In re Cardinal Congregate I, Bankruptcy No. 2-89-05133.

• Decision Date: 28 September 1990
• Docket Number: Bankruptcy No. 2-89-05133.
• Citation: 121 BR 760
• Parties: In re CARDINAL CONGREGATE I, an Ohio Limited Partnership, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

121 B.R. 760 (1990)

In re CARDINAL CONGREGATE I, an Ohio Limited Partnership, Debtor.

Bankruptcy No. 2-89-05133.

United States Bankruptcy Court, S.D. Ohio, E.D.

September 28, 1990.

COPYRIGHT MATERIAL OMITTED

Michael R. Szolosi, Guy R. Humphrey, Columbus, Ohio, for James F. Kacsmar & Co., Peoples Banking Co., The Peoples Banking & Trust Co., Peoples Sav. Bank, Guernsey Sav. Bank, First Federal Sav. Bank of Marion, Civic Sav. Bank, and Hobart Federal Sav. & Loan Ass'n.

Kenneth R. Cookson, Carlile, Patchen, Murphy & Allison, Columbus, Ohio, for debtor.

Larry J. McClatchey, Emens, Hurd, Kegler & Ritter Co., L.P.A., Columbus, Ohio, Counsel to certain Limited Partners.

Marilyn Shea-Stonum, Jones, Day, Reavis & Pogue, Columbus, Ohio, Sp. Counsel to the trustee.

Michael Cook, Skadden, Ars, Slate, Meagher & Flom, New York City, Gen. Counsel to the trustee.

Jay Alix, Jay Alix & Associates, Southfield, Mich., Chapter 11 Trustee.

P. Steven Kratseh, Kilpatrick & Cody, Atlanta, Ga., for the Official Committee of Unsecured Creditors of Cardinal Industries of Florida, Inc.

OPINION AND ORDER DENYING APPROVAL OF DISCLOSURE STATEMENT

BARBARA J. SELLERS, Bankruptcy Judge.

I. PRELIMINARY CONSIDERATIONS AND JURISDICTIONAL STATEMENT

This matter is before the Court upon the requested approval of an Amended Disclosure Statement (the "Disclosure Statement") filed by Chapter 11 debtor Cardinal Congregate I and upon this Court's independent obligation to find that the Disclosure Statement includes adequate information within the meaning of § 1125 of the Bankruptcy Code. Objections to the Disclosure Statement were filed by Peoples Banking Company, The Peoples Banking & Trust Company, Peoples Savings Bank, Guernsey Savings Bank, First Federal Savings Bank of Marion, Civic Savings Bank and Hobart Federal Savings & Loan Association (collectively, the "Loan Participants") and James F. Kacsmar & Company ("Kacsmar") (collectively referred to as the "Objectors"). The debtor responded to the objections. An evidentiary hearing was held on September 19, 1990, following which the Court took this matter under advisement.

The Court has jurisdiction in this matter under 28 U.S.C. § 1334(b) and the General Order of Reference entered in this district. This is a core proceeding which the Court may hear and determine under 28 U.S.C. § 157(b)(1) and (2)(A). For the reasons stated herein, the Court finds that the Disclosure Statement cannot be approved as presently proposed.

II. FACTS

The debtor is a syndicated Ohio limited partnership which owns a congregate retirement living facility located in Columbus, Ohio. According to documents filed by the debtor, Cardinal Industries, Inc. ("CII") is the general partner of the debtor with a nine per cent partnership interest in the debtor. The remaining 91 per cent ownership is apportioned among thirty-one individual limited partners.

The debtor was capitalized by limited partner contributions and by a $3,500,000 non-recourse loan from Cardinal Industries Mortgage Company ("CIMC"). CIMC subsequently assigned its rights under that loan to the Loan Participants. The note and security documents relating to the loan were in turn assigned by the Loan Participants to Kacsmar which has acted as the loan servicer. Repayment of the loan is secured by the debtor's single greatest asset, the retirement facility, as well as by the income derived from the operation of such property.

The debtor filed a voluntary Chapter 11 petition on September 13, 1989. On June 29, 1990 the debtor filed this third proposed Disclosure Statement. The first two statements and accompanying plans have been withdrawn.

III. ISSUES

The issues before the Court are whether the Disclosure Statement should be approved and whether it contains "adequate information" within the meaning of 11 U.S.C. § 1125.

IV. DISCUSSION

The Objectors have raised numerous objections to the Disclosure Statement. Those objections may be generally classified as relating either to the confirmability of the debtor's Amended Plan of Reorganization or to the quantity and quality of information disclosed.

A. Objections Relating to the Confirmability of the Amended Plan.

Many of the objections raised in the pleadings and at the September 19, 1990 hearing focus on the confirmability of the debtor's Amended Plan of Reorganization. The Objectors assert that the Amended Plan of Reorganization is not confirmable under the requirements of 11 U.S.C. § 1129 and that pursuit of Disclosure Statement approval is a waste of time and resources for all concerned. In particular, the Objectors allege that the Amended Plan of Reorganization cannot be confirmed because it attempts to replace the Loan Participants for Kacsmar as holder of the claims relating to the $3,500,000 mortgage loans; it provides for separate classification and treatment of Kacsmar's unsecured claims; it attempts to credit postpetition cash collateral payments against the debtor's post-confirmation interest obligations in contravention of the terms of a stipulated cash collateral order previously entered by this Court; it for various reasons fails to adequately protect Kacsmar's interest in the property securing Kacsmar's claim; and it is not feasible because it requires the unauthorized use of Kacsmar's cash collateral to pay administrative expenses. The debtor, on the other hand, contends that the Amended Plan of Reorganization is confirmable and that, in any event, those objections are more properly considered by the Court at the confirmation hearing.

The Court believes that disapproval of the adequacy of a disclosure statement may sometimes be appropriate where it describes a plan of reorganization which is so fatally flawed that confirmation is impossible. In re Monroe Well Service, Inc., 80 B.R. 324 (Bankr.E.D.Pa.1987); In re Pecht, 57 B.R. 137 (Bankr.E.D.Va.1986); In re Kehn Ranch, Inc., 41 B.R. 832 (Bankr.D.S.D.1984). However, "such action is discretionary and must be used carefully so as not to convert the disclosure statement hearing into a confirmation hearing, and to insure that due process concerns are protected." Monroe Well Service at 333 (footnote omitted). Where objections relating to confirmability of a plan of reorganization raise novel or unsettled issues of law, the Court will not look behind the disclosure statement to decide such issues at the hearing on the adequacy of the disclosure statement.

In this case, the Court finds that the Amended Plan of Reorganization is not so patently nonconfirmable as to bar consideration of the adequacy of the Disclosure Statement. The objections raised as to the confirmability of the Amended Plan of Reorganization may or may not ultimately be found meritorious; however, the Court will not determine such objections and the related issues at this juncture.

B. Objections Relating to the Quantity and Quality of Disclosure in the Disclosure Statement.

The Objectors also contend that approval of the Disclosure Statement must be denied because it fails to provide the quantity and quality of information required by 11 U.S.C. § 1125. Before addressing the specific objections advanced by the Objectors and making some additional findings and observations, the Court will first review the governing legal principles.

1. Governing Legal Principles.

The codal prerequisite to court approval of a disclosure statement is that it contain "adequate information." Specifically, 11 U.S.C. § 1125(b) provides:

An acceptance or rejection of a plan may not be solicited after the commencement of the case under this title 11 USCS §§ 101 et seq. from a holder of a claim or interest with respect to such claim or interest, unless, at the time of or before such solicitation, there is transmitted to such holder the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information. The court may approve a disclosure statement without a valuation of the debtor or an appraisal of the debtor\'s assets (emphasis added).

Section 1125(a)(1) of the Bankruptcy Code defines "adequate information" in general terms to mean:

. . . information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor\'s books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan, but adequate information need not include such information about any other possible or proposed plan.

Congress left vague the standard for evaluating what constitutes adequate information so as to permit a case-by-case determination based on the prevailing facts and circumstances. H.R.Rep. No. 595, 95th Cong., 1st Sess. 225, 409 (1977); S.Rep. No. 989, 95th Cong. 2d Sess. 121 (1978), U.S. Code Cong. & Admin.News 1978, p. 5787. While providing for judicial flexibility, Congress intended that the courts should consider as part of their determination the cost of preparing a more detailed disclosure statement, the nature and history of the debtor, the condition of the debtor's records, the need for expediency in the solicitation and confirmation process, and the necessity for protection of the reorganization constituencies. H.R.Rep. No. 595, 95th Cong., 1st Sess. at 409.

Numerous courts have prescribed a list of disclosures which typically should be included in a disclosure statement. In re Dakota Rail, Inc., 104 B.R. 138 (Bankr.D. Minn.1989); In re Scioto Valley Mortgage Co., 88 B.R. 168 (Bankr.S.D.Ohio 1988); In re S.E.T. Income Properties, III, 83 B.R. 791 (Bankr.N.D.Okla.1988); In re Jeppson, 66 B.R. 269 (Bankr.D.Utah 1986); In re Metrocraft Publishing Servs., Inc., 39 B.R. 567 (Bankr.N.D.Ga.1984); In re Malek, 35 B.R. 443 (Bankr.E.D.Mich.1983). In Scioto Valley, the court adopted a 19-point nonexhaustive list of the types of...