In re Bjolmes Realty Trust, Bankruptcy No. 91-41451-JFQ.
| Decision Date | 17 December 1991 |
| Docket Number | Bankruptcy No. 91-41451-JFQ. |
| Parties | In re BJOLMES REALTY TRUST Debtor. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Carl Aframe, Worcester, Mass., for debtor.
Stephan M. Rodolakis, Peters & Erskine, Worcester, Mass., for Federal Deposit Ins. Corp.
Bjolmes Realty Trust (the "Debtor") moves for court approval of the disclosure statement for its chapter 11 plan. The Federal Deposit Insurance Corporation ("FDIC"), the holder of a first mortgage, opposes the motion on the ground that the plan improperly places the unsecured portion of its claim in a class separate from trade debt. On the assumption that it will vote that unsecured portion against the plan, the FDIC also objects to the Debtor's principals retaining their stock for an additional capital contribution. It contends that the plan cannot be confirmed because there is no such thing as a fresh contribution exception to the absolute priority rule. Both issues are central to many plans containing so-called "cram down" provisions under which the proponent seeks confirmation notwithstanding lack of acceptance of the plan by a class of claims. The issues are particularly important in a reorganization proposed by an owner or developer of real estate, so common in our troubled local economy, where the creditor body tends to be dominated by secured and unsecured claims of mortgage holders.
The Debtor is a trust with transferrable shares. Its trustee, Stanley R. Bjorkman, holds the property for the benefit of Donald Holmes ("Holmes") and Paul Bjorkman ("Bjorkman"), each of whom owns an equal number of shares. The Debtor's principal asset is a fifteen unit apartment building in Spencer, Massachusetts which is under the management of a real estate management company. Bjorkman and Holmes bought the property in 1985 for $410,000, later transferring it to the Debtor. In September of 1988, they refinanced their mortgage with Bank of New England (the "Bank"), obtaining a $380,000 first mortgage loan amortizable over twenty five years and due in two years. The mortgage note granted the Bank recourse against the Debtor. Bjorkman and Holmes also signed unconditional personal guarantees.
The Debtor remained current with the Bank until September 21, 1990, when the entire loan balance became due. New England was then in the throes of our present real estate recession, and the Debtor was unable to obtain refinancing from the Bank or any other lender. The Bank, by then under the control of the FDIC, commenced foreclosure. The Debtor filed its chapter 11 petition on June 6, 1991, the day before the scheduled foreclosure sale.
The Debtor's plan places the unsecured trade debt of about $7,000 into one class and the unsecured portion of the FDIC's mortgage debt into another. The Debtor estimates that this unsecured portion amounts to about $160,000, based upon a $250,000 valuation of the building and a total debt balance of $410,000 including interest and costs. Although not committing itself to the $160,000 figure, the FDIC does not dispute that a large portion of its claim is unsecured under any standard of valuation for its mortgage interest.
Under the Debtor's plan, the court is to establish the value of the FDIC mortgage interest pursuant to 11 U.S.C. § 506(a). That secured claim, which is estimated at $250,000, is to be crammed down through equal payments of principal and interest over twenty five years at a rate of interest fixed by the court that will make the present value of the stream of payments equal the value of the secured claim. Both classes of unsecured debt are to be paid an immediate ten percent dividend totaling about $17,000. Rather than being discharged, the balance of the unsecured debt in both classes is to be secured by a new second mortgage and paid, without interest, at the time the building is sold or upon the refinancing or payment in full of the first mortgage. The plan proposes that Bjorkman and Holmes retain their stock interests in return for contributing the estimated $17,000 required for the initial dividend.
A preliminary question is raised concerning the appropriateness of the court passing upon substantive confirmation issues in the context of a hearing on the disclosure statement. The purpose of a disclosure statement hearing is of course to determine whether the statement contains "adequate information" within the meaning of § 1125; this means information "of a kind, and in sufficient detail . . . that would enable a hypothetical reasonable investor . . . to make an informed judgment about the plan." The parties have nevertheless treated the hearing as having the additional purpose of adjudicating the propriety of the plan's proposed classification, pursuant to Rule 3013. The disclosure statement and plan were required to be filed by a prior order which also denied relief from the automatic stay under § 362(d)(2) on the ground that there was a reasonable possibility of plan confirmation within a reasonable period of time. The court at that time directed the parties to be prepared to argue these issues at the hearing on the disclosure statement. Thus the hearing has significant § 362 ramifications. It is permissible, moreover, for the court to pass upon confirmation issues where, as here, it is contended that the plan is so fatally and obviously flawed that confirmation is impossible. In In re Eastern Maine Electric Co-op., Inc., 125 B.R. 329, 333 (Bankr. D.Me.1991); In re Cardinal Congregate I, 121 B.R. 760, 764 (Bankr.S.D.Ohio 1990); In re Monroe Well Service, Inc., 80 B.R. 324, 332 (Bankr.E.D.Pa.1987). For all the foregoing reasons, these issues are ripe for adjudication.
The Debtor needs the acceptance of at least one impaired class of claims in order to cram down the secured and unsecured portion of the FDIC claim. 11 U.S.C. §§ 1129(b)(1), 1129(a)(8), § 1129(a)(10) (1991). In light of the size of the FDIC claim and its opposition to the plan, the need to obtain the acceptance by one class is the obvious reason that the Debtor seeks to separate trade claims into their own class. The Debtor is sanguine concerning acceptance of the plan by the trade but not by the FDIC.
The controlling authority on claim classification in this circuit is In re Granada Wines, Inc., 748 F.2d 42 (1st Cir.1984). In Granada Wines, the debtor's chapter 11 plan placed into the same class its trade debt and its statutory liability for withdrawal from a multi-employer pension plan. Both claims were to be paid the same percentage dividend, but the dividend on the withdrawal claim was to be based upon fifty percent of the claim as the result of the fifty percent reduction allowed to an employer in liquidation. The court denied the reduction, ruling that the debtor was not in liquidation within the meaning of the statute permitting the fifty percent reduction.1 Conceding that the claim would be reduced by fifty percent in a chapter 7 liquidation, the court ruled that this potential for reduction was not enough to distinguish the claim from other unsecured debt so as to support different treatment or classification. The court viewed the legal nature of all the claims to be the same. In construing § 1122,2 the court relied upon case law under the prior Bankruptcy Act, stating:
The general rule regarding classification is that all creditors of equal rank with claims against the same property shall be placed in the same class. In re Los Angeles Land Investment, Ltd., 282 F.Supp. 448, 453 (1968), affirmed 447 F.2d 1366 (9th Cir.1971) quoting In re Scherk, 152 F.2d 747 (10th Cir.1945).
Granada Wines, 748 F.2d at 46.
The court was presumably influenced by the legislative history of § 1122 which states that "this section codifies current case law surrounding the classification of claims and equity securities." H.R.Rep. No. 595, 95th Cong., 1st Sess. 406 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 118 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5904, 6362. Confusingly, the prior Act had different rules under chapters X and XI. Chapter X, which governed the decisions cited in Granada Wines, required that "a creditor of equal rank with claims against the same property should be placed in the same class." Bankruptcy Act, § 197; 11 U.S.C. § 597 (repealed 1978). Chapter XI, on the other hand, permitted the plan to "include provisions for treatment of unsecured creditors on a parity with each other, or for the division of such debts into classes and the treatment thereof in different ways." Bankruptcy Act, § 357(1), 11 U.S.C. § 757(1) (repealed 1978).
The Debtor makes fond reference to decisions handed down in other jurisdictions permitting separate classification of claims based upon practical difference among the classes. E.g., In re Jersey City Medical Center, 817 F.2d 1055, 1060-61 (3rd Cir. 1987) (); In re U.S. Truck Co., Inc., 800 F.2d 581, 587 (6th Cir.1986) (). These courts reason that § 1122 prohibits placing dissimilar claims in the same class, but does not require that all similar claims be grouped in one class. They do not, however, deal with the contention that the statute's approval of a separate classification of small claims for administrative convenience, and its reference to that classification as an exception to the general rule, lends support to an interpretation that it otherwise requires all substantially similar claims to be placed in one class.
The Debtor nevertheless recognizes, as it must, that Granada Wines...
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