In re Elsinore Shore Associates

• Decision Date: 24 March 1988
• Docket Number: Bankruptcy No. 85-06058.
• Citation: In re Elsinore Shore Associates, 91 B.R. 238 (Bankr. N.J. 1988)
• Parties: In re ELSINORE SHORE ASSOCIATES, d/b/a The Atlantis Casino Hotel, Elsinore of Atlantic City, Elsinore of New Jersey, Inc., Elsub Corporation, and Elsinore Finance Corporation, Debtors.
• Court: U.S. Bankruptcy Court — District of New Jersey

91 B.R. 238 (1988)

In re ELSINORE SHORE ASSOCIATES, d/b/a The Atlantis Casino Hotel, Elsinore of Atlantic City, Elsinore of New Jersey, Inc., Elsub Corporation, and Elsinore Finance Corporation, Debtors.

Bankruptcy No. 85-06058.

United States Bankruptcy Court, D. New Jersey.

March 24, 1988.

Crummy, Del Deo, Dolan, Griffinger & Vecchione by Michael R. Griffinger, Karen A. Giannelli, David M. Hyman, Newark, N.J., Weill, Gotshal & Manges by Marvin E. Jacob, Jay M. Goffman, New York City, for debtors.

Mairone, Biel, Gould, Zlotnick, Feinberg & Griffith by Alan I. Gould, Eric A. Browndorf, Atlantic City, N.J., for Unsecured Creditors' Committee.

McCarter & English by Amelia H. Boss, Cherry Hill, N.J., for Playboy Enterprises, Inc.

Fried, Frank, Harris, Shriver & Jacobson by Brad E. Scheler, New York City, for the Unofficial Committee of Senior Bondholders.

Lashner, Victor & Maschmeyer by Melvin Lashner, William Lashner, Philadelphia, Pa., Meranze & Katz by Michael N. Katz, Cherry Hill, N.J., for H.E.R.E. Intern. Pension Plan, H.E.R.E. Welfare Fund, H.E.R.E. Local 54 Severance Fund ("Funds").

Leonard J. DiGiacomo, Asst. Counsel, State of N.J., Casino Control Com'n, John E. Adams, Jr., Robert Latimer, Deputies Atty. Gen., State of N.J., Div. of Gaming

Enforcement, United States Attorneys Office by Paul A. Blaine, Asst. Atty. for the I.R.S., Ober, Kaler, Grimes & Shriver by George J. Koelzer, Edison, N.J., for Maryland Nat. Leasing Services Corp.

Riker, Danzig, Scherer, Hyland & Perretti by Karen B. Bezner, Gabriel Del Virginia, Morristown, N.J., for Casino Reinvestment Development Authority.

OPINION

ROSEMARY GAMBARDELLA, Bankruptcy Judge.

Before the Court is the Debtors' Third Amended Joint Plan of Reorganization under Chapter 11 of the United States Bankruptcy Code("the Plan") dated December 7, 1987 submitted by Elsinore Shore Associates, d/b/a The Atlantis Casino Hotel ("ESA"), Elsinore of Atlantic City("EAC"), Elsinore of New Jersey, Inc.("ENJ"), Elsub Corporation("Elsub"), and Elsinore Finance Corporation("EFC"), all debtors herein (collectively referred to as "Debtors"), together with Elsinore Corporation, Hyatt Tahoe, Inc., and Four Queens, Inc.(collectively referred to as the "Proponents").

Objections to confirmation of the plan have been filed by H.E.R.E. International Pension Plan, H.E.R.E. Welfare Fund and H.E.R.E. Local 54 Severance Fund ("the Funds"), the Internal Revenue Service ("IRS"), and Stein's Food Service Equipment, Inc.("Stein's Food Service").Hearings on confirmation of the plan were conducted on February 8, 9 and 18, 1988.The following constitutes this court's findings of fact and conclusions of law.

On November14, 1985 ESA filed a voluntary petition under Chapter 11 of the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984("Bankruptcy Code").On July 24, 1987, EFC, ENJ, EAC and Elsub filed voluntary petitions for reorganization under Chapter 11.On July 24, 1987, this court entered an order consolidating the debtor proceedings for administrative purposes.ESA is in the business of operating the Atlantis Casino Hotel on the Boardwalk in Atlantic City, New Jersey.

Stein's Food Service filed an Objection to Confirmation of Plan of Reorganization on the basis that Stein's Food Service holds two claims against the debtors: an administrative priority claim in the amount of $3,994.88 and an unsecured claim in the amount of $6,936.44.Stein's Food Service asserts that the plan recognizes the unsecured claim but makes no provision for payment of the administrative claim.

Counsel for the debtors at the February 8, 1988 confirmation hearing stated that the debtors recognized a valid reclamation claim of Stein's Food Service to the extent previously ordered by the court, which will be paid as an administrative expense under the plan.(SeeTr. of2/8/88at 40).This court finds that Stein's Food Service's claim is adequately treated under the plan.

The IRS objects to payment of its unsecured priority claims on any basis other than with statutory interest as provided by 26 U.S.C. §§ 6621and6622.The IRS takes the position that the present value of the taxes owed by the debtors and to be paid in deferred payments pursuant to 11 U.S.C. § 1129(a)(9)(C) includes the statutory interest rate set by the Secretary under §§ 6621and6622 of the Internal Revenue Code.

The United States of America, Internal Revenue Service, on January 22, 1988 filed an "Objection to Confirmation of the Amended Plan of Reorganization."By its objection the IRS asserts that it has the following claims: (1) administrative claims in the amount of $8,893.29; (2) unsecured priority claims in the sum of $485,360.17, and (3) unsecured general claims of $2,149.51.The IRS asserts that the plan only provides for payment of interest on its priority claims at the rate specified in 26 U.S.C. §§ 6621and6622 as an alternative method of payment.(SeeArt. 4 of Plan).

Counsel for the debtors and the IRS at the February 8, 1988 confirmation hearing agreed to preserve the issue of the calculation of the present value of the IRS' claim, pending a determination of confirmation of the plan.(SeeTr. of2/8/88at 37-39).

The Funds filed objections to confirmation of the plan as follows:

(1) The Plan reflects the non-confirmability of said Plan since the Plan requires participating creditors to waive claims against non-debtor, third parties and the consummation of said Plan discharges non-debtor, third parties.The Funds assert that such release and discharge of non-debtor, third parties violates Section 524(e) of the Bankruptcy Code.

(2) The Plan provides for a release to be signed by counsel for the Unsecured Creditors' Committee on behalf of all unsecured creditors.The Funds assert that this provision is illegal and invalid and cannot be part of a confirmable plan.

(3) The Plan should not be confirmed since the acceptances thereto were obtained by a false and misleading Disclosure Statement, the approval of which is on appeal.The Funds assert that no order of confirmation should be entered until that appeal is decided.

(4) The Plan should not be confirmed in that it is not fair and equitable in that said Plan is a constructive fraud on unsecured creditors since the Debtors propose paying off guaranteed debts of their parent, Elsinore, in full, before unsecured creditors are paid.

(5)The Bankruptcy Court has scheduled a hearing on confirmation of the Plan without deciding various litigation that has been filed with this Court and has not been heard by the Court or if heard, has not been decided by the Court, including but not limited to:

(a) a motion filed by the Funds for the appointment of a trustee, and

(b) a motion by ESA for rescission of a certain real estate transaction which has been full tried and briefed.

(6) Until the issues brought before this Court on marshalling and equitable subordination of Elsinore's unconditional guarantee of certain bonds of the debtor are decided by the Bankruptcy Court, no confirmation hearing should be held.

(7) The Plan should not be confirmed in that it is not fair and equitable in that the Plan is a constructive fraud on unsecured creditors since the debtors propose paying off the guaranteed debts of their parent corporation which would eventually insure that the parent corporation is relieved of responsibility for all of its debts while the unsecured creditors are being paid only a small portion of their debt under the Plan.

(8) The Plan violates the absolute priority of payment rule in that the unsecured creditors have not been paid in full and other creditors who are lower in priority than the unsecured creditors are being paid various sums of money including but not limited to the debts of the parent corporation of the debtors, Elsinore, and debtor's ex-partner, Playboy Enterprises, Inc.

The Funds originally sought to argue that the plan violates the absolute priority rule and is not fair and equitable.The absolute priority rule and the fair and equitable standard come into play under the cram-down provisions of § 1129(b).The general principal of the subsection requires that a plan must provide either that an impaired non-accepting class of creditors be paid in full with respect to their claims, or that no interest junior to that class of creditors receive any distribution under the Plan with respect to the junior claimant's claim or interest.SeeIn re Toy & Sports Warehouse, Inc.,37 B.R. 141, 152(Bankr.S.D.N. Y.1984).

At the February 18, 1986 confirmation hearing Melvin Lashner, Esquire, counsel for the Funds stated:

We\'ve included our fair and equitable into the principle, the concept of not made in good faith, and the absolute priority is not applicable.

(SeeTr. of2/18/86at 247).

The plan before the court contains twelve classes of claims and interests, with varying payment provisions as follows:

Class 1 consists of priority non-tax claims.These claims are to be paid in cash on the Effective Date or upon such terms as may be agreed to by the holder of any such claim.

Class 2A consists of secured claims arising under the Senior Mortgage Bonds and Indenture.These claims arise as a result of a certain indenture, dated as of November 1, 1984 among EFC, Elsinore, as guarantor, and Manufacturers Hanover Trust Company, as Indenture Trustee, pursuant to which 15½% Senior Mortgage Bonds, in the original principal amount of $115,000,000.00 due 1999, were issued by EFC.

The Senior Mortgage Bonds are secured primarily by a $90 million promissory note of ESA (the "ESA note") and a mortgage on the Atlantis Casino Hotel (the "ESA mortgage"), which is owned by ESA, and a $25 million promissory note of Hyatt Tahoe and a mortgage on the Hyatt Lake Tahoe.Both the notes and mortgages have been assigned to the Indenture Trustee for the benefit of the holders of Senior Mortgage Bonds.

Under the plan, on...