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KBC Bank, N. V. v. Capitol Lakes, Inc.

United States District Court, W.D. Wisconsin

September 27, 2016

KBC BANK, N.V. and SANTANDER BANK, N.A., Appellants,
v.
CAPITOL LAKES, INC., Appellee.

          OPINION AND ORDER

          WILLIAM M. CONLEY DISTRICT JUDGE

         Appellants KBC Bank, N.V. and Santander Bank, N.A., seek review of two orders of the bankruptcy court entered in debtor and appellee Capitol Lakes, Inc.'s Chapter 11 petition. First, the debtor's banks, as the two sole, secured creditors, appeal the bankruptcy court's order setting the value of the secured creditors' claims at $36 million. Second, the banks challenge the bankruptcy court's order that confirmed the Fifth Amended Reorganization Plan for several reasons. The court previously consolidated these two appeals, issued a brief stay of the order confirming the plan, and expedited briefing. ('468 dkt. #10.) For the reasons that follow, the court will affirm both orders.

         BACKGROUND

         A. Facts

         The debtor Capitol Lakes is a non-profit corporation that owns and operates a continuing care retirement community (“CCRC”) in Madison, Wisconsin. The sole member of Capitol Lakes is Pacific Retirement Services, Inc. (“PRS”), an Oregon non-profit corporation. PRS manages Capitol Lakes through individuals employed by Pacific Retirement Management Services, Inc. (“PRMS”), a for-profit Oregon corporation that is wholly owned by PRS.

         PRS acquired Capitol Lakes from Meriter Health Services, Inc., in November 2007, in a transaction that involved: PRS assuming certain pre-existing bond debt; the issuance of new bond debt; PRS procuring letters of credit from the banks to provide credit support for the bonds; and the purchase from KBC of an interest rate swap to hedge the interest rate exposure associated with the variable nature of rates of certain of the bonds. Under the terms of this transaction, the banks secured first priority liens on substantially all of Capitol Lakes' assets. In addition, the Indenture Trustee holds approximately $3.799 million in a debt service reserve fund (“DSRF”) for the benefit of the banks.

         B. Procedural Posture

         On January 29, 2016, Capitol Lakes filed its Chapter 11 bankruptcy petition. On February 3, Capitol Lakes filed a motion asking the bankruptcy court to set a value for the collateral securing appellants KBC Bank, N.V. and Santander Bank, N.A.'s claims. The court held a hearing on the motion on April 6 and 7. Capitol Lakes relied on the expert opinion of Neil J. Beaton in seeking a valuation of $32 million. The banks' experts David Fields and Ed Smith valued the banks' collateral at $50.25 million and between $47.3 and $49.6 million, respectively. On April 7, the bankruptcy court entered an order valuing the bank collateral at $36 million.

         The banks then opted to elect application of 11 U.S.C. § 1111(b)(2) to their claims, which entitled the banks to a payment stream that: (a) is in the full amount of the bank claims; and (b) has a net present value as of the effective date of any plan of reorganization equal to the value of the bank collateral, set at $36 million.

         Capitol Lakes filed various iterations of a plan for reorganization. Material to the banks' challenges, the Third Amended Plan was filed on April 17. That Plan divided the claims into various classes, including the banks' secured claims, other general unsecured creditor claims, and the residents' claims. (Banks' Ex. 4 at ¶ 3.2.) On April 20, the bankruptcy court issued an order approving the disclosure statement and scheduling a hearing to consider confirmation of that plan for June 22. Capitol Lakes distributed the Third Amended Plan and the disclosure statement to creditors, and then solicited votes to accept it. The plan was overwhelmingly accepted by residents and the general unsecured creditors, with 98.12% of the residents and 99.84% of the holders of general unsecured claims voting in favor of the plan. (Appellee's Br. ('468 dkt. #19) 25 & 25 n.8.)

         Before the confirmation hearing, however, Capitol Lakes filed Fourth and Fifth Amended Plans, both without filing or distributing an amended disclosure, apparently because in particular, both amended plans only changed the treatment of the banks' secured claims. Material to this appeal, the Fifth Amended Plan provided that the bank claims would be treated as fully secured and paid by the debtor over the course of 12 years with annual payments of $1.674 million in years 1-12 (2017-2028) and a balloon payment of $33, 720, 000 in 2028. (5th Am. Plan ('468 dkt. #2-2).)

         In connection with the confirmation hearing, the parties provided expert opinions on the appropriate interest / discount rate for purposes of determining whether the net present value of the payment stream under the reorganization plan complied with the requirements of § 1129(b). Capitol Lakes' expert, Timothy J. Dragelin, opined that the appropriate rate was 4.65%. The banks' expert, Keith Bierman, opined that the appropriate rate was 8.37%.

         On June 22 and 23, the bankruptcy court held a confirmation hearing, and on June 27, the bankruptcy court issued its opinion and entered the order confirming the Fifth Amended Plan as “supplemented and modified specifically during the hearing on confirmation and augmented by the representations and promises made by the debtor or its counsel during argument.” (6/27/16 Bankr. Op. & Order ('468 dkt. #2-1) 13.)

         OPINION

         I. Standard of Review

         This court reviews a bankruptcy court's findings of fact deferentially for clear error, while legal conclusions are reviewed de novo. See In re Doctors Hosp. of Hyde Park, Inc., 474 F.3d 421, 426 (7th Cir. 2007) (citing Fed.R.Bankr.P. 8013 and In re Crosswhite, 148 F.3d 879, 881 (7th Cir. 1998)). “Special deference must be accorded to credibility determinations” in particular, “‘for only the trial judge can be aware of the variations in demeanor and tone of voice that bear so heavily on the listener's understanding and belief of what is said.'” Bonnett, 895 F.2d at 1157 (quoting Anderson, 470 U.S. at 575). “Absent an abuse of discretion, an appellate court should not attempt to redetermine the credibility of witnesses.” Id. (citing In re Pearson Bros. Co., 787 F.2d 1157, 1162 (7th Cir. 1986)).

         As for factual findings generally, appellate courts are admonished not to overturn the bankruptcy court simply because the appellate court may have decided the case differently. In re Morris, 223 F.3d 548, 553 (7th Cir. 2000). Although there may be evidence to support it, a factual finding is clearly erroneous when “the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” In re Thirtyacre, 36 F.3d 697, 700 (7th Cir. 1994) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573 (1985)).

         The banks raise several challenges to the bankruptcy court's order confirming the reorganization plan. They also object to the court's valuation of the banks collateral at $36 million. Each challenge is addressed in turn below.

         II. Order Confirming Reorganization Plan

         A. Satisfaction of § 1111(b) Election

         As previously explained, because the banks elected repayment of their secured claim under 11 U.S.C. § 1111(b), they are entitled to

receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's ...

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