In re Nilhan Developers, LLC

• Decision Date: 07 August 2020
• Docket Number: CASE NO. 15-58443-WLH
• Parties: IN RE: NILHAN DEVELOPERS, LLC, Debtor.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Georgia

620 B.R. 385

IN RE: NILHAN DEVELOPERS, LLC, Debtor.

CASE NO. 15-58443-WLH

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

Signed August 7, 2020

John A. Christy, Schreeder Wheeler & Flint LLP, Atlanta, GA, for Debtor.

AMENDED AND RESTATED ORDER ON CLAIM OF NORCROSS HOSPITALITY

Wendy L. Hagenau, U.S. Bankruptcy Court Judge

The Court entered an Order on the Claim of Norcross Hospitality on July 31, 2020 (Case No. 15-58443 Doc. No. 158). The Court now amends and restates the Order, supplementing its analysis under part IV of the Order.

THIS MATTER is before the Court on Norcross Hospitality's Motion for Allowance and Payment of Administrative Expense Claim or, in the Alternative, for Nunc Pro Tunc Approval of Post-Petition Financing (Case No. 15-58440 Docs. Nos. 1182 and 1439) (the "Motion").¹ Norcross

Hospitality seeks allowance and payment of an administrative expense claim in this case in the principal amount of $5,169,212.32 plus interest at the rate of 12 percent.

Norcross Hospitality is an insider of Nilhan Developers LLC ("the Debtor") and extended over $5 million of unauthorized post-petition financing to the Debtor. Whether its claim is allowed, and in what manner and priority, will affect the Debtor's estate and other creditors. If the Norcross Hospitality Claim is disallowed or subordinated to the claims of other creditors, all creditors will be paid in full. If it is allowed, either as an administrative claim or general unsecured claim sharing with other claimants, with or without interest, the creditors' claims will not be paid in full. Norcross Hospitality argues, however, there would be no funds to distribute to creditors if Norcross Hospitality had not provided funding to the Debtor to repurchase certain real property which the Chapter 11 Trustee ultimately sold during this case.

I. Facts

The facts are not in dispute and many are set out in the Joint Stipulation of Undisputed Facts (Case No. 15-58443 Doc. No. 131). The Debtor, together with its affiliates, Bay Circle Properties, LLC ("Bay Circle"), DCT Systems Group, LLC ("DCT"), Sugarloaf Centre, LLC ("Sugarloaf"), and NRCT, LLC ("NRCT") (collectively the "Debtors"), each filed a petition for relief under Chapter 11 of the Bankruptcy Code on May 4, 2015. On June 8, 2015, the Court administratively consolidated the Debtors' cases. The manager of each of the Debtors is Chuck Thakkar. Ownership in each debtor differs somewhat but in general in each debtor, ownership is held by some combination of Mr. Thakkar, his children Rohan and Niloy, his wife, or a company which some combination of Thakkars owns. The history of these cases is quite lengthy. The immediate reason for the bankruptcy filing was a default by the Debtors under certain obligations to Wells Fargo Bank, N.A. The obligations were secured by various pieces of real property owned by the Debtors.²

Nilhan Developer's Schedules reflect it owned certain real estate located at 2800 and 2810 Spring Road, Smyrna, Georgia known as Emerson Center. The property located at 2800 Spring Road was identified as a shopping center consisting of 1.56 acres. The property identified as 2810 Spring Road was described as office suites consisting of three buildings on 7.14 acres (2810 Spring Road; together with 2800 Spring Road, collectively the "Property"). The Property is located in the general vicinity of the park where the Atlanta Braves play.

The Property was collateral for the Wells Fargo obligations. Wells Fargo, the Debtors, and other non-debtor entities including Chuck, Niloy, and Rohan Thakkar executed a Settlement Agreement on November 18, 2015 in which Wells Fargo agreed to forbear from enforcing obligations and performance owed by the Debtor and other loan parties (the "Settlement Agreement"). The Settlement Agreement was amended on January 8, 2016 and approved by the Court on January 13, 2016 (Case No. 15-58440 Doc. No. 302). The Settlement Agreement required the full amount of the debt to Wells Fargo to be paid by April 30, 2017 and set various deadlines for interim payments and release prices for the collateral. The release price for the Property was $5.2 million. If Wells Fargo was not paid in full by April 30, 2017, it could record deeds-in-lieu of foreclosure on the Debtor's Property and property of the other obligors without further hearing. After the Settlement Agreement was finalized and approved, Wells Fargo assigned its interest and claim to Bay Point Capital Partners, L.P. ("Bay Point").

In April 2017, as the deadline to pay Wells Fargo neared, Debtor sought to sell the Property to Westplan Investors Acquisitions, LLC ("Westplan") or its assignee for $7 million free and clear of all liens, claims and encumbrances, and to remit the net sale proceeds to Bay Point (Case No. 15-58440 Doc. No. 634). The Debtor and Westplan had been in discussions going back to 2015 over joint development of the Property. The proposal contemplated that the Debtor would have the right to develop the retail, office and hotel portion of the property under certain circumstances while Westplan would develop the residential portion of the property. Paragraph 26 of the contract provided the Debtor the right to buyback all or a portion of the Property upon the occurrence of certain conditions, such as the failure of the City of Smyrna to rezone the Property to allow for the planned development. Bay Point, Good Gateway, LLC and SEG Gateway, LLC objected to the sale. Bay Point submitted a credit bid for the Property. At the Court's direction, the parties conducted an auction, which resulted in an offer from Westplan of $7.2 million otherwise in accordance with the proposed contract and from Bay Point of $7.3 million otherwise in accordance with the proposed Westplan contract, but without the repurchase option for the Property.

The Court held an evidentiary hearing on the motion to sell at which Mr. Thakkar testified to his desire for the Debtor to retain the right to repurchase the property. The Court found that the buy back option could have significant value if the Property was rezoned to accommodate residential and hotel use. The Court noted the option was clearly important to Mr. Thakkar, and ordered Mr. Thakkar, or a non-debtor party on his behalf, to contribute $100,000 at the closing such that the total proceeds paid to Bay Point would be $7,300,000. The Court authorized the sale of the Property to Westplan (Case No. 15-58440 Doc. No. 679).

Westplan assigned the right to purchase the Property to Accent Cumberland Apartments, LP ("Accent"). The sale closed and Accent applied for rezoning with Cobb County, but the rezoning request was denied. In a letter dated May 22, 2018, Accent notified the Debtor it had through August 20, 2018 to exercise an option to repurchase the Property for the price of $9,269,212.32 calculated in accordance with the contract. Debtor did not have sufficient funds to repurchase the Property at that time. The Debtor's Monthly Operating Reports show the Debtor had an ending cash balance for the month of May 2018 of just $25,742.58 and an ending cash balance in June and July 2018 of $24,983.58.

Without notifying or consulting with Debtor's bankruptcy counsel, Debtor sought financing to exercise the repurchase option. Mr. Thakkar, as manager of the Debtor, attempted to obtain financing from various lenders, but was unable to do so. Debtor ultimately succeeded in obtaining a loan from Rass Associates, LLC ("Rass") and executed a promissory note in the principal amount of $4,100,000 on August 20, 2018.³ Debtor also executed a deed to secure debt in favor of Rass on the Property that was recorded in the Cobb County, Georgia property records on August 20, 2018.

Debtor was still short of funds. Mr. Thakkar turned to Norcross Hospitality, a company of which he was manager and his children Niloy and Rohan are the majority owners. He arranged for Norcross Hospitality to borrow $4,500,000 from Metro City Bank and then loan that money plus an additional $616,212.32 to the Debtor. On August 20, 2018 (post-petition), Debtor executed a promissory note to Norcross Hospitality in the principal amount of $5,169,212.32 (the "Note"). The Note provided for interest at 12 percent and a maturity date of December 18, 2018. Debtor executed a deed to secure debt in favor of Norcross Hospitality, but the deed was never recorded. On August 20, 2018, the Debtor used the funds it obtained from Rass and Norcross Hospitality to repurchase the Property from Accent for $9,269,212.32.

It is undisputed that the Debtor never informed its counsel or the Court of its intent to borrow funds and exercise the option, nor sought nor obtained approval from the Court, to incur the post-petition financing from Rass or Norcross Hospitality or to purchase the Property. The Court learned the Property had been repurchased by the Debtor while reviewing Westplan's Motion to Dismiss a complaint filed by the Debtor against Westplan and Accent alleging breach of contract. The Court issued an Order to Show Cause (Case No. 15-58440 Doc. No. 894) on October 10, 2018 directing Debtor and its counsel to appear and explain to the Court the circumstances of the alleged repurchase. The Debtor, through counsel, filed a response on October 25, 2018 stating that the Property had no equity and in order for any value to be realized, zoning and development must occur. The Debtor contended that such could not occur in a bankruptcy case and proposed that the Property simply be transferred to Norcross Hospitality. Alternatively, the Debtor requested that the post-petition financing be approved. (Case No. 15-58440 Doc. No. 898). On November 11, 2018, the Debtor filed a Motion Requesting Entry of Order (1) Transferring or Assigning Real Property and Authorizing Assumption of Debt Obligations, or Alternatively, (2) Authorizing Post-Petition Financing Pursuant to Section 364 of the Bankruptcy Code Nunc Pro Tunc (Case No. 15-58440 Doc. No. 904). The Court did...