In re AG Consultants Grain Div., Inc.

• Decision Date: 14 August 1987
• Docket Number: Bankruptcy No. 85-60187.
• Citation: 77 BR 665
• Parties: In re AG CONSULTANTS GRAIN DIVISION, INC., Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

77 B.R. 665 (1987)

In re AG CONSULTANTS GRAIN DIVISION, INC., Debtor.

Bankruptcy No. 85-60187.

United States Bankruptcy Court, N.D. Indiana, Hammond Division.

August 14, 1987.

COPYRIGHT MATERIAL OMITTED

G. Gouveia, Gouveia & Miller, Merrillville, Ind., for debtor.

A. Kopko, Thomas, Burke, Dverly & Cuppy, Merrillville, Ind., for Unsecured Creditors' Committee (Committee).

R. Stochel, John M. O Drobinak, P.C., Crown Point, Ind., for The First Bank of Whiting (Bank).

MEMORANDUM DECISION ON ORDER DENYING CONFIRMATION OF PLAN

FRANCIS G. CONRAD, Bankruptcy Judge.^*

Debtor has requested confirmation of its Plan of Reorganization. Two creditors and the Unsecured Creditors' Committee objected to confirmation on various grounds. Because Debtor has failed to show the present value of its offer to Class VII claims and whether the value of the proposed shareholder's contribution to the plan satisfies an exception to the absolute priority rule, we deny confirmation.

Debtor, incorporated in 1979, initially engaged in consulting work about grain and agricultural supply pricing, and later began to broker, pick up, and deliver grain, and sell agricultural chemicals wholesale and retail. By 1983, the business had expanded its Indiana geographical sales area to Illinois, Michigan, Kentucky, Wisconsin, and Iowa. An unhappy purchase of a farm, also in Chapter 11 before this Court, resulted in nonrenewal of Debtor's line of credit, freezing of its bank accounts, and the removal of its inventory by financing creditors. The Chapter 11 petition followed shortly thereafter.

Debtor's post-petition disclosure statement indicates it has contracted its business operation and it now asks us to confirm its Plan of Reorganization under 11 U.S.C. § 1129.

To confirm a plan of reorganization, all elements of 11 U.S.C. § 1129(a) must be satisfied. All parties present¹ at the confirmation hearing represented or implicitly consented that the following provisions of 11 U.S.C. § 1129(a) are satisfied:

1) The plan has been proposed in good faith and not by any means forbidden by law, 11 U.S.C. § 1129(a)(3);

2) All payments, securities to be issued, etc., have been approved by or are subject to Court approval as reasonable, 11 U.S.C. § 1129(a)(4);²

3) No governmental regulatory commission or agency is involved, 11 U.S.C. § 1129(a)(6);

4) One class of impaired claims has accepted the plan, 11 U.S.C. § 1129(a)(10);

5) Confirmation of the plan is not likely to be followed by liquidation, 11 U.S.C. § 1129(a)(11).

6) All fees payable under 28 U.S.C. § 1930 have been paid, 11 U.S.C. § 1129(a)(12).

The omitted subparagraphs of 11 U.S.C. § 1129(a) delineate the several objections filed by the Bank and the Committee under that subsection and require the use of the Code's "cram down" provisions. The objections may be enumerated as follows:

1) The plan does not disclose the identity and affiliations of proposed individuals who will serve as an officer or director of the plan after confirmation; nor does the plan disclose the identity of any insider that will be employed or retained by the debtor and the nature of the compensation for such insider, 11 U.S.C. §§ 1129(a)(5)(A)(i), and 1129(a)(5)(B);³

2) A liquidation analysis is not presented. Without the analysis, creditors can not determine whether they will receive more under the plan than they would in a Chapter 7 liquidation, 11 U.S.C. § 1129(a)(7)(A)(ii);⁴

3) The plan fails to specify which claims or interests are impaired, 11 U.S.C. § 1123(a)(2).⁵ See also 11 U.S.C. § 1129(a)(1), footnote 14;

4) The plan does not provide the same treatment for all unsecured creditors, specifically, Classes VII and VIII are accorded different treatment without their consent, 11 U.S.C. § 1123(a)(4).⁶ Stated another way, the plan violates 11 U.S.C. § 1122(a)⁷ because the Class VII and VIII claims are substantially similar and do not warrant separate classification and treatment. See also 11 U.S.C. § 1129(a)(1), footnote 14;

5) Insiders are included in Classes VII and VIII. Stated another way, insiders should be in a separate class from other creditors;⁸

6) The plan is not fair and equitable under 11 U.S.C. § 1129(b)(2)(B)⁹ because Class VII did not accept the plan, 11 U.S.C. § 1129(a)(8),¹⁰ thereby violating the absolute priority rule. It also does not reveal how the administrative priority payments will be paid, 11 U.S.C. § 1129(a)(9).¹¹

DISCUSSION

Objection 1: Future officers, directors, and shareholders are not disclosed.

It is correct to say that neither the plan nor the disclosure statement specifically reveal the identity and affiliation of any individuals who will serve the debtor after confirmation. The plan also neither specifically discloses the identity of any insider who will be employed by the reorganized debtor, nor the exact nature of compensation for such insider. The objection, however, is somewhat corpulent.

A careful reading of the disclosure statement reveals many references to the president of the corporation, Brett Ellis. The plan, in Article III, paragraph 3.1, pg. 11 indicates "the current management of the debtor shall continue to operate the business." The plan does not, however, address the insider compensation issue. Debtor's counsel indicated they would amend the plan to show $30,000.00 per year compensation. When asked by the Court if they had any objection to the $30,000.00 compensation, the Committee's counsel responded "The Creditors' Committee objects to the fact that Mr. Ellis continues in operation of this business at all." Hearing Transcript, at pg. 4. The Committee offered no other rebuttal.

Further testimony elicited from Mr. Ellis at the hearing shows he arrived at the $30,000.00 salary by calculating what he required to live on. While we do not approve of this type of reasoning to support officer compensation, no creditor, or the Committee, objected to the proffered salary. Accordingly, it is allowed as a modification to the plan, and the objection based on 11 U.S.C. § 1129(a)(5)(A)(i) is denied.

Objection 2: No liquidation analysis is presented.

We find this objection appropriate, but unreasonable. It is patently obvious from the petition schedules and the financial statements that if Debtor's liquidation occurred, the unsecured creditors would receive little or nothing by way of dividend.¹² Based upon the foregoing, the objection under 11 U.S.C. § 1129(a)(7)(A)(ii) is denied. Our ruling here is not to be understood that a liquidation analysis is unnecessary in a plan of reorganization, but rather, it should be understood to mean that the economics of this case provide a reason to forego it.

Objection 3: The plan fails to specify which claims are impaired.

Brayton Chemicals, Inc. objects to the plan because it fails to specify which claims or interests under the plan are in contravention of 11 U.S.C. § 1123(a)(2). This objection has merit. While it is clear that Class VIII is impaired because they are or will receive a ten (10%) percent dividend, it is not readily apparent that Classes V, VI, and VII are impaired or unimpaired.

A closer reading of the plan, however, shows that Class V is a negotiated class. Negotiation of claims being the essence of Chapter 11, this class has agreed to its treatment. See 11 U.S.C. § 1123(a)(4).

Class VI, Whiting, has withdrawn its opposition to the plan and thus, any objection by it is moot.

Finally, Class VII is clearly impaired because stock is being received for an open account. The narrative for Class VII, frugal at best, is sufficient to show that the class is impaired. The better practice and compliance with § 1123(a)(2) would be to include with a class's treatment a prosaic statement to the effect that the class is impaired or unimpaired. With such a statement the most enervated mind would be placed on notice about the debtor's intentions. Accordingly, Objection 3 fails.

Objection 4: The plan does not provide the same treatment for all unsecured creditors.

Both Brayton Chemicals, Inc. and the Committee object to plan confirmation because the plan does not provide the same treatment of all unsecured creditors, this being in contravention of 11 U.S.C. § 1123(a)(4)¹³ and 11 U.S.C. § 1129(a)(1).¹⁴ Specifically, unsecured creditors in Class VII are to receive a pro rata share of forty-nine (49%) percent of the stock of the debtor while the unsecured creditors in Class VIII are to receive ten (10%) percent of their allowed unsecured claims payable annually over a six year period from the date of plan confirmation. Class VII consists of agricultural producers for grain sales and the chemical suppliers. Class VIII consists of all claims not entitled to priority under 11 U.S.C. § 507 and not provided for elsewhere in the plan.

At the confirmation hearing counsel for the debtor indicated "there is a valid economic and business reasons (sic) for the division of those claims," Hearing Transcript, at pg. 5, but no further elaboration about the reason, or reasons, was presented to the Court. The plan provides no explanation. From previous status conferences in this case, we understand the reason for the bifurcation of the classes is because the agricultural producers are continuing to do business with the debtor and the other unsecured creditors are not. By giving the stock we understand that the debtor hopes the agricultural producers will continue to do business with it.

Some difference in the treatment of unsecured claims must have been contemplated by Congress, or the provisions for classifying claims under 11 U.S.C. § 1122 would be superfluous and purposeless. The Bankruptcy Courts, however, have been unable to reach a consensus about the ability of a debtor to classify claims. One line of cases has construed 11 U.S.C. § 1122 and its circumscribed cousin in Chapter 13, § 1322, strictly, and seem to require that all unsecured claims be placed in a single classification.¹⁵ A parallel line of cases take a more flexible and...