Stone Hedge Properties v. Phoenix Capital Corp. (In re Stone Hedge Properties)

Stone Hedge Properties (debtor) obtained a mortgage from PNC Bank to finance the construction of a golf course. The mortgage was secured by collateral including the golf course, the golf course’s equipment, and a nearby housing development. Stone Hedge and PNC subsequently restructured the debt, but Stone Hedge could not make regular payments after the restructuring and filed a chapter 11 bankruptcy petition. The schedules filed with the petition listed PNC’s claim as undisputed, liquidated, and noncontingent. PNC then sold the mortgage to Phoenix Capital Corporation (creditor), a company run by former employees of the PNC subsidiary that had been servicing the mortgage. Although the balance due on the mortgage was $2,350,000, Phoenix paid PNC only $1,315,000. Phoenix then filed a proof of claim for $2,592,789.36 in the bankruptcy proceeding, which represented the face amount of the mortgage plus interest, fees, and costs. Phoenix also asserted that the collateral securing the debt was worth $2,080,000, which meant that part of Phoenix’s debt was unsecured. Stone Hedge objected to Phoenix’s claim, arguing that it would be inequitable to allow Phoenix to profit on the mortgage when Phoenix’s principals might have had insider information from their previous employment. Stone Hedge further argued that if the claim were allowed, it should be limited to the $1,315,000 Phoenix paid for the mortgage. Stone Hedge also disputed Phoenix’s valuation, asserting that the collateral was worth at least $4.5 million. Stone Hedge and Phoenix gave the court separate proposed plans for Stone Hedge’s reorganization. Both parties’ plans treated Phoenix as a fully secured creditor whose claim would eventually be allowed. Phoenix asked the court to temporarily allow its claim under Federal Rule of Bankruptcy Procedure 3018 so that Phoenix could vote on Stone Hedge’s reorganization plan. Phoenix also asked the court to value the collateral. Appraisers testified that the collateral was worth $2,567,000.