In re Trenton Ridge Investors, LLC

• Decision Date: 22 September 2011
• Docket Number: Case No. 09-62570,Case No. 09-63160
• Parties: In re: TRENTON RIDGE INVESTORS, LLC and COVENTRY EAST INVESTORS, LLC, Debtors and Debtors in Possession.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

In re: TRENTON RIDGE INVESTORS, LLC and COVENTRY EAST INVESTORS, LLC, Debtors and Debtors in Possession.

Case No. 09-62570

Case No. 09-63160

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF OHIO EASTERN DIVISION AT COLUMBUS

Dated: June 23, 2011

Dated: September 22, 2011

This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.

IT IS SO ORDERED.

John E. Hoffman, Jr.

United States Bankruptcy Judge

Jointly Administered with

Judge Hoffman

MEMORANDUM OPINION AND ORDER DENYING

CONFIRMATION OF DEBTORS' PLANS OF REORGANIZATION

Table of Contents

I. Introduction......................................................4

II. Jurisdiction.......................................................4

III. Background...................................................... 5

A. The Debtors and Their Chapter 11 Cases............................ 5

B. Summary of the Plans and the Results of Voting...................... 5

IV. Arguments of the Parties............................................9

V. Legal Analysis................................................... 10

A. Confirmation of Consensual Plans Under Section 1129(a) of the Bankruptcy Code........................... 10

B. Confirmation of Non-Consensual Plans Under Section 1129(b) of the Bankruptcy Code ..................... 15

C. The Court's Independent Duty to Determine Compliance with the Bankruptcy Code's Confirmation Standards ................. 15

D. The Debtors' Burden of Proof ................................... 17

E. Application of the Confirmation Requirements...................... 23

1. Applicable Requirements of Section 1129(a) ................... 23

a. Section 1129(a)(1): Plan's Compliance with Applicable Provisions of the Bankruptcy Code............. 23

i. Section 1122: Classification......................... 24

ii. Section 1123: Contents of the Plan ................... 28

b. Section 1129(a)(2): Proponent's Compliance with Applicable Provisions of the Bankruptcy Code ............. 30

c. Section 1129(a)(3): Good Faith ......................... 30

d. Section 1129(a)(4): Payments Subject to Court Approval .... 39

e. Section 1129(a)(5): Disclosure of Identity and Affiliations of Certain Individuals ....................... 40

f. Section 1129(a)(7): The Best-Interests-of-Creditors Test..... 40

g. Sections 1129(a)(8)-(9) and (a)(12)...................... 43

h. Section 1129(a)(10): At Least One Impaired Accepting Class ............................. 45

i. Section 1129(a)(11): Feasibility......................... 48

i. In General ....................................... 48

ii. The Effective Date ................................ 51

iii. The Debtors' Post-Effective Date Tax Obligations ....... 57

iv. The Debtors' Five-Year Projections .................. 58

1. Income...................................... 59

2. Expenses.................................... 63

v. The Cash Infusion from the Member Noteholders........ 66

vi. The Economic Life of the Trenton Ridge Apartments and the Coventry Apartments .............. 70

vii. The Trenton Ridge Balloon Payment .................. 732. Section 1129(b): The Requirements for Cramdown ..............76

a. Unfair Discrimination ................................. 77

b. Fair and Equitable Standard as Applied to PNC's Claims ..... 79

i. Compliance with the Technical Requirements of 1129(b)(2)(A)(i) .................... 80

ii. Compliance with the General Requirement that a Plan Be Fair and Equitable ..................... 84

c. The Fair and Equitable Standard as Applied to ATF's Claim . . 98

d. The Fair and Equitable Standard as Applied to General Unsecured Claims........................... 98

VI. Conclusion..................................................... 105

I. Introduction

In this contested matter, Trenton Ridge Investors, LLC ("Trenton Ridge") and Coventry East Investors, LLC ("Coventry," and collectively with Trenton Ridge, "Debtors"), seek confirmation of their Chapter 11 plans ("Plans").¹ PNC Bank, National Association ("PNC") opposes confirmation.² For the reasons set forth below—primarily, the lack of sufficient evidence establishing the "feasibility" of the Plans and the Debtors' failure to provide unsecured creditors with the treatment required by the "absolute priority rule"—the Court must deny confirmation of both of the Plans.

II. Jurisdiction

The Court has jurisdiction to hear and determine this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(L).

III. Background

A. The Debtors and Their Chapter 11 Cases

Both of the Debtors are Ohio limited liability companies operating multi-family apartment complexes in Columbus, Ohio. One of the complexes, which was constructed in 1973, lies on an approximately 16-acre tract of land owned by Trenton Ridge and consists of 272 townhouse units ("Trenton Ridge Apartments"). The other complex, which was constructed in 1972, lies on an approximately 26-acre tract of land owned by Coventry and consists of 320 garden and townhouse units ("Coventry Apartments").

With receivership proceedings relating to the operation of the Trenton Ridge Apartments and the Coventry Apartments pending in state court, the Debtors commenced these cases by filing voluntary petitions for relief under Chapter 11 of the Bankruptcy Code—Trenton Ridge on October 28, 2009 and Coventry on November 9, 2009. During their cases, the Debtors have used certain rents on which PNC has a lien pursuant to cash collateral orders approved by the Court and extensions thereof stipulated to by the Debtors and PNC.

B. Summary of the Plans and the Results of Voting

The parties in interest in these Chapter 11 cases, their proposed treatment under the Plans and the manner in which they voted on the Plans is summarized below.

Since November 2007, the co-managers of both of the Debtors have been John R. Davis ("Davis") and Patricia J. Shorr ("Shorr"). The Debtors anticipate that Davis and Shorr will continue to serve as co-managers after confirmation. Davis and Shorr have not asserted a claim against either of the Debtors. But they do hold—either directly or indirectly—equity in the Debtors in the form of membership interests. The Plans provide that the equity interests held by Davis and Shorr, along with all other existing equity interests, will be cancelled on the effective date. The holders of thoseinterests, therefore, were deemed to have rejected the Plans and were not entitled to vote. Davis and Shorr would receive membership interests in the reorganized Debtors pursuant to the Plans.

Certain of the other current holders of the membership interests (not Shorr and Davis) also received promissory notes from Trenton Ridge and Coventry. The members who received such notes will be referred to in this opinion as the "Member Noteholders." Under the Plans, the Member Noteholders are to receive a pro-rata share of membership interests in the reorganized Debtors. As a class, the Member Noteholders voted to accept both of the Plans.

The creditor holding the vast majority of the debt in these cases is PNC, which filed timely proofs of claim against both Debtors. It has asserted a claim against Trenton Ridge on account of a note dated March 21, 2005, as amended ("Trenton Ridge Note"), secured by substantially all of Trenton Ridge's assets, including the Trenton Ridge Apartments and rents generated therefrom by virtue of an Open-End Mortgage, Assignment of Rents and Security Agreement, dated March 21, 2005, as modified on November 28, 2007. PNC also has asserted a claim against Coventry on account of two notes, each dated September 20, 2005, as amended ("Coventry Notes"); that claim is secured by substantially all of Coventry's assets, including the Coventry Apartments and the rents generated from the operation therefrom pursuant to two Open-End Mortgages, Assignments of Rents and Security Agreements, both executed on or about September 20, 2008. As of the dates Trenton Ridge and Coventry commenced their Chapter 11 cases, the Trenton Ridge Note and the Coventry Notes had matured.

PNC has filed notices (Docs. 141 & 142) of its election to have its claims treated as fully secured pursuant to § 1111(b) of the Bankruptcy Code. In the Plans, the Debtors have provided for the retention by PNC of its liens and the payment of its claims in accordance with its §1111(b) election, with a 40-year amortization (and a 30-year balloon payment) for Trenton Ridge and a 30-year amortization for Coventry with no balloon payment. During the Confirmation Hearing, the Debtors and PNC entered into the stipulations summarized below:

For purposes of the Confirmation Hearing only, the values of the Trenton Ridge Apartments and the Coventry Apartments are as set forth in Trenton Ex. 3 and Coventry Ex. 3, respectively. See Tr. I at 5:14–24. Accordingly, the value of the Trenton Ridge Apartments is $3,660,000, see Trenton Ex. 3, The Robert Weiler Company Appraisal of Trenton Ridge Apartments, Effective Date of July 14, 2010 ("Trenton Ridge Appraisal"), and the value of the Coventry Apartments is $5,120,000. See Coventry Exhibit 3, The Robert Weiler Company Appraisal of Coventry East Apartments, Effective Date of July 14, 2010 ("Coventry Appraisal" and, collectively with the Trenton Ridge Appraisal, "Weiler Appraisals").

For purposes of whether the proposed Plans are fair and equitable under 11 U.S.C. § 1129(b)(2), the proposed 5.5% interest rate to be paid on PNC's claims "is a rate that is consistent with fair and equitable treatment under that section." Tr. I at 6:9–11.

The monthly payment amounts to PNC under the Plans, if confirmed, will be $27,835.45 with respect to Coventry and $14,198.43 with respect to Trenton Ridge. See id. at 7:7–11.

For purposes of the Confirmation Hearing, the amount due and owing to PNC by Trenton Ridge is $7,747,780.57 and by Coventry is $7,703,964.34. See id. at 8:14–17.

Although most terms and conditions...