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In re Westport Holdings Tampa, Ltd. Partnership

United States District Court, M.D. Florida, Tampa Division

September 10, 2019




         In the context of a Chapter 11 bankruptcy proceeding, Appellant SouthPoint Global Investments, LLC, appeals the Bankruptcy Court's order authorizing the Debtors to obtain replacement post-confirmation financing from another lender and granting that lender liens and administrative expense claims that would have priority over those held by SouthPoint. The appeal is fully briefed and, as discussed below, the Court affirms the Bankruptcy Court's order.

         I. Background

         University Village is a continuing care retirement community in Tampa, Florida. (Doc. # 10-21 at 9). University Village is comprised of 446 independent living apartments and 46 independent living villas and condominium units (the Independent Living Facility), along with an assisted living and skilled nursing facility (the Health Center). (Id.). The Independent Living Facility is owned by Westport Holdings Tampa, Limited Partnership and Westport Holdings Tampa II, Limited Partnership (collectively, the Debtors), both of which are debtors in the underlying bankruptcy proceeding. (Id. at 2, 9). At all times relevant to this appeal, the Health Center was owned by Westport Nursing Tampa, LLC (WNT), which is not a debtor in the underlying bankruptcy proceeding. (Id. at 3, 9; Doc. # 10-7 at 3).

         On September 22, 2016, the Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. (Doc. # 10-7 at 3; Doc. # 10-30 at ¶ 3). The Bankruptcy Court later appointed Jeffrey Warren as Liquidating Trustee to administer the Debtors' estates. (Doc. # 10-20 at 38-39; Doc. # 10-30 at ¶ 4).

         As part of the bankruptcy proceedings, CPIF Lending, LLC, one of the Debtors' creditors, filed a secured claim in the amount of $9, 781, 224.58 based on a $9.5 million pre-petition loan from CPIF in favor of the Debtors. (Doc. # 10-6 at 1, 4; Doc. # 10-7 at 4-5; Doc. # 10-30 at ¶ 5; Doc. # 10-47 at 1, 4). CPIF asserts that the loan was secured by a first-priority lien on substantially all of the Debtors' assets, including the Independent Living Facility, any cash collateral generated by the Independent Living Facility, and substantially all personal property owned by the Debtors. (Doc. # 10-6 at 5; Doc. # 10-7 at 5; Doc. # 10-30 at ¶ 5; Doc. # 10-47 at 5). CPIF's secured claim was subject to objections and an adversary proceeding, which remained pending before the Bankruptcy Court when this appeal was filed. (Doc. # 10-7 at 5; Doc. # 10-30 at ¶ 5). In addition, USAmeriBank[1] loaned money pre-petition to WNT, secured by a first-priority lien on substantially all of WNT's assets, including the Health Center. (Doc. # 10-7 at 5; Doc. # 10-30 at ¶ 6).

         In a May 8, 2018, order, the Bankruptcy Court determined that the value of the Independent Living Facility, as collateral for any secured claims, was $12.9 million for purposes of confirmation of the Debtors' modified plan of reorganization. In re Westport Holdings Tampa, L.P., et al., No. 8:16-bk-8167-MGW, (Doc. # 1010) (Bankr. M.D. Fla. May 8, 2018) (hereafter Bankruptcy Court Docket). Similarly, it determined that the maximum amount of CPIF's pre-petition secured claim was $12.9 million, less outstanding taxes. Id. On appeal, this Court affirmed that valuation on June 28, 2019. (Bankruptcy Court Docket, Doc. # 1505).

         The Debtors required approximately $2 million in post-petition financing for, among other things, capital improvements to the Independent Living Facility, including roof repairs, and operational expenses until a sale could be completed. (Doc. # 10-7 at 6-7; Doc. # 10-18 at 6, 9; Doc. # 10-30 at ¶ 7). In April 2018, SouthPoint agreed to extend the Debtors this financing pursuant to a revolving line of credit facility with a $2 million maximum balance (the SouthPoint Loan Facility). (Doc. # 10-7 at 7-8, 10; Exh. A to Doc. # 10-7). Accordingly, the Liquidating Trustee filed a motion to obtain post-petition financing under the terms of the SouthPoint Loan Facility. (Id. at 1).

         The Bankruptcy Court found that the Debtors had “an immediate and critical need” for the funds, and the financing would be “necessary and vital to the preservation and maintenance of the going concern values of the Debtors.” (Doc. # 10-18 at 9). Accordingly, on May 2, 2018, the Bankruptcy Court entered an order authorizing the Debtors to borrow up to $2 million from SouthPoint under the terms of the SouthPoint Loan Facility (the SouthPoint Financing Order). (Id. at 4-6; Doc. # 10-30 at ¶ 7).

         Under the SouthPoint Financing Order and the SouthPoint Loan Facility, Southpoint received the following liens and security interests: (1) a first-priority lien on any unencumbered assets of the Debtors (subject to certain exceptions under the Bankruptcy Code), (2) a second-priority lien on all encumbered assets owned by the Debtors, junior only to those liens held by CPIF and any tax liens, and (3) a junior-priority lien on all encumbered assets of WNT. (Doc. # 10-7 at 7; Doc. # 10-18 at 7; Doc. # 10-30 at ¶ 8).

         The SouthPoint Financing Order also granted SouthPoint a superpriority administrative claim under 11 U.S.C. § 364(c)(1):

The Debtors' obligations to repay [SouthPoint] for advances pursuant to [the SouthPoint Loan Facility] shall be accorded superpriority administrative expense status pursuant to Section 364(c)(1) of the Bankruptcy Code, superior to any other claims under Section 364(c)(1) of the Bankruptcy Code, and priority over any and all other claims against the Debtors, now existing or hereafter arising, of any kind whatsoever, including, without limitation, all administrative expenses of the kind specified in Sections 503(b) and 507(b) of the Bankruptcy Code (the “Superpriority Claim”), without the need to file any proof of claim. The Superpriority Claim of [SouthPoint] shall be entitled to the full protection of Section 364(e) of the Bankruptcy Code in the event that this Order or any provision hereof is vacated, reversed or modified, on appeal or otherwise.

(Doc. # 10-18 at 7-8).

         The Bankruptcy Court found that the SouthPoint Loan Facility had been negotiated in good faith and at arms' length, and found that SouthPoint was acting in good faith, thereby triggering the “protections offered by Section 364(e) of the Bankruptcy Code, and [SouthPoint] shall be entitled to the full protection of Section 364(e) of the Bankruptcy Code in the event that this Order or any provision hereof is vacated, reversed, or modified, on appeal or otherwise.” (Id. at 10).

         The SouthPoint Financing Order further provided that all outstanding amounts drawn under the SouthPoint Loan Facility would become due and payable upon the occurrence of a default. (Id. at 8). As pertinent to this case, the SouthPoint Loan Facility documents defined an “Event of Default” as: (1) an order “entered by the Bankruptcy Court in the Bankruptcy Cases, without the prior written consent of [SouthPoint], (i) to revoke, reverse, stay, modify, supplement or amend the Financing Order, or (ii) to grant or permit the grant of a Lien on the property or assets of either Borrower other than a Permitted Lien, ” and (2) where a person “shall attempt to grant a Lien in any of Borrowers' properties or assets” or when “any action is commenced by a Borrower that contests any provision of the Financing Order.” (Doc. # 10-12 at ¶¶ 8.1(j), (1)).

         After the SouthPoint Loan Facility closed, the Liquidating Trustee requested $969, 605 for a proposed project to repair and replace portions of the Independent Living Facility's roof. (Doc. # 10-30 at ¶¶ 10, 11). According to the Liquidating Trustee, the roofs at University Village suffered from water intrusion and were in “great disrepair.” (Doc. # 10-46 at 8). SouthPoint approved the roofing contract and advanced a $10, 000 down payment. (Doc. # 10-30 at ¶ 12). The Liquidating Trustee then entered into the roofing contract. (Id.). SouthPoint funded an additional $100, 000 for a progress payment on the roof but then refused two later requests for additional funds. (Id. at ¶¶ 13-15). Up to that point, SouthPoint had advanced a total of $488, 000 on the SouthPoint Loan Facility, with $110, 000 advanced for the roofing project. (Doc. # 10-46 at 7-8). The roofing contractor ceased any further work pending payment of its unpaid invoices. (Doc. # 10-30 at ¶ 16).

         After approaching several lenders to obtain replacement financing, the Liquidating Trustee filed an expedited motion for approval of a replacement financing facility from Rosemawr Management, LLC, pursuant to 11 U.S.C. §§ 364(c) and (d). (Doc. # 10-25; Doc. # 10-30 at ¶¶ 18-19; Doc. # 10-46 at 9-11). Under the terms of the proposed loan, Rosemawr would make advances of up to $2 million, with an “accordion” feature allowing Debtors to borrow up to an additional $500, 000. (Doc. # 10-25 at 7).[2] The proposed replacement financing would be secured by priming liens on all assets of the Debtors and WNT, subject only to existing liens on the assets of WNT. (Id.; Doc. # 10-30 at ¶ 27). In addition, the lender would be granted a superpriority administrative expense claim. (Id.).

         CPIF filed a written objection to the requested replacement financing, (Doc. ## 10-27, 10-28), but prior to the hearing, CPIF offered to provide the replacement financing on substantially the same terms and conditions as those offered by Rosemawr. (Doc. # 10-46 at 11-12). CPIF's offer did, however, contain a more favorable fee structure. (Id. at 12). The Liquidating Trustee accepted CPIF's offer, contingent upon the approval of the Bankruptcy Court, thus resolving CPIF's objection. (Id. at 11-12). SouthPoint did not lodge a written objection to the proposed replacement financing.

         According to a signed declaration filed by the Liquidating Trustee in support of the expedited motion, none of the potential lenders approached by the Liquidating Trustee were willing to extend post-confirmation financing on anything other than a priming basis. (Doc. # 10-30 at ¶¶ 20, 26). The Liquidating Trustee stated in his declaration that he believed obtaining this replacement post-confirmation financing was in the best interests of the estate and the creditors. (Id. at ¶ 21).

         Further, the Liquidating Trustee averred that replacement financing was necessary to complete much needed capital expenditures, including the roofing contract, and to fund operating expenses until University Village could be sold. (Id. at ¶ 23). According to the Liquidating Trustee, the replacement funding would be necessary to maintain and improve the value of the Debtors' assets, to continue the business without interruption, and to maximize the sale value for all creditors. (Id. at ¶ 24).

         Importantly, the Liquidating Trustee also averred that SouthPoint's and CPIF's interests, as existing secured creditors, would be adequately protected because the replacement financing would be used to increase the value of the collateral “in an amount at least equal to the amount [of the] Post-Confirmation Facility.” (Id. at ¶ 28). According to the Liquidating Trustee, the value of the collateral would be increased in four ways.

         First, the capital expenditures would increase the collateral's value by no less than the amounts spent. (Id. at ¶ 30(a)). Second, the forthcoming capital expenditures justified an increase in the residents' monthly service fee, resulting in an increased annual revenue of $276, 000. (Id. at ¶ 30(b)). According to the Liquidating Trustee, using a “conservative” capitalization rate of 4%, this increased fee would add $1, 104, 000 in value to the collateral. (Id.). Using a “market-based” 7% capitalization rate, the increase in the monthly service fee adds $1, 932, 000 in value to the collateral. (Id.).

         Third, the anticipated capital expenditures would allow the Liquidating Trustee to implement a marketing program expected to yield a minimum of four new renters every month, with an average blended monthly rent of $1, 854 and a $2, 500 community fee per move-in, adding further value to the collateral. (Id. at ¶ 30(c)). Finally, commencing capital improvements enhanced resident support and morale, which prompted residents to undertake repairs and refurbishments on their own, further enhancing the value of the collateral. (Id. at ¶ 30(d)). The Liquidating Trustee stated his belief that, without post-confirmation financing, the going-concern value of the Debtors would decline, making them “significantly less attractive” to potential buyers. (Id. at ¶ 30(e)).

         The Bankruptcy Court held a hearing on the replacement financing motion on November 5, 2018. (Doc. # 10-46 at 1). At the hearing, counsel for SouthPoint lodged a “conditional objection” to the replacement financing motion, stating that “the Trustee is not really authorized to borrow monies under the Court-approved financing that we provided without paying off our facility.” (Id. at 31). SouthPoint's counsel explained that it stopped making advances under the SouthPoint Loan Facility due to the Liquidating Trustee's lack of progress in selling the Debtors' assets, saying that SouthPoint was “very afraid” of advancing any more money to the Debtors due to “legitimate concerns about getting repaid.” (Id. at 31-32). Counsel pointed to the terms of the SouthPoint Loan Facility and the SouthPoint Financing Order providing that the loan would be paid off in full in the event of a default or an impairment by any other financing. (Id. at 32-33). In conclusion, SouthPoint stated that it had no objection to the CPIF replacement financing, so long as it was repaid the monies it already advanced. (Id. at 33-34).

         The Liquidating Trustee responded that the parties were not there to litigate the “default” by SouthPoint but, instead, “[w]e are here to prime them as a lender and we will resolve the disputes with them at a later and appropriate time.” (Id. at 34). The Liquidating Trustee explained that it was forced to file the emergency motion for replacement financing because SouthPoint refused to perform under their earlier agreement. (Id. at 34-35).

         The Bankruptcy Court stated at the hearing that “[n]o one disputes that the repairs to the roof needed to be made” and that “it's in everyone's interest that the Debtor be sufficiently funded so that it can continue to operate as a going concern.” (Id. at 37). As to SouthPoint's objections, the Bankruptcy Court stated that:

SouthPoint relies on its documents. But, you know, I can't overlook the fact that the reason we're here and doing this is because SouthPoint in fact didn't fund what their initial commitment was. And they have, I shall assume, wonderful reasons and we'll litigate those, I'm sure, in due course. But where we are here today is this roof needs to be fixed and we can't be going off and having -- trying major lawsuits as part of that process.
So the idea that we can now require CPIF to fund SouthPoint's piece of the case as part -- a condition to this is way too much at this stage. We'll have to resolve SouthPoint's issues in due course.
But taking everything into consideration, this is a fair and equitable resolution. It's one that harms no one, it improves the value of the collateral, it violates no bankruptcy principle that is not flexible and therefore I will overrule all those objections for purposes of this motion and approve the financing, as announced here in open court.

(Id. at 40-41).

         In an order dated November 9, 2018, the Bankruptcy Court memorialized its decision to approve the replacement financing (the Replacement Financing Order). (Doc. # 10-41). In the Replacement Financing Order, the Bankruptcy Court granted the Liquidating Trustee's expedited motion to obtain replacement financing, overruled SouthPoint's oral objection, and found that “approval of the final relief requested in the [m]otion is necessary to avoid immediate and irreparable harm to [the Debtors], is otherwise fair and reasonable, is in the best interests of [the Debtors] and their creditors, and is essential for the preservation of the value of [the Debtors'] assets.” (Id. at 4-5, 8).

         Specifically, the Replacement Financing Order authorized the Debtors to borrow up to $2 million from CPIF, with an option to borrow an additional $500, 000. (Id. at 11). The Replacement Financing Order granted CPIF first priority priming liens under 11 U.S.C. § 364(d)(1), “ranking prior to all other liens, claims and encumbrances on the Debtor Collateral, and shall prime all other liens and security interests on the Debtor Collateral, ” whether then existing or later acquired. (Id. at 13). The Bankruptcy Court also granted CPIF, as the replacement lender, first priority liens and security interests in the WNT collateral and in any proceeds from a sale of the post-confirmation collateral, subordinate only to Valley National's existing lien. (Id. at 3, 7-8, 13-14). The Replacement Financing Order also granted CPIF a superpriority administrative expense claim with priority over all other administrative expense claims under 11 U.S.C. § 364(c)(1). (Id. at 14).

         As part of the Replacement Financing Order, the Bankruptcy Court made several findings of fact and conclusions of law. (Id. at 5). The Bankruptcy Court found that good cause existed to approve the replacement financing, explaining that the Debtors needed funding to finance necessary capital expenditures, ensure the continued operation of the business, and enhance, preserve, and maintain the value of their assets in order to maximize a return for all creditors. (Id. at 6). Specifically, the Bankruptcy Court explained that the proceeds of the replacement financing “are intended to allow the Credit Parties to make certain capital expenditures and to continue the operation of [University Village] through the marketing and sale of the assets of [the Debtors and other related parties].” (Id.). The Bankruptcy Court relatedly found that the absence of such financing “would immediately and irreparably harm the Credit Parties, their assets, their creditors and the possibility for a sale of the Credit Parties' assets as a going concern or otherwise.” (Id.). The Bankruptcy Court also found that, despite his good faith efforts, the Liquidating Trustee was unable to obtain a loan on any more favorable terms than those offered by CPIF. (Id.).

         The Bankruptcy Court also made a finding as to adequate protection of the existing secured creditors, including SouthPoint:

The Post-Confirmation Liens shall constitute priming liens and security interests under Section 364(d) of the Bankruptcy Code in the Debtor Collateral, ranking prior to any existing liens and security interests of any other party in the Debtor Collateral, including any liens asserted by CPIF and SouthPoint, including, but not limited to, any liens granted by [the SouthPoint Financing Order]. The Court finds and determines that, after granting the Post-Confirmation Liens, the interests of any and all parties in the Debtor Collateral, ...

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