In the Matter of: HOUSTON REGIONAL SPORTS NETWORK, L.P. Debtor
v.
HOUSTON ASTROS, L.L.C.; ASTROS HRSN GP HOLDINGS, L.L.C.; ASTROS HRSN LP HOLDINGS, L.L.C.; ROCKET BALL, LIMITED; ROCKETS PARTNER, L.P., Appellees. HOUSTON SPORTSNET FINANCE, L.L.C.; COMCAST SPORTS MANAGEMENT SERVICES, L.L.C.; NATIONAL DIGITAL TELEVISION CENTER, L.L.C., doing business as Comcast Media Center; NBCUNIVERSAL MEDIA, L.L.C.; SPORTSCHANNEL NEW ENGLAND, L.L.C.; SPORTSCHANNEL PACIFIC ASSOCIATES; HOUSTON SPORTSNET HOLDINGS, L.L.C., Appellants,
Appeal
from the United States District Court for the Southern
District of Texas
Before
WIENER, PRADO, and OWEN, Circuit Judges.
PRISCILLA R. OWEN, Circuit Judge
Comcast[1] loaned Houston Regional
Sports Network, L.P. (the Network) $100 million, secured by a
lien on substantially all of the Network's tangible and
intangible assets. Included in the assets was an Affiliation
Agreement (the Agreement) pursuant to which a Comcast
subsidiary agreed to pay the Network to carry the
Network's content on its cable systems. The Network
involuntarily entered bankruptcy, and before a plan of
reorganization was confirmed, Comcast elected to treat its
entire claim as secured. The bankruptcy court then conducted
a valuation of the Network's assets, including the
Agreement. The valuation was as of the date of the bankruptcy
petition, and, after deducting the Network's unpaid media
fees from the Agreement's valuation, the court concluded
that the Agreement had no value. The district court affirmed.
Because the district court did not consider the value of
Comcast's collateral in light of the reality of the plan
of reorganization and accordingly deducted waived Network
liabilities from the Agreement's value, we remand for
further proceedings consistent with this opinion.
I
Houston
Regional Sports Network, L.P. is a television network that
was formed by the Houston Astros baseball team and Houston
Rockets basketball team (the Teams)[2] to televise their respective
games. The Network entered into media-rights agreements with
each of the Teams, pursuant to which the Network was granted
exclusive rights to broadcast games in exchange for fees. The
Network also entered into an Affiliation Agreement with
Comcast Cable Communications, LLC, pursuant to which Comcast
would carry the Network on its cable systems through 2032, in
exchange for a monthly fee based on the number of Comcast
subscribers. In 2010, a Comcast affiliate provided a $100
million loan to the Network, secured by a lien on
substantially all of the Network's tangible and
intangible assets, including the Agreement but not the
Teams' media rights.
In July
and August 2013, the Network defaulted on consecutive
payments to the Astros. The Astros sent a notice of default
stating that if the Network did not cure the default by
September 29, the Astros would have the right to terminate
its agreement with the Network. On September 27, various
Comcast entities filed an involuntary Chapter 11 petition
against the Network. The Astros filed a motion to dismiss the
petition, which the bankruptcy court denied. After the
petition was filed but before the bankruptcy court ruled on
its validity, Comcast and the Teams began negotiations for
Comcast to purchase the Network out of bankruptcy, but no
agreement was reached. Instead, the Teams entered into an
agreement with AT&T and DirecTV. The agreement provided
that AT&T and DirecTV would acquire all of the equity in
the Network and enter into separate agreements to pay the
Network for the right to broadcast the Network's content.
The
sale agreement with AT&T and DirecTV was included in a
plan of reorganization (the Plan), which the bankruptcy court
confirmed in October 2014. Under the Plan, the Teams agreed
to waive their rights to approximately $107 million in
media-rights fees owed by the Network that had accrued during
the bankruptcy.
Before
the Plan was confirmed, Comcast made an election pursuant to
11 U.S.C. § 1111(b), which permits an undersecured
creditor-a secured creditor whose collateral is worth less
than its claim-to elect to have its claim treated as fully,
rather than partially, secured.[3] This election guaranteed Comcast
the right to receive a stream of payments. The present value
of these payments is equal to the value of the collateral as
determined by the court; the nominal value of the payments
equals the amount of the claim.[4]
Under
the amended Plan, the Network's tangible collateral-cash,
accounts receivable, furniture, fixtures, and equipment-was
to be sold, so Comcast's § 1111(b) election does not
apply to that collateral.[5] The parties stipulated to the
bankruptcy court that the value of the tangible collateral
was $26.2 million. To value the intangible collateral, the
bankruptcy court projected the Network's net income
through 2032, discounted it to present value, and apportioned
it among the Network's intangible assets in proportion to
the revenue that each would generate. Because the bankruptcy
court was conducting the valuation as of the petition date,
it apportioned income to agreements that did not exist as of
the petition date based on the probability that such
agreements would come to fruition. Comcast's expert and
the Teams' expert disagreed about whether and how the
$107 million in waived media-rights fees should be included
in the calculation.
The
bankruptcy court concluded that the value of the Agreement
would be $54.3 million on the date that the Plan would go
into effect, but subtracted the waived media-rights fees from
the Network's income in the period between the petition
and the effective date, yielding large net losses for that
period. Since the Agreement was the only significant
intangible asset during that period, these costs lowered the
Agreement's value as of the petition date to zero.
Because a creditor cannot make a § 1111(b) election as
to collateral of "inconsequential value,
"[6] Comcast was unable to elect to have its
claim treated as fully secured.
After
the bankruptcy court confirmed the Plan, Comcast appealed the
bankruptcy court's valuation of the Agreement to the
district court. It also sought a stay of implementation of
the Plan pending appeal. The district court denied the stay,
but the Teams later agreed that they would be required to pay
the debt if Comcast prevailed on appeal. The district court
affirmed the valuation, holding that the petition date was
the proper date from which to value the Agreement and that
the expenses incurred by the Network during bankruptcy were
appropriately offset against the Agreement's value.
Comcast appeals.
II
When we
review a district court sitting as an appellate court, we
apply "the same standards of review to the bankruptcy
court's findings of fact and conclusions of law as
applied by the district court."[7] This court "review[s]
the bankruptcy court's findings of fact under the clearly
erroneous standard, and the bankruptcy court's
conclusions of law de novo."[8] The Bankruptcy
Code does not require a particular method to value
collateral, and "[v]aluation is a mixed question of law
and fact, the factual premises being subject to review on a
'clearly erroneous' standard, and the legal
conclusions being subject to de novo
review."[9]
III
Comcast
challenges the valuation date utilized by the bankruptcy
court. The bankruptcy court valued Comcast's claim as of
the petition date because it assumed In re
Stembridge[10] controlled, and in the alternative,
because it had the flexibility to select a fair date. Comcast
asserts that the statutory text and case law dictate that the
appropriate valuation date is the effective date of the Plan,
which would result in a higher valuation of the Agreement
that is eligible for a § 1111(b) election. The Teams
allege that Stembridge mandates valuation as of the
petition date, and that the bankruptcy court correctly held
that the Agreement was of inconsequential value and
ineligible for § 1111(b). We conclude that a court is
not required to use either the petition date or the effective
date. Courts have the flexibility to select the valuation
date so long as the bankruptcy court takes into account the
purpose of the valuation and the proposed use or disposition
of the collateral at issue.
The
Bankruptcy Code itself does not dictate the appropriate
valuation date for Chapter 11 bankruptcies. Under 11 U.S.C.
§ 506(a)(1), the value of a secured claim "shall be
determined in light of the purpose of the valuation and of
the proposed disposition or use of such property, and in
conjunction with any hearing on such disposition or use or on
a plan affecting such creditor's
interest."[11] Section 506(a) is often used in
conjunction with other parts of the Bankruptcy
Code.[12] This includes the cram-down provision in
§ 1129(b), which requires valuation of collateral in the
context of plan confirmation when the debtor retains
possession of the collateral.[13] Under this cram-down
provision, a bankruptcy court may confirm a plan over a
creditor's objection subject to certain conditions, so
long as the plan "does not discriminate unfairly, and is
fair and equitable, with respect to each class of claims or
interests that is impaired under, and has not accepted, the
plan."[14]
At
issue in this case is § 1129(b)(2)(A)(i)(II), which
provides that a bankruptcy plan is "fair and
equitable" with respect to a class of claims-and thus
confirmable over a creditor's objection-if under the
plan:
each holder of a claim of such class receives on account of
such claim deferred cash payments totaling at least the
allowed amount of such claim, of a value, as of the effective
date of the plan, of at least the value of such holder's
interest in the estate's interest in such
property.[15]
This
provision thus provides for the value of the collateral to be
discounted to present value when considering whether the
proposed plan provides adequate payment to the creditor.
However, it is § 506 that instructs the court on how to
make the initial valuation, before the collateral's
present value is calculated under § 1129. Accordingly,
whatever the valuation date, the language of § 1129 is
not superfluous, as § 1129 presumes the collateral has
been assigned value.[16] Section 1129 merely uses that value to
set a floor for what sum the creditor must receive in
deferred cash payments while the debtor retains possession of
the collateral. It does not provide any guidance as to how
the initial valuation should be made. That is left to §
506.
A 2005
amendment to § 506 provides that in Chapter 7 and
Chapter 13 personal bankruptcies involving claims of personal
property, the valuation shall be as of the date of the
petition and based on replacement value of the
property.[17] But the Code provides no similar
guidance for Chapter 11 business reorganizations, nor for
other types of property. Rather, § 506(a)(1) directs the
court to consider (1) "the purpose of the
valuation;" (2) "the proposed disposition or use of
[the] property;" and to do so (3) "in conjunction
with any hearing on such disposition or use or on a plan
affecting such creditor's interest."[18] This
provision allows the bankruptcy court to make valuations of
collateral throughout the proceeding based on the purpose of
each valuation.[19]
Precedent
also does not mandate a specific valuation date in the
Chapter 11 cram-down context. Rather, case law requires that
courts consider the purpose of the valuation and the proposed
use or disposition of the collateral at issue. In
Associates Commercial Corp. v. Rash, [20] the Supreme
Court stated that when considering possible valuations, the
"debtor's 'use' of the property" was
"[o]f prime significance, " and the "actual
use" of the property rather than a "foreclosure
sale that will not take place" should guide the
court's valuation.[21]Though the court was considering
whether foreclosure value or replacement value was
appropriate in the Chapter 13 cram-down context,
[22]
the language provides guidance on the proper interpretation
of § 506(a) as applied to plan-confirmation valuations
when the debtor proposes to retain property.[23]
In
addition, the Third and Eighth Circuits have held that the
effective or confirmation date of the plan is the appropriate
valuation date in a Chapter 11 cram-down valuation. The Third
Circuit adopted the confirmation date- albeit in a case where
neither party challenged the timing of the valuation- based
on the purpose of the valuation.[24] As that court explained:
[T]he value of the property should be determined as of the
date to which the valuation relates. Where, as here, the
purpose of the valuation is to determine the treatment of a
claim by a plan, the values determined at the § 506(a)
hearing must be compatible with the values that will prevail
on the confirmation date.[25]
The
Eighth Circuit likewise determined that "[t]he allowed
secured claim will equal the value of the collateral at the
time the plan is confirmed" in a Chapter 11 cram-down,
[26]
and bankruptcy courts have generally adopted the same
rule.[27] These holdings are
consistent with the leading bankruptcy treatise's
discussion of the issue.[28]
However,
the Third Circuit recognized that a valuation conducted under
§ 506(a) may not always relate to the confirmation or
effective date of the plan.[29] This is because § 506(a) valuations
are used in a variety of contexts. For example, the First
Circuit considered § 506(a) in the context of
determining the amount of post-petition interest an
oversecured creditor should receive.[30]The First Circuit determined that the
flexible nature of § 506(a), as contrasted with the
inflexible exception in § 506(a)(2), suggested the
bankruptcy court was not bound to use the value of the
collateral on either the petition date or the plan effective
date.[31] Rather, when the value of
collateral fluctuated over the course of the proceedings, the
bankruptcy court could determine the value of the collateral
as of the first point in time that the creditor became
oversecured, and thus entitled to post-petition
interest.[32] The First Circuit's
opinion echoed this court's logic in In re T-H New
Orleans Ltd. Partnership, where we held that, when
considering a valuation for the purpose of determining an
award of interest under § 506(b) "valuation of the
collateral and the creditor's claim should be flexible
and not limited to a single point in time, such as the
petition date or confirmation date."[33] This court thus found no error in the
bankruptcy court's use of the date at which it determined
the claim "probably" became
oversecured.[34]
That
§ 506(a) valuations may be made at different times under
different circumstances does not lessen the force of the
Third and Eighth Circuit holdings that the appropriate
valuation date is the date of plan confirmation in the
Chapter 11 cram-down context. When a court values collateral
to confirm a cram-down plan under § 1129(b)(2)(A)(i),
the proposed use or disposition of the property under the
plan of reorganization is critical, precisely because the
debtor is choosing to retain the collateral, rather than sell
it or return it to the creditor.[35] Yet the bankruptcy court can determine
the appropriate date of valuation on a case-by-case basis and
we need not adopt a bright-line rule.
Contrary
to the Teams' assertions and the bankruptcy court's
holding, this court's decision in Stembridge
does not compel a fixed valuation as of the date of the
petition for Chapter 11 cram-downs. Though some language in
the opinion could be broadly read to include all cram-downs,
[36] the holding that "the
value of the collateral should be ...