## Facts

- Stone Hedge Properties (debtor) obtained a mortgage loan from PNC Bank to finance construction of an 18-hole golf course and related development.
- The mortgage was secured by collateral that included the golf course, golf-course equipment, and a nearby housing development property.
- After Stone Hedge and PNC restructured the debt, Stone Hedge still could not make regular payments and filed a Chapter 11 petition.
- In its bankruptcy schedules, Stone Hedge listed PNC’s mortgage claim as undisputed, liquidated, and noncontingent.
- After the Chapter 11 filing, PNC sold the mortgage to Phoenix Capital Corporation (creditor). Phoenix was run by former employees of the PNC subsidiary that had been servicing the mortgage.
- Although the outstanding mortgage balance was about $2.35 million, Phoenix paid PNC $1.315 million for the loan.
- Phoenix filed a proof of claim for $2,592,789.36 (the asserted debt amount plus interest, fees, and costs) and contended the collateral was worth about $2.08 million, implying an unsecured deficiency.
- Stone Hedge objected to Phoenix’s claim, arguing it was inequitable to allow Phoenix to profit from the mortgage given the principals’ prior relationship to the servicing entity and possible access to nonpublic information; Stone Hedge argued any allowed claim should be limited to Phoenix’s $1.315 million purchase price.
- Stone Hedge also disputed Phoenix’s collateral value and asserted the collateral was worth at least $4.5 million, which would make Phoenix fully secured.
- Stone Hedge and Phoenix each filed a proposed plan of reorganization; both plans treated Phoenix as a secured creditor whose claim would ultimately be allowed.
- Phoenix moved for (i) valuation of collateral and (ii) temporary allowance of its claim for voting under Federal Rule of Bankruptcy Procedure 3018; appraisers testified that the collateral value was $2,567,000.

## Issues

1. What value should the bankruptcy court assign to the collateral securing Phoenix’s mortgage claim for purposes of determining the secured portion of the claim?
2. Under Rule 3018(a), to what extent and in what character (secured and/or unsecured) should Phoenix’s disputed claim be temporarily allowed so Phoenix could vote on a Chapter 11 plan, given Stone Hedge’s objections and request to cap the claim at Phoenix’s discounted purchase price?

## Decision

- The court valued the collateral securing the mortgage at $2,567,000.
- For plan voting purposes only, the court temporarily allowed Phoenix’s claim as a secured claim in the amount of $2,567,000.
- The court declined to temporarily allow any unsecured deficiency portion of Phoenix’s claim for voting.
- The court did not, on the record for these motions, disallow Phoenix’s claim or limit it to the $1.315 million Phoenix paid to acquire the mortgage, leaving broader equitable challenges for later litigation if appropriate.

## Legal Principles

- A bankruptcy court may determine the value of collateral securing a claim to fix the amount treated as secured under 11 U.S.C. § 506(a) and related procedures.
- Under Fed. R. Bankr. P. 3018(a), a court may temporarily allow a disputed claim (in whole or in part) for voting “for cause,” so plan voting can proceed without waiting for final claim resolution.
- Temporary allowance under Rule 3018(a) is provisional and does not finally decide claim allowance, disallowance, or equitable remedies.
- A purchaser of a claim generally steps into the seller’s position; the fact that the purchaser acquired the claim at a discount does not, by itself, require limiting the claim amount for interim voting treatment.
- When the existence or amount of an asserted unsecured deficiency is disputed and could skew voting, the court may limit temporary allowance to the secured portion tied to the collateral value.
- Allegations of unfair conduct in acquiring a claim may be considered in shaping interim voting treatment, but unsupported allegations do not necessarily justify denying all voting rights on an otherwise secured debt.

## Conclusion

In In re Stone Hedge Properties, the bankruptcy court set the value of the mortgage collateral at $2,567,000 and, to permit Chapter 11 voting to move forward while reserving broader disputes for later proceedings, temporarily allowed Phoenix’s claim for voting only as a secured claim up to that value and refused to grant Phoenix any unsecured deficiency vote.


Stone Hedge Properties v. Phoenix Capital Corp. (In re Stone Hedge Properties), 191 B.R. 59 (1995)