In re Griffiths, Bankruptcy No. 82-40737.
| Decision Date | 02 March 1983 |
| Docket Number | Bankruptcy No. 82-40737. |
| Citation | 27 BR 873 |
| Parties | In Re: Larry Max GRIFFITHS, Coralee (NMN) Griffiths d/b/a Coralar Farms f/d/b/a MGCB Packing Co., Ltd., Debtors. |
| Court | U.S. Bankruptcy Court — District of Kansas |
John H. Stauffer, Jr. of Colmery, McClure, Funk, Letourneau & Entz, Topeka, Kan., for debtors.
Jan M. Hamilton of Hamilton, Peterson, Tipton & Muxlow, Topeka, Kan., for creditor, Union State Bank.
In this chapter 11 proceeding, the parties have asked the Court, in a declaratory action, to determine if 11 U.S.C. § 1129(b)(2)(A)(iii) allows the debtors to cram down their plan of reorganization when an electing secured creditor intends to vote to reject the plan.
The issues presented for determination are:
1. If a recourse, undersecured creditor, in its own class, has made an election under 11 U.S.C. § 1111(b)(2), and rejects the debtor's plan of reorganization, is the creditor receiving the "indubitable equivalent" of its claim, under 11 U.S.C. § 1129(b)(2)(A)(iii) when the debtors propose to surrender to the creditor a portion of the collateral, and pay the creditor a lump sum equal to the highest value of the collateral retained by the debtor.
2. Is the creditor equitably estopped from opposing the proposed treatment.
The parties have submitted briefs and the Court is ready to rule.
The debtors are farmers and filed a chapter 11 petition in bankruptcy on August 6, 1982.
The creditor, Union State Bank (USB), has a security interest in personal property of the debtors including machinery, equipment, livestock and stored grain. USB filed an "election" under 11 U.S.C. § 1111(b)(2) in September, 1982.
The debtors intend to treat USB in the plan as follows:
The debtors will return a portion of USB's collateral and pay a lump sum equal to the value of the remaining collateral in total satisfaction of USB's claim. As the disclosure statement indicates:
It is debtors position that this combination of property turnover and payment in lump sum of the fair market value of said property is the "indubitable equivalent" of the creditor\'s allowed secured claim. This treatment will effectively satisfy Union State Bank\'s claim and no further payments are contemplated under the Plan.
(First Amended Disclosure Statement, pg. 20).
USB has filed a claim in the amount of $570,670.94. The total value of the security pledged to USB is less than the amount of the debt and thus, USB is "undersecured."
The debtors also allege the following facts in their reply memorandum which the Court accepts as correct for the purpose of this opinion:
On November 1, 1982, Debtors turned over their commercial cowherd to USB. On November 23, 1982, an adequate protection order was entered whereby Debtors were to pay U.S.B. $500.00 per month for the depreciation to the personal property being retained by Debtors. On December 8, 1982, Debtors turned over to U.S.B. and to Massey Ferguson, certain machinery and equipment and subsequently turned over the Registered Cowherd owned by Debtors. On that date, U.S.B. accepted the payment of $2,000.00, the fair market value of two cows, and Debtors retained two registered cows which are being used in rebuilding Debtors\' herd and in the reorganization efforts. Debtors have determined that the personal property still in their possession in which U.S.B. claims an interest, will be beneficial to the rehabilitative efforts they are undergoing and to their Plan of Reorganization. Debtors subsequently proposed to pay U.S.B. more than they would receive if Debtors were to turn over the property. On the notification of U.S.B. that it would not accept such a proposal, its Motion and this Response ensued.
Section 1111(b)(2) states:
If . . . an election is made, then notwithstanding section 506(a) of this title, such claim is a secured claim to the extent that such claim is allowed.
11 U.S.C. § 1111(b)(2). An undersecured creditor, a creditor whose security is worth less than the total amount owed to the creditor, may choose to have its claim treated in two manners. First, it can have a bifurcated claim, with a secured claim to the extent of the value of the collateral, and an unsecured claim for the remainder of the debt owed. 11 U.S.C. § 506(a). Second, the secured creditor can waive its unsecured claim and elect to have its total claim treated as secured. 11 U.S.C. § 1111(b)(2); Klee, All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code, 53 Am.Bankr.L.J. 133, 153 (1979).
There are two situations in which the election cannot be made. First, if the creditor's interest in the collateral "is of inconsequential value . . .," the election cannot be made. 11 U.S.C. § 1111(b) (1)(B)(i). Second, if the creditor has recourse against the debtor, such as under K.S.A. § 84-9-504(2) (Supp.1981), and the debtor intends to sell the collateral, such as under 11 U.S.C. § 363(k), the election cannot be made. In the instant case, the collateral has significant value, no sale is in the offing, and therefore the election is not prohibited.
USB is in a class of its own and intends to reject the debtors' plan. The parties agree USB's claim is being impaired. Thus, in order to confirm the plan the debtors will have to seek a cram down on USB. 11 U.S.C. § 1129(b)(1). There are three alternatives to cramming down a class of secured claims. Although not applicable herein, property can be sold, a lien granted on the sale proceeds, and the lien satisfied under one of the remaining two cram down alternatives. 11 U.S.C. § 1129(b)(2)(A)(ii). There can be a cash payment cram down, requiring the debtor to make cash payments of at least the allowed amount of the claim, and the discounted value of these payments must equal at least the value of the collateral. 11 U.S.C. § 1129(b)(2)(A)(i)(II). The debtor does not propose to cram down under this provision.
The debtors choose the third option of giving USB "the indubitable equivalent of such claim. . . ." 11 U.S.C. § 1129 (b)(2)(A)(iii). The phrase "indubitable equivalent" is derived from Judge Learned Hand's opinion in In Re Murel Holding Corp., 75 F.2d 941 (2nd Cir.1935). It includes "abandonment of the collateral" to the secured creditor. 124 Cong.Rec. H 11,104 (daily ed. Sept. 28, 1978) (statement of Rep. Edwards); 124 Cong.Rec. S 17,421 (daily ed. Oct. 6, 1978) (statement of Sen. DeConcini). Indubitable equivalent cash payments must equal at least the secured claim. Payments less than the secured claim are not the indubitable equivalent of the secured claim. Id.
The Court believes there are several reasons the debtors cannot return a portion of the collateral and pay the value of the remaining collateral as the indubitable equivalent of USB's section 1111(b)(2) claim.
First, USB's post-election secured claim is the total amount owed to it, $570,670.94, reduced by the value of any property returned. The debtors must pay the indubitable equivalent of the remaining amount owed, and not simply the indubitable equivalent of the value of the remaining property. The indubitable equivalent of the claim must be realized. The post-election claim is something more than the value of the remaining property.
3 Norton, Bankruptcy Law and Practice § 57.02 at 14-15 (Supp.1982). Thus, creditors may choose to elect in cases where the debtor's plan proposes a minimal or zero payment to unsecured claims. In such a plan, the debtor is proposing to "cash out" the secured creditor by paying the value of the collateral. As Judge Norton indicated, § 1111(b)(2) allows the creditor to decide if it will be cashed out for the value of the collateral. The creditor elects to "prevent a `cash out.'" See 5 Collier on Bankruptcy ¶ 1111.025, at 1111-27 (15th Ed.1982). In the instant case, the debtor is essentially proposing to "cash out" USB for the value of the remaining collateral. Section 1111(b)(2) gives USB the ability to prevent the cash out. The Court cannot agree that a cash out payment is the indubitable equivalent of a post election claim that prevented a cash out.
Third, under § 1129(b)(2)(A)(i)(II), payments to the dissenting electing creditor must pass two tests. Under the first test, the total payments must be at least the total allowed claim. When the election has been made, the total amount owed is the allowed claim. Under the second test, those payments must have a present value equal to the value of the collateral. In the instant case, the debtors do not propose to pay the total remaining allowed claim of USB (after credit for returned collateral), but rather only propose to pay the value of the collateral. Thus, under § 1129(b)(2)(A) (i)(II), the first requirement of cash payment cram down would not be satisfied. The Court does not believe § 1129 (b)(2)(A)(iii) was intended as an alternative to the cash payment requirements of § 1129(b)(2)(A)(i)(II).
As Collier...
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