In re Henderson

• Decision Date: 09 May 2006
• Docket Number: Bankruptcy No. 02-168887-9P1.,No. 2:05CV108FTM29SPC.,2:05CV108FTM29SPC.
• Citation: 341 B.R. 783
• Parties: In re James Bronce HENDERSON, III, Debtor. Van Buren Industrial Investors; 6700 Development Associates, Appellants, v. James Bronce Henderson, III, Appellee.
• Court: U.S. District Court — Middle District of Florida

341 B.R. 783

In re James Bronce HENDERSON, III, Debtor Van Buren Industrial Investors; 6700 Development Associates, Appellants, v. James Bronce Henderson, III, Appellee.

No. 2:05CV108FTM29SPC.

Bankruptcy No. 02-168887-9P1.

United States District Court, M.D. Florida, Fort Myers Division.

May 9, 2006.

COPYRIGHT MATERIAL OMITTED

David Hywel Leonard, Robert A. Soriano, Carlton Fields, P.A., Tampa, FL, for Appellants.

David Hywel Leonard, Robert A. Soriano, Carlton Fields, P.A., Asher Rabinowitz, Ruden, McClosky, Smith, Schuster & Russell, P.A., Tampa, FL, for Appellee.

OPINION AND ORDER

STEELE, District Judge.

This matter comes before the Court on the timely appeal of the Bankruptcy Court's Order Confirming Chapter 11 Plan (Alternative (B)) of Third Amended Plan (Doc. # 528),¹ the Order denying Motion for Reconsideration and Clarification of Order on Confirmation of Third Amended Plan, as modified (Doc. # 540), and the Amended Order on Confirmation of Third Amended Plan, as Modified (Doc. # 544) entered by the Honorable Alexander L. Paskay. See In re Henderson, 321 B.R 550 (Bankr.M.D.Fla.2005). The following briefs have been filed in this matter: (1) appellants' Initial Brief (Dist.Doc. # 11); (2) appellee's Brief of Appellee (Dist.Doc. # 13); (3) appellants' Reply Brief (Dist. Doc. # 26); (4) Joann Henderson's Answer Brief (Dist.Doc. # 30); and (5) appellants' Reply to Mrs. Hendeson's Answer Brief (Dist.Doc. # 33). Appellants also filed a Notice of Reliance Upon Additional Authority (Dist.Doc. # 34). The Court heard oral arguments on March 20, 2006.

I.

The United States District Court functions as an appellate court in reviewing decisions of the United States Bankruptcy Court. In re Colortex Indus., Inc., 19 F.3d 1371, 1374 (11th Cir.1994). The legal conclusions of the Bankruptcy Court are reviewed de novo, In re JLJ, Inc., 988 F.2d 1112, 1116 (11th Cir.1993), while findings of fact are reviewed for clear error. Fed. R. Bankr.P. 8013; In re Thomas, 883 F.2d 991, 994 (11th Cir.1989), cert. denied, 497 U.S. 1007, 110 S.Ct. 3245, 111 L.Ed.2d 756 (1990). A finding of fact is clearly erroneous when, "although there is evidence to support it, the reviewing court on the entire record is left with the definite and firm conviction that a mistake has been committed." Crawford v. Western Elec. Co., Inc., 745 F.2d 1373, 1378 (11th Cir.1984) (citing United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). Whether a reorganization plan violates the absolute priority rule is a question of law. In re Armstrong World Indus., 432 F.3d 507, 511 (3d Cir.2005).

II.

On August 29, 2002, James Bronce Henderson (Henderson, appellee or Debtor) filed a voluntary petition for Chapter 11 relief. Van Buren Industrial Investors, LLC (Van Buren) and 6700 Development Associates, LLC (6700 Development) (collectively appellants or creditors) filed timely Proofs of Claim. Bankruptcy proceedings established that Van Buren's capped claim was in excess of $2.69 million and that 6700 Development's claim was at least over $300,000. The Bankruptcy Court has accurately summarized the lengthy relevant history, In re Henderson, 321 B.R. at 551-54, which the Court adopts.² At the conclusion of the September 8, 2004, confirmation hearing, the Bankruptcy Court found that the Third Amended Plan, as modified, met the requirements of 11 U.S.C. § 1129(a)(1), (2), (3) and (11). The Bankruptcy Court could not determine, however, whether the Plan met the requirement of § 1129(a)(7) as it related to Henderson's interest in the Fort Wayne Wizards, a minor league baseball team.

After an additional deposition was filed, the Bankruptcy Court addressed the remaining issue in its January 26, 2005 Amended Order, In re Henderson, 321 B.R. at 554-57. Henderson's Third Amended Plan, as modified, proposed that he retain his interest in certain non-exempt assets, including his fractional ownership interest in the Wizards and 60% of the proceeds hopefully realized from his lawsuit against his former business partners. The value of the fractional ownership interest in the Wizards was variously estimated at between $100,000 and $800,000, although, as Judge Paskay found, both figures were speculative and neither were supported by hard evidence. In re Henderson, 321 B.R. at 556. Judge Paskay found the value of the lawsuit was even more questionable than the value of the Wizards. Id. Judge Paskay found that whatever their value, the proposal for Henderson to retain his ownership interest in the Wizards and retain 60% of the lawsuit proceeds failed to be in the best interests of the creditors, as required by § 1129(a)(7). Id. Judge Paskay further found that the Third Amended Plan, as modified, would meet the requirements of § 1129(a)(7) if Henderson contributed all of the proceeds, if any, in the sale of his interest in the Wizards, and the net proceeds, if any, from the lawsuit filed against his former business associates, to the funding of the Plan. Judge Paskay further found that with these two changes, the Third Amended Plan, as modified, was fair and equitable and met the requirements of § 1129(b)(2). Id. at 557, 561.³

Judge Paskay then addressed whether the Plan, under which Henderson also retained a substantial amount of exempt property and some non-exempt property, violated the absolute priority rule of § 1129(b)(2)(B)(ii). Under the Plan, Henderson would retain exempt properties (consisting of a homestead, an insurance policy, and an Individual Retirement Account) with a fair market value of over $3.5 million and a liquidated value of over $2.1 million. Additionally, under the Plan neither Van Buren nor 6700 Development would receive full satisfaction of their claims. Judge Paskay stated that "it appears that under a strict interpretation of § 1129(b)(2)(B)(ii), this Plan cannot be confirmed as it violates the absolute priority rule. See In re Yasparro, 100 B.R. 91 (Bankr.M.D.Fla.1989); In re Johnson, 101 B.R. 307 (Bankr.M.D.Fla.1989); In re Gosman, 282 B.R. 45 (Bankr.S.D.Fla.2002)." In re Henderson, 321 B.R. at 558. Judge Paskay found, however, that "the bottom line is that it could not have been and was not the intention of Congress in enacting the absolute priority rule to compel a Debtor to forfeit his exemption rights,..." Id. at 560. Judge Paskay rejected the holdings of In re Yasparro and In re Gosman, and held "that an individual debtor does not have to forfeit his exemption rights to which the debtor is otherwise entitled to in all operating Chapters of the Code as a price of obtaining confirmation of his or her plan of reorganization." Id. at 561.

Alternatively, and assuming without conceding the absolute priority rule did apply to Chapter 11 cases involving individuals, Judge Paskay found that a "new value" exception has been recognized and applies to Chapter 11 cases involving individuals. In this regard, Judge Paskay found that Henderson's retention of non-exempt property no doubt violated the absolute priority rule and would prevent confirmation of the Plan unless Henderson submitted sufficient "new value" to match or exceed the value of the non-exempt properties retained. In re Henderson, 321 B.R. at 561. The Bankruptcy Court found that Mrs. Henderson would contribute $525,000 to fund the Plan, while the fair market value of the non-exempt assets Henderson would retain was approximately $410,600 and the liquidation value was $212,500. Id. Thus, even if the absolute priority rule did apply, the "new value" exception was applicable and allowed confirmation of the Plan.

The Plan as thus modified and approved can be summarized as follows: Henderson was allowed to retain exempt property valued between $2.1 and $3.4 million, without any infusion of "new value;" Henderson was allowed to retain non-exempt property valued between $212,500 and $410,600 with an infusion of $525,000 in "new value" from his former wife; the first four classes of secured creditors were paid in full; Class 5 consisted of the support obligations to Henderson's former wife, which had been determined to be non-dischargeable and would be paid in full; Class 6 was the appellants, who would received a fixed sum of $800,000 in two equal payments; Class 7 was a convenience class of creditors with claims less than $20,000, who would receive 95% of their allowed claims; Class 8 was former employees of DCT who would receive a fixed payment of $33,000.00; Class 9 were other unsecured creditors who would receive a fixed payment of 20% of their agreed claims.

Appellants sought clarification from the Bankruptcy Court (Doc. # 538) asserting that Henderson should be required to "specify precisely how, when and from what source he intends to pay specific classes of creditors...." (Doc. # 538, p. 3, ¶ 8). The Bankruptcy Court summarily denied the motion. (Doc. # 540).

After this appeal was initiated, Henderson notified the Bankruptcy Court by Declaration (Doc. # 554, Ex. 1) that he was prepared to sell his interest in the Wizards for $700,000, but that his interest in the Wizards would "go almost entirely to pay the remaining administrative expenses of Ruden McClosky, Berger, Epstein & Garber, and the Chapter 7 Trustee [of DCT]." Additionally, on September 27, 2005, the Bankruptcy Court entered an Order on Compromise of Claims of Debtor Against the Defendants in the Captioned Adversary Proceeding (Doc. # 621) providing appellants an opportunity to pursue the claims against the debtor's former business associates themselves (in the adversary proceeding), and if not, approving a settlement agreement for $25,000. In March 2006, Henderson filed a Notice of Final Payments Due Creditors (Doc. # 626) stating that he had made the final installment of payments to all unsecured creditors in Classes 7, 8 and 9.

Both the Bankruptcy Court and the District Court denied appellants' motion for a stay pending appeal.

III.

Appellants first assert that the Bankruptcy...