Greystone III Joint Venture, Matter of, No. 90-8529

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Writing for the CourtBefore REYNALDO G. GARZA, POLITZ, and JONES; EDITH H. JONES; Before POLITZ, Chief Judge, REYNALDO G. GARZA and JONES; PER CURIAM; EDITH H. JONES
Citation995 F.2d 1274
Docket NumberNo. 90-8529
Decision Date19 November 1991
PartiesIn the Matter of GREYSTONE III JOINT VENTURE, Debtor. PHOENIX MUTUAL LIFE INSURANCE COMPANY, Appellant, v. GREYSTONE III JOINT VENTURE, Appellee.

Page 1274

995 F.2d 1274
In the Matter of GREYSTONE III JOINT VENTURE, Debtor.
PHOENIX MUTUAL LIFE INSURANCE COMPANY, Appellant,
v.
GREYSTONE III JOINT VENTURE, Appellee.
No. 90-8529.
United States Court of Appeals,
Fifth Circuit.
Nov. 19, 1991.
On Petition for Rehearing and
Suggestion for Rehearing En Banc
Feb. 27, 1992.

Page 1276

Larry Lesh, John Flowers, Neil L. Sobol, Louis Taylor, Locke, Purnell, Rain & Harrell, Dallas, TX, for appellant.

William B. Finkelstein, Jack F. Williams, Basil H. Mattingly, Hughes and Luce, Dallas, TX, for amicus Teacher Retirement System of Texas, et al.

Christopher F. Graham, Thacher, Proffitt & Wood, New York City, for amicus Amer. CNS of Life Ins., et al.

Adrian M. Overstreet, Stephen W. Sather, Overstreet, Winn & Edwards, Austin, TX, for debtor and appellee.

Appeal from the United States District Court for the Western District of Texas.

Before REYNALDO G. GARZA, POLITZ, and JONES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

This appeal pits a debtor whose only significant asset is an office building in the troubled Austin, Texas real estate market against a lender who possesses a multi-million dollar lien on the property. After obtaining bankruptcy relief under Chapter 11, Greystone III proposed a "cramdown" plan of reorganization, hoping to force a write-down of over $3,000,000 on the secured lender's note and to retain possession and full ownership of the property. Over the secured lender's strenuous objections, the bankruptcy court confirmed the debtor's plan. In re Greystone III Joint Venture, 102 B.R. 560 (W.D.Tex.1989). On appeal, the district court upheld the bankruptcy court's judgment. 127 B.R. 138.

For three reasons, we must reverse. First, the Greystone plan impermissibly classified like creditors in different ways and manipulated classifications to obtain a favorable vote. Second, tenant security deposit holders were not properly deemed an "impaired" class under the circumstances of this plan. Third, because we find no "new value exception" to the absolute priority rule codified in 11 U.S.C. § 1129(b)(2)(B), that rule was violated by Greystone's plan.

I.

Appellant Phoenix Mutual Life Insurance Corporation ("Phoenix") lent $8,800,000, evidenced by a non-recourse promissory note secured by a first lien, to Greystone to purchase the venture's office building. When Greystone defaulted on the loan, missing four payments, Phoenix posted the property for foreclosure. Greystone retaliated by filing a Chapter 11 bankruptcy reorganization petition. 1

At the date of bankruptcy Greystone owed Phoenix approximately $9,325,000, trade creditors approximately $10,000, and taxing authorities approximately $145,000. The bankruptcy court valued Phoenix's secured claim at $5,825,000, the appraised value of

Page 1277

the office building, leaving Phoenix an unsecured deficiency of approximately $3,500,000--the difference between the aggregate owed Phoenix and its secured claim.

As filed, Greystone's Second Amended Plan of Reorganization (the "Plan"), the confirmation of which is challenged in this appeal, separately classified the Code-created unsecured deficiency claim of Phoenix Mutual, see 11 U.S.C. § 1111(b), and the unsecured claims of the trade creditors. The Plan proposed to pay Phoenix and the trade creditors slightly less than four cents on the dollar for their unsecured claims, but it also provided that Greystone's general partner would satisfy the balance of the trade creditors' claims after confirmation of the Plan.

In a separate class, the Plan further provided for security deposit "claims" held by existing tenants of the office building. These claimants were promised, notwithstanding the debtor's eventual assumption of their leases, 11 U.S.C. § 365, 25% of their deposits upon approval of the Plan and 50% of their deposits at the expiration of their respective leases. The Plan stipulated that the general partner would "retain its legal obligations and ... pay the [tenant] ... creditors the balance of their claims upon confirmation."

Finally, Greystone's Plan contemplated a $500,000 capital infusion by the debtor's partners, for which they would reacquire 100% of the equity interest in the reorganized Greystone.

Unsurprisingly, Phoenix rejected this Plan, while the trade creditors and the class of holders of tenant security deposits voted to accept it. On January 27, 1989, the bankruptcy court held a confirmation hearing at which the Debtor orally modified its Plan to delete the statements that the general partner would pay the balance of trade debt and tenant security deposit claims after confirmation. A Phoenix representative testified that the insurance company was willing to fund its own plan of reorganization by paying off all unsecured creditors in cash in full after confirmation. The bankruptcy court refused to consider this proposal and then confirmed Greystone's modified Plan. The district court upheld the confirmation.

Phoenix Mutual now appeals on several grounds: (a) the plan classified Phoenix's unsecured deficiency claim separately from that of other unsecured creditors for no valid reason; (b) the "new value exception" to the absolute priority rule did not survive passage of the Bankruptcy Code; and (c) unpaid tenant security deposits were not impaired claims that could vote on the plan. 2

II.

Phoenix first attacks Greystone's classification of its unsecured deficiency claim in a separate class from that of the other unsecured claims against the debtor. This issue benefits from some background explanation.

Chapter 11 requires classification of claims against a debtor for two reasons. Each class of creditors will be treated in the debtor's plan of reorganization based upon the similarity of its members' priority status and other legal rights against the debtor's assets. 11 U.S.C. § 1122. Proper classification is essential to ensure that creditors with claims of similar priority against the debtor's assets are treated similarly. Second, the classes must separately vote whether to approve a debtor's plan of reorganization. 11 U.S.C. § 1129(a)(8), (10). A plan may not be confirmed unless either (1) it is approved by two-thirds in amount and more than one-half in number of each "impaired" class, 11 U.S.C. §§ 1126(c), 1129(a)(8); or (2) at least one impaired class approves the plan, § 1129(a)(10), and the debtor fulfills the cramdown requirements of § 1129(b) to enable confirmation notwithstanding the plan's rejection by one or more impaired classes. Classification of claims thus affects the integrity of the voting process, for, if claims could be arbitrarily placed in separate classes, it would almost always be possible for the debtor to manipulate "acceptance" by artful classification.

Page 1278

In this case, Greystone's plan classified the Phoenix claim in separate secured and unsecured classes, a dual status afforded by 11 U.S.C. § 1111(b) despite the nonrecourse nature of Phoenix's debt. Because of Phoenix's opposition to a reorganization, Greystone knew that its only hope for confirmation lay in the Bankruptcy Code's cramdown provision. 11 U.S.C. § 1129(b). The substantive impact of cramdown will be discussed later. Procedurally, Greystone faced a dilemma in deciding how to obtain the approval of its cramdown plan by at least one class of "impaired" claims, as the Code requires. 3 11 U.S.C. § 1129(a)(10). Greystone anticipated an adverse vote of Phoenix's secured claim. If the Phoenix $3.5 million unsecured deficiency claim shared the same class as Greystone's other unsecured trade claims, it would swamp their $10,000 value in voting against confirmation. The only other arguably impaired class consisted of tenant security deposit claims, which, the bankruptcy court found, were not impaired at all.

Greystone surmounted the hurdle by classifying Phoenix's unsecured deficiency claim separately from the trade claims, although both classes were to be treated alike under the plan and would receive a cash payment equal to 3.42% of each creditor's claim. Greystone then achieved the required favorable vote of the trade claims class.

Phoenix contends that Greystone misapplied § 1122 by classifying its unsecured claim separately from those of trade creditors. The lower courts rejected Phoenix's argument in three steps. First, they held that § 1122 of the Code does not unambiguously prevent classification of like claims in separate classes. The only question is what types of class differentiations among like claims are acceptable. Second, Greystone's unsecured deficiency claim is "legally different" from that of the trade claims because it arises statutorily, pursuant to § 1111(b). Third, "good business reasons" justify the separate classification of these unsecured claims. We must address each of these arguments.

Section 1122 prescribes classification of claims for a reorganization as follows:

(a) Except as provided in subsection (b) or this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such claims.

(b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.

We observe from this language that the lower courts' suggestion that § 1122 does not prevent classification of like claims in separate classes is oversimplified. It is true that § 1122(a) in terms only governs permissible inclusions of claims in a class rather requiring that all similar claims be grouped together. One cannot conclude categorically that § 1122(a) prohibits the formation of different classes from similar types of claims. But if § 1122(a) is wholly permissive regarding the creation of such classes, there would be no need for § 1122(b) specifically to authorize a class of smaller...

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188 practice notes
  • Bonner Mall Partnership, In re, No. 92-36754
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • August 4, 1993
    ...concluded in its "convincing" decision in Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274 (5th Cir.1991), petition for rehearing granted in part and opinion withdrawn in part, 995 F.2d 1284 (5th Cir.) (per curiam), cert. denied, -......
  • In re Idearc Inc., No. 09-31828 (BJH).
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas
    • December 22, 2009
    ...class are substantially similar. See Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1278 (5th Cir.1991), cert. denied, 506 U.S. 821, 113 S.Ct. 72, 121 L.Ed.2d 37 (1992); Aetna Cas. & Sur. Co. v. Clerk (In re Chateaugay Corp.), 8......
  • In re Pacific Lumber Co., No. 08-40746.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • September 29, 2009
    ...claims, but similar claims can be separated into different classes for "good business reasons." In re Greystone III Joint Venture, 995 F.2d 1274, 1281 (5th Cir.1991). Permissible justifications vary with circumstances, but "[i]n many bankruptcies, the proffered reasons ... will be insuffici......
  • 203 North LaSalle Street Partnership, Matter of, Nos. 96-2137
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • November 25, 1997
    ...not be "on account of" their junior interests but "on account of" their capital contributions. See In re Greystone III Joint Venture, 995 F.2d 1274, 1283 (5th Cir.1991), withdrawn on rehearing (1992) (Judge Jones dissented from the withdrawal of Part IV, which discusses the new value except......
  • Request a trial to view additional results
188 cases
  • Bonner Mall Partnership, In re, No. 92-36754
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • August 4, 1993
    ...concluded in its "convincing" decision in Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274 (5th Cir.1991), petition for rehearing granted in part and opinion withdrawn in part, 995 F.2d 1284 (5th Cir.) (per curiam), cert. denied, -......
  • In re Idearc Inc., No. 09-31828 (BJH).
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas
    • December 22, 2009
    ...class are substantially similar. See Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1278 (5th Cir.1991), cert. denied, 506 U.S. 821, 113 S.Ct. 72, 121 L.Ed.2d 37 (1992); Aetna Cas. & Sur. Co. v. Clerk (In re Chateaugay Corp.), 8......
  • In re Pacific Lumber Co., No. 08-40746.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • September 29, 2009
    ...claims, but similar claims can be separated into different classes for "good business reasons." In re Greystone III Joint Venture, 995 F.2d 1274, 1281 (5th Cir.1991). Permissible justifications vary with circumstances, but "[i]n many bankruptcies, the proffered reasons ... will be insuffici......
  • 203 North LaSalle Street Partnership, Matter of, Nos. 96-2137
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • November 25, 1997
    ...not be "on account of" their junior interests but "on account of" their capital contributions. See In re Greystone III Joint Venture, 995 F.2d 1274, 1283 (5th Cir.1991), withdrawn on rehearing (1992) (Judge Jones dissented from the withdrawal of Part IV, which discusses the new value except......
  • Request a trial to view additional results

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