In Re Heritage Highgate, Inc.
679 F.3d 132
| 3rd Cir. | 2012Background
- Debtors Heritage Highgate, Inc. and Heritage-Twin Ponds II, L.P. are developing a Lehigh County subdivision; Bank Lenders hold senior liens on substantially all assets, with Cornerstone Investors holding equal-priority liens that are later subordinated by intercreditor agreements.
- Administrative history: Debtors filed Chapter 11 on Jan 20, 2009; proposed plan (June 9, 2009) envisioned paying Bank Lenders first, then Cornerstone, then unsecureds; Cornerstone liens were subordinated to Bank Lenders in intercreditor agreements.
- Appraisal: Feb 2009 appraisal valued the Project at about $15 million (two methodologies, with the income-capitalization method favored); the Court accepted this value for cash collateral purposes.
- Subsequent value adjustments: as of confirmation, appraised value was adjusted to about $9.54 million from subsequent lot sales; total collateral value post-adjustment was about $11.17 million.
- Bankruptcy Court ruling: on May 3, 2010, held the Cornerstone Investors’ claims secured only to the extent of the Project’s value as of confirmation; concluded appraised FMV controlled; Cornerstone deemed unsecured; plan confirmed without objection; District Court affirmed on appeal.
- Issues presented on appeal: (1) appropriate burden of proof and standard for § 506(a) valuations in a Chapter 11 reorganization; (2) whether using FMV tied to proposed disposition/use is appropriate and whether plan projections can alter value; (3) whether Dewsnup lien stripping applies in Chapter 11; (4) allocation of burden of persuasion in valuation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| What valuation standard governs § 506(a) in this Chapter 11 | Cornerstone: wait-and-see/value over time should control | Heritage Cornerstone: FMV as of confirmation controls | FMV as of confirmation controls; burden-shifting framework adopted |
| Does proposed disposition/use mandate wait for full build-out for valuation | Cornerstone urges plan build-out to reflect value | Debtors argue valuation must reflect present use and value | Valuation based on present FMV aligned with proposed use; plan budget not a valuation |
| Application of Dewsnup lien stripping in Chapter 11 | Cornerstone argues Dewsnup limits lien stripping in reorganization | Court rejects extending Dewsnup to Chapter 11 | Dewsnup does not apply to Chapter 11 lien stripping; no impermissible stripping |
| Burden of proof for § 506(a) valuation | Cornerstone bears ultimate burden to show overvaluation | Committee bears initial burden to establish value; appraisal suffices | Burden-shifting framework applies; Committee carried initial burden; Cornerstone failed to prove higher value |
Key Cases Cited
- Associates Commercial Corp. v. Rash, 520 U.S. 953 (Supreme Court (1997)) (establishes § 506(a) valuation framework and use of disposition or use)
- In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72 (1st Cir. 1995) (replacement value concept; valuation in § 506(a) context)
- Dewsnup v. Timm, 502 U.S. 410 (Supreme Court (1992)) (limits on lien stripping in Chapter 7; relevance to 11 context questioned)
- In re Savannah Gardens-Oaktree, 146 B.R. 306 (Bankr. S.D. Ga. 1992) (valuation in connection with plan confirmation timing)
- In re Stanley, 185 B.R. 417 (Bankr. D. Conn. 1995) (valuation compatible with confirmation date)
- In re Tamarack Trail Co., 23 B.R. 3 (Bankr. S.D. Ohio 1982) (valuation of partially developed project; FMV)