In re Tucson Self-Storage, Inc.
| Decision Date | 31 March 1994 |
| Docket Number | BAP No. AZ-93-1114-RVMe. Bankruptcy No. 91-2130-TUC-LO. |
| Citation | 166 BR 892 |
| Parties | In re TUCSON SELF-STORAGE, INC., an Arizona corporation, Debtor. OXFORD LIFE INSURANCE COMPANY, Appellant, v. TUCSON SELF-STORAGE, INC., Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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John R. Clemency, Phoenix, AZ, for appellant.
Clifford B. Altfeld, Tucson, AZ, for appellee.
Before: RUSSELL, VOLINN and MEYERS, Bankruptcy Judges.
A creditor appeals from the bankruptcy court's order confirming a Chapter 112 plan of reorganization, arguing that the plan improperly placed similar claims in separate classes, the plan unfairly discriminated and violated the absolute priority rule. We REVERSE and REMAND.
On May 22, 1991, the Debtor/Appellee, Tucson Self-Storage, Inc. ("Tucson"), was formed and incorporated under the laws of the State of Arizona. Tucson owns and operates its only asset, a mini-storage facility in Tucson, Arizona ("Storage Facility").
On that date, Tucson acquired the Storage Facility from Villa Catalina Building Corporation. As part of the transfer, Tucson assumed all outstanding debts. The Storage Facility was subject to a first deed of trust in favor of Merabank, a Federal Savings Bank ("Merabank").3 The Storage Facility was also subject to a second deed of trust in favor of Point Loma Foundation ("PLF").4
On June 17, 1991, Tucson filed a Chapter 11 petition. On March 9, 1992, Tucson filed a disclosure statement and a proposed plan of reorganization. The disclosure statement provided for a reduction of the secured claims to the fair market value of the Storage Facility. Both Merabank/RTC and PLF were holders of deficiency claims which were also separately classified.
Tucson was indebted to Merabank/RTC for $1,642,917.35 plus accrued interest, charges, costs and attorneys' fees. Tucson was also indebted to PLF for $400,000. The court valued the Storage Facility at $1.5 million. The class 6 deficiency claim of Merabank/RTC was listed at $355,000. The class 7 deficiency claim of PLF was listed at $400,000.
Initially, Merabank/RTC was to receive only ten percent of its deficiency claim, while PLF was to receive twenty-five percent of its deficiency claim. The plan eventually was amended to provide a 10% payoff respectfully to Merabank/RTC's deficiency claim and to PLF, while the unsecured trade creditors were to be paid in full.
On July 21, 1992, Merabank/RTC filed an objection to the plan. Merabank/RTC objected to: (1) the improper classification of claims; (2) the discriminatory treatment of claims; (3) the violation of the absolute priority rule; (4) the application of a below-market interest rate and terms; (5) the improper calculation of secured claims; (6) feasibility; and (7) the plan not being proposed in good faith. In addition, Merabank/RTC objected to the classification of unsecured trade creditors as an administrative convenience class and to the disparate treatment, allowing the trade creditors5 to receive 100% distribution under the plan, while the deficiency claims receive 10% distribution.
Despite the objection of Merabank/RTC, Tucson reported that all voting creditors voted in favor of the plan except Merabank/RTC. On July 28, 1992, the court held the first of nine confirmation hearings.
Merabank/RTC sold its note secured by the first deed of trust to Oxford Life Insurance Company ("OLIC"). On October 23, 1992, a notice of substitution of real party in interest was filed. The court continued the confirmation hearing.
On December 23, 1992, Tucson filed a first amended plan. The amended plan provided for identical treatment of PLF and OLIC's deficiency claims. On January 6, 1993, OLIC filed an objection to plan confirmation which essentially raised Merabank/RTC's previous objections.
On January 14, 1993, the court ordered the plan confirmed, with January 29, 1993 as the effective date of the plan. On January 25, 1993, OLIC filed a notice of appeal of the confirmation order.
On January 29, 1993, Tucson borrowed $92,000 from Daniel and Olga Kujawa and the Felkner Children's "S" Trust.6 On that date, Tucson disbursed checks to OLIC ($30,026)7 as payment of the Class 6 deficiency claim and PLF ($75,531) as payment of the Class 7 deficiency claim.8 All priority and administrative claims were paid in full on the effective date of the plan.
On that date, OLIC filed a motion for stay pending appeal to stay the execution of the plan with the bankruptcy court. On February 4, 1993, that motion was denied.
On February 12, 1993, OLIC filed an emergency motion for a stay pending appeal with the BAP. On February 19, 1993, the BAP granted a stay pending appeal.
A. Whether the appeal of the order of confirmation is moot since the debtor has commenced the issuance of payments pursuant to the plan.
B. Whether the segregation of unsecured claims into separate classes from other unsecured claims in order to obtain an accepting impaired class constitutes an improper classification.
C. Whether the disparate treatment of the unsecured deficiency claims constitutes unfair discrimination under the plan.
D. Whether the advance of money to the debtor by equity holders constituted "new value" in accordance with the new value exception to the absolute priority rule.
A bankruptcy court's finding that a claim is or is not substantially similar to other claims, constitutes a finding of fact reviewable under the clearly erroneous standard. In re Johnston, 21 F.3d at 327 (9th Cir.1994) (quoting In re Commercial Western Fin. Corp., 761 F.2d 1329, 1334 (9th Cir.1985)). The bankruptcy court's conclusions of law are reviewed de novo. In re Pizza of Hawaii, Inc., 761 F.2d 1374, 1377 (9th Cir.1985).
A. Mootness
Tucson contends that this appeal should be dismissed as moot because it has substantially consummated the plan by commencing payments pursuant to the plan. Although a stay pending appeal was obtained after the effective date of the plan, this appeal is nonetheless not moot.
When an appellate court is unable to grant effective relief, the appeal must be dismissed as moot. Mills v. Green, 159 U.S. 651, 653, 16 S.Ct. 132, 133, 40 L.Ed. 293 (1895); In re Carroll, 903 F.2d 1266, 1269-70 (9th Cir.1990); In re Combined Metals Reduction Co., 557 F.2d 179, 187 (9th Cir.1977); In re Blumer, 66 B.R. 109, 113 (9th Cir. BAP 1986), aff'd, 826 F.2d 1069 (9th Cir.1987). The question, then, is whether effective relief would be precluded in the event of reversal by the Panel.
Tucson borrowed $92,000 from insiders. Although Tucson alleges that its shareholders are obligated under the loan, it is Tucson that is repaying the loan through its cash flow beginning in the ninth month of the plan. Tucson's shareholders are bearing no cost, risk, or burden, while pledging Tucson's assets to receive the principal and interest payments for the next fifteen years.10
The money disbursed by Tucson represents only a small portion of the total amount to be paid under the plan. This Panel is still able to structure effective relief by remanding with instructions to order the return of any erroneously disbursed funds. We have issued such instructions in the past: "`This Panel could structure effective relief by remanding with instructions to the trial court to order the return of any erroneously disbursed funds.'" In re Blumer, 66 B.R. at 113 (quoting In re Intern. Environmental Dynamics, Inc., 718 F.2d 322, 326 (9th Cir. 1983)). Additionally, future payments may be adjusted prospectively in order to arrive at the settled amount. As a result, we are of the opinion that the appeal of the confirmation order is not moot and that we may consider the merits.
B. Improper Classification
Section 1122(a) provides that for claims other than those classified together for administrative convenience, "a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class." 11 U.S.C. § 1122(a). Courts are not in complete agreement on whether § 1122(a) permits separate classification of substantially similar claims, mandating only that those claims that are classified be substantially similar, or whether § 1122(a) requires the classification of substantially similar claims in the same class. See Greystone, 995 F.2d 1274. Even if § 1122(a) is read to permit separate classification, it is not without limitation:
Although the proponent of a plan of reorganization has considerable discretion to classify claims and interests according to the facts and circumstances of the case, this discretion is not unlimited. "There must be some limit on a debtor\'s power to classify creditors . . . sic The potential for abuse would be significant otherwise." If the plan unfairly creates too many or too few classes, if the classifications are designed to manipulate class voting, or if the classification scheme violates basic priority rights, the plan cannot be confirmed.
In re Holywell Corp., 913 F.2d 873, 880 (11th Cir.1990) (citations omitted).
The Fifth Circuit in In re Greystone III Joint Venture, viewed prior case law as establishing what the court termed the "one clear rule" that a debtor cannot "classify similar claims differently in order to gerrymander an affirmative vote on a reorganization plan." Greystone, 995 F.2d at 1279.
The Sixth Circuit warned of the potential abuse of a wholly permissive reading:
Unless there is some requirement...
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