Stormfield Capital Funding I, LLC v. MBLA, LLC (In re MBLA, LLC)

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In re: MBLA, LLC and MBMB, LLC, Debtor

STORMFIELD CAPITAL FUNDING I, LLC, Movant v. MBLA, LLC and MBMB, LLC, Respondents

Nos. 23-30455 (AMN), 23-30456 (AMN)

Jointly Administered Under Case No. 23-30455 (AMN)^[1]

United States Bankruptcy Court, D. Connecticut, New Haven Division

March 21, 2024

Chapter 11

For the Movant: Joseph J. Cherico, Esq. McCarter & English LLP One Canterbury Green

For the Debtor: Stuart H. Caplan, Esq. Law Offices of Neil Crane LLC

For the U.S. Trustee: Steven E. Mackey, Esq. Office of the United States Trustee

MEMORANDUM OF DECISION AND ORDER GRANTING MOTION FOR RELIEF FROM STAY AND DISAPPROVING DEBTORS' DISCLOSURE STATEMENT RE: ECF NOS. 68, 101 ^[2]

ANN M NEVINS, CHIEF UNITED STATES BANKRUPTCY JUDGE

I. INTRODUCTION

The Chapter 11 debtors here-MBLA, LLC ("MBLA") and MBMB, LLC ("MBMB")(together, "Debtors")-propose to reorganize their financial affairs through a Chapter 11 Plan they admit is presently unconfirmable as a matter of law. ECF No. 124, 02:03:30 to 02:03:36.^[3] The Debtors and their principal, Kenneth W. Hill, propose a reorganization plan they claim will enable them to renovate, lease, and refinance one parcel of real property in New Haven, Connecticut, and then move forward to construct a new residential apartment building on a second parcel.

Stormfield Capital Funding I, LLC ("Stormfield"), the holder of a mortgage debt totaling approximately $4,000,000^[4] as of the June 26, 2023 petition date ("Petition Date") is skeptical about the Debtors' Chapter 11 Plan and prefers to go back to state court to complete a foreclosure of the two parcels. POC 3-1, p. 2. Stormfield lacks confidence in the Debtors' vision, timetable, and ability to access capital to fund construction and renovation costs. Stormfield vowed to vote to reject the Chapter 11 Plan's proposed treatment of its claim.^[5]

After notice and a hearing to consider the Debtors' First Amended Disclosure Statement ("Disclosure Statement") and after an evidentiary hearing to consider Stormfield's Motion for Relief from Stay ("Motion"), the court is persuaded it is required to grant the Motion and disapprove the Disclosure Statement. ECF Nos. 68, 101.

II. JURISDICTION

The United States District Court for the District of Connecticut has jurisdiction over the instant proceeding under 28 U.S.C. § 1334(b), and the Bankruptcy Court derives its authority to hear and determine this matter on reference from the District Court under 28 U.S.C. §§ 157(a) and (b)(1) and the General Order of Reference of the United States District Court for the District of Connecticut dated September 21, 1984. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(G) (motions to terminate, annul, or modify the automatic stay) and (b)(2)(L) (confirmation of plans).

III. APPLICABLE LAW

Chapter 11 of the Bankruptcy Code strikes a balance between two principal interests: facilitating the reorganization and rehabilitation of the debtor as an economically viable entity and protecting creditors' interests by maximizing the value of the bankruptcy estate. See generally, Title 11, United States Code (the "Bankruptcy Code"). When a case presents what is, in essence, a two-party dispute, a bankruptcy court should scrutinize the transaction to determine whether there is a bankruptcy reorganization in prospect or if there is some other bankruptcy-related purpose being served.

a. Disclosure Statements and Plans of Reorganization

A Chapter 11 disclosure statement must include adequate information describing the proposed plan in sufficient detail to enable a hypothetical investor of the relevant class to make an informed judgment about the plan. 11 U.S.C. § 1125(a)(1). A disclosure statement should not be approved if it describes a plan that is incapable of confirmation because it fails to satisfy Bankruptcy Code § 1129. In re 3333 Main, LLC, 2014 WL 2338273, *1 (Bankr. D.Conn. 2014)(AHWS); In re 18 RVC, LLC, 485 B.R. 492, 495 (Bankr. E.D.N.Y. 2012); see also, In re GSC, Inc., 453 B.R. 132, 157 n. 27 (Bankr. S.D.N.Y. 2011) ("An unconfirmable plan is grounds for rejection of the disclosure statement; a disclosure statement that describes a plan patently unconfirmable on its face should not be approved."); In re Quigley Co., 377 B.R. 110, 115 (Bankr. S.D.N.Y. 2007).

b. Treatment of Secured Claims in a Chapter 11 Plan; Cramdown

A secured claim is impaired for purposes of considering a Chapter 11 plan if the claimant's contractual rights are modified or the claimant will not be paid the full value of its claims under the plan. 11 U.S.C. § 1124. The Bankruptcy Code permits debtors to impair a secured claim by making "deferred cash payments" (often referred to as "cramdown" treatment). 11 U.S.C. § 1129(b)(2)(A)(i)(II). The deferred payments must ultimately amount to the full present value of the secured creditor's claims. To ensure the creditor receives the full present value of its secured claim, the deferred payments must carry an appropriate rate of interest. Matter of MPM Silicones, L.L.C., 874 F.3d 787, 798 (2d Cir. 2017) (citing Rake v. Wade, 508 U.S. 464, 472 n.8 (1993)).

To determine an appropriate rate of interest, in cases where there exists an efficient market, the market rate should apply. In re MPM Silicones, L.L.C., 874 F.3d at 800. Where no efficient market exists, the bankruptcy court is expected to employ a two-step analysis. In re MPM Silicones, L.L.C., 874 F.3d at 800 (citing Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951 (2004)). First, the court must determine a largely risk-free interest rate like the national prime rate. That rate reflects the financial market's estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default. The bankruptcy court should then hold a hearing when considering confirmation of a plan to determine a proper plan-specific risk adjustment to that prime rate, at which the debtor and any creditors may present evidence. Using this approach, courts have generally approved adjustments adding 1% to 3% to the prime rate. In re MPM Silicones, L.L.C., 874 F.3d at 799.

Bankruptcy Code Section 1129(b) permits a plan proponent to "cramdown" a plan over a dissenting class if the plan does not "discriminate unfairly" and provides "fair and equitable" treatment to the dissenting classes that are impaired under the plan. In re 20 Bayard Views, LLC, 445 B.R. 83, 99 (Bankr. E.D.N.Y. 2011); In re The Leslie Fay Cos., 207 B.R. 764, 788 (Bankr. S.D.N.Y. 1997). Before a plan proponent may cramdown a plan, it must establish that all of the other requirements of Section 1129(a) are met. In re 20 Bayard Views, LLC, 445 B.R. at 99.

Plans premised on the sale or refinance of real property that constitutes a debtor's primary or sole significant asset, when the asset has produced little or no revenue prior to the bankruptcy filing, are inherently speculative and invite close judicial scrutiny of the underlying plan's assumptions. In re 8315 Fourth Ave. Corp., 172 B.R. 725, 735 (Bankr. E.D.N.Y. 1994). In determining the feasibility of a Chapter 11 plan, the bankruptcy court must scrutinize the plan carefully. In re 8315 Fourth Ave. Corp., 172 B.R. at 735. While a relatively low threshold of proof will satisfy the feasibility requirement for a Chapter 11 plan, the plan's payment terms for the time immediately following bankruptcy will call for fairly specific proof of the company's ability to meet its obligations. In re 20 Bayard Views, LLC, 445 B.R. at 100-01 (citing Dish Network Corp. v. DBSD N. Am. Inc. (In re DBSD N. Am. Inc.), 634 F.3d 79 (2d Cir. 2011)).

c. Relief from Stay

Here, the movant seeks relief from the automatic stay provided in § 362(a) pursuant to Bankruptcy Code §§ 362(d)(1) and (d)(2):

On request of a party in interest . . ., the court shall grant relief from the [automatic] stay . . . --

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;

(2) with respect to a stay of an act against property under subsection (a) of this section, if-

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization.

11 U.S.C. § 362(d).

The party requesting relief from stay has the burden of proof on the issue of the debtor's equity in property while the party opposing relief from stay has the burden of proof on all other issues. 11 U.S.C. § 362(g). Once a movant makes an initial showing of cause, the burden shifts to the debtor on all issues other than the debtor's equity in property. See, In re Sonnax Indus., 907 F.2d 1280, 1285 (2d Cir. 1990).

i. Cause for Relief from Stay Pursuant to § 362(d)(1)

"Cause" is not defined in the Bankruptcy Code and is decided on a case-by-case basis. In re Celsius Network LLC, 642 B.R. 497, 501 (Bankr. S.D.N.Y. 2022). Cause is often found to include non-payment of a debt or a lack of adequate protection. U.S. Bank, Nat'l Ass'n v. Conrad (In re Conrad), 614 B.R. 20, 25 (Bankr. D. Conn. 2020) (collecting cases). A bad faith filing may constitute cause. In re Murray, 543 B.R. 484, 490 n.31 (Bankr. S.D.N.Y. 2016). When cause exists, a bankruptcy court is required to grant relief from the stay. In re Conrad, 614 B.R. at 25.

1. Lack of Adequate Protection

A lack of adequate protection supports a finding of "cause" for relief from the stay under Section 362(d)(1). In re Conrad, 614 B.R. at 25. An entity is entitled to adequate protection as a matter of right, not merely as a matter of discretion. 3 Collier on Bankruptcy P 361.02. The failure to tender post-petition payments, offer post-petition liens on alternate collateral,...