Hard-Knocks Rule: Hiding True Reasons For A Position Can Backfire (In re Heaven’s Landing)

By: Donald L Swanson

Here’s a hard-knocks rule:

• When you can’t or won’t explain the true reason for taking a position in negotiations or litigation, distrust and suspicion of the worst-possible motives will follow.

An Exhibit A for this rule is an opinion issued February 9, 2023, in In re Heaven’s Landing, LLC, Case No. 20-21350, Northern Georgia Bankruptcy Court (Doc. 145). 

Here are illustrative statements from that opinion:

• “This case presents the rare situation where a debtor proposes to pay all of its creditors in cash in full”;
• “This case also has the even more rare situation where the secured creditor – or any creditor – is objecting to being paid in cash in full”;
• “In this Court’s 37 years of experience . . . , it has never seen a case where the secured lender, or any other creditor, has objected to being paid in full in cash”; and
• “Why else would [Secured Creditor] be objecting to getting paid in full in cash in a few weeks?” 
  • “It is obvious”:
  • Secured Creditor “wants the value of Debtor’s property . . . for itself to the detriment of the Debtor.”

Doc. 145, at 1, footnote 1, & 9 of 14 (emphasis added).

Now . . . Secured Creditor may have a perfectly good reason for objecting to a prompt payment in cash and in full.  But it either fails or refuses to provide a satisfactory explanation to the Court.

And, to no surprise, the Court denies Secured Creditor’s objection, confirms Debtor’s plan, and attributes improper motives to Secured Creditor’s actions.

Facts

A couple decades ago, Debtor acquires 635 acres of land in the North Georgia mountains and gets a $6 million bank loan to develop it into Heaven’s Landing:

• Heaven’s Landing is a residential fly-in community, with private runway for residents to fly their private planes in and out.

The Great Recession of 2008 hits North Georgia hard, and prices of homes in Heaven’s Landing collapse.

Then, Debtor’s lending bank fails, FDIC takes the Bank over, and another party acquires Debtor’s loan.

Debtor had been current on the bank loan, but that loan matures and the new lender will not renew it.

Forbearance and settlement machinations occur over multiple years, resulting a Third Party owning some of Heaven’s Landing real property.  That Third Party (i) obtains a separate loan from Secured Creditor, and (ii) pledges its own property to secure the separate loan.

Additionally, Debtor hypothecates its own real property to Secured Creditor as security for the separate loan to Third Party.

Everything comes to a head in 2020, with Debtor filing Subchapter V bankruptcy, when Secured Creditor begins foreclosing on Debtor’s property.

After an unsuccessful bankruptcy mediation, Debtor files an Amended Plan proposing to pay all creditors in full (including Secured Creditor), using cash from a new loan that would be secured by the same real property as the old loan.

The Amended Plan also provides that, upon paying Secured Creditor’s claim, Debtor is subrogated to Secured Creditor’s lien position on Third Party’s real property, under Georgia’s subrogation laws.

Secured Creditor objects to the Amended Plan for the ostensible reason that it does not want Debtor to be subrogated to its paid-off lien rights in Third Party’s property.

Ruling and Rationale

The Bankruptcy Court rejects Secured Creditor’s objection and confirms Debtor’s Amended Plan.  What follows is an abbreviated summary of the Court’s lengthy and detailed analysis.

Debtor argues that by pledging its property as collateral for the loan to Third Party, it:

• holds the status under Georgia law of a surety or guarantor; and
• is entitled, upon payment of the loan to Third Party, to be subrogated to Secured Creditor’s lien rights in Third Party’s property.

Secured Creditor argues that Debtor does not hold the status of a surety or guarantor because Debtor merely pledged its collateral and is not personally liable for the loan to Third Party.

Bankruptcy Court declares Debtor’s position to be correct, under Georgia law, because:

• Debtor formally signed an agreement pledging its property as collateral to secure payment of Secured Creditor’s loan to Third Party, and Debtor cannot sell its own property without paying that loan; 
• Georgia appellate courts have declared a hypothecation agreement (pledging property to secure a loan without incurring personal liability) to be analogous to and interchangeable with surety and guaranty agreements:
  • all “create an obligation” to have promisor’s property answer for the default of another; and
  • Such Georgia rulings “are by no means outliers or controversial but are just basic hornbook law” that are “going back to ‘old English common law’;”
• A party who pledges its property as collateral to secure the debt of another can qualify as a surety under Georgia law; and
• In this case, there is substantial value in Debtor’s real property over the amount of the loan to Third Party that it is pledged to secure.

The Court adds these equitable considerations.  Debtor is:

• not arguing for a cute surety defense to get off liability;
• proposing, instead, to pay Secured Creditor’s claim in full; and
• merely seeking the benefit of Georgia’s subrogation law—which benefits arise only when payment in full happens.

Moreover, disallowing subrogation rights, when Debtor pays in full, would be inequitable in its own right.

Future Claims

Secured Creditor argues that its claims are not being paid in full because of a right to share in future profits that is secured by existing liens.

Bankruptcy Court rejects this argument because:

• The Amended Plan subordinates Debtor’s subrogation rights to such future rights of Secured Creditor; and
• Subrogation restores the economic terms the parties negotiated in 2013 (a 77/22 split of profits) under which the parties operated for seven years until shortly before the bankruptcy.

Conclusion

Secured Creditor’s failure to provide a satisfactory explanation for objecting to prompt payment in full:

• Leads to rejection by the Bankruptcy Court of Secured Creditor’s objection; and
• More importantly, engenders a sense of distrust and suspicion of the worst intentions by Secured Creditor—i.e., to spirit away the large equity in Debtor’s property for itself.

That’s an Exhibit A for the hard-knocks rule identified above.

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