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Full Opinion
CONSOLIDATED OPINION REGARDING MOTION TO ASSUME SHOPPING CENTER LEASE, CONFIRMATION OF PLANS OF REORGANIZATION, AND RELATED MOTIONS
These controversies present the latest episode of an ongoing public saga that found its way to this Court, when the Chapter 11 bankruptcy filing of one debtor (Patriot Place) spawned yet another Chapter 11 bankruptcy filing by a different debtor (Three Legged Monkey). This latest episode became a battle between one debtor (Patriot Place, the owner and landlord of Hawkins Plaza) that wants to sell its business at Hawkins Plaza to the City of El Paso to settle its ground lease dispute with the City ā and the other debtor (Three Legged Monkey, a rather notorious tenant at Hawkins Plaza) that is fighting the proposed sale to the City so that it can save its business at Hawkins Plaza. Many interesting factual and legal issues are presented in this very unusual and highly contentious battle between two separate
Will this be the final episode of the saga? Regrettably, no.
I.
INTRODUCTION
A. CONSOLIDATED HEARING AND CONSOLIDATED OPINION
On November 15 and 16, and December 6, 7, and 11, 2012, the Court conducted a consolidated hearing (herein āConsolidated Hearingā) with respect to the following contested matters: (1) Motion to Assume Non-Residential Lease of Real Property With Patriot Place Pursuant to 11 U.S.C. Ā§ 365 filed by Three-Legged Monkey L.P. in case no. 12-31019 (dkt# 18), and all objections and responses thereto; (2) confirmation of the competing Second Amended Plan of Reorganization, as amended, filed by Three Legged Monkey L.P. in case no. 11-31024 (dkt# 275, 358), and all objections and responses thereto; (3) confirmation of the Third Amended Plan of Reorganization, as modified, filed by Patriot Place Ltd. in case no. 11-31024 (dkt# 283, 348, 367, 396) and all objections and responses thereto; (4) Motion For Determination of Value of Leasehold Interest of Three Legged Monkey at Hawkins Plaza Shopping Center Pursuant to 11 U.S.C; Ā§ 363(e) and (f) filed by Patriot Place Ltd. in case no. 11-31024 (dkt# 330), and all objections and responses thereto; (5) Expedited Motion To Designate the Classes of 1(A) and 3 As Being Unimpaired and Strike the Ballots of Such Classes As Not Being Accepted, Solicited or Procured in Good faith Pursuant to 11 U.S.C. Ā§ 1126(E) filed by Three Legged Monkey L.P. in case no. 11-31024 (dkt# 337), and all objections and responses thereto; and (6) Request to Strike Ballots of Three Legged Monkey filed by Patriot Place Ltd. in case no. 11-31024 (dkt# 357), and all objections and responses thereto (herein collectively āContested Matters ā).
The Court consolidated the hearing and evidence on all of the Contested Matters under Rules 7042(a)(1) and 9014(c) of the Federal Rules of Bankruptcy Procedure (herein āBankruptcy Rules ā) due to the common questions of fact and law, as well as the common witnesses, exhibits and evidence with respect to the Contested Matters.
This Consolidated Opinion constitutes the Courtās findings of fact and conclusions of law with respect to each of the Contested Matters in accordance with Bankruptcy Rules 7052(a)(1) and 9014(c).
B. JURISDICTION
The Court has jurisdiction over each of the Contested Matters under 28 U.S.C. Ā§Ā§ 157 and 1334. The Contested Matters arise in bankruptcy cases referred to this Court by the Standing Order of Reference entered in this District. The Contested Matters are core proceedings pursuant to 28 U.S.C. Ā§ 157(b)(2)(A), (L), (M) and (N). The Court is authorized to enter a Final
II.
PROCEDURAL BACKGROUND
A. BANKRUPTCY CASES ā PROCEDURAL BACKGROUND
On May 30, 2011, Patriot Place Ltd. (herein āPPL ā), as a debtor, filed a voluntary petition under Chapter 11 of the Bankruptcy Code in this Court, case no. 11-31024 (herein āPPL Case ā). PPL owns and operates a shopping center known as Hawkins Plaza, and leases space to various tenants.
On July 26, 2011, PPL filed a Motion For Order Authorizing the Assumption of Commercial Ground Lease with the El Paso International Airport/City of El Paso (herein āMotion to Assume Ground Leaseā) in the PPL Case (PPL Case, dkt# 29). In general, through this Motion, PPL sought to assume a Commercial Ground Lease dated May 10, 1996 (herein āGround Lease ā) between PPL, as lessee, and the City of El Paso (herein āCity ā), as lessor. Shortly thereafter, on July 29, 2011, PPL filed an Omnibus Motion For Order Authorizing Assumption of Fifteen Unexpired Leases with Current Tenants of Hawkins Plaza (herein āMotion to Assume Tenant Leases ā) (PPL Case, dkt# 34). In general, through this Motion, PPL sought to assume the leases with its tenants at Hawkins Plaza, including its shopping center lease with Three Legged Monkey L.P.
In August and September 2011, the City filed Objections to PPLās Motion to Assume Ground Lease and Motion to Assume Tenant Leases (PPL Case, dkt# 36, 41, 62). In general, through such Objections, the City contended that the Ground Lease could not be assumed and should be terminated, primarily based on the activities of the Three-Legged Monkey L.P., a tenant of PPL. On August 18, 2011, City Bank (āCity Bankā) filed a Response and Join-der, supporting PPLās Motion to Assume Ground Lease (PPL Case, dkt# 39). At these partiesā request, the Court entered a Scheduling Order on September 8, 2011 with respect to the Motion to Assume Ground Lease and related Motions (PPL case, dkt # 57). Such Scheduling Order set a hearing on the merits for December 16, 2011 on the Motion to Assume Ground Lease and related Motions, and ordered PPL, the City, and City Bank to participate in mediation in an effort to resolve their disputes. Due to the length of the mediation, and at the request of these parties, the Court amended and extended various deadlines in the Scheduling Order.
The mediation between PPL and the City was conducted before retired Bankruptcy Judge Frank R. Monroe over a period of several months. This mediation culminated in a Settlement Agreement dated May 23, 2012 between the City and PPL (herein āSettlement Agreementā), which was subject to Court approval through a Plan of Reorganization to be filed by PPL (PPL Case, dkt# 283, Ex. A). As a result, the Court continued the hearing on the merits on the Motion to Assume Ground Lease, Motion to Assume Tenant Leases, and related Motions, so that approval of the Settlement Agreement could be sought from the Court. The Court also set a deadline of June 11, 2012 for PPL to file a proposed Plan of Reorganization seeking Court approval of the Settlement Agreement (PPL Case, dkt# 161). The Settlement Agreement between PPL and the City, provided, in part, for the termination of the shopping center lease between PPL and Three Legged Monkey L.P., and the sale of Hawkins Plaza by PPL to the City.
Shortly thereafter, on June 2, 2012, Three Legged Monkey L.P. (herein āSLM ā) as a debtor, filed a voluntary peti
On June 28, 2012, PPL filed a Motion For Relief From Automatic Stay in the 3LM Case (3LM Case, dkt# 21), which was opposed by 3LM. On August 16, 2012, the Court conducted a hearing on such Motion. By Order entered August 17, 2012, the Court granted such Motion and lifted the automatic stay in the 3LM Case so that PPL could proceed with seeking confirmation of its Plan of Reorganization in the PPL Case (herein āOrder Lifting Stay ā) (3LM Case, dkt# 62).
B. CONTESTED MATTERS ā PROCEDURAL BACKGROUND
On June 12, 2012, PPL filed its proposed Plan of Reorganization and accompanying Disclosure Statement in the PPL Case, based on its Settlement Agreement with the City (PPL Case, dkt# 169, 170). Following a series of hearings and various amendments, PPL filed its proposed Third Amended Plan of Reorganization on September 20, 2012 (PPL Case, dkt# 283). On September 21, 2012, the Court entered an Order approving PPLās Third Amended Disclosure Statement for its proposed Third Amended Plan and set November 15, 2012 as the date for the confirmation hearing on the PPL Third Amended Plan (PPL Case, dkt# 284).
The PPL Third Amended Plan with accompanying Disclosure Statement was then mailed to creditors and parties in interest for voting and objections. On November 2, 2012, PPL filed its Ballot Summary reflecting the voting by creditors on the PPL Third Amended Plan (herein āPPL Plan Ballot Summary ā) (PPL Case, dkt# 328). Limited objections to confirmation of PPLās Third Amended Plan were filed by the City of El Paso Tax Assessor and the U.S. Trustee, which were later withdrawn (PPL Case, dkt # 313, 316). Significant objections to confirmation of PPLās Third Amended Plan were filed by 3LM and Monaco Entertainment Group (herein āMonaco ā) (PPL Case, dkt# 324, 322). Thereafter, PPL filed its First Preconfirmation Modification to its Third Amended Plan (PPL Case, dkt# 348), its Second Preconfirmation Modification to its Third Amended Plan (PPL Case, dkt# 367), and finally its Third Preconfirmation Modification to its Third Amended Plan (PPL Case, dkt# 396). PPLās Third Amended Plan of Reorganization, as modified by such First, Second and Third Preconfirmation Modifications (PPL Case, dkt# 283, 348, 367, 396) are collectively referred to herein as the āPPL Planā. Confirmation of the PPL Plan is one of the Contested Matters that was the subject of the Consolidated Hearing and of this Consolidated Opinion.
On August 15, 2012, 3LM filed a proposed competing Plan of Reorganization for PPL in the PPL Case, and accompanying Disclosure Statement (PPL Case, dkt# 221, 222). Following a series of hearings and various amendments, 3LM filed its proposed competing Second Amended Plan of Reorganization for PPL on September 19, 2012 (PPL Case, dkt# 275). On September 21, 2012, the Court entered an Order approving 3LMās Second Amended Disclosure Statement for its proposed competing Second Amended Plan and set November 15, 2012 as the date for the confirmation hearing on the PPL Third Amended Plan (PPL Case, dkt# 285).
On November 5, 2012, PPL filed a Motion For Determination of Value of Leasehold Interest of Three Legged Monkey at Hawkins Plaza Shopping Center Pursuant to 11 U.S.C. Ā§ 363(e) and (f) in the PPL Case (herein āMotion to Value Leasehold ā) (PPL Case, dkt# 330). On November 14, 2012, 3LM filed its Objection to the Motion to Value Leasehold, and on November 14, 2012 PPL filed its Reply (PPL Case, dkt# 359, 363). The Motion to Value Leasehold is one of the Contested Matters that was the subject of the Consolidated Hearing and of this Consolidated Opinion.
On November 7, 2012, 3LM filed its Expedited Motion To Designate the Classes of 1(A) and 3 As Being Unimpaired and Strike the Ballots of Such Classes As Not Being Accepted, Solicited or Procured in Good faith Pursuant to 11 U.S.C. Ā§ 1126(E) in the PPL Case (herein ā3LM Motion to Strike Ballotsā) (PPL Case, dkt# 337). In general, through such Motion, 3LM sought to strike the ballots of City Bank and other tenants which voted in favor of the PPL Plan. On November 13, 2012, City Bank and PPL filed Responses to the 3LM Motion to Strike Ballots (PPL Case, dkt# 355, 357). The 3LM Motion to Strike Ballots is one of the Contested Matters that was the subject of the Consolidated Hearing and of this Consolidated Opinion.
On November 13, 2012, PPL filed a Request to Strike Ballots of Three Legged Monkey in the PPL Case (herein āPPL Request to Strike Ballots ā) (PPL Case, dkt# 357). In general, through such Request, PPL sought to strike the ballots of 3LM, who voted against the PPL Plan. The PPL Request to Strike Ballots is one of the Contested Matters that was the subject of the Consolidated Hearing and of this Consolidated Opinion.
Meanwhile, in the 3LM Case, 3LM filed a Motion to Assume Non-Residential Lease of Real Property With Patriot Place Pursuant to 11 U.S.C. Ā§ 365 on June 25, 2012 (herein āMotion to Assume Shopping Center Lease ā) (3LM Case, dkt# 18). In general, through this Motion, 3LM sought to assume the Shopping Center Lease between 3LM, as tenant, and PPL, as landlord. In July, August, and November 2012, PPL filed Objections, as amended
Following completion of the Consolidated Hearing and closing arguments with respect to the Contested Matters held on December 11, 2012, the Court entered an Order setting December 19, 2012 as the deadline for the filing of plan modifications, certain post-hearing statements, and any post-hearing briefs (PPL Case, dkt # 390; 3LM Case, dkt# 168). On December 19, 2012, PPL filed its Third Preconfir-mation Modification to its Third Amended Plan, Proposed Disbursement of Sales Proceeds and Deposits under the PPL Plan, and Memorandum of Authorities in Support of Confirmation of the PPL Plan (PPL Case, dkt# 396, 397, 398). On December 19, 2012, 3LM filed its Posh-Trial Brief and Notice of Estimate of Professional Fees (3LM Case, dkt# 173, 174; PPL Case, dkt# 395). On December 20, 2012, the City filed its Statement regarding confirmation of the PPL Plan (PPL Case, dkt# 399). On January 2, 2013, 3LM filed a Response to PPLās Third Pre-confirmation Modification to its Third Amended Plan (PPL Case, dkt# 401).
III.
FACTUAL BACKGROUND AND FINDINGS OF FACT
On November 15 and 16, and December 6, 7, and 11, 2012, the Court conducted the Consolidated Hearing. Six witnesses testified at the Consolidated Hearing: (1) David Brandt (herein āBrandt ā), the principal of PPL; (2) James Michael (āMikeā) Armstrong (herein āArmstrong ā), the principal of 3LM; (3) Ralph (āPeteā) Sellers (herein āSellersā), an El Paso real estate appraiser and consultant retained by PPL; (4) Ann Lee Herkenhoff (herein āHerken-hoffā), a City Bank representative; (5) Maria Mejia (herein āMejia ā), former administrative assistant to District 3 City of El Paso Representative Lozano and former Interim District 3 City of El Paso Representative; and (6) Ayida Gallardo (herein āGallardoā), 3LMās bookkeeper. Numerous exhibits were admitted into evidence by PPL (herein āPPL Ex.ā), 3LM (herein āSLM Ex.ā), and City Bank (herein āCity Bank Ex.ā).
Background
Hawkins Plaza Ltd. entered into a Commercial Ground Lease (herein āGround Lease ā) with the City of El Paso (herein āCityā) for the Hawkins Plaza Shopping Center (herein āHawkins Plaza ā) on May 10, 1996 (PPL Ex. 1). The Ground Lease was assigned from Hawkins Plaza, Ltd. to PPL on March 10,1995 as part of Hawkins Plaza Ltd.ās plan of reorganization in bankruptcy case no. 93-30278. Hawkins Plaza is a shopping center located at 1550 Hawkins Boulevard, El Paso, Texas. Hawkins Plaza is on real estate that is part of the El Paso International Airport (herein āAirportā) which is owned by the City (PPL Ex. 1). The stated term of the Ground Lease expires in the year 2025.
PPL leases space in Hawkins Plaza to numerous retail tenants, including 3LM. Brandt testified at the Consolidated Hearing that there were 12 tenants currently at Hawkins Plaza, including 3LM. Of these leases, all but 3LMās are relatively short-term leases.
PPL first entered into a lease in 2003 with 3LM. Thereafter, PPL and 3LM entered into a Shopping Center Lease Agreement dated November 28, 2005 (herein āShopping Center Lease ā) (PPL Ex. 2). The Shopping Center Lease has a stated term of 20 years and expires in 2025, and increased the leased space to 7,271 sq. ft., encompassing suites 2-6 of Hawkins Plaza (PPL Ex. 2).
At the Consolidated Hearing, Armstrong testified that 3LM requested a long term lease from PPL because he realized the value of the Hawkins Plaza location and viewed it as an asset. Armstrong also wanted to preserve the improvements 3LM had made to the leased premises and the 3LM brand that he had created at Hawkins Plaza. Immediately after signing the Shopping Center Lease, 3LM made the new suites accessible to the old suite that 3LM had already been leasing from PPL, in addition to making bathroom renovations, and purchasing new equipment. In total these renovations cost 3LM about $100,000.
3LM operates a sports bar and restaurant in Hawkins Plaza known as the āThree Legged Monkeyā. 3LM currently employs about 30 persons, and has historically been a profitable business. 3LM has paid its rent and CAM charges on time to PPL under the Shopping Center Lease except for one instance when 3LM paid its rent eight days late, because 3LM was setting up a required debtor-in-possession account once it filed Chapter 11 bankruptcy. 3LM is the major and anchor tenant in the Hawkins Plaza, from a rent paying perspective.
Issues with Neighbors/City/TABC
In the past, the 3LM establishment has been plagued with complaints from some residential neighbors in the nearby and well-established Cielo Vista neighborhood. Such complaints appear to have been centered on the behavior of 3LMās patrons, including parking in the neighborhood, sometimes unruly behavior, and noise emanating from the 3LM establishment. These neighbors, in turn, apparently have complained to the City. The City, in turn, has complained to PPL. PPL, in turn, has complained to 3LM. Armstrong testified at the Consolidated Hearing that the complaints came from a small number of vocal neighbors.
At the Consolidated Hearing, Armstrong stated that when 3LM first became a tenant at Hawkins Plaza, there were no parking problems. According to Armstrong, parking problems began in 2007 when Wet Ultra Lounge nightclub (herein āWet ā) became a tenant at Hawkins Plaza. Moreover, Armstrong said that once Wet left Hawkins Plaza in 2010, there were no longer any parking issues, and that today there is adequate parking at Hawkins Plaza for 3LMās patrons. Brandt (on behalf of PPL) testified that some neighbors first complained to the City about 3LM in January 2008. Brandt admitted that parking was a big problem at Hawkins Plaza and that Wet was a big contributor to the parking problem. Armstrong testified that Brandt told him sometime after 2010 that the problems with neighbors did not exist anymore, based on the deposition of John Billingsley (apparently a Cielo Vista
3LM for its part, attempted to appease the complaints by meeting with City officials and neighbors, increasing security, working with PPL to obtain additional parking, reducing its occupancy level, and changing its business model from primarily a bar to a restaurant. Perhaps as a natural result of neighborhood complaints, the Texas Alcoholic Beverage Commission (herein āTABCā) has also closely monitored 3LM, and challenged (albeit unsuccessfully to date) 3LMās liquor license. 3LM has also addressed the situation by hiring lawyers, filing lawsuits, and fighting back, sometimes needlessly escalating the situation.
PPL has, for the most part, been stuck in the middle of this dispute between its major tenant (3LM) and its ground lessor (the City). For example, on March 28, 2011, counsel for the City sent one of many demand letters to PPL. Such demand letter alleged that PPL was in default on the Ground Lease by failing to operate Hawkins Plaza as a āfirst class shopping centerā pursuant to the Ground Lease, which was based primarily on 3LMās establishment (PPL Ex. 3). The City claimed PPL had allowed Hawkins Plaza to be used by (1) persons armed with deadly weapons who were involved in a fatal shooting; (2) persons engaging in fighting; (3) loud, drunken patrons engaging in noxious and offensive conduct that has disrupted the adjoining neighborhood; and (4) subles-sees who permitted those same uses (PPL Ex. 3). The City also asserted parking violations under Article IV, āDevelopment of Site ā Required Improvements.ā The City demanded that PPL ācomply with the covenants and conditions required in the [Ground Lease] and cure the foregoing violations by immediately implementing all means necessary to prevent further violationsā [added] (PPL Ex. 3).
On April 25, 2011, counsel for PPL sent a lengthy response to the City in de facto defense of 3LM that disputed the alleged defaults in the Ground Lease (3LM Ex. 4). This letter detailed remedial measures undertaken by PPL to cure any alleged defaults and also denied that PPL was not operating a āfirst class shopping centerā because the City had allowed 3LM and other bars to lease at Hawkins Plaza. At the Consolidated Hearing, Armstrong testified that PPL leased to bars and restaurants that served alcohol throughout the ten years that 3LM had been a tenant at Hawkins Plaza. Armstrong also maintained that he operated 3LM as a bar and restaurant in compliance with the terms of the Shopping Center Lease. Both Armstrong (on behalf of 3LM) and Brandt (on behalf of PPL) testified that there was no default under the Ground Lease with the City, and that Hawkins Plaza was a āfirst class shopping centerā as required under the Ground Lease with the City.
At the Consolidated Hearing, Brandt (on behalf of PPL) and Armstrong (on behalf of 3LM) testified that during this time frame they began discussions with the City to obtain additional parking space. Brandt (on behalf of PPL) even agreed to lease an unpaved lot connected to Hawkins Plaza from the City. However, according to Armstrong and Brandt, the City would not allow PPL to pave the area they had leased from the City for parking. According to Armstrong, the City also refused to lease the adjacent City swimming pool or golf course parking lot, even though the City permitted this type of parking arrangement with bars and restaurants in other areas of El Paso.
Mejia, who in early 2008 worked as the Interim District 3 City of El Paso Representative ā which encompassed both Hawkins Plaza and the Cielo Vista neighborhood ā testified at the Consolidated
One catalyst for the current dispute occurred in May 2008 when 3LM hosted a āDrinko de Mayoā event in the Hawkins Plaza parking lot. Thousands of guests came to the party and parked in the surrounding Cielo Vista neighborhood. At the Consolidated Hearing, Armstrong testified that 3LM obtained both the TABC and PPLās approval for this event. However, Brandt stated that he did not remember Armstrong asking for PPL permission to have the event in the Hawkins Plaza parking lot. Armstrong said that although the Drinko de Mayo event was very successful financially for 3LM, it hurt 3LMās relationship with the neighbors, which led Armstrong to decide that 3LM would never again have another parking lot event.
In an attempt to resolve the Cityās and neighborsā concerns, PPL and the City mediated their dispute for two days in 2010. According to Brandt, two neighborhood representatives attended the mediation and advocated for 3LMās removal from Hawkins Plaza, and as a result the mediation failed to produce a resolution.
During this time frame, 3LM undertook remedial measures to address the concerns of the City, neighbors, and the TABC. At the Consolidated Hearing, Armstrong testified that 3LM installed sound reducing foam at 3LM to reduce the noise levels at a cost of about $10,000. In a June 2010 Agreed Order with the TABC (herein ā2010 Agreed TABC Orderā), 3LM and Armstrong also voluntarily agreed to: (1) reduce the 3LM occupancy level from 695 to 500 and station a doorperson at the front door with a counter device after 9:00 pm; (2) employ 1-8 security staff to clear the parking lot from Wednesday through Sunday nights; (3) turn off music at 1:50 am, stop selling alcohol at 2:00 am, ensure patrons have ceased consumption by 2:15 am, and begin to clear out the parking lot by 2:30 am; (4) permanently cease any promotional parties or events in the parking lot; (5) agree to take decibels level measurements from the street at 11:00 pm and 1:00 am each night; (6) prohibit minors in the establishment after 8:00 pm; (7) install signs in the parking lot stating āNo Loiteringā and āNo Cruisingā; (8) extend the hours of food sales to 12:00 am; (9) have 3LM employees attend a bi-annual MAPS classes as TABC scheduled; and (10) attend a quarterly meeting with the TABC and El Paso Police Department to address any outstanding concerns (PPL Ex. 26). Armstrong testified that as part of these changes, he also decided to remake 3LMās business model as ā3LM 2.0ā, which consisted of including more food items on the menu ā thereby necessitating hiring more cooks ā and attempting to create more of a family friendly sports atmosphere by installing games and decorating 3LM with sports paraphernalia.
Based on this February 2011 shooting incident and alleged violations of the 2010 Agreed TABC Order, the TABC initiated an administrative proceeding against 3LM in the State Office of Administrative Hearings (herein āSOAH ā) before an Administrative Law Judge, seeking to cancel 3LMās liquor permit. In the SOAH administrative proceeding, 3LM and the TABC appeared for a ācommon nuisanceā hearing in October 2011. On November 2, 2011, the Administrative Law Judge issued an Order Memorializing Agreed Additional Conditions on Permit and Denying Condition for Early Closure Based on Common Nuisance (herein ā2011 TABC Orderā), which denied the common nuisance claim against 3LM (PPL Ex. 36). The 2011 TABC Order also added the following conditions to 3LMās business, with the agreement of 3LM: (1) no unaccompanied minor would be allowed on the premises after 8:00 pm, and no minor whatsoever would be allowed after 11:00 pm; (2) 3LM would contract with three security guards to control the parking lot, rear driveway, and other exterior areas of the premises from Friday through Sunday from 10:00 pm to 2:00 am; (3) security guards would prevent loitering; (4) personnel would be stationed at each unlocked exit or entrance on Friday through Sunday from 10:00 pm to 2:00 am to prevent entry of unauthorized persons and persons exiting with alcoholic beverages; (5) 3LM would place signs on each entrance and exit door informing patrons how to contact the TABC for the purpose of making complaints; and (6) 3LM would provide weekly reports of the occupancy levels of the premises during business hours (PPL Ex. 36).
Very recently, on November 5, 2012 and after hearing evidence, the Administrative Law Judge in the SOAH proceeding issued a Proposal for Decision (herein āPFD ā). The Administrative Law Judge recommended that 3LMās liquor permit not be cancelled based on the violations alleged by the TABC and the February 2011 shooting incident outside 3LMās establishment (3LM Ex. 42). Among other findings, the Administrative Law Judge determined that āit [was] unreasonable to propose [3LM] could have controlled the shooting, predicted it, or prevented itā (3LM Ex. 42, p. 17). The Administrative Law Judge also found that āthe evidence [did] not prove [3LM] conducted [their] business in a manner in violation of the general welfare, health, peace, morals of the people and public sense of decencyā (3LM Ex. 42, p. 20). The only violation the Administrative Law Judge found was that 3LM exceeded the 500-person occupancy limit on one occasion in September 4, 2011. Accordingly, the Administrative Law Judge denied the TABCās request to cancel 3LMās liquor license.
PPL Chapter 11 Bankruptcy
When the City placed an item on the City Council Agenda to terminate the Ground Lease between PPL and the City ā largely based on the activities of 3LM ā PPL filed for Chapter 11 bankruptcy reorganization in this Court on May 30, 2011 (PPL Case, dkt# 1). Brandt testified that PPL filed for bankruptcy in good faith in an effort to protect a valuable asset ā its Ground Lease with the City for Hawkins Plaza. PPL has been operating as a debt- or-in-possession since the filing of its bankruptcy case. PPL has been a profitable enterprise, has remained current on its
Shortly after its bankruptcy filing, PPL filed its Motion to Assume Ground Lease with this Court in July 2011, whereby PPL sought to assume the Ground Lease with the City ā in essence bringing the fight about alleged defaults under the Ground Lease to this Court (PPL Case, dkt# 29). Not unexpectedly, the City vigorously opposed and objected to PPLās effort to assume the Ground Lease in PPLās bankruptcy case (PPL Case, dkt# 36). In July 2011, PPL also filed its Motion to Assume Tenant Leases with this Court, whereby PPL sought to assume the Shopping Center Lease with 3LM, and stated that 3LM was not in default under the Shopping Center Lease (PPL Case, dkt# 34).
The Court then set a hearing on the merits of the Motion to Assume Ground Lease, and ordered PPL and the City to participate in and attend a, mediation of their disputes (PPL Case, dkt# 57). After months of mediation, PPL and the City reached a settlement in May 2012 that is memorialized in the proposed Settlement Agreement which is the centerpiece of the PPL Plan. In short, the proposed Settlement Agreement provides that the City would purchase the Hawkins Plaza from PPL for approximately $2.9 million conditioned upon PPL terminating the Shopping Center Lease with 3LM and evicting 3LM from Hawkins Plaza first. Thus in one sense, through the proposed Settlement Agreement, PPL turned on 3LM after years of defending its tenant 3LM; but in another sense, the proposed Settlement Agreement provided a pool of money for PPL to pay to City Bank, income taxes generated from the sale, and some amount to 3LM as a displaced tenant.
3LM Chapter 11 Bankruptcy
The proposed Settlement Agreement with the City and threatened termination by PPL of the Shopping Center Lease with 3LM, precipitated yet another bankruptcy filing ā this time by 3LM. 3LM filed Chapter 11 bankruptcy on June 2, 2012 for essentially the same reason that PPL filed bankruptcy a year earlier ā in an effort to protect a valuable asset ā its Shopping Center Lease with PPL for its business at Hawkins Plaza (3LM Case, dkt# 1). 3LM has been operating as a debtor-in-possession since the filing of its bankruptcy case.
On June 25, 2012, 3LM filed a Motion to Assume the Shopping Center Lease with PPL (3LM Case, dkt# 18). At the Consolidated Hearing, Armstrong testified that 3LM wants to assume the Shopping Center Lease so that 3LM can continue to be a profitable business and to protect his employees. Armstrong testified that 3LM has been a profitable business since soon after it opened. Armstrong estimated that 3LM had close to 30 employees, and some of the employees and their families rely on 3LM as their sole source of income.
Armstrong testified at the Consolidated Hearing that 3LM now pays approximately $4,000 a month in Common Area Maintenance (herein āCAM ā) charges, which is due mostly to increased security provided by PPL. When 3LM first leased with PPL in 2003, their CAM charges were only approximately $600 a month. Armstrong said that 3LM paid a $3,000 security deposit when 3LM leased at Hawkins Plaza and indicated 3LM would be willing to increase the security deposit to equal 3LMās monthly rent if the Court requires it. Additionally, Armstrong stated ā and it was undisputed ā that 3LM has always paid rent on time to PPL except once in June 2012 when 3LM had to create a debtor-in-possession account as part of 3LMās bankruptcy, which caused the rent payment to be eight days late. Armstrong stated that he is confident that if these bankruptcy cases are resolved, he will be able to return 3LM to its 2008 profitability
At the Consolidated Hearing, Brandt (on behalf of PPL) testified that he did not believe 3LM would be able to perform on the Shopping Center Lease for the remainder of the leaseās term because in his opinion the City would continue to send notices of default in an attempt to remove 3LM from Hawkins Plaza.
On behalf of 3LM, Armstrong testified at the Consolidated Hearing that the area surrounding Hawkins Plaza has grown in the past ten years with the expansion of Ft. Bliss, a new shopping mall, a new community college, and a new hotel. Armstrong also said that he was very confident that this continued growth combined with 3LMās current business would enable 3LM to keep making payments on the Shopping Center Lease.
The evidence at the Consolidated Hearing demonstrated that 3LM has not always paid all of its bills and obligations on time. For example, a tax warrant was issued against 3LM in July 2011 (and thereafter paid by 3LM), and an ex-partner and judgment creditor had a writ of execution issued against 3LM in July 2011 (which was then paid by 3LM). (PPL Ex. 22, 42). 3LM has not always paid all of its taxes on time (such as personal property taxes and franchise taxes).
At the Consolidated Hearing, PPLās attorneys focused on 3LMās bankruptcy Monthly Operating Reports and yearly Profit and Loss Statements to argue that 3LMās profitability has been decreasing since 2008 (PPL Exs. 13-19). Armstrong admitted that 3LMās profits have decreased since 2008 because of bad publicity 3LM has received based on the neighborsā complaints, and because his wages increased when he added more food to his menu to change 3LMās business model. PPLās attorneys also contended 3LMās profits during its bankruptcy are questionable based on discrepancies in 3LMās Monthly Operating Reports (PPL Ex. 12 and 3LM Ex. 75). When 3LMās bookkeeper, Gallardo, was questioned by PPL as to why the cash on hand at the end of some preceding months in 3LMās monthly operating reports did not match the cash on hand at the beginning of the following month, Gallardo explained that during 3LMās bankruptcy she changed from a cash basis to accrual basis accounting, which caused the numbers to not match up.
PPL Notice of Default/Termination of Shopping Center Lease
On November 1, 2012, PPL sent written notice to 3LM that it was terminating the Shopping Center Lease effective November 14, 2012 (the day before the Consolidated Hearing commenced). This notice provided that in addition to numerous minor defaults, 3LM had violated Ā¶Ā¶ 4.1, 4.2, and 24.1 of the Shopping Center Lease by failing to timely pay personal property and franchise taxes (PPL Ex. 10). At the Consolidated Hearing, Brandt testified that PPL had the authority to terminate the Shopping Center Lease based on this Courtās Order Lifting Stay in the 3LM Case (3LM Case, dkt# 62). Brandt further stated that terminating a tenantās leases is in the ordinary course of PPLās business and that PPL had terminated approximately five or six leases since he began leasing Hawkins Plaza in 1989. However, Brandt testified that he could not recall if PPL had ever terminated a tenantās lease when the tenant consistently paid rent. In addition, when asked by 3LMās counsel whether terminating a lease at Hawkins Plaza happened āpretty rarelyā, Brandt responded that this was true. At the Consolidated Hearing, Armstrong testified that 3LM was not in default under any provisions of the Shopping Center
When asked by the Court, counsel for PPL stated that the only existing monetary defaults by 3LM under the Shopping Center Lease were its past due property taxes and franchise taxes, which was a default under Ā¶ 8.3 of the Shopping Center Lease. According to Proofs of Claim filed in the 3LM Case, 3LM owes $11,219 in property taxes to the City and $7,880 in Texas franchise taxes to the Texas Comptroller of Public Accounts (PPL Exs. 45, 52). At the Consolidated Hearing, Armstrong testified that 3LM was currently paying the past due amount of its franchise taxes and 3LM would pay its property taxes.
PPL Plan
PPL filed its Third Amended Plan of Reorganization on September 20, 2012, which was subsequently modified (herein āPPL Plan ā). In general, the PPL Plan seeks approval of the Settlement Agreement between PPL and the City in May 2012. At the Consolidated Hearing, Brandt emotionally testified that PPL entered into the Settlement Agreement with the City because he wanted to resolve the dispute with the City and was tired of having to defend 3LM for the past four years. The PPL Plan provides for the sale of Hawkins Plaza to the City free and clear of 3LMās leasehold interest under Ā§ 363 of the Bankruptcy Code and for eviction of 3LM as a tenant at Hawkins Plaza (PPL Case, dkt# 283). Additionally, the PPL Plan offers 3LM the greater of $250,000 or any adequate protection the Court may award under Ā§ 363(e) of the Bankruptcy Code (PPL Case, dkt# 396). As such, both parties questioned witnesses at the Consolidated Hearing as to the value of 3LMās leasehold interest at Hawkins Plaza for the purposes of adequate protection.
At various points during the Consolidated Hearing, Armstrong (on behalf of 3LM) estimated that it would cost $650,000 and $750,000 to move 3LMās business from Hawkins Plaza, including building a new kitchen with walk-in freezers, constructing a new bar, sprinkler installation, building a new patio, and marketing the new location. Armstrong also stated that 3LM would need approximately six months to move to a new location.
During his testimony regarding the cost of moving locations, Armstrong revealed that approximately four months before the Consolidated Hearing he signed an engagement letter with the landlord of a nearby property located at Montana and Yarbrough, and had placed a $30,000 deposit on the location. Not including any CAM charges, the rent at this location would be approximately $13,000 a month, which would be approximately $3,000 more per month than 3LM pays PPL in rent and CAM charges combined. Armstrong said this possible new location would require significant build-out, including plumbing, electricity, and architectural planning. According to Armstrong, although one side of the new space had been used as a nightclub, the other has been vacant. Armstrong also indicated that while 3LM would be able to move some of its property to this possible new location, 3LM would still have to purchase many new items. Additionally, Armstrong estimated that the possible new location was only 50 to 60% as good as Hawkins Plaza because the areaās traffic counts are not as high, there are not as many apartment complexes, and access to the location is more difficult.
However, on cross-examination, Sellers admitted that he did not take into account the time, cost, or risk associated with seeking both the bankruptcy courtās and the TABCās approval for 3LM to move locations and reapply for a liquor license, and did not include the value of 3LMās business in his calculation. Armstrong (on behalf of 3LM) strongly disagreed with Sellersā assessment of value, stating that Sellers did not understand TABC regulations, how to value a restaurant and bar such as 3LM, or the cost of a move of a restaurant and bar. Armstrong also said that 3LMās location at Hawkins Plaza was a big part of 3LMās value.
3LM Competing Plan
3LM filed its proposed competing Second Amended Plan of Reorganization for PPL on September 19, 2012 (herein ā3LM Competing Plan ā). In general, the 3LM Competing Plan provides for the reorganization of PPL, assumption of the Ground Lease with the City and Shopping Center Lease with 3LM, and continued operation at Hawkins Plaza by PPL with monthly payments to City Bank. The 3LM Competing Plan also provides for a Litigation Trust headed by Brandt as the Litigation Trustee, to pursue claims against the City and other persons. During closing arguments, 3LMās attorney admitted that 3LM included the Litigation Trust for leverage against the City.
At the Consolidated Hearing, Brandt unequivocally testified that he was unwilling to act as the Litigation Trustee under 3LMās Competing Plan. Brandt also testified he was unwilling to continue the operations of PPL under the 3LM Competing Plan. However, later Brandt indicated he would continue to operate PPL if he was forced to do so.
IV.
LEGAL ANALYSIS AND CONCLUSIONS OF LAW
One of the Contested Matters that is the subject of this Consolidated Opinion arises in the 3LM Case ā the Motion to Assume Shopping Center Lease filed by 3LM as debtor. The other Contested Matters that are the subject of this Consolidated Opinion arise in the PPL Case, which are: (1) confirmation of the 3LM Competing Plan for PPL filed by 3LM; (2) confirmation of the PPL Plan filed by PPL; and (3) certain PPL Plan-related Motions, namelyā the Motion to Value Leasehold filed by PPL, the 3LM Motion to Strike Ballots, and the PPL Request to Strike Ballots. The Court will analyze each of these Contested Matters in turn.
In the 3LM Case, 3LM is the Chapter 11 debtor. 3LM has filed a Motion to Assume Shopping Center Lease in the 3