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Bankruptcy - Class Hypo

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47 views3 pages

Bankruptcy - Class Hypo

Uploaded by

Keenan Smith
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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University of Florida

Spring 2022 - Applied Bankruptcy Course


Presented By: Chief Judge Laurel M. Isicoff
February 25, 2022

The Balance of Power – Team Secured Creditor or Team Debtor

Happy Malls Shopping Corporation (“Happy Malls”) purchased Mega Mall


in 2018. Happy Malls borrowed $40 million from First National Bank of Oz to
purchase the mall (the “First Loan”). The interest rate on First Loan was prime
plus 7% for a ten year term with a default rate of interest of 18%. The First
Loan is secured by a first mortgage on the mall and a security interest in all
the rents.

The First Loan loan agreement provides that if the note is paid prior to
the maturity date then, in addition to whatever other charges are due, the
lender will be entitled to an additional payment of a sum certain based on a
mathematical formula set forth in the document (the “Make Whole Provision”).
The loan agreement states that the Make Whole Provision is designed to reflect
the lost opportunity costs associated with possible changes in investing returns
if the loan is paid in advance. After a few weeks the First National Bank of Oz
sold the Happy Malls First Loan to Down & Dirty, LLC (“DND”).

One year after entering into the First Loan, Happy Malls borrowed an
additional $10 million from the First National Bank of Oz for infrastructure
improvements to the mall and the surrounding parking areas and green space.
This loan (the “Second Loan”) is also secured by a mortgage on the mall and a
security interest in all the rents. All of the terms of the First Loan are the same
as the terms of the Second Loan except that there is no make whole provision.
At the time Happy Malls took out the Second Loan, First National Bank of Oz
and DND entered into an agreement in which First National Bank of Oz
acknowledged that the Second Loan and First National Bank of Oz’ lien on all
the collateral is subordinate to the liens of the First Loan (the “Intercreditor
Agreement”). This Intercreditor Agreement also provided that First National
Bank of Oz would not take any action in a Happy Malls bankruptcy case that
could adversely impact the interests of DND in the First Loan or the collateral,
if Happy Malls ever filed bankruptcy.

Happy Malls encountered a problem when its anchor tenant started to


pay late, then missed a couple of rent payments and then filed bankruptcy. In
turn, Happy Malls started making its payments on the First Loan and Second
Loan late. Then Happy Malls missed a payment and DND declared a default,
accelerated the First Loan as authorized under the First Loan loan documents,
and filed an action to foreclose its security interest in Mega Mall.

University of Florida – Spring 2022


Applied Bankruptcy Course (2/25 Class Hypo)
Happy Malls filed bankruptcy. On the bankruptcy schedules, Happy
Malls listed the value of Mega Mall as $45 million. DND filed a proof of claim
for $43 million, which amount included unpaid principal, unpaid interest at
the note rate up to the date of acceleration, late fees, attorney fees, default
interest, and the amount due under the Make Whole Provision of the First
Loan.

First National Bank of Oz filed a proof of claim for $11 million with
respect to the Second Loan which included unpaid principal, unpaid interest at
the note rate, attorney fees and late fees. The claim seeks secured status up to
the value of the collateral.

DND filed a motion for relief from stay on the basis that Happy Malls
held no equity in the Mega Mall, alleging Mega Mall’s value is $40 million and
that the Mega Mall is not necessary for an effective reorganization. After an
evidentiary hearing the bankruptcy court found that the value of Mega Mall is
$43.5 million and that Happy Malls had outlined a proposed plan of
reorganization that appears to have a likelihood of success, at least
preliminarily. Stay relief was denied, but to compensate DND for its
contractual right to Mega Mall’s rental stream, the bankruptcy court ordered
Happy Malls to pay DND a sum certain each month as adequate protection.
The order was silent on how the payments would be applied to the First Loan.

Happy Malls filed an objection to DND’s claim arguing:

a. The Make Whole Provision is disguised unmatured interest and is


therefore unenforceable.
b. The attorney fees are unreasonable.
c. The late charges are impermissible penalties.

First National Bank of Oz filed a joinder to the claim objection.

Happy Malls also filed an objection to the claim of First National Bank of
Oz, stating the entire claim should be treated as unsecured.

A couple of months after the stay relief hearing, COVID struck and Mega
Mall closed down for several months. In the meantime, several more Mega Mall
tenants closed. Although Mega Mall was finally allowed to reopen, many of its
tenants are gone. Not giving up, Happy Malls filed an amended plan of
reorganization proposing to reconfigure part of the shopping center as a virtual
reality park. This revised plan values Mega Mall at $30 million for purposes of
confirmation, arguing the mall’s value has decreased significantly due to
COVID.

University of Florida – Spring 2022


Applied Bankruptcy Course (2/25 Class Hypo)
The plan proposes to leave DND’s lien in place at the reduced claim
amount and only with respect to the new $30 million value, less all the
payments DND received during the course of the bankruptcy case, all of which
payments, Happy Malls argues, should be applied to principal. The plan
proposes to treat the balance of DND’s claim, and all of First National Bank of
Oz’ claim, as unsecured.

DND objects to confirmation, arguing, first, that the bankruptcy court


already found the value of Mega Mall is $43.5 million, that even if the mall can
be valued again, that with the virtual reality park Mega Mall will be worth $45
million and that therefore, DND is entitled to payment in full of its claim over
the life of the plan.

First National Bank of Oz has filed its notice that it will exercise its right
to make the 1111(b) election.

Questions:
(a) What factors should the Court consider in determining whether the
Make Whole Provision is enforceable?
(b) Is DND entitled to post-petition interest? If so, at what interest rate?
(c) Was it okay for First National Bank of Oz to join in the claim
objection?
(d) Can the Court conduct another valuation hearing?
(e) Assuming that First National Bank of Oz has a secured claim, what
impact does the value of Mega Mall have on the 1111(b) election?
(f) Can Happy Malls deaccelerate the loan if the Make Whole Provision is
enforceable?
(g) If DND receives payments during the chapter 11 case, how does that
affect the DND’s claim at confirmation?

University of Florida – Spring 2022


Applied Bankruptcy Course (2/25 Class Hypo)

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