17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 1 of 51 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ---------------------------------------------------------------x In re : Chapter 11 : TABERNA PREFERRED FUNDING IV, LTD., : : Case No. 17-11628 (MKV) : Alleged Debtor. : ---------------------------------------------------------------x TABERNA PREFERRED FUNDING IV, LTD., : : Adv. Proc. No. 17-01087 (MKV) : Interpleader Plaintiff, : v. : : OPPORTUNITIES II LTD., HH HOLDCO CO- : INVESTMENT FUND, L.P., REAL ESTATE : OPPS LTD., KL FUND II, HILDENE : OPPORTUNITIES MASTER FUND II, LTD., : WATERFALL ASSET MANAGEMENT LLC, : INVESTORS TRUST ASSURANCE SPC, : AND CITI GLOBAL MARKETS INC., : : Interpleader Defendants. : ---------------------------------------------------------------x DECISION GRANTING MOTION FOR JUDGMENT ON PARTIAL FINDINGS AND DISMISSING THE INVOLUNTARY BANKRUPTCY PETITION APPEARANCES: KLEE, TUCHIN, BOGDANOFF & STERN LLP Counsel for the Petitioning Creditors 1999 Avenue of the Stars, 39th Floor Los Angeles, California 90067 By: Robert J. Pfister, Esq. Whitman L. Holt, Esq. PEPPER HAMILTON LLP Counsel for Hildene Opportunities Master Fund II, Ltd. 620 Eighth Avenue, 37th Floor New York, New York 10017 By: H. Peter Haveles, Jr., Esq. 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 2 of 51 QUINN EMANUEL URQUHART & SULLIVAN, LLP Counsel for Hildene Opportunities Master Fund II, Ltd. 865 S. Figueroa Street, 10th Floor Los Angeles, California 90017 By: Eric D. Winston, Esq. 51 Madison Avenue, 22nd Floor New York, New York 10010 By: Lindsay M. Webber, Esq. DAVIS POLK Counsel for Citigroup Global Markets, Inc. 450 Lexington Avenue New York, New York 10017 By: Elliot Moskowitz, Esq. Brian M. Resnick, Esq. Justin Sommers, Esq. MARKO & MAGOLNICK, P.A. Counsel for Investors Trust Assurance, SPC 3001 South West 3rd Avenue Miami, Florida 33129 By: Joel S. Magolnick, Esq. KASOWITZ BENSON TORRES LLP Counsel for Waterfall Asset Management, LLC 1633 Broadway New York, New York 10019 By: Matthew B. Stein, Esq. Michael A. Hanin, Esq. MILBANK, TWEED, HADLEY & MCCLOY LLP Counsel for TP Management LLC 28 Liberty Street New York, New York 10005 By: Gerard Uzzi, Esq. Daniel M. Perry, Esq. Alexander B. Lees, Esq. 2 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 3 of 51 MARY KAY VYSKOCIL UNITED STATES BANKRUPTCY JUDGE This dispute concerns an involuntary chapter 11 petition filed against Taberna Preferred Funding IV, Ltd., a structured finance entity known as a collateralized debt obligation (commonly referred to as a “CDO”), that issued several series of notes, which descend in priority (“Taberna”). The involuntary petition was filed by three holders of the two most senior classes of notes, Opportunities II Ltd., HH HoldCo Co-Investment Fund, L.P., and Real Estate Opps Ltd. (collectively, the “Petitioning Creditors”), and is opposed by Taberna, its collateral manager, and five holders of the junior classes of notes issued by Taberna. The movants seek a judgment that three Petitioning Creditors have failed to establish a prima facie case that they meet one of the requirements, set forth in section 303(b) of the Bankruptcy Code, to qualify as petitioning creditors eligible to commence this involuntary case, and as such, dismissal of this involuntary petition. Although the parties opposing the involuntary petition have raised a number of arguments, 1 they now seek judgment that the Petitioning Creditors have not made out a prima facie case with regard to only one of the eligibility requirements for filing an involuntary petition, namely, that Petitioning Creditors hold claims against the putative debtor, Taberna. The parties opposing the involuntary petition argue that the notes are nonrecourse, and accordingly, 1 The Objecting Parties oppose the involuntary petition on a number of other grounds that are not at issue here. Specifically, they contend that an order for relief should not be entered in this case because the Indenture prohibits the Petitioning Creditors from commencing an involuntary bankruptcy case against Taberna and that the Petitioning Creditors are ineligible under section 303(b) of the Bankruptcy Code because they hold oversecured claims. See Noteholders’ Prehearing Brief (I) Opposing Granting of the Involuntary Petition and (II) Requesting Dismissal of, or Abstention from this Chapter 11 Case [ECF No. 104]. The Objecting Parties also argue that the case should be dismissed because the Petitioning Creditors filed the involuntary petition in bad faith. See id. The Petitioning Creditors maintain that nothing in the Indenture or the Notes prohibits holders of A-1 Notes from commencing an involuntary bankruptcy case against Taberna and that the Petitioning Creditors satisfy all of the requirements of section 303 of the Bankruptcy Code, including those not at issue on this motion. See Petitioning Creditors’ Opening Brief (I) In Support of an Order for Relief and (II) In Opposition to Dismissal or Abstention [ECF No. 87]. 3 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 4 of 51 the Petitioning Creditors only hold claims against the collateral securing the notes; i.e. they do not hold claims against Taberna. Whether the Petitioning Creditors hold claims against Taberna on account of the notes turns in the first instance on whether the notes are nonrecourse and, if the notes are nonrecourse, on whether sections 1111(b) and 102(2) of the Bankruptcy Code eliminate any distinction between recourse and nonrecourse claims in bankruptcy for purposes of determining the eligibility of a petitioning creditor under section 303(b) such that, notwithstanding the nonrecourse nature of the claims, the Petitioning Creditors hold the requisite claims against Taberna. This opinion constitutes the Court’s findings of fact and conclusions of law pursuant to Rule 52(c) of the Federal Rules of Civil Procedure, made applicable here by Rule 7052 of the Federal Rules of Bankruptcy Procedure. 2 For reasons set forth herein, the Court concludes that the Petitioning Creditors do not meet the requirements of section 303(b) of the Bankruptcy Code and are not eligible to commence an involuntary case against Taberna. Accordingly, judgment should be entered dismissing this case. In addition, the Court finds that this involuntary case serves no legitimate bankruptcy purpose, Petitioning Creditors would not be prejudiced by dismissal, and it is in the best interest of the creditors and the estate that the case be dismissed. Accordingly, pursuant to sections 1112 2 The opinion contains both findings of fact (“Findings”) and conclusions of law (“Conclusions”). To the extent any findings may be deemed conclusions of law, they shall also be considered Conclusions. To the extent that any Conclusions may be deemed findings of fact, they shall also be considered Findings. See, e.g., Bison Capital Corp. v. ATP Oil & Gas Corp., No. 10 CIV. 714 SHS, 2011 WL 8473007, at *1 n.1 (S.D.N.Y. Mar. 8, 2011), aff'd, 473 F. App'x 40 (2d Cir. 2012) (citing Miller v. Fenton, 474 U.S. 104, 113—14 (1985); 9C Wright & Miller, Federal Practice and Procedure § 2579 (3d ed. 2002) (discussing that it is often difficult to categorize a particular matter as a finding of fact or a legal conclusion). 4 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 5 of 51 and 105 of the Bankruptcy Code, in the exercise of the Court’s discretion, the Court concludes that the case should be dismissed for cause. JURISDICTION This Court has jurisdiction over this chapter 11 case pursuant to 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M–431), dated January 31, 2012 (Preska, C.J.). The determination of whether an order for relief should be granted in an involuntary case is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and (b)(2)(A) and (O). Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409. All parties to this motion consent to the entry of a final judgment or order with respect to all matters now before the Court. See Joint Pretrial Order (the “JPO”) § II [ECF No. 132]; see also Objecting Parties Proposed Findings of Fact and Conclusions of Law [ECF No. 144-1]; Petitioning Creditors Proposed Findings of Fact and Conclusions of Law [ECF No. 147-1] (stating that the parties have agreed that these proceedings are matters as to which the Court can enter final orders and judgment “including the specific issue presented by the Rule 52(c) Motion . . . .”). I. A. Factual Background In 2005, Taberna issued eleven classes of notes in the aggregate principal amount of $630,175,000, which descend in priority and have a stated maturity date of May 5, 2036 (collectively, the “Notes”). See JPO § III Stipulated Fact (“Stip. Fact”) ¶¶ 4-6; ecrawford@example.com. The Notes are governed by an indenture dated December 23, 2005 (the “Indenture”). See JPO § 3 JX1 refers to Joint Exhibit 1, which is identified in the Joint Pretrial Order as the Indenture (defined below) and hereinafter will be referred to as the Indenture. Other Joint Exhibits will be referred to throughout as “JX” followed by the exhibit number. 5 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 6 of 51 III Stip. Fact ¶ 3; Indenture § 14.9. The funds generated by the issuance of the Notes were used to purchase various types of securities that were intended to generate proceeds sufficient to repay the Notes and serve as collateral securing the Notes (collectively, the “Collateral”). See Petitioning Creditors’ Statement About the Involuntary Chapter 11 Petition Regarding Taberna Preferred Funding IV, Ltd. (the “PC Stmt.”) [ECF No. 2] ¶¶ 1, 2; JPO § III Stip. Fact ¶1. The Collateral consists mostly of long-term securities issued by real estate investment trusts (“REITS”) and other real estate entities, see PC Stmt. ¶ 10; JPO § III Stip. Fact ¶ 7, and is held in trust for the benefit and security of, inter alia, holders of Notes (collectively, the “Noteholders”). See INDENTURE, Granting Clauses. The Indenture defines “Secured Parties” to include, among others, the Noteholders. See INDENTURE at 1, 44. At all times, Taberna has paid Class A Noteholders pursuant to the terms of the Indenture. See JPO § III Stip. Fact ¶¶ 12, 22. In August 2009, an event of default occurred under the Indenture due to Taberna’s payment default on Class B Notes, notes junior to those now held by the Petitioning Creditors. See JPO § III Stip. Fact ¶ 17. The Notes were accelerated the following month. See JPO § III Stip. Fact ¶ 18. Over six years later, on March 22, 2016, the Petitioning Creditors purchased a total of $135,525,044.37 of the most senior class of Notes (the “A-1 Notes”) and a total of $16.9 million of the second most senior class of notes (the “A-2 Notes”). See JPO § III Stip. Fact ¶¶ 29, 30. By virtue of these purchases, at the time of filing, the Petitioning Creditors held 100% of the A-1 Notes and approximately 34% of the A-2 Notes. See PC Stmt. ¶ 4. As the Indenture does not permit the Petitioning Creditors unilaterally to liquidate the Collateral without the consent of other parties, prior to filing the involuntary petition, the Petitioning Creditors took a number of steps in a failed effort to liquidate the Collateral. See PC 6 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 7 of 51 Stmt. ¶ 6; JPO § III Stip. Fact ¶¶ 35-40. Petitioning Creditors’ principal, Vikaran Ghei, demonstrated at trial that he has experience and expertise in working with complex financial instruments, and has a sophisticated understanding of the workings of the Bankruptcy Code. See 11/28/17 Tr. 47:24—50:24, Adv. Pro. No. 17-01087 ECF No. 15 (“11/28/17 Tr.”); see also 11/29/17 Tr. 177:1—17, Adv. Pro. No. 17-01087 ECF No. 16 (“11/29/17 Tr.”). After hiring counsel that was specifically experienced bankruptcy counsel, see 11/30/17 Tr. 108:2—110:24, Adv. Pro. No. 17-01087 ECF No. 17 (“11/30/17 Tr.”); see also JPO § III Stip. Fact ¶ 1, among the steps the Petitioning Creditors took to break open the CDO, in November 2016, Mr. Ghei, on behalf of Petitioning Creditors, reached out to the indenture trustee and “requested that the indenture trustee solicit consents to allow the underlying collateral to be liquidated.” PC Stmt. ¶ 6; see also JPO § III Stip. Fact ¶ 35; Email from Thomas Ji to Vik Ghei, [JX 66]. Mr. Ghei did not offer any consideration in exchange for the requested consents, and the Petitioning Creditors ultimately failed to receive sufficient consent to sell the Collateral. See Consent Solicitation [JX 66]; See email from Brandon Meyer To Vik Ghei [JX 67]; JPO § III Stip. Fact ¶ 35. In March 2017, Mr. Ghei, on behalf of Petitioning Creditors, and with the advice and assistance of their current bankruptcy counsel, launched a tender offer to purchase Notes from each class in amounts sufficient to allow them to direct the Trustee to auction the Collateral. 11/28/17 Tr. 183:17—184:1, Adv. Pro. No. 17-01087 ECF No. 15; email from Vik Ghei to Brandon Meyer, [JX 69]; See JPO § III Stip. Fact ¶ 36; PC Stmt. ¶ 6. When that also failed to draw consent, the Petitioning Creditors subsequently amended their offer, 11/30/17 Tr. 210:22—211:18, Adv. Pro. No. 17-01087 ECF No. 17; JPO § III Stip. Fact ¶¶ 38-39, but ultimately did not purchase any Notes pursuant to the original or amended offer. 11/29/17 Tr. 44:9—16, Adv. Pro. No. 17-01087 ECF No. 16; See JPO § III Stip. Fact ¶ 40. 7 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 8 of 51 The Petitioning Creditors thereafter immediately purchased the remaining A-1 Notes that they did not already own, 11/29/17 Tr. 46:8—10, Adv. Pro. No. 17-01087 ECF No. 16; see JPO § III Stip. Fact ¶ 41, and two months later filed the involuntary petition. See Involuntary Petition [ECF No. 1]. Petitioning Creditors simultaneously filed a document described as a ‘partial waiver’ and incorporated the waiver into the involuntary petition. Involuntary Petition [ECF No. 1], Exh. 3; see also JPO § III Stip. Fact ¶ 57. Through this document, each of the three Petitioning Creditors waived its right to benefit from security interests in any asset of the alleged debtor solely on account of its ownership interest in the Class A-2 Notes up to, but not to exceed, the amount of $5,259.00. JPO § III Stip. Fact ¶ 57; see also Involuntary Petition [ECF No. 1], Exh. 3. At the time the involuntary petition was filed, the Petitioning Creditors had prepared a draft chapter 11 plan and stated that they were “ready to file their plan and accompanying documents, and then they will promptly pursue confirmation of that plan.” PC Stmt. ¶ 8. The plan drafted by the Petitioning Creditors permits an auction of the Collateral at the option of a majority of the holders of the A-2 Notes. See Notice of Filing of Certain Unredacted Exhibits to Affidavit of H. Peter Haveles, Jr. Pursuant to Order Amending Prior Order Granting Ex Parte Motion to File Documents Under Seal [ECF No. 82], Exh. D. While Petitioning Creditors do not control a majority of the A-2 Notes with their 34 percent stake, a company named Anchorage owns 50 percent of the A-2 Notes. 11/28/17 Tr. Adv. Pro. No. 17-01087 183:19—22, ECF No. 15. Prior to commencing this case, Petitioning Creditors coordinated with Anchorage, an investor that had previously put another CDO into bankruptcy involuntarily, to effectuate the Chapter 11 proposed plan, which Anchorage agreed to support so long as Anchorage was not “on the front lines”. 11/29/17 Tr. 31:20— 35:1, Adv. Pro. No. 17-01087 ECF No. 16; see also JX 8 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 9 of 51 102 (Mr. Ghei’s notes from his phone call with Anchorage discussing how to accomplish an accelerated liquidation of Taberna prior to the involuntary petition). The day after filing the Involuntary Petition, Petitioning Creditors moved to terminate the alleged debtor’s exclusivity period in which to file a chapter 11 plan to enable Petitioning Creditors to pursue their proposed plan. See Notice of Motion to Terminate the Debtor’s Plan Exclusivity Periods [ECF No. 8]. B. Procedural History Soon after filing the involuntary petition, the parties entered a stipulation, which the Court so ordered, establishing a schedule for expedited discovery including expert discovery and the briefing of any threshold legal issues. So Ordered Stipulation [ECF No. 45]. At the close of discovery, the Petitioning Creditors moved for partial summary judgment, seeking a ruling that, having filed waivers of the lien on the collateral, see JPO § III Stip. Fact ¶ 57, they now held unsecured claims against Taberna, thereby satisfying one of the eligibility requirements in dispute under section 303(b) of the Bankruptcy Code (i.e. a different requirement than the one at issue on this motion). See Petitioning Creditors’ Motion for Partial Summary Judgment [ECF No. 51]. 4 TP Management LLP, as collateral manager (the “Collateral Manager”), and several holders of Notes junior to the A-1 and A-2 Notes (collectively, the “Junior Noteholders” 5 and together with the Collateral Manager, the “Objecting Parties”) opposed the summary judgment motion, arguing that summary judgment should be denied because the Petitioning Creditors’ Note claims are both oversecured and non-recourse. See Opposition to Petitioning Creditors’ 4 Pursuant to the So Ordered Stipulation among the Parties [ECF No. 45] the Summary Judgment Motion was filed in the main bankruptcy case, Case No. 17-11628-MKV, and the Adversary Proceeding commenced by the putative debtor, Adv. Pro. No. 17-1087-MKV (seeking dismissal of this case or abstention) has been held in abeyance. 5 The Junior Noteholders include Hildene Opportunities Master Fund II, Ltd. (“Hildene”), Waterfall Asset Management LLC (“Waterfall”), Investors Trust Assurance SPC (“ITA”), EJF Capital LLC (“EJF”) and Citigroup Global Markets Inc. (“Citibank”). Collectively, they hold over $85 million in principal amount of Notes. 9 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 10 of 51 Motion for Partial Summary Judgment [ECF No. 65]. By decision dated November 27, 2017, the Court denied the Petitioning Creditors’ summary judgment motion on the issue of whether they hold unsecured claims against Taberna on the grounds that they had failed to establish that there were no material issues of fact and that they were entitled to judgment as a matter of law. See Decision Denying Motion for Partial Summary Judgment [ECF No. 133] (the “Summary Judgment Decision”). Thereafter, a bench trial commenced on the disputed issue of the eligibility of Petitioning Creditors to maintain this case. After five days of trial, at which Vikaran Ghei (one of two Principals of the Petitioning Creditors) and two experts (who testified with respect to valuation issues not relevant on this motion) testified, excerpts of depositions were offered, and over 140 exhibits were received into evidence. At the close of the Petitioning Creditors’ case in chief, the Objecting Parties moved pursuant to Rule 52(c) of the Federal Rules of Civil Procedure for a judgment on partial findings (the “Motion” or “Mtn.”). See The Objecting Parties’ Motion Under Rule 52(c) of the Federal Rules of Civil Procedure for Judgment on Partial Findings [ECF No. 144]. In their Motion, the Objecting Parties seek a determination that the Petitioning Creditors’ claims with respect to the Notes (the “PC Note Claims”) are nonrecourse and, as holders of nonrecourse claims, the Petitioning Creditors are ineligible under section 303(b) of the Bankruptcy Code to file an involuntary petition. Taberna supports the Motion. See Alleged Debtor’s Joinder in The Objecting Parties’ Motion Under Rule 52(c) of the Federal Rules of Civil Procedure for Judgment on Partial Findings [ECF No. 145]. The parties submitted findings of fact and conclusions of law and thereafter the Court heard oral argument on the motion. ECF Nos. 144—152. The narrow issues before the Court on this Motion are (1) whether the PC Note 10 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 11 of 51 Claims are nonrecourse, and (2) whether the Petitioning Creditors nonetheless meet the eligibility criteria of section 303(b) of the Bankruptcy Code requiring that they hold claims against Taberna. While the Rule 52 motion was pending, the Second Circuit issued a decision in Wilk Auslander LLP v. Murray (In re Murray), affirming that a bankruptcy court has the authority to dismiss sua sponte an involuntary chapter 7 bankruptcy case for cause. 900 F.3d 53 (2d Cir. 2018). In light of Murray, the Court issued an order directing the parties to show cause with respect to whether this case should be dismissed for cause pursuant to section 1112(b) of the Bankruptcy Code. [ECF No. 153]. The parties submitted briefing on the issue [ECF Nos. 154— 159], and on October 18, 2018, the Court heard oral argument on the section 1112 issue. II. LEGAL STANDARDS WITH RESPECT TO MOTION FOR JUDGMENT ON PARTIAL FIDINGS A. Rule 52(c) of the Federal Rules of Civil Procedure Rule 52(c) of the Federal Rules of Civil Procedure, which applies here pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure, 6 provides: If a party has been fully heard on an issue during a nonjury trial and the court finds against the party on that issue, the court may enter judgment against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue. The court may, however, decline to render any judgment until the close of the evidence. A judgment on partial findings must be supported by findings of fact and conclusions of law as required by Rule 52(a). 6 Although Bankruptcy Rule 7052 provides that Federal Rule 52 applies in adversary proceedings, the parties are in agreement that Federal Rule 52(c) applies here, where Taberna initially raised the issues addressed herein in an adversary proceeding entitled Taberna Preferred Funding IV, Ltd. v. Opportunities II Ltd, et al., Adv. Pro. No. 17- 01087 (MKV) (the “Adversary Proceeding”) and the parties subsequently agreed that all pleadings shall be filed solely in the main case, not the Adversary Proceeding, pending the outcome of the trial, and that all further proceedings in the Adversary Proceeding would be held in abeyance. See So Ordered Stipulation [ECF No. 45]. 11 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 12 of 51 Fed. R. Civ. P. 52(c). Thus, judgment under Federal Rule 52(c) is appropriate where a plaintiff has failed to make out a prima facie case. Latin Am. Music Co., Inc. v. Spanish Broad. Sys., Inc., 254 F. Supp. 3d 584, 587 (S.D.N.Y. 2017), aff'd, 738 F. App'x 722 (2d Cir. 2018) (“A defendant’s Rule 52(c) motion may be granted when ‘the plaintiff has failed to make out a prima facie case or where the plaintiff has made out a prima facie case but the court determines that a preponderance of the evidence goes against the plaintiff's claim.’”); see also Pal v. New York Univ., No. 06 CIV. 5892 PAC FM, 2013 WL 4001525, at *1 (S.D.N.Y. Aug. 6, 2013), aff'd, 583 F. App'x 7 (2d Cir. 2014). When considering a motion under Federal Rule 52(c), a court does not consider the evidence in the light most favorable to the non-moving party or draw any special inferences in the non-movant’s favor. See Wechsler v. Hunt Health Sys., Ltd., 330 F. Supp. 2d 383, 433 (S.D.N.Y. 2004); Desiderio v. Celebrity Cruise Lines, Inc., No. 97 Civ. 5185(AJP), 1999 WL 440775, at *19 (S.D.N.Y. June 28, 1999). “Instead, the court acts as both judge and jury, and decides the case based upon where the preponderance lies.” Empire State Bldg. Co. v. New York Skyline, Inc. (In re New York Skyline, Inc.), Adv. Nos. 09–1107 (SMB), 09–1145(SMB), 2013 WL 655991, at *4 (Bankr. S.D.N.Y. Feb. 22, 2013) (citing Desiderio v. Celebrity Cruise Lines, Inc., 1999 WL 440775, at *19). B. Bankruptcy Code Section 303(b) Section 303 of the Bankruptcy Code governs involuntary bankruptcy cases under chapters 7 and 11 and stipulates that an involuntary case may be commenced “only against a person . . . that may be a debtor under the chapter under which such case is commenced.” 11 U.S.C. § 303(a). Section 303 goes on to set forth the minimum number of creditors required to commence an involuntary case and contains restrictions as to which types of creditors may 12 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 13 of 51 commence an involuntary bankruptcy case. Specifically, pursuant to section 303(b)(1), an involuntary case may be commenced by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, or an indenture trustee representing such a holder, if such noncontingent, undisputed claims aggregate at least $15,775 more than the value of any lien on property of the debtor securing such claims held by the holders of such claims. 11 U.S.C. § 303(b)(1) (emphasis added). Section 303(b) thus requires that an involuntary petition be brought by at least three qualifying creditors 7 and that each such creditor holds a claim against the target of the involuntary petition. 11 U.S.C. § 303(b)(1). A petitioning creditor bears the initial burden of establishing a prima facie case that it meets the eligibility requirements set forth in section 303(b) of the Bankruptcy Code. See, e.g., In re Persico Contracting and Trucking, Inc., No. 10–22736 (RDD), 2010 WL 3766555, at *3 (Bankr. S.D.N.Y. Aug. 10, 2010); see also Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357 F.3d 433, 437 (4th Cir. 2004); In re Gutfran, 210 B.R. 672, 673 (Bankr. D. Conn. 1997). Once a prima facie case has been established, the burden then shifts to the entity against whom the involuntary petition has been filed to demonstrate that the eligibility requirements have not been met. See In re Persico Contracting and Trucking, Inc., 2010 WL 3766555, at *3; In re Byrd, 357 F.3d at 439; In re Gutfran, 210 B.R. at 673. The Petitioning Creditors have been fully heard on the section 303 eligibility requirements. Therefore, if the Court finds that the Petitioning Creditors have not met their burden of establishing a prima facie case that they satisfy the eligibility requirement in section 7 Section 303(b)(2) of the Bankruptcy Code contains a variation on these requirements for circumstances, not present in this case, where there are fewer than twelve creditors. The number of creditors required under section 303(b) is not in dispute on this motion. 13 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 14 of 51 303(b) of the Bankruptcy Code, the Court may enter judgment against them on this issue and the petition in this involuntary case should be dismissed. III. FINDINGS OF FACT AND CONCLUSION OF LAW WITH RESPECT TO WHETHER PETITIONING CREDITORS HOLD A CLAIM AGAINST TABERNA A. The Notes are Nonrecourse The Objecting Parties assert that pursuant to the terms of the Indenture, the Notes are nonrecourse and therefore the Petitioning Creditors do not hold claims against Taberna since their claims are limited to the Collateral. See Mtn. ¶¶ 17, 20, 22. The Petitioning Creditors, on the other hand, assert that the Indenture does not yet, if ever, preclude claims against Taberna or otherwise limit the PC Note Claims to claims against the Collateral. See Petitioning Creditors’ Opposition to the Objecting Parties’ Motion under Rule 52(c) of the Federal Rules of Civil Procedure for Judgment on Partial Findings (the “Opposition” or “Opp.”) [ECF No. 147] ¶¶ 34- 51. Based on its review of the Indenture [JX1], the Court finds that the Notes are nonrecourse. The term “nonrecourse” describes a type of debt that is “of, relating to, or involving an obligation that can be satisfied only out of the collateral securing the obligation and not out of the debtor’s other assets.” Black’s Law Dictionary (10th ed. 2014). A nonrecourse note is “[a] note that may be satisfied upon default only by means of the collateral securing the note, not by the debtor’s other assets.” Id. Similarly, a “nonrecourse creditor is a creditor who has agreed to look only to its collateral for satisfaction of its debt and does not have any right to seek payment of any deficiency from a debtor’s other assets.” In re 680 Fifth Ave. Assocs. v. Mut. Benefit Life Ins. Co. (In re 680 Fifth Ave. Assocs.), 156 B.R. 726, 732-33 (Bankr. S.D.N.Y. 1993), aff’d, 169 B.R. 22 (S.D.N.Y. 1993) aff’d, 29 F.3d 95 (2d Cir. 1994); see also In re Montgomery Ward, 14 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 15 of 51 LLC, 634 F.3d 732, 740 (3d Cir. 2011) (“A claim secured by a nonrecourse security interest is, by definition, enforceable only against the debtor’s property. A claim secured by a recourse security interest is enforceable against both the collateral and, to the extent the claim exceeds the value of the collateral, against the debtor.”). To determine whether the Notes are nonrecourse, the Court looks to the Indenture [JX1], which is governed by New York state law. See JX 1 INDENTURE § 14.9. The plain meaning of the language controls the construction of contracts governed by New York state law. See City of Hartford v. Chase, 942 F.2d 130, 134–35 (2d Cir. 1991) (quoting Berger v. Heckler, 771 F.2d 1556, 1568 (2d Cir. 1985)); V.C. Vitanza Sons v. New York City Hous. Auth., 7 A.D.3d 398, 776 N.Y.S.2d 472 (1st Dep’t 2004) (“In interpreting a contract, the plain meaning of words and phrases should be determined and the language construed so as to give full meaning and effect to all provisions of the agreement.”). When called upon to construe a contract, a court should ascribe to the contract terms their ordinary meanings unless doing so would lead to an absurd result. See Mastrovincenzo v. City of New York, 435 F.3d 78, 104 (2d Cir. 2006). A court’s role in construing a contract is to “give effect to the intent of the parties as revealed by the language they chose to use.” Seiden Assocs. Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992) (citing Slatt v. Slatt, 64 N.Y.2d 966, 488 N.Y.S.2d 645, 477 N.E.2d 1099 (N.Y. 1985)). Moreover, it is presumed that every clause in a contract was intended to have an effect. See City of Hartford v. Chase, 942 F.2d 130, 135 (2d Cir. 1991). If a contract is unambiguous, its meaning should be determined without reference to extrinsic evidence. Goldman v. Comm’r of Internal Revenue, 39 F.3d 402, 406 (2d Cir. 1994) (citing Goodheart Clothing Co. v. Laura Goodman Enters., 962 F.2d 268, 272 (2d Cir. 1992)). Whether the language in a contract is ambiguous is a question of law, see Seiden Assocs., 959 F.2d at 429, determined by reference to 15 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 16 of 51 the contract alone. See Goodheart, 962 ecrawford@example.com. The Court finds that the relevant provisions of the Indenture are unambiguous. Section 2.6(h) of the Indenture, [JX 1], provides as follows: 8 The obligations of the Co-Issuers under the Notes and this Indenture are non-recourse obligations of the Co-Issuers payable solely from the Collateral and in accordance with the Priority of Payments, and following realization of the Collateral and its reduction to zero any claims of the Noteholders shall be extinguished and shall not thereafter revive. No recourse shall be had against any Officer, Preferred Shareholder, director, manager, employee, security holder or incorporator of the Issuer, the Co-Issuer, the Collateral Manager, the Trustee, any Rating Agency, the Placement Agent or their respective successors or assigns for the payment of any amounts payable under the Notes or this Indenture. It is understood that the foregoing provisions of this Section 2.6(i) [sic] shall not (i) prevent recourse to the Collateral for the sums due or to become due under any security, instrument or agreement that is part of the Collateral or (ii) constitute a waiver, release or discharge of any indebtedness or obligation evidenced by the Notes or secured by this Indenture until such Collateral has been realized, whereupon any outstanding indebtedness or obligation shall be extinguished. It is further understood that the foregoing provisions of this Section 2.6(i) [sic] shall not limit the right of any Person to name either Co- Issuers as a party defendant in any action or suit or in the exercise of any other remedy under the Notes or this Indenture, so long as no judgment in the nature of a deficiency judgment or seeking personal liability shall be asked for or (if obtained) enforced against any such Person or entity. JX 1, INDENTURE, § 2.6(h). Non-recourse provisions are enforceable under New York state law. See, e.g., Bronxville Knolls, Inc. v. Webster Town Ctr. P’ship, 221 A.D.2d 248, 634 N.Y.S.2d 62 (2d Dep’t 1995) (holding that “non-recourse clause of integrated mortgage and 8 The Court has added spaces in between sentences for ease of reference. 16 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 17 of 51 mortgage note precluded the underlying action by the plaintiffs for a personal judgment as against the defendants” because “the only recourse in connection with the underlying loan was the mortgaged property”). Applying the plain meaning of the language in section 2.6(h) and other provisions of the Indenture, the Court concludes that the Indenture explicitly provides that the Notes are nonrecourse and that Taberna shall have no personal liability with respect to the Notes. The first line of section 2.6(h) is unambiguous in stating that the Notes are nonrecourse: “[t]he obligations of the Co-Issuers under the Notes and this Indenture are non-recourse obligations of the Co- Issuers payable solely from the Collateral . . . .” JX 1, INDENTURE § 2.6(h). The Co-Issuers include Taberna, as Issuer, and Taberna Preferred Funding IV, Inc., as Co-Issuer. See JX 1, INDENTURE, p. 1. The remainder of the first line of section 2.6(h) provides that once the Collateral (here, various types of long-term securities) has been fully liquidated, the Noteholders’ claims shall be extinguished. JX 1, INDENTURE § 2.6(h). This is consistent with the nature of nonrecourse debt; as once the Collateral has been exhausted, the Noteholders cannot look to Taberna to recover any deficiency because payment on the Notes will be “solely from the Collateral” and not from Taberna. Similarly, the fourth line of section 2.6(h) provides that although Noteholders may name Taberna as a defendant in an action when exercising other remedies under the Indenture, they are prohibited from either seeking a deficiency judgment or any personal liability against Taberna. JX 1, INDENTURE § 2.6(h). The Petitioning Creditors argue, that the third line of section 2.6(h) limits the first line of section 2.6(h) (each quoted above) by providing that the Notes do not become nonrecourse until the Collateral has been realized. See Opp. ¶ 42. Thus, according to the Petitioning Creditors, the Noteholders’ claims are not presently limited to the Collateral because the Collateral has not 17 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 18 of 51 been fully liquidated, and only when the Collateral eventually is fully liquidated, will the Noteholders’ claims then be limited to the Collateral. In other words: The Noteholders’ claims will not be limited to the Collateral until after the Collateral has been liquidated. The Court disagrees with this construction of the third line of section 2.6(h), which is not supported by the plain meaning of the provision, any other provision of the Indenture, or common sense. This proposed construction is belied by the first line of section 2.6(h), which contains an unqualified statement that the Notes are (as opposed to “will be, once the Collateral is liquidated”) nonrecourse, as well as the fourth line of section 2.6(h), which prohibits Noteholders, with no temporal limitation, from seeking to hold Taberna personally liable on account of the Notes. The fourth line of section 2.6(h) does not qualify its prohibition on actions seeking a deficiency judgment against Taberna until after the Collateral has been liquidated. Moreover, the third line of section 2.6(h) is unambiguous. It does not provide that the Notes only become nonrecourse upon the occurrence of a subsequent event; i.e. the liquidation of the Collateral. Instead, it simply explains that, notwithstanding the first and second lines of section 2.6(h), section 2.6(h) shall not be construed as either preventing recourse to the Collateral or affecting a “waiver, release or discharge of any indebtedness or obligation evidenced by the Notes or secured by [the] Indenture until such Collateral has been realized.” This is consistent with the first line of section 2.6(h), which provides that “following realization of the Collateral and its reduction to zero” the Noteholders’ claims shall be extinguished. In this context, the claims are to be extinguished precisely because they are limited to the Collateral. The Petitioning Creditors also point to several other provisions of the Indenture that contain generalized references to Taberna’s payment obligations with respect to the Notes. See 18 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 19 of 51 Opp. ¶ 36 (referencing sections 2.4(a), 9 5.3(c), 10 7.1 11 and 14.12 12). While these sections reference a payment obligation of Taberna under the Indenture, they by no means give rise to any obligation to repay the Notes from any of its assets other than the Collateral. Nor do they provide that Taberna shall bear any personal liability on account of the Notes. Moreover, these provisions neither conflict with, nor give rise to any ambiguity concerning, the plain language of section 2.6(h). B. The Bankruptcy Code Does Not Eliminate the Distinction Between Recourse and Non-Recourse Debt for the Purposes of Considering Eligibility to Commence an Involuntary Chapter 11 Case. The Petitioning Creditors contend that even if the Notes are nonrecourse, the Petitioning Creditors nevertheless hold claims against Taberna because section 102(2) and, in cases commenced under chapter 11 of the Bankruptcy Code, section 1111(b)(1), eliminates any distinction between recourse and nonrecourse debt against Taberna for the purposes of determining their eligibility under section 303(b). See Opp. ¶¶ 2, 12-32. The Court concludes 9 Section 2.4(a) provides as follows: “All Notes and Combination Notes issued and authenticated upon any registration of transfer or exchange of Notes and Combination Notes shall be the valid obligations of [Taberna] . . . evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes and Combination Notes surrendered upon such registration of transfer or exchange.” JX1, INDENTURE § 2.4(a). 10 Section 5.3(c) provides as follows: “The Co-Issuers covenant . . . that if a Default shall occur in respect of the payment of any principal of or interest on . . . any Class A Note or Class B Note . . . Class C Note, Class D Note or Class E Note . . . the Co-Issuers . . . will upon demand of the Trustee or any affected Noteholder, pay to the Trustee, for the benefit of the Holder of such Note, the whole amount, if any, then due and payable on such Note for principal and interest . . . and, to the extent that payments of such interest shall be legally enforceable, upon overdue installments of interest at the applicable Note Interest Rate and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee and such Noteholder and their respective agents and counsel.” JX1, INDENTURE § 5.3(c). The Petitioning Creditors also cite section 5.3(a) of the Indenture, which authorizes the Trustee to file and prove a claim with respect to the notes in any bankruptcy case concerning Taberna. See Opp., ¶ 44. 11 Section 7.1 provides as follows: “The Co-Issuers will duly and punctually pay all principal, interest . . . and other amounts owing hereunder or under any other agreement or instrument to which the Issuer or the Co-Issuer is a party in accordance with the terms of the Notes, this Indenture and such other agreements or instruments.” JX1, INDENTURE § 7.1. 12 Section 14.12 provides that “payment obligations of [Taberna] under this Indenture and the Notes shall not be discharged by any amount in another currency.” JX1, INDENTURE § 14.12. 19 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 20 of 51 that the Bankruptcy Code does differentiate between recourse and nonrecourse Notes and that the Notes should not be characterized as recourse for the purposes of determining eligibility to commence an involuntary Bankruptcy Case. 1. Bankruptcy Code Section 1111(b) The Petitioning Creditors argue that section 1111(b) of the Bankruptcy Code “eliminates any distinction in chapter 11 between recourse and nonrecourse debt,” and therefore, when determining whether a petitioning creditor holds a claim against the entity that is the subject of an involuntary petition as required under section 303(b), nonrecourse creditors must be treated as holding recourse claims. Opp. ¶¶ 2, 12. The Objecting Parties, on the other hand, contend that section 1111(b) takes effect only after a bankruptcy case has been commenced and an estate comes into existence, and that it does not operate to render a party eligible to file an involuntary petition based on subsequent events that may or may not occur, particularly when that party otherwise would not meet the requirements of section 303(b). See The Obj. Parties’ Reply Mem. of Law in Supp. of Their Mot. Under Rule 52(c) of the Fed. Rules of Civil Proc. for J. on Partial Findings (the “Reply Brf.”) ¶¶ 5, 6 [ECF No. 15]. TP Management joins the Objecting Parties’ position that section 1111(b) is not applicable here, however for different reasons. TP Management argues that section 1111(b) is inapplicable because the “Noteholders here have contractually forfeited any right to assert a deficiency claim under section 1111(b) or otherwise since they agreed in the Indenture that ‘no judgment in the nature of a deficiency judgment or seeking personal liability shall be asked for or (if obtained) enforced against’ the Issuer.” TP Management LLC’s Answer to the Involuntary Chapter 11 Petition [ECF No. 20 ¶43]. The Court turns to the plain language of both statutes to resolve this issue. If a statute’s language is plain, the court’s only function is to enforce the statute according to its terms. See 20 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 21 of 51 United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). By its terms, Section 1111(b) governs how undersecured nonrecourse claims are to be treated under a debtor’s chapter 11 plan “for allowance and distribution purposes,” and provides as follows: (1)(A) A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of [the Bankruptcy Code] the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse, unless (i) the class of which such claim is a part elects, by at least two- thirds in amount and more than half in number of allowed claims of such class, application of paragraph (2) of this subsection; or (ii) such holder does not have such recourse and such property is sold under section 363 of [the Bankruptcy Code] or is to be sold under the plan. (B) A class of claims may not elect application of paragraph (2) of this subsection if – (i) the interest on account of such claims of the holders of such claims in such property is of inconsequential value; or (ii) The holder of a claim of such class has recourse against the debtor on account of such claim and such property is sold under section 363 of [the Bankruptcy Code] or is to be sold under the plan. (2) If such an election is made, then notwithstanding section 506(a) of this title, such claim is a secured claim to the extent that such claim is allowed. 11 U.S.C. § 1111(b) (emphasis added). The language of section 1111(b) is clear and unambiguous, and provides that an undersecured, nonrecourse creditor in a chapter 11 case may, for allowance and distribution purposes, have its claim split into an allowed secured claim equal to the value of the collateral and an allowed unsecured claim for the deficiency (notwithstanding that the claim is nonrecourse), unless either (a) the class of which the creditor’s claim is a part elects to have the 21 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 22 of 51 claim treated as a fully secured claim or (b) the creditor holds a nonrecourse claim and the collateral is sold under section 363 of the Bankruptcy Code or pursuant to a chapter 11 plan. As an initial matter, the plain language of section 1111(b) makes clear that “the recourse transformation is for distribution purposes only. The Code provision does not change the nature or terms of a creditor’s security interest.” In re Montgomery Ward, LLC, 634 F.3d at 740 (citing In re DRW Prop. Co., 57 B.R. 987, 992 (Bankr. N.D. Tex. 1986)); see id. (“The transformation of non-recourse claims into recourse claims is for distribution purposes only in a Chapter 11 reorganization case where the debtor has been given the power to retain encumbered property (over the objection of the secured creditor) for use in its plan of reorganization.”); Travelers Ins. Co. v. 633 Third Assocs., No. 91 CIV. 5735 (CSH), 1991 WL 236842, at *2 (S.D.N.Y. Oct. 31, 1991) (citing In re DRW Prop. Co., 57 B.R. at 992); 11 U.S.C. §1111(b) (“A claim secured by a lien on property of the estate shall be allowed or disallowed under section 502 of this title the same as if the holder of such claim had recourse against the debtor on account of such claim, whether or not such holder has such recourse . . . .”)(emphasis added); see also 7 Collier on Bankruptcy ¶ 1111.03[1](c) (16th ed. 2018) (“Thus, although the claim becomes recourse against the debtor for purposes of distribution, it remains a nonrecourse claim for all other purposes.”). Section 1111(b) does not, as the Petitioning Creditors argue, unequivocally treat all nonrecourse claims as recourse under all circumstances, or, for our purposes, at commencement of every chapter 11 case. Instead, for allowance purposes, it permits an undersecured nonrecourse claim to be allowed as recourse claim only if certain requirements are met: i.e. if the claim is not treated as fully secured under section 1111(b)(1)(A)(i) and the collateral securing the claim is not sold pursuant to either section 363 or pursuant to a plan. The second condition is 22 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document Pg 23 of 51 based on the rationale that if the “collateral is to be sold, the undersecured creditor does not get recourse because the nonrecourse lender may, under 11 U.S.C. § 363(k), bid in the undersecured portion of its claim when the collateral is sold.” In re 680 Fifth Ave. Assocs. v. Mut. Benefit Life Ins. Co. (In re 680 Fifth Ave. Assocs.), 156 B.R. 726, 733 (Bankr. S.D.N.Y. 1993), aff’d, 169 B.R. 22 (S.D.N.Y. 1993) aff’d, 29 F.3d 95 (2d Cir. 1994). Thus, if an order for relief were to be granted with respect to the involuntary petition, and if the Collateral were subsequently sold either pursuant to section 363 or as part of a chapter 11 plan, the Petitioning Creditors’ nonrecourse claims would not be entitled to recourse treatment under section 1111(b). Id. (“[I]f the plan of reorganization provides that collateral is to be sold, the undersecured creditor does not get recourse because the lender may . . . bid in the undersecured portion of its claim when the collateral is sold.”); 124 Cong. Rec. 32, 406 -07 (1978) (explaining that section 1111(b) does not afford recourse status to nonrecourse creditors “if the property securing the loan is sold under section 363 or is to be sold under the plan”). Because it is not clear at this stage of the proceedings whether the claims will ultimately qualify for recourse treatment under section 1111(b), there is no reason for the Court to conclude at this time that the Petitioning Creditors’ nonrecourse claims are presently entitled to allowance as recourse claims under section 1111(b). 13 In any event, allowance of Petitioning Creditors’ claim is not the issue now before the Court. Moreover, even if the Court were to conclude that the language of section 1111(b) is ambiguous and fails in itself to resolve the conflicting interpretations offered by the parties, a review of the purpose underlying section 1111(b) supports the Court’s conclusion. See 13 The construction of section 1111(b) urged by the Petitioning Creditors also has the potential to lead to an inequitable scenario given the Petitioning Creditors’ ultimate desire to liquidate the Collateral, such that section 1111(b) would operate to treat their nonrecourse claims as recourse claims for purposes of their eligibility under section 303(b), but not affect the nonrecourse nature of their claims for allowance and distribution purposes. 23 17-01087-mkv Doc 20 Filed 11/08/18 Entered 11/08/18 16:27:07 Main Document
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