505 B.R. 277
Bankr. C.D. Cal.2014Background
- Thirty-one affiliated LLC debtors (debtor TICs) own ~86% of commercial property in Alpharetta, GA; several non-debtor TICs own the remainder. Cases administratively consolidated.
- Lender (WBCMT 2007-C31) holds ~ $27M secured claim; foreclosure occurred prepetition but was unwound as void under In re Bialac because of lead debtor’s petition.
- Court valued the property at $21M for plan purposes, fixing a 5.94% interest rate to provide present value of the secured claim after a $1M paydown; unsecured deficiency ≈ $6M.
- Debtors proposed a plan relying on ~$5.11M new capital from ASB Acquisitions/Steelbridge, retention of existing equity interests, restructuring into a new LLC, and utilizing a TIC Agreement call option to address non-debtor TICs.
- Lender opposed confirmation and sought relief from stay; court held combined confirmation/hearing and found multiple legal and factual defects preventing confirmation.
Issues
| Issue | Debtors' Argument | Lender's Argument | Held |
|---|---|---|---|
| Fair & equitable valuation / present value | Court’s $21M valuation and 5.94% rate satisfy §1129(b)(2)(A) present value | Lender objects to feasibility and adequacy of plan payments | Court accepted $21M valuation and 5.94% as present-value math but other defects block confirmation |
| Absolute priority / new-value market testing (LaSalle) | Debtors contend new capital is sufficient and exclusivity lapse allowed market testing | Lender says debtor failed to market-test; Breakwater outreach inadequate | Court: LaSalle requires meaningful market testing; Breakwater’s limited, undocumented contacts fail to carry debtor’s burden |
| Classification / artificial impairment | Debtors separately classify lender’s deficiency (Class 5) and small unsecureds (Class 4); Class 4 is consenting impaired class | Lender contends gerrymandering and artificial impairment; guaranty is insufficient to justify separate class | Court: Bare guaranty without proof of meaningful recovery is not a valid business justification; likely no legitimate consenting impaired class; plan lacks good faith under §1129(a)(3) |
| Means of implementation / control of non-debtor TICs (Call Option / §363(h)) | Debtors assert Call Option in TIC Agreement or bankruptcy sale mechanisms enable obtaining non-debtor interests and effect reorganization | Lender says call exercise is legally doubtful, lacks required procedures, may implicate due process/Stern issues; §363(h) requires adversary proceeding | Court: Unclear that Call Option can be lawfully and summarily used here; non-debtor rights cannot be extinguished in this confirmation proceeding without further litigation; feasibility fails in practical terms |
| Credit-bid rights / sale vs transfer characterization | Debtors: restructuring into new entities is a transfer, not a §363 sale triggering credit-bid rights | Lender: Plan is a disguised sale; secured creditor must be allowed to credit-bid under §363(k) and §1129(b)(2)(A)(ii) | Court: Whether a transaction is a "sale" turns on whether creditor’s lien is being pried off to cash proceeds; here lien largely follows property so §363(k) credit-bid barrier does not preclude confirmation |
Key Cases Cited
- Harsh Investment Co. v. Bialac (In re Bialac), 712 F.2d 426 (9th Cir.) (petition can void foreclosure as affecting property of the estate)
- Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434 (1999) (new-value cramdown requires market testing)
- In re Pacific Lumber Co., 584 F.3d 229 (5th Cir.) (distinguishing transfers from sales in plan implementations)
- RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065 (2012) (credit-bid and plan/sale interplay)
- United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988) (standards for stay relief when no reorganization in prospect)