In re Meadow Glen, Ltd.
| Citation | 87 BR 421 |
| Decision Date | 01 June 1988 |
| Docket Number | Bankruptcy No. 87-50294,87-50514 and 87-51236. |
| Parties | In re MEADOW GLEN, LTD., the Appleridge, Ltd., Thousand Oaks, Ltd., Debtors. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas |
Frank B. Lyon and J. Ray Oujesky of Lynch, Chappel, Allday & Alsup, Austin, Tex., and Patrick McManemin of Gardner, Carton & Douglas, Dallas, Tex., for debtors.
Alfredo R. Perez and Susan C. Matthews of Bracewell & Patterson, Houston, Tex., for First Nationwide Bank.
AMENDED MEMORANDUM OPINION
The three cases addressed in this opinion are single asset real estate cases. Each Debtor is an operating apartment complex. Aran B. Katz is the general partner of each debtor and the first lien on the assets of each is held by First Nationwide Bank (hereinafter FNB). The current market value of the assets of each debtor is below the amount of the debt secured by the liens held by FNB. The deficiencies average five million dollars per case.1 While the loans are "no-recourse" loans, FNB has elected to be treated as partially secured and partially unsecured creditor under § 1111(b).
The plans in each case are identical. The plans classify unsecured creditors and propose payments to those creditors as follows:
CLASS DESCRIPTION AMOUNT TO BE PAID
1 Tenants 90% of allowed claims
2 Unsecured claims 90% of allowed claims
less than $100
3 Unsecured claims 75% of allowed claims
more than $100 except
FNB
4 Unsecured claims 10% equity interest in
of FNB each debtor
FNB objects to both the classification and the treatment of each class and has sought relief from the automatic stay under § 362(d)(2) alleging that reorganization under this plan is not possible.
These cases are typical single asset real estate cases. Yet, in this case, this Court must determine whether any similar case can ever succeed under Chapter 11 over the objection of the primary unsecured creditor — the lien holder claiming a deficiency.
The problem should be obvious. If "creative" classification and impairment are prohibited, it becomes almost impossible for debtors like these to propose a plan which can be confirmed under §§ 1129(a) & (b). If a plan is to be confirmed, either all creditors must consent and the court must find that all of the other requirements of § 1129(a) have been met; or alternatively, if the case is to go to "cram-down" under 1129(b), at least one impaired class (not counting the votes of insiders) must accept the plan, § 1129(a)(10), after which the relevant standards of § 1129(a) and (b) must also be met.
In cases like these, if all unsecured creditors are lumped together, the deficiency claim of the undersecured lender will dominate the vote and the chance of finding another class not composed of insiders that is impaired is almost impossible.
These cases reflect the typical debt structure of single-asset cases:
DEBTOR CLASS 1 CLASS 2 CLASS 3 CLASS 52
(more
(less than $100 (FNB
(Tenants) than $100) except FNB) deficiency)
APPLERIDGE $2,134.00 $ 515.23 $23,730.51 $5,525,077.39
MEADOWGLEN 1,250.00 846.84 7,733.41 6,123.858.27
THOUSAND
OAKS 850.00 750.58 8,740.10 5,468,334.05
_____________________________________________________________________________
$4,234.00 2,112.65 44,204.02 17,117,269.71
Other than administrative claims, claims of general and limited partners (insiders and equity security interest holders), and tax claims entitled to priority or secured treatment, there are no other creditors. This is typical of such cases.
This is limited stuff with which to work. From this group of creditors, the debtor must — at the very least — create one class that is impaired that will accept the plan without counting the votes of insiders.
Creating classes — even "creative" creation of classes — is both simple and (usually) lawful. In these particular cases, the objections of FNB to "classification" as such are probably not well taken.
Classification of classes is governed by § 1122:
Courts have usually read the two sections together, often quite narrowly, holding that "Congress intended all unsecured claims of a similar nature to be grouped within one class unless a separate classification is established under § 1122(b)." See e.g., In re Trail's End Lodge, 54 B.R. 898, 903 (B.Ct.Vt.1985). In re Fantastic Homes, 44 B.R. 999, 1000 (M.D.Fla.1984).
These restrictive cases are probably incorrect. In an exhaustive opinion, Judge Frank Conrad of Vermont, sitting by designation, has thoroughly examined the issue of classification. In re AG Consultants Grain Division, Inc., 77 B.R. 665, 670-76 (Bankr.N.D.Ind.1987). Judge Conrad has carefully distinguished the issue of classification under § 1122 and the issues of good faith or discrimination under § 1129(a) and (b), holding first that § 1122 is not ambiguous:
Section 1122 allows a claim or interest to be placed in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. It does not require that similar classes be grouped together but merely that any group be homogenous.
Id. at 674 (citations omitted).
Looking to the legislative history of § 1122, Judge Conrad does comment that there may be confusion about this issue — if the statute is ambiguous, which it is not — because § 1122 purported to be a codification of existing case law.3 Pre-code case law was certainly inconsistent, but Judge Conrad concludes that the case law would, at best, indicate that classifications would be questioned only if the classification scheme was not in the best interest of creditors; violated the absolute priority rule; or uselessly increased the number of classes. Id. at 672-74.
After reviewing the statutory language and its history, Judge Conrad reviewed cases under the Code, concluding that cases critical of particular classification schemes actually involved discriminatory treatment or something similar. Id. at 676. Judge Conrad's conclusions are straightforward:
Enough said. The real issue in this case is one of fairness. Here, the plan proponent has structured the classes within § 1122. But, it has not demonstrated that the treatment of the four classes is fair nor has it demonstrated that the impairment of the three small classes is "in good faith."
Circuit level support for Judge Conrad's analysis can be found at In re U.S. Truck Co., Inc., 800 F.2d 581, 584-587 (6th Cir. 1986) and In re Jersey City Medical Center, 817 F.2d 1055, 1061 (3rd Cir.1987). Both courts concluded that "similar claims may be grouped in different classes." Id., citing In re U.S. Truck Co., Inc., 800 F.2d at 587. The test is one of "reasonableness." Id.
Both Circuits recognize the problem of "creation" of impaired classes where the debtor seeks "out a few impaired creditors (or even one such creditor) who will vote for the plan and placing them in their own class." Id., quoting In re U.S. Truck Co., Inc., 800 F.2d at 586.
Like Judge Conrad, In re AG Consultants Grain Division, Inc., 77 B.R. at 676, the circuit courts point out that "created" classes should be scrutinized to prevent abuse. In re U.S. Truck Co., Inc., 800 F.2d at 586. See also Hanson v. First Bank, (In re Hanson), 828 F.2d 1310, 1313 (8th Cir.1987). As the Sixth Circuit notes, other classes continue to be protected by the provisions of § 1129(a) and (b), and "particularly by the requirements of subsection (b) that the plan not discriminate unfairly and that it be fair and equitable. . . ." In re U.S. Truck Co., Inc., 800 F.2d at 587.
Analysis of the case law, then, leads to the conclusion that classification of similar claims in separate classes is permissible but that the treatment of the separate claims must be fair and equitable, non-discriminatory, and, perhaps, in "good faith." In other words, creation of the separate class is not an abuse of classification system.
Once a class is created, impairment of the class is a different issue. The Fifth Circuit opinion, In re Sun Country Development Inc., 764 F.2d 406, 408 (5th Cir. 1985), deals directly with that problem. Sun Country involved only two classes: unsecured creditors and a secured creditor. In the original version of the plan, the unsecured creditors were not impaired. The plan was amended to "impair the unsecured creditors, and the secured creditor argued that the other class had been "impaired only so that they could approve the plan and effectuate the cram down." This said, the creditors urged the court to find that the plan had not been proposed "in good faith" under § 1129(a)(3). Id.
The Fifth Circuit analysis is limited to § 1129(a)(3) and is somewhat contradictory. First, the circuit panel seems to say...
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