In re Ramz Real Estate Co.

• Decision Date: 09 May 2014
• Docket Number: No. 12–35381,12–35381
• Citation: 510 B.R. 712
• Parties: In re: RAMZ Real Estate Co., LLC, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

510 B.R. 712

In re: RAMZ Real Estate Co., LLC, Debtor.

No. 12–35381

United States Bankruptcy Court, S.D. New York.

Signed May 9, 2014

Genova & Malin, Attorneys, Hampton Business Center, 1136 Route 9, Wappingers Falls, New York 12590–4332, Attorneys for the Debtor By: Thomas Genova, Esq.

McNamee, Lochner, Titus & Williams, P.C., 677 Broadway, Albany, New York 12207, Attorneys for the Community Preservation Corporation, By: Peter A. Pastore, Esq.

Chapter 11

MEMORANDUM DECISION DENYING CONFIRMATION OF DEBTOR'S CHAPTER 11 PLAN

CECELIA G. MORRIS, CHIEF UNITED STATES BANKRUPTCY JUDGE

Before the Court is the confirmation of Debtor's plan and an objection to the confirmation of that plan by a creditor who controls two rejecting classes of claims. As the Debtor has failed to meet its burden under the new value exception to the absolute priority rule, the Court denies confirmation of the plan.

Jurisdiction

This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a) and the Standing Order of Reference signed by Chief Judge Loretta A. Preska dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. § 157(b)(2)(L) (confirmations of plans).

Background

RAMZ Real Estate Co., LLC (the “Debtor”) owns two pieces of real property. See Vol. Pet., ECF No. 1; O'Neill Local R. 1007–2 Aff., ECF No. 1, Ex. 2. The first is a two-story, commercial property located in Highland, New York. Vol. Pet., ECF No. 1. The second is a three-story, mixed-use building containing four apartments and three commercial spaces located in Kingston, New York (“Kingston Property”). Id. The Kingston Property is encumbered by a first mortgage in favor of Community Preservation Corporation (“CPC”) in the amount of $744,000.00. See Second Amend. Plan 10, ECF No. 95, Ex. E. Prior to filing, Debtor was a defendant in a foreclosure action brought by CPC in the Supreme Court of Ulster County. O'Neill Local R. 1007–2 Aff., ECF No. 1, Ex. 2. On February 21, 2012, Debtor filed this chapter 11 case in order to attempt to restructure its debts. Vol. Pet., ECF No. 1. On October 19, 2012, this Court entered an order valuing the Kingston Property at $485,000.00. Order, ECF No. 53.

On July 5, 2013, the Debtor proposed its second amended plan of reorganization (the “Plan”), the confirmation of which is currently before the Court. See Plan, ECF No. 95, Ex. E. The Plan contains seven classes. Id. at 9–13. Class 1 contains administrative expense claims that will be paid in full. Id. at 9–10. Class 2 is comprised of the property tax claim of Kingston City School District. Id. at 10. The sole Class 2 claim was paid in full and expunged pursuant to this Court's August 23, 2013 order. Order, ECF No. 109.

Class 3 contains the secured claim of CPC in the amount of $474,000.¹ Plan 10–11. According to the Plan, this class is impaired and its vote was solicited. Id. at 11. Class 4 consists solely of the secured property tax claim of the County of Ulster (“Ulster”). Id. The claim of Ulster is classified as impaired and as such, it is entitled to vote. Class 5 contains the secured claim of Yardvine Equities Corporation (“Yardvine”). Id. at 11–12. The Plan states that Yardvine is not impaired and as such, is not entitled to vote. Id.

Class 6 contains the unsecured claims of CPC and VSR, Inc. Id. at 12–13. VSR, Inc. is wholly owned by Debtor's 100% shareholder, Ronan O'Neill (“O'Neill”). Memo. of Law 5, ECF No. 164. If CPC rejects the Plan, VSR, Inc. will waive its unsecured claim against the Debtor and will not receive a distribution through Class 6. Id. at 12. Through the plan, this class will receive 10% of its claims over the course of sixty months. Id. at 12–13. The unsecured portion of CPC's claim is valued at approximately $270,000; CPC will receive $27,000. Id. Class 6 is an impaired class and it entitled to vote on the Plan. Id. at 13.

Class 7 contains the interest of O'Neill. Id. Pursuant to the Plan, O'Neill will retain 100% of his ownership interest in the Debtor—though he will not receive any dividends or payments under the Plan. Id. Class 7 is not impaired and as such, not entitled to vote on the Plan. Id.

CPC cast votes to reject the Plan for both its secured claim in Class 3 and its unsecured claim in Class 6. See Ballot, ECF No. 112; Ballot, ECF No. 113. Both of those classes rejected the Plan. The sole remaining impaired class is Class 4, which consists entirely of Ulster's secured property tax claim. Ulster voted to accept the Plan by docketing a ballot on August 29, 2013. See Cert. of Ballots, ECF No. 111.

On September 18, 2013, CPC filed an objection to confirmation of the Debtor's Plan. See Obj., ECF No. 115. On March 4, 2014, the Court held a hearing to consider the confirmation of the Debtor's Plan. After the hearing, the Court allowed the parties to file supplemental briefs. The Debtor and CPC filed legal briefs on March 31, 2014. See Memo. of Law, ECF No. 163; Memo. of Law, ECF No. 164.

Discussion

CPC makes several arguments for why confirmation should be denied, including that Debtor's Plan contains classes that are artificially impaired, Debtor's projected income and expenses will result in a liquidation or need for an additional reorganization, Debtor's Plan violates the absolute priority rule, CPC's treatment in Class 3 is insufficient, Debtor cannot confirm the Plan over CPC's opposition, and no impaired classes have accepted. Obj. 3–11, ECF No. 114. In its supplemental objection to confirmation, filed on March 31, 2014, CPC also argues that Debtor cannot deem Ulster to have accepted the plan for purposes of § 1129(b) cramdown, since Ulster has not affirmatively voted to accept the Plan. Memo of Law, ECF No. 163. At the hearing held on April 29, 2014, both parties agreed that Ulster has affirmatively voted in favor of the Plan and that issue is no longer contested.

On October 25, 2014, the Debtor filed a response to CPC's objection to confirmation in which the Debtor acknowledged that the Plan could only be confirmed under § 1129(b). Resp. 2, ECF No. 126.

Standard for confirmation under § 1129.

Section 1129 of the Bankruptcy Code provides the two requirements that a debtor must meet in order to confirm a chapter 11 plan. 11 U.S.C. § 1129. Section 1129(a)(8) requires that each impaired class of claims accept the plan. Boston Post Rd. Ltd. P'ship v. Fed. Deposit Ins. Corp. (In re Boston Post Rd. Ltd. P'ship), 21 F.3d 477, 480 (2d Cir.1994). If this is not possible, § 1129(a)(10) permits a plan to be “crammed down” over the objection of every other class of creditors pursuant to § 1129(b) so long as at least one class of impaired claims held by non-insider creditors has accepted the plan. 11 U.S.C. § 1129(a)(10). In order to cram a plan down, the plan must meet all of the statutory requirements provided in § 1129(b), in addition to those provided in § 1129(a). Id. Cramdowns are common in cases where a debtor is seeking to reorganize a debt secured by real estate. Boston Post, 21 F.3d at 480.

In cases such as this one, where a secured creditor is undersecured, the debtor may bifurcate the claim of the creditor into secured and unsecured portions pursuant to § 506(a). Id. A secured creditor can then elect to have its entire claim treated as secured notwithstanding § 506(a) with the help of § 1111(b)(2). Id. CPC did not elect such treatment and, as such, CPC controls both the secured and unsecured class of claims. Since it voted to reject the plan in both classes, the only way the Plan may be confirmed is if Debtor satisfies the cramdown provisions of § 1129(b).

Is Class 4 “impaired”?

Before the Plan can be crammed down over CPC's objection, § 1129(a)(10) requires the affirmative acceptance of the plan by at least one impaired class of claims. See In re RYYZ, LLC, 490 B.R. 29, 39–40 (Bankr.E.D.N.Y.2013) (explaining that in single asset real estate cases § 1129(a)(10) is a powerful tool of creditors). The question here is whether for purposes of cramdown Class 4 counts as an accepting “impaired” class, where it is being paid in full over five years at 9% interest.

Section 1124 states that a claim is impaired unless the plan “leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest....” 11 U.S.C. § 1124. Where a section of the Bankruptcy Code alters a creditor's claim, that claim is not considered “impaired” by the plan as it is not the plan, but instead the Code, that impairs its treatment. In re Am. Solar King Corp., 90 B.R. 808, 819 (Bankr.W.D.Tex.1988) (“Impairment results from what the plan does, not what the statute does.”).

Sections 1129(a)(9)(C)(iii) and (D) permit unsecured and secured priority tax claims, respectively, to be paid “regular installment payments in cash ... of a total value, as of the effective date of the plan, equal to the allowed amount of such claim.” 11 U.S.C. § 1129(a)(9)(C)-(D). Section 511 provides that the rate of interest to be paid on tax claims “shall be the rate determined under applicable nonbankruptcy law.” 11 U.S.C. § 511(a). Pursuant to New York Real Property Tax Law § 924–a, the Debtor is required to pay 12% interest on the tax claim of Ulster. N.Y. Real. Prop. Tax Law § 924–a (McKinney 2014).

In In re Bryson Properties, XVIII, the Fourth Circuit noted that “priority tax claimants, which receive preferential treatment under the Code ( see11 U.S.C. § 1129(a)(9)(C)), are not an impaired class that can accept a plan and bind other truly impaired creditors to a cram down.” 961 F.2d 496, 501 (4th Cir.1992). Unlike in Bryson Properties, where the tax claim was being paid what it was entitled to under the Bankruptcy Code, in this case Ulster is receiving only 9% interest instead of the 12% that it is entitled to receive under New York Real Property Tax law. The Court finds that this is an impairment of Ulster's claim. See In re G.L. Bryan Invs., Inc., 340 B.R. 386, 389 (Bankr.D.Colo.2006) (...