T-H New Orleans Ltd. Partnership, Matter of

• Decision Date: 17 December 1993
• Docket Number: 92-3959 and 92-3983,92-3942,Nos. 92-3941,T-H,s. 92-3941
• Parties: 30 Collier Bankr.Cas.2d 478 In the Matter ofNEW ORLEANS LIMITED PARTNERSHIP, Debtor. NEW ORLEANS LIMITED PARTNERSHIP, Appellee, v. FINANCIAL SECURITY ASSURANCE, INC., Appellant. In the Matter ofNEW ORLEANS LIMITED PARTNERSHIP, Debtor. NEW ORLEANS LIMITED PARTNERSHIP, Appellant, v. FINANCIAL SECURITY ASSURANCE, INC., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1099

10 F.3d 1099

30 Collier Bankr.Cas.2d 478

In the Matter of T-H NEW ORLEANS LIMITED PARTNERSHIP, Debtor.

T-H NEW ORLEANS LIMITED PARTNERSHIP, Appellee, v. FINANCIAL SECURITY ASSURANCE, INC., Appellant.

In the Matter of T-H NEW ORLEANS LIMITED PARTNERSHIP, Debtor.

T-H NEW ORLEANS LIMITED PARTNERSHIP, Appellant, v. FINANCIAL SECURITY ASSURANCE, INC., Appellee.

Nos. 92-3941, 92-3942, 92-3959 and 92-3983.

United States Court of Appeals, Fifth Circuit.

Dec. 17, 1993.

Eugene R. Preaus, T. Rose Young, Preaus, Roddy & Krebs, New Orleans, LA, for Financial Sec. Assur., Inc.

Rudy J. Cerone, McGlinchey, Stafford Lang, Baton Rouge, LA, B. Franklin Martin, III, Michael H. Rubin, McGlinchey, Stafford, Lang, New Orleans, LA, for T-H New Orleans Ltd. Partnership.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before EMILIO M. GARZA, and DeMOSS, Circuit Judges, and ZAGEL, ¹ District Judge.

DeMOSS, Circuit Judge:

On its own motion, the Court withdraws the opinion issued in this case dated October 7, 1993, and substitutes the following:

I. FACTS AND PROCEDURAL HISTORY

In 1988, TH-New Orleans Limited Partnership (TH-NOLP), a hotel partnership, acquired its major asset, the Days Inn Hotel on Canal Street in New Orleans, Louisiana (the Hotel). In 1989, TH-NOLP sought to restructure the underlying mortgage debt on the Hotel through a mortgage bond financing transaction. To achieve that end, TH-NOLP and six other hotel partnerships, all controlled by Monty Hundley and Stanley Tollman, obtained separate but cross-collateralized and cross-guaranteed first mortgage loans, which were secured by the Hotel and other hotels, in the amount of $87,000,000 from a newly created business trust (the issuer). With the execution of the Mortgage Note and Loan Agreement, TH-NOLP executed a Collateral Mortgage Note, a Collateral Real and Collateral Chattel Mortgage and Assignment of Leases and Rents, a Pledge of Collateral Mortgage Note (the Pledge), and a General Assignment of Accounts Receivable. TH-NOLP also executed a Nonrecourse Guarantee, which guaranteed the payment of the six other borrowers under the loan transaction. TH-NOLP's maximum liability under the Guarantee is limited to the greater of TH-NOLP's net worth on the date of execution of the Guarantee, which was stipulated to be $18,425,000, or the net worth of TH-NOLP when the Guarantee is enforced.

To raise the necessary money to make the mortgage loans to TH-NOLP, the issuer issued $87,000,000 in bonds, the payment of which was guaranteed by a surety bond issued by Financial Security Assurance Incorporated (FSA). In return, the issuer of the bonds assigned to FSA all its rights and interest in the security agreements, and authorized FSA to be the "controlling party" and their attorney-in-fact to take whatever actions FSA deemed necessary to exercise its rights under the mortgage loans and related collateral.

By 1990, TH-NOLP and the six other partnerships were in default on the loans. After the parties were unable to reach a settlement, FSA accelerated the Mortgage Note and demanded payment of all amounts due under the Loan Agreement and Guarantee. ² TH-NOLP filed for bankruptcy soon thereafter.

In the bankruptcy court, FSA filed a motion for relief from the automatic stay under 11 U.S.C. Sec. 362(d)(1) and (2); and a motion for adequate protection or that the Hotel revenues be segregated. On March 19, 1992, the bankruptcy court granted FSA's relief from the stay on the grounds that FSA had shown that the secured property was not necessary to a successful reorganization. 144 B.R. 327. That ruling was based on the bankruptcy court's decision that TH-NOLP's plan of reorganization was unconfirmable, which was based on the findings that (1) the plan did not permit FSA to bid the full amount of its debt on the proposed sale of the Hotel, (2) the plan made no provision for FSA's unsecured debt, and (3) TH-NOLP had improperly classified creditors in its plan. The bankruptcy court also granted FSA's motion for adequate protection or segregation of Hotel revenues. TH-NOLP appealed to the district court, which affirmed the bankruptcy court's order granting FSA relief from the stay, but reversed the bankruptcy court's order granting FSA's motion for adequate protection or segregation of Hotel revenues because it held that FSA did not have a security interest in such revenues. 148 B.R. 456. TH-NOLP and FSA now appeal to this court. ³

II. DISCUSSION

The bankruptcy court's findings of fact are reviewed under a clearly erroneous standard. In re Missionary Baptist Foundation of America, 818 F.2d 1135, 1142 (5th Cir.1987). The bankruptcy court's conclusions of law are "freely reviewable on appeal." Id.

1. Relief from Stay

TH-NOLP contends that the bankruptcy court misinterpreted its plan of reorganization and its disclosure statement, which led the court to erroneously conclude that TH-NOLP did not have a reasonable probability of a successful reorganization within a reasonable period of time. Specifically, TH-NOLP contends that the bankruptcy court erred when it interpreted the plan to provide that FSA would be limited to bidding in the secured amount of its claim, as opposed to the full amount of its claim, when the Hotel was sold. Because of that alleged erroneous conclusion, TH-NOLP contends the bankruptcy court improperly determined that FSA was entitled to relief from the automatic stay to commence foreclosure proceedings against the Hotel.

The provisions of 11 U.S.C. Sec. 362(a) provide an automatic stay against foreclosure proceedings when a debtor files a bankruptcy petition. Relief from the stay is warranted under 11 U.S.C. Sec. 362(d)(2) if:

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization.

TH-NOLP concedes that it has no equity in the Hotel. The only disputed issue is whether the Hotel is necessary to an effective reorganization. The term "necessary to an effective reorganization" has been interpreted to mean that the debtor has a reasonable probability of a successful reorganization within a reasonable period of time. United Savings Association of Texas v. Timbers of Inwood Forest Associates., Ltd., 484 U.S. 365, 375, 108 S.Ct. 626, 633, 98 L.Ed.2d 740 (1988).

In its memorandum opinion, the bankruptcy court found that TH-NOLP owed $16,954,983 to FSA, and that the appraised value of the Hotel was $12,200,000, leaving FSA with a under-secured nonrecourse deficiency claim for approximately $4,754,983.

TH-NOLP's plan proposed to deal with FSA's claim under 11 U.S.C. Sec. 1111(b)(1)(A)(ii), which provides in pertinent part:

(A) A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse, unless--

... (ii) such holder does not have such recourse and such property is sold under section 363 of this title or is to be sold under the plan.

Section 1111(b)(1)(A) effectively provides under-secured nonrecourse creditors, such as FSA, an opportunity to elect to have their claims treated as recourse claims if their debtors retain the secured property. In re Tampa Bay Associates, Ltd., 864 F.2d 47, 50 (5th Cir.1989). Under subsection (ii), however, a nonrecourse deficiency claim is not treated as a recourse obligation when there is a sale of the collateral at which a creditor may credit bid up to the full amount of its claim. Id. However, subsection (ii) may only be utilized when a creditor is entitled to credit bid up to the full amount of its claim, not just the amount of its secured claim. Id. In re National Real Estate Ltd. Partnership II, 104 B.R. 968, 974 (Bankr.E.D.Wis.1989).

FSA's claim against TH-NOLP is a nonrecourse claim; FSA's recourse on its claim is limited solely to the collateral for the debt--the Hotel. The bankruptcy court decided that TH-NOLP's plan did not provide for the treatment of FSA's entire debt because it did not address FSA's nonrecourse deficiency claim of $4,754,983; therefore it held that application of subsection (ii) was improper. Accordingly, the bankruptcy court held that the plan was unconfirmable, in that no reasonable prospect for a successful reorganization existed within a reasonable time, and lifted the automatic stay.

We disagree with the bankruptcy court's reading of the plan. Under the plan, TH-NOLP was to retain the Hotel for up to two years, during which time it would "actively market the Hotel and ... use its best efforts to procure a purchaser ... for the highest possible purchase price," and if it could not do so it would deed the Hotel to FSA. If a purchaser was found, the plan provided that FSA would be entitled to "credit bid the full allowed amount of its finally allowed claim." Additionally, TH-NOLP's disclosure statement provided:

[s]ince the Trustee [FSA] is an under-secured, nonrecourse creditor and since the Plan provides for, the abandonment and/or sale of the Trustee's collateral security, with the Trustee being permitted to credit bid its entire nonrecourse claim prior to any sale, the Trustee will not be permitted to make any election under Sec. 1111(b) of the Code.

Disclosure Statement at 13.

Based on the plain language of the plan and the disclosure statement, we hold that the bankruptcy court erred in holding that the plan was unconfirmable because it did not permit FSA to bid the full amount of its claim, and consequently did not provide for FSA's nonrecourse deficiency claim.

As an additional ground for its ruling, the bankruptcy court held that the plan improperly gerrymandered classes of creditor's claims so as to manipulate the voting process for the purpose of facilitating a cramdown under 11 U.S.C. Sec. 1129 in violation of this court's opinion in In re Greystone III Joint Venture, ...