In the Matter of: TEXAS GRAND PRAIRIE HOTEL REALTY, L.L.C., Debtor WELLS FARGO BANK NATIONAL ASSOCIATION, as Trustee for the Morgan Stanley Capital I Incorporated, Commercial Mortgage Pass Through Certificates Trust, Series 2007-XLF9, acting by and through its Special Servicer, Berkadia Commercial Mortgage, L.L.C., Appellant v. TEXAS GRAND PRAIRIE HOTEL REALTY, L.L.C.; TEXAS AUSTIN HOTEL REALTY, L.L.C.; TEXAS HOUSTON HOTEL REALTY, L.L.C.; TEXAS SAN ANTONIO HOTEL REALTY, L.L.C., Appellees
No. 11-11109
United States Court of Appeals for the Fifth Circuit
March 1, 2013
Appeal from the United States District Court for the Northern District of Texas
PATRICK E. HIGGINBOTHAM, Circuit Judge:
I.
In 2007, Texas Grand Prairie Hotel Realty, LLC, Texas Austin Hotel Realty, LLC, Texas Houston Hotel Realty, LLC, and Texas San Antonio Hotel Realty, LLC (collectively, “Debtors“) obtained a $49,000,000 loan from Morgan Stanley Mortgage Capital, Inc., applying the proceeds to acquire and renovate four hotel properties in Texas. Morgan Stanley — not a party to this case — took a security interest in the hotel properties and in substantially all of the Debtors’ other assets. Wells Fargo eventually acquired the loan from Morgan Stanley.
In 2009, the Debtors’ hotel business soured. Unable to pay Wells Fargo‘s loan as payment came due, the Debtors filed for Chapter 11 protection and proposed a plan of reorganization. When Wells Fargo rejected the proposed reorganization, the Debtors sought to cram down their plan under
Wells Fargo filed a Daubert motion seeking to strike Robichaux‘s testimony under Rule 702, insisting that “Robichaux‘s . . . failure to correctly apply Till and its progeny show[s] that his methodology is flawed, does not comport with applicable law, and is unreliable.” The bankruptcy court denied Wells Fargo‘s motion to strike, adopted Robichaux‘s analysis as correct, and confirmed the Debtors’ cramdown plan.
Wells Fargo appealed to the district court, challenging the bankruptcy court‘s decision to admit Robichaux‘s testimony as well as the court‘s adoption of Robichaux‘s
II.
We begin by reviewing de novo the Debtors’ equitable mootness defense.4 The doctrine of equitable mootness is unique to bankruptcy proceedings, responsive to the reality that “there is a point beyond which a court cannot order
This Circuit has taken a narrow view of equitable mootness, particularly where pleaded against a secured creditor.7 Reasoning that “the possibility of partial recovery obviates the need for equitable mootness,”8 we have permitted appeals to go forward even where granting full relief “could have imposed a very significant liability on the estate, to the great detriment of both the success of the reorganization and third parties.”9 For example, in Matter of Scopac, we permitted secured creditors to appeal a bankruptcy court valuation order whose reversal had the potential to — and ultimately did — impose millions of dollars in liability on a cash-starved entity just emerging from bankruptcy.10 In Matter
The Debtors insist that granting relief to Wells Fargo could result in a cataclysmic unwinding of the reorganization plan. According to the Debtors, “all of the nearly $8 million in distributions made under the Plan, and all of the other actions taken in furtherance and implementation of the Plan — including transactions with third parties — will be in jeopardy of needing to be undone, clawed back, or otherwise abrogated.” Moreover, the Debtors contend, any money judgment against them would come out of the pockets of unsecured creditors, as “[t]here is just one ‘pot’ of funds to distribute.” Finally, the Debtors aver, a judgment in favor of Wells Fargo would affect the rights and expectations of the “Equity Purchaser” — that is, the Debtors themselves — who paid a substantial sum to acquire equity in the bankrupt entities pursuant to the reorganization plan.
While the Debtors’ concerns might be realized, they need not be. This Court could grant partial relief to Wells Fargo without disturbing the reorganization, by, for example, awarding a slightly higher
Nor do the Debtors present compelling evidence that granting fractional relief would unduly burden the rights of third parties not before the court.
As for the Debtors’ assertion that a fractional award to Wells Fargo would affect their interest as equity holders in the reorganized bankrupt, perhaps they are correct. But equitable mootness protects only “the rights of parties not before the court.”12 The fact “that a judgment might have adverse consequences [to the equity holders of the reorganized bankrupt] is not only a natural result of any appeal . . . but [should have been] foreseeable to them as sophisticated investors.”13
Unpersuaded by the Debtors’ motion to dismiss this appeal as equitably moot, we proceed to the merits, turning first to Wells Fargo‘s claim that the bankruptcy court erred in admitting the testimony of the Debtors’ restructuring expert — Mr. Louis Robichaux — regarding the appropriate
III.
According to Wells Fargo, Robichaux‘s testimony is inadmissible under Rule 702 because his “purely subjective approach to interest-rate setting” violates the Supreme Court‘s decision in Till, which “call[s] for an objective inquiry.”
Here, Wells Fargo does not challenge Robichaux‘s factual findings, calculations, or financial projections, but rather argues that Robichaux‘s analysis as a whole rested on a flawed understanding of Till. As we read it, Wells Fargo‘s Daubert motion is indistinguishable from its argument on the merits. It follows that the bankruptcy judge reasonably deferred Wells Fargo‘s Daubert argument to the confirmation hearing instead of deciding it before the hearing.19 We pursue the same path and proceed to the merits.
Wells Fargo claims that the bankruptcy court erred in setting a 5% cramdown rate. We turn first to the standard under which this Court reviews a Chapter 11 cramdown rate determination, then to its application.
A.
Under
Wells Fargo contends that though a bankruptcy court‘s factual findings under
We disagree. In T-H New Orleans, we “[declined] to establish a particular formula for determining an appropriate cramdown interest rate” under
Nor is Till. In Till, a plurality of the Supreme Court ruled that bankruptcy courts must calculate the Chapter 13 cramdown rate by applying the
B.
At length, we turn to address whether the bankruptcy court clearly erred in assessing a 5% cramdown rate under
1.
Under the Till plurality‘s formula method, a bankruptcy court should begin its cramdown rate analysis with the national prime rate — the rate charged by banks to creditworthy commercial borrowers — and then add a supplemental “risk adjustment” to account for “such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan.”35 Though the plurality “d[id] not decide the proper scale for the risk adjustment,” it observed that “other courts have generally approved adjustments of 1% to 3%.”36
In ruling that the formula method governs under Chapter 13, the Till plurality was motivated primarily by what it viewed as the method‘s simplicity and objectivity.37 First, the plurality reasoned, the method minimizes the need for costly evidentiary hearings, as the prime rate is reported daily, and as “many
For these same reasons, the plurality “reject[ed] the coerced loan, presumptive contract rate, and cost of funds approaches,” as “[e]ach of these approaches is complicated, imposes significant evidentiary costs, and aims to make each individual creditor whole rather than to ensure the debtor‘s payments have the required present value.”40 The plurality was particularly critical of the coerced loan approach applied by the Seventh Circuit below, noting that it “requires bankruptcy courts to consider evidence about the market for comparable loans to similar (though nonbankrupt) debtors — an inquiry far removed from such courts’ usual task of evaluating debtors’ financial circumstances and the feasibility of their debt adjustment plans.”41
Having explained its prime-plus formula, the plurality applied it to the case before the Court, in which the secured creditor — an auto-financing company — objected to the bankruptcy court‘s assessment of a cramdown rate at 1.5% over prime.42 The creditor claimed that this cramdown rate was woefully inadequate to compensate it for the risk that the debtor would default on its restructured obligations, presenting evidence that the subprime financing
In a spirited dissent, Justice Scalia warned that the plurality‘s approach would “systematically undercompensate” creditors.45 Justice Scalia observed that “based on even a rudimentary financial analysis of the facts of this case, the 1.5% [risk adjustment assessed by the plurality] is obviously wrong — not just off by a couple percent, but probably by roughly an order of magnitude.”46 As for the plurality‘s reference to the testimony of the debtors’ economics expert, Justice Scalia noted that “[n]othing in the record shows how [the expert‘s] platitudes were somehow manipulated to arrive at a figure of 1.5 percent.”47 Justice Scalia concluded that it was “impossible to view the 1.5% figure as anything other than a smallish number picked out of a hat.”48
While Till was an appeal from a Chapter 13 proceeding, the plurality observed that “Congress [likely] intended bankruptcy judges and trustees to follow essentially the same [formula] approach when choosing an appropriate interest rate under [Chapters 11],” reasoning that the applicable statutory language was functionally identical in both contexts.49 However, in Footnote 14,
In spite of Justice Scalia‘s warning, the vast majority of bankruptcy courts have taken the Till plurality‘s invitation to apply the prime-plus formula under Chapter 11.51 While courts often acknowledge that Till‘s Footnote 14 appears to endorse a “market rate” approach under Chapter 11 if an “efficient market” for a loan substantially identical to the cramdown loan exists, courts almost invariably conclude that such markets are absent.52 Among the courts that follow Till‘s formula method in the Chapter 11 context, “risk adjustment” calculations have generally hewed to the plurality‘s suggested range of 1% to 3%.53 Within that range, courts typically select a rate on the basis of a holistic
2.
Returning to the proceedings in this case, both Wells Fargo and the Debtors presented the bankruptcy court with expert testimony on the appropriate prime-plus cramdown rate. Mr. Louis Robichaux, the Debtors’ expert, began his analysis by quoting the prime rate at 3.25%. He then proceeded to assess a risk adjustment by evaluating the factors enumerated by the Till plurality, looking to “the circumstances of the [D]ebtors’ estate, the nature of the security, and the duration and feasibility of the plan.” Robichaux concluded that the Debtors’ hotel properties were well maintained and excellently managed, that the Debtors’ owners were committed to the business, that the Debtors’ revenues exceeded their projections in the months prior to the hearing, that Wells Fargo‘s collateral was stable or appreciating, and that the Debtors’ proposed cramdown plan would be tight but feasible. On the basis of
Wells Fargo‘s expert, Mr. Richard Ferrell, corroborated virtually all of Robichaux‘s findings with respect to Debtors’ properties, management, ownership, and projected earnings. Ferrell also agreed that the applicable prime rate was 3.25%. However, Ferrell devoted the vast majority of his cramdown rate analysis to determining the rate of interest that the market would charge to finance an amount of principal equal to the cramdown loan. Because Ferrell concluded that there was no market for single, secured loans comparable to the forced loan contemplated under the cramdown plan, he calculated the market rate by taking the weighted average of the interest rates the market would charge for a multi-tiered exit financing package comprised of senior debt, mezzanine debt, and equity. Ferrell‘s calculations yielded a “blended” market rate of 9.3%.56
To bring his “market influenced” analysis within the form of Till‘s prime-plus method, Ferrell purported to “utilize the [3.25%] Prime Rate as the Base Rate,” making an upward “adjustment” of 6.05% to account for “the nature of the security interest.” This calculation yielded Ferrell‘s 9.3% blended market rate.57
The bankruptcy court agreed with the parties that Till was “instructive, if not controlling” under Chapter 11. Turning to Mr. Robichaux‘s analysis, the court concluded that “Mr. Robichaux properly interpreted Till and properly applied it,” and that his “assessment of the circumstances of the estate, the nature of the security, and the feasibility of the plan . . . [were] credible and persuasive.” As for Mr. Ferrell‘s analysis, the court rejected it as inconsistent with Till‘s prime-plus method:
I disagree with [Mr. Ferrell‘s] approach because it establishes a benchmark before adjustment that I just view to be completely inconsistent with Till. Till set that benchmark at national prime, but according to Mr. Ferrell, you first determine what level any portion of a loan would be financeable, and then you begin to work from there. . . . The Court finds no support for that type of analysis in Till. If anything this strikes the Court as more in the nature of a forced loan approach that the majority in Till expressly rejected.
Ultimately, the court determined, “[Robichaux‘s] risk adjustment rate of 1.75% is defensible, . . . especially . . . in light of the modifications to the plan which render, in the Court‘s opinion, the plan feasible.” Consequently, the court concluded that Wells Fargo was entitled to a 5% cramdown rate.
We agree with the bankruptcy court that Robichaux‘s
We also agree that Ferrell predicated his 8.8% cramdown rate on the sort of comparable loans analysis rejected by the Till plurality. Wells Fargo‘s briefs repeatedly aver that the plurality characterized “the market for comparable loans” as “relevant,” complaining that Ferrell‘s analysis can “hardly be consigned to the dustbin for considering relevant information.” However, aside from the fact that Wells Fargo takes the quoted language out of context, the plurality expressly rejected methodologies that “require[] the bankruptcy courts to consider evidence about the market for comparable loans,” noting that such approaches “require an inquiry far removed from such courts’ usual task of
Wells Fargo complains that Robichaux‘s analysis produces “absurd results,” pointing to the undisputed fact that on the date of plan confirmation, the market was charging rates in excess of 5% on smaller, over-collateralized loans to comparable hotel owners. While Wells Fargo is undoubtedly correct that no willing lender would have extended credit on the terms it was forced to accept under the
Notably, Wells Fargo makes no attempt to predicate Ferrell‘s “market-influenced” blended rate calculation on the Till plurality‘s Footnote 14, which suggests that a “market rate” approach should apply in Chapter 11 cases where
Even assuming, however, that Footnote 14 has some persuasive value, it does not suggest that the bankruptcy court here committed any error. Among the courts that adhere to Footnote 14, most have held that markets for exit financing are “efficient” only if they offer a loan with a term, size, and collateral comparable to the forced loan contemplated under the cramdown plan.65 In the present case, Ferrell himself acknowledged that “there‘s no one in this market today that would loan this loan to the debtors — one to one loan-to-value ratio,
***
The bankruptcy court in this case calculated the disputed 5% cramdown rate on the basis of a straightforward application of the prime-plus approach — an approach that has been endorsed by a plurality of the Supreme Court, adopted by the vast majority of bankruptcy courts, and, perhaps most importantly, accepted as governing by both parties to this appeal. On this record, we cannot conclude that the bankruptcy court‘s cramdown rate calculation is clearly erroneous. However, we do not suggest that the prime-plus formula is the only — or even the optimal — method for calculating the Chapter 11 cramdown rate.
V.
The judgment of the district court is AFFIRMED.