Shefa, LLC v. Oakland Cnty. Treasurer (In re Shefa, LLC)

535 B.R. 165

In re SHEFA, LLC, DebtorShefa, LLC, Appellant/Counter–Appellee

v.Oakland County Treasurer, Appellee/Counter–Appellant.

Civil Case No. 15–10665.

Bankruptcy No. 14–42812.

United States District Court, E.D. Michigan, Southern Division.

Signed July 22, 2015.

Robert N. Bassel, Clinton, MI, for Appellant/Counter–Appellee.

Leonora K. Baughman, Kilpatrick Assoc., Auburn Hills, MI, for Appellee/Counter–Appellant.

OPINION AND ORDER

LINDA V. PARKER, District Judge.

This matter is before the Court as an appeal from the United States Bankruptcy Court for the Eastern District of Michigan. Debtor and Appellant/Cross–Appellee, Shefa, LLC (hereafter “Debtor”), appeals the following decisions entered by the Honorable Phillip J. Shefferly: (A) a January 20, 2015 “Opinion (1) Sustaining in Part Debtor's Objection to Proof of Claim; (2) Denying Confirmation of Debtor's Plan of Reorganization; and (3) Granting Motion for Relief from the Automatic Stay”; (B) a January 20, 2015 order consistent with that opinion; and, (C) a February 9, 2015 “Order Denying Motion for Reconsideration and For Other Relief.” Claimant and Appellee/Counter–Appellant, Oakland County Treasurer (hereafter “Oakland County”), has filed a cross-appeal. Debtor filed an initial appeal brief on April 2, 2015 (ECF No. 8); Oakland County filed a responsive brief on April 16, 2015. (ECF No. 9.) Debtor filed a reply brief on April 30, 2015. (ECF No. 10.) Debtor has requested oral argument “because of the fact-intensive issues presented on appeal.” (ECF No. 8 at Pg ID 752.) The Court, however, finds the facts and legal arguments sufficiently presented in the parties' pleadings and in the bankruptcy court's January 20, 2015 decision. Therefore, the Court is dispensing with oral argument pursuant to Eastern District of Michigan Local Rule 7.1(f).

I. Standard of Review

The bankruptcy court's findings of fact are reviewed under the clearly erroneous standard. Fed. R. Bankr. P. 8013. “A finding of fact is clearly erroneous ‘when although there is evidence to support it, the reviewing court, on the entire evidence, is left with the definite and firm conviction that a mistake has been committed.’ ” United States v. Mathews (In re Mathews), 209 B.R. 218, 219 (6th Cir. BAP 1997) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) ). The bankruptcy court's conclusions of law are reviewed de novo. Nuvell Credit Corp. v. Westfall (In re Westfall), 599 F.3d 498, 501 (6th Cir.2010). This means the Court reviews the law independently and gives no deference to the conclusions of the bankruptcy court. Myers v. IRS (In re Myers), 216 B.R. 402, 403 (6th Cir. BAP 1998). “[I]f a question is a mixed question of law and fact, then [the reviewing court] must break it down into its constituent parts and apply the appropriate standard of review for each part.” Investors Credit Corp. v. Batie (In re Batie), 995 F.2d 85, 88 (6th Cir.1993).

II. Factual and Procedural Background

Debtor filed this Chapter 11 bankruptcy case on February 25, 2014. Debtor's sole asset is a vacant hotel located at 16400 J.L. Hudson Drive, Southfield, Michigan (“Hotel”). Oakland County is Debtor's largest creditor, having filed a proof of claim on February 26, 2014 for real property taxes and water and sewerage charges for the Hotel totaling $3,665,155.82, which Oakland County identified as a secured claim. Debtor identified few additional creditors on its bankruptcy schedules. On June 4, 2014, Debtor filed an objection to the Oakland County claim.

Prior to that time, Oakland County moved for relief from the automatic stay and Debtor filed a Disclosure Statement and Combined Plan of Reorganization. The bankruptcy court concluded that an evidentiary hearing was necessary to resolve disputed issues of fact relevant to the matters before the court. A two-day hearing ensued. On January 20, 2015, the bankruptcy court issued a decision. In re Shefa LLC, 524 B.R. 717 (Bankr.E.D.Mich. Jan.20, 2015). This Court will not restate the facts found by the bankruptcy court in that decision except to the extent relevant to the present appeal. The Court assumes the reader's familiarity with those facts, however.

Sidney Elhadad, an attorney from Montreal, Canada, is Debtor's sole member. Elhadad formed Debtor to purchase the first mortgage on the Hotel from Grand Pacific Finance Corporation (“Grand Pacific”), which had an outstanding balance of over $10.3 million. Debtor purchased the mortgage from Grand Pacific for $165,000.00. Debtor then completed a foreclosure sale on the Hotel, with a sheriff's deed for the Hotel executed and delivered to Debtor on November 10, 2009.

At that time, there were substantial delinquent taxes and water and sewerage charges owed by the Hotel to the City of Southfield (“City”). Taxes for the Hotel had not been paid since 2005. The last payment on water and sewerage charges occurred in July 2009. Elhadad hoped that he could negotiate a deal with the City to make a discounted lump sum payment for the outstanding amounts. He was unsuccessful in reaching such an agreement, however.

In addition, the Hotel experienced higher vacancy rates and poorer collections than Elhadad had anticipated. Elhadad personally contributed approximately $1.5 million to fund the Hotel's operating losses, but it was not enough. The Hotel closed in October 2010, and was subsequently boarded up.

Under Michigan law, cities turn over unpaid taxes and water and sewerage charges to the local counties for collection after one year of delinquency. Oakland County therefore held the City's claim against the Hotel. Oakland County moved to foreclose on the Hotel pursuant to its statutory authority under Michigan law. Debtor then filed this Chapter 11 case.

As mentioned, Debtor listed few creditors on its bankruptcy schedules. Four secured claims were identified: (1) the Oakland County claim listed in an unknown amount; (2) Elbaz Building in the amount of $269,800.00; (3) Professionally Driven, LLC in the amount of $3,500.00; and (4) Fernand Soultan in the amount of $3 million. Two unsecured creditors were identified: (1) Ieshula Ishakis for $189,541.00; and (2) King Solomon Properties, LLC for $282,000.00.

Based on testimony of a certified commercial real estate appraiser, the bankruptcy court concluded that the Hotel's value was $690,000.00 as of two months after the petition date. The Hotel's value had decreased significantly since December 31, 2008 (from $1.57 million) due to its deteriorating condition and location in a declining area. The appraiser opined that the highest and best use of the Hotel would be for senior housing and medical facilities.

The Combined Disclosure Statement and Plan of Reorganization (hereafter “Plan”) submitted by Debtor prior to the evidentiary hearing proposes renovating and reopening the Hotel for use as a combined upper mid-scale limited service hotel, upper mid-scale extended stay hotel, and independent living facility. The Plan states that financing would be provided by SMi ENERPRO, consisting of approximately $2 million of financing, together with a Small Business Administration guaranteed loan. The Plan also proposes that Elhadad would provide funding either individually or through one of his entities.

By the time of the evidentiary hearing before the bankruptcy court, however, the Plan had been modified in that Debtor proposed that the financing to renovate the Hotel and make Plan payments would be provided by KFG Southfield, LLC. KFG was formed by Salomon Knafo, a long-time acquaintance of Elhadad, who is involved in investing, purchasing, and selling distressed real properties.

In November 2014, KFG entered into two agreements with Debtor: a loan agreement and a letter of intent. The loan agreement provides for KFG to loan up to $50,000.00 to Debtor for repairs to the Hotel. The letter of intent provides that KFG would contribute a total of $2 million of equity in consideration for a 60% partnership interest in the Hotel. Knafo indicated at the evidentiary hearing, however, that KFG is not presently committed to provide any funds to Debtor under either agreement. The terms of the loan agreement and letter of intent also reflect that both are non-binding.

The Plan specifies three classes of claims and one class of equity interests, with the class one claim consisting of the Oakland County claim. Based on Debtor's objection to the Oakland County claim, the Plan states that the allowed amount of the claim is limited to $690,000.00. The Plan provides for a lump sum payment in that amount to Oakland County on the effective date of the Plan, which the Plan defines as eleven days after the order confirming the Plan becomes a final order.

Class two of the Plan consists of a secured claim in the amount of $3,5000.00 held by Professionally Driven. The Plan provides for payment in full of this claim by 35 monthly installments with no interest. Professionally Driven voted to accept the Plan.

The Plan identifies class three as consisting of general unsecured claims, which the Plan describes as aggregating $3,741,341.00. The Plan lists four creditors in this class: Ieshula Ishakis and King Solomon Properties, LLC (listed on Debtor's schedules as unsecured creditors) and Elbaz Building and Fernand Soultan (listed as secured creditors). The Plan provides for payment of 2% to class three claims, without interest, in 120 monthly installments beginning on the effective date of the Plan. By the time of the evidentiary hearing, however, Debtor had modified this aspect of the Plan to now pay 30% to class three creditors, thereby increasing payments to those creditors from $74,826.82 to $1,122,402.30. This resulted in an increase in Debtor's monthly payments to class three creditors from $623.56 to $9,353.35. Ishakis, Elbaz Building, and Soultan voted to accept the Plan. Debtor did not receive a ballot form King Solomon Properties.

The Plan does not contain a class four or class five,...