In re Midway Investments, Ltd.
| Decision Date | 06 July 1995 |
| Docket Number | Bankruptcy No. 95-20241-BKC-RBR. |
| Parties | In re MIDWAY INVESTMENTS, LTD., a Florida limited partnership, Debtor. |
| Court | United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Florida |
Peter H. Levitt, Miami, FL.
Robert L. Jennings, Ft. Lauderdale, FL. for debtor.
John A. Moffa, Tampa, FL.
Arthur C. Neiwirth, Ft. Lauderdale, FL.
Joel L. Aresty, Gary J. Rotella, Miami, FL.
Arthur H. Rice, Miami, FL.
This matter came before the Court on May 10 and 15, 1995 upon a Motion for Dismissal for Bad Faith Filing ("Motion for Dismissal") filed by Aetna Casualty and Surety Company ("Aetna")1.
Upon consideration of the evidence adduced at the hearing, the motion, briefs and other documentation submitted by the parties, the testimony of witnesses, the Court file, and applicable authorities, I make the following findings of fact and conclusions of law.
The Debtor, Midway Investments, Ltd. ("Midway"), owns a shopping center in Tamarac, Florida. Since 1988, Aetna has held a first mortgage on the center and an assignment of all rents and profits, securing an original principal balance of $18.8 million.
Midway failed to make several payments of principal and interest due in 1992. In lieu of foreclosure, Aetna and Midway entered into a cash flow agreement whereby Aetna agreed not to pursue its remedies and Midway agreed to remit to Aetna all net operating income ("NOI") from the center.
The note matured on July 1, 1993, and Aetna agreed to extend the "termination date" of the cash flow agreement to October, 1993.
In December, 1993, Aetna and Midway entered into a series of agreements. The termination date of the cash flow agreement was extended again, to March 31, 1994, and the interest rate on the loan was reduced. Aetna and Midway also entered into a discounted payoff agreement, whereby Aetna agreed to accept a reduction of over $4 million in principal and $2 million in interest2 if the loan was repaid before the March 31, 1994 termination date, time being of the essence. The discounted payoff agreement required Midway to make an initial payment of $250,000, which it did, and permitted Midway to extend the termination date to December 31, 1994 by making an additional payment of $750,000 by March 31, 1994.
As part of these agreements, Midway placed in escrow a deed to the entire project3. Aetna was entitled to the deed if the discounted payoff was not made by the termination date, or earlier if Midway committed a "termination event", i.e., a breach of its agreements. The escrow agent was to deliver the deed within 10 business days after Aetna's request unless Midway procured an injunction from a court of competent jurisdiction or furnished the escrow agent with a "dispute notice" stating under oath that the loan had been repaid or that the termination date or the termination event, as applicable, had not occurred.
Midway was unable to make the $750,000 payment by March 31, 1994, and requested additional time from Aetna. The parties then entered into an "extension agreement" giving Midway until May 30, 1994 to make the payment. The extension agreement provided that, since December 31, 1994 was a Saturday, the termination date would be December 30, 1994. The extension agreement further provided if the loan were not repaid by December 30th, Aetna would be entitled to receive the deed immediately, without regard to the 10 business day period contemplated by the escrow agreement. The extension agreement also provided that Midway's failure to give written notice by December 9 that it "has, or reasonably expects to have (based on arrangements then in process) . . . the ability, resources and wherewithal" to pay off the loan by December 30 would constitute an additional "termination event".
In connection with the extension agreement, the parties also executed a loan modification agreement reducing the interest rate from 9.875% to 6.875% and providing that the interest of $2,014,991.96 which had accrued as of March 31, 1994 (and which would have been forgiven if the loan were repaid by December 30) would be payable without interest if the loan was not repaid by December 30, 1994. The loan modification agreement modified the cash flow agreement as well, imposing a requirement that Aetna approve disbursements for capital improvements, tenant improvements and leasing commissions.
Midway waived its right to the benefits of the automatic stay relief provided by 11 U.S.C. § 362 in both the discounted payoff agreement and the loan modification agreement, and agreed that those documents were in lieu of and rendered any bankruptcy unnecessary. This Court entered its order granting Aetna stay relief on March 31, 1995.
Midway stopped paying NOI after June 1, 1994. Alan Goldberg, president of Midway's general partner, testified that Midway stopped payments due to Aetna's refusal to release some $39,000 of tenant improvement expenses. William Chamberland testified for Aetna that he declined to release the funds since Midway failed to provide the budget or backup documentation required by the loan documents. I find that Midway was not justified in withholding payments of NOI in excess of the amount in dispute.
Although the failure to pay NOI constituted a "termination event", Aetna continued to forbear from exercising its remedies.
Midway's schedules filed in this case indicate that Midway made distributions of approximately $450,000 to its partners from May, 1994 through the filing of its petition, some of which were claimed to be in lieu of leasing commissions and management fees. Goldberg testified that these distributions were income consolidations consistent with Midway's new REIT structure, and that Aetna was aware of the distributions. Chamberland testified that he was aware of the REIT structure, but was never apprised of the distributions and never gave consent. The loan modification agreement and cash flow agreement required Aetna's approval to such payments. I find that Aetna did not consent or acquiesce to the distributions.
On December 9, 1994, Midway notified Aetna that it "has, or reasonably expects to have . . . the ability, resources and where-withal" to pay off the loan by December 30. On December 14, Midway notified Aetna that it was pursuing funding of the payoff but was unable to "finalize a commitment", and requested a 5 year extension of the loan. Aetna rejected the request on December 16, stating it expected the loan to be paid by December 30.
On December 19, Midway requested an extension to January 31, 1995, with the right to a further extension upon payment of $100,000.00 by that date. On December 21, Midway requested an extension for an additional 2 years. On December 23, Midway made a further extension proposal.
Aetna, in response to the Debtor's various proposals, verbally offered to extend the loan for 6 months past the December 30th date in consideration for a $1 million payment by December 30th and an $800,000.00 increase in the payoff amount. On December 28, Aetna wrote to Midway confirming its verbal offer and rejecting Midway's pending requests. Aetna further advised of its intention to request delivery of the deed if Aetna's proposal was not accepted by December 30, 1994.
On December 30, the "termination date", Midway wrote to Aetna to confirm a December 29 conversation in which Midway proposed a 90 day extension. The letter advised Aetna that Midway was negotiating a tax free exchange of the center with Kimco, and enclosed a letter from Kimco's president stating that Kimco was prepared to enter into such an agreement. The Kimco letter did not set forth any details of the transaction. Aetna advised Midway in late afternoon of December 30 that Aetna rejected Midway's request for the proposed 90 day extension.
Midway did not make the discounted payoff by December 30 and did not accept Aetna's proposal for a 6 month extension. On December 31, Aetna, stating that the termination date had occurred, requested that the escrow agent deliver the deed. Although the extension agreement eliminated the 10 business day waiting period, the escrow agent waited the 10 business days.
Meanwhile, as January 13, 1995 (the 10th business day after December 31) approached, Midway continued to urge Aetna to accept the Kimco deal or to extend the loan for 5 years. Aetna requested details of the Kimco deal and Midway advised Aetna that the deal would yield Aetna only $11,565,000. Midway's last proposal came on January 16, 1995. On January 17 Aetna rejected all of Midway's proposals.
On January 18, Midway sent a notice to the escrow agent, disputing that a "termination event" had occurred and directing the escrow agent not to deliver the deed. The escrow agent had not delivered the deed to Aetna by January 23, the date Midway filed its Chapter 11 petition, and later stated in papers filed in an adversary case before this Court that it held the deed as a result of Midway's notice. Goldberg testified that between January 18 and January 23, 1995, he did not know whether the escrow agent would deliver the deed.
In addition to its first mortgage, Aetna held a perfected lien on all rents from the center. On January 19, 1995 it invoked its rights under Section 697.07 of the Florida Statutes to require that all rents in Midway's possession or subsequently collected be turned over to Aetna. Shortly after the commencement of this case, Midway offered Aetna adequate protection payments of $50,000.00 per month, which were substantially less than Midway's post-petition NOI. Aetna did not accept that amount and moved this Court to prohibit or condition the use of its cash collateral. The Court's stay relief order permits Aetna to enforce its assignment of rents in state court, without prejudice to its right to return to this Court should the state court not grant suitable relief.
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