In re Safety Harbor Resort And Spa A/K/A S.H.S. Resort Llc

Decision Date30 August 2011
Docket NumberNo. 8:10–bk–25886.,8:10–bk–25886.
Citation456 B.R. 703,23 Fla. L. Weekly Fed. B 169,55 Bankr.Ct.Dec. 121
PartiesIn re SAFETY HARBOR RESORT AND SPA a/k/a S.H.S. Resort, LLC, Debtor.
CourtU.S. Bankruptcy Court — Middle District of Florida

OPINION TEXT STARTS HEREWest CodenotesRecognized as Unconstitutional28 U.S.C.A. § 157(b)(2)(C) Steven M. Berman, Hugo S. deBeaubien, Shumaker, Loop & Kendrick LLP, Tampa, FL, for Debtor.

MEMORANDUM OPINION ON PLAN CONFIRMATION1

MICHAEL G. WILLIAMSON, Bankruptcy Judge.

The Debtor proposed a chapter 11 plan that provides for the contribution of substantial assets from the principals of the Debtor's parent company, Olympia Investment Group, LLC., who are also the non-debtor guarantors of a debt owed to a creditor, German American Capital Corporation, to help effect a successful reorganization. In exchange for that contribution, the Debtor requested releases for the non-debtor guarantors. The Court, instead, imposed a four-year stay on any actions by German American against the non-debtor guarantors. German American has requested that the Court impose certain “lock-up” restrictions on the reorganized Debtor's business operations and the non-debtor guarantors to prevent the Debtor and the non-debtor guarantors from disposing of assets during the four-year injunction period to thwart any potential future collection efforts.

The Debtor objects to German American's proposed “lock-up” restrictions with respect to the non-debtor guarantors on the basis that they exceed this Court's constitutional authority under the Supreme Court's recent decision in Stern v. Marshall.2 The Debtor reads Stern too broadly. The Supreme Court's holding in Stern was very narrow. The Supreme Court merely held that Congress exceeded its authority under the Constitution in one isolated instance by granting bankruptcy courts jurisdiction to enter final judgments on counterclaims that are not necessarily resolved in the process of ruling on a creditor's proof of claim. Nothing in Stern limits a bankruptcy court's jurisdiction over other “core” proceedings. Nor does the Stern Court's reliance on its earlier decision in Granfinanciera3 somehow impose some new limitation on this Court's jurisdiction that has not existed since that case was decided over twenty years ago. Besides, parties can still consent—either expressly or impliedly—to a bankruptcy court's jurisdiction after Stern.

Accordingly, this Court has jurisdiction to impose “lock-up” restrictions on the reorganized Debtor's business operations and the non-debtor guarantors.

Background

The Debtor owns and operates a 175–room resort in downtown Safety Harbor, Florida. The Debtor acquired the resort in December 2004 for $25 million. Approximately $17 million of the purchase price was financed through BB & T Bank. In October 2006, the Debtor refinanced its acquisition of the resort through Wells Fargo Bank. The Debtor used the net proceeds from the $29.7 million refinancing for extensive renovations to the guestrooms (and major portions of the common area), as well as capital improvements. Under its loan agreement with Wells Fargo, the Debtor was required to sell or develop 15 acres of undeveloped land adjoining the resort. The principals of the Debtor's parent corporation, Olympia Investment Group, LLC, personally guaranteed the Debtor's obligations to Wells Fargo.

When the Debtor refinanced its mortgage, the appraised value of the resort fully secured the $29.7 million loan. But revenue generated from the resort was only able to support half of the debt service allocated to resort operations. And since 2008, resort revenues have decreased by over 40%. That decrease in revenues, coupled with the collapse of the real estate market, left the Debtor unable to service the debt and either sell or develop the 15 acres of adjoining land.

As a consequence, the Debtor filed for chapter 11 bankruptcy principally to value the secured portion of its loan with Wells Fargo in hopes of reducing its overall debt service. The Debtor and Wells Fargo were able to agree on a value for the resort: approximately $13.8 million. Wells Fargo later sold its loan to German American. As a consequence of the parties' agreement on value, German American holds a secured claim in this case in the amount of approximately $13.8 million and an unsecured claim for the balance in the amount of approximately $15.9 million.

The Debtor's plan proposes to pay German American's secured claim from three sources. First, Olympia Development Group, Inc. (“Olympia”), an entity that is owned by the non-debtor guarantors, will provide approximately $3 million from the sale of some of its assets. Second, the Debtor also proposes to sell a portion of its undeveloped land and use the proceeds from that sale (net of any outstanding real estate taxes) to further pay down the secured claim. Third, under the Debtor's plan, the Debtor proposes to pay German American's reduced secured claim in full based upon a 25–year amortization with a five-year balloon payment.

As for German American's unsecured claim, the Debtor proposes to pay German American a total of $4 million. That amount will be paid at a rate of $500,000 per year for the first four years of the plan, with a $2 million balloon payment. The $2 million balloon payment will be funded from the sale or refinance of a securities portfolio held by Olympia. Under the Debtor's plan, the $2 million balloon payment is due in four years from the sale of the securities. To further enhance the Debtor's enterprise value and liquidity, the non-debtor guarantors, as Olympia's owners, agree to contribute 100% of their Olympia stock to the Debtor. That stock transfer will produce approximately $200,000 in additional revenue necessary to fund the plan.

In exchange for their stock transfer to the Debtor, Olympia's principals (and German American's non-debtor guarantors) requested a release of their liability to German American under their personal guaranties. German American objected to confirmation, in general, and the proposed third-party releases, in particular. The Court held a lengthy evidentiary hearing on plan confirmation over two days in April 2011. And the Court ultimately determined that the Debtor satisfied the requirements of Bankruptcy Code section 1129. So the Court confirmed the Debtor's plan.

But the Court did not approve the proposed release of the non-debtor guarantors. Instead, the Court entered a limited injunction prohibiting German American from suing the non-debtor guarantors on their personal guaranties for the remainder of the amounts owed by the Debtor (but not paid under the plan) until payment of the final $2 million balloon payment. So long as the Debtor performs under the plan, German American is enjoined from pursuing the non-debtor guarantors on their personal guaranties. But once the $2 million balloon payment is made, the injunction expires. And the non-debtor guarantors will remain liable only for the amount due German American on its unsecured claim (approximately $12 million).

At the conclusion of the confirmation hearing, German American asked the Court to impose restrictions to prevent the non-debtor guarantors from effectively dissipating assets that German American could use to satisfy their obligations under the personal guaranties. The Court asked both parties to submit proposed “lock-up” restrictions on the Debtor's use of the Olympia stock.

German American proposed that the Court, among other things, prohibit the Debtor and Olympia from: (i) issuing additional equity interests to anyone other than the non-debtor guarantors; (ii) borrowing any additional funds; (iii) transferring or encumbering their equity interests in the Debtor; (iv) materially changing their management personnel or the business in which they are engaged; or (v) purchasing other companies. German American also requested that the Court prohibit the non-debtor guarantors from transferring or pledging their equity interests in the Debtor or Olympia, as well as prohibit Olympia from terminating or materially altering certain leases. The Debtor, on the other hand, proposed only that Olympia be prohibited from selling the securities intended to fund the $2 million balloon payment without German American's consent or Court approval, unless Olympia maintains a positive net worth of no less than $12 million.

Then at a June 29, 2011 hearing on the proposed “lock-up” provisions, the Debtor questioned the Court's constitutional authority to impose German American's—and perhaps any—proposed “lock-up” restrictions. The Debtor contends that the Supreme Court's decision in Stern imposes new limitations on bankruptcy courts' jurisdiction. In light of the arguments raised by the Debtor, the Court must first determine whether it has jurisdiction to impose any “lock-up” restrictions on the Debtor or the non-debtor guarantors. To make that determination, the Court must begin by reviewing the Stern decision. It is only after a thorough examination of Stern that the Court can understand the implications of that decision on the Court's constitutional authority to impose the requested “lock-up” restrictions or other restrictions the Court might fashion.

Summary of Stern v. Marshall 4
I. Overview.

Stern involved a tort claim by Vickie Lynn Marshall (a/k/a Anna Nicole Smith) (“Vickie”) against E. Pierce Marshall (“Pierce”), the son of her late husband J. Howard Marshall II. Vickie alleged Pierce tortiously interfered with a substantial inter vivos gift (estimated to exceed $300 million) that her late husband intended to give to her. Vickie brought the tort claim as a debtor-in-possession in her chapter 11 case pending before the bankruptcy court for the Central District of California. She asserted it as a counterclaim to a proof of claim that Pierce filed based on state-law defamation. Because the counterclaim was brought in response to a claim filed in Vickie's case, it was treated as a core...

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