In re Route One West Windsor Ltd. Partnership

Decision Date04 September 1998
Docket NumberBankruptcy No. 97-33423.
Citation225 BR 76
CourtU.S. Bankruptcy Court — District of New Jersey


Robert S. Burrick, Scott A. Zuber, Pitney, Hardin, Kipp & Szuch, Florham Park, NJ, for Debtor.

Richard M. Meth, Deborah A. Reperowitz, Friedman, Siegelbaum L.L.P., Roseland, NJ, for Barclays Bank PLC.

Myron Waxberg, Cartaret, NJ, for Pathmark Stores, Inc.


STEPHEN A. STRIPP, Bankruptcy Judge.

This is the court's decision on confirmation of the debtor's plan of liquidation. A hearing was held on July 20, 1998, after which the court reserved decision. The principal issue is whether two secured creditors are entitled to interest at an increased contractual rate upon default resulting from failure to pay such loans at their maturity dates. The court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 151 and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (L) and (O). The following shall constitute the court's findings of fact and conclusions of law.


The debtor is a New Jersey limited partnership. DKM Windsor Green ("DKM") is the sole general partner of the debtor and Morris Harris is the only limited partner. The debtor owned and operated a shopping center known as the Shops at Windsor Green, 3495 Route One South, Princeton, New Jersey ("the property"). On or about April 2, 1992 Pathmark Stores, Inc. ("Pathmark") made a construction loan to the debtor in the principal amount of $4,000,000.00, the primary purpose of which was to finance the construction of the shopping center on the property. The loan was reflected in a mortgage note from the debtor to Pathmark (the "Pathmark note"). The debtor executed a mortgage in favor of Pathmark on the property to secure the note (the "Pathmark mortgage").

On or about April 2, 1992 Barclays Bank PLC ("Barclays") also made a loan to the debtor in the principal amount of $16,500,000.00 (the "Barclays loan"). The purpose of this loan was also to finance the construction of the shopping center. The debtor executed a mortgage note to Barclays evidencing the Barclays loan (the "Barclays note"). The maturity date on the Barclays note was April 7, 1997. The Barclays note provides that upon and following either the (i) maturity date or (ii) default by the debtor, the note shall bear interest at a rate per annum (the "default rate") of the lesser of: "(i) six (6) percentage points in excess of the Base Rate plus the applicable Base Rate Margin or (ii) the maximum rate permitted by law. . . ." The default rate is 15 1/8%. The pre-default base rate was 7.0625%. The post-default base rate is 9.5%.1

The debtor executed a mortgage and security agreement to secure its obligations under the Barclays note. The mortgage encumbered the property. The security agreement provided additional security of, inter alia, the equipment, leases, rents, unearned premiums with respect to insurance policies, payments arising from operation of improvements on the property, services rendered, and payments from the voiding of transfers to the debtor.

On April 7, 1997, one day prior to the maturity date of the Barclays note, the debtor filed for relief under chapter 11 of title 11, United States Code (the "Bankruptcy Code"). At that time the debtor was current in payment of its obligations to Barclays and Pathmark. There were twelve non-insider unsecured creditors who were owed a total of $48,678.25 according to Schedule F filed with the bankruptcy petition. Barclays alleges, and the debtor does not dispute that, with one possible exception, these non-insider unsecured claims were not past due on the petition date. (Objection of Barclays Bank to Confirmation ¶ 18.) The debtor had cash on hand on that date of $330,423.24. Id. at ¶ 19. There was a contingent claim of the New Jersey Department of Transportation (NJDOT) for roadway improvements to be completed by March 23, 2002. (Third Modified Disclosure Statement, at 26.) The only other debt was an unsecured claim of the debtor's general partner DKM in the amount of $2,695,819.86. The debtor does not allege that any payment was due on DKM's claim as of the petition date. Thus, the debtor was substantially current on all of its obligations when the petition was filed. Barclays alleges, and the debtor does not dispute, that the purpose of the bankruptcy petition was to avoid paying interest to Barclays at the default rate. (Objection of Barclays Bank to Confirmation ¶ 12.) Indeed, the debtor admits that was its purpose. (Third Modified Disclosure Statement at 16-17.) The debtor had been negotiating a sale of the property to Federal Realty Investment Trust, and when that sale did not materialize the petition was filed. Id.

The court entered orders authorizing use of cash collateral under which the debtor made monthly adequate protection payments to Barclays and Pathmark of principal and interest at a pre-default rate. On November 3, 1997 the debtor filed a motion for an order authorizing private sale of substantially all of debtor's property free and clear of liens, with valid liens to attach to the proceeds of the sale pursuant to Code sections 363(b) and 363(f). On November 17, 1997 the court signed an order granting the sale motion. The sale order authorized the debtor to sell the property to National Re/Sources West Windsor LLC ("National") free and clear of liens, mortgages and encumbrances, for a purchase price of $ 19,200,000.00. The sale order provided that the secured lenders would retain a lien on the proceeds of the sale.

On December 19, 1997 the debtor closed the sale to National for an adjusted price of $19,000,000.00. On the closing date the debtor paid Barclays and Pathmark the principal due under the loans and interest at the non-default rate in amounts totaling $14,816,965.84 and $966,321.37, respectively.

Then on January 30, 1998 the debtor filed its First Modified Chapter 11 Plan of Liquidation and First Modified Disclosure Statement. Those instruments were subsequently modified. The court signed an order approving the Third Modified Disclosure Statement on June 5, 1998.

The Third Modified Plan of Liquidation ("plan") provides for payment in full of all unsecured claims with interest, with the exception of the unsecured claim of DKM, the debtor's general partner. The plan states that the debtor believes that both Barclays and Pathmark (the "secured creditors") have been paid in full by virtue of the payments made to them at the closing of the sale of the property. The plan also states that the secured creditors disagree with the debtor's position, and assert that in addition to the payments received at closing, they are entitled to be paid interest at the default rate for the period following the maturity date until payment in full of their claims. As to the resolution of this dispute, the disclosure statement provides:

The Court will determine whether Barclays and Pathmark are entitled to the payment of default/post-maturity interest as provided for pursuant to their loan documents at the hearing on confirmation of the Debtor\'s Third Modified Plan of Orderly Liquidation. Footnote omitted. The Court will also determine the entitlement of Barclays and Pathmark to payment of late charges, costs and attorneys fees, which decision may be made at the confirmation Hearing or on some other date set by the Court. If the Court rules in favor of Barclays and Pathmark, and thus directs that it pay default/post-maturity interest or any other additional interest within fifteen (15) Business Days of the Effective Date, then the Debtor will either pay such amounts on or before that date or will appeal from the Court\'s decision and escrow funds in an amount sufficient to pay all sums ultimately determined to be due and payable to Barclays and Pathmark.

(Third Modified Disclosure Statement at 15-16.) The plan contains substantially identical provisions.

On July 20, 1998 the court held a hearing on the confirmation of the plan. Barclays voted to reject confirmation and Pathmark did not vote. The secured creditors both objected to confirmation to the extent that they do not receive interest at the default rate, interest on that interest, late fees and other costs. All parties filed certifications and memoranda in support of their positions. The court reserved decision on confirmation of the plan pending determination of the secured creditors' entitlement to interest at their respective default rates. Upon stipulation of the debtor and the secured creditors the court ordered that non-insider unsecured creditors be paid immediately.

The amount of Barclays' claim for additional interest at the default rate is $817,544.24. Barclays also claims late charges of $40,877.21 and interest on default interest of $58,786.97. The amount of Pathmark's claim for interest at the default rate is $39,416.58 plus interest on that of $3,846.85. These claims, totaling $960,471.85, are the subject of this dispute.

As of June 30, 1998 the debtor held cash in the amount of $3,025,162. according to the Monthly Operating Report for June 1998. The debtor has since paid the non-insider unsecured creditors by order of August 4, 1998. The debtor must pay administrative expenses and establish an escrow or alternative security for NJDOT's contingent claim of $742,000. The plan proposes to pay DKM an initial installment of $1,845,847. on its unsecured claim of $2,695,819.86 if it prevails on this default interest dispute, with possible additional payments from collection actions and from the escrow for the NJDOT claim if the amount ultimately due to NJDOT is less than projected. (Third Modified Plan at 12-13.) Any distribution to the secured creditors on their claims for default interest will reduce the payment of DKM's claim to that extent.


The court begins by noting that in footnote 1, page 2 of the...

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