Inn Limited Partnership ("Alchemedes") now owns the revenue bonds, having acquired them from the Resolution Trust Corporation ("RTC"). RTC entered the picture when it was appointed receiver of Anchor Savings and assumed its operation. As receiver of Anchor, RTC purchased the revenue bonds from their original holder, Merrill Lynch, also acquiring the bondholder's lien against securities Anchor had pledged as the primary collateral for the revenue bonds. RTC appropriated the pledged collateral securities for itself and offered the revenue bonds for sale based on the value of the hotel which remained as the only bond collateral. Alchemedes bought the bonds and now seeks to evict KAR under the IRB lease. In a general sense, there is no dispute that the hotel property stands as collateral for the bonds, but the legal form and nature of that security is contested by the parties.
Debtor KAR Development Associates, L.P., appears by its attorneys, R. Pete Smith and Jonathan A. Margolies of the firm of McDowell, Rice & Smith, P.C., Kansas City, Missouri. Alchemedes/Olathe Inn Limited Partnership, the City of Olathe, and Security Bank of Kansas City (collectively "the movants") appear by their attorneys, Mark A. Shaiken and Cindi S. Woolery of the firm of Stinson, Mag & Fizzell, Kansas City, Missouri. David W. Queen of the firm of Gilmore & Bell, Kansas City, Missouri, also appears for the City of Olathe, Kansas.
The litigation began when Alchemedes/Olathe Inn Limited Partnership, the City of Olathe, Kansas, and Security Bank of Kansas City8 joined in filing an involuntary Chapter 11 petition against the debtor, KAR Development Associates, L.P., in the United States Bankruptcy Court for the District of Kansas, Topeka Division, on October 21, 1993.9 The record shows that Alchemedes instigated the action. Before the City and Security would sign the involuntary petition, they required Alchemedes to agree in writing to indemnify them against any liability arising from the filing of the involuntary petition.10 KAR responded to the petition on October 25, 1993, by filing a voluntary Chapter 11 petition here in the Kansas City, Kansas, Division of the Court.
The involuntary case was assigned to The Honorable James A. Pusateri, Chief Bankruptcy Judge. Judge Pusateri held a hearing on November 4, 1993, and ordered the involuntary case transferred from Topeka to the Kansas City, Kansas, Division of the Court. His order directed that the voluntary case proceed and that the involuntary case remain pending in the event its filing date should become relevant under any applicable section of the Bankruptcy Code. So far, all activity involves only this voluntary case.
The next procedural event occurred on November 5, 1993, when Alchemedes, the City, and Security filed their joint motion for relief from the automatic stay to obtain possession of the hotel property. Realizing that success on the motion for stay relief would depend on the legal classification of the industrial revenue bond transaction, the moving parties sought an expedited decision on the issue by filing a Motion for Partial Summary Judgment on November 23, 1993.
Debtor objected to the Motion for Partial Summary Judgment, and the Court scheduled oral argument for December 16, 1993. At the conclusion of the hearing, the Court denied the Motion for Partial Summary Judgment and stay relief, directing that the parties complete discovery and prepare a pretrial order.
Following approval of the pretrial order, the parties presented evidence on May 19, 20, and 23, 1994. They stipulated Movants' Exhibits 1 through 38 and Debtor's exhibits A through L into evidence. Each side called witnesses who testified about the history and legal structure of the hotel project and the effect that a ruling favorable to debtor would have on the future sale of revenue bonds in Kansas.
At the conclusion of the hearing, Mr. Smith requested leave to obtain a transcript of witness Dennis Mitchell's testimony for use in preparing debtor's suggested findings of fact and conclusions of law. Mr. Shaiken agreed for the movants and the Court allowed the request. The parties' post-trial submissions refer to Mr. Mitchell's testimony and the last section of this opinion contains footnote references to the partial transcript.
The parties have stipulated in the pretrial order that the Court has jurisdiction over the parties and subject matter of the action; that venue in this district is proper; that all necessary and indispensable parties are joined; and that the Court can try this proceeding to final judgment. The Court finds independently of the stipulation that it has jurisdiction under 28 U.S.C. §§ 1334 and 157 and the general reference order of the District Court effective July 10, 1984 (D.Kan.Rule 705).
Alchemedes, the City of Olathe, Kansas, and Security Bank of Kansas City have each filed proofs of claim. Alchemedes' claim no. 16 for $902,146.63 reserves the right to amend if the claim is determined to be a mortgage. Security's claim no. 15 for $1,089,000.00 was amended by claim no. 22 for $1,329,850.00 to include additional amounts due under a deferral agreement. Security's claims are also designated as secured and reserve the right to amend if held not to be rents under the lease. The City of Olathe's claim no. 17 for $33,444.50 of payments in lieu of taxes and $6,000,000.00 of bond debt is marked secured and also reserves the right to amend if the lease is deemed to be a mortgage. The new bondholder, Alchemedes, is the principal interested party since the risk to the interests of the City and Security is minor.
The question for decision is whether Alchemedes' claim is for rent under a lease arising from the revenue bond transaction or whether in reality it is a secured claim subject to restructuring because it arises from a security agreement as defined by the Code.11 The underlying question is whether the hotel is property of the bankruptcy estate. In any event, this is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (G), (K), (M), and (O).
The first witness at the hearing was Joe Ross, an experienced hotelier in the Kansas City area, who later became the general partner of KAR. In 1982, officials of the City of Olathe approached Mr. Ross and his partners about constructing and operating a hotel in the City, offering the...
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