In re Charterhouse, Inc., Bankruptcy No. 3-86-3166.
| Decision Date | 01 April 1988 |
| Docket Number | Bankruptcy No. 3-86-3166. |
| Citation | 84 BR 147 |
| Parties | In re CHARTERHOUSE, INC., Debtor. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
John H. Morris, Kirkland & Ellis, Chicago, Ill., for debtor.
Craig Curry, Oppenheimer, Wolff & Donnelly, Minneapolis, Minn., for First Nat. Bank Minneapolis, Indenture Trustee.
Scott A. Johnson, Robins, Zelle, Larson & Kaplan, Minneapolis, Minn., for Official Bondholders' Committee.
ORDER DENYING MOTION OF BONDHOLDERS' COMMITTEE FOR MODIFICATION OF CONFIRMATION AND POST-CONFIRMATION ORDERS
This Chapter 11 case came before the Court on September 15, 1987, upon the motion of Debtor's Official Bondholders' Committee for an order modifying the confirmation and post-confirmation orders in this case. The Committee appeared by its attorney, Scott A. Johnson. Debtor appeared by its attorney, John H. Morris. The First National Bank of Minneapolis, Indenture Trustee, appeared by its attorney, Craig Curry. Upon the moving and responsive documents, arguments of counsel, and all of the other files, records, and proceedings in this case, the Court makes the following order.
Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code in this Court on November 24, 1986. Debtor was and is a Minnesota nonprofit corporation, organized in 1981 to construct and operate a large residential facility for retired persons in Rochester, Minnesota. When this case was commenced, Debtor's sole member (owner) was the Mayo Foundation, another Minnesota nonprofit corporation. Debtor achieved its initial capitalization via issuance of municipal revenue bonds by the City of Rochester. The City used the bond sale proceeds to fund a loan to Debtor for the construction of its facility. The First National Bank of Minneapolis (hereinafter, "the Bank") served as Indenture Trustee for the administration of the bond program and various escrow funds established under it. The bonds were issued as bearer bonds and have been traded on the open municipal-bond market. Debtor's aggregate obligations to its bondholders were secured by a mortgage in favor of the Bank as Indenture Trustee against its facility, and a security interest against its revenues, tangible personal property, and various other assets. The face value of bonds outstanding as of the commencement of this case exceeded $39,000,000.00.
Debtor opened its facility in January, 1985. At no time during its operation has its actual occupancy rate met its initial projections. The prospect that it will ever fully meet them is uncertain at best. As a result, Debtor failed to generate cash flow in amounts sufficient to meet operating expenses and to make current principal and interest payments on the bonds. Debtor first defaulted on bondholder payments in the spring of 1986. After the Bank raised the prospect of foreclosure on its security if Debtor continued in default, it and Debtor entered into protracted discussions in an attempt to work out an obviously-untenable situation. After months of negotiation, and after Debtor obtained a commitment from the Mayo Foundation for a substantial cash infusion, the Bank and Debtor finalized the basic form of a reorganization plan. Shortly thereafter, Debtor filed the petition that commenced this case.
The case was one of the more noteworthy Chapter 11 reorganizations in this Court since the enactment of the Bankruptcy Code of 1978, for several reasons: the sheer magnitude of claims which were to be treated and restructured under the plan; the prospect of complex and novel substantive issues; and the formidable logistical task of insuring adequacy of notice to holders of bonds which were still traded on the open market. The case was also noteworthy for the paucity of contested issues ultimately presented for adjudication.
After laudable and herculean effort by counsel for all parties in interest, a plan was finalized under which bondholders' individual claims were to be satisfied via a one-time distribution of 60 percent of the face value of their bonds. The distribution was to be made from a settlement fund of $23,418,000.00, which was to be established in part from the proceeds of a voluntary capital contribution from the Mayo Foundation. The plan provided that the settlement fund would be administered and bondholders' claims would be paid by the Bank. The Bank was to receive the corpus of the settlement fund from Debtor, after the Mayo Foundation made its contribution to Debtor and after the Bank released to Debtor the monies in the various escrow accounts it had administered under the original bond program.
The Official Bondholders' Committee in this case actively and exhaustively evaluated Debtor's offer; alternative prospects of realization on bondholders' claims via foreclosure and re-sale of the facility; and the prospect of proposing a creditors' operating plan of reorganization. After a lengthy process of sharing of information, discussion, and evaluation — virtually all of which took place outside the purview of this Court — the Official Bondholders' Committee voted to recommend that bondholders accept Debtor's proposal. The Committee communicated its recommendation via a letter and notice separately transmitted to all bondholders, at the same time that Debtor's plan and disclosure statement were disseminated during the confirmation process.
The class of bondholders voted via a substantial majority (98 percent of ballots, 97 percent of principal balance on bonds) to accept Debtor's plan. The Court confirmed the plan on May 20, 1987. By June 8, 1987, Debtor had completed payment of all non-administrative expense claims treated under its plan (including the payment of the settlement fund to the Bank), and had fully paid all but one of its administrative-expense claims.
Between confirmation and the date of hearing on the motion at bar, the Bank distributed approximately $22,000,000.00 from the settlement fund to bondholders who had surrendered their bonds in accordance with the plan. Approximately $1,000,000.00 remained unclaimed. During the time between Debtor's deposit of the corpus of the fund and the hearing on the Committee's motion, the settlement fund had accrued approximately $34,000.00 in interest.
The Committee now seeks authority to use the interest accrued on the bondholders' settlement fund in a manner not provided under Debtor's confirmed plan. The plan contemplates a second distribution to bondholders of the accrued interest on a pro rata basis, after the Bank distributes the corpus of the fund. In its written motion, the Committee requests Court authorization (via modification of the confirmation and post-confirmation orders) to use the accrued interest to pay a litigation-cost-and-fee retainer to a law firm with whose attorneys the Committee has discussed the commencement of class-action securities litigation against parties involved in the initial 1983 issuance and/or the subsequent marketing or re-marketing of Debtor's bonds. The written motion apparently contemplates a notice of the proposed modification and payment to all bondholders (with the cost of the noticing to be paid out of the accrued interest), with opportunity for bondholders to object to the modification; however, it appears to assume entry of an order approving the modification in the meantime. At hearing the Committee's counsel altered the Committee's request; the motion as orally qualified is now for authority to first notice the proposed modification to all bondholders, with opportunity for objection, and then for entry of an order approving the modification and disposition of the interest if no bondholder lodges an objection. Debtor has no objection to the revised notice procedure, but opposes the motion on its merits.
A grant of the motion, either as cast under the written pleadings or as qualified at hearing, is inappropriate. The Committee nominally casts its motion as one for the modification of this Court's confirmation and post-confirmation orders, insofar as ¶ 4.e. of the confirmation order and ¶ 2.e. of the post-confirmation order empowered and directed Debtor and the Bank to dispose of the settlement fund and its accrued interest in accordance with the plan. However, what the Committee really seeks is to modify the operative term of the confirmed plan itself. The Code provision governing post-confirmation modification of a Chapter 11 plan is 11 U.S.C. § 1127(b), which reads as follows:
(b) The proponent of a plan or the reorganized debtor may modify such plan at any time after confirmation of such plan and before substantial consummation of such plan, but may not modify such plan so that such plan as modified fails to meet the requirements of sections 1122 and 1123 of this title. Such plan as modified under this subsection becomes the plan only if circumstances warrant such modification and the court, after notice and a hearing, confirms such plan as modified, under section 1129 of this title.
Debtor opposes the motion on four stated grounds. Denial of the motion is mandated on three of those grounds.
11 U.S.C. § 1127(b) allows post-confirmation modification of a confirmed Chapter 11 plan, but on its face limits the parties who may bring a motion for such modification to "the proponent of a plan or the reorganized debtor." Goodman v. Phillip R. Curtis Enterprises, Inc., 809 F.2d 228, 234 (4th Cir.1987). The Committee is clearly not "the reorganized debtor," so the issue is whether it was a "proponent" of Debtor's confirmed plan. The term "proponent of a plan" is not defined in 11 U.S.C. § 101, but it is clear from a contextual reading of the provisions of Chapter 11 that the "proponent" contemplated by § 1127 is the party in interest who negotiates, formulates, disseminates, makes disclosure in connection with, and seeks acceptances of, a reorganization plan. See 11 U.S.C. §§ 1121 (...
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