The Northern Outer Banks Associates, LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
GREENVILLE DIVISION
IN RE:
THE NORTHERN OUTER BANKS
ASSOCIATES, LLC,
DEBTOR
CHAPTER 11
CASE NO. 10-01292-8-RDD
ORDER DENYING CONFIRMATION OF
CHAPTER 11 PLAN OF REORGANIZATION
Pending before the Court is the Chapter 11 Plan of Reorganization filed on May 20, 2010
(the “Plan”) by The Northern Outer Banks Associates, LLC (the “Debtor”), the Objection to the
Chapter 11 Plan of Reorganization filed on July 15, 2010, by Wells Fargo Bank, National
Association, successor by merger to Wachovia Bank, National Association (“Wells Fargo”), (the
“Objection”) and the Bankruptcy Administrator’s Response to Debtor’s Plan of Reorganization filed
on July 15, 2010 (the “Response”). The Court conducted a hearing on the Plan, the Objection, and
the Response on September 30, 2010 in New Bern, North Carolina and continued that hearing on
October 7, 2010 in Wilson, North Carolina.
SO ORDERED.
SIGNED this 08 day of November, 2010.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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BACKGROUND
On February 19, 2010, the Debtor filed a voluntary petition for relief under Chapter 11 of
Title 11 of the United States Code (the “Bankruptcy Code”). The Debtor is a North Carolina limited
liability company and owns real estate consisting of approximately 5.35 acres of undeveloped
property located at 6195 Croatan Highway, Southern Shores, North Carolina (the “Real Property”).
Wells Fargo is the holder of a promissory note in the principal amount of two million two
hundred fifty thousand dollars ($2,250,000.00) executed on January 23, 2007 by both the Debtor and
Bruce S. Pollak (“Mr. Pollak”), a managing member of the Debtor (the “Note”). As of the petition
date, the balance due under the terms of the Note was two million one hundred one thousand five
hundred eight dollars and seventy one cents ($2,101,508.71), exclusive of attorneys’ fees and costs.
The parties do not dispute that the Note is in default.
In addition to executing the Note, the Debtor and Mr. Pollak executed a Deed of Trust
granting Wells Fargo a first priority lien against the Real Property based on the indebtedness
described in the Note.
Based on the arguments of counsel and the evidence presented to the Court at the hearings,
confirmation of the proposed Plan is DENIED for the reasons set forth herein.
I. FAILURE TO COMPLY WITH APPLICABLE PROVISIONS OF THIS TITLE
Section 1129(a)(1) provides that a court shall confirm a debtor’s plan of reorganization only
if the plan complies with the applicable provisions of this title. 11 U.S.C. § 1129(a)(1). Section
1129(a)(10) requires that at least one impaired class vote to accept the plan without regard to the
vote of any insider. Although the Debtor argues that it has an impaired class that voted in favor of
the Plan, a closer look at the members of that class reveal that two creditors voting in that class were,
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in fact, insiders, as defined in the Bankruptcy Code. Therefore, the Plan proposed by the Debtor
does not comply with § 1129(a)(10).
The term “insider,” as it relates to corporate debtors, is defined in § 101(31)(B) of the
Bankruptcy Code:
(31) The term “insider” includes-
(B) if the debtor is a corporation-
(i) director of the debtor;
(ii) officer of the debtor;
(iii) person in control of the debtor;
(iv) partnership in which the debtor is a general partner;
(v) general partner of the debtor; or
(vi) relative of a general partner, director, officer, or person in control of the
debtor.
11 U.S.C. § 101(31)(B).
Determining whether an entity is an insider is a question of fact, which must be determined
on a case-by-case basis. See In re Broumas, Nos. 97-1183 & 97-1182, 1998 WL 77842, at *7 (4th
Cir. 1998) (citing Browning Interests v. Allison, 955 F.2d 1008, 1011 (5th Cir. 1992)). 	Excluding
insiders from impaired classes who vote on the reorganization plan stems primarily from the desire
to protect the interests of other creditors. In re Gilbert, 104 B.R. 206, 210 (Bankr. W.D. Mo. 1989).
The concern is to “forestall the voting of a creditor who is so beholden to or controlled by the debtor
as to in effect be an alter ego of the debtor.” Id. at 210.
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1A limited liability company (“LLC”) “is owned by members who have the same protection
from liability as shareholders of a corporation. Thus, although the members of an LLC are in some
respects similar to partners in a partnership, they are not general partners. Even if they were
partners, their protection from liability would render the entity the type of partnership association
falling within subsection (A)(ii), thus making the limited liability company fall within the Code’s
definition of “corporation.” 2 C OLLIER ON B ANKRUPTCY ¶ 101.09 (Alan N. Resnick & Henry J.
Sommer eds. 16 th ed. 2009) (citing Broyhill v. DeLuca, 194 B.R. 65, 74 (Bankr. E.D. Va. 1996); In
re ICLNS Notes Acquisition, L.L.C., 259 B.R. 289 (Bankr. N.D. Ohio 2001)).
4
The definition of insider is “illustrative rather than exhaustive.” Longview Aluminum, L.L.C.
v. Brandt, 431 B.R. 193, 196 (N.D. Ill. 2010) (citing In re Krehl, 86 F.3d 737, 741-42 (7 th Cir.
1996)). Section 101(31)(B) uses the word “includes.” The use of such a term does not connote that
the examples listed are exclusive. Courts have held that “in addition to the individuals and entities
actually named, the term also encompasses anyone with ‘a sufficiently close relationship with the
debtor that his conduct is made subject to closer scrutiny than those dealing at arm’s length with the
debtor.’” Id. (citing In re Krehl, 86 F.3d 737, 741-42 (7th Cir. 1996)).
“[I]nsider analysis invites the Court to consider whether the disputed relationship is similar
to or bears characteristics of any of the relationships specified in the statute.” In re Gilbert, 104 B.R.
at 210 (citing In re Henderson, 96 B.R. 820, 825 (Bankr. E.D. Tenn. 1989)). Courts have held that
the Bankruptcy Code’s definition of “corporation” as defined in § 101(9) includes the limited
liability company.1 “[L]imited liability companies and similar entities . . . fall under the definition
of a corporation in the Bankruptcy Code § 101.” See Fed R. Bankr. P. 7007.1 Advisory Committee
Note (2009).
Section 101(31) does not directly define an insider in the context of a limited liability
company. 	However, case law provides guidance for determining whether a member of a debtor
limited liability company can be considered an insider, as defined in § 101(31)(B). In Longview
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Aluminum, L.L.C. v. Brandt, the District Court for the Northern District of Illinois addressed the
issue of whether a managing member of an limited liability company qualified as an insider as
defined in 11 U.S.C. § 101(31) for the purpose of setting aside preferential transfers. 431 B.R. 193
(N.D. Ill. 2010). 	Longview’s limited liability company agreement listed five members who made
up the board of managers. Id. at 194. The managing members had the right to inspect, audit, check
and make copies of the company’s books and records. 	Id. at 195. 	Longview made prepetition
payments to one of its managing members during the one year prior to the filing of the petition for
relief. 	The court found that the managing member who received the funds was an insider for
purposes of 11 U.S.C. § 101(31), and that the trustee could avoid and recover the prepetition
payments. In making its determination, the court addressed the issue of whether a member of a
limited liability company can be properly analogized to a “director” of a corporation. The court
found that the term “director” in § 101(31)(B) “is merely intended to illustrate the underlying
relationship between the individual and the company.” Id. at 196. The court noted that the limited
liability company agreement, provided its members with authority, power and responsibility to
manage the operations and affairs of the limited liability company. 	Id. at 197. 	The managing
member’s position as one of the five members of the limited liability company was a “position
equivalent to a director’s position.” Id. at 196. Therefore, a managing member of a limited liability
company can be analogized to a director of a corporation under § 101(31) when the member
possesses authority, power and responsibility for managing the limited liability company. Id. at
197.
In this case, the Debtor is a limited liability company as opposed to a corporation. The
Debtor was formed in 2003 and is engaged in the business of owning and developing real estate.
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2On the Amended Summary of the Ballots as submitted by the Debtor on September 29,
2010, McKim & Creed, P.A. is listed as having a secured claim consisting of a judgment lien
that is secured by the Real Property and stems from a 2008 state court case. Because this lien
attached subsequent to the recordation of Wells Fargo’s Deed of Trust, there is no equity or
value in the Real Property to support the judgment lien as the Court has valued the Real Property
at $1,900,000.00. See Order For Valuation of Collateral docketed in conjunction with this Order.
Therefore, the claim will be treated as unsecured. As further support that this claim is
unsecured, McKim & Creed P.A. listed its claim of twelve thousand five hundred dollars
($12,500.00) as unsecured on the proof of claim filed in this proceeding.
3 On the Amended Summary of the Ballots as submitted by the Debtor on September 29,
2010, Wells Fargo is listed as having an unsecured claim in the amount of one hundred ninety one
thousand five hundred eight dollars and seventy-one cents ($191,508.71) and a secured claim in the
amount of one million nine hundred ten thousand dollars ($1,910,000.00). However, because the
Court finds that the Real Property is valued at one million nine hundred thousand dollars
($1,900,000.00), the unsecured claim must be increased by ten thousand dollars ($10,000.00) to
adjust for the lower property value set by this Court. Therefore, this ten thousand dollars
($10,000.00) should be added to the initial unsecured claim of one hundred ninety one thousand
five hundred eight dollars and seventy-one cents ($191,508.71) giving Wells Fargo a total
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Mr. Pollak testified the Debtor is governed by a Limited Liability Company Agreement (“LLC
Agreement”) and four individuals are members. According to the voluntary petition filed by the
Debtor and the testimony presented to the Court, Mr. Pollak is a managing member with a fifty-eight
percent (58%) equity interest. Neal Blinken (“Mr. Blinken”) is also a managing member with a
twenty-two percent (22%) equity interest. Craig Difeo is a member with a ten percent (10%) equity
interest and Gary St. Jean is the fourth member, who also holds a ten percent (10%) equity interest.
Class 6 of the proposed Plan is comprised of general unsecured creditors. The Debtor asserts
that this class is impaired. Class 6 includes a one hundred fifty thousand dollar ($150,000.00) claim
asserted by Mr. Pollak, a three hundred fifty thousand dollar ($350,000.00) claim held by Southern
Coastal Associates of Dare County, Incorporated (“SCA”), a twelve thousand five hundred dollar
($12,500.00) claim alleged by McKim & Creed, P.A.,2 and a two hundred one thousand five
hundred eight dollar and seventy-one cent ($201,508.71) claim held by Wells Fargo.3 Both Mr.
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unsecured claim of two hundred one thousand five hundred eight dollars and seventy-one cents
($201,508.71).
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Pollak and McKim & Creed, P.A. cast ballots accepting the 	Plan. Wells Fargo filed a ballot
rejecting its treatment under the Plan. Mr. Blinken, who is also a managing member of the Debtor,
signed the ballot on behalf of SCA as accepting the Plan. Based on the acceptances received, the
Debtor argues that it has the requisite accepting votes, both in amount and number, of an impaired
class of claims that would permit confirmation. The Court disagrees.
11 U.S.C. § 1126(c) states that “a class of claims has accepted a plan if such plan has been
accepted by creditors, . . . that hold at least two-thirds in amount and more than one-half in number
of the allowed claims of such class held by creditors.”
As previously addressed, Mr. Pollak is a managing member of the Debtor, a limited liability
company. Mr. Pollak is the active manager of the Debtor. Unlike the other members of the Debtor,
he took on substantial responsibility and control in managing the operations and affairs of the
Debtor. Both the Debtor and Mr. Pollak executed the Note establishing the indebtedness to Wells
Fargo in 2007. 	Mr. Pollak is a fifty-eight percent (58%) equity interest holder in the Debtor.
Additionally, Mr. Pollak has signed on behalf of the Debtor countless times, and was the only
member of the Debtor to testify during the hearings. Mr. Pollak also signed the voluntary petition
filed with this Court. His position as a managing member of the Debtor, makes his conduct subject
to closer scrutiny by this Court. 	Based on his close relationship with the Debtor, his management
role in the Debtor’s operations, and his ownership in the Debtor, Mr. Pollak is clearly an “insider”
under § 101(31).
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Similarly, the facts support this Court’s holding that the SCA unsecured claim is an “insider”
claim. SCA is an administratively dissolved corporation. Mr. Blinken is president of SCA and is
also a managing member of the Debtor with direct influence over the Debtor’s operations. Although
Mr. Blinken is not directly making a claim against the Debtor, one of the corporations in which he
controls, SCA, has voted in favor of the Plan. Mr. Blinken, unlike the other members of the Debtor
is the principal of SCA. Property owned by SCA is adjacent to the property owned by the Debtor.
SCA developed the adjacent septic plant which aided the Debtor to obtain permits.
SCA was administratively dissolved in 2004. However, Mr. Pollak testified that SCA was
the original contracting party to purchase the Real Property. SCA later assigned the Real Property
to the Debtor for one dollar ($1.00). 	The Debtor made a deal with SCA, “that if the Debtor
developed the property and the property made money, SCA would get a portion of the profits.” See
testimony of Bruce Pollak.
Based on the function of SCA in the Debtor’s operations, its involvement with the Debtor,
Mr. Blinken’s status as the president of SCA, and his position as one of the managing members of
the Debtor, the Court finds that SCA is an insider for purposes of § 1129(a)(10).
Given the insider status of these two (2) Class 6 creditors who voted in favor of the Plan, the
Debtor fails to meet the threshhold requirement of Section 1126 (c). More specifically, the Court
finds that Mr. Pollak and SCA are both “insiders” under § 101(31) of the Bankruptcy Code, and
therefore, both claims will not be considered in the Section 1126(c) ballot computation. 	The
exclusion of either the claim of Mr. Pollak or the claim of SCA results in less than two-thirds
(2/3rds) acceptance in amount by Class 6. Therefore, the Debtor does not satisfy the requirements
of 11 U.S.C. § 1126(c) and § 1129(a)(10).
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In addition, Wells Fargo questioned whether SCA, as an administratively dissolved
corporation, had the ability and authority to submit a ballot in favor of the Plan and whether or not
Mr. Pollak and SCA timely submitted their ballots. Having previously determined that the ballots
of SCA and Mr. Pollak are disallowed on “insider” grounds, the Court need not consider these
issues.
II. FEASIBILITY OF THE AMENDED PLAN
Section 1129(a)(11) of the Bankruptcy Code requires that in order for a plan to be
confirmable, “[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need
for further financial reorganization, of the debtor or any successor to the debtor under the plan,
unless such liquidation or reorganization is proposed in the plan.” This requirement is often called
the feasibility requirement. In re A.H. Robins, Co., Inc. 880 F.2d 694, 698 (4t h Cir. 1989). The
question of feasibility is a question of fact in which the debtor bears the burden to show feasibility
of the plan by a preponderance of the evidence. In re Investment Co. Of Southwest, Inc. (F.H.
Partners, L.P. v. Investment Co. of Southwest, Inc., Four Hills Associates, and Bank of America),
341 B.R. 298, 310 (B.A.P. 10th Cir. 2006). Feasibility is “firmly rooted in predictions based on
objective fact.” In re Cheatham, 78 B.R. 104, 109 (Bankr. E.D.N.C. 1987); In re Investment, 341
B.R. at 310.
In re Piece Goods Shops Company, L.P./Piece Goods Shops Corp., the Bankruptcy Court
for the Middle District of North Carolina set forth factors a court may consider in assessing
feasibility. 188 B.R. 778, 798 (Bankr. M.D.N.C. 1995). These factors include “the capital structure
of the reorganized [d]ebtors, their projected earning power, economic conditions, management’s
ability and likelihood of continuing to work for the reorganized [d]ebtors, and any other factors
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4Debtor’s proposed Plan stated an interest rate of “three and one-half percent (3.25%) per
annum.” During the hearing, counsel cleared up this inconsistency, stating the correct interest
rate was three and one-half percent (3.5%) per annum.
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relevant to the performance of the [p]lan.” Id. (citing In re Polytherm Industries, Inc., 33 Bankr. 823
(W.D. Wis. 1983)).
Debtor’s Plan proposes to treat Wells Fargo’s claim as a secured obligation and proposes to
retain and market the Real Property for sale for an eighteen (18) month period. Debtor’s Plan does
not provide for payments of any kind to creditors throughout this period. During the eighteen (18)
month marketing period interest shall accrue at the rate of three and one-half percent (3.5%)4
. At
the end of the eighteen (18) month period, if the Real Property has not sold, the Debtor proposes to
create a term loan in favor of Wells Fargo consisting of all principal and interest due to Wells Fargo
payable in equal monthly installments of principal and interest under a twenty (20) year amortization
schedule with a five (5) year call.
The Court holds that the Plan is not feasible within the meaning of § 1129(a)(11). First, the
Debtor has been unwilling or unable to make monthly interest payments to Wells Fargo on a
consistent basis, and has failed to present any evidence that the Debtor or its principals are able or
willing to infuse capital to improve the Real Property, capitalize the Debtor to support a feasible
Plan, or assume any risks associated with the extended marketing period. Since the filing of this
case, the Debtor has had difficulty satisfying its financial obligations. Although the Debtor did make
a payment of interest to Wells Fargo on the ninetieth (90th
) day following the filing of the Petition,
the Debtor has failed to make any additional interest or principal payments to Wells Fargo since that
time. 	In addition to Debtor’s failure to make monthly interest payments to Wells Fargo on a
consistent basis, Debtor also failed to pay the 2009 ad valorem taxes. Mr. Pollak testified that the
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only asset of the Debtor is the Real Property, and therefore, the Debtor has no assets from which to
pay the ad valorem taxes.
Furthermore, the Court notes that throughout Mr. Pollak’s testimony, he was asked several
times whether any of the managing members of the Debtor had the ability to, would consider, or
were willing to infuse capital into the Debtor in order to make the Plan more feasible. Mr. Pollak
finally responded by stating that his opinion was that the other members did not have the ability to
infuse capital into the Debtor, and even if they did have the ability, they were not willing to do so.
Mr. Pollak further testified that there is a clause in the operating documents of the Debtor that allows
it to request capital contributions from the members. 	However, there is no provision in those
documents which would allow for the enforcement of such clause. Mr. Pollak testified that he was
personally willing to contribute between fifteen thousand dollars ($15,000.00) to twenty-five
thousand dollars ($25,000.00) for the purpose of marketing the Real Property. 	However, this
proposed contribution is neither disclosed in the proposed Plan nor Disclosure Statement that is
before the Court.
The Plan places all risks associated with non-payment and a continued declining real estate
market on Wells Fargo. 	Ms. Kee Marshall, a senior vice president with Wells Fargo, 	(“Ms.
Marshall”), has worked with special asset groups for the past eleven (11) years. She testified at the
hearing on October 7, 2010. Ms. Marshall stated that throughout her career she has never seen a
forbearance agreement with such terms as the Debtor proposed in its Plan. More specifically, she
stated that the bank would bear all the risk of the eighteen (18) month marketing period as the
Debtor would not be required to make any payments and the interest would continue to accrue.
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In addition, if the Real Property has not sold at the end of the marketing period, the Debtor
requests that Wells Fargo be required to amortize the total amount due under the Note, including all
principal and interest, over twenty (20) years with a five (5) year call. The Debtor proposes to make
monthly payments based on the twenty (20) year amortization schedule during the five (5) year
period, subsequent to the year and a half marketing period. Ms. Marshall stated that the risk is high
of missed payments or other defaults. By being required to sit and wait for a year and half and then
reamortizing the principal and interest for yet another twenty (20) years, Wells Fargo is assuming
all the risks involved, including such risks as nonpayment, continued decline in the value of the Real
Property, further downturns in the real estate market and economy, while the Debtor has nothing at
risk during the eighteen (18) month marketing period.
Ms. Marshall testified that there is no current market for financial arrangements of the type
proposed by the Debtor. If the Debtor wanted a loan in today’s market, most banks would expect
a double digit interest rate as opposed to a three and a half percent (3.5%) rate as proposed by the
Debtor. Furthermore, Ms. Marshall testified that the loan documents require the Debtor to submit
updated financial information on a regular basis. However, after numerous attempts to obtain this
updated information from the Debtor, the Debtor has refused to provide such information. Without
this information, Wells Fargo is unable to determine whether the Debtor or its principals have any
financial ability to make the proposed Plan more feasible.
Debtor presented no evidence that it either has the ability to generate funds or obtain a capital
infusion from investors or its members, or to make payments to Wells Fargo. The lack of capital
funding or payments places all the risks of nonpayment on Wells Fargo.
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Second, Debtor’s proposed Plan is speculative in regards to how and when payments will
be made to creditors. The Plan proposes to retain and market the property for an eighteen (18)
month period. During this marketing period, the Plan does not provide for any payments to creditors
and does not propose the payment of ad valorem taxes. 	In addition, the Plan does not require
payments to unsecured creditors until the Real Property is sold at some point in the future. The
Debtor addresses the lack of sale contingency by requiring Wells Fargo to reamortize its loan and
accept monthly payments based on the reamortization schedule. 	However, the Debtor failed to
present any evidence on how it would generate funds to pay the monthly payments to Wells Fargo
after the eighteen (18) month marketing period. Mr. Pollak even testified that the only asset of the
Debtor is the Real Property and the only means of repaying the creditors is through the sale of said
property.
Both the appraiser for the Debtor and the appraiser for Wells Fargo testified that very few
tracts of undeveloped land have sold in the past two (2) years in Dare County, and that the
probability of the Debtor finding a purchaser during the eighteen (18) month marketing period is
highly unlikely. Since a sale is unlikely, presumably, the Debtor will need to commence monthly
payments after the marketing period. However, the Debtor failed to provide the Court with evidence
of how and when any payments will be made to creditors.
Third, the Real Property has been on the market since 2004 and has failed to produce a buyer
or generate any income. Because of zoning restrictions and the current economic climate, future use
of the Real Property is limited. At the present time, the Debtor has obtained approval for a thirty-six
(36) unit condominium project but no improvements have been made on the Real Property. Mr.
Pollak testified that the Real Property is currently in the same physical condition as it was on July
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5Mr. Pollak testified that bulkheading was added along the shoreline as an improvement
by the Debtor.
6Gregory Bourne (“Mr. Bourne”) testified on behalf of Wells Fargo. Mr. Bourne is
certified by the Member Appraisal Institute (“MAI”) and is a state certified real estate appraiser
with twenty-three (23) years of experience.
7See Order on Motion of Valuation of Property docketed in conjunction with this Order.
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21, 2003, when the Debtor purchased it.5 Of the 5.35 acre site, 4.55 acres are uplands and 0.80 acres
are wetlands. About 0.80 acres of uplands is situated within a North Carolina power line easement
which runs along the road frontage. The Real Property will share a waste water treatment plant with
a patio home development to its east. However, in order to obtain a working sewer access, the
Debtor or a future purchaser would need to install sewer infrastructure. The Debtor failed to present
any evidence of a plan to provide infrastructure for the raw land or any funds available to improve
or develop the property.
Furthermore, Wells Fargo’s appraiser6 valued the property at one million nine hundred ten
thousand dollars ($1,910,000.00). He testified that in today’s economic climate, a twenty-four (24)
to thirty-six (36) month marketing period would be required to sell the property as a residential
development tract at this price. In order for the Debtor to sell the Real Property in less than twelve
(12) months, he believes a considerable price discount would be required. 	This Court has
determined the value of the property to be one million nine hundred thousand dollars
($1,900,000.00).7 In recent years, the demand for residential condominiums has dramatically
decreased. Mr. Bourne testified that it would take nine (9) years to sell all of the thirty-six (36)
residential condominium units. 	Based on the current market, there is 2.37 years of existing
inventory of condominiums for sale within the market area of the Debtor’s property.
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Based on the testimony presented to the Court, the Debtor’s ability to sell the property within
the eighteen (18) month marketing period proposed by the Plan is speculative. Just ten (10) months
ago, the list price of the Real Property was four million two hundred thousand dollars
($4,200,000.00). The price has since been reduced to three million two hundred thousand dollars
($3,200,000.00). Even at this reduced price, it is speculative as to whether any purchasers would
be willing to step into such a situation in today’s volatile economy and real estate market or if
purchasers would even be able to obtain financing. The Debtor’s appraisal was two million eight
hundred thousand dollars ($2,800,000.00), yet the Debtor still continues to market the Real Property
at three million two hundred thousand dollars ($3,200,000.00). To continue marketing the Real
Property at a list price of four hundred thousand dollars ($400,000.00) above its own appraised
value raises not only feasibility questions, but also questions of good faith.
As noted, zoning restrictions limit the future use of the Real Property. At the present time,
the property is zoned C - Commercial District, which permits offices, retail stores, financial
institutions, service uses, restaurants, single family dwellings, duplexes, multifamily dwellings, large
home dwellings and associated uses, as defined by the RS-8 Multi-Family Residential District. The
Debtor’s proposed thirty-six (36) unit residential condominium project has all governmental
approvals in place. To permit this land for any other sort of development, such as a restaurant, hotel,
etc., would require the development of a new site plan, additional expenses and costs, as well as the
risk that such development would not be approved by the requisite government agencies.
The Debtor’s appraiser suggested the best use of the Real Property would be a restaurant.
However, based upon the statistics and the data presented throughout the hearing, this is not a
commercially reasonable proposal for this Real Property. 	New permits would be required if a
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purchaser was interested in building a restaurant. However, Mr. Bourne testified the Real Property
does not have access to a stoplight. The traffic gridlocks at this particular location, would probably
result in access difficulties for a restaurant. Such traffic flow problems would hinder the approval
process or deter potential purchasers.
Therefore, based on the reasons set forth above, the Debtor has failed to satisfy its burden
that its Plan is, in fact, feasible. It is likely that this Plan would be followed by liquidation or the
need for further financial reorganization. The Plan fails to satisfy the feasibility requirement of §
1129(a)(11).
III. TREATMENT OF WELLS FARGO IS NOT FAIR AND EQUITABLE
Had at least one class of impaired claims accepted the proposed Plan, the proposed Plan
could be confirmed over Wells Fargo’s objections under 11 U.S.C. § 1129(b)(1). A proposed plan
must be “fair and equitable with respect to each class of claims or interests that is impaired under,
and has not accepted, the plan.” 11 U.S.C. § 1129(b)(2) sets forth the standards a plan must meet
to be considered “fair and equitable.” However, these requirements are not exclusive. Even if a
plan meets the standards of 11 U.S.C. § 1129(b)(2), it can still be considered not “fair and equitable”
and, therefore, nonconfirmable. In re EFH Grove Tower Associates, 105 B.R. 310, 313 (Bankr.
E.D.N.C. 1989) (citing In re Matter of D&F Construction Co., 865 F.2d 673, 675 (5th Cir. 1989);
In re Cheatham, 78 B.R. 104 (Bankr. E.D.N.C. 1987), aff’d 91 B.R. 377 (E.D.N.C. 1988)). For a
plan to be “fair and equitable,” the plan must literally be fair and equitable.
While a Chapter 11 reorganization gives debtors the opportunity to restructure their financial
relationships with creditors, the Debtor’s proposed Plan is not fair and equitable in that it requires
a lengthy period of negative amortization and no payments during the eighteen (18) month
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marketing period. 	The long negative amortization period, the unwillingness on behalf of the
managing members of the Debtor to infuse capital into the Debtor, the lengthy marketing period and
the unbalanced risks placed on Wells Fargo including nonpayment, further decline in the value of
the property, accumulating interest and the proposed three and a half percent (3.5%) interest rate that
is below the commercial market rate for a loan of this type, combine to make this proposed Plan
treatment of Wells Fargo not fair and equitable.
Whether negative amortization in a Chapter 11 plan is “fair and equitable” should “be
determined on a case-by-case basis.” Great Western Bank v. Sierra Woods Group, 953 F.2d 1174,
1178 (9th Cir. 1992). Negative amortization is not “per-se” inequitable. In re Club Assocs., 107 B.R.
385, 398 (1989). However, “negative amortization is highly suspect” when evaluating whether the
plan is “fair and equitable” under 11 U.S.C. § 1129(b)(1). Id. (citing In re Anderson Oaks Ltd.
Partnership, 77 B.R. 108 (Bankr. W.D. Tex. 1987); In re Century Investment Fund VII Ltd.
Partnership, 96 B.R. 884 (Bankr. E.D. Wis. 1989)).
Many courts, including the Ninth Circuit, have adopted a ten factor test to determine whether
a plan with negative amortization is fair and equitable. In re Apple Tree Partners, L.P. 131 B.R.
380, 398 (1991); Great Western Bank v. Sierra Woods Group, 953 F.2d 1174, 1178 (9th Cir. 1992);
In re Windwood Heights, Inc., 385 B.R. 832, 840 (Bankr. N.D. W.VA. 2008) (applying the ten factor
test to a plan proposing negative amortization); In re Consolidation Properties Ltd. Partnership, 170
B.R. 93, 99 (Bankr. D. Md. 1995) (relying on the ten factor test, and noting that “only where it is
clear that a negative amortization plan does not unduly shift the risk of loss to the creditor, should
the Court find that it is fair and equitable”); In re Oaks Partners, Ltd., 141 B.R. 453, 456 (Bankr.
N.D. Ga. 1992) (applying the ten factor test to a plan proposing negative amortization).
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Based on the cases cited, the ten factors which should be considered to determine whether
a negative amortization plan is fair and equitable include: (1) whether the plan offers a market rate
of interest and the present value of the deferred payments; (2) whether the amount and length of the
proposed deferral is reasonable; (3) whether there is a sufficient equity cushion; (4) whether the plan
is feasible; (5) whether the collateral is appreciating, depreciating or stable; (6) whether the risks
involved are unduly shifted to the creditor; (7) whether the risks are borne by one secured creditor
or a class of secured creditors; (8) whether the plan precludes secured creditors from foreclosure;
(9) whether the original loan terms provide for negative amortization; (10) whether there are
adequate safeguards to protect the secured creditor against plan failure. Sierra Woods Group, 953
F.2d at 1178.
More recently, the United States Bankruptcy Court for the Eastern District for North
Carolina addressed deferred interest payments and negative amortization in In re Carolina Commons
Dev., LP, No. 09-011230-8-JRL, 2010 WL 1965895, at *2 (Bankr. E.D.N.C. May 17, 2010). The
court, while addressing the issue of whether to grant relief from the automatic stay under §
362(d)(3), noted that a debtor’s plan “which defer[s] all interest for three years, during which time
the debtor cannot default under the plan and is not obligated to sell the collateral but is entitled to
keep 30% of any sale proceeds” is commercially unreasonable. Id. The court found that such a plan
“bears no resemblance to current commercial market conditions.”Id.
In addition, In re EFH Grove Tower Associates, 105 B.R. 310, 313 (Bankr. E.D.N.C. 1989),
the United States Bankruptcy Court for the Eastern District of North Carolina, found that a plan
which imposes substantial risks upon a creditor is not “fair and equitable” under 11 U.S.C. 	§
1129(b)(1). The debtor’s plan precluded the creditor from exercising its right to foreclose on its
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defaulted mortgage yet sought to impose a payment moratorium lasting approximately two years.
Id. at 313. When the installment payments would commence, the amount proposed was insufficient
to reduce the actual debt owed. Id. In that case the debtor argued the plan would allow the debtor
time to make improvements to the building, thus enhancing the value of the creditor’s collateral.
This would occur because during the period of the payment moratorium, a general partner of the
debtor was to loan the debtor funds for the purpose of improving the building and paying off the first
mortgage. Id. at 314. The court found that the creditor bore the risk of realizing only the liquidation
value of the property if the property did not appreciate during the payment moratorium period. Id.
The court noted that the plan provided the debtor and the debtor’s general partners with significant
benefits, but only required them to accept minimal risks. Id. at 313. Further, the court noted the
“costs of the debtor’s reorganization should be borne by those who stand to gain from the
reorganization.” Id. at 314. Based on this reasoning, the court denied confirmation noting that the
“debtor would have presented a stronger case if it had been willing to assume more of the risk.” Id. at
314-15.
The Court has valued the property at one million nine hundred thousand dollars
($1,900,000.00) and the total outstanding balance of principal and interest as of the date of the
Petition owed to Wells Fargo was two million one hundred one thousand five hundred eight dollars
and seventy one cents ($2,101,508.71.) There is no equity cushion in the Real Property. The Plan
does not propose for the Debtor to make payments of any kind to Wells Fargo during the eighteen
(18) month negative amortization period, and only proposes that interest accrue at three and one half
percent (3.5%) per annum. Additionally, if the Debtor has not sold the property within the eighteen
(18) month period, the Debtor proposes to amortize the remaining principal balance of the debt at the
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same interest rate of three and one half percent (3.5%) with a twenty-year (20) amortization and a five-
year (5) call.
No evidence was offered of the Debtor’s ability to make payments after the eighteen (18)
month period. T he Real Property is an undeveloped lot whose value has drastically declined in the
last several years. In the current economic climate, a sale of the Real Property is highly speculative.
Wells Fargo would be assuming all associated risks of failure. The Plan precludes Wells Fargo from
foreclosing during the first eighteen (18) months and requires it to accept a negative amortization,
which was not part of the original loan terms. Nowhere in the Plan are there adequate safeguards
to protect the secured creditor’s interest. In the Debtor’s proposal, it just wants to sit back and stall,
all the while expecting Wells Fargo to carry the debt without any payments and expose itself to
further market declines. Considering the factors articulated in Great Western Bank v. Sierra Woods
Group, 953 F.2d 1174, 1178 (9th Cir. 1992), and the aforementioned case law, the Court finds that
the Debtor’s proposed treatment of Wells Fargo’s claim is not fair and equitable.
Furthermore, this Plan is similar to the situation in In re Carolina Commons, in that the
Debtor’s proposed plan “bears no resemblance to current commercial market conditions.” In re
Carolina Commons Dev., LP, No. 09-011230-8-JRL, 2010 WL 1965895, at *2 (Bankr. E.D.N.C.
May 17, 2010). Ms. Marshall testified that there is no present “front end” real estate financing
market in which such favorable terms would be available to the Debtor. Ms. Marshall also testified
that there is no “exit financing” market in which such terms would be available to the Debtor. As
such, proposed treatment of Wells Fargo’s claim and the Debtor’s proposed Plan are commercially
unreasonable.
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As in In re EFH Grove Tower Associates, 105 B.R. 310, 313 (Bankr.E.D.N.C. 1989), the
Debtor’s proposed Plan allows the Debtor to benefit from the Plan and places all associated risks
upon Wells Fargo. 	Under the Plan, Wells Fargo would assume all risks associated with non-
payment. No payments of any kind are required to be made to Wells Fargo during the eighteen (18)
month period. During this time, Wells Fargo risks the further decline in value of the collateral, the
likelihood that the Real Property will not sell, while additional interest and fees accrue on the
obligation.
Therefore, based on the specific facts and circumstances in this case, the Plan’s treatment
of the claim of Wells Fargo is not fair and equitable. 	This finding does not mean a plan that
proposes negative amortization is “per se” not fair and equitable. Plans proposing negative
amortization with different circumstances and plan terms may be considered fair and equitable.
However, this Plan treatment of Wells Fargo does not pass the fair and equitable test.
Accordingly, the Court holds that the Plan does not satisfy the requirements of § 1129.
Therefore, confirmation of the Plan is DENIED.
SO ORDERED.
END OF DOCUMENT
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