In re Elmwood, Inc., CV-S-94-895-PMP (LRL)
| Decision Date | 30 May 1995 |
| Docket Number | CV-S-94-1088-PMP (LRL).,No. CV-S-94-895-PMP (LRL),CV-S-94-895-PMP (LRL) |
| Citation | 182 BR 845 |
| Parties | In re ELMWOOD, INC., Debtor. STATE STREET BANK AND TRUST COMPANY, Appellant, v. ELMWOOD, INC., and Clark County Treasurer, Appellees. |
| Court | U.S. District Court — District of Nevada |
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Laurel E. Davis, Lionel Sawyer & Collins, Las Vegas, NV, for appellant State Street Bank and Trust Co.
Mark Hafer, Mushkin & Hafer, Las Vegas, NV, for debtor, appellee Elmwood, Inc.
Kathleen Jansen, Deputy Dist. Atty., Las Vegas, NV, for appellee Clark County Treasurer.
State Street Bank and Trust Company ("State Street") appeals the confirmation of the Debtor's plan of reorganization under Chapter 11. After obtaining bankruptcy relief under Chapter 11, the debtor-in-possession, Elmwood, Inc. ("Elmwood"), proposed a "cramdown" plan of reorganization (the "Plan"), which would force a writedown on the secured lender's note and allow Elmwood to retain possession and ownership of the property. Despite objections from State Street, Elmwood's largest creditor, the Bankruptcy Court confirmed the Plan. State Street asserts the Bankruptcy Court committed several errors in confirming the Plan. Because the Court finds the Bankruptcy Court did not err in confirming the Plan, the Court will affirm the decision of the Bankruptcy Court.
The Debtor, Elmwood, Inc., is a Nevada corporation which acquired its primary asset, the Elmwood Villas Apartments ("Elmwood Villas"), at a fourth trust deed foreclosure sale on December 2, 1991. Elmwood purchased its interest in Elmwood Villas, a 156-unit Las Vegas, Nevada, apartment complex, subject to senior liens. State Street currently holds a promissory note secured by the first deed of trust on the property in the principal amount of $4.18 million.
Gang-related crime plagues the Elmwood Villas complex and its value as an income-producing asset decreased dramatically after its acquisition by Elmwood. Unable to complete its obligation due to insufficient income from the property, Elmwood defaulted on the note in October 1992 and did not make any payments for over a year. Consequently, State Street initiated nonjudicial foreclosure and commenced a receivership action in the United States District Court, District of Nevada, Case No. CV-S-93-01149-LDG(RLH). In response, Elmwood filed its Voluntary Petition for bankruptcy protection under Chapter 11 (# 1) on December 13, 1993.
Elmwood filed its initial plan and disclosure statement (# 19) on February 22, 1994, and with minor amendments it was approved and set for confirmation on April 26, 1994. At the April 26 confirmation hearing, the Court determined that the plan could proceed to cramdown hearings. The Bankruptcy Court scheduled the evidentiary hearing for June 8, 1994. The hearing was later continued to August 4, 1994.
Elmwood's original plan for reorganization, as amended (# 30), divided the undersecured State Street obligation into two separate claims, one secured claim of $1.1 million based on a previously appraised value in the same amount which it classified in Class 3, and one unsecured claim of $3.5 million pursuant to 11 U.S.C. § 1111(b). Elmwood originally classified State Street's unsecured claim with all other unsecured claims in Class 4.
State Street, while it did file objections to the plan, did not timely vote against the plan. Instead, it requested an extension of time to submit ballots rejecting the reorganization plan. If allowed to file late ballots, State Street would have controlled the unsecured class and defeated confirmation with its negative vote, since without its approval there would be no accepting impaired class. See 11 U.S.C. § 1126(c) (1994). The Bankruptcy Court allowed State Street to file late ballots, and also allowed Elmwood to revise its proposed Plan. See Order (# 56).
Elmwood accordingly revised its plan to remove State Street's unsecured deficiency claim from the other unsecured claims through its Revised Amended Disclosure Statement and Reorganization Plan (# 53), filed June 30, 1994. The other unsecured creditors approved the confirmation plan, providing an "accepting class" within the meaning of the cramdown provisions of 11 U.S.C. § 1129(b). See 11 U.S.C. § 1129(a)(10). State Street voted against the Plan, see (# 62), and State Street filed objections to confirmation. See (# 57). The Bankruptcy Court subsequently approved the plan as revised, based upon oral modifications made after the close of evidence.
State Street appeals the confirmation of the reorganization plan. It filed its Opening Brief (# 119) on March 20, 1995, and its Errata to Appellant's Opening Brief (# 121) on March 21, 1995. Elmwood filed its Answering Brief (# 124) on April 14, 1995. State Street filed its Reply Brief (# 125) on April 27, 1995.
The Court reviews the Bankruptcy Court's findings of fact for clear error. In re Fowler, 903 F.2d 694, 696 (9th Cir.1990). The Court reviews conclusions of law de novo. Id.
Section 1122 governs classification of claims for a reorganization.1 11 U.S.C. § 1122(a) (1994). The Court reviews questions of whether claims are substantially similar within the meaning of § 1122(a) as a question of fact, under the clearly erroneous standard. Steelcase, Inc. v. Johnston (In re Johnston), 21 F.3d 323, 327 (9th Cir.1994) (citing In re Commercial Western Finance Corp., 761 F.2d 1329, 1334 (9th Cir.1985)).
The Bankruptcy Court has broad discretion in classifying claims under § 1122. In re Johnston, 21 F.3d at 327. In resolving a question of whether claims are "substantially similar," a bankruptcy court must evaluate the kind, species, or character of each category of claims. Id. A plan may place substantially similar claims in different classes when a reasonable nondiscriminatory basis exists for such treatment. In re Montclair Retail Center, 177 B.R. 663, 665 (9th Cir. BAP 1995) (citing In re Johnston, 21 F.3d at 328).
A court must not approve a classification scheme designed solely to manipulate class voting. Phoenix Mutual Life Insurance Company v. Greystone III Joint Venture, (In re Greystone III Joint Venture), 995 F.2d 1274, 1279 (5th Cir.1991). In the Ninth Circuit, the Bankruptcy Appellate Panel places the burden on the Debtor to offer a business or economic justification for the separate classification of unsecured claims, or to show a legal distinction between the claims. See In re Montclair Retail Center, 177 B.R. 663, 665; Oxford Life Ins. Co. v. Tucson Self-Storage (In re Tucson Self-Storage), 166 B.R. 892, 898 (9th Cir. BAP 1994).
It is not enough to justify separate classification on the basis that the unsecured claim derived from an undersecured claim under the Code. Hanson v. First Bank of South Dakota, N.A., 828 F.2d 1310, 1313 (8th Cir.1987); In re Greystone III Joint Venture, 995 F.2d at 1279; John Hancock Mut. Life Ins. Co. v. Route 37 Business Park Assocs., 987 F.2d 154, 159-61 (3d Cir.1993), reh'g denied, en banc (3d Cir.1993); In re Bryson Properties, XVIII, 961 F.2d 496, 502 (4th Cir.1992), cert. denied, ___ U.S. ___, 113 S.Ct. 191, 121 L.Ed.2d 134 (1992). Further, it is not enough to justify separate classification on the basis of the unsecured creditor's right to make a § 1111(b)(2) election. In re Tucson Self-Storage, 166 B.R. at 897. Finally, it is not enough to justify separate classification based on the administrative convenience exception except in those cases where the unsecured claims are numerous and small in amount. Id. at 898.
State Street challenges Elmwood's classification of State Street's unsecured claim in a separate class from other unsecured claims under 11 U.S.C. § 1122(a). State Street asserts that Elmwood classified its unsecured claim separately only to procure the necessary votes of an impaired class under the cramdown provisions. The Bankruptcy Court determined that Elmwood properly classified appellant State Street's claims in the plan of reorganization, and confirmed the plan over State Street's objections.
Under the terms of the Plan, State Street, as a Class 4 unsecured creditor, receives payments differently than the Class 5 unsecured creditors. The Plan provides for minimum monthly payments of 7.9% of the claims for both Class 4 and Class 5. The Plan further provides that the shareholder of Elmwood, Inc. will infuse initially $50,000 into the refurbishment of the units in the complex. The net operating income ("NOI") generated from all usable units will be used to refurbish the remaining units in the complex, and be used to make the 7.9% payments under the Plan. Once the Class 1 claims are paid in full, the $1000 monthly payments roll over to the Class 5 unsecured claimants. Further, once the Class 2 claims are paid in full, the $1000 monthly payments also roll over to the Class 5 unsecured claimants. Finally, once all units are refurbished, half of the NOI will be paid to State Street. See Order Confirming Plan (# 70); Findings of Fact and Conclusions of Law (# 65).
The Bankruptcy Court permitted the separate classification of State Street's Class 4 unsecured deficiency claim from the claims of the Class 5 unsecured creditors since the Plan provides for repayment to these creditors by different means. See Findings of Fact and Conclusions of Law (# 65). Indeed, the payments made to State Street are contingent upon the amount of excess NOI from the rental of the units in the complex. The claims thus are different in kind, species, and character. Accordingly, there is a reasonable nondiscriminatory basis for the separate classification. As a result, the Court finds that the Bankruptcy Court did not err in finding a basis for separate classification of the unsecured creditors. See, e.g., In re Johnston, 21 F.3d at 328 (...
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