1

IN THE UNITED STATES BANKRUPTCY COURT 

 FOR THE WESTERN DISTRICT OF PENNSYLVANIA 

______________________________________ 

In re: : 

 : Case No. 14-22724-GLT 

COMMONWEALTH : Chapter 11 

RENEWABLE ENERGY, INC., : 

 : 

 : 

 : 

RUTH F. ANDERSON, and : 

KATHY L. ANDERSON, as executor of the : 

ESTATE OF WILLIAM E. ANDERSON, : Related to Dkt. No. 39 

 : 

 Movants, : 

 : 

v. : 

 : 

COMMONWEALTH : 

RENEWABLE ENERGY, INC., : 

 : 

 Respondent. : 

 : 

Appearances: Douglas A. Campbell, Esq., Paul J. Cordaro, Esq., and Frederick D. Rapone, Jr. of 

Campbell & Levine, LLC for the Debtor, Commonwealth Renewable Energy, Inc. 

Robert O Lampl, Esq. of the Law Offices of Robert O Lampl, and Karen Y. 

Bonvalot, Esq. of Sherrard, German & Kelly, P.C. for Ruth F. Anderson and 

Kathy L. Anderson as the executor of the Estate of William E. Anderson 

Kirk B. Burkley, Esq., Arthur W. Zamosky, Esq., and Daniel R. Schimizzi, Esq. 

of Bernstein-Burkley, P.C. for Stephen C. Frobouck and Steven Savor, Jr. 

MEMORANDUM OPINION 

In November 2006, Bill and Ruth Anderson advanced over $7 million to 

Commonwealth Renewable Energy, Inc., a venture created by Bill Anderson and his colleagues, 

Steven Savor and Stephen Frobouck, to develop an ethanol production facility in Western 

Pennsylvania. After the project failed to materialize, the Andersons1

 pursued an action in 

                                                            

1

 Bill and Ruth were husband and wife until his passing in 2008. As a matter of convenience, the Court uses 

the term “Andersons” to refer to Ruth and either Bill Anderson or his estate (as represented by their 

FILED

CLERK

U.S. BANKRUPTCY

COURT - WDPA 11/4/15 9:51 am

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mortgage foreclosure to recover the amounts due under a judgment note, prompting 

Commonwealth to file this bankruptcy case. The Andersons now seek relief from the automatic 

stay. 

This Court must decide whether the advance constitutes a loan or an equity 

contribution. Because the parties originally intended the transaction to be a loan and the Court 

finds no credible evidence that Bill Anderson agreed to modify the obligation prior to his death, 

the Court concludes that the Andersons hold a secured claim against the bankruptcy estate. In 

the absence of any grounds to equitably subordinate the claim and without sufficient proof that 

the Property (as defined below) is necessary for an effective reorganization, the Andersons are 

granted relief from the automatic stay. 

I. 

Anderson, Savor, and Frobouck were business associates with a long history of 

doing business together. In the early 1990s, Anderson and Savor formed the Anderson Group of 

Companies, Inc. (“AGC”) to serve as a holding company for the various business enterprises in 

which they might invest. Frobouck became a shareholder in 1998 and, by that time, Anderson, 

Savor, and Frobouck each held a 1/3 interest in AGC. Under the AGC business model, 

Anderson, Frobouck, and Savor made capital contributions to AGC which, in turn, were invested 

by the company in various business opportunities. Through this investment vehicle, Frobouck 

and Savor claim their intent, together with Anderson, was to share the financial burdens and risk 

equally. 

 In August 2006, Anderson, Savor, and Frobouck embarked upon a new enterprise 

to develop an ethanol treatment facility on a 133.662-acre industrial site located in New Stanton, 

                                                                                                                                                                                               

daughter, Kathy Anderson, in her capacity as executor of the Estate of William E. Anderson). The singular 

term “Anderson” shall mean Bill Anderson alone. 

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Pennsylvania (the “Property”). The site was owned by the Pennsylvania Industrial Development 

Authority (“PIDA”) and formerly housed the Sony American Video Glass manufacturing 

facility. 

Commonwealth was formed to acquire Sony’s leasehold interest in the Property, 

together with an option to purchase the Property from PIDA. In a departure from their prior 

transactions, AGC was not used to acquire the equity interests in Commonwealth. Instead, 

Anderson, Frobouck, and Savor each controlled 1/3 of the voting shares. Frobouck’s and 

Savor’s shares are held in their individual names, while the remaining third is owned by 

Anderson Energy Investments, LP (“AEI”), an entity controlled by Anderson. Prior to 

Anderson’s death, Anderson, Frobouck, and Savor were the directors of Commonwealth. After 

Anderson’s passing, Frobouck and Savor remained the sole directors. 

Commonwealth’s initial interest in the Property was acquired for $17 million. 

Part of the purchase price was financed through Commonwealth’s assumption of certain loan 

obligations owed to PIDA and the Pennsylvania Infrastructure Investment Authority. 

Commonwealth also entered into an Indenture of Lease dated November 21, 2006 with PIDA. 

To cover the remaining balance of the purchase price and closing costs, Commonwealth obtained 

an advance of $7,022,423.37 from the Andersons. 

Commonwealth executed a Judgment Note in the amount of $20 million (the 

“Anderson Note”) to evidence its obligations to the Andersons for the cash advance. Although 

the amount advanced by the Andersons was substantially less than the face amount of the note, 

the parties wanted flexibility in the event additional advances were made in the future.2

 The 

Anderson Note required Commonwealth to make monthly “interest-only” payments during a six-

                                                            

2

 Transcript (“Tr.”) at 39:17—40:4 (Apr. 27, 2015). 

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month term. The obligations under the Anderson Note matured on May 21, 2007, at which time 

all principal and accrued interest was due and payable to the Andersons. 

To secure the obligations under the Anderson Note, Commonwealth executed an 

Open-End Leasehold Mortgage and Security Agreement dated November 20, 2006 (the 

“Mortgage”), which granted the Andersons a mortgage lien upon its leasehold interest in the 

Property. In the event that Commonwealth acquired fee simple title to the Property, the liens and 

security interests granted under the Mortgage would automatically attach to the fee interest. The 

Mortgage was duly recorded in the public records. Both the Anderson Note and Mortgage were 

signed by Frobouck (as president) and Savor (as secretary) on behalf of Commonwealth. 

Each month, Kathy Anderson invoiced Commonwealth for the interest payments 

due under the Anderson Note. Commonwealth paid the six monthly interest payments according 

to the terms of the note, although the last payment (billed on June 6), was not made until August 

6, 2007. It is undisputed that no further interest payments were made after August 6, 2007, and 

there was never a payment made on the principal. 

After the Maturity Date, Kathy Anderson continued to send the invoices to 

Commonwealth each month through February 2010. Upon receipt of the invoices, 

Commonwealth recorded the interest accruals. Erin Henninger, Commonwealth’s office 

manager, testified that she was responsible for maintaining Commonwealth’s books and records 

and would enter the interest accruals from the Anderson Note into Commonwealth’s books long 

after the maturity date had passed.3

 She also continued to list the obligations under the Anderson 

Note as a debt liability on Commonwealth’s balance sheet through 2012.4

 

                                                            

3

 Henninger testified that she worked as Commonwealth’s office manager until it discontinued office 

operations in 2008. She then began work as an office manager for Reserved Environmental Services, LLC 

(“RES”), an entity controlled by Frobouck and Savor and discussed more fully below. Despite her new 

position, Henninger continued to maintain Commonwealth’s books and records while employed by RES. 

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Anderson, Frobouck, and Savor utilized two lines of credit from PNC Bank in 

connection with their projects. An initial $5 million line of credit was used for business which 

predated the Commonwealth transaction. When Commonwealth’s cash requirements exceeded 

the remaining availability under the $5 million line, Anderson, Frobouck and Savor obtained an 

additional $10 million line of credit from PNC. Ruth Anderson was not a borrower on either 

one of the PNC credit lines, but she pledged certain securities jointly owned by her and Bill 

Anderson as collateral for the $10 million line of credit. 

In its early stages, the ethanol treatment facility project was highly promising. 

Savor negotiated a five-year out-take agreement with BP Products North America, Inc. (“BP”) 

by which BP would purchase all of the project’s output of ethanol, including a pass through of 

the main input costs of natural gas and corn. Projected profits were estimated at as much as 

$0.22 per gallon for 127 million annual gallons produced.5

 

To achieve these projections, Anderson, Frobouck, and Savor recognized that 

development of the ethanol treatment project would require considerable outside investment. 

Once the Property rights were secured, Commonwealth engaged prominent Wall Street legal 

counsel to explore the bond financing market, and enlisted a well-known investment bank to 

solicit investors and handle investment inquiries. Through these efforts, the parties hoped to 

raise in excess of $40 million to convert the Property into a fully-functional facility. 6 

Despite its promise, Commonwealth was ravaged by the credit crunch in May 

2007 which effectively dried up credit sources and eliminated any interest in the project by third-

                                                                                                                                                                                               

Henninger was occasionally listed as assistant secretary of Commonwealth and was formally listed as 

corporate secretary of RES. 

4

 Exs. AA and C. 

5

 Ex. 11. 

6

 Ex. 11. 

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party investors. This development caused Anderson, Frobouck, and Savor to revisit the business 

plan by considering a much smaller project than originally conceived. 

During this time, Anderson met weekly with his financial advisor Mohammad A. 

Samad and Frobouck for lunch at Franco’s Restaurant. At one particular meeting in June 2007, 

Frobouck and Savor claim that Anderson agreed to cancel the Anderson Note and consider the 

indebtedness to be part of Anderson’s equity investment in Commonwealth. The discussion 

appears to have been prompted by Frobouck’s suggestion that the Mortgage be modified to add 

Frobouck and Savor as mortgagees. There is nothing in the record to support that Anderson 

ever agreed in writing to cancel the Anderson Note or add Frobouck and Savor as mortgagees to 

the Mortgage. 

Anderson died on October 16, 2008. Two months later, Ruth and Kathy 

Anderson filed a Complaint in Confession of Judgment against Commonwealth in the U.S. 

District Court for the Western District of Pennsylvania, arguing that the Anderson Note was in 

default and seeking payment of $7,881,969.67 plus late charges, interest, and attorney’s fees. 

Judgment was entered on December 17, 2008. The district court subsequently voided the 

judgment on April 19, 2010 because it lacked subject matter jurisdiction (lack of diversity). 

CRE eventually paid off the PIDA loan and acquired title to the Property in 2010. 

Upon the transfer of ownership, the liens and security interests granted under the Mortgage 

automatically attached to the fee interest and became the first-priority liens against the Property. 

On April 10, 2010, Commonwealth (by Frobouck and Savor) leased a ten-acre 

portion of the Property to RES, a company in which Frobouck and Savor held controlling 

membership interests (Savor 27 percent, Frobouck 22-24 percent).7

 The term of the RES lease is 

                                                            

7

 Tr. 20:20-22 (April 28, 2015). 

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fifty years, and RES holds an option to purchase its parcel for $6 million. Ruth Anderson alleges 

that she did not give consent to the RES lease. 

From 2008 to 2010, the parties continued discussions regarding ways to resolve 

their disputes. When those discussions failed, Ruth and Kathy Anderson filed a complaint in 

mortgage foreclosure on October 26, 2010. The state court was about to hear argument on the 

Andersons’ motion for summary judgment when this bankruptcy case was commenced on July 3, 

2014.8

The bar date to file claims has passed and only four claims were filed against 

Commonwealth. Ruth Anderson filed a claim for a secured debt in the amount of 

$13,637,249.01, together with interest, attorneys’ fees, and costs (the “Anderson Claim”). The 

Anderson Claim is premised upon the amounts owed under the Anderson Note and Mortgage. 

Savor and Frobouck each filed unsecured claims for approximately $11 million for funds 

advanced to Commonwealth. The only other proof of claim was submitted by the Hempfield 

Township Tax Collector for $115,538.43 in prepetition taxes. 

Commonwealth does not intend to reorganize as an ongoing concern. On October 

29, 2014, it filed a liquidating plan of reorganization that provides for the sale of the Property, its 

primary asset.9

 Although the Property has been marketed by a real estate broker for over a year, 

Commonwealth has yet to seek Court approval of any purchase offers. For the purpose of this 

                                                            

8

 In addition to the foreclosure action, the parties were engaged in litigation on several fronts. On July 24, 

2012, AEI filed a derivative suit in the Court of Common Pleas of Allegheny County, Pennsylvania, 

alleging that, inter alia, Savor and Frobouck had misused their positions at Commonwealth to the financial 

detriment of the company and its shareholders. Frobouck and Savor then filed a declaratory judgment 

action on October 19, 2012, seeking a court determination of the relationships among Frobouck, Savor, 

Ruth and Kathy Anderson, and AEI, in connection with Commonwealth. The actions were consolidated on 

July 10, 2014. All actions have since been stayed by the bankruptcy. Frobouck, Savor, and 

Commonwealth removed the consolidated actions to this Court on September 29, 2014, at adversary 

proceeding 14-2199-GLT. Any further consideration of the adversary proceeding has been stayed pending 

the disposition of the Anderson’s request for stay relief. 

 

9

 See Dkt. Nos. 79, 80. 

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Opinion, the parties agree that the Property has a value of less than $7 million which has not 

diminished since the bankruptcy case began. 

Ruth and Kathy Anderson filed their Motion for Relief from Stay or, in the 

Alternative, for Adequate Protection on August 26, 2014.10 Their motion alleged that cause for 

relief exists under § 362(d)(1) because, among other things, Commonwealth is in default of its 

obligations under the Anderson Note and Mortgage and is unable to provide adequate protection. 

They further allege that Commonwealth has no equity in the Property and it is not necessary for 

an effective reorganization, and thus there are no grounds for relief under § 362(d)(2). 

Commonwealth, Frobouck, and Savor opposed the motion, prompting the Court 

to conduct a two-day evidentiary hearing. The Court heard testimony from Savor, Frobouck, 

Henninger, and Samad. After the close of testimony, the Court requested post-trial briefing on 

certain issues. Following submission of the post-trial briefs, the Court took the matters under 

submission. 

The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157(b). 

This is a core proceeding under 28 U.S.C. § 157(b)(2)(G). Venue is proper under 28 U.S.C. § 

1409. This matter is now ripe for adjudication. 

II. 

Before considering the motion for relief from stay, the Court must first examine 

the challenge to Ruth and Kathy Anderson’s status as secured creditors. Commonwealth, 

Frobouck, and Savor advance three arguments which implicate the treatment of the Anderson 

                                                            

10 Ruth and Kathy Anderson also brought a motion to dismiss the bankruptcy case or, in the alternative, 

seeking the appointment of a chapter 11 trustee at the same time as the motion seeking stay relief. Dkt. 43. 

The Court will consider this motion after disposing of the stay relief motion. 

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Claim.11 It is first alleged that, notwithstanding their appearance as debt instruments, the 

Anderson Note and Mortgage represent capital contributions and should be recharacterized as 

such by the Court. Frobouck and Savor also contend that the Anderson Note and Mortgage were 

expressly modified to render the $7 million advance as an equity investment in Commonwealth. 

As a final alternative, Commonwealth, Frobouck, and Savor seek the equitable subordination of 

the Anderson Claim. The Court will address each of these arguments in turn.

A. 

Recharacterization of the Anderson Claim 

The Court’s initial inquiry strikes at whether the Andersons’ $7 million advance 

was a “loan” or a “capital contribution” to Commonwealth. On their face, the Mortgage and 

Anderson Note bear all of the hallmarks of a debt instrument and security agreement. 

Commonwealth, Frobouck, and Savor request that we look beyond the documents and ascertain 

the parties’ intentions through evidence of their past conduct. Based on a series of prior 

transactions, they claim a long-standing business practice was established in which Anderson, 

Frobouck, and Savor agreed to share the investment burden and risk on an equal one-third basis 

in every business deal. They allege that the same result was intended with respect to all funds 

advanced to Commonwealth. 

Bankruptcy courts possess equitable authority to recharacterize a claim from debt 

to equity as a means of ensuring that form does not triumph over substance. See Cohen v. KB 

Mezzanine Fund II (In re SubMicron Sys. Corp.), 432 F.3d 448, 457 (3d Cir. 2006) 

(“Submicron”). The determination of whether a debt actually exists is a question of fact that 

must be evaluated on a case-by-case basis as “[n]o mechanistic scorecard suffices.” Id. at 455-

56. The Third Circuit explains that “the determinative inquiry in classifying advances as debt or 

                                                            

11 As of this date, no party has filed a formal objection to the Anderson Claim. 

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equity is the intent of the parties as it existed at the time of the transaction.” Id. at 457. Intent 

may be “inferred from what the parties say in their contracts, from what they do through their 

actions, and from the economic reality of the surrounding circumstances.” Id. at 456. 

To assist the court in its determination of the intent of the parties at the time they 

created the Anderson Note and Mortgage, the Court looks to the “pertinent factors” used by five 

United States Courts of Appeals. The factors “are aimed at determining the intent of the parties 

at the time they entered into the loan transaction.” Vieira v. AGM II, LLC (In re Worldwide 

Wholesale Lumber, Inc.), 372 B.R. 796, 811 (Bankr. D.S.C. 2007). These factors include: (i) 

the names given to the instruments, if any, evidencing the indebtedness; (ii) the presence or 

absence of a fixed maturity date and schedule of payments; (iii) the presence or absence of a 

fixed rate of interest and interest payments; (iv) the source of repayments; (v) the adequacy or 

inadequacy of capitalization; (vi) the identity of interest between the creditor and the 

stockholder; (vii) the security, if any, for the advances; (viii) the corporation's ability to obtain 

financing from outside lending institutions; (ix) the extent to which the advances were 

subordinated to the claims of outside creditors; (x) the extent to which the advances were used to 

acquire capital assets; and (xi) the presence or absence of a sinking fund to provide repayments. 

See Bayer Corp. v. Mascotech, Inc. (In re Autostyle Plastics, Inc.) 269 F.3d 726, 750-53 (6th Cir. 

2001) (“Autostyle”) (adopting the eleven-factor test set forth in an earlier, tax-related case, Roth 

Steel Tube Co. v. Comm’r, 800 F.2d 625, 630-32 (6th Cir. 1986)).12

                                                            

12 The courts of appeals for the Fourth, Fifth, Tenth and Eleventh Circuits have adopted most of these eleven 

factors as well as additional ones in their own recharacterization analyses. Ellinger v. United States, 470 

F.3d 1325,1333 (11th Cir. 2014); Fairchild Dornier GmbH v. Official Comm. of Unsecured Creditors, 453 

F.3d 225, 233 (4th Cir. 2006); Sender v. Bronze Group, Ltd. (In re Hedged-investments Assocs.), 380 F.3d 

1292, 1298 (10th Cir. 2004); Estate of Mixon v. United States, 464 F.2d 394, 402 (5th Cir. 1972); In re 

SubMicron, 432 F.3d at 456. Bankruptcy courts within the Third Circuit have utilized some or all of the 

eleven factors to determine whether recharacterization is appropriate under a given set of circumstances. 

See, e.g., Patel v. Shubh Hotels, LLC (In re Shubh Hotels Pittsburgh, LLC), 476 B.R. 181, 187-88 (Bankr. 

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After due consideration of each of these factors, the Court concludes that the 

Anderson cash advance was intended to be a loan at the time it was made. The analysis begins 

with the Anderson Note and Mortgage, which are unquestionably instruments of indebtedness. 

Titled as a “Judgment Note,” the Anderson Note contains all of the salient terms necessary to 

establish a lending relationship between Commonwealth and the Andersons. It identifies the 

amount of the loan, sets a fixed rate of interest,13 and creates an obligation for Commonwealth to 

repay the balance. By its own terms, the Anderson Note matured within six months of execution 

and requires monthly interest payments through the maturity date.14 Although the absence of a 

fixed interest rate and regular payments is indicative of an equity infusion, the presence of both 

factors evidences a debt obligation. Indmar Prods. Co. v. Comm’r, 444 F.3d 771, 779 (6th Cir. 

2006) (citing Roth, 800 F.2d at 630); see also 7 MERTENS LAW OF FED. INCOME TAX’N § 26:28 

(“A fixed interest rate is indicative of a deductible interest payment.”). 

The complexity of the documents substantiates their classification as debt 

instruments. These were not generic or “form” documents. Rather, the Anderson Note and 

Mortgage were carefully drafted by Commonwealth’s legal counsel to address the unique aspects 

of the transaction. Notably, the Mortgage navigated the intricacies of Commonwealth’s 

relationship with PIDA and provided a mechanism for the Andersons’ liens to attach to the fee 

title in the event Commonwealth exercised its right to purchase the Property. While the absence 

                                                                                                                                                                                               

W.D. Pa. 2012); Autobacs Strauss v. Autobacs Seven Co. (In re Autobacs Strauss), 473 B.R. 525 (Bankr. D. 

Del. 2012); Neilson v. Agnew (In re Harris Agency, LLC), 465 B.R. 410, 421 (Bankr. E.D. Pa. 2011); 

Official Comm. of Unsecured Creditors v. Highland Capital Mgmt., L.P. (In re Moll Indus., Inc.), 454 B.R. 

574, 581 (Bankr. D. Del. 2011). 

13 Ex. I, Anderson Note at ¶ 1 (providing a fixed interest rate of 8% per annum.) 

14 See Ex. I, Anderson Note at ¶ 2. 

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of a written instrument may be compelling evidence of a capital contribution,15 the existence of a 

highly-specialized promissory note and mortgage suggests the parties intended to create a 

secured debt. 

Frobouck and Savor argue that the mere existence of an executed Anderson Note 

does not prove indebtedness, relying on Fid. Bond & Mortg. Co. v. Brand (In re Fid. Bond & 

Mortg. Co.) 340 B.R. 266, 303 (Bankr. E.D. Pa. 2006). They also claim that the presence of a 

fixed maturity date does not evidence a debt instrument, based on the holding in Friedman’s 

Liquidating Trust v. Goldman Sachs Credit Partners, LP (In re Friedman’s Inc.), 452 B.R. 512, 

520 (Bankr. D. Del. 2012). The Court finds both cases to be inapplicable. In Brand and 

Friedman’s, the court was confronted with documents that did not require principal payments for 

several years. Finding it unreasonable to provide for a lengthy loan term without at least some 

principal pay down, the Friedman’s court concluded that the parties intended an equity 

contribution. Id. Similarly, the Brand court determined that, despite the existence of written 

promissory notes, the amount in controversy was not a debt because, over the course of a fiveyear term, there was no payment of principal and this was inconsistent with the “economic 

reality” of the parties. Id. 

The Anderson Note, in contrast, provides an abbreviated loan term and defers 

principal payments for only six months. The transaction had a short fuse because the parties 

envisioned this to be a temporary solution until a permanent credit facility could be obtained.16 

Indeed, Commonwealth’s counsel, the drafter of the instruments, described the Anderson Loan 

                                                            

15 See Autostyle, 269 F.3d at 750. 

16 Tr. 214:1-6 (Apr. 27, 2015). 

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and Mortgage as a “bridge loan” in an e-mail to Savor and Samad.17 Commonwealth already 

obtained a commitment from BP that was projected to generate a steady income stream, and it 

was actively soliciting outside investment for the purpose of, among other things, repaying the 

$7 million advance. Unlike the parties in Brand and Friedman’s, the Andersons had a 

reasonable expectation of full repayment within a year,18 and the documents accurately reflect a 

short-term financing arrangement. 

To enhance the likelihood of repayment, Commonwealth armed the Andersons 

with remedies to compel performance. As security for its obligations under the Anderson Note, 

Commonwealth pledged a lien against its interest in the Property and provided a litany of 

protections which are generally unavailable to equity holders.19 The Anderson Note also 

contains a confession of judgment clause which provides an immediate mechanism for 

enforcement.20 When a creditor secures a transaction with a lien, courts typically conclude that a 

loan was intended. Autostyle, 269 F.3d at 751. Moreover, the existence of these features is 

probative of the parties’ intent to be bound by the precise terms of the instruments as written. 

Frobouck and Savor contend that no security could be provided when, in reality, 

the Property was valueless. This is a most puzzling argument in light of the factual record. At 

the time the Mortgage was recorded, the Property was anything but “valueless.” The parties 

envisioned tremendous potential for the facility, and a prominent investment bank, Houlihan 

                                                            

17 Ex. VV. 

18 In reaching this conclusion, the Court finds that it was rational to expect the repayment to be funded from 

third-party financing or investment. When, at the time a cash advance is made, a prudent investor has a 

reasonable expectation of repayment from an obligor’s cash flow or outside financing, the economic reality 

suggests a valid debt has been created. State St. Bank & Trust Co., 520 B.R. at 77. Conversely, advances 

which can only be paid from profits or liquidation proceeds are considered equity investments since they 

are “at the risk of the venture.” Scriptomatic, Inc. v. U.S., 397 F. Supp. 753, 764 (E.D. Pa. 1975). 

19 See Ex. I, Mortgage at ¶ 16(b). 

20 Ex. I, Note at ¶ 10. 

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Lokey, projected a valuation as high as $435 million.21 Anderson estimated his own share to 

have a potential value in excess of $100 million, presumably based upon these projections.22 

The Andersons also received the benefit of a $20 million title insurance policy issued by Chicago 

Title Insurance Company.23 The parties certainly would not have taken precautions to protect 

the Mortgage, including payment of a $36,000 insurance premium, if the liens were merely 

illusory.24 Although the Mortgage initially attached to Commonwealth’s leasehold interest and 

remained subordinate to the liens held by PIDA, these actions reflect that, at a minimum, 

Anderson believed his debt was fully secured. 

The Court is unconvinced that, at the time it was made, the Andersons’ $7 million 

advance was subject to any long-standing agreement between Anderson, Frobouck, and Savor to 

share investment risks and rewards equally. While the parties may have agreed to a one-third 

split in their previous transactions, this deal took on a distinctly different flavor. The parties 

dispensed with using AGC as the investment vehicle and, instead, made all of their advances 

directly to Commonwealth. Unlike the prior transactions, Ruth Anderson was directly involved 

as a named party in the instruments and a security agreement was executed in connection with 

the cash advance. 

After reviewing the documentation prepared at the time of the advance, the Court 

is struck by the overwhelming number of items that support the existence of a loan, and the lack 

                                                            

21 Ex. 105. 

22 Ex. 40. 

23 Ex. UU. 

24 Ex. TT. The Court also observes that as late as 2008, the parties were cautious about any business decision 

that might affect the validity of the mortgage. Counsel for Commonwealth cautioned Samad that there may 

be negative consequences to the securitization of the mortgage if the parties changed Commonwealth from 

a C Corporation to an LLC. Ex. FF. 

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of contemporaneous documents indicative of a capital contribution. In 2006, Commonwealth’s 

balance sheet reflected a $7,022,428.37 loan from Bill Anderson as one of the company’s 

“current liabilities.”25 Conversely, the register of capital contributions maintained by 

Commonwealth failed to show the $7 million advance as an equity contribution.26 

As the transaction unfolded, the parties had no qualms describing the advance as a 

loan in their dealings with third parties. In November 2006, PIDA provided its written consent 

to the placement of a leasehold mortgage on the Property for the benefit of the Andersons.27 The 

consent was given based upon PIDA’s express understanding that the mortgage would “secure a 

loan” made by the Andersons “for various purposes related to the acquisition and modification of 

the project property...”28 

Commonwealth’s tax returns also identified the $7 million advance as a loan. 

From 2006 to 2012, the advance was classified as a “loan from shareholder” or “other liabilities” 

on the Commonwealth income tax returns. By 2012, the Commonwealth tax return showed 

$337,006 in accrued interest due on the Anderson Note and Mortgage.29 Each return was 

prepared from information supplied by Commonwealth’s employees to its accountants and was 

signed by Frobouck in his capacity as president.30 

Anderson, Frobouck, and Savor were savvy businessmen who recognized the 

distinction between debt and equity in their dealings with Commonwealth. An examination of 

                                                            

25 Ex. X 

26 Ex. Y. 

27 See Ex. SS. 

28 Id. 

29 Ex. W at CRE 04246. 

30 Exs. Q-W. 

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the Andersons’ advances bears this out. While the Andersons’ initial $7 million was 

documented as a loan, other advances were treated differently. By contrast, Anderson’s 

subsequent infusion of $3.4 million to partially satisfy the PNC line of credit was deemed an 

equity investment in Commonwealth. Anderson did not add the $3.4 million to the indebtedness 

owed under the Anderson Note, nor did he claim it was secured by the mortgage. The Court 

finds this to be compelling evidence that the loan documentation was no accident, but rather, the 

product of deliberate choices made by the parties with full knowledge of their consequences. 

The testimony of Frobouck and Savor is the only material evidence suggesting the 

advance was an equity contribution at the time it was made. The Court finds this evidence 

unpersuasive considering the way Frobouck and Savor vascillate on the characterization of their 

own advances over the years. In 2009, both attempted to convert their admitted capital 

contributions into a debt secured by a mortgage lien.31 After they subsequently disavowed this 

effort,32 Frobouck and Savor each filed unsecured proofs of claim in this bankruptcy case, 

reserving the right to categorize their separate $11 million contributions as loans to the extent 

necessary.33 The wavering is not limited to their own contributions, either. In contrast to its 

current position, Commonwealth previously asserted (in a statement verified by Frobouck) that 

Anderson agreed to convert his secured claim into a capital contribution in June 2007.34 This 

serves as an acknowledgement that the advance was originally cast as a loan. At the June 2007 

meeting at Franco’s, Frobouck also admitted he wanted the Mortgage to remain in place as a 

prophylatic measure to discourage subordinate claims, including mechanics liens, from being 

                                                            

31 Exs. GG and II. 

32 Ex. KK. 

33 See Claims 2 and 3. 

34 See Ex. B at ¶ 52. 

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filed against the Property.35 From this record, it appears that Frobouck and Savor do not view 

“debt” and “equity” as static characterizations, but rather, interchangeable labels that can be 

altered as needed to suit their needs. For this reason, the Court finds their testimony unreliable. 

Although our court of appeals warns against excessive reliance on mechanistic 

scorecards, it observed that the presence of one group of factors could make it “easy” for a court 

to deny recharacterization of debt as equity. Upon finding a document titled as a “note” which 

calls for payments of a sum certain at fixed intervals with market-rate interest and secured by a 

pledge of collateral, the Third Circuit suggests the determination is clear-cut and the inquiry can 

end there. See Submicron, 432 F.3d at 456. As discussed above, those features are present here. 

The Anderson Note required payments at fixed intervals at a market rate of interest which were 

partially performed and for which security was provided. Upon consideration of these factors 

alone, the Court can confidently conclude that the Anderson Note and Mortgage were intended 

to be debt instruments at their inception and that no grounds exist to recharacterize the 

transaction. While the evidence suggests that Anderson, Frobouck, and Savor sought to make 

equivalent advances to the company (and in fact they kept track of the amounts), the question 

before the Court is not how much each party funded, but rather, the terms by which the advance 

was made. The Court cannot easily cast aside the corporate form and transactional details used 

in the Commonwealth deal that was markedly different from those that preceded it. Based on its 

analysis of the eleven factors, credibility determinations of witness testimony and documentary 

evidence, and the economic reality of the parties, the Court concludes that the funds advanced by 

Anderson and secured by the Anderson Note and Mortgage represent a debt obligation of 

Commonwealth and do not qualify as a capital contribution. 

                                                            

35 Tr. 9:1-9 (April 28, 2015). 

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III. 

Alleged Modification of the Anderson Debt Obligations 

Having determined that the Anderson Note and Mortgage were intended to be a 

debt obligation of Commonwealth at the time of execution of the documents, the Court now 

turns to whether the parties later agreed to convert the debt into an equity contribution. It is 

undisputed that economic conditions deteriorated after 2006, leaving Commonwealth in a 

position where it could no longer develop an ethanol production facility with BP. Facing this 

new reality, Frobouck and Savor allege that Anderson agreed to reposition the company to 

pursue other opportunities. An apparent stumbling block to the strategy was the Anderson Note 

and Mortgage. In June 2007, Frobouck met with Anderson and Samad.36 

Frobouck testified that Anderson asked if the Anderson Note and Mortgage 

should be modified. According to Frobouck, he told Anderson to leave the instruments in place 

to protect their investments: 

... Bill Anderson actually asked me the question, should we remove the 

mortgage and I said no. We’ll leave the mortgage there, you know, 

basically, to save the certain purpose that it’s been there since the very 

beginning, you know, to secure the equity that he and Bill, that he and 

Steve and I had in the project[.] 

Tr. 9:2-6 (April 28, 2015). 

The Court considers the evidentiary implications of this discussion in two ways: 

first, both Anderson and Frobouck considered the Anderson Note and Mortgage as a binding, 

secured debt obligation that was already in place. Second, they left the mortgage intact to serve 

as a barrier to the enforcement of junior debt. Although Frobouck suggests the mortgage 

protected the investment of all three shareholders (a contention which is not substantiated by 

                                                            

36 Despite representations in Frobouck and Savor’s pretrial brief that Savor was present at the meeting, 

testimony elicited at the hearing establishes that he was not. 

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written documentation in the record), his testimony confirms that a decision was made to retain 

the Anderson Note and Mortgage for the purpose of preserving their character as a debt 

obligation. 

There is no further evidence in the record that Anderson, Frobouck, and Savor 

ever met and formally decided to modify, satisfy, or release the Anderson Note and Mortgage. It 

is also significant that the parties never bothered to document any such arrangement in the 

sixteen months which elapsed between the Franco’s meeting and Bill Anderson’s death. 

Frobouck and Savor are sophisticated businessmen who were trained as attorneys and were 

familiar with the documentation necessary to memorialize these arrangements. They also had 

outside legal counsel and accountants at their disposal. If there was an understanding with the 

Andersons to dramatically shift $7 million from the liability ledger to equity, the Court expects at 

least one written agreement would exist to substantiate it. 

The Court also finds no support for a modification from the parties’ actions 

following the June 2007 meeting. Savor and Frobouck argue that Bill Anderson ceased 

collecting interest payments after the meeting and did not foreclose on the Mortgage once the 

obligations matured. They contend that a failure to foreclose upon a mortgage is evidence that 

the transaction was an investment, not a debt. United States v. State St. Bank & Trust Co., 520 

B.R. 20, 23 (Bankr. D. Del. 2014) (citing Aquivo v. Black (In re Atlantic Rancher, Inc.). 279 

B.R. 411 (Bankr. D. Mass 2002). While the allegation that Bill Anderson ceased to collect 

payments after maturity is correct, it is also misleading. Kathy Anderson continued to send 

invoices to Commonwealth for the monthly interest accrual through February 2010.37 Although 

                                                            

37 Although Frobouck and Savor have claimed the invoices stopped coming in October 2008, the record 

contains copies of invoices from November 2006 through February 2010. Exs. O, C. 

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the invoices were unpaid, there is nothing in the record to indicate that she was told to 

discontinue this practice. 

Henninger, who maintained the books and records for Commonwealth on a daily 

basis, was not informed of any modification. Although she was told to stop issuing payments to 

the Andersons, she was not instructed to stop accruing interest. Instead, Henninger dutifully 

recorded the interest expense in Commonwealth’s corporate records consistent with the invoices 

she received from Kathy Anderson. In the months and years following the June 2007 meeting, 

she continued to show the Anderson Note and Mortgage as a loan on Commonwealth’s financial 

statements and reported this information to Commonwealth’s accountants for the preparation of 

the corporate income tax returns. If the parties agreed (after June 2007) that the funds advanced 

by Anderson were equity rather than debt, there would have been no need to record the interest 

accruals on Commonwealth’s financials.38 The evidence establishes that Henninger had regular 

conversations with Frobouck and Savor, and the two reviewed her books and records.39 She 

therefore had reason to know of any changes in the Commonwealth’s debt structure. If the 

person most knowledgeable about Commonwealth’s financial records was unaware that the 

Anderson loan had been modified, the Court certainly cannot reach this conclusion. 

Even if the Court would consider that Bill Anderson orally agreed to alter or 

extinguish the Mortgage, the modification is barred by the Parol Evidence Rule and 

Pennsylvania’s Statute of Frauds, 33 Pa. Stat. § 1. Both the Anderson Note and Mortgage 

                                                            

38 The Court also notes that Commonwealth’s final interest payment was made in August 2007, two months 

after the Franco’s meeting at which Anderson allegedly agreed to convert his debt into equity. Again, had 

the parties agreed in June 2007 to convert, there would have been no need to pay any further interest 

payments. 

39 Tr. at 108: 3-4; 129:1-5 (Apr. 27, 2015). The Court also notes that the balance sheets and monthly 

operating reports produced by Commonwealth during these bankruptcy proceedings lists the amounts owed 

under the Anderson Note as liabilities rather than equity contributions. 

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contained restrictions strictly prohibiting oral modification of the documents.40 Moreover, 

Pennsylvania case law holds that any agreement to modify a mortgage or refrain from enforcing 

its terms is subject to the statute of frauds and must be in writing. Strausser v. PRAMCO, 944 

A.2d 761, 765 (Pa. Super. Ct. 2008); see U.S. Bank N.A. v. JGKM Assocs., LLC, 2015 WL 

1474448, at *5 (E.D. Pa. March 13, 2015) (accepting PRAMCO as applicable law in 

Pennsylvania and that any modification of mortgage falls under the statute of frauds and must be 

in writing); Hansford v. Bank of Am., 2008 U.S. Dist. LEXIS 65502, at *36 (E.D. Pa. August 26, 

2008) (same); Atl. Fin. Fed. v. Orianna Historic Assocs., 594 A.2d 356, 358 (Pa. Super. Ct. 

1991); Eastgate Enters., Inc. v. Bank & Trust Co. of Old York Road, 345 A.2d 279 (Pa. Super. 

Cit. 1975); see also Phoenix Four Grantor Trust #1 v. 642 N. Broad St. Assocs., No. 00-597, 

2000 WL 876728, at *5 (E.D. Pa. June 29, 2000) (“[B]ecause the mortgages constitute interests 

in land, under . . . Pennsylvania law, the statute of frauds requires any modification of those 

mortgages to be in writing.” (citing Linsker v. Sav. of Am., 710 F. Supp. 598, 600 (E.D. Pa. 

1989)). Here, the Court finds no evidence of a signed agreement that varies the terms of the 

Anderson Note and Mortgage. It also concludes that Commonwealth, Frobouck, and Savor 

failed to establish that any of the exceptions to the Statute of Frauds apply. 

Commonwealth, Frobouck, and Savor challenge the proposition that mortgages 

fall within the Statute of Frauds. They rely upon decisions from the Nineteenth Century (and a 

1931 case following those rulings) that suggest a mortgage represents only security for the 

payment of money. Bulger v. Wilderman, 101 Pa. Super. 168, 171 (1931), citing Wilson v. 

                                                            

40 Anderson Note at ¶ 6 (“Lender shall not be deemed, by any act of omission or commission, to have waived 

any of its rights or remedies hereunder unless such waiver is in writing and signed by Lender, and then only 

to the extent specifically set forth in writing.”); and Anderson Mortgage at 25(j): (“This Mortgage is 

intended as a document under seal and may only be amended, modified, supplemented, or waived by a 

writing signed by Mortgagor [CRE] and Mortgagee [Anderson, Mrs. Anderson]. No course of dealing, 

course of performance or trade usage, and no parol evidence of any nature shall be used to modify, amend, 

supplement or waive any of the terms of this Mortgage.”). 

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Shoenberger Ex’rs, 31 Pa. 295 (1858) and McIntyre v. Velt, 153 Pa. 350 (1893). None of those 

cases specifically discuss the application of the Statute of Frauds to mortgages, and it is 

axiomatic that when formulating modern law, federal and state courts of Pennsylvania take these 

early cases into account. The Court therefore finds the more recent rulings of PRAMCO, 

Eastgate, and Orianna instructive as to the current state of Pennsylvania law which requires 

mortgage modifications to be evidenced in writing. 

In addition to the lack of any written evidence, there is no proof that Ruth 

Anderson ever consented to a modification of Anderson Note and Mortgage. Commonwealth 

admits that Ruth did not sign an agreement to convert the Anderson Note and Mortgage into a 

capital contribution, and that she failed to exhibit any conduct that would lead to this 

conclusion.41 Frobouck, Savor, and Henninger testified that they never dealt with Ruth on any 

business matters, and as far as Frobouck knew, no one else from Commonwealth consulted her 

either.42 While a contract may be altered after its formation, all parties must mutually agree to 

the new terms and consideration must be exchanged. See Great N. Ins. Co. v. ADT Sec. Servs., 

517 F.Supp.2d 723, 736 (W.D. Pa. 2007); J.W.S. Delavau v. E. Am Transp. & Warehousing, 

Inc., 810 A.2d 672, 681 (Pa. Super. Ct. 2002) (citing Corson v. Corson's Inc., 434 A.2d 1269 

(Pa. Super. 1981)). As a holder and co-owner of the Anderson Note and Mortgage, Ruth 

Anderson’s approval was a prerequisite for any modification of the documents. See Wilcox v. 

Regester, 417 Pa. 475 (1965); Corson, 434 A.2d at 1271. Absent Ruth’s consent, the contention 

that both Andersons agreed to convert their loan into an equity contribution falls flat. 

                                                            

41 See Commonwealth’s Responses to Request for Admission. 

42 Tr. at 30:14-31; 52:15-16; 136:18-23. 

 

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Frobouck and Savor suggest that Bill Anderson routinely made decisions for his 

wife Ruth. Even if this were true, there is no credible evidence in the record that Bill possessed 

the authority to unilaterally modify Ruth’s rights under the documents. The Court is reluctant to 

ignore Ruth’s independent ownership rights without a writing, and the absence of an executed 

consent, assignment, or power of attorney is compelling. As noted above, this transaction 

deviated from the path previously followed by the parties where advances were made to AGC 

which, in turn, invested in the various subsidiary businesses. Because the record fails to show 

that Ruth had any involvement in AGC, the Court concludes that Commonwealth was designed 

to be a decidedly different transaction and, therefore, Ruth’s authorization was required before 

any modification could occur. 

Finally, the Court does not consider the analysis and testimony of Samad as 

probative of an agreement to modify the instruments. Frobouck and Savor place great reliance 

on Samad’s “investment analysis,” a spreadsheet they claim to be proof of Bill Anderson’s intent 

to share the cash burdens and risk equally with his colleagues.43 While the analysis suggests an 

effort was undertaken to balance the amounts advanced to Commonwealth, Samad prepared it 

upon his own initiative and not at the request or direction of any party. It therefore sheds no light 

into the mindset of the principals, nor is it conclusive of any intent to re-cast the Mortgage as 

equity. To the contrary, the analysis distinguishes between funds advanced “via mortgage” from 

those made as direct investments or through payments on the line of credit. Samad’s testimony 

further confirmed that, at least initially, the Anderson Note and Mortgage were deemed to be a 

legitimate, enforceable debt of Commonwealth. 

To overcome the Statute of Frauds requires clear and convincing evidence with 

“full, complete, satisfactory, and indubitable proof” of the terms of the contract. Kurland v. 

                                                            

43 See Ex. 50. 

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Stolker, 533 A.2d 1370, 1373 (Pa. 1987). Commonwealth, Frobouck, and Savor have fallen far 

below the minimum evidentiary and probative standards necessary to satisfy the Statute of 

Frauds and the Parol Evidence Rule in this case. Faced with clear evidence of a secured loan 

from the Andersons, the Court is swayed by the absence of any contrary documentation 

substantiating an agreement to release or modify the Mortgage. Although the testimony of 

Frobouck and Savor was offered to fill this void, the Court does not find these witnesses credible 

because their statements are inconsistent with Commonwealth’s financial records which 

continuously recorded the $7 million advance as a liability. Considering that Frobouck and 

Savor had both supervisory authority over the preparation of the financial statements and a major 

financial incentive for advocating their current position, the Court places more weight upon the 

contemporaneous financial records than the statements of two self-interested shareholders whose 

testimony can no longer be refuted by Bill Anderson. Accordingly, the Court concludes that the 

Anderson Note and Mortgage remain valid and enforceable debt instruments and may be 

asserted as a claim against Commonwealth in this bankruptcy. 

IV. 

Equitable Subordination 

Equitable subordination is a remedy provided in § 510(c), which states: 

(c) Notwithstanding subsections (a) and (b) of this section, after notice 

and a hearing, the court may — 

(1) under principles of equitable subordination, subordinate for 

purposes of distribution all or part of an allowed claim to 

all or part of another allowed claim or all or part of an 

allowed interest to all or part of another allowed interest; or 

(2) order that any lien securing such a subordinated claim be 

transferred to the estate. 

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Equitable subordination is “a ‘remedial rather than penal’ doctrine designed ‘to 

undo or to offset any inequality in the claim position of a creditor that will produce injustice or 

unfairness to other creditors in terms of the bankruptcy results.” Schubert v. Lucent Tech., Inc. 

(In re Winstar Commc’ns, Inc.), 554 F.3d 382, 411 (3d Cir. 2009) (quoting Citicorp Venture 

Capital, Ltd. v. Comm. of Creditors Holding Unsecured Claims, 323 F.3d 228, 233-34 (3d Cir. 

2003)). 

Section 510(c) permits a bankruptcy court to subordinate an allowed claim, on 

equitable grounds, to the claims of other creditors of a debtor’s estate. “In the exercise of its 

equitable jurisdiction the bankruptcy court has the power to sift the circumstances surrounding 

any claim to see that injustice or unfairness is not done in administration of the bankruptcy 

estate.” In re Mid-American Waste Sys., Inc., 284 B.R. 53, 68 (Bankr. D. Del. 2002) (quoting 

Burden v. United States, 917 F.2d 115, 117 (3d Cir. 1990) in turn, quoting Pepper v. Litton, 308 

U.S. 295, 307-08 (1939)). 

The party seeking to subordinate a claim has the initial burden of coming forward 

with material evidence to overcome the prima facie validity accorded to proofs of claim. MidAmerican Waste, 284 B.R. at 69. Then, the burden shifts to the claimant to demonstrate the 

fairness of its conduct. Id. The burden on the claimant is not only to prove the good faith of the 

parties to the transaction, but also to show the inherent fairness from the point of view of the 

debtor corporation and those with interests therein. Id. 

In Winstar, the Third Circuit adopted a three-factor test that must be satisfied 

before determining if equitable subordination of a claim is appropriate: (1) the claimant must 

have engaged in some type of inequitable conduct; (2) the misconduct must have resulted in an 

injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) 

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equitable subordination of the claim must be consistent with the provisions of the Bankruptcy 

Code. Winstar, 554 F.3d at 411. The Winstar three-part test is consistent with U.S. Supreme 

Court teachings. U.S. v. Noland, 517 U.S. 535 (1996) (describing existing case law as consistent 

with the three-part test originally identified in In re Mobile Steel Co., 563 F.2d 692, 700 (5th Cir. 

1977)). 

Frobouck and Savor have presented an extraordinarily confusing argument 

concerning allegedly inequitable conduct by Bill, Ruth, and Kathy Anderson. Under their legal 

theory, Bill used his interest in Commonwealth to over-leverage his investments and obtain 

excessive credit from S&T Bank and PNC Bank. Once the economic recession hit, Bill could no 

longer make the required payments to the banks. After his death, the banks put pressure on Ruth 

and Kathy Anderson to foreclose on the Anderson Note and Mortgage. Rather than pursue this 

remedy immediately, they claim that Ruth and Kathy Anderson waited in the bushes until Savor 

and Frobouck paid off the PIDA lien and then pounced with a foreclosure action after the 

Mortgage became the senior lien on the Property. 

The Court fails to understand how any of this constitutes inequitable conduct as 

understood in the context of § 510(c) or Winstar. Anderson’s financial decisions harmed 

himself, his family, and possibly the banks, but not Commonwealth or its creditors. That Ruth 

and Kathy Anderson might have baited Savor and Frobouck into paying off the PIDA lien is not 

supported by evidence in the record. In December 2008, two months after Bill passed away, 

Ruth and Kathy confessed judgment against Commonwealth, indicating their intent to enforce 

the terms of the documents as written. It was therefore apparent at least two years before the 

PIDA loan was satisfied (in October 2010) that Ruth and Kathy exhibited hostile intent with 

respect to Commonwealth, and a mortgage foreclosure action was foreseeable. And it stretches 

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credulity to suggest that two attorneys who are highly-successful entrepreneurs would be 

unaware that paying off the PIDA loan would elevate the Andersons’ mortgage lien to firstpriority status during a time when the Andersons were encountering financial difficulties. 

The purpose of equitable subordination is “to undo or to offset any inequality in 

the claim position of a creditor that will produce injustice or unfairness to other creditors in terms 

of the bankruptcy results.” Citicorp Venture Capital, Ltd., 323 F.3d at 233. It is often wielded 

against insiders of the debtor to prevent harm to those who could not protect themselves, either 

due to deception or an unfamiliarity with a firm’s capital structure, from overreaching by those 

with intimate knowledge of everything. 

Where equitable subordination is sought against a non-insider creditor, the 

plaintiff bears a heavy burden. Bank of N.Y. v. Epic Resorts (In re Epic Capital Corp.), 307 B.R. 

767, 772 (D. Del. 2004). It must allege an “egregious level of misconduct” to satisfy the first 

prong of the Winstar test. Century Glove, Inc. v. Isellin (In re Century Glove, Inc.), 151 B.R. 

327, 333 (Bankr. D. Del. 1993). It must also establish the claim with particularity. Bank of N.Y. 

v. Epic Resorts—Palm Springs Marquis Villas (In re Epic Capital Corp.), 290 B.R. 514, 524 

(Bankr. D. Del. 2003). 

Since Ruth and Kathy are not insiders, Frobouck and Savor fail to establish the 

first and most important of the Winstar factors, that Ruth and Kathy engaged in inequitable 

conduct. Fraud, spoliation, breach of fiduciary duty, and the creditor’s use of the debtor as a 

mere instrumentality are examples of egregious conduct justifying equitable subordination, but 

none of those factors are present here. See Waslow v. MNC Commercial Corp. (In re Paolella), 

161 B.R. 107, 118 (E.D. Pa. 1993); In re Aluminum Mills Corp., 132 B.R. 869, 896 (Bankr. N.D. 

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Ill. 1991). Frobouck and Savor did not demonstrate with particularity how any actions 

undertaken by Ruth, Kathy, or even Bill Anderson rose to the level of egregious misconduct. 

As evident by its name, the concept of “equitable subordination” requires that 

principles of equity are to be considered in any application of this remedy. Since Frobouck and 

Savor are creditors who would stand to benefit from any imposition of an equitable 

subordination remedy against the Andersons, it is entirely appropriate for the Court to evaluate 

how their own conduct may have contributed to the circumstances for which they now find 

themselves. In re Papercraft Corp., 211 B.R. 813, 827 (Bankr. W.D. Pa. 1997) (remedy of 

equitable subordination of creditor's claim should be reconciled with principles of equity). 

One principle of equity is that it will not aid a party which is not vigilant. Banco 

Urquijo, S.A. v. Signet Bank, 861 F. Supp. 1220, 1251 (M.D. Pa. 1994) (finding bank failed to 

require monthly financial statements although entitled to do so); Roeder v. Lockwood (In re 

Lockwood Auto Group, Inc.), 450 B.R. 557, 558 (Bankr. W.D. Pa. 2011). 

Frobouck and Savor were anything but diligent. According to their testimony, the parties 

acknowledged Commonwealth’s precarious financial position when they met at Franco’s in June 

2007. After the discussion turned to the Mortgage, it is claimed that Anderson agreed to treat the 

$7,022,423.37 advance as a capital contribution. To the extent this was the understanding, 

Frobouck and Savor had every incentive to ensure that it was properly documented. As officers 

and directors of Commonwealth, they also possessed the tools and the resources to make it 

happen. Frobouck and Savor were not unwitting participants in these transactions, but trained 

lawyers who were experienced in constructing venture capital investments capable of generating 

hundreds of millions of dollars. Their failure to prepare a written modification in this instance 

indicates that the Andersons never agreed to such terms. 

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In short, Savor and Frobouck failed in their initial burden to overcome the prima 

facie validity of the Anderson claim. They then failed the first two Winstar elements in not 

demonstrating how Bill, Ruth, and Kathy acted inequitably and caused injury to Commonwealth 

or its creditors. In consideration of these factors, the Court denies the request to equitably 

subordinate the claim of Ruth Anderson and the Anderson estate. 

V. 

Relief from the Automatic Stay 

The Court now turns to the question of whether Ruth and Kathy Anderson are 

entitled to relief from the automatic stay to proceed with their foreclosure action in the state 

court. Section 362(d)(2) provides that relief must be granted with respect to a stay against 

property if “(A) the debtor does not have an equity in such property; and (B) such property is not 

necessary to an effective reorganization.” 

As the proponents of the motion, Ruth and Kathy have the burden of proof on the 

issue of Commonwealth’s equity in the Property. The test in the Third Circuit for determining 

whether a debtor has any equity in property for purposes of § 362(d)(2)(A) focuses on comparing 

the total amount of all liens against the property and the current value of the property subject to 

the lien(s). Nantucket Investors II v. California Fed. Bank (In re Indian Palms Assocs., Ltd), 61 

F. 3d 197, 206 (3d Cir. 1995). The term “equity” as it appears in § 362(d)(2)(A) is defined as the 

amount by which the value of a given property exceeds the total amount of the lien(s) or charges 

against it. In re Indian Palms Assocs., Ltd., 61 F. 3d at 208. If this value is equal to or less than 

the amount of the liens, there is no equity. 

Ruth and Kathy have carried their burden of proof under § 362(d)(2)(A). There is 

no doubt that Commonwealth has no equity in the Property. The value of the Anderson Claim is 

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at least $7,022,428.37. By contrast, the parties stipulate that the Property has a value of less than 

$7 million,44 and it is likely the actual value is substantially less. Commonwealth authorized its 

real estate broker to list the Property for sale at $6,850,000, but after sixteen months on the 

market, it remains unsold. In his testimony, the broker expressed a belief that the Property will 

ultimately sell for between $3.5 million and $4 million. Comparing the acknowledged lien totals 

against the current and anticipated value of the Property shows that Commonwealth has no 

equity in the Property. 

Commonwealth has the burden of proving that the Property is necessary for an 

effective reorganization. See 11 U.S.C. § 362(d); In re Diversified Energy Venture, 311 B.R. 

712, 717 (Bankr. W.D. Pa. 2004). As explained by the United States Supreme Court, property is 

necessary to an effective reorganization when it is “essential for an effective reorganization that 

is in prospect.” United Sav. Ass’n of Tex. v. Timbers of Inwood Forest, 484 U.S. 365, 375-77 

(1988) (emphasis in original). Accordingly, there must be “a reasonable possibility of a 

successful reorganization within a reasonable time.” Id. 

On this count, Commonwealth has not carried its burden of proof. 

Commonwealth has proposed a liquidating plan of reorganization. Such plans are acceptable for 

§ 362(d)(2)(B) purposes. In re Conroe Forge & Mfg. Corp., 82 B.R. 781, 785 (Bankr. W.D. Pa. 

1988) (“In a liquidating Chapter 11 where Debtor has ceased operations and collateral value is 

not decreasing, ordinarily all property will be necessary for an effective reorganization.”). 

However, Commonwealth cannot take comfort from the Conroe Forge decision because it has 

provided no evidence that the centerpiece of that liquidation, the sale of the Property, could 

realistically occur within a reasonable time period. 

                                                            

44 See Stipulation [Dkt. No. 190] at ¶ 9. 

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Courts have described the burden of proof necessary to establish a reasonable 

possibility of an effective liquidation as a sliding scale, where the debtor has great freedom in the 

early stages of bankruptcy and the burden enlarges as the bankruptcy case progresses. In re 

Madco Prods., 2009 Bankr. LEXIS 5724, at *13 (Bankr. W.D. Tenn. June 16, 2009); In re 

Holly’s, 140 B.R. 643, 701 (Bankr. W.D. Mich. 1992). When relief from stay is requested near 

the expiration of the exclusivity period, “the moving target burden of proof requires a greater 

showing than ‘plausibility.’” In re Holly’s, 140 B.R. at 701. Here, Commonwealth has not 

demonstrated that a successful reorganization within a reasonable period of time is “probable.” 

Commonwealth has been marketing the Property for almost two years without success. 

Although the Property has been listed at $6.8 million and the court-appointed broker expressed a 

willingness to entertain offers in the $3.5 to $4 million range, Commonwealth has not brought 

forth any potential buyers willing to acquire the Property at any price. 

Where there is only one asset of the debtor, the asset has no equity, and the debtor 

is not conducting any business, “there is no basis to conclude that property lacking equity has 

any value to the estate in a liquidating plan.” In re 6200 Ridge, Inc., 69 B.R. 837, 844 (Bankr. 

E.D. Pa. 1987). It is possible under some circumstances that a property without equity may still 

be productive, when it can be sold in a package with other assets. Empire Enters., Inc. v. 

Koopmans (In re Koopmans), 22 B.R. 395, 407 (Bankr. D. Utah 1982) (discussing, for example, 

liquidating plans where the property was needed to house inventory or other assets, or where the 

property could be combined with other assets to make a more profitable asset, such as 

assembling continguous parcels of real estate). But in this case, there are no other assets and the 

Property has no equity. At this advanced stage of the bankruptcy, Commonwealth has not shown 

that it could realistically implement a liquidating plan within a reasonable time period. 

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Further, there are numerous impediments to an effective sale of the Property 

which prompts the Court to conclude that, even if a suitable buyer were found, approval is 

anything but inevitable. Ruth and Kathy Anderson have already indicated that they will oppose 

the proposed assumption of the RES lease in the plan. They challenge the validity of the lease 

due to various alleged improprieties and self-dealings by Frobouck and Savor which occurred 

when the lease was granted. Included among these allegations is the assertion that Ruth and 

Kathy Anderson did not consent to the RES lease, even though the mortgagees’ consent is 

required by the Mortgage.45 While this motion does not present the proper context to examine 

the circumstances surrounding the execution of the RES lease, enough legitimate questions have 

been raised to suggest that if Commonwealth insists on the lease assumption as part of the sale, it 

is not substantially certain that the sale will be approved. Based on the lack of any interest in the 

Property, Commonwealth’s insistence that any sale include the assumption of the RES lease, 

numerous complications with that lease, and the near-certainty of protracted hearings on plan 

confirmation, the Court is forced to conclude that Commonwealth has not carried its burden of 

proof that there is a reasonable possibility of a successful reorganization/liquidation within a 

reasonable time. 

In reaching this determination, the Court is influenced by the absence of any 

creditors who are unaffiliated with Anderson, Frobouck, or Savor. Indeed, the only independent 

creditor is the real estate tax collector who can expect to be paid regardless of whether a sale or 

foreclosure occurs because its lien is superior to the lien granted by the Mortgage. All of the 

remaining claims are either held by Frobouck, Savor, the Andersons, or an entity they own or 

                                                            

45 See Ex. I, Mortgage at ¶ 10 (Commonwealth may not lease any part of the Property for purposes other than 

ethanol production without mortgagee’s written consent); ¶ 7 (mortgagee’s written consent required for 

construction or destruction of improvements on any part of the Property). 

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control. The Court also finds it unlikely that any surplus funds will remain from the sale to pay 

any parties other than the Andersons and the real estate taxing authorities. As determined above, 

Ruth Anderson and the estate of Bill Anderson hold a secured claim of at least $7,022,428.37,46

and they possess the ability to credit bid for the Property. Considering that the Property 

valuations range from $3.5 million to $6.8 million, the Andersons can expect to receive virtually 

all of the proceeds from a sale. Under these circumstances, the Court concludes that it is 

improbable that Commonwealth can confirm a plan within a reasonable period of time that will 

provide a benefit to anyone other than the Andersons. For these reasons, the Andersons should 

not bear any further delays and shall be granted relief from the stay. 

The motion for relief from stay under § 362(d)(2) is GRANTED. Because the 

Court grants relief under this provision, it does not reach the merits of the motion for relief from 

stay under § 362(d)(1). 

An appropriate Order will issue. 

46 It is unnecessary for the Court to determine the precise amount of the Anderson Claim at this stage since 

the value of the Property does not exceed the outstanding principal amount owed. 

cm: Debtor

 Douglas A. Campbell, Esq.

 Robert O Lampl, Esq.

 Karen Y. Bonvalot, Esq.

 Kirk B. Burkley, Esq.

 Arthur W. Zamosky, Esq. 

November 4, 2015 _______________________________

 GREGORY L. TADDONIO

 UNITED STATES BANKRUPTCY JUDGE

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