In re Jones

• Decision Date: 16 September 1983
• Docket Number: Bankruptcy No. 82C-00407.
• Citation: In re Jones, 32 B.R. 951 (Bankr. Utah 1983)
• Parties: In re William Lynn JONES and Irene Hilton Jones dba Prestige Enterprises, Debtors.
• Court: U.S. Bankruptcy Court — District of Utah

32 B.R. 951 (1983)

In re William Lynn JONES and Irene Hilton Jones dba Prestige Enterprises, Debtors.

Bankruptcy No. 82C-00407.

United States Bankruptcy Court, D. Utah.

September 16, 1983.

Rulon T. Burton, Burton & Schiess, Salt Lake City, Utah, for debtors.

MEMORANDUM OPINION

GLEN E. CLARK, Bankruptcy Judge.

The issue in this case is whether cure and compensation payments under 11 U.S.C. § 1124(2) may be made in deferred cash payments commencing after the effective date of a chapter 11 plan. The ruling is that they may not.

INTRODUCTION

Debtors' chapter 11 plan places two allowed secured claims into separate classes, designated B-2 and B-3. The obligation underlying each claim is in default. The plan intends to cure the defaults and leave these two classes unimpaired by complying with Section 1124(2).

Section 1124(2) provides for curing defaults and leaving classes unimpaired under a chapter 11 plan. A class of claims or interests is not impaired even though there has been a default which, under a contract or applicable law, triggers the right to demand or receive accelerated payment if, with respect to each holder of a claim or interest of that class, the plan

(A) cures any such default, other than a default of a kind specified in section 365(b)(2) of this title,¹ that occurred before or after the commencement of the case under title 11;

(B) reinstates the maturity of such claim or interest as such maturity date existed before such default;

(C) compensates the holder of such claim or interest for any damages incurred as a result of any reasonable reliance by such holder on such contractual provision or applicable law; and

(D) does not otherwise alter the legal, equitable, or contractual rights to which such claim or interest entitles the holder of such claim or interest.

Debtors plan to pay the money required to cure and compensate for defaults under subsections (A) and (C) by making monthly cash installment payments commencing thirty days after the effective date of the plan.² Class B-2 will receive about $1,436.00 in approximately eighteen and one-half monthly payments of $85.00. Class B-3 will receive approximately $7,000.00 in one $5,500.00 payment on the effective date of the plan and the balance in monthly payments of $50.00. Debtors propose to add 12 percent annual interest to the unpaid cure and compensation amounts.

At the confirmation hearing, the court questioned whether the cure and compensation payments specified by Section 1124(2) may be made over time after the effective date of the plan even if sufficient interest is added to give present value as of the effective date, or whether those payments must be made on or before the effective date. That issue was taken under advisement and is decided by this memorandum opinion.

DISCUSSION

Debtors advance two arguments. First, debtors claim entitlement to make their cure and compensation payments over time after the effective date of their plan because the language of Section 1124(2) fixes no time limits for cure or compensation, unlike Section 1322(b)(5) which requires cure of defaults "within a reasonable time," unlike Section 365(b)(1)(A) which requires cure or adequate assurance of prompt cure of defaults "at the time of assumption" of a contract or lease, and unlike Section 1124(3) which requires payment of cash "on the effective date of the plan." See also Section 1110(a)(2) (requiring cure of certain defaults under contracts relating to aircraft equipment and vessels within 60 days after the date of the order for relief) and Section 1168(a)(2) (similar provision for contracts relating to rolling stock).

Second, debtors contend that classes designated to receive installment payments for cure and compensation of defaults do not need the protections given by Section 1129(b) because, in debtors' view, the only Section 1129(b) issues raised by this plan are the interest rate necessary to give present value and the feasibility of the plan. Debtors say these issues can be determined at confirmation just as easily under Section 1124(2) as under Section 1129(b). This contention is made in view of the second approach to impairment described in In re Barrington Oaks General Partnership, 15 B.R. 952, 963-964 (Bkrtcy.D. Utah 1981), viz., a class is impaired "where necessary to prevent wrongs which are redressable under Section 1129(b)."

In my judgment, debtors' proposal for installment payments after the effective date of their plan, though well-intentioned and arguably not forbidden by the words of Section 1124(2), impairs classes B-2 and B-3. This conclusion is based on an analysis of the plan under the two approaches to impairment explained in Barrington Oaks.

The bankruptcy code adopts the concept of "private control of the reorganization process with a minimum of judicial intrusion." Barrington Oaks, supra at 958. Chapter 11 is "a vehicle to channel negotiation among the parties." Aaron, "The Bankruptcy Reform Act of 1978: The Full-Employment-For-Lawyers Bill Part V: Business Reorganization," 1982 UTAH L.REV. 1, 16. "The reorganization process is not basically an adversary process. The reorganization process is one of controlled negotiation, much like labor negotiations are conducted between labor and management." Trost, "Corporate Reorganization Under Chapter VII of the `Bankruptcy Act of 1978': Another View," 48 AM. BANKR.L.J. 111, 120 (1974).³

Courts, debtors, and creditors should approach reorganization in ways that discourage litigation and promote negotiation. Chapter 11 supplies useful tools which, in the hands of enlightened debtors and creditors willing to substitute bargaining for brawling, can remedy otherwise irreparable financial disasters. Two provisions of chapter 11 which were designed to limit litigation are Sections 1124 and 1129.

If all classes of claims and interests accept a chapter 11 plan, the plan's proponent need only satisfy the requirements of Section 1129(a) to secure confirmation of the plan. But if any class is impaired under and has not accepted the plan, the plan's proponent must also prove that the plan meets the specifications of Section 1129(b). Section 1129(b) bars confirmation of a plan impairing a class that has not accepted the plan unless "the plan does not discriminate unfairly, and is fair and equitable."

Deciding whether a chapter 11 plan does not discriminate unfairly and is fair and equitable is complicated. Kenneth N. Klee, one of the drafters of Section 1129(b), has stated that to understand when a plan may be confirmed over the dissent of a class "involves a tortuous journey through the statute and legislative history that is fraught with complex concepts, terms of art, and innuendoes." Klee, "All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code," 53 AM.BANK. L.J. 133, 136 (1979). Although an intellectual grasp of the statute can be gained by study,⁴ applying the statute to particular cases is arduous. Litigation under Section 1129(b) is expensive, time consuming, and unpredictable. In many cases the cost and delay can be fatal to the reorganization. "The patient may die on the operating table while the lawyers are diagnosing." H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 229 (1977), U.S.Code Cong. & Admin.News 1978, pp. 5787, 6189.

For these reasons, the threat of forcing a hearing under Section 1129(b) is a potent source of creditor power in chapter 11. On the other hand, the power to confirm a plan over the dissent of a class of claims or interests gives the proponent of a chapter 11 plan a significant advantage in negotiating a plan. Thus, "the threat of cramdown . . . overshadows the bargaining." Miller, supra note 4, at 1076. "Perhaps the principal use of Section 1129(b) will be as a bargaining club which dissidents on the one hand or plan proponents on the other may employ to reach agreement rather than face the trials and tribulations of a section 1129(b) proceeding." Coogan, supra note 3, at 362. See generally Aaron, supra note 4.

Congress interposed the unfair discrimination and fair and equitable tests as safeguards for dissenting impaired classes. At the same time, however, Congress determined that those protections are not needed and that the burdens and risks of a hearing under Section 1129(b) may be avoided for a class not impaired under the plan. Thus, classes left unimpaired by a plan are deemed by Section 1126(f) to have accepted the plan and solicitation of acceptances from holders of claims or interests of those classes is not required.⁵

Debtors, anxious to avoid the perils of a Section 1129(b) hearing, may wish to use Section 1124 to leave unimpaired as many classes as possible. Classes of claims or interests, hoping to have the protection and leverage given by Section 1129(b), may desire to be found impaired under Section 1124.

Debtors may also wish to create unimpaired classes under Section 1124(2) because it enables reversal of contractual or legal acceleration and retention of advantageous contract terms. "Curing of the default and the assumption of the debt in accordance with its terms is an important reorganization technique for dealing with a particular class of claims, especially secured claims." S.Rep. No. 95-989, 95th Cong., 2d Sess. 120 (1978) U.S.Code Cong. & Admin.News 1978, p. 5906.⁶But see In re Taddeo, supra note 5, at 29 (The authority to cure is found in Section 1123(a)(5)(G) not in Section 1124(2)); Accord, In re Madison Hotel Associates, supra note 2, at 1007. But creditors who are parties to agreements a debtor wishes to reinstate under Section 1124(2) may argue they are impaired in order to escape a contract with terms favorable to the debtor. Section 1124 and its interpretation therefore occupy a pivotal position.⁷

Barrington Oaks, supra, offers two approaches to impairment. The first examines the plan in light of the language and purpose of Section 1124 and strictly construes Sections 1124(1) and (2) to find...