In re Greystone III Joint Venture

• Decision Date: 06 June 1989
• Docket Number: Bankruptcy No. 88-10968.
• Citation: 102 BR 560
• Parties: In re GREYSTONE III JOINT VENTURE, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Texas

102 B.R. 560 (1989)

In re GREYSTONE III JOINT VENTURE, Debtor.

Bankruptcy No. 88-10968.

United States Bankruptcy Court, W.D. Texas, Austin Division.

June 6, 1989.

Adrian M. Overstreet, Kammerman & Overstreet, P.C., Austin, Tex., for debtor.

John Flowers, John H. Reid, Neil L. Sobol, Locke Purnell Rain Harrell, P.C., Dallas, Tex., for Phoenix Mut. Life Ins. Co.

DECISION ON CONFIRMATION OF DEBTOR'S SECOND AMENDED PLAN OF REORGANIZATION, AS MODIFIED

LEIF M. CLARK, Bankruptcy Judge.

CAME ON for hearing the Second Amended Plan of Reorganization of Debtor (as modified) together with the objection thereto by Phoenix Mutual Life Insurance Company ("Phoenix"). This decision focuses on those critical issues on which the parties focused at the hearing and in their post-submission briefs. The court finds that the balance of the findings required to confirm a plan under Section 1129 of the Bankruptcy Code have been successfully established by the debtor and will be set out in detail in the confirmation order.

I. THE FACTS AND POSTURE OF THE CASE

The plan proposes to pay both trade debt of approximately $10,000 and the Code-created deficiency claim of Phoenix Mutual (approximately $3,475,000) slightly over three (3) cents on the dollar. The plan also proposes to pay 1987 ad valorem taxes in excess of $108,000, and to assure payment of 75% of tenant security deposit claims. The partnership currently has on hand approximately $101,000, more than enough to pay off the trade in full, though nowhere near enough to pay even the remaining taxes, much less Phoenix' deficiency claim.

Absent bankruptcy, Phoenix is a nonrecourse creditor and would have no claim at all beyond its secured claim against either the partnership or its general partners. The trade debt and the tenants, on the other hand, have recourse under Texas law against both the partnership and the general partners, and the plan does not purport to restrict or eliminate that recourse. Texas Uniform Partnership Act, Tex.Rev.Civ. Stat.Ann., Art. 6132b, § 40 (West pamphl. ed. 1988); see Republic Supply Co. v. Shoaf, 815 F.2d 1046 (5th Cir.1987) (plan's discharge of nondebtor entity withstood collateral attack under principles of res judicata where creditor failed to timely object to plan). The debtor's partners intend to retain their equity interest in the venture with a capital infusion of $500,000, to be used both to fund payments to creditors and for future operations.

All creditors other than Phoenix have supported the plan. The plan was amended at the confirmation hearing to delete the affirmative statement that general partners would satisfy the balance of trade debt claims¹ and to reduce the term of repayment for Phoenix' secured claim from thirty to ten years, with a balloon at the end.

Phoenix still objects to the plan, contending that (1) the plan is either not proposed in good faith because the plan improperly classifies the trade debt as a separate impaired class or, alternatively, unfairly discriminates by "artificially impairing" the trade debt and (2) the plan cannot be forced upon Phoenix over its objections anyway because it is not fair and equitable with respect to Phoenix' deficiency claim. The debtor responds that the Code contemplates flexibility in classification, so that making use of the tools afforded by the Code cannot, by definition, be anything other than good faith as that term is used in Section 1129(a)(3). The debtor adds, in the same vein, that its treatment of the trade is intended to come within the rule of law announced by this court in In re Meadow Glen, Ltd., 87 B.R. 421, 425 (Bankr.W.D. Tex.1988), in order to avoid a finding that the plan "unfairly discriminates." Finally, the debtor argues that the capital infusion of $500,000 proposed by the partnership's partners brings the plan within the exception announced in Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939).

II. ANALYSIS OF THE LAW

Phoenix argues that this debtor's plan takes improper advantage of Chapter 11, and subverts the intent of Congress in the process. Phoenix complains that the plan impermissibly silences Phoenix, by putting the trade debt into a separate class which has enthusiastically accepted the plan. This, Phoenix urges, subverts the "clear intentions" of Congress in enacting Section 1129(a)(10). Meanwhile, the debtor's principals are "buying" their way back in ostensibly under the exception to the absolute priority rule announced in Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939), undermining the "veto" which Phoenix believes Congress intended to confer on undersecured nonrecourse lenders by virtue of Section 1129(b)(2)(B). According to Phoenix, the debtor has taken advantage of creative classification, then "artificially impaired" that class in order to give the debtor an accepting class, avoiding domination by Phoenix' Code-created deficiency claim. The cash infusion meanwhile skirts the absolute priority rule of Section 1129(b)(2)(B) that the objecting unsecured class either be paid in full or that junior interests retain or get nothing under the plan. Phoenix is vociferous in urging that the debtor's tactics circumvent the structure of the Code. The argument presupposes, however, that Congress intend the secured lender in cases such as this to have the final say over whether a plan should be confirmed. That presupposition gives more credit to Congress and its intentions than Congress appears to be due, however.

A. An Historical Perspective on the Role Envisioned for Secured Creditors in Single-Asset Real Estate Cases under the Bankruptcy Code

Prior to the passage of the Bankruptcy Reform Act in 1978, single asset real estate debtors, employing Chapter XII of the Bankruptcy Act, could "write down" their secured debt while the market was low, then enjoy the appreciation realized in excess of the written-down mortgage when the market rebounded. See Great National Life Insurance Co. v. Pine Gate Associates, Ltd., 2 B.C.D. 1478 (Bankr.N.D.Ga. 1976) (hereinafter Pine Gate). According to the Pine Gate court,

Nowhere in Chapter XII is there any exclusion of the benefit of Chapter XII to a debtor having only one secured creditor. The history of the creation of Chapter XII, which was to provide a remedy to property owners to avoid foreclosure under distressed economic conditions indicates otherwise. . . . The contract rights of a secured creditor in the property of which a debtor is the legal or equitable owner may be modified or altered even without the consent of such secured creditor so long as the secured creditor receives adequate protection under Section 461 to realize the value of its lien. Retention of property is the statutory scheme of Section 461(11)(c) and adequate protection, rather than consent, of the secured creditor is its keystone.

Id. at 1487; see also Matter of Accousti, 2 B.C.D. 1093 (Bankr.D.Conn.1976); Matter of Marietta Cobb Apartments, 3 B.C.D. 720 (Bankr.S.D.N.Y.1977); Matter of Hobson Pike Associates, Ltd., 3 B.C.D. 1205 (Bankr.N.D.Ga.1976).

These cases construing Chapter XII (which until the early 1970's had fallen into disuse) arose even as Congress was undertaking a major overhaul of the bankruptcy laws. See generally "Report of the Commission on the Bankruptcy Laws of the United States," H.R.Doc. No. 137, 93rd Cong, 1st Sess (1973). By 1977, the House had completed its final proposed draft of a new Bankruptcy Code, H.R. 8200, which combined former reorganization chapters X, XI, and XII into a single chapter (Chapter 11), optimistically designed to be flexible enough to meet all the needs for which the three chapters were created in the Chandler Act of 1938. 124 Cong Rec H11117, 95th Cong, 2d Sess (daily ed. Sept. 28, 1978) (remarks of Rep. McClory). The House version adopted many of the recommendations of the Bankruptcy Commission, and took a liberal approach in its provisions which decidedly favored reorganization. H.R.Rep. No. 595, 95th Cong, 1st Sess 220 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787. In its confirmation section, the House version permitted confirmation over the objections of dissenting secured creditors so long as their claim was essentially "adequately protected," (cf. 11 U.S.C. (repealed) § 861), and over the objections of dissenting impaired unsecured classes of creditors so long as no junior classes received property on account of their junior claims (a modified version of the Chandler Act's "fair and equitable" standard, codified and preserved in Chapter X of the Bankruptcy Act). H.R. 8200, § 1129, 95th Cong, 1st Sess (1977). Section 506(a) of the proposed bill defined a secured claim in terms of the value of the collateral securing the debt, as had Chapter XII of the Bankruptcy Act. Section 502, meanwhile, provided that claims would be disallowed if unenforceable against the debtor for any reason. One such unenforceable claim would, of course, be a "deficiency" claim asserted by a nonrecourse lender. Under the House version, a plan could conceivably be confirmed even though no impaired class voted in favor of the plan, because there was no antecedent to current Section 1129(a)(10) in H.R. 8200. Under the House version, then, a Chapter XII-type reorganization would be permitted under new Chapter 11 as well. See Matter of Marietta Cobb Apartments, 3 B.C.D. 720 (Bankr.S. D.N.Y.1977); Matter of Hobson Pike Associates, Ltd., 3 B.C.D. 1205 (Bankr.N.D.Ga. 1976) (single asset real estate cases with only one creditor — the secured creditor — confirmed over the objections of that creditor).

By the next year, the Senate came up with its own, somewhat more conservative version of the Bankruptcy Code. S. 2266, 95th Cong, 2d Sess (1978). In its reorganization sections, the Senate version preserved many of the provisions of Chapter X of the Act, at least for publicly held companies. S. 2266, §§ 1128, 1130, 95th Cong, 2d Sess...