In re Pine Lake Village Apartment Co., Bankruptcy No. 81 B 20737

• Decision Date: 23 April 1982
• Docket Number: Bankruptcy No. 81 B 20737,Adv. No. 82 6001.
• Citation: 19 BR 819
• Parties: In re PINE LAKE VILLAGE APARTMENT CO., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

19 B.R. 819 (1982)

In re PINE LAKE VILLAGE APARTMENT CO., Debtor.

Bankruptcy No. 81 B 20737, Adv. No. 82 6001.

United States Bankruptcy Court, S.D. New York.

April 23, 1982.

COPYRIGHT MATERIAL OMITTED

Burns & Fox, New York City, for debtor.

Zalkin, Rodin & Goodman, New York City, for Thomas J. Hartigan; Andrew D. Gottfried, New York City, of counsel.

HOWARD SCHWARTZBERG, Bankruptcy Judge.

The debtor in this Chapter 11 case, a limited partnership owning a multi-apartment house complex, opposes its mortgagee's request for relief from the automatic stay imposed under 11 U.S.C. § 362. The debtor concedes that it has no equity in the apartment house complex, which is its sole asset, since the mortgage principal amounts to $10,400,000, exclusive of interest, whereas the uncontradicted value of the property is approximately $6,400,000. The only creditors, other than the mortgagee, are trade creditors whose claims, aggregating approximately $44,952.06, would have been paid in due course but for the filing of the Chapter 11 petition.

The debtor contends that relief from the stay should not be granted because the mortgagee is adequately protected and there is a likelihood of reorganization. The adequate protection factor is based upon the assumption that if the debtor continues to maintain and repair the premises, so that there would be no physical deterioration of the property during the short run, the debtor should be afforded an opportunity during that period to proceed with its plan of reorganization, since its maintenance of the status quo under the matured mortgage that is now in default should adequately protect the mortgagee from any depreciation of its collateral. The debtor additionally contends that since the mortgagee is an undersecured creditor it cannot claim the right to interest under 11 U.S.C. § 506(b) and, therefore, the concept of adequate protection does not require any allowance for interest, even on the secured portion of the mortgagee's claim. This position is based on the theory that adequate protection simply means that there should be no further deterioration of the collateral and that the secured claim holder need not be compensated for the purported loss of its bargain during the continuance of the automatic stay.

Crucial to the debtor's position is the assertion that there exists a likelihood of reorganization. The mortgagee contends that the debtor's plan cannot be confirmed because no plan may be confirmed over the mortgagee's rejection. Apart from the relatively small class of unsecured trade creditors, the mortgagee is the debtor's only other creditor. The mortgage has matured by its own terms and now is in default. Since the collateral securing the mortgage is valued at $6,400,000, whereas the principal amount of the mortgage is $10,400,000 exclusive of interest, the bifurcation of claims principle under 11 U.S.C. § 506(a) comes into play with the result that the mortgagee is the holder of two claims, a secured claim for approximately $6,400,000 and an unsecured claim in excess of $4,000,000. The mortgagee contends that if it rejects the debtor's plan, as it announced it will, the debtor will be precluded from attaining the requisite majority for acceptances as required under 11 U.S.C. § 1126, for both the secured and unsecured claim holders.

The debtor maintains, however, that it expects to obtain acceptances from its trade creditors, since they are offered 100% repayment under the debtor's plan. Therefore, the debtor reasons that it will be able to obtain the acceptance of at least one class of creditors, as required under 11 U.S.C. § 1129(a)(10), so that the debtor may cram down its plan for confirmation, notwithstanding the rejection by the holder of the largest secured and unsecured claims against this estate.

Accordingly, the fulcrum upon which the debtor supports its case is the soundness of the proposition that the debtor's trade creditors may be characterized as a separate class of unsecured creditors whose consent to the debtor's plan will satisfy the requirement under 11 U.S.C. § 1129(a)(10) that there exist at least one consenting class of creditors. There is also another issue which the parties have not addressed, namely, whether or not the debtor may confirm a plan that proposes payment to its largest nonconsenting unsecured creditor of something less than the allowed amount of its claim at the time of confirmation, and yet permits the debtor's general and limited partners to retain their interests.

FACTS

1. The debtor is a limited partnership owning a multi-apartment house complex in Lindenwold, New Jersey which is encumbered by a first mortgage of approximately $14,000,000. The debtor's schedules list the book value of the property at $5,540,082.00. The debtor's only general partner is a corporation.

2. On December 23, 1981, the debtor, Pine Lake Village Apartment Co. filed a petition in this court for relief under Chapter 11 of Title 11, United States Code.

3. The mortgage covering the debtor's premises was originally held by the Chase Manhattan Mortgage and Realty Trust ("CMART"). On June 25, 1974 a Consolidated Modification Agreement was entered into consolidating various outstanding mortgages into one single first priority mortgage lien upon the premises in question as security for a restructured indebtedness of $10,400,000.

4. The Consolidated and Modification Agreement provides, among other things, that the indebtedness of $10,400,000 would bear interest at the rate of nine percent per annum payable monthly out of Net Cash Flow (as defined therein) on the twentieth day of each month until March 1, 1982 when all unpaid principal and accrued interest would be due and payable. To the extent that Net Cash Flow was insufficient to pay interest at the stated rate, such interest was to accrue and would be payable at maturity.

5. The term net cash flow is defined in the mortgage to mean the rental and other income from the premises after the payment of the operating expenses, which would include the debtor's obligations to trade creditors. An exhibit annexed to the Consolidation and Modification Agreement provides that if "the prior month's . . . rental and other income derived from the operation of the Premises after the payment of the operating expenses (the Net Cash Flow) is insufficient to pay interest at the Interest Rate, the amount by which said interest exceeds Net Cash Flow shall accrue."

6. On April 24, 1980, CMART assigned all of its interest in the mortgage note to the plaintiff in this case, as Trustee of the Twenty Seven Trust under a certain Trust Agreement dated May 1, 1980.

7. The mortgage matured in accordance with its terms on March 1, 1982 and is now in default. The per diem rate of interest under the mortgage at 9 percent per annum is $2,564.38. The per diem rate at 12 percent, which is the New Jersey rate for interest on mortgage foreclosure judgments, is $3,419.18.

8. The uncontroverted evidence at the trial established that the premises are presently worth $6,400,000, as contrasted with a mortgage principal, exclusive of interest, of $10,400,000. The amount owed on the mortgage as of the filing of the Chapter 11 petition is listed in the debtor's schedules as $13,818,353. Hence, the mortgagee is undersecured and the debtor lacks equity in the property.

9. The mortgagee testified that he would reject the debtor's plan of arrangement which proposes payment over a period of thirty years.

10. The debtor has submitted a plan of reorganization that separately classifies creditors into four classes. The first class embraces wage claims. The second class covers the mortgagee's secured claim. The sole member of this class is the plaintiff. The third class relates to unsecured creditors holding claims arising from the prepetition operations of the business of the debtor; its trade creditors. The fourth class is comprised of the partnership interests of the general and limited partners of the debtor.

11. The plan proposes that the wage claimants in class one and the trade creditors in class three will be paid in full in cash upon the effective date of the plan and are unimpaired. Significantly, the plan also provides that the "partnership interests of the general and limited partners in Class `4' shall be left unaltered and are unimpaired hereunder."

12. The plan further provides that the mortgagee in Class two shall receive $350,000 in cash on the effective date of the plan. Additionally the mortgagee shall receive on account of its allowed claim a note issued by the debtor for the balance, with interest at the rate of 15.75% percent per annum, in monthly installments commencing one month after the effective date of the plan and continuing for thirty years thereafter.

13. The plan also proposes that the present equity security holders of the debtor will contribute pro rata the sum of $700,000 in cash to enable the debtor to make the payments required under the plan and to furnish operating capital and to permit the performance of repairs and rehabilitation of the premises in question.

DISCUSSION

Adequate Protection

In those cases where there existed a so-called equity cushion, in that the value of the collateral exceeded the amount of the secured claim, it has been held that such equity cushion alone may suffice for the purpose of adequately protecting a secured claim holder during the period in which the automatic stay under 11 U.S.C. § 362 continued in effect. In re Pitts, 2 B.R. 476 (Bkrtcy.C.D.Cal.1979); In re Rogers Development Corp., 2 B.R. 679, 5 B.C.D. 1392 (Bkrtcy.E.D.Va.1980); In re San Clemente Estates, 5 B.R. 605, 6 B.C.D. 838, 2 C.B.C.2d 1003 (Bkrtcy.S.D.Cal.1980); In re Shockley Forest Industries, Inc., 5 B.R. 160, 6 B.C.D. 642, 2 C.B.C.2d 756 (Bkrtcy.M.D.Ga.1980). However, the absence of an equity cushion need not be fatal. Obviously if a debtor were able to obtain a surety bond for the protection of a secured...