Windmill Run Assocs., Ltd. v. Fed. Nat'l Mortg. Ass'n (In re Windmill Run Assocs., Ltd.)

• Decision Date: 31 January 2017
• Docket Number: CASE NO. 15–80319–G3–11,ADV. NO. 15–8013
• Citation: 566 B.R. 396
• Parties: IN RE WINDMILL RUN ASSOCIATES, LTD., Debtor, Windmill Run Associates, Ltd., Plaintiff, v. Federal National Mortgage Association, and Oak Grove Commercial Mortgage, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Texas

566 B.R. 396

IN RE WINDMILL RUN ASSOCIATES, LTD., Debtor,Windmill Run Associates, Ltd., Plaintiff,

v.Federal National Mortgage Association, and Oak Grove Commercial Mortgage, Defendants.

CASE NO. 15–80319–G3–11

ADV. NO. 15–8013

United States Bankruptcy Court, S.D. Texas, Galveston Division.

Signed January 31, 2017

Annie E. Catmull, Edward L. Rothberg, Hoover Slovacek, LLP, Houston, TX, for Plaintiff.

Glenn A. Ballard, Dentons US LLP, Houston, TX, Michael P. Cooley, Bryan Cave LLP, Dallas, TX, Shannon A.S. Quadros, Brian A. Kilmer, Kilmer Crosby & Walker PLLC, Houston, TX, for Defendants.

MEMORANDUM OPINION

LETITIA Z. PAUL, UNITED STATES BANKRUPTCY JUDGE

The court has held a joint trial on the above captioned adversary proceeding, and in the instant Chapter 11 case, the "Amended Motion for (I) Allowance of Secured Claim and Reasonable Fees, Costs, and Charges Pursuant to 11 U.S.C. § 506(b) and Fed. R. Bankr. P. 2016 and (ii) Estimation of Future Costs Pursuant to 11 U.S.C. § 502(c)" (the "506(b) motion") (Docket No. 279, amending Docket No. 276, Case No. 15–80319–G3–11).

Introduction

Part of the statutory mandate of the Federal National Mortgage Association (generally known as "Fannie Mae") is to encourage investment in construction and management of low to middle income housing. See 12 U.S.C. § 1716(c). This encouragement is created through tax credits, administered for the United States Department of Housing and Urban Development by each state's allocating agency. These properties financed through Low Income Housing Tax Credits ("LIHTC") are ordinarily marketed to groups composed of financial institutions and individual investors seeking the specified tax benefit. The dedication of property in Texas for low to middle income housing is accomplished through a Land Use Restriction Agreement ("LURA") with the Texas Department of Housing and Community Affairs ("TDHCA").

The Debtor in the instant case built and managed an apartment complex subject to a LURA in Sweeny, Texas, consisting of 76 three- and four-bedroom units in 19 single story buildings, in a garden style, with paths and shrubbery.

Beginning in approximately 2010, Oak Grove Commercial Mortgage ("Oak Grove"), a private, for-profit, business servicing Debtor's debt on behalf of Fannie Mae pursuant to a contract that is not before the court, made ever-increasing demands for repairs on the property.

On the surface, the dispute between Debtor on one side, and Fannie Mae and Oak Grove on the other side, appeared to involve two basic issues: The scope of repairs necessary for the property, and whether funds to make those repairs were to be held and disbursed by Oak Grove or by Debtor or Debtor's principals. However, although the Debtor was never in default on payments of principal and interest under the loan, Oak Grove and Fannie Mae worked together in bad faith to drive toward a foreclosure of Debtor's interest in the property. This drive was not motivated solely by a desire to ensure that the property was well-maintained. Rather, Fannie Mae and Oak Grove perceived an opportunity to remove the property from the restrictions of the LURA, and to trigger recourse liability for the Debtor's principals, by foreclosing. This would increase the value of the property by enabling the new owner of the property to charge market rents. Oak Grove previously has foreclosed on Fannie Mae properties in Kentucky and Oklahoma, both of which were current on principal and interest, but as to which some problem other than staying current on principal and interest was perceived by Oak Grove to justify foreclosure. Individuals working for Fannie Mae and Oak Grove frequently testified at this trial as to their seeking to serve low income tenants. However, their actions drove toward foreclosure, on a note that was current on principal and interest, and foreclosure would have abolished the LURA which assured availability of apartments to low income tenants.

Fannie Mae posted the property for a foreclosure sale to take place on September 1, 2015. The posting for foreclosure led to Debtor's filing of the petition in the instant Chapter 11 case. Fannie Mae expected to recover its costs from Debtor under the loan documents.

After the filing of the bankruptcy case, Fannie Mae and Oak Grove focused on litigation rather than negotiation, resulting in costs to Debtor, as well as to Oak Grove and Fannie Mae, that were out of proportion to the amount in controversy.

The court has considered the pleadings; the docket sheets in the instant adversary proceeding and Chapter 11 case, of which the court takes judicial notice; the testimony of the witnesses, developed over 25 days of trial; the documentary evidence; and the memoranda of law submitted by the parties. The following are the Findings of Fact and Conclusions of Law of the court. A separate conforming Judgment will be entered. To the extent any of the Findings of Fact are considered Conclusions of Law, they are adopted as such. To the extent any of the Conclusions of Law are considered Findings of Fact, they are adopted as such.

Table of Contents

1. Findings of Fact

A. Formation of Debtor

B. LURA

C. Loan Documents

1. Note

2. Deed of Trust

3. Replacement Reserve and Security Agreement

4. Assignment

D. Servicing Relationship

E. Prepetition Course of Dealing Among the Parties

1. Prior to Pre–Negotiation Letter

2. First Pre–Negotiation Letter

3. The Push Toward Foreclosure

F. Overview of the Chapter 11 Case

G. Fannie Mae's Motion For Relief From Stay

H. Plan and DIP Financing Negotiations

I. The Confirmed Plan

J. Post–Confirmation Operations

K. The Pleadings in the Instant Adversary Proceeding

1. Debtor's Complaint

2. Defendants' Answer and Fannie Mae's Counterclaim

3. Windmill's Answer to Fannie Mae's Counterclaims

L. Postpetition Matters

1. The 506(b) Motion

2. Debtor's Objection to the 506(b) Motion

M. Testimony as to the 506(b) Motion

1. Keith Aurzada, of Bryan Cave

2. Brian Kilmer, of KCW

N. Credibility of Witnesses

2. Conclusions of Law

A. Jurisdiction and Authority to Enter Final Orders

B. Preference

C. Standing

D. Breach of Contract

1. Valid Contract

2. Performance or Tendered Performance

3. Breach

4. Damages

a. To the Extent of Defendants' Breach

b. To the Extent of Debtor's Breach

E. Declaratory Judgment

F. Claim Objection

G. The 506(b) Motion

1. Attorney Fees

a. The Motion for Relief from Stay

b. DIP Financing, Plan, and Disclosure Statement

2. Expert Witness Fees

3. "Miscellaneous Fees"

4. Postpetition Interest

5. Summary of 506(b) Claim

Findings of Fact

Windmill Run Associates, Ltd. ("Debtor") filed a voluntary petition under Chapter 11 of the Bankruptcy Code on August 29, 2015. Debtor owns and operates the 76–unit Windmill Run apartment complex as a Low Income Housing Tax Credit ("LIHTC") property, in Sweeny, Texas. Debtor's Chapter 11 plan was confirmed, by order entered on August 15, 2016. (Docket No. 267, Case No. 15–80319–G3–11).

A. Formation of Debtor

Debtor was formed through a series of agreements between Frank Fonseca, Mark Walther, National Partnership Investments Corp. ("NAPICO"), and various of their affiliates. Prior to the formation of Debtor, Fonseca had previously worked at NAPICO, which was a syndicator of LIHTC properties. (Tr. 11/18/2016, at p. 11).¹ Fonseca headed NAPICO's asset management department, overseeing NAPICO's portfolio of approximately 10,000 LIHTC apartment units. (Tr. 11/18/2016, at p. 11–12). After Fonseca left NAPICO, he and Walther formed American Communities, an entity which develops apartment complexes, primarily LIHTC properties. (Tr. 11/18/2016, at p. 18). Fonseca testified that American Communities has developed approximately 1,000 apartment units. (Tr. 11/18/2016, at p. 19). He testified that the Windmill Run apartment complex was American Communities' first development. (Tr. 11/18/2016, at p. 18).

In the agreements forming Debtor, Windmill Run Development, Inc., an entity owned by Fonseca and Walther, became the operating general partner of the Debtor entity. National Corporate Tax Credit Inc. X ("NCTC X") became the administrative general partner of the Debtor entity.² National Corporate Tax Credit Fund X ("NCTC Fund X") became the limited partner of the Debtor entity. (Windmill Exhibit 38).³ NCTC Fund X was an entity administered by NCTC X, and syndicated to investors by NAPICO. (Tr. 11/18/2016, at p. 20). NCTC X was a NAPICO entity. (Tr. 11/18/2016, at p. 20). Fonseca testified that the tax benefits generated by the property were to flow to the investors in NCTC Fund X. (Tr. 11/18/2016, at p. 20). Fonseca testified that NAPICO holds a nominal ownership interest in the Debtor. (Tr. 11/21/2016, at p. 124).

Breen testified that he was the construction company, part of the development company, and gave guaranties to the tax credit investors with respect to the completion and initial leasing of the property.⁴ (Tr. 12/12/2016, at p. 32).

During December, 2000, Debtor and the Texas Department of Housing and Community Affairs ("TDHCA") executed a "Declaration of Land Use Restrictive Covenants for Low–Income Housing Credits" ("LURA"). The parties have stipulated that the LURA was filed in the real property records of Brazoria County, Texas on December 29, 2000. (Docket No. 80, Adv. No. 15–8013, at Exhibit 1, Fact No. 2).

On December 18, 2002, Debtor closed on permanent financing of the apartment complex. Debtor executed a note payable to Midland Mortgage Investment Corp. ("Midland Mortgage"), in the original principal amount of $2,024,000. (Windmill Exhibit 15).

Effective as of January 1, 2012, Debtor amended its partnership agreement, with Windmill Venture, LLC taking over as the administrative partner of Debtor, in place of NCTC X and NCTC Fund X.⁵ (Windmill Exhibit 40). Fonseca testified that Windmill Venture, LLC is owned by Breen, Fonseca, and Walther. (Tr. 11/18/2016, at p. 19). Breen testified that he repurchased an interest in the Debtor, through the 2012 transaction, because the compliance period under the LURA was nearing completion. (Tr. 12/12/2016, at...