In re: Heritage Hotel Associates, LLC, Debtor.
No. 8:19-bk-09946-CED
United States Bankruptcy Court, M.D. Florida, Tampa Division
June 28, 2021
Chapter 11
MEMORANDUM OPINION SUSTAINING, IN PART, DEBTOR'S OBJECTION TO CLAIM NO. 35 OF CCP SP HOTEL, LLC
Caryl E. Delano Chief United Stares Bankruptcy Judge
THIS CASE came before the Court on February 9 and 10, 2021, for trial of Debtor's Objection to Claim No. 35 Filed by CCP SP Hotel, LLC.[1] On March 3, 2021, counsel for the parties presented their closing arguments.
Under Federal Rule of Bankruptcy Procedure 3001(f), a properly filed proof of claim constitutes prima facia evidence of the validity and amount of the claim.[2] If the objecting party overcomes the prima facie case, then the burden of proof falls to the party that would bear the burden outside of bankruptcy.[3]
I. BACKGROUND
The debtor in this Chapter 11 case, Heritage Hotel Associates, LLC ("Heritage"), previously owned a Hotel Indigo in St. Petersburg, Florida (the "Hotel") and an adjoining property (the "Retail Parcel"). Heritage's primary creditor was Valley National Bank ("Valley"), the holder of a promissory note secured by a mortgage on the Hotel and the Retail Parcel (the "Heritage Loan").
As described below, CCP SP Hotel, LLC ("CCP") acquired Valley's claims and filed Claim 35 (the "CCP Claim") to amend and update the proofs of claim filed by Valley. The CCP Claim consists of three components: the Heritage Loan; a claim for a junior mortgage on the Hotel ("the Glover Mortgage"); and a claim for overdrafts in Heritage's deposit accounts at Valley (the "Overdraft Claims").
Heritage objected to the CCP Claim (the "Objection").[4] The issues before the Court on the Objection are (a) the amount due on the Heritage Loan, including whether CCP is entitled to default interest and the reimbursement of attorney's fees and costs; (b) the amount due on the Glover Mortgage; and (c) whether the Overdraft Claims are secured or unsecured claims.
A. The Heritage Loan
In 2008, Valley's predecessor, USAmeriBank, [5] made a loan to Heritage documented by a promissory note in the amount of $7, 284, 000.00 (the "2008 Note")[6]and a mortgage on the Hotel and the Retail Parcel (the "Heritage Mortgage").[7] The Heritage Loan was modified at least four times, most recently in 2014, when Heritage executed a Modification Promissory Note (the "2014 Note") and related agreements.[8]Together, the original and modified loan documents are referred to as the "Heritage Loan Documents." The Heritage Loan was personally guaranteed by Heritage's three principals, Norman Giovenco, George Glover, and Ford Smith (the "Guarantors").[9]
The 2014 Note includes the following relevant provisions:
1. Heritage shall make monthly payments of principal and interest commencing on October 14, 2014, as set forth on an attached schedule (the "2014 Amortization Schedule").[10] After August 14, 2017, interest on the 2014 Note accrued at the greater of 5.5% or the average of a defined interest swap rate[11] plus 3.25%.
2. Daily interest was to be computed on the basis of a 360-day year for the actual number of days elapsed, and any payment on the 2014 Note "shall be applied first to accrued and unpaid interest, second to principal and the balance, if any, to unpaid fees."[12]
3. Lender was entitled to a late charge equal to 5% of the unpaid amount of the late payment if Heritage failed to make a payment within ten days of its due date, as long as Lender had not exercised its right to accelerate the loan balance.[13]
4. The term "Event of Default" is defined as including the "non-payment within ten (10) days of the date due of any interest or principal." In the Event of Default, Lender, at its option "and without notice (Borrower hereby expressly waives notice of default)," could accelerate the 2014 Note and declare the entire principal balance immediately due and payable, together with accrued interest and fees.[14] This provision of the 2014 Note differs from the 2008 Note, which required that Heritage be given ten days' notice to cure any default.[15]
5. The maturity date was July 2, 2020.[16]
6. Upon maturity or default, the 2014 Note bears interest at the "highest rate permitted under then applicable law."[17] 7. Finally, the 2014 Note provides that no failure or delay by Lender in exercising its rights operates as a waiver.[18]
B. The Glover Mortgage
In 2011, one of Heritage's principals, George Glover, obtained two loans from USAmeriBank, one for $150, 000.00 and another for $125, 000.00 (together, the "Glover Notes").[19] In June 2016, Mr. Glover, USAmeriBank, and Heritage's two other principals entered into a settlement agreement to resolve a number of outstanding issues (the "Settlement Agreement").[20] Under the Settlement Agreement, Heritage executed a promissory note to Mr. Glover in the amount of $270, 000.00 to memorialize loans that Mr. Glover had previously made to Heritage (the "Glover Heritage Note")[21] and a junior mortgage on the Hotel as security for the Glover Heritage Note (the "Glover Mortgage").[22]
Under the Settlement Agreement, Mr. Glover executed an Assignment of Loan Documents (the "Glover Assignment"), [23] in which he assigned the Glover Heritage Note and the Glover Mortgage to USAmeriBank "as additional collateral" for the Glover Loans.[24] The Glover Assignment does not state whether it is an "absolute" assignment or a "collateral" assignment.[25]
C. Heritage's Bankruptcy Case
On October 21, 2019 (the "Petition Date"), Heritage filed a Chapter 11 bankruptcy case.[26] In its bankruptcy schedules, Heritage listed the Hotel valued at $8, 960, 000.00 and the adjacent Retail Parcel valued at $720, 000.00.[27]
1. The Proofs of Claim
The deadline for filing proofs of claim in the Chapter 11 case was February 3, 2020 (the "Claims Bar Date").[28] On the Claims Bar Date, Valley, as successor in interest to USAmeriBank, timely filed four proofs of claim (the "Valley Claims"):[29]
Claim 27, a secured claim in the amount of $6, 298, 573.08, representing the balance due on the Heritage Loan, including principal of $5, 642, 281.86, accrued interest and attorney's fees as of February 3, 2020, and late charges. In Claim 27, Valley stated that the "present fair market value" of its collateral-the Hotel[30]-was $10.5 million;
Claim 29, a secured claim in the amount of $415, 356.40, representing the balance due on the Glover Mortgage that Mr. Glover had assigned to USAmeriBank; and
Claim 30 and Claim 31, filed as unsecured claims in the amounts of $64, 030.42 and $19, 533.00, respectively, representing amounts for overdrafts in Heritage's deposit accounts at Valley.
In addition, the Small Business Administration (the "SBA") timely filed a proof of claim (Claim 32) asserting a mortgage lien on the Hotel (junior to the Heritage Mortgage) in the amount of $554, 636.52 (the "SBA Mortgage"). The attachments to Claim 32 include a Third Party Lender Agreement executed by USAmeriBank (the "Third Party Lender Agreement"), discussed in more detail below.
2. Significant Events in the Bankruptcy Case
On January 9, 2020, Heritage sold the Retail Parcel to a third party, Fit2Run, LLC.[31] The net proceeds of the sale, $695, 590.33 (the "Retail Proceeds"), were paid to Valley.[32] Valley applied the Retail Proceeds, first, to the contractual interest then due on the Heritage Loan, and then to reduce the unpaid principal balance.[33]
On January 27, 2020, the Court entered an order confirming Heritage's Chapter 11 Plan (the "Confirmation Order").[34] Under the Confirmation Order, Heritage was to close on a sale of the Hotel to a third party in February 2020. However, on January 29, 2020, the third party terminated the purchase and sale agreement and the sale did not close.[35]
Shortly thereafter, Debtor filed a motion to modify its confirmed Plan (the "Plan")[36] to extend the maturity date of the Heritage Loan to December 31, 2020.[37] In April 2020, Heritage filed an amended motion to modify the Plan (the "Plan Modification Motion").[38] In the Plan Modification Motion, Heritage sought to modify the Plan to, inter alia, accrue interest on the Heritage Loan at the contract rate of 5.5% per annum, to make no payments to Valley until the Hotel was operating on a positive cash flow basis, and to extend the maturity date of the Heritage Loan to December 2, 2021.[39] Heritage also disclosed that it had entered into a purchase agreement with Liberty DTSP, LLC ("Liberty") in March 2020, but that Liberty had terminated the agreement prior to the expiration of its due diligence period.[40]
On June 9, 2020, CCP filed a notice[41] that Valley had transferred the Valley Claims to CCP pursuant to a June 5, 2020 Sale & Assignment Agreement (the "Claim Assignment").[42]
On July 28, 2020, Heritage filed a motion for approval of bid procedures (the "Bid Procedures Motion") in connection with an offer to purchase the Hotel that it had received from Ally Capital Group, LLC ("Ally").[43] The sale process was contentious, with CCP raising numerous objections.[44] But on September 28, 2020, with Court approval and over CCP's objections, Heritage sold the Hotel for $8 million, an amount sufficient to pay all claims secured by the Hotel in full (the "Ally Sale").[45] The Court authorized the closing agent to pay the SBA's claim in full and to pay CCP the undisputed portion of its secured claim, which the Court determined to be $5, 475, 058.35.[46]
3. Valley's Claim for Default Interest and Attorney's Fees
Meanwhile, in February 2020, Valley had filed an application for payment of postpetition interest and attorney's fees (the "Default Interest Application").[47] In the Default Interest Application, Valley asserted that as a fully secured creditor, it was entitled to payment of postpetition interest and attorney's fees under 11 U.S.C. § 506(b);[48] that Heritage...
