In re Stanley Hotel, Inc.

• Decision Date: 08 September 1981
• Docket Number: Bankruptcy No. 80 B 01741 M.
• Citation: 13 BR 926
• Parties: In re The STANLEY HOTEL, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Colorado

13 B.R. 926 (1981)

In re The STANLEY HOTEL, INC., Debtor.

Bankruptcy No. 80 B 01741 M.

United States Bankruptcy Court, D. Colorado.

September 8, 1981.

COPYRIGHT MATERIAL OMITTED

David Schwartz, Denver, Colo., for the Trustee Steven L. Zimmerman.

Charles E. Matheson, Denver, Colo., for Frank J. Normali.

Jimmye S. Warren, Asst. U.S. Atty., Denver, Colo., for the United States of America.

Vicki Porter, Denver, Colo., for the Consumer Creditor's Committee.

MEMORANDUM OPINION

JOHN P. MOORE, Bankruptcy Judge.

THE ISSUE before the Court concerns the adequacy of three Disclosure Statements submitted by the Trustee in this case, Steven L. Zimmerman, in support of a Chapter 11 Plan of Reorganization. After notice and a hearing at which arguments were heard upon objections to the Disclosure Statements, the matter was taken under advisement. I ordered the submission of simultaneous briefs, one of which was filed by the Trustee and Club Holiday Stanley Investment Group, Inc.¹ (Club Holiday) and another by Frank J. Normali, a creditor.

Any analysis of the adequacy of a disclosure statement must begin by ascertaining the purposes Congress intended a statement to serve. From this, we may develop a yardstick against which the statements here involved can be measured. It is required by 11 U.S.C. § 1125(b) that, before an acceptance or rejection of a Chapter 11 plan may be solicited, a written disclosure statement must be transmitted to each claimholder or interestholder who will vote upon the plan. Clearly, if acceptances need not be solicited, a disclosure statement is not required. In re Union County Wholesale Tobacco & Candy Co., Inc., 8 B.R. 442 (Bkrtcy.D.N.J., 1981). Before the disclosure statement may be transmitted, it must be "approved, after notice and a hearing, by the court as containing adequate information." This latter phrase determines the task here at hand. What is "adequate information", and do the disclosure statements at issue here contain it?

11 U.S.C. § 1125(a) provides:

In this section —

(1) "adequate information" means information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor\'s books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan; and

(2) "investor typical of holders of claims or interests of the relevant class" means investor having —

(A) a claim or interest of the relevant class;

(B) such a relationship with debtor as the holders of other claims or interests of such class generally have; and

(C) such ability to obtain such information from sources other than the disclosure required by this section as holders claims or interests in such class generally have.

In short, then, the purpose of a disclosure statement is to inform equity holders and claimants, as fully as possible, about the probable financial results of acceptance or rejection of a particular plan. Moreover, since no plan proponent is expected to be able to predict the future with unerring accuracy, the information to be provided should be comprised of all those factors presently known to the plan proponent that bear upon the success or failure of the proposals contained in the plan.

While § 1125(a) does not provide a specific list of elements that must be present in order for a disclosure statement to fulfill its purposes, it does aid in an understanding of those things that are not necessarily required in order to gain approval of a disclosure statement. In the first place, § 1125(a) makes clear the purpose of a disclosure statement is not to assure acceptance or rejection of a plan, but rather is to provide enough information to interested persons so they may make an informed choice between two alternatives. So, for example, a disclosure statement's internal inconsistencies — such as those alleged by Mr. Normali to be present in the statements considered here — should not necessarily bar its approval. ". . . Rather than resulting in a denial of the approval of the disclosure statement, inconsistencies simply illustrate to the reader of the disclosure statement why they should not vote for the plan as proposed. That is what a disclosure statement is supposed to do." In re Hughes Marina, Inc., 6 B.C.D. 978 (Bkrtcy.W.D.N.Y., 1980).

I believe the same must be said for alleged illegalities in the plan. In this regard, I find nothing in the Code which indicates a duty on the part of a plan proponent to foresage the Court's rulings upon the plan. Indeed, it must logically be presumed that no proponent would proffer a plan containing known legal defects. Hence, requiring the proponent to look for and disclose suspected infirmities tends to the ridiculous. Additionally, one must surmise that the Court will properly exercise its responsibility to assess the legal merit of any plan at the confirmation hearing, and that this function will be performed regardless of the vote of the creditors.

In establishing the disclosure statement requirements, Congress expressly recognized that businesses seeking the protection of Chapter 11 cannot always be expected to have available information prepared with the same expertise and precision as that of a healthy and solvent enterprise. The resultant recognition of the necessity for flexible disclosure requirements to be administered by the courts is evidenced in both the legislative history of the pertinent sections, and in the statute itself. As explained in the Report of the Senate Judiciary Committee:

Both the kind and form of information are left essentially to the judicial discretion of the court, guided by the specification in subparagraph (a)(1) that it be of a kind and in sufficient detail that a reasonable and typical investor can make an informed judgment about the plan. The information required will necessarily be governed by the circumstances of the case.

Reporting and audit standards devised for solvent and continuing business do not necessarily fit a debtor in reorganization. Subsection (a)(1) expressly incorporates consideration of the nature and history of the debtor and the condition of its books and records into the determination of what is reasonably practicable to supply. Senate Report No. 95-989, p. 121, U.S.Code Cong. & Admin.News 1978, pp. 5787, 5907.

The words of the statute reflect this intent to establish a variable standard as to what is adequate. For example, § 1125(b) states: "The court may approve a disclosure statement without a valuation of the debtor or an appraisal of the debtor's assets." Section 1125(a)(1), quoted above, adopts a standard of reasonable practicability in light of the debtor's books, records, nature, and history. Section 1125(d) provides, in part: "Whether a disclosure statement contains adequate information is not governed by any otherwise applicable nonbankruptcy law, rule, or regulation."

These provisions give a great deal of discretion to a court considering the adequacy of a disclosure statement, and I will apply this discretion, in light of the need for information adequate to enable an informed choice, to ruling upon the many specific and detailed objections various parties have made to these disclosure statements. Before doing so, however, I will deal with what I see as the seminal objection — the contention that the plan and its underlying transactions constitute a "security" which is not qualified for any exemption, and therefore the disclosure statement must include, or call for, the issuance of a prospectus and the filing of a registration statement prior to solicitation of plan acceptances or rejections.

In my judgment, the argument that the disclosure statement itself must contain the same information as a prospectus or registration statement is readily refuted by the plain language of § 1125(d):

Whether a disclosure statement contains adequate information is not governed by any otherwise applicable nonbankruptcy law, rule, or regulation . . .

As the legislative history of this section makes clear, this provision is meant to free the court of the need to follow any otherwise applicable law in determining the adequacy of a disclosure statement, including the registration and disclosure requirements of the Securities Act of 1933. Senate Report No. 95-989, p. 121.

However, the objections raised by Mr. Normali also appear to assert that even if the type of information the Securities Laws would require need not be included in the disclosure statement itself, a separate prospectus and registration statement are still required in order for the plan to be offered to creditors. In a closely reasoned argument, Mr. Normali asserts that the contract whereby Club Holiday is to purchase the Stanley Hotel, the deed of trust to secure Club Holiday's obligation and the Chapter 11 plan to eventually satisfy creditors with the proceeds of this transaction, taken together, constitutes an "investment contract" and therefore a "security" subject to the securities disclosure and registration laws. Normali further contends that there is no exemption available to relieve the debtor from these strict requirements. I disagree.

Regardless of whether a "security" is involved, the necessary exemption is provided by 11 U.S.C. § 1145. Section 1145 is entitled "Exemption from securities laws" and provides, in pertinent part:

(a) Except with respect to an entity that is an underwriter as defined in subsection (b) of this section, section 5 of the Securities Act of 1933 (15 U.S.C. 77e) and any State or local law requiring registration for offer or sale of a security or registration or licensing of an issuer of, underwriter of, or broker or dealer in, a security does not apply to —

(1) the offer or sale under a plan of a security of the debtor, of an affiliate participating in a joint plan with the debtor, or of a successor to the

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