In re Elijah, Bankruptcy No. 82-03082-S-11.
| Decision Date | 06 August 1984 |
| Docket Number | Bankruptcy No. 82-03082-S-11. |
| Citation | 41 BR 348 |
| Parties | In re Kinder Allen ELIJAH and Maude Eulalia Elijah, Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
Max W. Lilley, Springfield, Mo., for creditors Moss.
James E. Miller, Springfield, Mo., for Kentland Bank.
Thomas J. Carlson, Springfield, Mo., for creditor Smith.
Fred Charles Moon, Springfield, Mo., for West Plains Bank.
Debtors, who are an elderly farm couple, purchased two tracts of land totalling 2,624 acres in Wright and Howell Counties in Missouri. They traded some Indiana land for part of the price and made substantial cash payments. Five creditors, Federal Land Bank, West Plains Bank, Sherman Smith, Kentland Bank and Donald and Eileen Moss took deeds of trust in various portions of the property. After a downturn in the farm economy, debtors filed for bankruptcy in 1982.
In their plan they propose to surrender part of the property to the creditors to satisfy their secured positions in full. Debtors assert that these creditors are oversecured and that the proposal leaves them unimpaired. The creditors contest this characterization and contend that they can only be paid by surrender of all of their collateral. The Court heard argument and briefs were filed on the issues raised by the plan. The issues were submitted to the Court on the assumption that all of the creditors were oversecured but no evidence was produced by any party on that assumption and there would probably be some dispute as to valuation.
Debtors assert that because creditors are paid in full by surrender of collateral that they are not impaired within the meaning of the Code. Creditors disagree. Resolution of the question is important as unimpaired creditors are deemed to accept the plan, Section 1126(f) of the Code, and may not be able to vote against confirmation. 5 Collier on Bankruptcy ¶ 1126.06 (15th Ed.). But see Marston Enterprises, Inc., 13 B.R. 514, 7 B.C.D. 1403 (BC ED NY 1981). Compare In re Masnorth Corp., 28 B.R. 892 (BC ND Ga.1983).
Section 1124 of the Code, Title 11, U.S.C., defines impairment, providing that:
The debts owed to these secured creditors call for periodic payments in cash with interest. Alternatively the instruments of debt permit the creditor to foreclose and repossess the collateral. The plan does not propose cash payments; rather, it proposes surrender of some of the collateral. In fact, in one instance, it proposes that the creditor exchange collateral in which he holds an interest for an interest in other property to be surrendered. The plan does propose to cure any defaults by payment of the amount of the claim with interest, but not in cash. Any defaults are to be cured by surrender of a portion of the collateral.
Debtors advance the notion that payment in full to a creditor, however such payment is accomplished, causes such a creditor to be unimpaired. Such an argument is not a fair reading of Section 1124. First the statute provides that a creditor is unimpaired if its "legal, equitable and contractual rights" are unaltered. A plan which neither pays the debt as required by the debt instrument nor surrenders all the collateral does alter rights. The wording is clear. Alteration is synonymous with impairment. See, for example, In re Madison Hotel Associates, 29 B.R. 1003 (DC WD Wis.1983).
There is an exception to this broad reading. Under Section 1124(2), the debtor may cure a default by de-accelerating a mortgage, provided other creditor rights are unaltered. In re Taddeo, 685 F.2d 24 (2d Cir.1982). But any other change in the arrangement between debtor and creditor constitutes impairment. In re Otero Mills, Inc., 31 B.R. 185 (BC N.M.1983); In re Barrington Oaks General Partnership, 15 B.R. 952 (BC Utah 1981).
In Otero Mills, supra, debtor proposed to pay a creditor upon sale of the collateral. The Court held that the shift in payments from monthly installments to a lump sum payment sometime in the future was an alteration of the creditors' contractual rights and impaired its status. In Barrington Oaks, supra, the debtor proposed to sell the property to a third party which would assume the obligation (a non-recourse secured note) to the creditor. The Court held that substitution of debtors constituted an impairment under Section 1124.
These provisions concerning impairment result from experience under Section 107 of Chapter X of the Bankruptcy Act, Section 507, Title 11, U.S.C. That section provided in part that creditors "shall be deemed to be `affected' by a plan only if their . . . interest shall be materially and adversely affected thereby". Where a plan did not disturb the position of an oversecured creditor, such a creditor was not materially and adversely affected. Central States Life Ins. Co. v. Koplar Co., 85 F.2d 181 (8th Cir.1936). See also 5 Collier on Bankruptcy ¶ 1124.01 (15th Ed.).
A reading of the language of Section 1124 suggests that impairment is no longer limited to material and adverse effects. The legislative history is in disagreement as to whether this approach is a mere continuation of the prior analysis, Senate Report No. 95-989, 95th Cong., 2d Sess. 120 (1978), or is new, House Report No. 95-595, 95th Cong., 1st Sess. 408 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787. Collier suggests that the difference is more apparent than real. 5 Collier on Bankruptcy ¶ 1124.02 (15th Ed.).
But when balanced against the right to vote on confirmation, it is not difficult to conclude that Section 1124 is to be read broadly. When the relationship to the debtor is changed, the creditor ought to have the right to express a formal opinion about the change. 5 Collier on Bankruptcy ¶ 1124.03, 1125.06, 1129.028 (15th Ed.); In re Madison Hotel Associates, supra. The Court concludes, therefore, that the limitations expressed in Section 1124 should be read liberally to effectuate the purposes of the Code, encouraging creditors to be involved actively in the reorganization process. The Court holds that these creditors are impaired under the plan proposed by debtors and are eligible to vote on confirmation.
Some but not all of these secured creditors have made election to have their claims treated as fully secured under Section 1111(b) of the Code. They argue that this election prevents the debtor from returning less than all of the collateral in which they hold an interest in satisfaction of their respective claims.
If an election under § 1111(b) is made "then notwithstanding section 506(a) of this title, such claim is a secured claim to the extent that such claim is allowed". The purpose of the election is to avoid the splitting of an undersecured creditor's claim into secured and unsecured portions, and to prevent the debtor from depriving the creditor of the benefit of appreciation in value of the asset over time. Matter of Pine Gate Associates, Ltd., 2 B.C.D. 1478 (BC ND Ga.1976); 5 Collier on Bankruptcy ¶ 1111.02 (15th Ed.); In re Griffiths, 27 B.R. 873, 10 B.C.D. 173 (BC Kan.1983); Stein Section 1111(b); Providing Undersecured Creditors with Postpetition Appreciation, 56 Am.Bankr.L.J. 195 (1982); Pusateri, Section 1111(b) of the Bankruptcy Code, 58 Am.Bankr.L.J. 129 (1984).
In Griffiths, supra,...
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