In re Woodstone Ltd. Partnership

Citation133 BR 678
Decision Date08 November 1991
Docket NumberBankruptcy No. 189-93578-352.
PartiesIn re WOODSTONE LIMITED PARTNERSHIP, d/b/a Woodstone Apartments, Debtor.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

133 B.R. 678 (1991)

In re WOODSTONE LIMITED PARTNERSHIP, d/b/a Woodstone Apartments, Debtor.

Bankruptcy No. 189-93578-352.

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

November 8, 1991.

133 BR 679
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Levine, Weinberg, Kaley & Pergament, P.C., Garden City, N.Y., for Woodstone Ltd. Partnership

Philips, Nizer, Benjamin, Krim & Ballon, Garden City, N.Y., for First Gibralter Bank.

MARVIN A. HOLLAND, Bankruptcy Judge:

First Gibralter Bank (hereinafter "FGB") filed a proof of a secured claim in the amount of $5,153,151, exclusive of interest, costs, expenses and attorneys' fees, against the debtor in possession, Woodstone Limited Partnership (hereinafter "the debtor" or "Woodstone"). Woodstone moved to reduce or expunge the secured claim of FGB, or, in the alternative, to reduce or reclassify FGB's secured claim and to determine the validity and extent of FGB's lien in real property located in Fort Worth, Texas, and known as the Woodstone Apartments. FGB filed papers in opposition to Woodstone's motion. The parties submitted briefs prior to the hearing held on June 5, 1991 as well as post-hearing briefs.1

At the hearing, the parties advanced only oral arguments. No testimony was offered. At the conclusion of the hearing it was agreed that the court should decide this matter as if FGB had moved to dismiss Woodstone's motion for failure to state a claim upon which relief can be granted under Fed.R.Civ.P. 12(b)(6) as made applicable by Bankruptcy Rule 7012(b), now Fed.R.Bankr.P. 7012(b).

We deny FGB's motion and hold that Woodstone has adequately set forth a claim sufficient to entitle it to an evidentiary hearing regarding the enforceability of the alleged modification to the loan agreement under Texas law.

These proceedings are subject to bankruptcy court jurisdiction under 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a) and the Order of Referral of Matters to Bankruptcy Judges of this district, 69 B.R. at 186. They are core proceedings under 28 U.S.C. § 157(b)(2)(B) and (K).

Statement of Facts

The following is the parties' position with regard to the facts pertinent to the discussion herein. Woodstone's version of those facts in dispute is assumed for purposes of this discussion.

1. On August 14, 1987 Woodstone and First Texas Savings Association (hereinafter "First Texas") entered into a loan agreement under which Woodstone borrowed $4,945,000 from First Texas and gave First Texas a note with a term of 15 years secured by a mortgage on the property (both the loan agreement and the note referred to hereinafter as "the loan agreement"). FGB maintains that this mortgage was properly perfected (see FGB objection dated April 19, 1991) and Woodstone does not dispute this.

2. The parties do not dispute the payments schedule due to First Texas under the loan agreement. The parties agree that the loan agreement provides that payments for the first year were to be equal to the cash flow available to Woodstone, presumably

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from the Woodstone Apartments. No dispute is before us with respect to the payments that were due for the first year

3. For the rest of the term of the loan the rate of interest payment due from Woodstone to First Texas varied. It ranged from 5% for the second and third year to the prime rate plus 1% for years eleven to fifteen. Payments of amortization were due to First Texas commencing as of the sixth year.

4. Additional payments of $127,500 each were due to First Texas by August 1988 and August 1989. FGB argues that the agreement required Woodstone to provide letters of credit for these said amounts. It is not disputed that FGB was paid $127,500 for the payment due on August 1988, while it was paid only $93,031 for the payment that was due in August 1989. It is not clear from the parties' papers whether the $127,500 due to FGB in August 1989 (the second such payment) was due in addition to the interest payments required under the loan agreement or not. However, the parties did not pursue this issue, and we need not address it here.

5. In August 1988 Woodstone approached First Texas with a request to modify the loan agreement. As a result of several months of negotiations the parties reached an accord, the effect of which is central to this decision. Woodstone argues that there was a binding modification or novation of the loan agreement, while FGB maintains that the discussions had no binding effect. In our discussion of the effect of these negotiations we will refer to the "understanding" reached between the parties.

6. It is not disputed that there was an "understanding" that interest was to continue to accrue at the 5% contract rate although it was to be paid during the second year of the loan at the reduced rate of 2.5 percent.

7. During the negotiation process, First Texas submitted several documents to Woodstone which contained specific and explicit language to the effect that they were proposals only and that First Texas was not to be bound by any agreement unless it had executed the appropriate papers and had received the required approvals from its supervising regulatory agency. The papers clearly stated that no modification should be implied if these conditions were not met.

8. On October 28, 1988 the Federal Home Loan Bank of Dallas (hereinafter "FHB Dallas") notified First Texas by letter that the application to modify the Woodstone loan agreement, i.e., to reduce the interest payment rate from 5 percent to 2.5 percent for the period from August 14, 1988 through August 14, 1989, was approved. Although the parties do not dispute the existence or the accuracy of such a letter, FGB refuses to acknowledge the letter as an approval by the federal regulators of the "understanding".

9. On November 14, 1988 counsel for First Texas sent a letter to Ms. Sandra Robin, First Texas' vice-president, informing Ms. Robin that the Federal Home Loan Bank had approved the request to modify the repayment provisions of the Woodstone loan. In his letter counsel instructed Ms. Robin that "a memo stating the purpose for the modification be prepared and included at the front of the file so an examiner can easily locate the approval." (emphasis added). FGB did not contest the existence or the accuracy of this letter. It is unclear whether First Texas complied with this requirement. Although the letter itself does not specifically state that it refers to the loan agreement subject to the dispute brought before this court, this is not dispusted by FGB.

10. On December 21, 1988 First Texas, by its counsel, forwarded to Woodstone's counsel for Woodstone's execution documents to memoralize the modification. These documents also contained the provisions stated in paragraph 7 supra. Woodstone executed the documents and obtained the letter of credit which was required to be submitted to First Texas together with the executed documents, but never forwarded them to FGB. Woodstone's counsel stated that the only reason for the failure to tender these papers to First Texas

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was due to a telephone call received from First Texas' counsel advising Woodstone's counsel not to deliver same. These statements are disputed by FGB

11. On December 28, 1988 the Federal Home Loan Bank Board (hereinafter "FHB Board") appointed the now defunct Federal Savings and Loan Insurance Corporation (hereinafter "FSLIC") as receiver of First Texas. On the same day FSLIC sold most of First Texas' assets, including the Woodstone loan, to FGB. The transaction took the form commonly referred to as a "purchase and assumption agreement." Transcript of February 27, 1991 at 20.

12. FGB, refusing to acknowledge the enforceability of the "understanding" outlined supra, filed a proof of claim for the entire amount outstanding under the original loan agreement.

13. Woodstone argues that the loan agreement between it and First Texas is a "covered asset" under the "Assistance Agreement" entered between FGB and FSLIC, under which FSLIC guaranteed FGB against any loss that FGB might incur with regard to the Woodstone loan. Neither side has raised the "real party in interest" issue.

Parties' Positions

Woodstone seeks three types of relief:

(i) To expunge FGB's secured claim pursuant to 11 U.S.C. § 502(b)(1) and (2). We read the relief requested by Woodstone under these sections to mean that the secured claim should be expunged in total. Woodstone, however, is not entitled to the relief requested. It cannot expunge FGB's total claim pursuant to 11 U.S.C. § 502(b)(1) since Woodstone objected only to that portion of FGB's claim which may be unenforceable against it under the modification agreement, i.e., the difference between the claim as computed by FGB based on the original terms of the loan agreement and as computed by Woodstone based on the loan agreement as modified by the "understanding".2 In addition, Woodstone cannot be awarded the relief requested under 11 U.S.C. § 502(b)(2) because no proof was submitted regarding the amount of unmatured interest claimed by FGB.

We note further that Woodstone is not entitled to a determination directly affecting FGB's lien since it did not follow Bankruptcy Rule 7001(2), Fed.R.Bankr.P. 7001(2), which mandates the filing of an adversary proceeding rather than notice of motion.

(ii) To reduce or reclassify the secured claim of FGB; and

(iii) To determine the "validity and extent" of FGB's lien in the Woodstone Apartments. Woodstone does not contest the creation or the perfection of FGB's rights in the Woodstone Apartments. See: Debtor's proposed disclosure statement, pp. 4, 13 (docket no. 28), debtor's proposed plan of reorganization, Article V (docket no. 27). The relief sought by Woodstone is that FGB's secured claim should be reduced to an amount that would represent the "understanding" reached between Woodstone and the original holder of the note— First Texas. This is therefore the only issue addressed herein. The reliefs requested under ...

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