Leominster Materials Corporation

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NOT FOR PUBLICATION

UNITED STATES BANKRUPTICY COURT
DISTRICT OF MASSACHUSETTS

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: Chapter 11
LEOMINSTER MATERIALS CORPORATION : Case No. 05-42488

Debtor

MEMORANDUM OF DECISION DENYING CONFIRMATION OF PLAN OF
REORGANIZATION

This matter came before the Court for an evidentiary hearing on the confirmation
of the Debtor's plan of reorganization, dated July 15, 2005 [docket # 45] and the
objection of the secured creditor, First Fidelity Corp. [docket # 60]. For the reasons set
forth herein, confirmation is DENIED.

BACKGROUND

In March 2003 the Debtor borrowed $1.5 million from First Fidelity and in
exchange granted First Fidelity a first mortgage on the Debtor’s 64 acre parcel of land,
located in Leominster, Massachusetts (the “Real Fstate”) at the intersection of Route
190 and Route 117, and a security interest in all of the Debtor's personalty. The Debtor
subsequently defaulted and First Fidelity advised the Cebtor of its intent to foreclose.
Before the foreclosure sale was to take place, the Debtor filed its Chapter 11 petition.
As of the petition date, the Debtor owed First Fidelity in excess of $1.6 million and
currently owes over $1.9 million.

The proposed plan of reorganization calls for the Debtor to pay First Fidelity’s

claim, plus interest at the non-default contract rate of 12%, within 36 months of the

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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effective date of the plan. First Fidelity is to retain its security interest in the Real
Estate.’ The Debtor proposes that the unsecured creclitors, whose claims aggregate to
approximately $950,000, will receive a second mortgage on the Real Estate and will
also be paid in full, albeit without interest, within 36 month of the effective date of the
plan. The equity holders will retain their interests in the Debtor. There will be no
payments to First Fidelity, who has not received a morigage payment since 2004, until
the Real Estate is sold unless there are surplus proceeds from the potential mining
operations at the site.

In order to pay the creditors, the Debtor proposes to sell the Real Estate within
36 months and use the proceeds to pay both First Fidelity and the unsecured creditors.
If the Debtor has not sold the Real Estate within 180 days of the effective date of the
plan or such earlier time as the Debtor may elect, a braker will be engaged to market
and sell the Real Estate. Although the plan requires the Debtor to share all offers to
purchase with First Fidelity, it, however, does not impose any affirmative obligation on
the Debtor to sell. The plan does not set forth any minimum or maximum orice
thresholds. If at the end of the 36 month period, the Real Estate has not been sold, the
plan calls for the Real Estate to be turned over to First Fidelity free and clear of all liens,
claims, and encumbrances. The Real Estate would belong to First Fidelity with no
obligation to pay unsecured creditors in the event the proceeds of any sale conducted
by First Fidelity exceed the amount then owed to it.

During the period from the effective date of the plan to the longer of (i) the date

‘At the confirmation hearing, counsel for the Debtor acknowledged that any
confirmation order should also provide that First Fidelity retain its lien on the personalty.

2

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on which the Debtor sells the Real Estate and (ii) 36 months, the Debtor will not make
any payments to First Fidelity. It anticipates that it will pay the usual carrying expenses
of the Real Estate from money derived from crushed stone operations at the Real
Estate and cash infusion from a sister company if the sister company becomes
profitable. In 2000 through 2002 the Debtor realized profits from the operation of this
business in excess of $100,000 per year when the sand and gravel was removed
without the need for drilling but in 2003 and 2004 revenue sharply declined to $14,443
and $7,500, respectively because substantial drilling and mining operations were
needed to access the stone.

First Fidelity has voted to reject the plan and filed an objection to confirmation.
The unsecured creditors have unanimously voted to accept the plan.

The Debtor’s principal asset is the Real Estate which it acquired in 1994 from
P.J. Keating Corporation. Paul J. Keating II, the Debtor's president and the trustee of
the trust which owns 100% of the shares of the Debtor had been the president and
CEO of P.J. Keating Corporation. Mr. Keating was the only witness testifying at the
confirmation hearing. He testified that in his opinion the Real Estate was worth $15
million although the cover sheet of the Chapter 11 petition lists the assets as having an
aggregate value inthe range of $1-10 million while Schedule A lists the value of the
Real Estate as “undetermined.” He testified that the real estate has two uses, one as a
Stone quarry that would yield approximately 22 million tons of stone at a net price of
$1.25 per ton on a royalty basis, the other for potential commercial development. The
Debtor's predecessor had received offers to purchase or expressions of interest since

1989 but it was only with a 2001 zoning change that interest increased according to Mr.

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Keating. The Debtor has been actively attempting to sell the Real Estate since late
2003.

Unlike the income realized in the past from the removal of sand and gravel,
mining the stone now would require the substantial drilling and blasting on the Real
Estate. The Debtor does not have any contract with any company to do this work. In
fact Mr. Keating testified most companies performing this kind of work look for a three to
five year contract because of the high cost to the mining company to move in the
equipment needed to mine the stone. Moreover although Mr. Keating testified that the
sister company has started to become profitable, there is no agreement or
demonstrated ability to fund the Debtor’s post confirmation operations. He also testified
that, based upon his attempts to secure financing for this property, it was his opinion
that 12% would be the interest rate the Debtor would need to pay. That rate, however,
is based upon the assumption that mortgage payments would be made at regular
intervals rather than accruing as provided for in the plan.

DISCUSSION

At confirmation the plan proponent bears the burden of demonstrating by a
preponderance of the evidence that each slement of 11 U.S.C. § 1129 has been met.
Beal Bank, S.S.B. v. Waters Edge Ltd. Partnership, 248 B.R. 668, 690 {D. Mass. 2000).
Among those elements is the requirement that each impaired class or interest vote to
accept the plan. 11 U.S.C. § 1129(a)(8). Where, as here, one class of creditors has
voted to reject the plan, the plan may be confirmed only if it meets the so-called
cramdown test for non-consensual plans set forth in 11 U.S.C. § 1129(b). To satisfy

the cramdown test, the plan first, “must comply with all other general requirements of §

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1129(a) and be accepted by at least one impaired class. See id. § 1129(a)(10). Second,
the objection of an impaired creditor class may be overridden if ‘the plan does not
discriminate unfairly, and is fair and equitable, with respect to each class of claims or
interests that is impaired under, and has not accepted, the plan.’ Id. § 1129(b)(1).” Id.
at 678.

Among the requirements that the Debtor must satisfy under § 1129(a) is proof
that the plan is feasible. In the context of confirmation of a chapter 13 plan, feasibility
has been defined as “a reasonable likelihood of success, i.e., that it is likely that the
debtor will have the necessary resources to make all payments as directed by the plan.”
In re Fantasia, 211 B.R. 420, 423 (1st Cir. BAP 1997). Courts have found the
feasibility requirement of § 1129(a)(11) to be more stringent that the feasibility standard
imposed under Chapter 13 “because confirmation of a chapter 11 plan generally acts
as a discharge at the time of confirmation, rather than only after the promised payments
have been made. (Compare 11 U.S.C. § 1129(a)(1) arid § 1141(d)(1) with 11 U.S.C. §
1325(a)(6) and § 1328(a)). In the chapter 11 context, that concern means the scrutiny
of feasibility should increase as the effect of the discharge on creditors increases.” ” In
re Ridgewood Apartments of DeKalb County, Ltd., 183 B.R. 784, 790 (Bankr. S.D. Ohio
1985). Nevertheless the test “does not require proof that meeting the economic
projections is certain....The requirement is to prevent confirmation of visionary
schemes. The Court must find that the financial projections presented to support a plan
of reorganization are derived from realistic and reasonable assumptions which are
capable of being met.” /d. at 789

Based upon the evidence submitted, the Debtor cannot satisfy the feasibility test.

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First the Debtor bases its ability to pay the expenses for maintaining the Real Estate
based on money it receives from mining operations and from a sister company in the
event that mining revenue is nonexistent or insufficient. The Debtor has not provided
any credible evidence that either source of funds will be available. That the Debtor will
be able to find a mining company willing to expend the resources necessary to access
the stone when the Real Estate must either be sold or turned over to First Fidelity within
36 months is speculative at best. The Debtor's expectation that its affiliate will become
sufficiently profitable to fund expenses if and to the extent needed is not supported by
any hard evidence. There was no evidence of the current financial status of the affiliate
and no basis upon which to characterize its anticipated! profitability as anything other
than a hope. All the Debtor has is Real Estate that, to date, has not been the subject of
a successful purchase and sale agreement and whose value is uncertain at best.
Moreover, even if the Debtor were to enter into a mining contract, there is no evidence
of what the change to the topography of the Real Estate due to the mining operations
would do to the value of the Real Estate while, given the absence of interim payments,
the amount of First Fidelity’s claim must certainly increase.

Given that the plan ts not teasible, the Cou! need not consider whether the pian
satisfies the other requirements for cramdown other than to say it has serious doubts as
to whether an interest rate which the Debtor's principal acknowledged was based ona
rate he believed a lender would charge a borrow under a loan that called for mortgage
payments to be made at regular intervals is the appropriate rate.

Finally, although the unsecured creditors voted unanimously to accept the plan,

the Court cannot help but comment on their treatment under the plan. Unless the Real

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estate is sold within 36 months, they take nothing. Their rights will be eliminated upon
the transfer of the Real Estate free and clear to First Fidelity so that any proceeds of a
subsequent sale of the property, even for a price in excess of First Fidelity is then
owed, will not go to them. The First Amended Disclosure Statement and the plan only
mention the elimination of the unsecured creditors’ rights in their discussion of the
treatment of First Fidelity’s claim; the discussion of the treatment of unsecured claims
only addresses the formation of a distribution trust ancl the second mortgage that will
secure payment of all unsecured claims. Any new disclosure statement and plan will
need to explicitly advise the unsecured creditors if their rights are subject to termination.
CONCLUSION

For the foregoing reasons, confirmation is DENIED.

A separate order will issue.

Dated: November 17, 2005 seek 6, beet!

/ Jdel B. Rosenthal
nited States Bankruptcy Judge