Financial Security Assurance Inc. v. T-H New Orleans Ltd. Partnership

United States Court of Appeals,

Fifth Circuit.

No. 95-31233.

In the Matter of T-H NEW ORLEANS LIMITED PARTNERSHIP, Debtor.

FINANCIAL SECURITY ASSURANCE INC., Appellant-Cross-Appellee,

v.

T-H NEW ORLEANS LIMITED PARTNERSHIP, Appellee-Cross-Appellant.

July 9, 1997.

Appeals from the United States District Court for the Eastern
District of Louisiana.

Before WISDOM, SMITH and PARKER, Circuit Judges.

ROBERT M. PARKER, Circuit Judge:

This Court visits this case for a second time.1 The

Appellant, Financial Security Assurance, Inc. ("FSA"), appeals the

bankruptcy court's ruling that it was not entitled to postpetition

preconfirmation interest from the petition date notwithstanding

FSA's overcollateralization at confirmation; the value assigned to

the collateral; the appropriate confirmation interest rate; and

confirmation of the bankrupt's Chapter 11 plan. On appeal, FSA

asserts a myriad of errors by the bankruptcy court. T-H New

Orleans Limited Partnership ("T-H NOLP") asserts two cross-issues.

Finding no reversible error, we affirm.

FACTS AND PROCEDURAL HISTORY

In June of 1988, T-H NOLP acquired a Days Inn Hotel (the

1
This Court has already heard a previous appeal between the
two parties to this appeal. See In re T-H New Orleans Ltd.
Partnership, 10 F.3d 1099 (5th Cir.1993) ("T-H NOLP I").

1
"Hotel") in New Orleans, Louisiana and has operated the Hotel

continuously since that date. T-H NOLP is a limited partnership

with a corporate general partner, Tollman-Hundley New Orleans

Corp., and five individual limited partners. The day-to-day

management and operations of the Hotel property are carried out by

the individuals employed by T-H NOLP. T-H NOLP is also a member of

the Tollman-Hundley Hotels group of companies.

In February 1989, T-H NOLP sought to restructure the

under-lying mortgage debt on the Hotel through a mortgage bond

financing transaction involving T-H NOLP and six other hotels owned

by separate Tollman-Hundley partnerships. As part of the

refinancing, T-H NOLP and the six other hotel partnerships, all

controlled by Monty Hundley and Stanley Tollman, obtained separate

but cross-collateralized and cross-guaranteed first mortgage loans,

which were secured by the Hotel and other hotels as well as the

revenues generated therefrom, in the amount of $87,000,000 from a

newly created business trust (the "Issuer"). T-H NOLP executed

various agreements including a Mortgage Note and Loan Agreement,

and a Collateral Mortgage Note.

To raise the necessary money to make the mortgage loans to T-H

NOLP and the other hotels, the Issuer issued $87,000,000 in bonds,

the payment of which was guaranteed by a surety bond issued by FSA.

In return, the Issuer of the bonds assigned to FSA all its rights

and interest in the security agreements, and authorized FSA to be

its attorney-in-fact in order to take whatever actions FSA deemed

necessary to exercise its rights under the mortgage loans and

2
related collateral.

By 1990, T-H NOLP and the six other partnerships were in

default on the loans, and FSA stepped into the shoes of the bond

Issuer. After the parties were unable to reach a settlement, FSA

accelerated the mortgage note and demanded payment of all amounts

due under the loan agreement and guarantee. On February 25, 1991,

T-H NOLP filed for bankruptcy under Chapter 11 of the Bankruptcy

Code; the other six hotel partnerships also filed for bankruptcy.

At the time T-H NOLP filed bankruptcy, FSA's allowed claim was

$18.424 million.

Subsequent to the bankruptcy filing, FSA filed a motion for

adequate protection or segregation of hotel receipts. The

bankruptcy court granted FSA's motion, finding that it had a

security interest in the Hotel's prepetition and postpetition

revenues from its operations, and ordered that the Hotel's business

revenues be segregated. The bankruptcy court also entered a cash

collateral order (dated May 1, 1992) which provided that T-H NOLP

make payments from the Hotel's net revenues in order to reduce its

obligation to FSA.

On appeal, this Court in In re T-H New Orleans Limited

Partnership, 10 F.3d 1099 (5th Cir.1993) ("T-H NOLP I") held that

T-H NOLP's postpetition Hotel revenues were "rents" under Louisiana

law and, therefore, were subject to FSA's prepetition security

agreement under § 552(b) of the Bankruptcy Code and must be

segregated. The Court remanded the case with instructions for

further proceedings consistent with its opinion.

3
 On February 24, 1994 T-H NOLP filed its amended disclosure

statement and amended plan of reorganization. The bankruptcy court

approved the amended disclosure statement in June 1994. On July

15, 1994, FSA filed an objection to plan confirmation, and T-H NOLP

filed an objection to FSA's claim.

The bankruptcy court, early in the case, found that the

appraised value of the Hotel was $12.2 million; this valuation was

based upon an appraisal report as of July 1, 1991 which was

commissioned by FSA. FSA's motion for adequate protection was based

upon this appraised value. Subsequently, the bankruptcy court held

a hearing to determine the fair value of the Hotel and found, after

considering the evidence presented by T-H NOLP and FSA, that, as of

July 14, 1994, the fair value of the Hotel was $13.7 million.2

Accordingly, the bankruptcy court found that the value of FSA's

security interest in the Hotel was $13.7 million. The bankruptcy

court also found that based on the uncontroverted testimony, the

fair value of the Hotel would increase over the two year period

following confirmation of T-H NOLP's proposed amended plan.

The bankruptcy court also held a hearing on FSA's allowed

claim. FSA stipulated for purposes of the confirmation hearing

that its allowed claim as of the petition date was $18,424,000. T-

2
FSA provided an appraisal valuing the Hotel at a greater
value. However, that appraisal did not include adjustments for a
yearly corporate overhead allocation which the bankruptcy court
found, based on the evidence presented, to be a necessary expense
and should be accounted for in determining the fair value of the
Hotel. FSA's appraiser testified that if the corporate overhead
allocation charge was considered, his opinion as to the appraised
value of the Hotel would decrease by the amount of the allocation
and the Hotel's fair value would be $13.7 million.

4
H NOLP presented evidence showing that it had made postpetition

cash collateral payments of $4,675,945 through the end of

September, 1994.3 Thus, the bankruptcy court, after accounting for

the postpetition rent payments (pursuant to the May 1, 1992 cash

collateral order) on FSA's claim and not including any potential

entitlement to postpetition preconfirmation interest, found that

FSA's claim amounted to $13,748,055 as of September 30, 1994.4

The bankruptcy court therefore found that because FSA's claim

of $13,748,055 was greater than the fair value of the Hotel ($13.7

million), thus making FSA's claim undersecured, FSA was not

entitled to postpetition, preconfirmation interest on its claim

under § 506(b) of the Bankruptcy Code until the time when the value

of its collateral exceeded the amount of its claim. At that point,

FSA would be entitled to interest at the contract rate on its claim

to the extent that the value of the collateral exceeds its allowed

claim, i.e. the equity cushion, and that any postpetition interest

was limited to the equity cushion created by the monthly accrual of

3
A representative of FSA testified that FSA had received cash
collateral from T-H NOLP in the amount of $4,770,666 as of
September 23, 1994; however, FSA's representative failed to
present any supporting evidence to support FSA's position.
4
The bankruptcy court applied the cash collateral payments
against the unsecured portion of FSA's claim, following the
bankruptcy court in In re 354 East 66th Street Realty Corp., 177
B.R. 776 (Bankr.E.D.N.Y.1995). In reaching its decision, the
bankruptcy court analyzed the two line of cases that have addressed
this issue, i.e., the addition cases and the subtraction cases.
See, e.g. In re Union Meeting Partners, 178 B.R. 664
(Bankr.E.D.Pa.1995). However, we do not answer today the question
of whether the bankruptcy court's reduction of the unsecured
portion of FSA's claim was proper, as that issue was not raised on
appeal.

5
net rents generated by the Hotel.

Finally, with respect to T-H NOLP's amended plan of

reorganization (the "Plan"), FSA was the only creditor to object to

confirmation of the Plan and to vote to reject the amended Plan.5

FSA argued against Plan confirmation on several grounds which are

addressed in each of its issues on appeal. All other classes of

creditors either voted affirmatively to accept the amended Plan or

were deemed to have accepted the amended Plan. Thus, T-H NOLP

sought confirmation of its amended Plan under the "cramdown"

provisions of Chapter 11 of the Bankruptcy Code. Following three

days of confirmation hearings, the bankruptcy court on March 27,

1995, entered an order denying Plan confirmation.6

On March 30, 1995, the bankruptcy court entered an order

confirming T-H NOLP's amended Plan under the cramdown provisions of

Chapter 11. The bankruptcy court also determined that the proper

postconfirmation interest rate was 11.5 percent. On June 27, 1995,

5
FSA's claim was a Class 4 claim in the amended plan which was
to be treated as follows: (a) reduction of FSA's claim from the
prepetition amount of $18.242 million by application of
postpetition, preconfirmation payments made to FSA under the
bankruptcy court's May 1, 1992 cash collateral order; (b) payment
of the remaining amount of the FSA claim through twenty-four
monthly payments of principal and post-confirmation interest, based
on a twenty-year principal amortization at 8% interest or such
other cramdown rate approved by the bankruptcy court, with a
balloon payment of all remaining principal and interest at the end
of two years; and (c) payment of the remaining balance, after
application of all prior payments, in one of three ways (1)
refinancing with another lender; (2) sale of the Hotel; or (3) a
dation en paiement transferring ownership of the Hotel.
6
The bankruptcy court denied plan confirmation based on
language in Section X.2 of the plan which it considered overly
broad and ambiguous. T-H NOLP agreed to delete this language.

6
the bankruptcy court denied FSA's motion for reconsideration or new

trial.

Both FSA and T-H NOLP appealed to the district court for a

review of the bankruptcy court's decisions. The district court

affirmed. This appeal ensued. We now address FSA's and T-H NOLP's

arguments raised before this Court.

DISCUSSION

This Court, acting as a second review court, reviews the

bankruptcy court's findings of fact under the clearly erroneous

standard, and the bankruptcy court's conclusions of law de novo.

In re United States Abatement Corp., 79 F.3d 393, 397 (5th

Cir.1996). We also note that while FSA listed in its brief

fourteen issues on appeal, FSA only discusses six of them in the

corpus of its brief. Federal Rule of Appellate Procedure 28(a)(6)

provides that "[t]he argument must contain the contentions of the

appellant on the issues presented, and the reasons therefor...."

Pursuant to Rule 28, this Court has found "that contentions not

briefed are waived and will not be considered on appeal." Trust

Co. of Louisiana v. N.N.P., Inc., 104 F.3d 1478, 1485 (5th

Cir.1997) (citing Zeno v. Great Atlantic & Pacific Tea Co., 803

F.2d 178 (5th Cir.1986)). Thus, the only issues that this Court

will consider on appeal are those that were actually briefed by the

parties in accordance with Rule 28.

1. FSA's Entitlement to Postpetition Interest

FSA asserts that the value of the Hotel was increasing during

the bankruptcy proceedings, and that its claim was decreasing due

7
to the monthly cash collateral payments. Thus, at some point

between September 1994 and the March 30, 1995 confirmation order

the value of the property became greater than its claim.

There-fore, FSA argues that since the collateral's value exceeded

its claim on the day the Chapter 11 plan was confirmed or became

effective, it was entitled to postpetition interest under § 506(b)

to the extent of its contract rate for the entire postpetition

period. FSA also argues that it should have been paid the

postpetition interest monthly instead of at confirmation. In

response, T-H NOLP relies on the bankruptcy court's conclusion, and

objects to the allowance of any postpetition preconfirmation

interest on FSA's claim until that point in time when the Hotel's

value was greater than FSA's claim. T-H NOLP also asserts on

cross-appeal that the bankruptcy court erred by requiring it to

make postpetition preconfirmation interest payments while FSA

appealed the bankruptcy court's order confirming T-H NOLP's Plan.

The parties' arguments raise the following questions for our

consideration. First, where a secured creditor is receiving cash

collateral payments which reduce the creditor's allowed claim such

that at some point in time prior to plan confirmation the creditor

may become oversecured, is that creditor entitled to accrue

interest under § 506(b)? Second, when, under § 506(b), does

interest begin to accrue, and the extent to which a creditor is

entitled to postpetition interest?

There is no question that a creditor's entitlement to

postpetition interest on its claim is determined under § 506(b) of

8
the Bankruptcy Code. Section 506(b) states in relevant part that

"[t]o the extent that an allowed secured claim is secured by

property, the value of which ... is greater than the amount of such

claim, there shall be allowed to the holder of such claim interest

on such claim...." 11 U.S.C. § 506(b). The United States Supreme

Court in United States v. Ron Pair Enter., Inc., 489 U.S. 235, 109

S.Ct. 1026, 103 L.Ed.2d 290 (1989) made clear that under § 506(b)

a creditor is unqualifiedly entitled to postpetition interest on

its oversecured claim. Id. at 241, 109 S.Ct. at 1030; see In re

Pointer, 952 F.2d 82 (5th Cir.1992); In re Sublett, 895 F.2d 1381

(11th Cir.1990). However, § 506(b) applies only from the date of

filing through the confirmation date. Rake v. Wade, 508 U.S. 464,

468, 113 S.Ct. 2187, 2190, 124 L.Ed.2d 424 (1993) (overruled on

other grounds by 11 U.S.C. § 1322(e)).

Under § 506(b), the creditor's entitlement to postpetition

interest is clearly predicated on the threshold establishment of

the two values to be compared, that of the property and the claim.

Thus, the first inquiry under § 506(b) is usually a finding of

whether the creditor is oversecured and thus entitled to accrue

postpetition interest on its claim. In arguing that at some point

between the time the petition was filed and confirmation of the

Plan, the value of the Hotel became greater than the value of FSA's

claim thus entitling FSA to postpetition interest, FSA invites us

to consider when valuation should occur for purposes of determining

a creditor's entitlement to postpetition interest.

With respect to the first question, the parties in their

9
argument cite this Court to United Sav. Ass'n. of Texas v. Timbers

of Inwood Forest Assoc., Ltd. (In re Timbers of Inwood Forest

Assoc., Ltd.), 793 F.2d 1380 (5th Cir.1986), on reh'g, 808 F.2d 363

(5th Cir.1987) (en banc court reinstating panel opinion), aff'd,

484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). In Timbers, an

undersecured creditor sought postpetition interest representing

lost "opportunity costs" on the amount of its secured claim under

§ 362(d) of the Bankruptcy Code. This Court declined the creditor's

request and held that an undersecured creditor was not entitled to

postpetition interest on the value of its collateral as an element

of adequate protection. In reaching its ruling, the Timbers court

examined other Bankruptcy Code provisions that bore "indirectly" on

the question considered. In considering § 506(b) and (c), the

Court noted that:

[t]he timing of the payment of accrued interest to an
oversecured creditor (at the conclusion of the proceeding) is
doubtless based on the fact that it is not possible to compute
the amount of § 506(c) recovery (and, accordingly the net
allowed secured claim on which interest is computed ) until
the termination of the proceeding.

Timbers, 793 F.2d at 1407. (emphasis added).

Although beneficial, this language does not answer the

question we are presented with in the instant case. In addition,

the Timbers Court was not confronted with the question we are

presented today. We note that the creditor in Timbers was

undersecured at the time of the adequate protection hearing and its

appeal to this Court, and the value of the collateral was not

increasing and there was no evidence that future appreciation would

10
provide for post-petition interest.7

Under § 506, valuations are to be made in light of the purpose

of the valuation. In re Landing Assoc., Ltd. 122 B.R. 288

(Bankr.W.D.Tex.1990). We recognize that the value of a debtor's

collateral and the amount of a creditor's claim are among the most

important issues between the debtor and the secured claimholder.

Valuation issues can arise in various contexts throughout the

entire bankruptcy case. See In re Stanley, 185 B.R. 417

(Bankr.D.Conn.1995). Establishing equity, allowing claims,

adequate protection, and plan confirmation are only a few examples

of when the issue of valuation can be raised. Id. at 423. Neither

Bankruptcy Code § 506(b) nor the Bankruptcy Rules define or

establish the time for determining valuation of collateral for

purposes of § 506(b). In re Fox, 142 B.R. 206 (Bankr.S.D.Ohio

1992). The legislative history to § 506(b) is also silent on this

point. This Court's research has not disclosed any circuit

7
We also note that In re Delta Resources, Inc., 54 F.3d 722
(11th Cir.), cert. denied, sub nom. Orix Credit Alliance, Inc. v.
Delta Resources, Inc., --- U.S. ----, 116 S.Ct. 488, 133 L.Ed.2d
415 (1995), addressed the narrow issue of whether a purportedly
oversecured creditor was entitled to receive periodic cash payments
for accruing postpetition interest as part of adequate protection
in order to preserve the value of its equity cushion. We are not
confronted with this question.

In comparing when adequate protection is measured versus
interest under § 506(b), the Delta Resources court held that
a creditor's claim is measured as it existed at the time of
the petition date because postpetition interest is limited to
the amount by which the claim was oversecured at that time.
We agree with this general proposition in the ordinary
"underwater" asset case; however, in the context where the
collateral is rising and the creditor's claim is decreasing
(as in the present case), we find this ruling to be
inappropriately narrow.

11
authority which has discussed the question before us today,

although we note that the lower courts that have faced this

circumstance have selected a single valuation date. See, e.g., In

re Hulen Park Place, Ltd., 130 B.R. 39, 43 (N.D.Tex.1991)

(determining whether creditor's claim is oversecured must be

determined as of the petition date); In re Landing Assoc., Ltd.,

122 B.R. 288, 297 (Bankr.W.D.Tex.1990) (measurement date is

confirmation date).8

We decline to follow such a narrow path. Therefore, we

conclude that for purposes of determining whether a creditor is

entitled to accrue interest under § 506(b) in the circumstance

where the collateral's value is increasing and/or the creditor's

allowed claim has been or is being reduced by cash collateral

payments, such that at some point in time prior to confirmation of

the debtor's plan the creditor may become oversecured, valuation of

the collateral and the creditor's claim should be flexible and not

limited to a single point in time, such as the petition date or

confirmation date. We further hold that, notwithstanding the

bankruptcy court's determination of a creditor's secured status as

of the petition date (if such a finding is made), the party who

contends that there is a dispute as to whether a creditor is

8
Although not controlling, we also recognize that there is
ample discussion on the valuation issue in the context of adequate
protection. See, e.g., In re Cason, 190 B.R. 917
(Bankr.N.D.Ala.1995) (discussing three valuation approaches); In
re Addison Properties Ltd. Partnership, 185 B.R. 766
(Bankr.N.D.Ill.1995) (same); see also Craig H. Averch et al., The
Treatment of Net Rents in Bankruptcy—Adequate Protection, Payments
of Interest, Return of Collateral, or Reduction of Debt, 48 U.
Miami L.Rev. 691 (1994).

12
entitled to interest under § 506(b) must motion the bankruptcy

court to make such a determination. The creditor though bears the

ultimate burden to prove by a preponderance of evidence its

entitlement to postpetition interest, that is, that its claim was

oversecured, to what extent, and for what period of time. In re

Grabill Corp., 121 B.R. 983, 991-92 (Bankr.N.D.Ill.1990). This

ruling recognizes the discretionary nature of bankruptcy courts as

courts of equity. However, bankruptcy courts are not precluded

from fashioning remedies to prevent unwarranted multiple

redeterminations.

A flexible approach recognizes the fact that a creditor's

allowed claim, which is being reduced over time, may become

entitled to accrue postpetition interest, and that under the plain

language of § 506(b) there is nothing limiting that right. See

United States v. Ron Pair Enter., Inc., 489 U.S. 235, 109 S.Ct.

1026, 103 L.Ed.2d 290 (1989) (employing a plain meaning reading of

§ 506(b)). A flexible approach also recognizes that any increase

over the judicially determined valuation during bankruptcy rightly

accrues to the benefit of the creditor, and not to the debtor.

Moreover, as the bankruptcy court in In re Addison Properties

noted, the single valuation approach generally balances the

bankruptcy process in favor of the debtor. In re Addison

Properties Ltd. Partnership, 185 B.R. 766, 772

(Bankr.N.D.Ill.1995). Because of the equitable nature of

bankruptcy in seeking a balance between debtors and creditors

(debtor's right to a fresh start versus the creditor's right to the

13
value of its claim), we reject the single valuation approach under

the particular facts of this case.

Thus, applying this ruling to the instant case, if FSA

believed that under § 506(b) it was entitled to accrue postpetition

interest on its claim during the period following the confirmation

hearing, then absent agreement between the parties as to the point

in time when FSA's claim became oversecured, FSA was required to

motion the bankruptcy court for a redetermination of its secured

status. The bankruptcy court in this case was presented with the

unusual fact situation where FSA's claim was being reduced and the

Hotel's value was appreciating during the time from the petition

date to the confirmation hearing. However, the bankruptcy court

found that, for the period from the confirmation hearings to Plan

confirmation, FSA's claim went from being undersecured to being

oversecured and that this would probably occur in October 1994.

Because the bankruptcy court made the factual finding as to when

FSA would become oversecured, under the particular facts of this

case we cannot say that the bankruptcy court was clearly erroneous

in its decision.9

We next address the accrual of interest under § 506(b) and

the extent to which a creditor is entitled to interest under §

506(b). We find this question to be relatively straightforward.

The measuring date on which the status of a creditor's collateral

9
We note that the bankruptcy court found that FSA "probably"
would become oversecured sometime in October 1994. Although we
find it to be a close question, we are persuaded that the
bankruptcy court's finding is supported by the evidence in this
case.

14
and claim are compared is determinative of a creditor's right to

accrue interest under § 506(b). Thus, a secured creditor's

entitlement to accrue interest under § 506(b) matures at that point

in time where the creditor's claim becomes oversecured.10 However,

as Timbers dictates, accrued interest under § 506(b) is not paid to

an oversecured creditor until the plan's confirmation or its

effective date, whichever is later. United Sav. Ass'n. of Texas v.

Timbers of Inwood Forest Assoc., Ltd. (In re Timbers of Inwood

Forest Assoc., Ltd.), 793 F.2d 1380, 1381, 1407 (5th Cir.1986), on

reh'g, 808 F.2d 363 (5th Cir.1987 (en banc court reinstating panel

opinion)), aff'd, 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740

(1988). Thus, to the extent that the bankruptcy court's order does

violence to the teachings of Timbers by ordering the payment of

interest pending confirmation as opposed to ordering interest to

accrue, it was error. However, because of the particular facts of

this case, we are not inclined to set aside the bankruptcy court's

ruling. On the effective date of the Plan's confirmation T-H NOLP

would be receiving a credit for the interest paid during this time.

FSA also asserts that it was entitled to the postpetition

interest that would have accrued during the entire postpetition

preconfirmation period on its claim since the petition date. We

disagree. The Supreme Court has made it clear that an oversecured

creditor is entitled to postpetition interest on its claim only "to

10
In the instant case, the parties agreed that FSA could accrue
interest under § 506(b) when its claim became oversecured. Thus,
the parties agreement comports with our reading of the law under §
506(b).

15
the extent that such interest, when added to the principal amount

of the claim, [does not] exceed the value of the collateral."

Timbers, 484 U.S. at 372, 108 S.Ct. at 631; see also Landmark

Financial Serv. v. Hall, 918 F.2d 1150, 1155 (4th Cir.1990) (an

oversecured creditor's claim may include interest up to the value

of the collateral). Thus, the amount of interest allowed under §

506(b) is limited to that amount of interest which, when added to

the amount of FSA's allowed claim, will not exceed the value of its

collateral.

Finally, we address FSA's assertion that the bankruptcy court

erred in valuing the Hotel at $13.7 million at the confirmation

hearing. The Bankruptcy Code does not prescribe any particular

method of valuing collateral, but instead leaves valuation

questions to judges on a case-by-case basis. See House Rep. No 95-

595, 95th Cong. 1st Sess. 216, 356 (1977), reprinted in 1978

U.S.S.C.A.N. 5963, 6176, 6312. Valuation is a mixed question of

law and fact, the factual premises being subject to review on a

clearly erroneous standard, and the legal conclusion being subject

to de novo review. In re Clark Pipe & Supply Co., Inc., 893 F.2d

693, 697-98 (5th Cir.1990). Value under § 506 is to be determined

in light of the purpose of the valuation and of the proposed

disposition or use of the property. Associates Commercial Corp. v.

Rash, No. 96-454, 1997 WL 321231, at *5, --- U.S. ----, ----, ---

S.Ct. ----, ----, --- L.Ed.2d ---- (U.S. June 16, 1997); In re

Sandy Ridge Dev. Corp., 881 F.2d 1346 (5th Cir.1989). In this

particular case, valuation was made for the purpose of plan

16
confirmation. We note that FSA's appraisal expert agreed with T-H

NOLP's expert regarding the Hotel's value once FSA's appraisal

incorporated the overhead allocation charge, which the bankruptcy

court found to be a necessary expense. Therefore, based on our

review of the record, we concluded that the bankruptcy court did

not err in its valuation of the Hotel. We find FSA's remaining

arguments to be without merit.

2. The Postconfirmation Interest Rate

The bankruptcy court's calculation of an appropriate

"cramdown" interest rate for purposes of Chapter 11 plan

confirmation is reviewed for clear error. In re Briscoe Enter.,

Ltd., II, 994 F.2d 1160, 1169 (5th Cir.1993); see also In re

Bryson Properties, XVIII, 961 F.2d 496, 500 n. 4 (4th Cir.1992).

T-H NOLP urges this Court to establish a particular formula for

determining an appropriate cramdown interest rate. We decline. As

we recognized in Briscoe, "[c]ourts have used a wide variety of

different rates as benchmarks in computing the appropriate interest

rate (or discount rate as it is frequently termed) for the specific

risk level in their cases." Id. We will not tie the hands of the

lower courts as they make the factual determination involved in

establishing an appropriate interest rate; they have the job of

weighing the witness' testimony, demeanor and credibility. Thus,

absent clear error, we will not disturb the bankruptcy court's

determination.

In the instant case, the bond financing documents provided for

an interest rate of 11.5% per annum. During the confirmation

17
hearing, the bankruptcy court heard testimony from T-H NOLP's and

FSA's financing experts. T-H NOLP's hotel financing expert, Joel

Ross, stated that in his opinion the appropriate interest rate that

T-H NOLP should pay to FSA under the Plan was 8.45%.11 On

cross-examination, however, Ross admitted that he did not know of

any lender to whom he would recommend making this loan at an 8.45%

interest rate. FSA's interest rate expert, John Keeling, testified

that the appropriate interest rate under the Plan would be 13.6% if

the Hotel were valued at $13.7 million, and 14.6% if the Hotel were

valued at $15.4 million. Keeling's opinion regarding this interest

rate range was based on a lender having the same loan documentation

as FSA. Keeling's methodology was to break down the loan into

components, and to fix a rate dependent upon how much debt service

would be available for each component.12

The bankruptcy court, after considering Ross' and Keeling's

testimony, concluded that neither interest rate proposed was an

appropriate interest rate. The court found that as to Ross'

proposed interest rate of 8.45%, this interest rate would not

11
Ross determined this by adding 210 basis points to the
two-year U.S. Treasury rate, resulting in an interest rate under
the Plan of 8.45% as of September 21, 1994.
12
According to Keeling's methodology, the first component would
comprise 60-70% of the debt and would carry a 9.75% interest rate
because a debt service ratio of 1.4 would be available. This
component was determined by adding 3.25% to two-year treasuries
which were 6.7% as of October 3, 1994. The second component,
comprising 10% of the debt (described as mezzanine financing),
would carry a 12.75% interest rate. The third component would be
serviced as to interest only, no amortization, and would carry a
16.25% interest rate. The fourth component would not receive
current interest or amortization and would carry a 25% interest
rate.

18
adequately compensate FSA for not receiving its money on the Plan's

effective date. With respect to Keeling's proposed interest rate

of 13.6%, the bankruptcy court found this rate too high, given that

there was expert testimony that the value of the Hotel would

increase over the next two years, and evidence that T-H NOLP would

be able to make its payments under the Plan. Based on these

findings, the bankruptcy court determined that the appropriate

cramdown interest rate under 11 U.S.C. § 1129(b)(2)(A)(i)(II)

should be the contract rate of 11.5%. We find no reason to

disagree.

Bankruptcy Code § 1129(b)(2)(A)(i)(II) has been interpreted to

require that the total deferred payments have a present value equal

to the amount of the secured claim. In re Bryson Properties,

XVIII, 961 F.2d 496, 500 (4th Cir.1992). T-H NOLP argues that the

postconfirmation interest rate should be 8.45% which would allow

FSA to recover the allowed amount of its claim. T-H NOLP relies on

footnote 47 in Briscoe as support for its argument that in

determining the appropriate cramdown interest rate to a secured

creditor's claim, this Court should refer to the Treasury rate and

add a case-specific risk premium. On the other hand, FSA argues

that the interest rate Keeling proffered should be used in the

Plan. We decline both suggestions.

Our review discloses that the bankruptcy court's use of the

contract rate reflects the present value of FSA's claim and

accounts for the specific risk level in this case. We explained in

Briscoe that "[o]ften the contract rate will be an appropriate

19
rate," Id., and that "[n]umerous courts have chosen the contract

rate if it seemed to be a good estimate as to the appropriate

discount rate," Id. (citing In re Monnier Bros., 755 F.2d 1336 (8th

Cir.1985)). In Briscoe the risk premium was more than 50% of the

riskless rate, whereas in the instant case, the contract rate of

11.5% was more than 1.7 times that of the riskless two-year

Treasury rate. The bankruptcy court concluded that the contract

rate of 11.5% included a risk premium to account for the increased

risk FSA would bear as a claimant under the Plan and for not

receiving its money today. In other words, the contract rate was

a reasonable rate that adequately compensated for risk. See Id.

Accordingly, we hold that the bankruptcy court was not clearly

erroneous in its determination of the appropriate cramdown interest

rate in T-H NOLP's amended Plan.

3. T-H NOLP's Amended Plan of Reorganization

We now turn to FSA's arguments regarding T-H NOLP's amended

Plan and the bankruptcy court's confirmation of the amended Plan.

On appeal, FSA contends that T-H NOLP's Plan was not feasible under

Bankruptcy Code § 1129(a)(11), that the Plan was not proposed in

good faith under § 1129(a)(3), and that the Plan was a liquidating

Plan under § 1141(d)(3). We address each of these in turn.

A. The § 1129(a)(11) Feasibility Requirement

Section 1129(a)(11) codifies the feasibility requirement and

requires that confirmation of the plan is not likely to be followed

by liquidation or the need for further financial reorganization,

unless such liquidation or reorganization is proposed in the plan.

20
11 U.S.C. § 1129(a)(11). To allow confirmation, the bankruptcy

court must make a specific finding that the plan as proposed is

feasible. In re M & S Assoc., Ltd., 138 B.R. 845, 848

(Bankr.W.D.Tex.1992). The standard of proof required by the debtor

to prove a Chapter 11 plan's feasibility is by a preponderance of

the evidence, Briscoe, 994 F.2d at 1165, and we review the

bankruptcy court's finding that a debtor's plan is feasible under

the clearly erroneous standard. Id. at 1166.

In determining whether a debtor's Chapter 11 plan of

reorganization is feasible, we noted in Briscoe that "the

[bankruptcy] court need not require a guarantee of success ...,

[o]nly a reasonable assurance of commercial viability is required."

Id. at 1165-66; see also Kane v. Johns-Manville Corp., 843 F.2d

636 (2nd Cir.1988). All the bankruptcy court must find is that the

plan offer "a reasonable probability of success." In re Landing

Assoc., Ltd., 157 B.R. 791, 820 (Bankr.W.D.Tex.1993).

The bankruptcy court found that the Plan was feasible based on

the following: (1) that T-H NOLP would be able to service the debt

at an 11.5% interest rate with an infusion of capital by the

principals as modified in the Plan; (2) the earning power of T-H

NOLP after the reorganization; (3) the past performance of T-H

NOLP's business operations; (4) the ability of T-H NOLP's

management; and (5) the economic picture for hotels in New

Orleans. Based on these findings, the bankruptcy court found that

T-H NOLP's Plan had a reasonable assurance of commercial viability.

FSA argues that the Plan does not satisfy the feasibility

21
requirement of § 1129(a)(11) because T-H NOLP cannot fulfill its

commitments during the initial two years under the Plan. FSA

primarily contends that T-H NOLP erred by using higher revenue

projections for showing feasibility while using lower projections

for collateral valuations, that there was no basis to believe that

T-H NOLP's revenue projections would be obtained, and that the

Hotel's value would have to appreciate in order to satisfy the

Plan.13

FSA has not asserted any "clear error" basis that would

warrant reversal of the bankruptcy court's feasibility finding.

With respect to FSA's contention regarding how the projections were

utilized and that the revenues projected could not be obtained, we

cannot conclude that the bankruptcy court erred in determining that

T-H NOLP's Plan was feasible. We agree with the notion that

"[w]here the projections are credible, based upon the balancing of

all testimony, evidence, and documentation, even if the projections

are aggressive, the court may find the plan feasible." In re

Lakeside Global II, Ltd., 116 B.R. 499, 508 n. 20

(Bankr.S.D.Tex.1989). Debtors are not required to view business

and economic prospects in the worst possible light. In re Western

Real Estate Fund, Inc., 75 B.R. 580, 585 (Bankr.W.D.Okla.1987).

The factors set forth by the bankruptcy court as to the feasibility

of T-H NOLP's Plan are not untenable nor unreasonable. Our review

13
FSA also asserts that if the Hotel is sold under the Plan,
there is no credit worthiness test for the new purchaser. However,
we note that FSA does not disclose how this affects the Plan's
feasibility, and we refuse to speculate on this point without
references to the record or legal authority.

22
of the evidence discloses that actual net revenues increased by

over eight percent from 1993 to 1994, and that for the year 1994

the actual net operating cash flow was greater than the amount

projected for that year. Moreover, as stated previously, the

Hotel's revenue stream has enabled T-H NOLP to reduce the amount of

FSA's claim considerably since the petition date. In addition, the

evidence reflects a reasonable expectation that the payments

required to be made during the term of the Plan will be made.

Thus, we find no clear error regarding feasibility on this point.

Regarding FSA's argument that the Hotel's value will have to

appreciate in order the satisfy the Plan, the bankruptcy court

found that T-H NOLP could pay off FSA's claim. As stated above,

the Plan included several alternatives which could reasonably

result in the full payment of FSA's claim; for example, by

refinancing, a balloon payment at the end of twenty-four months,

the sale of the Hotel to a third party, or a dation en paiement.

In In re Nite Lite Inns, 17 B.R. 367, 369-70 (Bankr.S.D.Cal.1982),

the bankruptcy court found feasible a plan which contemplated

liquidation in the event the debtor defaulted, since such

liquidation was proposed in the plan. See also In re Sandy Ridge

Dev. Corp., 881 F.2d 1346 (5th Cir.1989) (finding that a

liquidating reorganization under Chapter 11 did not violate §

1129(a)(11)). We agree with the bankruptcy court in Nite Lite

Inns, that a debtor's plan is feasible where at least one of the

alternative proposals is feasible. Therefore, because T-H NOLP's

Plan included several alternatives which would fully satisfy FSA's

23
claim, we conclude that the bankruptcy court did not err in finding

that the Plan was feasible under § 1129(a)(11).

B. The § 1129(a)(3) Good Faith Requirement

Section 1129(a)(3) requires that a debtor's plan be proposed

in good faith and not by any means forbidden by law. 11 U.S.C. §

1129(a)(3). The requirement of good faith must be viewed in light

of the totality of the circumstances surrounding establishment of

a Chapter 11 plan, keeping in mind the purpose of the Bankruptcy

Code is to give debtors a reasonable opportunity to make a fresh

start. In re Sun Country Dev., Inc., 764 F.2d 406, 408 (5th

Cir.1985). "Where the plan is proposed with the legitimate and

honest purpose to reorganize and has a reasonable hope of success,

the good faith requirement of § 1129(a)(3) is satisfied." Id. A

debtor's plan may satisfy the good faith requirement even though

the plan may not be one which the creditors would themselves design

and indeed may not be confirmable. In re Briscoe Enter., Ltd., II,

994 F.2d 1160, 1167 (5th Cir.1993). The standard of proof required

by the debtor to prove a Chapter 11 plan was proposed in good faith

is by a preponderance of the evidence. Id. at 1165.

The Plan in this case provided that T-H NOLP would make

payments for twenty-four months commencing on the Plan's effective

date. In addition, the Plan proposed various time lines during

which the classes of claim would be extinguished, including FSA's

claim. The bankruptcy court found that the Plan was proposed in

good faith.

FSA contends that the Plan was not proposed in good faith for

24
two reasons. First, FSA argues that under the Plan, T-H NOLP is

required to actively market the Hotel for the highest possible

price and, although FSA bid its full claim at the confirmation

hearing, T-H NOLP did not sell. Thus, FSA contends that T-H NOLP's

refusal to sell amounts to a lack of good faith. We disagree with

FSA's assertion.

This Court's review of the amended Plan disclosed that if T-H

NOLP received an offer to purchase the Hotel, the Trustee (FSA) had

a right of first refusal. Amended Plan Article 5(E). If FSA

elected to acquire the Hotel pursuant to its right of first

refusal, FSA had the right to credit bid an amount up to the

allowed amount of its final allowed claim. Amended Plan Article

5(F). During the confirmation hearing, FSA's counsel asked Maria

Cheng, FSA's Vice President, "if the Debtor were to put the hotel

up for sale today, is FSA ready, willing and able to ... credit bid

[the amount of its claim]." Cheng responded affirmatively.

(Confirmation Hearing Transcript p. 107). However, we note that

there were no other parties present at the hearing which offered to

purchase the Hotel and, thus, based on the plain language of the

Plan, FSA's right of first refusal never matured. See, e.g., In re

Table Talk, Inc., 53 B.R. 937 (Bankr.D.Mass.1985) (right of first

refusal granted to bidder by trustee was exercisable after

competitive bid was proffered). Consequently, we find that FSA's

argument on this point must fail.

Secondly, FSA argues that T-H NOLP's control persons

commenced bankruptcy proceedings for all six partnerships in four

25
different courts, and that because T-H NOLP resisted FSA's efforts

to consolidate the instant case with the other bankruptcy cases

taking place in other jurisdictions, T-H NOLP's Plan was not

proposed in good faith. The bankruptcy court denied FSA's requests

to consolidate or change venue. We find FSA's argument meritless.

We cannot see any nexus between the "good faith" requirement and T-

H NOLP's resisting consolidation of the instant case which would

preclude a debtor's plan from being proposed in good faith.

Accordingly, we refuse to read into the statutory requirement of

"good faith" a mandate that the debtor is precluded from resisting

any attempt by a creditor, such as FSA, to consolidate bankruptcy

proceedings. FSA's contention has no bearing on whether the

proposed plan will result in reorganization of T-H NOLP or whether

the Plan has a reasonable hope of success. Based on the above, we

find that the bankruptcy court did not err in determining that T-H

NOLP's Plan was proposed in good faith.

C. § 1141(d)(3) & Liquidating Plans

Generally, under § 1141(d)(1)(A) of the Bankruptcy Code,

confirmation of a plan of reorganization grants the Chapter 11

debtor a discharge of all debts arising prior to confirmation. 11

U.S.C. § 1141(d)(1)(A). However, § 1141(d)(3) provides that in a

Chapter 11 case the debtor may be denied discharge upon

confirmation of the plan if the following three requirements are

present: (1) the plan provides for the liquidation of all or

substantially all of the property of the estate (§ 1141(d)(3)(A));

(2) the debtor does not engage in business after consummation of

26
the plan (§ 1141(d)(3)(B)); and (3) the debtor would be denied a

discharge under § 727(a) of this title if the case were a case

under chapter 7 of this title (§ 1141(d)(3)(C)). 11 U.S.C. §

1141(d)(3).

The bankruptcy court and the district court found that the

Plan was not a liquidation plan because the Plan did not satisfy

the three nondischarge requirements of § 1141(d)(3). On appeal,

FSA argues that the Plan was a liquidation plan since under the

Plan, T-H NOLP will operate the Hotel for only twenty four months

or until the Hotel is sold or otherwise disposed of, whichever

occurs first. In addition, FSA asserts that the bankruptcy court's

reasoning was erroneous. We disagree, and affirm the bankruptcy

court's reading of § 1141(d)(3).

Under the first requirement, the plan must "provide[ ] for

the liquidation of all or substantially all of the property of the

estate." 11 U.S.C. § 1141(d)(3)(A).14 According to T-H NOLP's

14
The legislative history to § 1141(d) states:

Paragraph (3) specifies that the debtor is not discharged
by the confirmation of a plan if the plan is a
liquidating plan and if the debtor would be denied a
discharge in a liquidation case under Section 727.
Specifically, if all or substantially all of the
distribution under the plan is of all or substantially
all of the property of the estate or the proceeds of it,
if the business, if any, of the debtor does not continue,
and if the debtor would be denied a discharge under
section 727 (such as if the debtor were not an individual
or if he had committed an act that would lead to denial
of discharge), then the Chapter 11 discharge is not
granted.

House Rep. No. 95-595, 95th Cong. 1st Sess. 418-19 (1977),
reprinted in, 1978 U.S.C.C.A.N. 5963, 6374-75.

27
Plan, there are three options with respect to the Hotel: (1) the

refinancing of FSA's debt and paying FSA in full; (2) the sale of

the Hotel; or (3) the transfer of the Hotel to FSA in satisfaction

of its nonrecourse debt. The first option proposed by T-H NOLP

does not result in liquidation of the property, but instead results

in liquidation of FSA's claim, and obviously is the one preferred

by T-H NOLP. Moreover, if T-H NOLP is successful in refinancing the

debt, its business operations will continue. The record discloses

that during the two-year period following the effective date of the

Plan,15 T-H NOLP will pursue the refinancing option simultaneously

with its efforts to market the Hotel under the second option.

However, no evidence was presented to support the fact that

refinancing within two years was so unlikely that sale of the Hotel

(option two under the Plan) or dation en paiement (option three

under the Plan) were the only viable options. We also note that

FSA fails to cite any authority for the proposition that where one

alternative of a Plan is liquidation of the property two years

after a plan's effective date, it constitutes a liquidation under

1141(d)(3)(A). We refuse to so hold. Because requirement (A) of

§ 1141(d)(3) is not met and this section requires that all three

requirements be present in order to deny the debtor a discharge, we

conclude that the bankruptcy court was correct in finding that T-H

15
T-H NOLP's conducting business for two years following Plan
confirmation satisfies § 1141(d)(3)(B). Compare In re Wood Family
Interests, Ltd., 135 B.R. 407 (Bankr.D.Colo.1989) (holding that
partnership debtor was not entitled to a discharge where its
reorganization plan provided for discontinuation of its business
upon confirmation).

28
NOLP's Plan was not a liquidation plan. FSA's remaining arguments

that T-H NOLP's Plan is a liquidating plan are meritless.

CONCLUSION

Based on the foregoing discussion, the district court's

judgment affirming the bankruptcy court's judgment is AFFIRMED.

AFFIRMED.

29