In re Triple R Holdings, LP
| Decision Date | 10 December 1991 |
| Docket Number | Bankruptcy No. 91-5-4118-MM,R.S. No. 911027. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Northern District of California |
| Parties | In re TRIPLE R HOLDINGS, L.P., Debtor. |
Seymour J. Abrahams, San Jose, Cal., for debtor.
Robert M. Lichtman, San Francisco, Cal., for secured creditor and moving party.
Before the court is the motion of First Republic Thrift & Loan of San Diego, a secured creditor, seeking relief from the automatic stay to foreclose on the debtor's principal asset, a condominium unit in San Francisco, California. First Republic is undersecured and asserts that any plan proposed by the debtor, Triple R Holdings, L.P., would violate the absolute priority rule. The court has considered the argument, and concluded that the new value exception to the absolute priority rule remains viable, and that it is possible for the debtor to confirm a plan within a reasonable time.
On October 4, 1990, First Republic loaned $510,000 to Benjamin M. Bitanga for the purpose of refinancing real property consisting of a single condominium unit and accompanying storage area located at 1001 California Street. The loan was evidenced by a nonrecourse promissory note and secured by a deed of trust. On November 7, 1990, Mr. Bitanga transferred title to the property to Robert R. Romer without the knowledge or consent of First Republic.1
The property was subsequently conveyed by Mr. Romer to the debtor, a California limited partnership; the debtor's general partner is a corporation wholly owned by Mr. and Mrs. Romer, who are sophisticated real estate investors. Mr. and Mrs. Romer also own and reside in the penthouse unit at 1001 California Street. The debtor began making payments to First Republic in order to preserve its interest in the property, and filed an application with First Republic to assume Mr. Bitanga's loan.
At the time of their transactions with Mr. Bitanga, First Republic and Mr. Romer believed that Doris Symons, a tenant occupying Mr. Bitanga's unit, held a month to month tenancy. Because she was an elderly person at the time of the condominium conversion, however, Ms. Symons has, in effect, a life estate in the unit by operation of San Francisco's condominium conversion and rent control ordinances; the ordinances limit her rent to the amount payable at the time of the condominium conversion, subject to certain allowed adjustments. She has a remaining life expectancy of approximately seven and one half years.
Ms. Symons' life estate has depressed the value of the condominium unit. Her current monthly rent of approximately $1,920 is less than the monthly condominium dues of $1,950 and pays nothing toward debt service on the property. First Republic initially asserted that the property was worth $625,000, but now claims that the property should be valued at approximately $344,000. The debtor contends that the value may have to be discounted even further.
When Mr. Romer learned of Ms. Symons' life estate, he withdrew the application to assume First Republic's loan to Mr. Bitanga. He also stopped making payments to First Republic. First Republic then began foreclosure proceedings which prompted the filing of the debtor's Chapter 11 petition.
At the commencement of the case on July 8, 1991, the amount owed to First Republic was approximately $540,000. The motion for relief from the automatic stay was filed on August 7, 1991. In opposition to the motion, the debtor outlined a plan which would permit it to retain the real property.
Under the debtor's tentative plan, First Republic would receive the value of its secured claim on the effective date of the plan. There would be no payment on First Republic's unsecured claim. The debtor's only other unsecured claim, dues of approximately $42,000 owed to the homeowners' association, would be separately classified. The plan proposes to pay that claim in full, and the debtor asserts that it is necessary to do so in order to avoid further assessments by the homeowners' association. Mr. Romer has sufficient cash which he will contribute to the debtor to make these payments.
Alternatively, the tentative plan provides that if First Republic elects to have its whole claim treated as secured under § 1111(b), it would receive a payment of $100,000 on the effective date of the plan, and monthly payments thereafter of $2,010 for a period of eighteen years and three months. These monthly payments total $440,000. In this scenario, First Republic would receive the allowed amount of its claim, $540,000.
Although the debtor's tentative plan provides for payment in the full amount of First Republic's claim if it elects to have its claim treated as fully secured pursuant to § 1111(b), First Republic asserts it will split its claim and use the vote for its unsecured claim to veto the debtor's plan. First Republic takes this position even though the property will be essentially unmarketable for a period of years as a result of the life tenancy.
The court must grant relief from the automatic stay unless there is "a reasonable possibility of a successful reorganization within a reasonable time." United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365, 376, 108 S.Ct. 626, 632, 98 L.Ed.2d 740 (1988). First Republic asserts that the debtor's tentative plan is not confirmable because it violates the absolute priority rule. The debtor claims that its tentative plan falls within the new value exception to the absolute priority rule. The court must consider whether the new value exception remains an open path to reorganization in determining whether to grant relief from the automatic stay.
Under Chapter X of the Bankruptcy Act of 1898, as amended ("the Act"), the absolute priority rule2 and the new value exception3 were subsumed within the term "fair and equitable." Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 115-17, 60 S.Ct. 1, 6-8, 84 L.Ed. 110 (1939). Congress made substantial revisions to the bankruptcy laws when it enacted the Bankruptcy Reform Act of 1978 ("the Code").4 Whether the new value exception continues to exist was brought into question by the Supreme Court's opinion in Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 203 n. 3, 108 S.Ct. 963, 967 n. 3, 99 L.Ed.2d 169 (1988). The Supreme Court in Ahlers expressly declined to resolve the issue, stating that "its decision today should not be taken as any comment on the continuing vitality of the Los Angeles Lumber exception. . . ." Id.
The Seventh Circuit considered the question posed by Ahlers in a case involving a closely held corporation engaged in retail sales. See In re Kham & Nate's Shoes No. 2 v. First Bank of Whiting, 908 F.2d 1351 (7th Cir.1990). The court acknowledged that its discussion of the new value exception was dicta and addressed issues not raised in the bankruptcy court. Id. at 1362.
However, that court indicated the definition of "fair and equitable" is "no longer a matter of common law." The bankruptcy courts' equitable powers must be "exercised within the confines of the Bankruptcy Code." Id. at 1361 (citing Ahlers). The Seventh Circuit then suggested, but stopped short of ruling, that the new value exception did not survive codification of the absolute priority rule in § 1129(b)(2).5
Recently, one bankruptcy court in this district held that the new value exception did not survive enactment of the Code. See In re Outlook/Century Ltd., 127 B.R. 650 (Bankr.N.D.Cal.1991). In Outlook/Century, the court stated that "the starting point for interpreting a statute is the language of the statute itself." Id. at 656 (citations omitted). It reasoned that "in enacting section 1129(b) of the Code, Congress replaced the judicially created definition of `fair and equitable' with a congressionally created definition of that standard." Id. at 657 (emphasis in original). Because the plain language of § 1129(b) does not contain a new value exception, the court concluded that it does not exist. Id. at 656.
The court further reasoned that the statutory context of the term "fair and equitable" makes the continued vitality of the new value exception unnecessary. Id. at 657. Since § 1129(a) altered prior law by authorizing courts to confirm a plan to which all classes of creditors consent, regardless of whether it is fair and equitable, the new value exception is no longer needed as a means of confirming a plan. Id.
This court does not agree with two aspects of the analysis in Outlook/Century. First, the plain language of § 1129(b) does not exclude the new value exception. Rather, § 1129(b) is silent with respect to the new value exception. In the absence of specific statutory guidance, a court should consider the pre-Code practice and legislative history. Begier v. Internal Revenue Service, 496 U.S. 53, 110 S.Ct. 2258, 2265-67, 110 L.Ed.2d 46 (1990).
Second, statutory analysis should not be limited to § 1129, as statutory construction is a "holistic endeavor." Timbers, 484 U.S. at 371, 108 S.Ct. at 629-630. Although the Outlook/Century court's interpretation of § 1129 may appear reasonable when viewed in isolation, consideration of the remainder of the statutory scheme is important "because only one of the permissible meanings may produce a substantive effect that is compatible with the rest of the law." Id. This fundamental disagreement regarding statutory construction leads this court to the opposite conclusion: the new value exception continues to exist under the Code.
An even more recent opinion also concluded that there was no new value exception under the Code. See In re Greystone III Joint Venture, 948 F.2d 134 (5th Cir. 1991). In Greystone, the debtor's only...
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