In re Union Meeting Partners
| Decision Date | 14 March 1994 |
| Docket Number | Bankruptcy No. 92-17118DAS. |
| Citation | 165 BR 553 |
| Parties | In re UNION MEETING PARTNERS, a Pennsylvania general partnership, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Aris J. Karalis, Ciardi & DiDonato, Philadelphia, PA, for debtor.
J. Scott Victor, Saul, Ewing, Remick & Saul, Philadelphia, PA, for Lincoln Nat. Life Ins. Co.
Frederic Baker, Asst. U.S. Trustee, Philadelphia, PA.
Presently before this court in the voluntary Chapter 11 bankruptcy case of UNION MEETING PARTNERS ("the Debtor") are (1) the Debtor's request that we confirm its Third Amended Plan of Reorganization ("the Debtor's Plan") over the opposition of its first mortgagee, Lincoln National Life Insurance Company ("Lincoln"); and (2) Lincoln's request that we confirm its own Second Amended Plan of Reorganization ("Lincoln's Plan") over the Debtor's objections.
We find that the Debtor's Plan cannot be confirmed because it seeks to use the rents ("the Rents") generated by the Debtor's only asset, two adjoining office buildings in Blue Bell, Pennsylvania ("the Property"), which belong to Lincoln. Because we find that Lincoln's interest extends to all portions of the Rents generated by the Property, none of the Rents can be used by the Debtor in conjunction with its Plan, even if they are used only to pay for the reasonable expenses of operating the Property. We also find that Lincoln's Plan cannot be confirmed because certain unsecured recourse creditors ("the Recourse Creditors"), who have voted against the plan, will not receive or retain property under the plan equal to or greater than the amount that such creditors would receive in a Chapter 7 liquidation.
At this juncture, both parties have had several bites at the confirmation apple and neither has yet succeeded in serving up a plan which is totally palatable. However, because Lincoln is now, even clearer than before, the only interested party who has proposed a plan with a possibility of confirmation, we will give Lincoln alone one last opportunity to propose a confirmable plan. To achieve confirmation, Lincoln will apparently have to pay the Recourse Creditors, whose claims allegedly total about $70,000, the same amount that they would receive in a hypothetical Chapter 7 liquidation, which appears to be 100% of their allowed claims. If Lincoln declines our invitation or is unable to confirm an amended plan, we will convert this case to a case under Chapter 7 of the Bankruptcy Code forthwith.
The extensive history of this case, which documents the Debtor's tenacious efforts to regain control of the Rents from Lincoln, is set forth in great detail in our two previous opinions arising out of this case, In re Union Meeting Partners, 160 B.R. 757 (Bankr. E.D.Pa.1993) ("Union Meeting I") (); and In re Union Meeting Partners, 163 B.R. 229 (Bankr.E.D.Pa.1994) ("Union Meeting II") (). Undaunted by the bleak landscape which appears on the horizon for its prospects of achieving confirmation of any plan in this case in light of Lincoln's nonavoidable pre-petition seizure of the Rents, the Debtor now seeks confirmation of its current Plan. Lincoln, likewise having failed to confirm an earlier version of its competing plan of reorganization, seeks confirmation of its Plan.
The Debtor's Plan is typical of those filed by debtors in single-asset bankruptcy cases. The Debtor seeks to restructure Lincoln's secured debt, stretch out the maturity date of Lincoln's note, and continue operating the Property in the hope of retiring the modified debt and creating/preserving equity for the Debtor's general partners ("the General Partners").1 One important difference between the Debtor's situation and that of a single-asset debtor with a clear path to confirmation is that the Debtor has lost its ownership interest in and control of the Rents generated by the Property. Union Meeting I, 160 B.R. at 765-67. With all the Rents being applied to Lincoln's debt, the Debtor was relegated to either having its General Partners fund the costs of operation throughout the term of the Plan, or somehow regaining control of all or part of the Rents. The Debtor attempted and failed to assail Lincoln's interest in the Rents under the preference provisions of the Bankruptcy Code. Union Meeting II, 163 B.R. at 233-40. Despite this setback, the General Partners remain unable or unwilling to fund the costs of operating the Property. Thus, when the time came to file an amended plan, the Debtor proposed its current Plan, which incorporates the Debtor's "net rent theory."2 Basically, the Debtor asserts that, according to the parties' Mortgage and Security Agreement ("the Mortgage") and the accompanying Assignment of Rents and Profits ("the Rent Assignment"), Lincoln has bargained for, and is entitled to, only the rental income remaining after the payment of the necessary costs of the Property's operation ("the Net Rents"). This is the first juncture in the course of this case at which the Debtor has asserted that Lincoln's interest in the Rents is limited to the Net Rents.
The Debtor's Plan provides Lincoln with a secured claim in the amount of $6,392,280 and an unsecured claim in the amount of $2,972,281. The amount of the secured claim was fixed by subtracting $207,720, equal to certain property taxes which have accrued during the bankruptcy, from the agreed Property value of $6.6 million, as was approved in Union Meeting I, 160 B.R. at 767-68. No adjustment was made for either of two U.S. Healthcare leases which were entered into and approved by this court without objection after the Property was valued.
Pursuant to an amended, non-recourse promissory note, the Debtor is required to make monthly payments of principal and interest to Lincoln beginning on the first day of the first full month following the effective date of the Plan and ending on March 1, 2004. The monthly payments are to be equal to the amount of rental income remaining after the payment of "reasonable expenses, maintenance, repairs, management, escrow of real estate taxes and tenant fit out of the Property." The Net Rents will be applied, first to interest which accrues at the rate of nine and one eighth (9 1/8%) percent; and the remainder, if any, to principal. Thus, Lincoln is not promised any set amount on a monthly basis. A balloon payment equal to all outstanding principal and interest is due on March 1, 2004. Until the debt is paid in full, Lincoln will retain the lien of its Mortgage. Lincoln is also entitled to all amounts remaining in a certain escrow account ("the Suspense Account") after the payment of Lincoln's adequate protection claim and certain taxes. Lincoln's unsecured deficiency claim is treated similarly, but not in precisely the same manner, as other general unsecured claims. Although it is not clear, see page 567 infra, it appears that both Lincoln's secured and unsecured claims are classified together as the only claims in Class 1.
The claim of E.F. Hansen, Jr. and Eileen Hansen, the Debtor's second mortgagees ("Hansen"), is alone contained in Class 2. The entire amount of the Hansen's claim, fixed at $316,820, is in substance an unsecured deficiency claim and is treated in exactly the same manner as the claims of the general unsecured creditors.
The general unsecured creditors, as well as the deficiency claims of Lincoln and Hansen, will be paid five (5%) percent of their allowed claims within a year of the effective date of the Debtor's Plan. Moreover, the general unsecured creditors and Hansen (but not Lincoln) are entitled to an additional payment equal to fifteen (15%) percent of their allowed claims directly from the General Partners if they vote to accept Debtor's Plan and agree to release the General Partners from all liability. However, Lincoln is entitled to the additional payment from the General Partners only if it (1) agrees to treatment under a Plan alternative which would require it to relinquish its entitlement to the Rents; (2) declines its § 1111(b) election; (3) votes in favor of the Debtor's Plan; and (4) agrees to release the General Partners. The claims of the unsecured claimants comprise Class 6 of the Plan.
The General Partners' interests in the Debtor comprise Class 7 of the Plan. The General Partners are allowed to retain their respective interests in the Debtor if they contribute, in the aggregate, at least $200,000 on the effective date of the Plan. Under certain Plan alternatives, the General Partners are also required to make additional contributions over time toward the Plan's funding. The amounts of these future contributions vary depending on the alternative of the Plan which is confirmed.
Finally, the Debtor places the priority property tax claims in Class 3 and provides for payment of their principal, plus interest at seven (7%) percent, over the six years following the date of their assessment. Allowed administrative claims comprise Class 4, and all other allowed priority claims comprise Class 5. The Class 4 and Class 5 claimants are to be paid in full on the effective date of the Plan or within 30 days after their respective claims are allowed.
The Report of Plan Voting for the Debtor's Plan recites affirmative acceptance by Classes 2, 3 and 7; deemed acceptance by Classes 4 and 5; and rejection by Classes 1 and 6.
Lincoln has filed numerous objections to the Debtor's Plan. Once again, the focus of Lincoln's attack is directed towards the Debtor's proposed use of the Rents. Because we do not find that the parties' contract or the Pennsylvania common law supports Debtor's "net rent theory," we must sustain this objection and deny confirmation...
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