In re General Development Corp.
| Decision Date | 18 December 1991 |
| Docket Number | Bankruptcy No. 90-12231-BKC-AJC. |
| Citation | 135 BR 1002 |
| Parties | In re GENERAL DEVELOPMENT CORPORATION, et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
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Mark D. Bloom, Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, Miami, Fla., for Gen. Development Corp., et al.
This cause came before the Court for hearing on Friday, December 13, 1991, at 10:00 p.m., upon Objections to Confirmation of the Second Amended Joint Plan of Reorganization of GENERAL DEVELOPMENT CORPORATION filed by the City of North Port, Sarasota County and Charlotte County (collectively, the "Objecting Municipalities"). The Court having read and considered the Objections, the Memorandum in Support of Confirmation of the Second Amended Joint Plan of Reorganization of General Development Corporation, the City of North Port's Memorandum in Opposition to Confirmation of Second Amended Joint Plan of Reorganization of General Development Corporation, the authorities cited by the parties and other matters of record, heard the argument of counsel and otherwise been duly advised in the premises, issues this Memorandum Decision and Order overruling the Objections.
Prior to the filing of its Chapter 11 petition on April 6, 1990, GENERAL DEVELOPMENT CORPORATION ("GDC") or (the "Debtor") was principally involved in the sale and development of real estate throughout the State of Florida and in Tennessee. In connection with its development of residential communities across the State, GDC incurred a number of obligations to local municipalities, largely relating to the construction and maintenance of roads, drainage and other infrastructure necessary to support these communities.
At the time of the Chapter 11 filing many of these obligations remained unfulfilled. Budgetary constraints and the diversion of management attention to the task of reorganization required that most development activity be interrupted, leaving incomplete or unstarted various projects for which development approvals had been obtained and obligations incurred. As a result, a number of municipalities have timely filed claims aggregating in the hundreds of millions of dollars.
Along with the Official Creditors Committee, the Debtor has jointly filed a Second Amended Joint Plan of Reorganization (the "Plan"). By Order dated October 9, 1991 the Court approved the related Disclosure Statement as containing adequate information, scheduled hearings on confirmation of the Plan for December 5, 12 and 13, and set November 25, 1991 as the deadline for filing Objections to confirmation. The Plan provides, in pertinent part, that general unsecured creditors including the municipal claimants treated in Class 11 will receive a combination of common stock and notes from the Reorganized Company.
Each of the Objecting Municipalities has timely filed an Objection to confirmation of the Plan on the basis that it is not proposed "in good faith and not by any means forbidden by law," as required by Section 1129(a)(3) of the Bankruptcy Code, 11 U.S.C. § 1129(a)(3). The Objecting Municipalities argue that the Plan contravenes Section 1129(a)(3) because the proposed distribution of common stock to creditors in Class 11 violates Article VII, Section 10 of the Florida Constitution, Fla. Const., Art. VII, § 10.1
In addressing these Objections, it is important first to observe that Class 11 has voted in the requisite number and amount to accept the Plan pursuant to Section 1126(a) of the Code. Accordingly, the Objections do not require the Court to invoke the cramdown provisions of Section 1129(b) with respect to Class 11.
The treatment of all Class 11 claims, other than claims of the Florida Division of Land Sales, Condominiums and Mobile Homes (the "Division"), is addressed in Section 5.8(b) of the Plan. In lieu of the distributions of notes and stock offered to other classes of general unsecured creditors, Section 5.8(b) provides that GDC "may provide alternative distributions of other property of the Company," which property shall be so distributed free and clear of any liens securing indebtedness to be issued pursuant to the Plan. The intent of this provision is to enable the Debtor to offer municipal creditors the option to receive land in respect of their claims, upon settlements of those claims approved by the Court pursuant to Fed.R.Bankr.P. 9019(a). The land can then be sold by the municipalities to generate cash or, if appropriate, used for public purposes.
Simply stated, the issue before the Court is whether the proposed distribution in stock to municipal creditors is in violation of Article VII, § 10 of the Florida Constitution, such that the Plan cannot be confirmed for failure to meet the requirements of Section 1129(a)(3) of the Bankruptcy Code. Each of these provisions is set forth below.
Section 1129(a)(3) of the Bankruptcy Code provides:
11 U.S.C. § 1129(a)(3). Article VII, Section 10 of the Florida Constitution provides, in pertinent part:
Neither the state, nor any county, school district, municipality, special district, or agency of any of them, shall become a joint owner with, or stockholder of, or give, lend or use its taxing power or credit to aid any corporation, association, partnership or person. . . .
Fla. Const. Art. VII, § 10. The impact of each of these provisions will be considered separately.
The initial issue is whether the distribution of common stock to the Objecting Municipalities and other Class 11 creditors violates this provisions of the Florida Constitution. One reasonable construction of Article VII, Section 10 is that it merely prohibits a municipality or other governmental entity from holding stock "to aid any corporation," and is not an outright prohibition against the ownership of stock. If the Plan is confirmed, Class 11 creditors who fail to reach agreement with the Debtor on an alternative distribution of real property will acquire stock in the Reorganized Company in their own right, and not for the aid or benefit of that Company. Under this construction of Article VII, Section 10, the Plan does not violate that provision.
The purpose of the constitutional prohibition against a municipality owning corporate stock is to protect public funds and resources from exploitation by private for-profit ventures with only incidental benefits to the public. State v. City of Panama City Beach, 529 So.2d 250 (Fla.1988); Bannon v. Port of Palm Beach District, 246 So.2d 737, 741 (Fla.1971); Bailey v. City of Tampa, 92 Fla. 1030, 111 So. 119 (1926). Thus, Article VII, Section 10 acts as a check against voluntary acts by public officials to invest public funds or commit the credit of a municipality for private benefit at the public expense. If there is no voluntary act by public officials to invest public funds for private benefit, then there is no constitutional violation. See, City of West Palm Beach v. Williams, 291 So.2d 572 (Fla.1974) (), reversing Williams v. Turrentine, 266 So.2d 81 (Fla. 4th DCA 1972).
In the instant case, there is no voluntary investment of public funds and resources in aid of a private enterprise. Instead, the Objecting Municipalities are holders of general unsecured claims. Pursuant to a Chapter 11 plan of reorganization proposed for confirmation under federal law, holders of such claims may receive a distribution of stock in the same manner as other similarly situated creditors. Because the purpose of the constitutional provision is not violated, the Court refuses to hold that Article VII, Section 10 of the Florida Constitution prohibits the Objecting Municipalities from receiving stock under the Plan such that confirmation must be denied under 11 U.S.C. § 1129(a)(3).
This conclusion is supported not only by the availability of an alternative distribution to Class 11 creditors under the Plan, but also by the numerous other options available to such creditors who desire to avoid becoming stockholders in the Reorganized Company. One such option is to simply to arrange to sell the stock when issued.2 The City of North Port contends that if required to dispose of the stock immediately upon issuance it will receive little or no consideration in respect of its claim, and that the Plan accordingly fails to comply with Section 1129(a)(7)(A)(ii) of the Code in that the City would receive a greater return upon liquidation of the Debtor under Chapter 7. In light of the notes to be received by Class 11 creditors in addition to the stock, the liquidation analysis offered in the Disclosure Statement and the uncontroverted testimony of Peter A. Martosella at the confirmation hearing on December 12, 1991, the Court rejects this argument as well.3
Another possibility is the creation of a blind trust to hold the stock for the benefit of municipalities. The Court views the creation of such a blind trust to be a reasonable and appropriate means of implementing the Plan with respect to Class...
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