In re Shin

• Decision Date: 13 February 2004
• Docket Number: No. 02-00357.,02-00357.
• Citation: 306 B.R. 397
• Parties: In re Peter C. SHIN, Debtor.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

Page 397

306 B.R. 397

In re Peter C. SHIN, Debtor.

No. 02-00357.

United States Bankruptcy Court, District of Columbia.

February 13, 2004.

COPYRIGHT MATERIAL OMITTED

Christopher Spera, Deckelbaum, Deckelbaum, Ogens & Raftery Chtd., Bethesda, MD, Nelson Deckelbaum, Deckelbaum, Ogens, Reiser & Shedlock Chtd., Bethesda, MD, Stephen W. Nichols, Deckelbaum, Ogens & Fischer Chtd., Bethesda, MD, for Debtor.

DECISION AND ORDER RE SECOND AMENDED PLAN

S. MARTIN TEEL, JR., Bankruptcy Judge.

At the confirmation hearing on his First Amended Reorganization Plan, the debtor, Dr. Peter C. Shin, filed a second Amended Reorganization Plan (Docket Entry No. 129) ("Second Amended Plan")¹ under chapter 11 of the Bankruptcy Code (11 U.S.C.).² The debtor must modify the Second Amended Plan for the reasons that follow, unless the debtor (who has not had an opportunity to address these issues) files a motion convincing the court that its analysis is in error.

I THE PLAN MAKES NO PROVISION FOR NON-TAX CLAIMS INCURRED POSTPETITION OF A NON-ADMINISTRATIVE CHARACTER, AND MUST LEAVE THOSE CLAIMS UNAFFECTED BY ANY DISCHARGE AND UNAFFECTED BY ANY RELEASE OR INJUNCTION PROVISION IN THE PLAN

After filing this case, Dr. Shin likely incurred debts for which he is personally liable based on activities not associated with being a debtor-in-possession (for example, a home heating bill). Claims unrelated to Dr. Shin's being a debtor-in-possession will not be of an administrative character.³ For ease of discussion, the court will refer to these claims as postpetition non-administrative claims.

Dr. Shin's plan contemplates that all claims against Dr. Shin arising prior to confirmation will be discharged, and the plan has release and injunction provisions that apply to such claims. The Bankruptcy Code does not specifically require that postpetition non-administrative claims receive any particular treatment. However, a chapter 11 plan is obviously not proposed in good faith, as required by § 1129(a)(3), if it attempts to rid a debtor of such claims without providing for their payment. As developed below, a plan that fails to provide for payment of postpetition non-administrative claims cannot be confirmed unless the plan expressly excepts such claims from discharge, and from the plan's release and injunction provisions.

A. § 1141(d)(1)(A) PLAINLY IS APPLICABLE TO POSTPETITION ADMINISTRATIVE CLAIMS INCURRED BY THE ESTATE

Under 11 U.S.C. § 1129(a)(9)(A), to be confirmed a plan must provide that any administrative expense claim allowed under 11 U.S.C. § 503(b) will be paid in full on the effective date of the plan, unless the holder of the claim agrees to a different treatment. The discharge provisions of § 1141(d)(1)(A), except as provided in § 1141(d)(2) and (3), apply to such an administrative claim.⁴ The plan can provide a bar date for filing such a claim.⁵ If the claim is neither timely filed nor allowed to be filed tardily, a discharge under the plan will bar collection of the claim unless it comes within one of the exceptions to § 1141(d)(1)(A).

B. § 1141(d)(1)(A) IS ARGUABLY ALSO APPLICABLE TO POSTPETITION NON-ADMINISTRATIVE DEBTS

In Sequa Corp. v. Christopher (In re Christopher), 28 F.3d 512, 515 (5th Cir.1994), the court of appeals held that a postpetition claim was discharged under § 1141(d)(1)(A) even though there was some uncertainty (which the court found unnecessary to resolve) regarding whether the claim was an administrative claim (a debt of the estate as opposed to a personal liability of the debtor Christopher).⁶ Accordingly, Christopher necessarily holds (albeit without much analysis) that a § 1141(d)(1)(A) discharge applies to postpetition non-administrative claims.⁷

However, in enacting § 1141(d)(1)(A), Congress gave no indication in the legislative history that it was aware that the statute's plain language would apply not only to prepetition and administrative claims against the estate, but also to those postpetition-preconfirmation claims against the debtor that are non-estate liabilities.⁸ Indeed, at first glance, § 1141(d)(1)(A)(i) through (iii)⁹ might lead one to think that in order for a claim to be discharged by § 1141(d)(1)(A), the claim must be one that (i) could be asserted via a proof of claim, (ii) could be allowed under § 502 (unless § 502 requires disallowance of the claim), and (iii) gives rise to a right to vote on the plan. Read that way, § 1141(d)(1)(A)(i) through (iii) would make § 1141(d)(1)(A) inapplicable to a postpetition non-administrative claim, for such a claim (i) is not one for which a proof of claim can be filed;¹⁰ (ii) would not be an allowed claim under § 502 in any event;¹¹ and (iii) does not give the holder of the claim a right to vote on a plan.¹² However, administrative claims share the same three characteristics: they (i) are not asserted via a proof of claim (but via a § 503(a) request); (ii) are not allowed under § 502 (but under § 503(b)); and (iii) do not give rise to a right to vote on the plan (see § 1126(a)). As already noted, § 1141(d)(1)(A) was intended to discharge administrative expense claims allowed under 11 U.S.C. § 503(b). It logically follows that § 1141(d)(1)(A)(i) through (iii) do not through implication except either administrative claims or the debtor's postpetition non-administrative debts from the reach of a discharge under § 1141(d)(1)(A).

However, administrative claims are different from postpetition non-administrative claims in very important respects: the Bankruptcy Code provides a mechanism for their allowance against the estate, and explicitly requires that a plan provide for full payment of allowed administrative claims. See 11 U.S.C. §§ 503(a), 507(a)(1), and 1129(a)(9)(A). As more fully discussed next, this suggests that Congress did not realize that it was providing for a discharge of postpetition non-administrative claims, and that, even if the discharge does apply to such claims, the court should guard against a plan's discharging such claims when a plan leaves them unpaid.

C. PROPRIETY OF MAKING § 1141(d) DISCHARGE INAPPLICABLE TO AN INDIVIDUAL DEBTOR'S POSTPETITION NON-ADMINISTRATIVE DEBTS

The applicability of § 1141(d)(1)(A) to postpetition non-administrative debts is disturbing, as Congress appears to have overlooked such debts in enacting chapter 11, making no provision for their treatment under a plan, and leaving them in a wilderness of neglect:

• Holders of postpetition non-administrative claims (in contrast to administrative claims) cannot insist pursuant to § 1129(a)(9)(A) that the plan must provide for full payment of the claims.

• No other provision of § 1129(a) specifically addresses such claims.

• Because such non-administrative claims cannot acquire allowed status, either under § 502 (prepetition claims) or § 503 (administrative claims), the confirmation requirements of § 1129 that protect a claim based on "the allowed amount of such claim"¹³ simply cannot apply to such non- administrative postpetition claims.

• Additionally, because such claims are not allowed claims under § 502, they are not permitted pursuant to § 1126(a) to vote on a plan.

Such postpetition claims of a non-administrative character are arguably not addressed by the so-called best interest of creditors test of § 1129(a)(7) (requiring, "[w]ith respect to each class of impaired claims" [emphasis added], that any non-accepting "holder of a claim ... of such class ... will receive or retain property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 ... on such date"). It is doubtful that Congress intended such postpetition non-administrative claims (whose holders cannot vote on a plan), to be placed in a class (the predicate to § 1129(a)(7) being applicable) when the purpose of placing claims in a class is that the holders of the claims in that class are generally permitted to vote on the plan.¹⁴

In any event, even if § 1129(a)(7) can be made to apply to such claims, that does not cure those claims' status of being a disenfranchised group¹⁵ not entitled to vote on a plan. Even if such claims could be placed in a class despite having no right to vote, § 1129(a)(8)¹⁶ could not be satisfied as to them — because the class would never be an accepting class based on the claims' disenfranchised status — unless the claims are left unimpaired (which is the equivalent of declaring them nondischarged).

Of course, it must be acknowledged that notwithstanding a failure to meet the requirements of § 1129(a)(8), a plan may be confirmed if it meets all of the other requirements of § 1129(a) and "if the plan does not discriminate unfairly, and is fair and equitable" with respect to the non-accepting class. 11 U.S.C. § 1129(b). However, with respect to a class of unsecured claims, the "fair and equitable" requirement incorporates an absolute priority rule: the plan is not fair and equitable unless "the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim" (§ 1129(b)(2)(B)(i) (emphasis added)) or "the holder of any interest that is junior to the interests of such class will not receive or retain under the plan on account of such junior interest any property" (§ 1129(b)(2)(B)(ii)). These two parts of § 1129(b)(2)(B) reinforce the absurdity of viewing the provisions of chapter 11 as being applicable to such claims.

First, postpetition non-administrative claims, as was already noted, can never be an allowed claim, so § 1129(b)(2)(B)(i) would be satisfied automatically as to such claims, thereby according them no protection whatsoever!

Second, § 1129(b)(2)(B)(ii) permits cramdown when classes of junior interests and claims will not retain or receive any property under the plan on account of such junior interests or...