In re Kellogg Square Partnership
| Decision Date | 22 October 1993 |
| Docket Number | Bankruptcy No. 3-92-5211. |
| Citation | 160 BR 343 |
| Parties | In re KELLOGG SQUARE PARTNERSHIP, Debtor. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
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Michael L. Meyer, Ravich, Meyer, Kirkman & McGrath, Minneapolis, MN, for debtor.
Dennis J. Ryan, Stephen M. Mertz, Faegre & Benson, Minneapolis, MN, for Prudential.
ORDER DENYING CONFIRMATION OF DEBTOR'S PLAN OF REORGANIZATION
This Chapter 11 case came on before the Court on May 4, 13, and 20, and June 3, 1993, for the hearing on confirmation of the Debtor's plan of reorganization. The Debtor appeared by its attorney, Michael L. Meyer. The Prudential Insurance Company of America ("Prudential") appeared by its attorneys, Dennis J. Ryan and Stephen M. Mertz. Upon the evidence adduced over the course of the hearing and the pre- and post-hearing briefs and arguments of counsel, and upon the disposition of four motions made by Prudential and the Debtor in connection with the confirmation proceedings, as set forth in separate orders entered today, the Court denies confirmation.
The Debtor is a Minnesota general partnership. It was formed in 1977 by Antonio Bernardi to acquire Kellogg Square from Kellogg Square Company, an affiliate of Prudential. Kellogg Square is a block-sized parcel of developed commercial real estate at the intersection of Kellogg Boulevard and Robert Street in downtown St. Paul, Minnesota. The members of the partnership originally included Bernardi; Sentinel Management Company ("Sentinel Management"), a corporation through which Bernardi does business in real estate development and ownership; and a group of European investors. Over time, the Bernardi family business interests acquired the outstanding partnership shares in the Debtor; by early 1992, the Debtor was owned by Antonio Bernardi individually, to the extent of a 0.1 percent share, and by Aurora Investments Limited Partnership, an entity in which Bernardi's children were the principals. Shortly before the commencement of this case, Bernardi divested himself of his ownership interest in the Debtor.
The Debtor has owned, and Sentinel Management has managed, the property since the acquisition in 1977.
The Debtor commenced this case by filing a voluntary petition under Chapter 11 on September 28, 1992. During the case, it has remained in possession. It has continued to use the revenues generated from its assets in the ordinary course of business pursuant to several court-approved cash collateral stipulations with Prudential.
On March 5, 1993, the Debtor filed a modified1 plan of reorganization. By an order entered on the same date, the Court approved the Debtor's amended disclosure statement. The Debtor then disseminated the modified plan, with the amended disclosure statement and a ballot, to all creditors and parties in interest to the case. The modified plan is now before the Court for the proceedings on its confirmation.
Prudential is the Debtor's sole scheduled secured creditor, and the only secured creditor whose claim is treated under the plan. It provided the Debtor with the financing for the 1977 purchase. The debt is evidenced by the Debtor's December 1, 1977 non-recourse note, in the original principal amount of $10,000,000.00; it is secured by perfected liens against the real and personal property described in a mortgage instrument, and an assignment of the rents derived from the property, both executed by the Debtor on December 1, 1977.
Prudential timely objected to confirmation on a number of stated grounds, and cast a ballot rejecting the plan. All of the evidence received during the three-plus days of the confirmation hearing went to the issues it raised in its objection to confirmation.
The Debtor's modified plan treats four classes of pre-petition claims.
The plan provides that claims in two classes are unimpaired: Class I, being the claim of Ramsey County for all past-due real estate taxes chargeable against the Debtor's property, and Class IV, being the ownership interests held by the Debtor's partner or partners.2 As to Class III, the class of unsecured creditors, the plan proposes a payment in full via eight equal monthly installments.3
Class II consists of Prudential's claim. The plan sets forth two alternate treatments. In them, the Debtor essentially gives Prudential a choice between proposed restructurings of its claim, which is to be exercised by Prudential's vote on the plan. In the event of a rejection by Prudential, the plan provides for:
Under this alternative, the Debtor would retain the right to continue to prosecute certain litigation against Prudential. The lawsuit, brought against Prudential as the agent of Kellogg Square Company, is pending in the United States District Court for this District. It was commenced after the Debtor's Chapter 11 filing, though apparently the Debtor had contemplated suing out the claim before then. In the lawsuit, the Debtor seeks to recover damages from Prudential, on the basis of its allegation that Prudential committed certain acts and/or omissions as to the disclosure of the presence of asbestos-containing materials in the improvements to the property when Kellogg Square Company sold it to the Debtor.4
The Debtor proposes to implement the plan via a capital contribution in the sum of $650,000.00 from its partner(s), to be made on the Effective Date. The capital contribution would be applied first to pay outstanding real estate taxes under Class I, and then to reduce the balance of Prudential's claim pursuant to Class III. Any funds not so expended would be placed into a "Segregated Fund." The Debtor then could draw on this fund as needed to pay operating expenses to the extent revenues were not sufficient, the expenses of the continuing litigation against Prudential, and any costs of remediating "the Building's asbestos problem."
As to executory contracts, the plan proposes to assume various outstanding contracts with vendors of services for operations; the Debtor's management contract with Sentinel Management; and the unexpired lease of a parking facility in the building. The plan also provides for the rejection of the Debtor's executory contract with District Energy St. Paul, Inc. ("District Energy") for the provision of hot water for heating purposes, and for the entry into a new contract with District Energy for the provision of the same service.5
Prudential's objection to confirmation raises eight main issues. The threshold issue, and the one to which the great majority of evidence was directed, is factual: the valuation of the real estate and building that are the Debtor's single asset.6 The resolution of this issue affects the conclusion on several of the remaining issues, all of which involve disputes of both fact and law.
The Debtor's sole asset is a square city block of real estate, located (as noted earlier) in downtown St. Paul. The real estate is improved by a 32-story building, built in 1973. Throughout its existence, the building has been committed to mixed uses, both residential and commercial. It contains 450 residential apartments and townhouse units, approximately 425 of which are currently leased or available for long-term occupancy and approximately 25 of which are currently available for "corporate" use — that is, short-to medium-term occupancy by visiting employees, contractors, etc., under leases to local business concerns. The building also contains approximately 48,000 square feet of commercial space, adaptable for retail or office use, located on its first and second floors. Approximately 70 percent of the commercial space is under lease at present. Finally, the building has an attached 598-stall parking garage facility.
On the issue of the property's value, both sides presented the testimony of professional appraisers who were qualified as experts; Maxwell O. Ramsland testified on behalf of the Debtor, and Roger G. Lunz testified on behalf of Prudential. In their prefatory testimony both witnesses acknowledged the standard methodology for appraisal, which contemplates the calculation of value by three different methods, and a final opinion reached by assigning appropriate weight to the three preliminary results according to the purpose for which the opinion is given. They both agreed that, due to the nature of the subject as investment property, the income method was the one to be given most weight, with the cost method to be applied to a limited degree as a control and possible verification of the income method.7
As Ramsland testified, the theory for the income method assumes that an investor-buyer identifies two components of value for an investment in real property it is considering for purchase and retention as an income-generating asset.
The first component is the present value of the net revenue to be generated from the property over the period for which the buyer intends to hold it. This component is analogous to the...
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