Briscoe Enterprises, Ltd., II, Matter of
| Decision Date | 13 July 1993 |
| Docket Number | No. 92-1446,92-1446 |
| Citation | 994 F.2d 1160 |
| Parties | 29 Collier Bankr.Cas.2d 528, 24 Bankr.Ct.Dec. 717, Bankr. L. Rep. P 75,351 In the Matter of BRISCOE ENTERPRISES, LTD., II, d/b/a/ Regalridge Apartments, Debtor. HEARTLAND FEDERAL SAVINGS & LOAN ASSOCIATION, Appellee, v. BRISCOE ENTERPRISES, LTD., II, d/b/a/ REGALRIDGE APARTMENTS, Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Marilyn D. Garner, Margaret A. Mahoney, Weil, Gotshal & Manges, Dallas, TX, for appellant.
Douglas Steward Lang, Robin I. Krumme, Deirdre B. Ruckman, Gardere & Wynne, Dallas, TX, for appellee.
Appeal from the United States District Court for the Northern District of Texas.
Before WISDOM and DUHE, Circuit Judges, and DOHERTY *, District Judge.
This bankruptcy case requires the Court to confront some very difficult problems associated with a Chapter 11 "cramdown" reorganization. 1 We agree with the Bankruptcy court's approval of the reorganization plan; we REVERSE the District Court.
The debtor, Briscoe Enterprises, Ltd., II, is a Texas limited partnership formed to develop a 784-unit apartment complex in a depressed section of Fort Worth. It is a low-to-moderate-income community, and about 25% of the residents receive rental assistance from either the federal government or the city of Fort Worth. This complex, known as the Regalridge Square Apartments, was the sole asset of the limited partnership. Construction was in two phases. It was completed in early 1985. Financing was non-recourse and was from two sources: the predecessor of Heartland Federal Savings and Loan Association and the city of Fort Worth. 2 Heartland lent Briscoe $18.7 million. The city which had a lien junior to that of Heartland lent $7 million.
When the free-wheeling real estate ride of the mid-eighties ground to a halt, Briscoe began to miss its interest payments. Briscoe failed to make interest payments for the last three months of 1988 and entirely ceased servicing its debt to Heartland in July 1989. On December 29, 1989, Briscoe sought relief under 11 U.S.C. § 1101 et seq. (Chapter 11). Briscoe filed its first amended plan of reorganization on November 16, 1990 and its fourth on January 22, 1991. The fourth plan is the subject of this case.
On January 23, 1991, the bankruptcy court began hearings to consider the confirmation of the plan. The bankruptcy court held four days of hearings in January and one day in March. Eight witnesses appeared. The court, with counsel present, personally inspected the property. During these hearings, the bankruptcy court assigned a value to the property of $8.2 million. This was classified as a secured claim for Heartland. Heartland's remaining $10 million 3 and the city's $7 million became unsecured claims. Heartland objected, so that for the reorganization plan to be confirmed, it would have to pass the cramdown requirements of § 1129(b). The bankruptcy judge confirmed the plan on April 23, 1991.
Heartland appealed to the district court. The district court, without oral argument but in a lengthy opinion, reversed the bankruptcy court's confirmation on April 14, 1992. 4 Briscoe then appealed to this Court.
The plan divides the claims and interests into six classes:
"Class 1 consists of Allowed Administrative Claims.
Class 2 consists of Allowed Priority Claims.
Class 3 consists of the Allowed City Claim.
Class 4 consists of the Allowed Heartland Claim.
Class 5 consists of all Allowed Unsecured Claims asserted against the Debtor.
Class 6 consists of holders of Interests in the Debtor."
The property is to be placed in a trust managed by three trustees. Heartland, the city, and the Fort Worth NAACP will each nominate a trustee. Heartland's claim was divided into a secured and an unsecured portion. The secured portion is to be paid in monthly installments of principal and interest as though amortized over thirty years with interest at a rate of 10.25%, the rate of interest in the loan. The secured claim is to be paid in full upon the sale of the property or the expiration of fifteen years, whichever shall first occur. At the end of fifteen years, 20% of the principal would be paid down. Heartland's unsecured claim is accorded the same treatment as the city's unsecured claim and the class 5 general unsecured creditors. These unsecured creditors are to receive periodic cash payments if net cash flow allows and the trustees determine that excess cash need not be reserved for any other purpose. The unsecured creditors would also benefit pro rata from any sale or refinancing of the property if there is an excess over Heartland's secured claim. The holders of class 6 interests will receive nothing and their interests are cancelled. 5
The bankruptcy appellate process makes this Court the second level of appellate review. This Court, however, performs the identical task as the district court. We review the bankruptcy court's findings of fact under the clearly erroneous standard and its conclusions of law de novo. 6 We do benefit from the district court's thoughts on the matter, but as Judge Frank Johnson wrote for the Eleventh Circuit: "The amount of persuasive weight, if any, to be accorded the district court's conclusion ... is entirely subject to our discretion." 7
The first question that we need to resolve is the debtor's standard of proof in proving that the reorganization is confirmable under § 1129(a) and whether the fact that this is a § 1129(b) cramdown affects the standard.
The two options are proof by a preponderance of the evidence or by clear and convincing evidence. "Preponderance" means that it is more likely than not. 9 "Clear and convincing" is a higher standard and requires a high probability of success. 10
A number of bankruptcy courts have used the clear and convincing standard in a cramdown, but in none of the cases have we found a satisfactory explanation why that is the appropriate standard. 11 A few hedge and state that the plan would fail under either standard. 12 This is exactly what the district court did in this case. 13 As we view it, however, this is a case in which the plan would not pass a clear and convincing standard, but, as will be discussed below, it was not clearly erroneous for the bankruptcy court to conclude that the plan was feasible and the cramdown fair and equitable under a preponderance standard.
The United States Supreme Court has on several occasions discussed when particular standards of proof are applicable. Chief Justice Burger in Addington v. Texas spoke of the different factual settings which prompt a particular standard. "At one end of the spectrum is the typical civil case involving a monetary dispute between private parties." 14 In such a case the "plaintiff's burden of proof is a mere preponderance of the evidence". 15 At the other end of the spectrum is a criminal case. The nature of a criminal proceeding has led our legal system to require that the guilt of the accused be proved beyond a reasonable doubt. Between these two poles is some middle standard. "The intermediate standard, which usually employs some combination of the words 'clear,' 'cogent,' 'unequivocal,' and 'convincing,' is less commonly used, but nonetheless 'is no stranger to the civil law.' " 16 The Chief Justice noted that this standard had typically been employed in civil cases when "the interests at stake are deemed to be more substantial than mere loss of money". 17 He proceeded to cite several cases in which the Supreme Court had used the clear and convincing standard "to protect particularly important individual interests". 18 These concerned deportation and denaturalization. Addington, itself, concerned involuntary commitment to a mental institution, and the Court rejected the suggestion that preponderance was the correct burden.
This case clearly does not fit within any of the above "liberty" categories. The Supreme Court, however, gives further guidance in several opinions in which it held that "clear and convincing" was the incorrect standard and that "preponderance" should be used. In Herman & MacLean v. Huddleston 19, Justice Marshall for the Supreme Court reversed this Court's conclusion that the clear and convincing standard was appropriate in a 10b-5 case, although the late Judge Rubin had suggested that because of its analogy to civil fraud and its effect on the defendant's reputation, the higher standard was the correct one. Justice Marshall's opinion relied on some older cases in which it seems that the Court contemplated only preponderance or reasonable doubt. 20 The Court unanimously refused, however, to depart from the preponderance standard although the case involved fraud. This may express a more restricted view of when clear and convincing is appropriate than the Addington Court which noted that clear and convincing had often been used in civil cases involving fraud or "some other quasi-criminal wrongdoing". 21
In 1991, the Supreme Court in Grogan v. Garner 22 reversed the Eighth Circuit which had held that clear and convincing was the creditor's standard of proof to show that a debtor's debt was not dischargeable under 11 U.S.C. § 523(a) because it had been procured by fraud. The Court, after citing the "particularly important interests" language of Huddleston and Addington, observed that both the language of the statute and the statutory history were silent as to burden of proof. The Court viewed this silence as "inconsistent with the view that Congress intended to require a special, heightened standard of proof". 23 Moreover, the Court examined the conflicting interests and concluded that proof by a preponderance of the evidence would reflect "a fair balance" between the conflicting interests. 24
In this case, the district court found Grogan inapplicable because it involved dischargeability. Considering the other precedents and the process of the Grogan Court, we find this to be...
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