574 B.R. 107
Bankr. E.D. Mich.2017Background
- Debtor (Packard Square, LLC) obtained a $53.78M construction loan from Canyon in 2014 to build a mixed-use project in Ann Arbor; it defaulted on milestone dates and state court appointed a receiver in Oct. 2016.
- State-court receiver obtained court-approved receivership financing (initially up to $19.7M) with superpriority lien; receiver performed construction work thereafter.
- Debtor filed Chapter 11 on Sept. 5, 2017, and moved under 11 U.S.C. § 364 to borrow up to $22,006,132 from Ardent (with $1.5M interim) that would prime existing liens and receive superpriority administrative expense status.
- Canyon objected, asserting lack of adequate protection and disputing property value and lien amounts; several subcontractors also filed (limited) objections asserting construction liens.
- The Court held an evidentiary hearing limited to adequate protection, received competing appraisals and lien evidence, and denied the DIP financing motion for lack of adequate protection.
Issues
| Issue | Debtor's Argument | Canyon's Argument | Held |
|---|---|---|---|
| Whether Debtor proved adequate protection to permit a priming DIP lien under §364(d) | Value of property (as‑is and projected after completion) substantially exceeds liens even after adding $22M DIP; draws would track value increases | Property value is lower; existing lien amounts (Canyon’s loans + construction liens) are higher and accruing interest; Debtor’s appraisals and assumptions are unreliable | Denied — Debtor failed to prove adequate protection by preponderance (no indubitable equivalent) |
| Reliability of Debtor’s valuation evidence | Appraiser (Abraham) opined As‑Is $73.8M (+ $4.08M TIF), completion $85.7M, stabilized $89.4M; draws will increase value as work proceeds | Canyon’s appraiser (Eisenbraun) rebutted assumptions: overstated rents/retail area, unsupported cap rate, unrealistic lease‑up, underestimated completion costs/time | Debtor’s appraisal found speculative and unreliable; Court gave it little weight |
| Correct amount of existing liens and treatment of subcontractor claims | Debtor disputed some lien amounts and asserted lower totals (range presented) | Canyon presented credible evidence existing liens ≥ $59.625M as of Aug. 31, 2017, increasing ≈ $640k/month in interest; construction liens ≈ $8.915M | Court credited Canyon’s lien totals for adequate‑protection analysis |
| Whether projected equity cushion is adequate protection | Gradual DIP advances will be matched by rising asset value, producing sufficient cushion | Even on debtor’s optimistic values, projected cushions are thin (single‑digit %), and risk to existing lienholders is substantial | Thin, speculative equity cushions (≈3–8%) are insufficient; priming denied |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (preponderance standard for civil claims) (sets burden for proving facts by preponderance)
- In re Qualitech Steel Corp., 276 F.3d 245 (7th Cir.) (§ 364(d) priming liens are last resort)
- In re YL West 87th Holdings I LLC, 423 B.R. 421 (Bankr. S.D.N.Y. 2010) (deny priming DIP where project speculative)
- Resolution Trust Corp. v. Swedeland Dev. Group, Inc., 16 F.3d 552 (3d Cir.) (rejects relying on speculative future value to provide adequate protection)
- In re Kost, 102 B.R. 829 (D. Wyo.) (equity cushion case law: >20% generally adequate; <11% generally insufficient)