In re Marble Cliff Crossing Apartments, LLC

Caldwell

On November 1 through November 30, 2012, the Court conducted a trial to confirm the plan of reorganization and related amendments filed on behalf of Marble Cliff Crossing Apartments, LLC ("Debtor"). The only objecting party and holder of the most significant secured and unsecured claims, is MTGLQ Investors, LP ("Creditor").

Currently, the Debtor proposes to pay in full the Creditor's secured claim over a period of thirty-two years with interest at a market rate determined by the Court. The Creditor responds that such loan terms are not available in the market, that the Debtor does not have the financial ability to consummate the plan, and liquidation would inevitably follow plan confirmation.

The dispute is under advisement, and the parties may file memoranda, of no more than thirty pages, on or before December 28, 2012. Below, the Court has detailed critical concerns the parties should consider in preparing memoranda. On Friday, January 4, 2013, at 2:00 p.m. in Courtroom B, 170 N. High Street, Columbus, Ohio, the Court will conduct a hearing to consider any memoranda and discuss the status and future of this Chapter 11 proceeding.

During the trial, representatives of the Debtor's interests testified including the property manager, Mr. Chris Deibel, the managing partner, Mr. Brad Armstrong, and the non-managing partner, Mr. John Chester. Mr. Andrew McCorkle testified on the status of the methane gas remediation, a Mr. John Carr testified about available loan terms for apartment communities, and the Debtor's insurance broker, Mr. Ronald E. Nelson, testified regarding the Debtor's loss history and potential impact of the remediation project.

On behalf of the Creditor's interests, the Court heard testimony from a Mr. Jerry M. Morris regarding available loan terms for apartment communities, and a Mr. Thomas W. Chatham regarding future availability and cost of insurance after the discovery of methane gas at the apartment complex. In addition, the Creditor presented testimony from a Mr. James R. Maddox, regarding available loan terms for apartment communities.

From all these sources and related documents, the Court perceives impediments to confirmation, including but not limited to: a. feasibility of the proposed plan, as amended; b. appropriate rates of interest for creditors; and c. length of repayment on the $31,750,708.00 secured claim of the Creditor. From the Court's perspective, however, feasibility is the dispositive concern.

With feasibility as the chief concern, the evidence presented suggests a considerable potential for extraordinary post-confirmation expenses that may cause the plan to fail. Such factors include: a. increased costs for the methane gas remediation project; b. larger insurance expenses given the multi-year implementation of the remediation plan; c. fluctuations in demand for apartments over time, based upon the economy and entrance of competitors to the market; d. catastrophic, weather-related insurance losses, similar to those experienced in the past; and, e. major repair and replacement costs associated with the aging of the property.

Neither the Court nor the parties can predict the future, and there is always an element of risk associated with plan confirmation. In this case, however, history dictates a heightened degree of skepticism in the face of the future drawn by the Debtor. The apartment community is atop a former quarry filled with construction and organic debris. The complex experienced great financial difficulties in the opening years, due to unanticipated road construction. The Debtor defaulted on its HUD-guaranteed loan, ultimately leading to the Creditor's purchase of the obligation for a discount at auction.

Even with this history, the plan as most recently amended does not guarantee irrevocable capital contributions and/or loans from the owners to fund operations and plan payments, should the Debtor's projections vary from reality. The Second Amended Plan does provide for the commitment of loans up to $1,500,000 from the owners to the Debtor (Doc. No. 453, Exhibit 3). The commitment, however, is subject to substantial reservations that appear to favor the owners rather than the estate and its creditors.

On November 30, 2012, the Debtor filed an amended loan commitment; however, it only provides that the owners are personally obligated, without any other enhancement of the terms. Further, the evidence is at best sketchy on the financial ability of the owners to fund the commitment. Indeed, during the Debtor's case on rebuttal, the Court questioned Mr. Armstrong regarding this deficiency, and he did not have any documentation prepared at the time. The Court requires a substantial showing from the owners and any of their related entities that includes, for example, financial statements, bank account records, and tax returns.

Given the proposed thirty-two year repayment term on the Creditor's secured claim, a substantial, definite and irrevocable commitment from the owners becomes more necessary to provide proof of plan feasibility. The Court understands that the Creditor acquired both the loan and its remaining term at auction and for a discounted price. The Court, however, must weigh these factors against the related loss of the federal guaranty. Further, the record suggests that commercially available loan terms are presently in the range of ten years. Certainly, a shorter repayment term on the Creditor's secured claim, which for example provides for sale or refinancing by a date certain, reduces the risk to the Creditor's interests, and all other parties dependent upon the success and consummation of the proposed plan.

The parties should also consider the creation of reserve accounts in the names of the Debtor and the Creditor, in which agreed upon sums are deposited by the Debtor on a monthly basis to defray potential extraordinary expenses. Such reserve accounts could also include any loan commitments and/or capital contributions from the owners. These types of arrangements will not interfere with the Debtor's control over rents, but rather will provide continued assurance that the rents benefit the estate and all of its creditors. Further, the parties should consider non-recourse carve-outs for any fraud or gross mismanagement that may occur after confirmation.

In order to conserve time and resources, the Court has communicated these concerns to the parties in advance of the briefing deadline. In response, the owners of the Debtor and/or the Creditor's representative must determine the best use of the dwindling time and opportunity that remain. Whatever happens, the Court will be prepared on January 4, 2013, to consider any memoranda, and to discuss the status and future of this Chapter 11 proceeding.

IT IS SO ORDERED.

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