In re Fansteel Foundry Corp.

In the Matter of: Fansteel Foundry Corporation, Debtor.

Case No. 16-01825-als11

UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF IOWA

May 8, 2019

MEMORANDUM OF DECISION

Before the Court is a contested matter involving the Liquidating Trustee's objection¹ to Abigail Land Holdings II, LLC's tax lien (Abigail). Jurisdiction arises under 28 U.S.C. §§ 157 and 1334. For the reasons stated the Trustee's objection is overruled.

FACTS

Debtor filed its petition on September 13, 2016. An amended Schedule E/F added the Union County Treasurer as an unsecured priority claimant in the amount of $267,102.00 which was not identified as contingent, unliquidated or disputed. An amendment to Schedule D was also filed adding Gardenia Ventures, LLC (Gardenia) as a secured creditor for a disputed "tax lien" in the amount of $95,301.00 but did not identify the property subject to the lien.

When it appeared that reorganization was unlikely the Debtor turned to a sale of its assets under 11 U.S.C. §363. A Motion to Sell Free and Clear of Liens under 11 U.S.C. §363(f) was filed in July 2017. The Motion attached proposed bid procedures and an Asset Purchase Agreement from TCTM Financial LLC, Debtor's senior secured lender, as the Stalking Horse.Around this same time the Committee filed a request that a mediator be appointed to assist in facilitating the resolution of claims held by various entities. The sale was pursued simultaneously with the mediation process.

The final sale hearing was eventually held on March 5, 2018. Upon determining that the sale met the conditions of 11 U.S.C. S363(f) the Court approved the sale. The final sale order was not appealed. The sale closed on May 7, 2018.

On July 16, 2018 the Debtor filed its third amendment to Schedule D which deleted Gardenia Ventures, LLC from the schedules and added Abigail as a secured creditor in the amount of $236,134.00. The description states that Abigail "purchased tax-sale property from Gardenia Ventures LLC." Unlike Gardenia's scheduled claim, however, there is no indication on the amendment that Abigail's claim is disputed. Four days after that amendment was filed the Trustee filed this pending objection.

During final arguments Trustee's counsel stated that Abigail had not provided information to establish its claim. The Court directed Abigail to file a proof of claim that included the required documentation. On January 25, 2019 Abigail filed its claim in the amount of $226,657.42. The documents attached set forth the following facts:

1. In June 2015 the Creston property was subject to tax sale.

2. Gardenia obtained the tax sale certificate for that real estate by paying the 2013 delinquent taxes in the amount of $95,301.00.

3. Later Gardenia paid the delinquent 2014 taxes in the amount of $183,001.00 and that amount was added to the tax sale certificate.

4. On February 8, 2018 Abigail received an assignment of Gardenia's tax sale certificate by payment of $236,134.00.² The claim includes a document from the Union CountyTreasurer records that reflects, as of January 19, 2019, a lien in the amount of $183,000.00 and accrued interest in the amount of $146,613.00.

5. After including service fees, the total amount to redeem the certificate as of the same date is $329,548.62.

DISCUSSION

The focus of the Trustee's objection is that the value of Abigail's lien is subject to bifurcation into secured and unsecured amounts based upon the value of the underlying collateral. 11 U.S.C. §506(a). He asserts the because the Creston real estate has no value Abigail holds an unsecured claim. The Trustee advances three reasons to justify this conclusion.

First, is the value of the real estate. The Trustee points to the allocation of the purchase price in a revised APA to indicate the property has a value below that of Abigail's lien. This revised document was supplied to the Court and interested parties on the morning of the Sale Hearing. Section 2.1 states:

$1.00 of such consideration (or such other amount as may be determined by the Bankruptcy Court) shall be apportioned for the purchase of the Debtor's real estate assets and the remainder of the consideration shall be apportioned for the purchase of the Debtor's non-real estate assets.

This position overstates the meaning and purpose of this allocation and is taken out of context. Set forth below is Section 6.3 of the APA which more specifically describes the purpose of the allocation.

Allocation of Consideration and Consideration Allocation Forms.Buyer shall allocate the TCTM Credit Bid, the Cash Consideration, and the Assumed Liabilities among the Acquired Assets as reasonably determined by Buyer (the "Allocation"). The Parties agree, however, that the consideration shall be apportioned only to non-real estate assets. No later than ninety (90) days, after the Closing Date Buyer shall prepare and deliver to Seller Buyer's determination of the allocation (the "Asset Acquisition Statement"). The Asset Acquisition Statement shall be conclusive and binding onthe parties. Seller and Buyer will cooperate in filing with the Internal Revenue Service their respective Forms 8594 as provided for in Section 1060 of the Code on a basis consistent with the Allocation, and the Allocation shall be reflected on any Tax Returns required to be filed as a result of the transactions contemplated hereby.

(emphasis original). As demonstrated by this language the Allocation under the APA does not support the Trustee's argument that it establishes the value of the Creston property. No authority is cited that an allocation for tax purposes is an accepted method of collateral valuation for purposes of 11 U.S.C. §506(a).

The Debtor's schedules did not identify any environmental agency that would have served to inform parties or the Court of potential claims that may have existed against the real estate. In his Objection the Trustee relies upon an assertion made in a claim objection against Creditor William Bieber to calculate the value of the Creston real estate. The Trustee states: "it has been determined that the current known environmental liabilities associated with the Creston Property are not less than $19 million. . . These liabilities far exceed the modest estimated market value of the Creston Property. . . ." To back this statement the Trustee cites to an unexecuted copy of the Environmental Settlement Agreement (Docket No. 552) between the Debtor, Buyer and various environmental agencies, including the United States of America Environmental Protection Agency. That document fails to provide any details, or reference to, the estimated $19 million liability. No information has been supplied to persuade the Court of the relevance of this valuation outside the confines of a settlement with William Bieber.

Second is the language of the Sale Order. The Trustee points to language contained in the sale order that states: "The terms and provisions of the APA and this Sale Order will be binding in all respects upon, and will inure to the benefit of the Debtor, its estate, the Buyer and its respective affiliates, successors and assigns, and any affected third parties . . ." (emphasisoriginal). The Trustee's emphasis on only certain specific terms overlooks that both the APA and Sale Order are binding to the benefit of the named parties. This section does not establish a mandate that permits the APA, an agreement between the Debtor and the Buyer, to govern the rights of parties that may be affected by the provisions of 11 U.S.C. §363(f) and the Sale Order.

Third is the language of the Confirmed Plan related to the tax claim. The exact text states:

Class 6

Secured Claim Tax

Claim of Gardenia

Ventures LLC

The Gardenia Secured Claim3 remains outstanding as an

asserted lien against the WDC Sale Proceeds. The Claim

is disputed. To the extent Allowed [as a secured claim], it

will be paid pursuant to 11 U.S.C. §1129(a)(9)(C). If the

Claim is deemed an Unsecured Claim, it will be paid as

part of Class 9 [the class of general unsecured claims].

Throughout this case the claim arising under the tax sale certificate has been referred to as a "secured claim," "tax lien" or "tax claim." These terms are not interchangeable. The Court asked the parties to clarify their respective positions on whether Abigail would hold a tax claim if it did not hold a lien. The parties agreed that Abigail does not hold a "tax claim" under 507(a)(8). This further serves to highlight the inconsistencies in using these multiple references and the differing treatment that could result under 11 USC §§363(f), 506(a), 506(d), 507(a)(8) or 1129(a)(9)(C) for treatment of the Class 6 claim.

Further complicating the Trustee's reliance on the language appearing at Class 6 is the specific identification of Gardenia as the holder of the tax claim. The Plan filed on June 23, 2018 identified Gardenia and its treatment in Class 6. It was after that date, on July 16, 2018, that the Debtor amended Schedule D to add Abigail. The docket reflects that a copy of the entire proposed plan was served in late June 2018.⁴ Accordingly, it seems that Abigail would not have a copy ofJoint Plan and Disclosure Statement. The Trustee appears to suggest that the confirmed plan that identified Gardenia and its treatment is now automatically binding on Abigail.

In its resistance Abigail contends that the objection to its claim does not apply a precise reading of 11 U.S.C. §506(a) which only permits a valuation of a creditor's lien "on property in which the estate has an interest." "A fundamental premise of section 506(a) is that a claim is subject to reduction in security only when the estate has an interest in the property. Koppersmith v. United States, 156 B.R. 537, 539 (Bankr. S.D. Texas 1993); Dewsnup, 502 U.S. at —, 112 S.Ct. at 776 (citing In re Dewsnup, 908 F.2d 588, 590-591 (10th Cir.1990). Legislative history therefore indicates that, "property ceases to be property of the estate, such as by sale, abandonment, or exemption." Se...