IN RE MOODY NAT. SHS HOUSTON H, LLC
| Decision Date | 24 March 2010 |
| Docket Number | No. 10-30172.,10-30172. |
| Citation | 426 B.R. 667 |
| Parties | In re MOODY NATIONAL SHS HOUSTON H, LLC, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Henry J. Kaim, King & Spalding LLP, Houston, TX, for Debtor(s).
Debtor Moody National SHS Houston H, LLC ("Moody") proposes to cure the defaults on a promissory note secured by Moody's only asset, a tenant-in-common interest in a Marriott Hotel located in Houston, Texas ("Hotel"). RLJ III—Finance Houston, LLC ("RLJ") purchased the note after Moody was in default. RLJ's affiliates are in the business of owning Marriott hotels. Accordingly, RLJ prefers to foreclose on the Hotel rather than to hold a cured and performing note. The parties dispute what is required to cure the note.
For the reasons set forth below, the Court holds that:
1. The note may be cured only by making all payments due on the note under applicable non-bankruptcy law;
2. Default interest that accrued under state law is allowed and may not be retroactively forgiven upon payment of the cure amount; and
3. Because of the peculiarities of the note, the default interest is payable, if at all, only at maturity.
On August 31, 2007, Moody borrowed $14,431,000 from Citigroup Global Markets Realty Corp. ("Citigroup"). The $14,431,000 debt was evidenced by a limited recourse note. The note was secured by a lien on the Hotel. As part of the original financing transaction and with Citigroup's knowledge and consent, the ownership of the Hotel was allocated to a number of tenants-in-common. Following the allocation of interests, Moody was left with a 0.74956% undivided interest in the Hotel; however, the entire Hotel continued to serve as collateral for the $14,431,000 note.
The hotel was heavily damaged during Hurricane Ike. Payments to Citigroup were delayed or not made. The parties entered into workout arrangements concerning the debt. The debt was accelerated and default interest was imposed.
RLJ's affiliates are in the business of owning Marriott hotels.1 During the workout period, RLJ acquired the note and deed of trust from Citigroup. RLJ's primary interest was (and remains) acquiring the Hotel through foreclosure. Accordingly, after RLJ acquired the note and deed of trust, it attempted to proceed with a foreclosure under Texas law.
On January 4, 2010, Moody filed this chapter 11 proceeding to stop the foreclosure.
The other tenants-in-common are not debtors, but have generally been unopposed to Moody's bankruptcy case.
Although Moody acknowledges its prior monetary defaults, it now seeks to cure the $14,431,000 note held by RLJ and to reinstate the note pursuant to a plan of reorganization under chapter 11 of the Bankruptcy Code.
It is undisputed that Moody failed to make all required pre-petition payments on the note, that the holder of the note accelerated the note, and that default interest accrued on the note. The precise timing and amount of the various events are not relevant to the issues before the Court.
This dispute is complex. The Court considers three principal issues:
Moody claims, with some support, that § 1124(2) provides Moody with the ability to cure a default and to avoid the payment of default interest upon the curing of the default. RLJ alleges that any cure requires the payment of default interest and that § 1124(2) does not provide for forgiveness of the default interest.
The Court begins with an overview of the relevant provisions of the Bankruptcy Code:
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Statute Application to Cure of Default
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§ 502 Allowance or disallowance of claims. Claims are determined as of the
petition date, generally in accordance with state law
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§ 506(b) Governs post-petition interest and fees
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§ 1123(a)(5)(G) Permits a plan to include a provision for the "curing or waiving of any
default."
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§ 1123(d) Requires that any cure of a default must be determined "in accordance with
the underlying agreement and applicable nonbankruptcy law."
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§ 1124(2) Defines whether a claim is impaired following a cure
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§ 1126(f) Provides that a class of holders of unimpaired claims is "conclusively
presumed to have accepted the plan."
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§ 1129 Sets the standards that must be satisfied to obtain confirmation of a
chapter 11 plan
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The essence of Moody's argument is that the definitional provisions of § 1124(2) provide a basis for the granting of substantive relief. This Court holds that § 1124(2) merely defines the standards for unimpaired status. That is, whether a cure under § 1123(d) is sufficient to deem a party unimpaired is defined by § 1124. If the treatment of a claim meets § 1124's definition of unimpairment, then it is conclusively presumed that the holder of the claim has accepted the plan under § 1126(f). 11 U.S.C. § 1126(f). Accordingly, the Court rejects Moody's argument.
To best understand the Court's conclusions, it is helpful to explain the end-game. Moody wants to avoid the foreclosure of the Hotel. To avoid the foreclosure, Moody must obtain confirmation of a chapter 11 plan that allows Moody to reorganize its debts.2 Section 1129(a) of the Bankruptcy Code provides the most direct route to confirmation. See 11 U.S.C. § 1129(a). One of the requirements under § 1129(a) is that each class of claims has accepted or is not impaired under the plan. 11 U.S.C. § 1129(a)(8). Accordingly, if Moody can propose a plan that leaves RLJ unimpaired, it could (with the approval of other classes of creditors) obtain confirmation of a chapter 11 plan of reorganization that would leave the current ownership of the Hotel intact and avoid a foreclosure.
The issue under § 1129(a)(8) is whether the proposed plan leaves RLJ unimpaired. If RLJ is unimpaired, then § 1126(f) provides that RLJ is conclusively presumed to have accepted the plan.
Section 1123 governs the contents of a plan. One of the provisions that may be included in a plan is a provision providing for the curing or waiving of any default. 11 U.S.C. § 1123(a)(5)(G). If the plan provides for the curing of a default, then the "amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law." 11 U.S.C. § 1123(d).3
It is noteworthy that § 1123(a)(5)(G) does not require that every cure leave the holder of the claim unimpaired. See 11 U.S.C. § 1123(a)(5)(G). For example, a cure could conceivably provide for reinstatement of a mortgage only after 12 months of payments that would bring the mortgage current. Such a provision would not leave the holder unimpaired as the holder would be forced to accept payment over an extended time period and presumably could not foreclose during that period of delay. Because § 1124(2)(E) provides that a plan may not otherwise alter the holder's "legal, equitable or contractual rights," the holder of the to-be-cured claim would nevertheless be impaired if the holder were forced to forego declaring a default (and again accelerating the note) during the period prior to completion of the cure. 11 U.S.C. § 1124(2)(E); Imperial Bank v. Tri-Growth Centre City, Ltd. (In re Tri-Growth Centre City, Ltd.), 136 B.R. 848, 852 (Bankr.S.D.Cal.1992).4 See also In re Holthoff, 58 B.R. 216, 219 (Bankr.E.D.Ark.1985).
It is § 1124 that defines whether a particular "cure" under § 1123(a)(5)(G) leaves the holder of the claim unimpaired. To leave the holder unimpaired, the holder must either retain all of its state law rights under subsection (1), or the plan must meet five requirements, as set forth in subsections (A) through (E) of subsection (2). 11 U.S.C. § 1124.
With respect to the five requirements under subsections (A) through (E) of § 1142(2), the plan must:
11 U.S.C. § 1124(2)(A)-(E).
Moody incorrectly reads § 1124 as providing not just the measure of unimpairment, but the means to cure as well. Specifically, Moody points to § 1124(2)(B). Subsection (B) provides that the plan must reinstate the original maturity as one of the requirements to deem a party unimpaired under § 1124(2). 11...
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