In re Jenkins
| Decision Date | 30 September 1988 |
| Docket Number | Bankruptcy No. 86-04603-1-11. |
| Citation | 99 BR 949 |
| Parties | In re Cleo Wayne JENKINS and Mary Grace Jenkins, Debtors. |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
Jack Hoke, Springfield, Mo., for debtors.
David Munton, Kerry Douglas, Bolivar, Mo., for Citizen's Bank of Polk County.
Robert E. Stemmons, Mt. Vernon, Mo., for First Sav. & Loan Ass'n.
Pending before the court is debtors' Second Amended Plan of Reorganization and three related motions: 1) Motion to Amend the Plan, filed by debtors; 2) Motion to Determine Secured Status filed by Citizen's Bank of Polk County ("Citizens"); and 3) Motion to Determine Secured Status and for Valuation of Collateral filed by Polk County Bank. Also relevant to the issues raised by these motions are objections to the Plan filed by Citizen's, Polk County Bank, and First Savings and Loan Association. A hearing on confirmation was held September 24, 1987 at which all parties were represented by counsel.
Debtors, who are farmers, filed bankruptcy under Chapter 11 on October 21, 1986. Earlier in these proceedings both Citizen's and Polk County Bank sought adequate protection on their claims. As to Citizens, in its Order entered November 18, 1986, the court found that Citizen's was a secured creditor in the amount of $47,848 on two debts that the court merged. The court further found that the total value of the collateral securing the combined debt was $69,930. Thus, Citizen's was oversecured in an amount in excess of $21,000. Of the $69,930, $33,000 was debtors' equity in real estate valued at $52,000 in which a prior mortgage of $19,000 existed. The remaining $14,8481 was the value of the cattle and machinery on which Citizens had a first lien.2 The court ordered adequate protection payments in the amount of $573.74.3 Debtors owed Citizen's an additional debt in the outstanding principal amount of $4,978. The court found the value of the collateral securing that debt to be $3,250 and that Citizen's was secured to that amount. Adequate protection payments of $55.60 were ordered.
As to Polk County Bank, the court found that it also had a debt secured by a security interest, junior to Citizen's security interest, in the cattle and machinery. The outstanding principal balance on the debt was $28,752.90. The court used the figures from the adequate protection hearing on Citizen's motion and found that Polk County Bank was a secured creditor in the amount of $21,040. Debtors were required to make adequate protection payments in the amount of $330.51 per month on this debt. Polk County Bank was also found to have a fully secured interest in two vehicles. Adequate protection payments in the amount of $101.54 were ordered on the remaining principal balance of $3,928.78.
Debtors' Plan treats Polk County Bank as a secured creditor only as to its first lien on the vehicles in the amount of $3,928.78. The remaining $37,510.69 is treated as an unsecured claim. In support of this treatment, debtors contend that because Citizen's is the second mortgagee on the portion of its debt secured by real estate in all likelihood its claim would be satisfied out of the cattle and machinery if it became necessary. If that happened, Polk County Bank would be rendered totally unsecured because it is junior to Citizen's on the cattle and machinery. Polk County Bank contends that the same is true of Citizen's, as second mortgagee on the real estate, yet the Plan treats Citizen's as a fully secured creditor. Polk County Bank argues that this treatment of its claim is analogous to a marshaling of assets in an attempt to defeat an otherwise properly perfected, albeit subordinate, claim. For the reasons that follow, the court finds that, as proposed, the Plan cannot be confirmed because it neither properly treats an impaired class nor, absent the modifications made herein, meets the requirements for "cramdown".
First, a plan of reorganization can only be confirmed if it meets all the requirements of 11 U.S.C. § 1129. One of these requirements is that the holder of an impaired claim must either accept the plan or be given property equal in value to the amount it would receive in a liquidation under chapter 7. 11 U.S.C. § 1129(a)(7). The claim of Polk County Bank is impaired under the Plan because the Plan alters the Bank's rights by treating its secured debt4 as an unsecured debt. See 11 U.S.C. § 1124(1). As the holder of an impaired claim, Polk County Bank has rejected the Plan. The Plan does not provide for the Bank to retain or receive any interest in any property. Thus, the provisions of § 1129(a)(7) have not been met. Under these circumstances, the "cramdown" portion of § 1129 comes into play. Absent modification of the Plan, that portion of § 1129 has not been met, either.
Section 1129(b) allows a court to confirm a plan despite a class of rejecting, impaired creditors. H.R. No. 95-595, 95th Cong., 1st Sess. 413-418 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6369-6374. In its present form the Plan pays Polk County Bank's claim on a pro rata basis with other unsecured creditors when it should provide for payment in full to the Bank before any unsecured creditors are paid. Thus, the "cramdown" requirements of § 1129(b) have not been met.
Additionally, the court agrees with Polk County Bank's analysis that debtors' treatment of its claim is analogous to the marshaling of assets. The case law is quite clear that neither a trustee nor a debtor in possession can force "reverse marshaling" of assets by requiring a senior lienor to satisfy its claim out of collateral also securing a junior lienor's interest when the senior lienor has other collateral it may draw from first. In re Center Wholesale, Inc. (Owens-Corning Fiberglas Corp. v. Center Wholesale, Inc.), 788 F.2d 541, 5421 (9th Cir.1986); accord In re Larry's Equipment Service, Inc. (Canal National Bank v. Larry's Equipment Service, Inc.), 23 B.R. 132, 1343,4 (Bankr.D.Me.1982). See also In re Jack Green's Fashions for Men — Big and Tall (Berman v. Green), 597 F.2d 130, 1322 (8th Cir.1979); Matter of McElwaney (Federal Land Bank of Columbia v. Tidwell), 40 B.R. 66, 723 (Bankr.M.D.Ga.1984). If debtors could not succeed in an action to require marshaling of assets, they certainly cannot obtain the same result through the confirmation of a plan. For both of these reasons the Plan is unconfirmable in its present form. Polk County Bank's Motion to Determine Secured Status and for Valuation of Collateral is granted as it relates to this claim. In accordance with this court's Order entered June 30, 1987, Polk County Bank has a secured claim in the amount of $21,040.00 and an unsecured claim for the remaining amount due and owing to the debt. Additionally, Polk County Bank's objection to the Plan on this ground is sustained.
The court does note, however, that Polk County Bank is an undersecured creditor on this claim. Although an oversecured creditor may be entitled to the entire value of its claim plus postpetition interest to the value of the collateral, an undersecured creditor is not. Compare 11 U.S.C. § 506(b) with 11 U.S.C. § 502(b)(2). Additionally, after the Supreme Court's decision in United Savings Association v. Timbers of Inwood Forest Association, Ltd, 484 U.S. 365, 108 S.Ct. 6261, 98 L.Ed.2d 740 (1988), an undersecured creditor, unlike an oversecured creditor, is not entitled to adequate protection payments. Thus, Polk Count Bank is not entitled to either postpetition interest or adequate protection payments made since Timbers. Accordingly, all adequate protection payments made on the debt since that date shall be credited to the principal amount due and owing on the debt. The parties will be directed to file an accounting detailing the number and amount of payments made since January 20, 1988, the adjusted principal balance, and the adjusted amount of unsecured debt under the Plan.
Polk County Bank also objected to the Plan because it did not provide for payment of its claim secured by a bale wagon in the amount of $1,200. At the confirmation hearing, counsel for the debtor indicated that Class V of the Plan could be amended to provide for the payment of that claim at 11% interest over eight years for a monthly payment of $18.86. Transcript at p. 3.5 The parties being in agreement, the Plan will be so amended and Polk County Bank's Motion to Determine Secured Status on this claim will be granted. Polk County Bank's remaining objections to the Plan will be overruled.
Citizen's objects to the Plan for several reasons. First, the Plan treats Citizen's as a secured creditor on the real estate and cattle loans in the amount of $45,545. This issue is also raised in Citizen's Motion for Determination of Secured Status. The court previously found the value of this claim to be $47,848. See Order for Adequate Protection, Case No. 86-04603-S-1-11 (W.D.Mo. 11/18/86). Debtors' response to Citizen's objection to the Plan did not address the issue of valuation. However, at the hearing on confirmation counsel for the debtor stated that there was no issue as to valuation. Transcript...
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