Opinion
Case No. 16-21142-11 (Jointly Administered)
2020-04-29
IN RE: JOHN Q. HAMMONS FALL 2006, LLC, et al., Debtors.
James E. Bird, Kansas City, MO, pro se. Mark S. Carder, Nichols J. Zluticky, Stinson Leonard Street LLP, Patrick R. Turner, Omaha, NE, Bruce E. Strauss, Merrick, Baker, & Strauss, P.C., Kansas City, MO, for Debtor. J. Michael Morris, Wichita, KS, pro se.
James E. Bird, Kansas City, MO, pro se.
Mark S. Carder, Nichols J. Zluticky, Stinson Leonard Street LLP, Patrick R. Turner, Omaha, NE, Bruce E. Strauss, Merrick, Baker, & Strauss, P.C., Kansas City, MO, for Debtor.
J. Michael Morris, Wichita, KS, pro se.
Order Granting Motion to Reconsider
ROBERT D. BERGER, U.S. BANKRUPTCY JUDGE On January 3, 2020, the Court issued a Memorandum Opinion concerning proofs of claim filed by Midland Loan Services, Inc. (Midland). In that Memorandum Opinion, the Court allowed proofs of claim numbers 614 and 615 in the amount of $50,689,895.56 (consisting of $42,124,649.94 in principal, $151,999.78 in interest, $7,521,751.82 in post-petition default interest, and $891,494.02 in legal fees, expenses, and appraisal fees). The Court disallowed, however, pre-petition default interest of $3,554,981.98, a special servicing fee of $351,143.12, and a workout fee of $608,340.32.
Doc. 2792. The Court issued a nunc pro tunc Memorandum Opinion on January 21, 2020, to correct a typo in a dollar amount. Doc. 2800.
The "Joint Objectors" now ask for reconsideration of the Court's decision, arguing that of the approximately $7.5 million in post-petition default interest, a portion of that is calculated from after the effective date of their confirmed plan to the current date (in an amount "exceeding $3 million") and that whatever default gave rise to the post-petition default interest was necessarily cured upon confirmation of that plan. The Joint Objectors ask for reconsideration of this Court's decision under 11 U.S.C. § 502(j) and both Federal Rules of Civil Procedure 59 and 60(b).
The Joint Objectors are the Jointly Administered Debtors (consisting of the Revocable Trust of John Q. Hammons and seventy-five of that Trusts directly or indirectly wholly owned subsidiaries and affiliates) and J.D. Holdings, LLC (the former foe of the Jointly Administered Debtors who has since acquired all of Debtors' real property assets through a purchase and sale agreement).
Doc. 2795.
All statutory references in this order are to Title 11, United States Code (the Bankruptcy Code) unless otherwise indicated.
Federal Rules of Civil Procedure 59 and 60 are made applicable to bankruptcy proceedings via Federal Rules of Bankruptcy Procedure 9023 and 9024, respectively.
The Court concludes that an error of law has occurred, warranting reconsideration for cause, and grants the motion for reconsideration filed by the Joint Objectors. Postpetition default interest shall be calculated from the Jointly Administered Debtors' petition date to the effective date of the Jointly Administered Debtors' plan. All other aspects of the Court's prior Memorandum Opinion remain unchanged.
I. Procedural and Factual Background
The Jointly Administered Debtors filed their Chapter 11 bankruptcy petitions in late June and early July 2016. Midland is the special servicer for a CMBS (commercial mortgage-backed security) lender who loaned funds to one of the Debtors. In late December 2016, Midland filed proofs of claim in the Jointly Administered Debtors' Chapter 11 bankruptcy cases stating claims totaling approximately $58.7 million.
At about the same time the Jointly Administered Debtors' plan was being negotiated, in mid-April 2018, the Joint Objectors filed their objection to the claims filed by Midland and Midland filed a motion seeking to allow those claims in full. The Jointly Administered Debtors' plan was ultimately confirmed in May 2018. It specifies that all classes of creditors are unimpaired and that all allowed claims will be paid in full, except for any assumed loans, which would be paid according to their terms. The Plan permits loans to be reinstated and assumed by JD Holdings "pursuant to the terms of the underlying loan agreement," but does not require reinstatement. The plan specifies that if a loan is "neither reinstated nor assumed, then such loan shall be treated as a Secured Claim." A supplement to the plan indicates that the loan at issue was to be assumed, although that did not (and has not) occurred in the nearly two years since the plan was confirmed.
Doc. 2032.
Doc. 2038.
Doc. 2188 p.8; Doc. 1946 p.17 (Modified Amended Joint and Consolidated Chapter 11 Plans of Reorganization for All Debtors Filed by Creditor J.D. Holdings, L.L.C. at § IV.B.2(c)). Under the Plan, J.D. Holdings agreed to pay all "Allowed Claims" in exchange for Debtors' "Assets." See Doc. 1946 p.23.
Doc. 1946 p.6 (defining "assumed Loans" as "those loans to be identified in the Plans Supplement to be reinstated, as necessary, and assumed by JD Holdings pursuant to the terms of the underlying loan agreement(s) and/or an agreement between JD Holdings and the applicable lender or its authorized representative").
Id. p.17 n.4 ("For the avoidance of doubt, a loan may be reinstated and/or assumed. To the extent that any loan is neither reinstated nor assumed, then such loan shall be treated as a Secured Claim.").
Doc. 2050, Exh. E p.308 (listing the "Chateau Lake Loan" as a loan "to be Reinstated and Assumed). Footnote 2 to Exhibit E specifically states: "These loans shall be reinstated pursuant to the Bankruptcy Code and assumed pursuant to the underlying loan agreements. These agreements essentially provide that that the Debtors may assume and assign the loans to JD Holdings. Indeed, the Debtors specifically negotiated for the right of JD Holdings to assume the loans, and the transactions were priced accordingly. JD Holdings has provided all of the materials requested by the lenders for the loan assumption. Moreover, the assumption request with respect to the Chateau Loan was first made last summer (and a fee was paid), such that the issue has been pending for some time .... JD Holdings did not expect any issues, especially given that the lenders are oversecured, JD Holdings has cash on hand and will be receiving funding, and JD Holdings' sponsor, guarantors, and management company have been parties in multiple securitized loans that were originated by major investment banks and scrutinized and accepted by all major ratings agencies. If the lenders properly deny assumption, JD Holdings shall pay the Allowed Claims relating to these loans in full pursuant to Article IV of the Plans."
Many months passed. In the interim, the parties briefed their claims issues, and the Court held oral argument. The Court issued an Order indicating it needed additional information and another round of briefing occurred. The parties then engaged in mediation of their dispute. Finally, an evidentiary hearing was set, and the Court took the matter under advisement in late November, 2019.
The Court's opinion, issued January 2, 2020, dealt with more than a half dozen aspects of the Midland claim. Regarding default interest, the Court began by considering an alleged default stemming from the commingling of funds between the Debtors and their cash management system. The Court ruled that Midland had not satisfied its burden to show a commingling default, and was not entitled to prepetition default interest or any default interest based on the alleged commingling. The Court then assessed Midland's claim to postpetition default interest under § 506(b). The Court concluded that the applicable state law would permit the default rate suggested by the parties' contract, and then considered whether there were countervailing equitable considerations that would justify a reduction in the amount of the contracted default interest rate. Finding none, the Court then considered whether other sections of the Bankruptcy Code would prohibit a default provision like that in the parties' contract, and concluded they would not. Ultimately, the Court allowed those portions of the proofs of claim seeking $7,521,751.82 in post-petition default interest. The Joint Objectors disputed that the postpetition default interest was owed, but specifically agreed with the mathematical calculation of the number. In fact, because the parties agreed on the number for postpetition default interest, the Court was never informed how, from when, to when, etc. the actual number was even calculated. Concerning postpetition default interest, the only issue addressed by the Court or the parties was whether Midland was entitled to claim it.
Section 506(b) grants oversecured creditors the ability to include postpetition interest as part of their secured claim up to the value of the collateral.
Doc. 2787 (parties Joint Stipulation, stating the Joint Objectors "agree with the mathematical calculations [for post-petition default interest of $7,521,751.82 and other stated items] but deny that they are owed").
Shortly after the Court entered its Memorandum Opinion, the Joint Objectors filed their motion to reconsider. Therein, the Joint Objectors argue that postpetition default interest should be calculated only from the petition date to the effective date of the plan. The Joint Objectors argue that of the approximately $7.5 million in postpetition default interest awarded in the Memorandum Opinion, a portion of that is calculated from after the effective date of the plan to the current date, in an amount "exceeding 3 million." The Joint Objectors argue as follows: "the Court should reconsider the Order because no one raised, and the Court did not, therefore, have any reason to consider, whether default interest should continue to accrue post Effective Date. The parties had expressly anticipated and provided that the issue would be resolved shortly after confirmation [through assumption of the loan], not almost two years later (and longer if either party appeals)." The Joint Objectors additionally argue it would be "unfair" to require the payment of default interest after the plan's effective date. Midland has responded to the motion to reconsider, and the Court has considered the parties' oral argument.
Doc. 2795 (motion); Doc. 2798 (support document).
II. Analysis
The Court has jurisdiction of this matter under 28 U.S.C. §§ 1334(a) and (b) and 28 U.S.C. §§ 157(a) and (b)(1). This is a core proceeding pursuant to 28 U.S.C § 157(b)(2)(B), as it concerns the allowance or disallowance of claims against these bankruptcy estates.
The Joint Objectors' motion to reconsider is made under § 502(j), which permits reconsideration of a claim "for cause" and "according to the equities of the case." The Bankruptcy Code does not elaborate on what constitutes "cause according to the equities of the case" under § 502(j), but one commentator has called it "an adaptable standard which reflects bankruptcy laws' roots in equity jurisprudence." The statute itself appears to provide the standard (i.e., "cause" and the "equities of the case" are not foreign concepts to bankruptcy judges), but many bankruptcy courts in this Circuit (and beyond) have determined that the standards for "cause" are those defined by motions to alter or amend the Court's judgment under Federal Rule of Civil Procedure 59(e) or motions for relief from judgment under Federal Rule of Civil Procedure 60(b). The Court's first task, therefore, is to determine whether Rule 59(e) or Rule 60(b) applies.
Federal Rule of Bankruptcy Procedure 3008 then states: "A party in interest may move for reconsideration of an order allowing or disallowing a claim against the estate. The court after a hearing on notice shall enter an appropriate order."
4 Collier on Bankruptcy ¶ 502.11[5] (Richard Levin & Henry J. Sommer eds., 16th ed.).
See, e.g. , In re Aguilar , 861 F.2d 873, 874 (5th Cir. 1988) (applying Rules 59 and 60 —depending on timing of the filing of the motion for reconsideration—to reconsideration of claims); Ashford v. Consol. Pioneer Mortgage (In re Consol. Pioneer Mortgage), 178 B.R. 222, 227 (9th Cir. BAP 1995) (citing cases applying the standards of Rules 59 and 60 to motions for reconsideration of claims for "cause"); Haggart Group v. Frontier Airlines, Inc. (In re Frontier Airlines, Inc.) , 137 B.R. 808, 810 (D. Colo. 1992) ("When a party appeals the bankruptcy courts judgment on a Rule 3008 motion for reconsideration, the court must examine whether the motion was filed before or after the time to appeal the original order had expired" to determine whether to apply Rule 59 or Rule 60 standards); In re Lane , 374 B.R. 830, 839 n.41 (Bankr. D. Kan. 2007) (noting that "courts have held that when the motion [to reconsider a claim under § 502(j) ] is filed within 10 days of the order allowing or denying the claim, the standard of Bankruptcy Rule 9023, which incorporates Fed. R. Civ. P. 59, will apply, but, as to motions filed outside the 10 days, the standards of Bankruptcy Rule 9024, which incorporates Fed. R. Civ. P. 60, will control).
The Joint Objectors move for relief under both Rules 59(e) and 60(b), but the "two rules are distinct; they serve different purposes and produce different consequences. Which rule applies to a motion depends essentially on the time a motion is served." Rule 59(e) requires that any motion to alter or amend be filed no later than twenty-eight days after the entry of the judgment. The motion to reconsider was filed nine days after the Court's decision. As a result, the motion must be considered under Rule 59(e). A. Rule 59(e) : Standards of Law
Van Skiver v. United States , 952 F.2d 1241, 1243 (10th Cir. 1991) ; see also Price v. Philpot , 420 F.3d 1158, 1167 n.9 (10th Cir. 2005) ("Generally, a motion for reconsideration, not recognized by the Federal Rules of Civil Procedure, may be construed in one of two ways: if filed within [Rule 59's time limit] from the district court's entry of judgment, it is treated as a motion to alter or amend the judgment under Rule 59(e) ; if filed [too long after] entry of judgment [to satisfy Rule 59's deadline], it is treated as a motion for relief from judgment under Rule 60(b)."); New Mexico Health Connections v. United States Dep't of Health & Human Servs. , 340 F. Supp. 3d 1112, 1150 (D.N.M. 2018) ("Except where the Federal Rules of Civil Procedure specify, motions to reconsider in civil cases fall into three categories. First, there are motions to reconsider filed within twenty-eight days of the entry of judgment, which are treated as a motion to alter or amend the judgment under rule 59(e). Second, there are motions to reconsider filed more than twenty-eight days after judgment, which are considered a motion for relief from judgment under rule 60(b). Finally, there are motions to reconsider any order that is not final, which are treated as a general motion directed at the Court's inherent power to reopen any interlocutory matter in its discretion. Courts may treat motions for reconsideration as a rule 59(e) motion when the movant files within twenty-eight days of a court's entry of judgment. If the movant files outside that time period, courts should treat the motion as seeking relief from judgment under rule 60(b). A motion for reconsideration of the district court's judgment, filed within rule 59's filing deadline, postpones the notice of appeal's effect until the motion is resolved.").
Van Skiver , 952 F.2d at 1243 (stating that a motion to reconsider served within Rule 59(e)'s time constraints should be considered under that Rule, but that a motion not served within that Rule's time "must be construed as one pursuant to Rule 60(b)"); Servants of the Paraclete v. Does , 204 F.3d 1005, 1012 (10th Cir. 2000) (noting that how a motion to reconsider is considered is based on the time it is filed after entry of judgment); Phelps v. Hamilton , 122 F.3d 1309, 1324 (10th Cir. 1997) (noting that "regardless of how" a motion to reconsider is styled, a motion filed within the time requirements of Rule 59(e) "that questions the correctness of the judgment is properly treated as a Rule 59(e) motion" (internal quotation marks omitted)).
There is a strong public interest in protecting the finality of courts' decisions. A Rule 59(e) motion is "not appropriate to revisit issues already addressed or advance arguments that could have been raised in prior briefing." "A Rule 59(e) motion to alter or amend the judgment should be granted only to correct manifest errors of law or to present newly discovered evidence." A "party cannot invoke Rule 59(e) to raise arguments or present evidence that should have been set forth in the first instance or to rehash arguments previously considered and rejected by the court." In addition, a party cannot "dress up an argument that previously failed."
Nelson v. City of Albuquerque , 921 F.3d 925, 929 (10th Cir. 2019).
Id. The Supreme Court has also said that a Rule 59(e) motion "may not be used to relitigate old matters, or to raise arguments or present evidence that could have been raised prior to the entry of judgment." Exxon Shipping Co. v. Baker , 554 U.S. 471, 485 n.5, 128 S.Ct. 2605, 171 L.Ed.2d 570 (2008) (internal quotation marks omitted).
Phelps , 122 F.3d at 1324 (internal quotation marks omitted).
Pound v. Airosol Co., Inc. , 368 F. Supp. 2d 1158 (D. Kan. 2004) (internal quotation marks omitted).
Cline v. S. Star Cent. Gas Pipeline, Inc. , 370 F. Supp. 2d 1130, 1133 (D. Kan. 2005) (internal quotation marks omitted).
On the other hand, a motion under Rule 59(e) "allows a party to reargue previously articulated positions to correct clear legal error." The Rule also "allows the district court to rectify its mistakes in the period immediately following entry of the judgment." A motion under Rule 59(e) is appropriate and should be granted when "the court has misapprehended the facts, a party's position, or the controlling law."
Hayes Family Tr. v. State Farm Fire & Cas. Co. , 845 F.3d 997, 1005 (10th Cir. 2017).
Nelson v. City of Albuquerque , 925 F.3d 1187, 1197 (10th Cir. 2019) (concurrence supporting denial of rehearing) (citing White v. N.H. Dep't of Empl. Security , 455 U.S. 445, 102 S.Ct. 1162, 71 L.Ed.2d 325 (1982) ("the Rule was adopted to make clear that the district court possesses the power to rectify its own mistakes in the period immediately following the entry of judgment") (internal quotation marks omitted)).
Servants of the Paraclete , 204 F.3d at 1012.
B. Rule 59(e) : Analysis
The Joint Objectors argue that reconsideration of the allowance of default interest accruing after the effective date of the plan is warranted because no default could have existed after the effective date of the plan, as the loan was to be either paid in full or reinstated and assumed under the plan, and the Court specifically found the lender was unimpaired under § 1124. The Joint Objectors argue that awarding default interest after the plan's effective date would overcompensate Midland, as the risk to the lender was necessarily obfuscated by the plan's confirmation order, which required full payment and was backed by certain secured creditor protections. The Joint Objectors argue that the Court's allowance of post-effective-date default interest was "mistaken and inadvertent." They claim that no party anticipated the issue of post-effective date default interest, because the parties did not anticipate such a lengthy process for consideration of the claim.
Midland argues in response that the Joint Objectors are simply too late—the parties filed briefs as recently as two weeks prior to the Court's evidentiary hearing, and the Joint Objectors never raised the issue of the plan's effective date terminating default interest. Midland also responds that the loan has neither been paid in full or reinstated and assumed, so how could the default have been cured by the effective date of the plan?
The parties, of course, vehemently dispute who is at fault, and who has caused the delay, in the assumption of the loan. Frankly, this is immaterial to the Court. The loan should either be assumed or paid in full; it does not matter to the Court which option is chosen, only that it gets done.
Midland also argues that regardless of the above, post-effective-date default interest is enforceable, citing In re Monclova Care Center, Inc. , 254 B.R. 167 (Bankr. N.D. Ohio 2000). The Monclova case has a discussion of postpetition and postconfirmation interest on a secured claim, and presumably is addressing standard interest on the principal amount, not additional, default interest. See id. at 170-71 (discussing the secured creditor's claim to statutory interest). The confirmed plan in the Monclova case was a liquidating Chapter 11 plan, and the secured creditor was listed as unimpaired in the plan, to be paid in full. Id. at 171. The bankruptcy court in Monclova ultimately concluded that any postconfirmation interest the secured creditor was entitled to ceased on the effective date of the debtor's plan. Id. at 179. The case does not support Midland's proposition.
The Court has considered the parties' arguments, and does believe an error of law occurred, warranting reconsideration. The Court believes that neither party thoughtfully considered post-effective-date default interest in any way. The Court assumed that the numbers the parties gave it were correct, without considering them further. As the Court noted above, the Court was never informed how, from when, to when, etc. the actual number for postpetition default interest was even calculated.
Under the parties' loan agreement, default interest accrues so long as the loan is in default. The Court expressly found in its Memorandum Opinion that the Debtors' ipso facto default (the mere act of filing bankruptcy petitions) was sufficient to support the award of default interest under the parties' contract, and was permitted by state law and the Bankruptcy Code. The plan, and the confirmation order thereof, expressly found that Midland's claim was unimpaired under § 1124 of the Code. Under § 1141(a), a confirmed plan replaces the parties' rights and obligations that existed prepetition with the provisions of the plan. The Court has also found that the alleged "commingling default" was not supported by the facts presented. As a result, the only default existing was cured on the effective date of the plan. As of that date, the loan was either to be reinstated and assumed or paid in full as a secured claim.
Call it a mutual mistake, call it a clear legal error, call it new evidence (because the Court assumed the parties had come to a meeting of minds on the calculation of the numbers, when, in fact, they had not); the bottom line is that the Court wants to correct its Orders when an error is brought to its attention. What the Court assumed was that, because the loan was "neither reinstated nor assumed," then it would be "treated as a Secured Claim" under the plan. The Court did not consider the issue further, and it appears the parties had not either. The Court never intended for postpetition default interest to continue past the plan's effective date, and did not even realize that was what the parties' numbers included. As a result, the Court grants reconsideration of the allowed claim for "cause" and "according to the equities of the case" under § 502(j).
Doc. 1946 p.17 n.4 ("For the avoidance of doubt, a loan may be reinstated and/or assumed. To the extent that any loan is neither reinstated nor assumed, then such loan shall be treated as a Secured Claim.").
III. Conclusion
The Court grants the motion for reconsideration filed by the Joint Objectors. Postpetition default interest shall be calculated from the Jointly Administered Debtors' petition date to the effective date of the Jointly Administered Debtors' plan.
Doc. 2795.
IT IS SO ORDERED.