Jointly administered under Case No. 04-00757-W11.United States Bankruptcy Court, E.D. Washington.
June 9, 2004
Barry W. Davidson Davidson Medeiros Spokane, Washington, and Bruce W. Leaverton Mary Jo Heston Susan Brye Jahnke Lane Powell Spears Lubersky LLP, Seattle, Washington, Attorneys for Metropolitan Mortgage Securities Co., Inc., Debtor and Debtor-in-Possession.
Ford Elsaesser Doug B. Marks Bruce A. Anderson Elsaesser Jarzabek Anderson Marks Elliott McHugh, Chartered, Sandpoint, Idaho, and Jeffrey T. Wegner John J. Jolley, Jr. Kutak Rock LLP, Omaha, Nebraska, Attorneys for Summit Securities, Inc., Debtor and Debtor-in-Possession.
RANDALL DANSKIN, P.S., Anthony E. Grabicki, Attorneys for Metropolitan Unsecured Creditors’ Committee.
WITHERSPOON, KELLEY, DAVENPORT TOOLE, P.S., Michael D. Currin, Attorneys for IDS Life Insurance Company.
ORDER AUTHORIZING SUMMIT’S USE OF METROPOLITAN’S CASH COLLATERAL AND GRANTING ADEQUATE PROTECTION
PATRICIA WILLIAMS, Chief Judge, Bankruptcy
THIS MATTER having come before the Court on the Motion for Order Authorizing Summit’s Use of Metropolitan’s Cash Collateral and Granting
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Adequate Protection (Doc. No. 401) (the “Motion”) filed by the Debtors-in-Possession, Metropolitan Mortgage Securities, Co., Inc. (“Metropolitan”), and Summit Securities, Inc. (“Summit”) pursuant to 11 U.S.C. § 363 and Fed.R.Civ.P. 4001 and Local Bankruptcy Rule 4000-2(b)(1) and the Stipulation Authorizing Summit’s Use of Metropolitan’s Cash Collateral and Granting Adequate Protection (the “Stipulation”) by and between Summit and Metropolitan; having reviewed the Motion, the Stipulation and the Declarations of William A. Smith in Support of Motion for Order Authorizing Summit’s Use of Metropolitan’s Cash Collateral and Granting Adequate Protection (the “Smith Declarations”); having determined that cause exists to grant the Motion; and having determined that the Debtors’ notice to parties was adequate; IT IS THEREFORE ORDERED AS FOLLOWS:
FACTUAL FINDINGS
A. On February 4, 2004 (the “Petition Date”), Summit filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”). Summit continues to operate its businesses and manage its properties as debtor-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. Also on the Petition Date, Metropolitan filed a voluntary petition in this Court for relief under Chapter 11 of the Bankruptcy Code. Metropolitan continues to operate its businesses and manage its properties as
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debtor-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
B. Between 2000 and 2003, Metropolitan extended secured financing to Summit through various intercompany loans pursuant to various loan agreements supported by security agreements, promissory notes and related documents, including UCC filing statements and perfection certificates. As of the Petition Date, Summit was indebted to Metropolitan pursuant to the following intercompany secured loans:[1]
(a) Structured Settlement Notes: Metropolitan and Summit entered into a Sales Agreement dated September 29, 2000 pursuant to which Summit purchased certain assets of Metropolitan, consisting of various structured settlement and equipment lease receivables and the cash proceeds thereof (the “2000 Assets”). Metropolitan financed a portion of Summit’s purchase price pursuant to a Promissory Note executed by Summit dated September 29, 2000 in the original principal amount of $10,900,800.00 (the “2000 Note”). Summit’s payment obligations under the 2000 Note were secured by
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the stream of payments Summit expected to receive from the 2000 Assets purchased from Metropolitan.
Metropolitan and Summit subsequently entered into an Asset Purchase Agreement dated March 29, 2002 (the “2002 Agreement”) pursuant to which Metropolitan sold Summit additional assets (the “2002 Assets”). Metropolitan financed a portion of Summit’s purchase price for the 2002 Assets pursuant to an amendment to the 2000 Note (the “2000 Note Amendment”), which increased the principal balance of the 2000 Note as of March 29, 2002 to $13,762,887.34. The 2000 Note, as amended by the 2000 Note Amendment, is secured by certain of the 2000 Assets and the 2002 Assets as more particularly described in a Security Agreement dated March 29, 2002 by and between Summit and Metropolitan (collectively, the “Structured Settlement Portfolio Collateral”). Under the terms of the 2000 Note, as amended by the 2002 Note Amendment, Summit made annual payments to Metropolitan of approximately $2,234,355.00. As of the Petition Date, the outstanding principal balance owed Metropolitan under the 2000 Note, as amended by the 2002 Note Amendment, was approximately $9,775,482.00.
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Metropolitan filed UCC financing statements in an effort to perfect its security interest in the Structured Settlement Portfolio Collateral on December 4, 2003 and December 9, 2003, dates within 90 days of the Petition Date. Summit asserts that Metropolitan’s security interest in the Structured Settlement Portfolio Collateral may be avoided pursuant to 11 U.S.C. §§ 547, 550 and 551. Metropolitan asserts that it holds a security interest in the Structured Settlement Portfolio Collateral subject to possible avoidance. True and correct copies of the 2000 Note, the 2002 Note Amendment and the supporting loan documents evidencing Summit’s secured obligation to Metropolitan are attached as Exhibit A to the Smith Declaration and incorporated herein by reference.
Summit anticipates receiving post-petition collections from the Structured Settlement Portfolio Collateral, which Summit asserts are essential to its ability to operate its business and pay the administrative expenses of its Chapter 11 proceeding.
(b) Mortgage Backed Receivables Note: Summit is further indebted to Metropolitan pursuant to a Loan Agreement dated June 24, 2003 (the “Receivable Loan Agreement”) and a Promissory Note dated June 24, 2003 in the original principal amount of $4,023,877.05 (the “ReceivablePage 6
Note”). Summit’s obligations to Metropolitan under the Receivable Loan Agreement and Receivable Note are evidenced by a Security Agreement dated June 24, 2003 (the “Receivable Security Agreement”) encumbering certain of Summit’s assets, including: 1) seller financed mortgage notes and contracts for the sale of real estate; 2) tax liens on certain real property; 3) certain residual bonds; and 4) all proceeds thereof (collectively, the “Mortgage Backed Receivable Collateral”). True and correct copies of the Receivable Loan Agreement, the Receivable Security Agreement and the Receivable Note are attached as Exhibit B to the Smith Declaration and are incorporated herein by reference. Under the terms of the Receivable Loan Agreement and the Receivable Note, Summit paid Metropolitan regular interest only payments of approximately $5,000.00. As of the Petition Date, the outstanding principal balance owed Metropolitan under the Receivable Loan Agreement and Receivable Note was approximately $2,100,000.00.
The collections and proceeds Summit receives from the Mortgage Backed Receivable Collateral constitute cash collateral of Metropolitan pursuant to 11 U.S.C. § 363. Summit anticipates receiving post-petition collections from the Mortgage Backed Receivable Collateral, which SummitPage 7
asserts are essential to its ability to operate its business and pay the administrative expenses of its Chapter 11 proceeding.
(c) KOA Receivables Note: Summit executed a Loan Agreement dated September 16, 2003 (the “Koa Loan Agreement”) and a Promissory Note dated September 16, 2003 (the “Koa Note”) in favor of Metropolitan in the original principal amount of $16,000,000.00. Summit’s obligations to Metropolitan under the Koa Loan Agreement and Koa Note are secured by a Security Agreement dated September 16, 2003 granting Metropolitan a security interest in 420 shares of common stock of Summit Group Holding, Co., a Delaware corporation (“SGH Stock”), and Summit’s rights under a Timber Harvesting Agreement dated June 27, 2000 executed among Metropolitan, Hawaiian Forest Preservation LLC (“HFP”), KOA Timber, Inc. and various other parties (the “Timber Harvesting Agreement”).[2] The SGH Stock and rights under the Timber Harvesting Agreement are collectively referred to herein as the “Koa Receivable Collateral”. True and correct copies of the Koa Loan Agreement, the Koa Note and related loan documents are attached to the Smith Declaration at Exhibit C andPage 8
incorporated herein by reference. As of the Petition Date, the principal balance Summit owed Metropolitan under the Koa Loan Agreement and Koa Note was approximately $16,000,000.00. Under the Koa Note, Summit had been making interest-only payments to Metropolitan of $140,000.00 a month.
Although Metropolitan asserts that proceeds Summit receives from the Koa Receivable Collateral constitute cash collateral of Metropolitan, HFP has not made any payments on the Timber Harvesting Agreement since October 2000 and the underlying real property is currently subject to a pending foreclosure action commenced by Summit that is being litigated in Hawaii. Furthermore, no dividends have been paid on the SGH Stock.
C. The Structured Settlement Portfolio Collateral, the Mortgage Backed Receivable Collateral and the Koa Receivable Collateral collectively shall hereafter be referred to as “Metropolitan’s Cash Collateral”.
D. Summit asserts that the use of Metropolitan’s Cash Collateral is essential to Summit’s ability to fund operations and Chapter 11 administration expenses. Without the use of Metropolitan’s Cash Collateral, Summit asserts that its operations may be substantially and irreparably harmed. In order to avoid this harm, Summit may require the use of Metropolitan’s Cash Collateral to pay, among
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other items, utilities, taxes, insurance and ordinary business costs and expenses. The use of Metropolitan’s Cash Collateral is vital to Summit’s ability to reorganize and is therefore in the best interests of its estate and creditors.
E. Summit and Metropolitan contemplate pursuing a consensual joint plan of reorganization.
F. Metropolitan has, subject to approval from the Bankruptcy Court and the adequate protection provided herein, agreed to Summit’s use of Metropolitan’s Cash Collateral as set forth herein.
ORDER NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the Court orders as follows:
1. Summit shall separately account for Metropolitan’s Cash Collateral used subject to the Stipulation and Order. Summit shall also segregate Metropolitan’s Cash Collateral subject to its control for the benefit of Metropolitan;
2. Subject to the terms of this Order, Summit shall be authorized to use Metropolitan’s Cash Collateral for the period February 4, 2004 through June 30, 2004 (the “Expiration Date”) for the budgeted expenses set forth in the Summit Cash Budget (the “Summit Cash Budget”) attached hereto as Exhibit A;
3. Summit’s authority to use Metropolitan’s Cash Collateral is limited to
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the cumulative amounts and uses of cash collateral as set forth in each line item of the Summit Cash Budget (but specifically excluding, absent a court order, any pre-petition claims and expenses, including authorized pre-petition wages, benefits and related employee expenses, or any other pre-petition creditor with a security interest in Summit’s pre-petition cash and cash equivalents, or any administrative professional fees and costs). Summit may not exceed any such line item by a variance of more than ten-percent 10% of the amount contained in the Summit Cash Budget without the prior written consent of Metropolitan and the Metropolitan Unsecured Creditors’ Committee. The consent to the line item expenses set forth in the Summit Cash Budget shall not be construed as authorization by any creditor for Summit to accrue, and Summit shall not accrue, additional liabilities, or create any obligation or agreement on behalf of Summit to subordinate, expressly or by implication, any claims or rights of Metropolitan to payment from Summit. Absent a court order, Summit shall not use Metropolitan’s Cash Collateral to purchase or lease office space or equipment or fixtures without the express consent of Metropolitan and the Metropolitan Unsecured Creditors’ Committee;
4. Metropolitan shall retain all of its valid, non-avoidable pre-petition security interests in all of Metropolitan’s collateral (the “Metropolitan Pre-Petition Collateral”) subject to Summit’s rights pursuant to 11 U.S.C. §§ 547, 550 and 551.
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Metropolitan is further granted adequate protection liens in the Structured Settlement Portfolio Collateral and in any Metropolitan Cash Collateral arising after the Petition Date and in the assets listed on the attached Exhibit B for any diminution in the value of Metropolitan’s interest in Metropolitan’s Cash Collateral and the cash proceeds and products thereof, which Adequate Protection Liens shall be superior to all other liens in the same collateral other than Metropolitan’s pre-petition liens in Metropolitan’s Cash Collateral, subject to the provisions of paragraph 5 of this Order; provided, however, that in the event Metropolitan’s pre-petition lien on the Structured Settlement Portfolio Collateral is avoided or avoidable as determined by an agreement of Metropolitan and the Metropolitan Unsecured Creditors’ Committee, the adequate protection liens granted to Metropolitan herein in the assets described on Exhibit B shall be null and void and the adequate protection liens granted in the Structured Settlement Portfolio Collateral herein shall be limited to the extent of any diminution in the value of the Mortgage Backed Receivable Collateral and the KOA Receivable Collateral as a result of Summit’s use thereof;
5. As adequate protection for any diminution in the value of the interests of any other party in interest based upon valid, perfected and unavoidable lien claims or security interests in Metropolitan’s Cash Collateral, the Court grants an
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adequate protection lien (the “Third-Party Adequate Protection Liens”) against the same category of property to which any valid lien of such party was perfected prior to filing of this case, such that should a party hold a lien or security interest in cash expended under the Summit Cash Budget, the Third-Party Adequate Protection Lien(s) will attach to the same category or categories of property to which such lien or security interest originally attached and will have a priority based on the priority that existed in Summit’s property as of the Petition Date;
6. No further documentation shall be necessary to evidence Metropolitan’s or any other party’s Adequate Protection Liens, although Summit is authorized to execute any and all security documents necessary to implement or perfect the foregoing Adequate Protection Liens or to give notice to third parties of the same. The automatic stay imposed pursuant to Section 362 of the Bankruptcy Code is modified to permit Metropolitan to prepare, file, and serve, as appropriate, financing statements and other documents to perfect the Adequate Protection Lien granted by this Order;
7. The authority of Summit to use Metropolitan’s Pre-Petition Collateral and Metropolitan’s Cash Collateral shall pursuant to this Order terminate automatically upon the earliest to occur of: (a) Summit’s failure to cure, after notice to Summit from Metropolitan, any material terms of this Order as further set forth
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below; (b) conversion of Summit’s Chapter 11 case to one under Chapter 7 of the Bankruptcy Code; (c) 12:01 a.m. PST on June 30, 2004; or (d) the appointment of a trustee in Summit’s Chapter 11 case. Moreover, notwithstanding the termination of this Order or Summit’s ability to use Metropolitan’s Pre-Petition Collateral or Cash Collateral for any reason, Metropolitan’s Pre-Petition Collateral and Cash Collateral may continue to be used, to the extent of any expenses approved under this Order or the Summit Cash Budget prior to such termination, to pay checks presented for payment of expenses actually incurred during the term of this Order even though the term of this Order may have expired. In the event of a material breach of the terms of this Order, Summit’s use of Metropolitan’s Cash Collateral shall not be deemed automatically terminated pursuant to the provisions of this paragraph unless and until Summit fails to cure any such default or breach within two (2) business day’s following written notice of any such default or breach to Summit’s attorneys, Kutak Rock LLP and Elsaesser Jarzabek Anderson Marks Elliott McHugh, Chtd.;
8. Summit is authorized to use Metropolitan’s Cash Collateral to pay fees to the United States Trustee. The failure of any party to strictly enforce any right conferred by this Order shall not constitute a waiver of such rights;
9. By consenting to Summit’s use of Metropolitan’s Pre-Petition
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Collateral and Cash Collateral pursuant to the terms of the Motion and the Stipulation, Metropolitan does not waive any rights to later assert that, notwithstanding the terms and provisions of this Order, that its interest in Metropolitan’s Pre-Petition Collateral and Cash Collateral lacks (or at any time lacked) adequate protection within the meaning of Sections 362(d)(1) and 363(e) of the Bankruptcy Code, including Metropolitan’s right to assert a claim against Summit under 11 U.S.C. § 507(b);
10. This Order shall take effect upon entry. Nothing contained in this Order shall prejudice any party’s right to apply for a later order modifying the terms stated herein on appropriate grounds and after notice and opportunity for a hearing. The use of Metropolitan’s Cash Collateral after the Expiration Date, if any, shall be the subject of further order of the Court;
11. Nothing in this Order shall preclude (i) any party in interest from claiming a lien against, or security interest in, Metropolitan’s Pre-Petition Collateral and Cash Collateral; and (ii) Summit or any party in interest from avoiding or objecting to the validity, priority or extent of the security interests claimed by Metropolitan in the Metropolitan Pre-Petition Collateral or Cash Collateral. This Order specifically reserves all issues relating to the lien avoidance, validity, extent or priority of all such liens and security interests, as well as all issues relating to any
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right of setoff under 11 U.S.C. § 553;
12. Nothing contained in this Order shall be construed in any form as consent by Metropolitan to any further use of Metropolitan’s Pre-Petition Collateral and Cash Collateral, nor as imposing any liability on Metropolitan to any third party. Additionally, Summit may not use or apply Metropolitan’s Pre-Petition Collateral or Cash Collateral or the proceeds thereof to fund litigation or pursue claims and actions challenging any legal right or remedy of Metropolitan in their respective Chapter 11 cases or as granted pursuant to this Order, except that Summit’s ordinary review of Metropolitan’s loan documents and security agreements to confirm Metropolitan’s secured claim shall not constitute such a challenge. Further, Metropolitan’s consent to the use of Metropolitan’s Cash Collateral is limited to the items set forth in the Summit Cash Budget;
13. With respect to professional fees, Metropolitan does not consent to the use of Metropolitan’s Cash Collateral to pay any professionals other than those retained in the Chapter 11 case pursuant to Section 327 of the Bankruptcy Code; and
14. Nothing contained in this Order shall be construed to deem Metropolitan to be in control of Summit’s property, operations or management or to be acting as a “responsible person” within the meaning of any state or federal
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statute or regulation with respect to Summit’s assets, property, operations or management.
EXHIBIT A ORDER REGARDING CASH COLLATERAL Summit Securities, Inc. Cash Flow Report Per Request fromCreditors Committee Counsel For Cash Collateral Agreement5/21/04
Exhibit B MADSEN COURT: All of Summit Securities’ right, title and interest in that real property commonly known as Madsen Court Lot, situated in Liberty Lake, Washington, and legally described in that quit claim deed executed by Total Concepts Business Park, LLC, grantor, in favor of Summit Securities Inc., grantee, said deed filed of record on September 7, 2000 in Spokane County, Washington, Auditor’s File 4514183. Estimated value: $138,750.
KOYAH: All of Summit Securities’ right, title and interest as limited partner in Koyah Leverage Partners, LP, a Delaware limited partnership formed February 3, 1998. Estimated value: $590,000.
MAFI: All of Summit Securities’ right, title and interest in Mortgage Pass-Through Certificates, Series 1999-A, Metropolitan Asset Funding Inc., Depositor, Metropolitan Mortgage Securities Co., Inc. and Western United Assurance Company, Sellers, and Metwest Mortgage Services Inc., Master Servicer. Estimated value: $140,000.
BETHEL COURT: All of Summit Securities’ right, title and interest in those Loans to Bethel Properties LLC, consisting of the following evidence of indebtedness and security instruments:
1. One (1) original Construction Loan Promissory Note, as amended, in the face amount of $600,000,00, dated October 27, 1999, wherein Bethel Properties, L.L.C. is the Maker of the Note and Summit Securities, Inc. is the Payee/Holder;
2. One (1) original Open End Construction Mortgage Deed, as corrected, and dated October 27, 1999 granted by Bethel Properties, L.L.C. as Grantor or Borrower, in favor of Summit Securities, Inc., as Grantee, to secure payment of the above referenced Construction Loan Promissory Note, against real property commonly known as 268 Greenwood Avenue, Bethel, Connecticut, located in Fairfield County, State of Connecticut; and,
3. One (1) original Collateral Assignment of Leases and Rents dated October 27, 1999 given by Bethel Properties, L.L.C. as Assignor, as modified and in favor of Summit Securities, Inc., as Assignee.
Estimated value: $405,000.
AIRWAY BUSINESS CENTER: All of Summit Securities’ right, title and interest in that tract of land situated within that real property commonly known as the Airway Business Center, said tract located in Airway Heights, Washington, and legally described in that statutory warranty deed executed by SLR Properties LLC, grantor, in favor of Summit Securities Inc., grantee, said deed filed of record on June 13, 2002 in Spokane County, Washington, Auditor’s File 4738752. Estimated value: $67,500.
ALTERNATIVE CASH FLOWS: All of Summit Securities’ right, title and interest in unpledged alternative cash flow receivables, including, but not limited to, general and/or payment intangibles consisting of lottery prizes, sweepstakes prizes, music royalties, business notes and assignable annuities. Estimated value: $1,500,000.
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