First National Bank of Durango v. Woods (In re Woods)

A three judge panel of the Bankruptcy Appellate Panel for the Tenth Circuit (the “BAP”) affirmed the confirmation of a chapter 12 plan of reorganization over the objection of an over-secured lender on six issues. The BAP held: (1) the over-secured lender’s debt, which was secured by the debtors’ principal residence arose out of the operation of a farming operation because the principal residence was an integral part of the farming operation; (2) the bankruptcy court did not abuse its discretion by admitting, as non-hearsay admissions of a party-opponent, two older appraisals commissioned by the over-secured lender, but which were offered only by the debtors; (3) The Till prime-rate plus risk analysis determines the post-confirmation interest rate on secured claims in a chapter 12 case; (4) a plan proponent is not required to demonstrate the repayment period in the plan for a secured claim is a repayment period available in the market; (5) the debtors demonstrated their plan, which had a seven year repayment term, was feasible with projections that forecasted only three years of revenue and expenses; and (6) an over-secured creditor seeking attorneys’ fees and costs under 11 U.S.C. § 506(b) must comply with Fed. R. Bankr. P. 2016 and provide detailed statements of time, services and expenses for which reimbursement is sought.
Procedural context:
The bankruptcy court confirmed debtors’ chapter 12 plan of reorganization over the objection of an over-secured lender. The over-secured lender appealed to the Bankruptcy Appellate Panel of the Tenth Circuit.
Debtors borrowed $480,000 from First National Bank of Durango (the “Bank”) for the purpose of constructing a house on property the debtors already owned and on which the debtors conducted a horse-boarding and hay raising operation. The office and headquarters of the debtors’ operations were in the house. At the time of the confirmation hearing, the Bank’s debt, excluding attorneys’ fees, was approximately $503,000. The value of the property in which the Bank had a security interest was valued between $600,000 and $750,000. Prior to the bankruptcy case, the Bank commissioned two appraisals of the debtors' property. At the evidentiary hearing on confirmation, the Bank did not offer those appraisals or the appraiser who made the appraisals to testify about the values stated in the appraisals. The debtors, however, did offer those appraisals as evidence of what the Bank believed the value of the property was. The BAP approved the plan's post-confirmation interest rate of 5.25%. There was no dispute that the then-current prime rate was 3.25%. Debtors and the Bank each presented expert testimony about the appropriate risk adjustment. The Bank offered testimony that the lowest interest rate it offered on a loan of the type at issue in the case was 6.5%. The Bank’s expert testified that the lowest interest rate he would offer was 13%. The debtors’ expert characterized the loan as primarily a real estate loan, for which interest rates in the range of 4.7% to 5.1% were available. The bankruptcy court confirmed the debtors’ plan that contained a seven-year repayment term for the debt to the Bank. Evidence showed that the Bank had previously offered debtors a seven-year permanent loan after the construction loan matured. The bankruptcy court also found that the primary collateral for the Bank’s repayment was real estate, for which thirty year terms were available and common. On feasibility, the debtors offered financial projections that forecasted three years of revenue and expenses. The debtors also testified that they intended to continue their operations and would, if necessary, sell assets and/or refinance the Bank’s debt. Moreover, the Debtors’ expert testified that the plan was “very doable.” As an over-secured creditor, the Bank sought approximately $92,000 in attorneys’ fees and costs. However, the Bank’s only evidence of the amount of attorneys’ fees and costs was a summary. The Bank did not offer any exhibits that detailed the time for which the Bank’s attorneys billed or the expenses claimed by the Bank.
Cornish, Michael, and Nugent

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