Opinion
Case No. 02-41188-JBR
December 20, 2002
William R. Baldiga and Sunni W. Pearson, Brown Rudnick Berlack Israels LLP, Boston MA, for National/Northway Limited Partnership.
Thomas O. Bean and Elizabeth M. Harvey, Nutter, McClennen Fish, LLP, Boston, MA, for LaSalle Bank National Association.
MEMORANDUM OF DECISION
This matter came before the Court for an evidentiary hearing on confirmation of the Debtor's Plan of Reorganization, as amended by the modifications of September 9, 2002 (the "September 9 Plan"), to which LaSalle Bank National Association ("LaSalle") objected, and the Debtor's Objection to LaSalle's Proof of Claim. The Court also held a hearing on LaSalle's Motion for Relief from Stay for "Cause" (the "Motion for Relief") at the same time. The trial was conducted over three non-consecutive days, and on the last day of trial, the Debtor filed a further modification of its Plan (the "September 30 Plan") to which LaSalle verbally raised the same objections as it had to the September 9 Plan and moved to strike the September 30 Plan. Also on the last day of trial, LaSalle introduced evidence of its attorneys' fees through the live testimony of Attorney Beth Mitchell and Exhibits 95 and 96 which testimony and Exhibits the Debtor has moved to strike. For the reasons set forth herein, the Debtor's Objection to LaSalle's Proof of Claim is sustained in part and overruled in part. The Debtor's Motion to Strike with respect to Mitchell's testimony and those documents admitted in evidence as Exhibits 95 and 96 is denied. Confirmation of the September 30 Plan is denied. LaSalle's oral Motion to Strike is moot. LaSalle's Motion for Relief is granted.
LaSalle filed a previous motion for relief which was denied by the Court.
Pursuant to 11 U.S.C. § 1127 (a), the September 30 Plan became the operative plan upon its filing with the Court.
BACKGROUND
In or about October 1989 Penn Mutual Life Insurance Company ("Penn Mutual"), LaSalle's predecessor in interest, loaned $4 million to the Debtor, National/Northway Limited Partnership ("National/Northway" or the "Debtor") in order for it to construct an industrial/commercial building on its property located in Georgetown, Massachusetts. The ten-year note was secured by a mortgage on that property now described as Lots 2, 3, 4, 5, and 6. Lot 4 is improved by a building which in 1989 was leased Salomon/North America, Inc. ("Salomon") pursuant to a ten-year lease. The lease and rents were also pledged as security for the loan. In 1990 the Debtor transferred title to all of the lots, except Lot 4, to the Debtor's limited partner, National Construction Company (the "Affiliate"), which owns 99% of the Debtor. In August 1996 Penn Mutual assigned the loan to LaSalle. Whether through the expiration of Salomon's lease or otherwise, the building on Lot 4 sat vacate for a period of time until the Debtor and Hi-Tech Hose, Inc. ("Hi-Tech"), the current tenant, entered into a ten-year lease in April 2000.
The borrower was actually National/Northway Nominee Trust of which the Debtor is the sole beneficiary according to some of the pleadings. In its bankruptcy petition the Debtor lists National/Northway Nominee Trust as a "d/b/a." Whether the Debtor is currently the only beneficiary of a validly existing trust or the same entity as the trust, both parties have agreed that the Debtor is the borrower.
LaSalle is actually the trustee for certain holders over Penn Mutual's mortgage pass-through certificates. Amresco Management, Inc. ("Amresco") is the special servicer. Various documents collectively define LaSalle, Penn Mutual, and Amresco as the "Lender."
The Debtor was unable to pay off the loan at maturity and consequently, on February 15, 2000 the Debtor and LaSalle entered into the first of three forbearance agreements (the "First Forbearance Agreement"), covering the period from October 1, 1999 through April 1, 2000. The First Forbearance Agreement provided that, in addition to the regular monthly payments of $34,386.18, the Debtor was obligated to pay some specifically identified charges.
3. Additional Payments. As of the date of this agreement, the Borrower acknowledges that there are outstanding and past due amounts for principal and interest of $103,104.54, late charges of $0.00, reimbursement for overpayment of October 1998 monthly rebate amount of $13,039.32, legal fees and collection expenses of $2,138.20, for a total past due amount of $118,282.06 ("Amounts Due"). In additional to the Monthly Payment, the Borrower shall make the additional payment ("Additional Payment") in I installment due on the execution of this Agreement. The Additional Payment may be applied to amounts due in such order as the Lender may elect.
In addition to the foregoing, the Debtor was required to pay a forbearance fee of $12,124.36.
A second forbearance agreement (the "Second Forbearance Agreement"), dated May 24, 2000, for the period of April 1, 2000 to July 31, 2000 was executed by the parties. The Second Forbearance Agreement carried a forbearance fee of $23,984.49 and called for the payment of attorneys' fees in the amount of $1,962.78. The Second Forbearance Agreement imposed the additional condition that default interest would be charged for the period of April 1, 2000 to the payment in full of the note without regard to whether the Debtor made timely payments on the note.
On September 17, 2001, however, the parties executed the third and final forbearance agreement (the "Third Forbearance Agreement") for the period from September 17, 2001 through November 16, 2001. The Third Forbearance Agreement did not include a forbearance fee but contained the Debtor's acknowledgment of additional amounts owed. Specifically, it provided:
As of the date of this Agreement, Borrower acknowledges that there are outstanding amounts for legal fees and collection expenses under the Loan ("Amounts Due"). In addition to the Monthly Payments, Borrower shall pay $125,000 toward the Amounts Due in one installment due on the execution date of this Agreement. To the extent that the payment of $125,000 exceeds the Amounts Due, any excess will be applied to the Loan pursuant to Section 4 of this Agreement.
On or about September 18, 2001, the Debtor paid the $125,000. How that money was applied, however, is the subject of some controversy. The Debtor's expert testified that he was unable to get the Transaction History to "foot" while LaSalle's witnesses testified that the money was applied in three different installments. First, $34,368.18 was applied on October 26, 2001 to the principal and interest payment due from the Debtor to LaSalle under the Loan on April 1, 2001, next $45,948.25 was applied to LaSalle's legal fees that it determined were "permissible" and incurred through December 31, 2001, and finally $44,683.57 was applied to other legal fees and costs of collection incurred by LaSalle.
The Transaction History, admitted in evidence as Debtor's Exhibit 8, reflects that the $125,000 was posted to the Debtor's account as of September 18, 2001.
The Transaction History is clear with respect to the application of this portion of the $125,000.
This amount is less than the sum of the 17 entries reflected in the Transaction History as "Misc. Amounts Payments", each in a different amount ranging from $65.00 to in excess of $17,000. The miscellaneous payments reflected on the Transaction History total $53,091.97; each, however, has a transaction date of September 18, 2001 and therefore the only inference is that a portion of the $125,000 payment was applied to these transactions. The application of legal fees is discussed at greater length below.
These payments are not reflected on the Transaction History and indeed, LaSalle's witnesses did not offer credible testimony that the remainder of the money was applied in this fashion. It may be that some portion of the $125,000 has remained in the escrow account. Inconsistencies and omissions in the proof of its legal fees, however, are addressed below.
When the Debtor failed to repay LaSalle in accordance with the Third Forbearance Agreement, LaSalle scheduled a foreclosure sale. On February 26, 2002 (the "Petition Date"), two days before the scheduled foreclosure, the Debtor filed its bankruptcy petition along with its original plan of reorganization and disclosure statement. As set forth in this Court's decision in In re National/Northway Ltd. Partnership, 279 B.R. 17, 25-29 (Bankr. D. Mass. 2002), after a series of contentious motions and oppositions by both the Debtor and LaSalle, the Court determined that the original plan could not be confirmed because it impermissibly classified LaSalle's deficiency claim. The Court, however, rather than allow LaSalle relief from stay at that juncture, gave the Debtor a short period of time to file a new plan.
This sale was actually LaSalle's fifth attempt to foreclosure on its collateral; the others had been avoided by, among other things, the prior Forbearance Agreements. One sale, scheduled for September 11, 2001, was continued because of the acts of terrorism that took place on that day.
On June 21, 2002 the Debtor filed an amended plan (the "First Amended Plan") and an amended disclosure statement (the "First Amended Disclosure Statement"), followed shortly by its objection to LaSalle's claim. These pleadings noted that, contemporaneously with their filing the Affiliate reconveyed lots 2, 3, 5, and 6 (the "Affiliate Property") to the Debtor. The First Amended Plan also proposed to compel LaSalle to be bound by what the Debtor described as a "customary" Subordination, Non-Disturbance and Attornment Agreement ("SNDA") pursuant to which, among other things, LaSalle's superior mortgage would be subordinated to Hi-Tech's lease in the event LaSalle foreclosed on Lot 4. In exchange Hi-Tech was to waive its right to terminate its lease in the event that Lot 4 was sold at foreclosure or otherwise. The First Amended Plan also gave the Debtor the right to sell the undeveloped lots piecemeal and without LaSalle's approval of any release prices. LaSalle objected to the First Amended Plan and First Amended Disclosure Statement, claiming among other things that the SDNA impermissibly subordinated LaSalle's rights with respect to its collateral. LaSalle also challenged the Debtor's objection to its claim. At the hearing on the adequacy of the First Amended Disclosure Statement, the Debtor filed a further amended disclosure statement titled the First Modified Disclosure Statement for the Debtor's Amended Plan of Reorganization dated June 21, 2002 (the "Second Amended Disclosure Statement") which the Court approved. LaSalle voted to reject the First Amended Plan, objected to its confirmation, and filed its Motion for Relief. Confirmation, the Debtor's objection to LaSalle's claim, and LaSalle's Motion for Relief were all scheduled for hearing on September 9, 2002.
The Debtor previously filed two other amended plans but as this Court noted they were not properly served and therefore the Court did not consider them. National/Northway, 279 B.R. at 19 n. 1.
Shortly before the hearing the Debtor filed yet another plan, the September 9 Plan, along with a memorandum in support of confirmation; LaSalle filed an opposition. On the third and last trial day, the Debtor filed the September 30 Plan to which LaSalle continued its objection. Thus the September 30 Plan can only be confirmed if it can be "crammed-down" on LaSalle.
There was a flurry of pleadings that continued up to the first day of trial. These included LaSalle's Prehearing Memorandum; LaSalle's Response to the Debtor's Memorandum In Support of Confirmation With Respect to LaSalle's Right to Recover Cost of Collection; Debtor's Memorandum in Response To LaSalle's Argument that Debtor's Entry on its Schedules Constitutes a Judicial Admission; Debtor's Motion in Limine as to Legal Bills Not Produced in Discovery; LaSalle's Motion in Limine to dude the Debtor from Introducing any Evidence as to the Amount of LaSalle's Prepetition Claim that Varies from the Amount for Which the Debtor has Scheduled that Claim, and to Exclude the Testimony of Peter Armanetti; and Opposition By Debtor To Request for Exclusion of Expert Testimony of Peter Armanetti by LaSalle Bank National Association.
By the second trial day, LaSalle had filed an Opposition to the Debtor's Motion in Limine as to Legal Bills Not produced in discovery while the Debtor filed a Reply to LaSalle's Response to the Debtor's Memorandum In Support of Confirmation with Respect To LaSalle's Right to Recover Costs.
In essence the September 30 Plan provided that LaSalle would not be required to subordinate its mortgage to the Hi-Tech lease if the Court held such subordination was an impermissible alteration of LaSalle's prepetition rights. Moreover, the Debtor proposed to give LaSalle additional non-Debtor property, namely property rented to the United States Postal Service and located in Chelmsford, Massachusetts, and ultimately in response to one of LaSalle's objections, agreed to give LaSalle a collateral assignment of the rents from the Chelmsford property. While the September 30 Plan, as did its predecessor plans, continues to provide that Mr. Rizzo, the principal of the Debtor's limited and general partners, will cause $100,000, and possibly more, to be contributed to the Debtor upon confirmation, the September 30 Plan is vague in respect to any contributions above $100,000. Importantly the September 30 Plan provides that the Debtor will use the escrowed rents, namely LaSalle's own cash collateral (the "Cash Collateral"), which the Debtor has been collecting from Hi-Tech, to pay the administrative expenses of the bankruptcy. The accompanying disclosure statement is clear: the Debtor does not have an alternative in the event it is denied use of those funds. Finally, the September 30 Plan calls for LaSalle's claim to be amortized over 20 years with a balloon payment on the fifth anniversary of the effective date of the plan. The junior secured creditor, which agreed to a slightly reduced amount of its claim, and the unsecured creditors will all be paid in full within the first year of the plan term. The Cash Collateral will be used to help fund these payments.
LASALLE'S CLAIM AND THE DEBTOR'S OBJECTION
On April 11, 2002, LaSalle filed a proof of claim in the amount of $3,826,015.99 and noted that this figure did not include prepetition attorneys' fees or late fees, nor any postpetition fees that were continuing to accrue. An attachment to the proof of claim further itemized the claim as of the Petition Date as follows:
Principal: $3,510,276.07
(Contract) interest: 167,323.16
Special Servicer fee: 69.80
Late fees: 12,372.48
(Additional default) interest: 135,974.48
The per diem for the contract rate of interest is $950.6998 and the per diem for the default interest is $195.0153: therefore the per diem for the combined contract and default interest is $1,145.7151. In addition LaSalle holds a total of $30,038.19 in a "suspense account."
The Debtor has objected on several grounds. It argued that LaSalle did not properly apply the periodic payments it received in a timely fashion and even then did not give the Debtor proper credit for the payments; that it was undersecured as to the Debtor's property until June 21, 2002 and therefore is not entitled to interest on its claim until, at the very least, June 21, 2002; that, even if and when it was oversecured, LaSalle is not entitled to default interest; and that LaSalle is not entitled to attorney's fees on its claim because the underlying documents fail to provide for them.
During the last day of the trial, the Debtor's counsel stated that the Debtor agreed with LaSalle's calculations, assuming that the principal was correct and assuming that LaSalle was entitled to each component set forth in its proof of claim. Because the Debtor continued to press its objection that the principal was improperly computed and that LaSalle was not entitled to most of the additional items sought, the "agreement" has little meaning.
"[A] proof of claim in a bankruptcy proceeding cannot be defeated by mere formal objection and . . . the sworn proof is to be treated `as some evidence even when it is denied.' This rule does not, however, affect the burden of proof. Therefore, if substantial evidence is introduced in opposition, the claimant must still prove its claim by a preponderance of the evidence." In re Sabre Shipping Corp., 299 F. Supp. 97, 99 (S.D.N.Y. 1969) (citations omitted). When an objector to a claim goes forward at the hearing with the same type and quantum of evidence contradicting the claim as the claimant proffered in support of its claim, the objector's burden of going forward with the evidence is met. Then the bankruptcy judge must weigh the evidence presented by the objector against the proof of claim, together with any evidence presented by the claimant, and he must make a finding of fact as to the validity and amount of the claim. In re Friedman, 436 F. Supp. 234, 237-38 (D. Md. 1977). With these principals in mind, the Court must now review the evidence proffered in support of and in opposition to LaSalle's claim.
LASALLE'S CLAIM ON THE PETITION DATE
The Debtor disputes the principal amount of LaSalle's claim as set forth in the proof of claim for three primary reasons, all of which stem from the Debtor's expert's testimony that the transaction history (the "Transaction History"), provided by LaSalle and introduced as an exhibit at trial, does not "loot." First, the Debtor argues that LaSalle did not apply the payments when received; it points to instances in the Transaction History that reflect a lag time of two weeks or more between the date payment was received and the time the payment was applied. Second, the Debtor disputes LaSalle's right to charges and apparently to have charged attorneys' fees at various times throughout the loan history. Included within this argument is the Debtor's contention that LaSalle received $125,000 in connection with the Third Forbearance Agreement and that this money, or at least some portion of it, must be reallocated as an off-set against the principal. Finally, the Debtor notes that LaSalle is still holding in excess of $30,000 in a suspense account and that it should have applied this money against the principal rather than hold it in a suspense account.
The timing of the application of proceeds
LaSalle's witness testified that the timing of the application of payments to the loan had no impact on the calculation of interest incurred because the loan was in default. Upon cross-examination by LaSalle's counsel, one of the Debtor's experts, Peter Armanetti, agreed. Therefore the witnesses are in agreement that the timing of the application of payments is irrelevant to the calculation of LaSalle's claim. In its post-trial submission of Proposed Findings of Fact and Conclusions of Law, the Debtor, however, argues that "LaSalle averaged an 18-day delay in applying payments to the Loan while it was charging default interest and late charges. . . . LaSalle has failed to adequately explain how failure to timely apply received funds to reduce the principal balance would have no effect on future payments."
Upon cross-examination by Attorney Bean, Mr. Armanetti testified as follows:
Q: And you — you made a point during your direct examination with Mr. Baldiga about a delay in application of payments to — to the principal, is that right?
A: That's correct.
Q: And if the loan had matured and interest was — a default interest was accruing on the principal, a delay in application of the payments wouldn't change the amount of the principal, would it?
A: No, it would not.
Mr. Armanetti testified that he concluded the average delay in applying payments was 18 days based upon his review of the Transaction History.
Although the Court agrees that a reduction in the amount of the principal will decrease the amount of accruing interest, the Debtor failed to produce any evidence as to even an approximate amount of excess interest charged. Furthermore the Court notes that the Debtor failed to establish that the delay was a delay in applying payments rather than a reflection of internal posting dates. In fact the Transaction History indicates that beginning in the fall of 1996 the Debtor was often late in making its payments. For example, the Transaction History indicates that the Debtor made the October 1, 1996 payment on October 4 and it was posted on October 7; it made its November 1, 1996 payment on November 12 and it was posted the same day. This pattern continued until the note became due. Rarely does the Transaction History reflect a timely payment during this period. On some occasions it appears that the Debtor was charged late fees; in other instances late fees were not charged or were waived. Once the note was in default the parties negotiated interest, late fees, and other charges in the Forbearance Agreements.
The Debtor's logic may be sound but its proof was not. Therefore there will be no adjustment arising from any alleged delays in the application of payments.
Attorneys' fees
The Debtor's obligation to pay legal fees has been the subject of dispute among the parties. During the course of the trial, the Court entered an order on the Debtor's Motion In Limine As To Legal Bills Not Produced In Discovery (the "Fee Order") and will not repeat that order in its entirety herein. It is sufficient to note that although the Debtor is correct that the note and mortgage do not provide for the payment of the secured creditor's legal fees except those incurred in connection with a foreclosure, the Debtor, upon default specifically agreed to the payment of some legal fees in all three Forbearance Agreements. The First and Second Forbearance Agreements provide for legal fees in sums certain. The Third Forbearance Agreement, however, is ambiguous. While it calls for the payment of legal fees, the amount of those fees was not specified. Moreover, the parties apparently contemplated that the legal fees might be less than $125,000 and provided that, in that case, the excess would be applied to the outstanding balance.
The testimony regarding the application of the $125,000 was less than clear. The Debtor's expert witness stated that he spent several hours analyzing the Transaction History but could not reconcile it; it appears to the Debtor and its expert that the Debtor received no credit for the $125,000. It therefore contends that the outstanding principal must be reduced by $125,000. A review of the Transaction History, however, reveals that the Debtor's extreme position is erroneous. The Transaction History is clear with respect to application of some, although not all, of the $125,000. All of the $125,000 was originally placed in an escrow account on September 18, 2001. On October 26, 2001 $87,460.15 of the $125,000 was disbursed from escrow and applied as follows: (i) $34,368.18, the amount of the regular monthly payment, was applied to the principal and interest payment due on April 1, 2001, the oldest unpaid monthly payment; and (ii) $53,091.97 was applied against miscellaneous payments. Clearly the Debtor got credit for at least one monthly Payment and thus it is not now entitled to a credit for the full $125,000. The question which the Court must answer is whether the Debtor is entitled to a credit for the $53,091.97 applied as miscellaneous payments and the balance of $37,539.85.
In attempting to answer that question, the Court spent several hours attempting to reconcile the Transaction History with the other exhibits proffered by the parties and the testimony of their witnesses. Tracing the money through the Transaction History is virtually impossible and Julia Lovelace, LaSalle's witness who attempted to explain it, fared no better. She did not prepare the Transaction History. In fact she is employed by Lend Lease Asset Management, the special servicer which assumed responsibility for the loan when the Debtor defaulted. The Transaction History was prepared by the master servicer.
Because there was no credible evidence that the $37,539.85 was ever credited to the loan, the Debtor will receive a credit against the principal in this amount. The Court is aware that some portion of the $30,038.19 that both parties agree is in the suspense account may derive from the $37,539.85 but there was no evidence on this point. Given LaSalle's witness' inability to interpret the Transaction History, there is no reasonable basis for the Court making such a finding. LaSalle has failed to meet its burden on this point.
The Transaction History does reflect that $53,091.97 was applied as several smaller payments noted to be "miscellaneous" payments. Ms. Lovelace attempted to correlate these payments to legal fees and it may be that each was for the payment of legal bills. In fact it is quite likely that the $53,091.97 went to pay LaSalle's current counsel. According to Attorney Mitchell's testimony, she reviewed the legal bills issued by Nutter, McClennen Fish apparently from the beginning of its engagement through December 31, 2001 and determined that the firm had billed LaSalle approximately $52,000. She also stated that she reviewed the invoices in light of the Fee Order and determined that $45,948.25 of the time billed related to foreclosure services. LaSalle thus argues that it is permitted to deduct $45,948.25 from the $125,000. This conclusion, however, is incorrect. The Fee Order only permitted legal fees that were either (1) provided for in the Forbearance Agreements or (2) allowable under the loan documents, that is, reasonable fees related to foreclosure proceedings.
There was no evidence, and no party has claimed, that any portion of the $125,000 went to pay those legal fees expressly set forth in the First and Second Forbearance Agreements. The $125,000 payment relates solely to the Third Forbearance Agreement. Given that the Third Forbearance Agreement does not establish a fixed amount of legal fees to be paid by the Debtor, and contemplates how any balance is to be applied if fees are less than $125,000, the Court must determine what legal fees the parties intended to be included within its scope. Neither party introduced any evidence on this point.
The Third Forbearance Agreement was executed in September 2001. Although it is possible that the parties anticipated that the $125,000 might also cover fees yet to be incurred, nothing in the Agreement nor the trial testimony supports such an interpretation. Therefore the Court finds that the $125,000 was intended to offset fees incurred after the execution of the Second Forbearance Agreement through the signing of the Third Forbearance Agreement. Again, however, there was no testimony as to what those fees through September 16, 2001 were. Moreover, the Third Forbearance Agreement does not indicate nor was there any testimony as to whether the phrase "legal fees" was intended to mean all legal fees or only those fees relating to foreclosure activities. Because LaSalle had this burden and it failed to offer any evidence that the former interpretation was intended, the Court will only permit payment of legal expenses for the period from the expiration of the Second Forbearance Agreement to the execution of the Third Forbearance Agreement and only to the extent that those fees were both reasonable and incurred in connection with work done in connection with a foreclosure. Simply put, LaSalle will get only what was contemplated under the original loan documents.
LaSalle offered certain invoices and partially redacted supporting documentation for bills for the period from November 13, 2000 to March 30, 2002. Those bills, admitted as LaSalle's Exhibit 95, and the testimony of Attorney Mitchell were taken subject to the Debtor's Motion to Strike. The Court denies the Motion to Strike; the Debtor was not prejudiced by their admission nor by Ms. Mitchell's testimony. The Debtor's counsel took full advantage of the opportunity to cross-examine Attorney Mitchell and used the disputed exhibits in an effort to undermine the witness' credibility. Based upon a review of the relevant legal bills in Exhibit 95 and the Court's own experience and expertise in this area, the Court determines that the appropriate amount of the $125,000 to be applied to LaSalle's legal fees under the Third Forbearance Agreement is $20,000.00.
Moreover, even though the Third Forbearance Agreement did not contemplate future legal expenses, under the express terms of the initial loan documents, LaSalle is entitled to reasonable fees incurred after September 16, 2001 if those fees were incurred in connection with a foreclosure. Based upon Attorney Mitchell's testimony that LaSalle incurred foreclosure related expenses of $45,948.25 through December 31, 2001 but a review of the invoices in Exhibit 95 reflect minimal foreclosure services rendered after September 16, 2001 and therefore the Court declines to add any additional fees to LaSalle's claim.
Consequently, the Debtor is entitled to a credit of $70,631.82, the balance of the $125,000, plus $30,038.19, the balance in the suspense account. These amounts should be deducted from the principal leaving a principal balance of $3,460,237.88. This amount represents an approximately 11% reduction of the amount LaSalle claimed as unpaid principal. Consequently the Court will reduce all allowable prepetition interest by 11% and thus LaSalle's claim as of the Petition Date was $3,730,172.77.
LASALLE'S CLAIM AT CONFIRMATION
Because LaSalle is oversecured, it is entitled to interest on its claim. 11 U.S.C. § 506 (b). The parties disagree as to the amount of such interest, however.
Postpetition interest
The Debtor argues that LaSalle was undersecured until June 21, 2002 when the Affiliate Property was reconveyed to the Debtor. Therefore, according to the Debtor, LaSalle is not entitled to interest on its claim until June 21, 2002. LaSalle posits several reasons why this is incorrect including that the Affiliate is an alter ego of the Debtor and that the Debtor's conveyance of those lots to its Affiliate was a breach that should not be rewarded by the denial of interest. The Court need not address those grounds, however, as there is a very simple but compelling reason why LaSalle is entitled to interest from the Petition date forward. The Affiliate Property was encumbered by LaSalle's mortgage from the beginning of the loan. Until the Affiliate Property was reconveyed to the Debtor, it remained outside of the bankruptcy estate and was, therefore, to be treated in accordance with state law. Under state law LaSalle is entitled to interest on its claim without regard to whether it was oversecured or undersecured. Thus whether LaSalle was undersecured as compared only to the value of Lot 4 is irrelevant. It is entitled to interest, including default interest, on the claim it secured by the Affiliate Property. When that Property became part of the Debtor's estate, it came with LaSalle's encumbrances as they existed at the time of transfer. Therefore LaSalle is entitled to interest from the Petition Date forward. Moreover, there is nothing to suggest, nor has the Debtor argued, that the contract rate should not be utilized. In re Chang, 274 B.R. 295, 302 (Bankr. D. Mass. 2002). There are no equities compelling utilization of a lower rate. In reality this case is little more than a two party dispute; other creditors hold minimal claims. Other creditors will not be adversely affected by the allowance of interest as contemplated by the contract. Therefore LaSalle is entitled to interest from the Petition Date forward at the contract rate.
Cushman Wakefield, the next largest creditor, which holds a lien junior to LaSalle's, was not even a secured creditor of the Debtor until the reconveyance of the Affiliate Property. Moreover, the Debtor and Cushman Wakefield have reached agreement whereby Cushman Wakefield will reduce its claim in exchange for a distribution to be made on the effective date of the September 30 Plan and an acceleration of the remainder.
Default interest
Because the Affiliate Property came into the estate encumbered by LaSalle's mortgage which provided for an additional 2% interest upon default, LaSalle is entitled to default interest through at least June 21, 2002. Whether it is entitled to default interest through the remainder of the postpetition preconfirmation period merits only a little more discussion.
Just as a court may modify the contract rate if appropriate, a court can deny or modify default rates based on the equities of each case. Chang, 274 B.R. at 302. Fischer Enterprises, Inc. v. Geremia (In re Kalian), 178 B.R. 308, 313 (Bankr. D.R.I. 1995). Default rates of interest are permissible if it is not an impermissible penalty. In determining whether a default rate constitutes a penalty, courts examine whether the creditor also is seeking to impose late fees, whether the default rate is so high as to be excessive, and the impact of the rate on the estate as a whole.
In the instant case the default rate is not an impermissible penalty. The additional charge is 2% and, as with the contract rate of interest, there are no equitable considerations that compel the denial of this interest. Moreover the Debtor agreed to the payment of default interest in the Second Forbearance Agreement. The late fees which LaSalle seeks to include in its claim, namely $12,372.80, however, will not be allowed. There was no testimony that LaSalle or any of the other servicers incurred additional expenses that might justify imposing both late fees and default interest.
As stated above, after giving the Debtor credit for the approximately $100,000 previously applied to legal fees or held in suspense, and after allowing interest at the contract and default rates, LaSalle's claim as of the Petition Date was $3,730,172.77. Added to that is a per diem of $1,019.68, the per diem of the contract and default rates reduced by 11%. This results in the addition of $273,274.24 to LaSalle's claim through December 20, 2002. Thus LaSalle's claim for the purposes of determining whether the September 30 Plan is feasible is $4,003,447.01.
The Court has not calculated any interest for the money held in suspense. No party requested it or offered any evidence of what the amount of such interest should be.
FEASIBILITY OF THE SEPTEMBER 30 PLAN
The Debtor argues that its proposed plan is feasible, especially in light of the additional collateral which it will give to LaSalle under the September 30 Plan. Although the inclusion of additional property brings the Debtor closer to a determination that LaSalle will receive the "indubitable equivalent" of its claim under the plan, see 11 U.S.C. § 1129 (b)(2)(A), it does not necessary help the Debtor establish the feasibility of the plan. The Debtor's feasability analysis values LaSalle's claim at $4 million. At post-confirmation interests rates of 5% or 6%, the cash flow is barely positive. At 7% it is negative, even with the use of the Cash Collateral to fund payments to be made within the first year after confirmation.
The Debtor proposes to pay Cushman Wakefield and all unsecured creditors 6% interest on their claims even though the risk of non-payment to those creditors is minimal under the September 30 Plan.
By the Debtor's own calculations, the cash flow which will be generated by the Debtor, assuming that the Debtor's numbers are accepted as true, is barely enough to meet the demands for payment under the plan. If the expenses, which the Debtor claims are virtually non-existent, even approach those to which LaSalle's expert testified, the Plan is not feasible. But again, the Court need not immerse itself in precise mathematical calculations to decide if the Plan should be confirmed. Nor does the Court have to engage in any protracted discussion of the appropriate interest rate to be applied to LaSalle's claim in a cram-down scenario. Instead there are clearer hurdles to confirmation which the Debtor did not overcome.
THE BALLOON PAYMENT
The inclusion of a balloon payment is not dispositive of a plan's feasibility. The proponent of such a plan must offer some evidence to show that the funds will be available at the time the balloon payment is due, however. See Chelsea State Bank v. Wagner (In re Wagner), 259 B.R. 694, 700 (8th Cir. BAP 2001) (debtors have burden to prove that plan is feasible); In re Fantasia, 211 B.R. 420, 423 (1st Cir. B.A.P. 1997) (debtors must show by definite and credible evidence that they will have the financial ability to make the balloon payment); In re St. Cloud, 209 B.R. 801, 809-10 (Bankr. D. Mass. 1997) (debtors established by a preponderance of the evidence that there is a reasonable likelihood of obtaining refinancing); In re Harris, 199 B.R. 434, 436 (Bankr. D.N.H. 1996) (plan too speculative and debtor provided no evidence of likelihood of refinancing). In re Amadon, 2001 WL 1757047, at 4 (Bankr. D.N.H.).
In the instant case, the Debtor offered testimony that was speculative at best about potential sales or joint ventures of the property. During the time in which the Debtor and/or its Affiliate have owned the property, however, it has been unable to accomplish any further development of the land. Indeed the testimony was that the Debtor had approached over 10 lenders in unsuccessful attempts to refinance the property. The Debtor did not produce any credible evidence that would lead the Court to conclude that it will be able to accomplish a refinancing of the debt at the end of the Plan term. Therefore, the Plan cannot be confirmed because it does not comply with 11 U.S.C. § 1129 (a)(11).
THE USE OF CASH COLLATERAL TO FUND THE PLAN
LaSalle objects to the Debtor's proposed use of the escrowed rents which total in excess of $300,000, to fund the September 30 Plan. The Debtor counters with Mr. Rizzo's testimony that he is willing to contribute $100,000 and more, if necessary, to make the Plan feasible. Mr. Rizzo, however, also testified that there was a limit to the amount that he would be willing to invest although he did not know what that limit was. As of the date of the Second Amended Disclosure Statement, the Debtor had incurred over $210,000; its attorneys are holding a retainer of $100,000. It also noted as follows:
The Partnership will seek to use cash receipts collected during the pendency of the case to fund payments to claimants (including the payment of allowed professional fees or other accrued administrative expenses) under the Plan or used as working capital (and LaSalle has stated that it will object to such request). . . . The Partnership does not have a present plan to deal with the possibility that the Court may deny the Partnership's use of rents for such purposes. . . . [I]f LaSalle's objection [to the use of rents to pay such claims] is sustained, the Partnership may not be able to pay them.
In order to confirm the September 30 Plan, the Court must find that the Debtor has the ability to make the distributions called for under the plan. In the instant case, the Debtor cannot make such payments unless it is permitted to invade the escrowed funds. The Debtor does not dispute that the funds are LaSalle's collateral. Instead it argues that it should be permitted to use them because LaSalle is getting the indubitable equivalent of its claim. It has not, or could it, argue that a surcharge of LaSalle's collateral is permissible under 11 U.S.C. § 506 (c). "It is the general rule that the unsecured creditors must assume the costs of administering the estate." In re Parque Forestal, Inc., 949 F.2d 504, 511 (1st Cir. 1991). See In re Visual Industries, Inc., 57 F.3d 321, 324 (3d Cir. 1995) ("The general rule is that post-petition administrative expenses and the general costs of reorganization ordinarily may not be charged to or against secured collateral."); In re Flagstaff Food Service Corp., 739 F.2d 73, 76 (2d Cir. 1984) ("Payment of administration expenses traditionally has been the responsibility of the debtor's estate, not its secured creditors."). Consistent with this rule and the Code's priority scheme, the claim of an attorney rendering services to an estate is not entitled to priority over the claim of a secured creditor to its collateral. In re A.J. Lane Co., Inc., 113 B.R. 821, 824 (Bankr. D. Mass. 1990).
Because the Debtor may not use the Cash Collateral to pay its professional fees, the Plan does not satisfy section 1129(a)(1). Therefore the Court need not address the Debtor's proposal to pay other creditors using LaSalle's collateral.
THE MOTION FOR RELIEF
Despite numerous chances and the passage of almost ten months, this Debtor is unable to confirm a plan. Cause exists to grant relief from stay.
CONCLUSION
For the foregoing reasons, confirmation is denied. LaSalle is granted relief from the stay.
Separate orders will issue.