In re Broad Associates Ltd. Partnership

• Decision Date: 09 April 1991
• Docket Number: Bankruptcy No. 5-90-01070.
• Citation: 125 BR 707
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re BROAD ASSOCIATES LIMITED PARTNERSHIP, Debtor.

125 B.R. 707 (1991)

In re BROAD ASSOCIATES LIMITED PARTNERSHIP, Debtor.

Bankruptcy No. 5-90-01070.

United States Bankruptcy Court, D. Connecticut.

April 9, 1991.

James Berman, Zeisler & Zeisler, P.C., Bridgeport, Conn., for debtor.

Grant T. Stein, Alston & Bird, Atlanta, Ga., Gregory W. Nye, Hebb & Gitlin, Hartford, Conn., for Pacific Mut. Life Ins. Co.

MEMORANDUM AND ORDER ON CONFIRMATION OF DEBTOR'S THIRD AMENDED PLAN AS MODIFIED

ALAN H.W. SHIFF, Bankruptcy Judge.

The issue presented is whether the debtor's chapter 11 plan of reorganization may be confirmed over the objection of Pacific Mutual Life Insurance Company, an undersecured creditor.

BACKGROUND

The debtor is a Connecticut limited partnership with two general partners, Morris J. Zakheim and 300 Broad Street Corporation, and twenty-seven limited partners. In December, 1986, the debtor purchased a nine story office building located at 300 Broad Street, Stamford, Connecticut (the "building") from HAB Stamford Associates ("HAB"), a New York general partnership, for $8,000,000.00, subject to a $5,050,000.00 promissory note to Pacific Mutual Life Insurance Company ("Pacific") dated June 14, 1985. The Pacific note is secured by a first mortgage on the building; an assignment of the leases, rents, and profits of the building; and a perfected security interest in certain personal property of the debtor. The building is also encumbered by a $1,200,000.00 wrap-around mortgage held by HAB.

In November, 1988, Pacific commenced a foreclosure action against the debtor in Connecticut Superior Court after the debtor defaulted on the Pacific note. On February 14, 1989, the state court entered a judgment of strict foreclosure and established September 6, 1989 as the debtor's law day.

On September 5, 1989, the debtor filed a petition under chapter 11 of the Bankruptcy Code. On September 21, 1989, Pacific filed a motion for relief from the automatic stay, see 11 U.S.C. § 362(d), which was granted on February 28, 1990. In re Broad Associates Limited Partnership, 110 B.R. 632 (Bkrtcy.D.Conn.1990), aff'd, Doc. No. 90-170 (D.Conn., Cabranes, J., 7/20/90). On April 18, 1990 and December 20, 1990, the debtor filed a Third Amended Plan of Reorganization and Modification to Third Amended Plan of Reorganization, respectively, (collectively, the "Plan") which is the subject of this decision.

It is undisputed that $6,000,000.00¹ was due on the Pacific note as of the commencement of this case, and that Pacific's claim is undersecured. See 11 U.S.C. § 506(a). On September 5, 1990, Pacific filed an election under § 1111(b)(2) "to the extent that Pacific Mutual may elect treatment under Section 1111(b)(2)" (footnote omitted, see infra at p. 712).

The Plan

There are five classes of claims and interests in the Plan:

Class 1 consists of "all allowed secured claims" of Pacific, in the approximate amount of $2,700,000.00, which are to be treated as follows:

In full, complete and final satisfaction of Class 1 creditors, the Debtor shall pay to said claimant the present value of $2,700,000.00 with interest at ten (10%) percent in equal quarterly installments over fourteen years which stream of payments shall not exceed the face amount of Pacific Mutual\'s Allowed Claims. The first payment shall be made ninety (90) days after the Distribution Date². Coterminous with the last interest payment, Pacific Mutual shall receive a lump sum payment to satisfy the balance of its Allow sic Claim. Pacific Mutual shall retain its liens against the Realty until paid in full under the Plan, but the Debtor shall be permitted to use rent proceeds for operations and payments under the Plan.

Article IV, ¶ 4.01; Article VI, ¶ 6.01

Class 2 consists of HAB's unsecured claim in the approximate amount of $1,300,000.00. HAB will receive eight percent of its allowed claim on the Distribution Date. Further, the debtor will release HAB from any and all claims. Article IV, ¶ 4.02; Article VI, ¶ 6.02

Class 3 consists of the allowed claims of general unsecured creditors with recourse against the General Partners. The approximate amount of the claims is $24,000.00. The holders of Class 3 claims will be paid in full on the Distribution Date. Article IV, ¶ 4.03; Article V, ¶ 5.01

Class 4 consists of the debtor's limited partners who will receive a pro rata share of a five percent interest in Newco provided said partners pay $50,000.00 to the debtor on the Effective Date.³ Class 4 will be extinguished if the requisite contribution is not made. Article IV, ¶ 4.04; Article VI, ¶ 6.03

Class 5 consists of the debtor's general partners who will receive a pro rata share of a five percent interest in Newco provided said partners pay $50,000.00 to the debtor on the Effective Date. Class 5 will be extinguished if the requisite contribution is not made. Article IV, ¶ 4.05; Article VI, ¶ 6.04

The Plan provides a means for its implementation, see § 1123(a)(5), as follows:

This Plan is to be implemented consistent with Code Section 1123. The initial cash distributions called for under the Plan shall be made from operations, and to the extent necessary, from the guarantee of Mr. Marx and the contributions of the equity interests. Newco, an entity controlled by Moses Marx shall acquire the Realty. Moses Marx shall have a ninety (90%) percent interest in Newco. If Newco contributes all or part of the $100,000.00 which Class 4 and Class 5 equity interests might otherwise contribute, Moses Marx will receive an additional .0001 equity interest in Newco for each dollar contributed.

Article VII; ¶ 7.01

A letter from Moses Marx is attached to the Modification of the Third Amended Plan as Exhibit A:

This is to confirm that I am prepared on the effective date of your Plan of Reorganization to advance $3,000,000.00 to guarantee the payments called for thereunder, including the payments to Pacific Mutual Life Insurance Company. I understand that a modification to the Fourth Amended Plan sic will be filed shortly, and this modification, will call for interest only payments to Pacific Mutual Life Insurance Company for the life of the Plan at ten (10%) percent on a principal balance of $2,400,000.00. At the end of the payment schedule under the Plan approximately fifteen years, and simultaneously with the final interest payment, the principal payment of $2,400,000.00 will be made. It is contemplated that the necessary funds due Pacific Mutual Life Insurance Company will be placed in an interest bearing escrow account so that all interest installments can be timely made and that the principal balance will be available at the time of the final payment. In the event that the court finds that the property is worth up to $2,700,000.00, then $2,700,000.00 will be set in the Pacific Mutual Life Insurance Company account and the balance will be available for other necessary purposes.

. . . .

On January 4, 1991, Pacific filed an objection to the Plan, contending that its treatment is not fair and equitable; that the debtor cannot implement that treatment even if it is; and that the Plan was not filed in good faith.

DISCUSSION

fair and equitable — 11 U.S.C. § 1129(b)(2)

Credit Bid

Section 1129(b)(1) provides that a plan may be confirmed or "crammed down" over the objection of a dissenting class, see 11 U.S.C. § 1129(a)(8), if the plan is fair and equitable with respect to that class. Section 1129(b)(2)(A) lists three nonexclusive, alternative methods of providing fair and equitable treatment to a class of secured claims.⁴ The Plan utilizes the first, (A)(i), under which Pacific is to retain its lien and receive cash in deferred payments on account of its claim. The second method, (A)(ii), provides for the sale of property free and clear of liens and permits a secured creditor to "bid in" its claim.

Pacific argues that the Plan cannot be confirmed under (A)(i) because the debtor proposes to sell the building without giving it a right to make a credit bid, that is, a bid which is offset by its $6,000,000.00 claim. Objection of Pacific, January 4, 1991 at p. 9. Pacific made a similar claim during the hearing on its motion for relief from the automatic stay. That argument was rejected.

The plain language of that provision makes it applicable only where a sale "free and clear of such liens" is contemplated. The sale under the debtor\'s Pending Plan and New Plan would not be free and clear of liens. Further, § 1129(b)(2)(A) includes three methods for cramming down a secured creditor which are connected by "or". Code § 102(5) provides that "`or\' is not exclusive. . . ." The legislative history to that section provides: "If a party `may do (a) or (b)\', then the party may do either or both." On its face, § 1129(b)(2)(A) is disjunctive, and Pacific has not persuaded me that I should go beyond the plain language of the statute. Thus, if the debtor could meet the requirements of § 1129(b)(2)(A)(i), its inability to meet the requirements of § 1129(b)(2)(A)(ii) would not prevent confirmation.

In re Broad Associates Limited Partnership, supra, 110 B.R. at 636, n. 7. The sale proposed under the Plan will be not free and clear of liens, but rather subject to Pacific's liens.

There is no express code requirement that a sale proposed by a chapter 11 plan must give secured creditors the right to make a credit bid. In re Woodridge North Apts., Ltd., 71 B.R. 189 at 191 (Bkrtcy.N.D. Ca.1987). See also In re Waterways Barge Partnership, 104 B.R. 776 at 781 (Bkrtcy.N.D.Miss.1989); In re California Hancock, Inc., 88 B.R. 226 (9th Cir. BAP 1988); In re 222 Liberty Associates, 108 B.R. 971 at 978 (Bkrtcy.E.D.Pa.1990). All that is required is that dissenting secured creditors be treated fairly and equitably. See 11 U.S.C. § 1129(b)(1).

Pacific contends that even if § 1129(b)(2)(ii) does not literally support its credit bid theory, it is nonetheless "philosophically" entitled to make such a bid. Pacific cites In the Matter of D & F Construction, Inc., 865...