Coltex Loop Central Three Partners, L.P., In re

• Decision Date: 19 February 1998
• Docket Number: Docket No. 96-5140
• Parties: 39 Collier Bankr.Cas.2d 656, 32 Bankr.Ct.Dec. 179, Bankr. L. Rep. P 77,634 In Re: COLTEX LOOP CENTRAL THREE PARTNERS, L.P., Debtor. COLTEX LOOP CENTRAL THREE PARTNERS, L.P., Debtor-Appellant, v. BT/SAP POOL C ASSOCIATES, L.P., Creditor-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

Page 39

138 F.3d 39

39 Collier Bankr.Cas.2d 656, 32 Bankr.Ct.Dec. 179,

Bankr. L. Rep. P 77,634

In Re: COLTEX LOOP CENTRAL THREE PARTNERS, L.P., Debtor COLTEX LOOP CENTRAL THREE PARTNERS, L.P., Debtor-Appellant, v. BT/SAP POOL C ASSOCIATES, L.P., Creditor-Appellee.

Docket No. 96-5140.

United States Court of Appeals Second Circuit.

Argued Oct. 15, 1997.

Decided Feb. 19, 1998.

Peter D. Wolfson (Suzanne D.T. Lovett, Pryor, Cashman, Sherman & Flynn, New York City, on the brief), for Debtor-Appellant.

Michael Luskin (Lori Lapin Jones and Etty M. Pollack, Luskin, Stern & Eisler LLP, New York City, on the brief), for Creditor-Appellee.

Before: JACOBS and LEVAL, Circuit Judges, and RESTANI, Judge. ^*

RESTANI, Judge:

This is an appeal from a judgment of the district court reversing a bankruptcy court order confirming a Chapter 11 cramdown reorganization plan (the "Plan"). The Plan allows pre-bankruptcy equity holders to retain the primary asset of the debtor based on a new capital contribution. We affirm the district court's decision that the Plan does not meet the requirements of confirmation set forth in 11 U.S.C. § 1129 (1994).

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction pursuant to 28 U.S.C. § 158(a) and we have jurisdiction pursuant to 28 U.S.C. §§ 158(d) and 1291. This court's appellate review of a district court's review of a bankruptcy court order is plenary. Gulf States Exploration Co. v. Manville Forest Prods. Corp. (In re Manville Forest Prods. Corp.), 896 F.2d 1384, 1388 (2d Cir.1990). We review the bankruptcy court's factual findings for clear error. Id.

FACTS

Background

The facts, undisputed by the parties and as articulated by the district court, are as follows.

Appellant Coltex Loop Central Three Partners, L.P. ("Coltex"), a limited partnership consisting of one general partner and six limited partners (the "Partners"), was organized under the laws of the state of Delaware in 1990. Coltex's primary asset is a ten-story office building in Houston, Texas. Coltex purchased the property in June 1990 for $8,500,000, financing approximately $6,400,000 of the purchase price with funds obtained from a secured loan from an affiliate of the Bank of Boston.

In 1994, the loan documents were assigned to appellee BT/SAP as part of a portfolio purchase by BT/SAP from the Bank of Boston. At the time of the assignment to BT/SAP, Coltex was in default under the loan. On January 6, 1995, BT/SAP notified Coltex that it was in continued default under the loan agreements and that if it did not cure the default, the property would be posted for foreclosure on February 7, 1995. On February 6, 1995, Coltex paid $25,000 to BT/SAP in exchange for which BT/SAP agreed to adjourn the upcoming foreclosure sale for a period of one month. On February 9, 1995, BT/SAP notified Coltex that the sale would occur on March 7, 1995.

The Filing of the Petition

On March 7, 1995, just prior to the foreclosure sale, Coltex filed a Chapter 11 petition with the United States Bankruptcy Court for the Southern District of New York. The foreclosure sale was automatically stayed under 11 U.S.C. § 362. After an initial dispute as to the amount due on the loan, BT/SAP and Coltex stipulated that BT/SAP's total claim was $7,200,000. Coltex's schedule also listed other general unsecured claims of approximately $123,000 and various tax claims of approximately $355,000.

The Plan

In September 1995, during its exclusive period for submitting a plan, Coltex submitted its Third Amended Plan of Reorganization. The bankruptcy court did not permit a shortening of the exclusivity period so that BT/SAP could submit its own plan, which proposed to pay non-insider unsecured creditors in full. Coltex's Plan contained the following classes and proposed the following treatment:

Class 1 Tax Claims--Cash payment of essentially the full amount of the claims.

Class 2 BT/SAP Secured Claim--Option on the part of Coltex to pay the claim either in cash on the effective date or over time. Coltex later decided to pay cash on the effective date.

Class 3 Unsecured Claims--(including BT/SAP's unsecured deficiency claim)--To be paid 10% of allowed amount of claim in cash.

Class 4 Equity Interests of Partners--To be retained.

The Plan permitted the Partners to contribute money to Coltex and, in return, to retain their interests in Coltex post-confirmation. At trial, Joseph Lambert ("Lambert"), a limited partner and executive vice president of the general partner of Coltex, testified that the Partners, i.e., the equity holders, would be funding the Plan, which required approximately $3.4 million. Lambert further testified that Coltex had approached only one lender in approximately the last year in an effort to obtain equity or other financing for the property and that the request was rejected. Lambert also stated that within the prior year Coltex had not retained any mortgage brokers or outside consultants to help locate other sources of equity or financing and, apart from BT/SAP, the Partners did not consider bringing in new equity partners as an alternative means of obtaining money to fund the Plan.

BT/SAP objected to the Plan on the grounds, inter alia, that (1) it incorrectly valued the Property at $2.95 million (BT/SAP's appraisals valued the Property at $5.7 million); (2) the tax claims were artificially impaired so as to create an impaired class allowing Coltex to achieve a "cramdown" of the Plan over BT/SAP's objections; and (3) the Plan violated the requirements of the "absolute priority rule."

The Bankruptcy Court's Decision

On May 21, 1996, the bankruptcy court issued its "Order Confirming Debtor's Third Amended Plan of Reorganization Dated September 13, 1995" over the objections of BT/SAP. The bankruptcy court set the value of the Property at $2.95 million and held that consequently "the capital infusion by the [Partners] satisfies 11 U.S.C. § 1129(b) and the 'new value' exception to the 'absolute priority rule.' "

The District Court's Decision

The district court reversed. It reasoned that while the absolute priority rule as codified in 11 U.S.C. § 1129(b)(2)(B)(ii) does not always bar old equity's participation in a plan of reorganization, it does bar participation if it is "on account of" the prior interest. BT/SAP Pool C Assocs., L.P. v. Coltex Loop Central Three Partners, L.P., 203 B.R. 527, 534 (S.D.N.Y.1996). The court explained that the interest received under the new Plan would not be on account of the prior interest if the five-part "new value" test was met. Id. Under the five-part test, the capital contribution by the old equity holders must be new, substantial, money or money's worth (not future labor, goodwill, etc.), necessary for a successful plan of reorganization, and reasonably equivalent to the value of the property to be retained by old equity. Id.; see also Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership ), 2 F.3d 899, 908 (9th Cir.1993), cert granted, 510 U.S. 1039, 114 S.Ct. 681, 126 L.Ed.2d 648 (1994), appeal dismissed as moot, 513 U.S. 18, 115 S.Ct. 386, 130 L.Ed.2d 233 (1994). The district court found the debtor failed to establish that old equity's "new value" contribution was "necessary," because other avenues for funding a successful reorganization had not been adequately explored. BT/SAP Pool C Assocs., 203 B.R. at 536. The court stated that because old equity was the lender of first opportunity, rather than the lender of last resort, old equity would receive its interest on account of its prior subordinate status, in violation of the absolute priority rule. Id. The court also noted the extinguishment of half of the secured creditor's debt, the lack of exposure of the property to the market, and the lack of fair opportunity for bids from other parties. Id. Accordingly, the district court reversed the bankruptcy court and found the Plan unconfirmable. Id.

DISCUSSION

The numerous lower courts and three courts of appeals which have addressed the issue presented here have employed different reasoning to reach variable results. Both the Ninth Circuit in Bonner Mall, 2 F.3d at 908-09, and the Seventh Circuit in In re 203 N. LaSalle Street Partnership, 126 F.3d 955, 971-72 (7th Cir.1997)(Kanne, J., dissenting), have found, in essence, that the debtor's opportunity to submit a new value plan for confirmation without subjecting the primary asset of the debtor to market bids does not cause old equity to receive anything "on account of" its prior interest, and thus complies with the absolute priority rule. ¹ The Fourth Circuit in Travelers Insurance Co. v. Bryson Properties XVIII (In re Bryson Properties, XVIII ), 961 F.2d 496, 504 (4th Cir.1992), reached a different conclusion. ² We find the reasoning of the dissent in LaSalle, 126 F.3d at 970-73, and the Fourth Circuit in Bryson, 961 F.2d at 504, which adopt a plain reading of the statute, persuasive. Although the reasoning for our conclusion has been explained very well by the dissent in LaSalle, it may be useful to reiterate it, in part, here. We begin with the statute.

Generally, a Chapter 11 reorganization plan may be confirmed only with the assent of each class of impaired creditors. 11 U.S.C. §§ 1126(c); 1129(a)(8). If an impaired class of creditors rejects a plan, however, the plan, nonetheless, may be confirmed if the other requirements of confirmation are met and the plan is "fair and equitable." 11 U.S.C. § 1129(b)(1) (the so-called "cramdown" provision). One of the attributes of a fair and equitable plan is that if an unsecured creditor is not paid in full, "the holder of any claim or interest that is junior to the claims of [the unsecured creditor] class will not receive or retain under the plan on account of such junior claim or interest any property." 11 U.S.C. § 1129(b)(2)(B)(ii). This is the "absolute priority rule." As will be explained, we think it is clear that the former equity holders, who are...