324 F.3d 197 (3rd Cir. 2003), 01-4140, In re PPI Enterprises (United States) Inc.
|Citation:||324 F.3d 197|
|Party Name:||In re: PPI ENTERPRISES (U.S.), INC. and POLLY PECK PRODUCE, INC., Debtors SHELDON H. SOLOW, d/b/a SOLOW BUILDING COMPANY v. PPI ENTERPRISES (U.S.), INC., POLLY PECK PRODUCE, INC., ARVI LIMITED and PPI HOLDINGS, B.V. Sheldon H. Solow, d/b/a Solow Building Company, Appellant|
|Case Date:||March 28, 2003|
|Court:||United States Courts of Appeals, Court of Appeals for the Third Circuit|
[Copyrighted Material Omitted]
Argued July 15, 2002
On Appeal from the United States District Court for the District of Delaware D.C. Civil Action No. 00-cv-00469 (Honorable Roderick R. McKelvie)
STEPHEN J. SHIMSHAK, (ARGUED) JAMES H. MILLAR, Paul, Weiss, Rifkind, Wharton & Garrison New York WILLIAM A. HAZELTINE, Page 200
Potter Anderson & Corroon Wilmington, Delaware Attorneys for Appellant JAMES L. PATTON, JR.(ARGUED), TIMOTHY E. LENGKEEK, Young Conaway Stargatt & Taylor, Wilmington, DE, Attorneys for Appellees, PPI Enterprises (U.S.), Inc., Polly Peck Produce, Inc., ARVI Limited and PPI Holdings, B.V.
CHARLENE D. DAVIS, (ARGUED) The Bayard Firm, Wilmington, DE, Attorney for Appellees, Arvi Limited and PPI Holdings, B.V.
Before: SCIRICA, ALITO and FUENTES, Circuit Judges
SCIRICA, Circuit Judge :
This is an appeal by a commercial landlord who contends a Chapter 11 bankruptcy was filed only to frustrate his collection of rent. At issue is an interpretation of Bankruptcy Code § 502(b)(6) and the Code's good faith requirements.
Sheldon Solow owns a Manhattan office tower at 9 West 57th Street. On August 9, 1989, he leased 10,000 square feet to PPI Enterprises ("PPIE"), a Delaware corporation, for its corporate headquarters. The lease ran for ten years, requiring annual payments (in monthly installments) of $620,000 for five years and $650,000 thereafter. Polly Peck International, PLC, a United Kingdom corporation and the indirect corporate parent of PPIE, guaranteed these commercial lease obligations.1 Sanwa Bank issued a stand- by letter of credit to Solow, on behalf of PPIE, in the amount of $650,000.
Over time, Polly Peck's financial status unraveled and insolvency proceedings commenced in Great Britain. On October 25, 1990, the Chancery Division of the High Court of Justice entered an administration order2 for Polly Peck and appointed three administrators for the company. As Polly Peck's subsidiary, PPIE faced credit cancellations and defaults exceeding $17 million.3
In September 1991, PPIE abandoned its corporate headquarters in Manhattan and ceased paying rent to Solow. On October 8, 1991, Solow delivered PPIE written notice of default under the lease. After PPIE failed to cure the default, Solow Page 201
gave notice on October 21, 1991, of his intent to terminate the lease. Remaining rent due under the leasehold agreement totaled approximately $5.86 million. Solow subsequently drew on Sanwa Bank's letter of credit, applying it in lieu of monthly rent payments between October 1991 and July 31, 1992. By the latter date, the letter of credit was exhausted. On October 25, 1991, Solow sued PPIE and Polly Peck in the United States District Court for the Southern District of New York. On November 13, 1992, the district court granted Solow partial summary judgment, holding PPIE wrongly terminated its lease, but did not address possible damages. On March 4, 1996, almost four and one half years after filing its initial lawsuit and after the failure of settlement negotiations, Solow asked the district court to schedule a damages trial. On the eve of that proceeding, PPIE filed for Chapter 11 bankruptcy in Delaware. PPIE stated it had four objectives: (1) concluding the Polly Peck "wind-down"; (2) "liquidating" PPIE; (3) invoking provisions to reject a restriction on its ability to sell the Del Monte stock and (4) limiting Solow's lease termination damages under Bankruptcy Code § 502(b)(6).
On August 9, 1996, Solow filed a proof of claim with the Bankruptcy Court, reducing his alleged damages to $4,757,824.94.4 Then, in December 1996, Solow moved to dismiss the Chapter 11 filing for bad faith. Solow alleged PPIE's bankruptcy was a sham filing designed to create value for Polly Peck and its creditors at his expense, and that the bankruptcy served no legitimate purpose. According to Solow, PPIE did not intend its bankruptcy filing to effectuate a corporate reorganization, because the company had no ongoing business, only one remaining employee, and "no assets other than stock certificates representing a 2% interest in Del Monte Foods Company." After an evidentiary hearing, the Bankruptcy Court in January 1997 denied the motion without prejudice.5
On March 31, 1998, PPIE filed its bankruptcy plan ("Plan"), dividing administrative claims and priority tax claims into four classes.6 After providing for the four-class division, the Plan stated: "The treatment of and consideration to be received by holders of Allowed Claims and Interests pursuant to this Article IV of the Plan shall be in full and complete satisfaction, settlement, release and discharge of such Claims and Interests. The Debtors' obligations in respect of such Claims and Interests shall be satisfied in accordance with the terms of this Plan."
The Plan treated Solow's claim as a "Class 2 non-insider general unsecured claim." PPIE contended Plan approval by the classes of creditors was unnecessary since none were impaired. Nonetheless, PPIE solicited votes from Classes 1, 2, and 3. Only two of seven ballots were returned from Class 2 Solow's "no" vote and one "yes" vote. With no clear majority, Solow contends Class 2 effectively rejected the Plan.7
Solow renewed his motion to dismiss on April 6, 1998, contending his vote against the Plan had not counted because his claim was improperly classified as "unimpaired." Over a four-day period, the Bankruptcy Court heard evidence on the debtors' objection to Solow's claim; Solow's renewed motion to dismiss; and Solow's objections to the Plan's confirmation. On December 30, 1998, the Bankruptcy Court determined Solow's claim was subject to the statutory cap of 11 U.S.C. § 502(b)(6) and reduced by application of the letter of credit; the bankruptcy was filed in good faith; and as an "unimpaired creditor," Solow was deemed to have accepted the plan. In re PPI Enters., 228 B.R. 339 (Bankr.D.Del.1998) (Walsh, J.).
The United States District Court for the District of Delaware affirmed without opinion and this appeal followed.8
The Bankruptcy Court had subject matter jurisdiction under 28 U.S.C. §§ 1334 and 157. The District Court had jurisdiction over the Bankruptcy Court's order under 28 U.S.C. § 158(a). We have jurisdiction under 28 U.S.C. § 158(d). We review the Bankruptcy Court's "legal determinations de novo, its factual findings for clear error, and its exercises of discretion for abuse thereof." In re Cont'l Airlines, 203 F.3d 203, 208 (3d Cir. 2000).
The central issue on appeal is whether the doctrine of impairment precludes Solow from having voting rights against PPIE's Chapter 11 bankruptcy plan.
"Impairment" is a term of art crafted by Congress to determine a creditor's standing in the confirmation phase of bankruptcy plans. In re L & J Anaheim Assoc., 995 F.2d 940, 942-43 (9th Cir. 1993). Each creditor has a set of legal, equitable, and contractual rights that may or may not be affected by bankruptcy. If the debtor's Chapter 11 reorganization plan does not leave the creditor's rights entirely "unaltered," the creditor's claim will be labeled as impaired under § 1124(1) of the Bankruptcy Code. If the creditor's claim is impaired, the Code provides the creditor with a vote that, depending on the value of the creditor's claim, may be sufficient to defeat confirmation of the bankruptcy plan.
The Bankruptcy Code creates a presumption of impairment "so as to enable a creditor to vote on acceptance of the plan." In re Monclova Care Ctr., Inc., 254 B.R. 167, 178-79 (Bankr. N.D. Ohio 2000); In re Seasons Apartments, L.P., 215 B.R. 953, 958 (Bankr. W.D. La.1997). Under 11 U.S.C. § 1124(1), the presumption of impairment is overcome only if the plan "leaves unaltered the [creditor's] legal, equitable, and contractual rights." 9 The burden is placed on the debtor to demonstrate the plan leaves the creditor's rights unaltered.
The Bankruptcy Court here began by reviewing 11 U.S.C. § 502(b)(6). The court determined the Plan did not impair Solow's legal, equitable, and contractual rights, since the limitation on Solow's potential recovery was dictated by § 502(b)(6), which was independent of the Plan. Solow contends application of § 502(b)(6) alters his claim and entitles him to vote against the Plan's confirmation. The question is whether the impairment sections of the Bankruptcy Code require such a result.
We begin with the language of the Bankruptcy Code. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241(1989). As noted, § 1124(1) provides that a claim is impaired unless the plan "leaves unaltered the legal, equitable, and contractual rights to which such claim . . . entitles the holder of such claim." Under § 101(5), a "claim" refers broadly to a creditor's right to recovery. 10 See also Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) ("We have previously explained that Congress intended by this language to adopt the broadest available definition of 'claim.' ") (citations omitted).
Solow contends a broad definition of "claim" requires a finding of impairment whether the source of impairment is the plan or a statute. The Bankruptcy Court rejected Solow's argument, finding he "confuse[d] two distinct concepts: (i) plan impairment, under which the debtor alters the 'legal, equitable, and contractual rights to which [the] claim entitles the holder of such claim,' and (ii) statutory impairment, under which the operation of a provision of the Code alters the amount that the creditor...
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