In re Dynamic Brokers, Inc., BAP No. CC-02-1376-PKMa.

Citation293 B.R. 489
Decision Date19 May 2003
Docket NumberBankruptcy No. LA 00-30879-ES.,BAP No. CC-02-1376-PKMa.
PartiesIn re DYNAMIC BROKERS, INC., Debtor. Raul Varela; Inter Mountain Mortgage, Appellants, v. Dynamic Brokers, Inc.; United States Trustee; Foothill Independent Bank, Appellees.
CourtBankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

Robert M. Ruben, Law Offices of Steven J. Melmet, Inc., Santa Ana, CA, for Raul Varela and Inter Mountain Mortgage.

Louis J. Esbin, Law Office of Louis J. Esbin, Valencia, CA, for Dynamic Brokers, Inc.

Before PERRIS, KLEIN and MARLAR, Bankruptcy Judges.

OPINION

KLEIN, Bankruptcy Judge.

The key question in this appeal from the disallowance of a claim and the confirmation of a chapter 11 plan of reorganization is whether a chapter 11 plan confirmation proceeding can be used to reduce a creditor's claim without compliance with claim objection procedures. We conclude that the comprehensive chapter 11 statutory scheme defines the minimum due process for dealing with creditors, requires compliance with the claim objection procedures, and precludes using a chapter 11 plan provision as the means to reduce a claim that is "deemed allowed" without the creditor's consent. Accordingly, we REVERSE both orders on appeal and REMAND.

FACTS

Debtor Dynamic Brokers, Inc., filed a chapter 11 case in July 2000, scheduling appellant Raul Varela as a secured creditor with a $170,000 claim, secured by a second deed of trust on real property valued at $1,900,000. Debtor did not designate the Varela claim as contingent, unliquidated, or disputed, with the consequence that it was "deemed allowed" ("Varela `deemed allowed' claim").

Neither Varela nor his loan servicer, appellant Inter Mountain Mortgage (which has not filed a brief in this appeal), filed a proof of claim by the December 15, 2000, deadline that the court fixed under Rule 3003(c)(3).

In its first two versions of its plan of reorganization filed in February and May 2001, debtor proposed to pay the full $170,000 on Varela's "deemed allowed" claim. However, beginning with the second amended plan, filed November 5, 2001, debtor changed course and designated Varela's claim as $95,275 in principal, plus $23,125.19 in interest.

Debtor did not amend its schedules to reflect any change in the status or amount of Varela's $170,000 scheduled claim. The plan does not explain the change, but does state that the proposed interest rate and amortization period are a "modification of the contractual agreement between the Debtor and each of the class claimants, based upon an adjustment from the usurious rate of interest charged, no claims being filed, and Debtor's documentation." Fourth Amended Plan of Reorganization at 6.

The court held hearings on confirmation of the fourth amended plan in six sessions stretching from March 5, 2002 to July 2, 2002, during which the court was concerned primarily with issues of feasibility and cram down.

In the middle of the confirmation process, on April 8, 2002, Inter Mountain filed a proof of claim on behalf of Varela for $218,384.30, based on a principal amount of $170,000 plus interest and other costs ("Varela filed claim").

Debtor objected to the Varela filed claim as not timely filed but did not object to the Varela "deemed allowed" claim.

Although the Internal Revenue Service objected to confirmation from the outset, Inter Mountain did not take a position until the fourth session of the confirmation hearing, on May 23, 2002, when its counsel orally objected to confirmation on the basis that the plan reduced the Varela claim's principal from the $170,000 stated in both the schedules and the proof of claim. In other words, although both the Varela filed claim and the Varela "deemed allowed" claim were implicated, the essence of the confirmation objection was that the plan did not propose to pay the Varela "deemed allowed" claim the amount the Bankruptcy Code requires.

The court declined to entertain the oral objection to confirmation, because it was not in writing and because the issue presented could be considered in the claim objection process.

The fifth session of the confirmation hearing, held on June 13, also included argument on debtor's objection to the Varela filed claim. Inter Mountain's counsel explained that it had not filed a timely proof of claim for Varela by the December 15, 2000, court-imposed deadline because there was never any dispute about the amount of the claim until after the claims bar date had passed. He argued that it was not permissible for debtor to use the plan as a method for disputing and reducing the amount of the claim. Debtor contended that it was entitled to use the plan to reduce the principal amount of the Varela "deemed allowed" claim from $170,000 to $95,275, because debtor believed that the interest rate on the loan was usurious.

At the July 2 hearing, the court confirmed the fourth amended plan and sustained the objection to the Varela filed claim, reasoning that Varela should have objected to confirmation of the plan if he wanted to preserve the full amount of his claim.

The court entered orders confirming the plan and sustaining the objection to the Varela filed claim. Varela timely appealed.

ISSUES

1. Whether the appeal is moot.

2. Whether a chapter 11 plan provision can be used to object to a claim and to circumvent the claims objection procedure prescribed by the Federal Rules of Bankruptcy Procedure.

3. Whether the fourth amended plan of reorganization satisfied the confirmation requirements of the "best interest" test and of fair and equitable treatment, without unfair discrimination, as to nonconsenting classes.

STANDARD OF REVIEW

The issues relating to the disallowance of Varela's claim are questions of law, which we review de novo. Weeks v. Pederson (In re Pederson), 230 B.R. 158, 159 (9th Cir. BAP 1999). Whether a chapter 11 plan satisfies the "best interest" test for confirmation and whether it unfairly discriminates against, or is fair and equitable to, nonconsenting impaired classes of claims are issues of fact, which we review for clear error. United States v. Arnold & Baker Farms (In re Arnold & Baker Farms), 177 B.R. 648, 653 (9th Cir. BAP 1994), aff'd, 85 F.3d 1415 (9th Cir.1996).

DISCUSSION

We examine the assertion that the appeal is moot before turning to the main questions regarding chapter 11 claim objection procedure and plan confirmation.

I

Debtor argues that this appeal should be dismissed as moot because the confirmed plan has been substantially consummated without Varela having obtained a stay pending appeal of the confirmation order.

An appeal is moot if events have occurred after the entry of the order being appealed that prevent an appellate court from granting effective relief. First Fed. Bank v. Weinstein (In re Weinstein), 227 B.R. 284, 289 (9th Cir. BAP 1998). An appeal from an order confirming a chapter 11 plan is not moot despite substantial consummation1 if, under the facts of the case, there has not been such a comprehensive change of circumstances as to render it impractical to grant effective relief. Id. The appeal is not moot where relief can be fashioned merely by ordering additional disbursements of money by one of the parties. Id.

Here, debtor contends that the appeal is moot because some payments have been made under the plan, including payments to Varela. In addition, it asserts that third parties are now relying on the confirmed plan, including debtor's creditors and the creditors of debtor's principal, who has filed his own chapter 13 case. The primary secured creditor has sold its claim to a third party, which is relying on the stream of payments under the plan. Debtor has assumed its franchise agreement with Century 21, is making royalty payments and has hired additional real estate agents. The Internal Revenue Service is relying on the plan for its analysis of debtor's principal's liability in his chapter 13 plan.

Even assuming that debtor's plan is substantially consummated, debtor has not demonstrated that we cannot provide effective relief if the confirmation order were to be reversed. Varela seeks payment in full of his secured claim, rather than payment of a vastly reduced principal amount. Debtor does not argue that allowing Varela's claim, with the accompanying consequences for the plan, would reduce the payments to other creditors enough so that the distribution could not be adjusted over time to accommodate Varela's claim. Nor does debtor assert that the plan would be infeasible if it were required to pay Varela.

The plan was confirmed in July 2002, and payments to secured creditors are to continue for 20 years. Thus, only a small portion of the plan's payments have been made, and future payments could be adjusted if Varela's claim must be paid in full. See Oxford Life Ins. Co. v. Tucson Self-Storage, Inc. (In re Tucson Self-Storage, Inc.), 166 B.R. 892 (9th Cir. BAP 1994) (appeal of confirmation order not moot where future payments could be adjusted to provide amount determined on appeal). There is no assertion that the assumption of the Century 21 franchise agreement or the hiring of additional real estate agents would be affected by any relief we could provide.

As in Baker & Drake, Inc. v. Pub. Serv. Comm'n (In re Baker & Drake, Inc.), 35 F.3d 1348 (9th Cir.1994), this is not a complex reorganization where it would be impossible to "unscramble the eggs." Id. at 1351. Although payments have been made to third parties who are not parties to this appeal, there is nothing in debtor's submissions that shows that those parties' rights would be unreasonably adversely affected if Varela is successful on this appeal. Therefore, the appeal is not moot.

II

The bankruptcy court disallowed Varela's claim as untimely because the proof of claim was filed nearly 16 months after the court-imposed December 15, 2000 "claims bar date,"2 and then...

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