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In the Matter of v. Unsecured Creditors Committee

March 16, 2011

IN THE MATTER OF: HERITAGE HIGHGATE, INC., DEBTOR. INVESTORS, ET AL., APPELLANTS,
v.
UNSECURED CREDITORS COMMITTEE, APPELLEE.



Case No. 09-11198/GMB ON APPEAL FROM AN ORDER OF THE UNITED STATES JOHN YAISSLE and CORNERSTONE BANKRUPTCY COURT FOR THE DISTRICT OF NEW JERSEY

The opinion of the court was delivered by: Hon. Jerome B. Simandle

SIMANDLE, District Judge

I. INTRODUCTION

This matter is before the Court on the appeal of John Yassile and the Cornerstone Investors (the "Cornerstone Investors" or "Appellants") of the May 6, 2010 Order of the Bankruptcy Court for the District of New Jersey, which granted the motion of the Official Committee of Unsecured Creditors ("Committee" or "Appellee") to determine the value of the Cornerstone Investors' secured claims at zero, pursuant to 11 U.S.C. § 506(a) and Rule 3012 of the Federal Rules of Bankruptcy Procedure. Because the Court finds that the Bankruptcy Court appropriately interpreted § 506(a) in valuing the Appellants' claims and followed appropriate procedure under the Federal Rules of Bankruptcy Procedure, the Court will affirm the Bankruptcy Court's order.

II. BACKGROUND AND PROCEDURAL HISTORY

This issue is rooted in the voluntary Chapter 11 petitions for bankruptcy filed by the Debtors in this case.*fn1 On January 20, 2009, Debtors Heritage Highgate, Inc. and Heritage-Twin Ponds, II, L.P. both filed separate Chapter 11 petitions with the Bankruptcy Court for the District of New Jersey. (Stipulation ¶ 1.) (See Bankruptcy Dockets 09-11197 and 09-11198.) Debtors own and develop a residential subdivision in Lehigh County, Pennsylvania, encompassing approximately 140 acres, known as the "Highgate." (Stipulation ¶ 2.) The Debtors anticipated developing 411 individual residential units in the Highgate. (Id.) The Debtors entered into construction loan agreements with a group of Bank Lenders, who hold a first priority lien on substantially all of the Debtors' assets, which the parties to this appeal refer to as the "Senior Secured Debt." (Id. ¶ 8.) As of the date of the Joint Stipulation of Facts, the Senior Secured Claim amounted to $12,074,333. (Id. ¶ 10.)

Prior to petitioning for Chapter 11 bankruptcy, the Debtors had entered into various loan agreements with the Appellants, a group of individuals and trusts known as the "Cornerstone Investors." (Id. ¶ 11.) These loans were secured by liens of equal priority on substantially all of the Debtors' assets. (Id.) As of the date of the Joint Stipulation of Facts, the Appellants were owed approximately $1.4 million. (Id.) During the course of the bankruptcy proceedings, the Cornerstone Investors entered into agreements with the Bank Lenders, which provide that the Cornerstone Investor claims are subordinated to the Bank Lenders' Senior Secured Claim. (Id.)

After developing and selling off 101 units of the 411 unit subdivision, on January 20, 2009, Debtors filed their petitions for bankruptcy. On June 9, 2009, the Debtors filed a joint proposed plan of reorganization in which the Debtors would emerge from Chapter 11, continue and complete the project, and make distributions to creditors according to a set of projections.

(Id. ¶ 2.) [Bankruptcy Docket Items 133 & 134.] In the first proposed plan, Debtors projected that they would pay the secured claims of the Cornerstone Investors in full after paying the Bank Lenders in full, and thereafter pay all unsecured allowed claims at a rate of approximately 20% of each claim upon completion of the project. (Disclosure Statement, June 9, 2009 at 18-20.)

On September 4, 2009, the Official Committee of Unsecured Creditors, Appellee in this matter, filed its Motion to Determine the Value of the Secured Claims of Cornerstone Investors Pursuant to 11 U.S.C. § 506(a) and Rule 3012, Fed. R. Bankr. P. [Bankruptcy Docket Item 190.] The Committee argued in its brief that the Bankruptcy Court should value the secured claims of the Cornerstone Investors at zero because, based on an appraisal of the Highgate Project, the entire Project, the collateral securing the Cornerstone Investors' liens, was worth less than the Senior Secured Claims, leaving no collateral to secure the Cornerstone Investor claims. (Mot. to Determine Value ¶ 19.)

On September 22, 2009, the Cornerstone Investors responded in opposition to the Committee's motion. [Bankruptcy Docket Item 211.] In their response, the Cornerstone Investors argued that their claims should be valued as fully secured because the Debtors' proposed plan included a budget which projected sufficient plan revenue to be able to pay the Cornerstone Investors' claims in full. (Br. in Opp. ¶ 11.) Additionally, the Cornerstone Investors argued that "the Committee's Motion is premature and should be deferred pending a determination as to whether the Plan will be confirmed." (Id. at ¶ 31.)

In the following months, the Debtors' Chapter 11 Plan was amended multiple times. On October 19, 2009, the Debtors submitted the Second Amended Disclosure Statement [Bankruptcy Docket Item 253], which was approved by the Bankruptcy Court on October 22, 2009 [Bankruptcy Docket Item 263]. The approved Disclosure Statement estimated that the unsecured creditors would receive approximately 33% of their claims upon completion of the project. (Second Am. Disclosure Statement at 27.) The parties to this appeal have subsequently stipulated that the final confirmed plan proposes to pay "general unsecured creditors a distribution in the approximate amount of forty-five percent (45%) of all outstanding prepetition general unsecured claims." (Stipulation ¶ 5(c).)

On March 2, 2010, the Debtors submitted the First Modified Second Amended Joint Plan of Reorganization ("Confirmed Plan"). [Bankruptcy Docket Item 348.] This final plan specifies that the secured claims of the Cornerstone Investors (classified as Class 3 under the Plan) will be treated as secured only to the extent determined by the Bankruptcy Court according to 11 U.S.C. § 506(a).

The amount of the Secured Claims of the Cornerstone Investors shall be determined by the Bankruptcy Court under Section 506(a) of the Bankruptcy Code, which has been presented to the Bankruptcy Court by the Committee's Motion to Determine the Value of the Secured Claims of Cornerstone Investors . . . Each holder of a Class 3 Claim shall be paid under this Section 4.3 to the extent of the determination of its secured status by the Bankruptcy Court in connection with the 506(a) Proceeding, and to the extent any portion of the Claim is an unsecured Deficiency Claim under section 506(a) of the Bankruptcy Code, such portion shall be treated as a Class 5 Claim under this Plan." (Confirmed Plan at 15-16). The Plan otherwise classified all allowed unsecured claims as Class 5 claims.

The Plan contains a budget, which anticipates full payment of the Bank Lenders' senior secured debt by January of 2013, and commencing payment to a line item titled the "subordinated equity loan" in January of 2013 and to complete payment ...


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