In re Walsh

• Decision Date: 09 March 2011
• Docket Number: No. 09–16031–WCH.,09–16031–WCH.
• Citation: 447 B.R. 45
• Parties: In re Mary Ann WALSH, Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

447 B.R. 45

In re Mary Ann WALSH, Debtor.

No. 09–16031–WCH.

United States Bankruptcy Court, D. Massachusetts,Eastern Division.

March 9, 2011.

Paula R.C. Bachtell, U.S. Dept. of Justice, Office of the U.S. Trustee, Boston, MA, for John Fitzgerald.Charles R. Bennett, Jr., Kathleen R. Cruickshank, Murphy & King, Professional Corporation, Boston, MA, for Mary Ann Walsh.Erika Cormier, IRS Office of Chief Counsel, Boston, MA, for Internal Revenue Service/IRS.John G. Hofmann, Gilman McLaughlin & Hanrahan LLP, Boston, MA, Alex M. Rodolakis, Gilman, McLaughlin & Hanrahan LLP, Hyannis, MA, for Cape Cod Cooperative Bank.Christopher Lee, New London, NH, for James Kasper.Walter M. Lupan, Grassia, Murphy & Lupan, P.A., Natick, MA, Matthew J. McGowan, Elizabeth W. Shealy, Linda Rekas Sloan, Salter, McGowan, Sylvia & Leonard, Inc., Providence, RI, for TD Bank, N.A.Alex F. Mattera, Demeo & Associates, P.C., Boston, MA, for Corinth Investors Trust, James Kasper.Richard T. Mulligan, Harmon Law Offices, P.C., Newton Highlands, MA, for Webster Bank, N.A.Maureen N. Shea, Shea & Shea, P.C., Yarmouth Port, MA, for Trustees of the Plantation Realty Trust.Adrienne Kotowski Walker, Mintz, Levin, Cohn, Ferris Glovsky and Popeo, Boston, MA, for Hingham Institution For Savings.Brian J. Wall, Troy Wall Associates, Sandwich, MA, for Cape Cod Vacation Condominium Ass'n.

PRELIMINARY DECISION ON CONFIRMATION OF AMENDED PLAN OF REORGANIZATION

WILLIAM C. HILLMAN, Bankruptcy Judge.

Background

Mary Ann Walsh (“Debtor”) filed her petition under Chapter 11 of the Bankruptcy Code on July 29, 2009. She owns and operates 56 residential apartments in five locations in Barnstable County and owns a home and a vacation property (collectively the “Properties”).

The Properties are encumbered by a variety of mortgages. With the exception of mortgages in favor of Corinth Investors Trust (“Corinth”), the Debtor has reached accommodation with her various secured creditors.

On October 13, 2010, Debtor filed her Amended Disclosure Statement (the “Disclosure Statement”) and Amended Chapter 11 Plan (the “Plan”).¹ The Plan established seven classes of secured creditors, Class 8 for general unsecured claims, and Class 9 for Debtor's Equity Interest. The secured creditors were to be paid as provided in the plan, by a deed in lieu of foreclosure (or surrender), payment from the proceeds of the sale of the particular property involved, as agreed by the creditor, or as ordered by the Court.

The unsecured claims were to receive 5% over five years. As to the Debtor's Equity Interest, the Plan provides that the Properties shall re-vest in the Reorganized Debtor at the effective date of the plan.

Corinth filed a limited objection to Debtor's original disclosure statement which was carried over as applicable to the Disclosure Statement. On October 26, 2010, I entered an order ² approving the Disclosure Statement. Corinth's objection was overruled as to the Disclosure Statement but preserved as an objection to confirmation of the Plan.³ Corinth, as a secured creditor in Class 6, and an unsecured creditor in Class 8 (assuming a deficiency) cast negative votes on the Plan. The issues preserved relate to the applicability of the Absolute Priority Rule to confirmation of Debtor's plan, the enforceability of the dragnet clause contained in three mortgages,⁴ the issue of merger of title to the South Cape Property, and the valuation of the Marshfield Property.

A hearing on the Plan was scheduled for January 25, 2011. Unfortunately, counsel for Corinth became ill on that date and was unable to be present. However, armed with the PTS, I took the matter under advisement as to the legal issues involving the Absolute Priority Rule and the effect of the dragnet clauses and ordered that the evidentiary hearing would be rescheduled after issuance of an opinion as to those issues.⁵ This is the promised opinion.

The Absolute Priority Rule

If the result of creditor votes in Class 8 show that class to have rejected the plan (it may depend on the amount of Corinth's deficiency) the Plan may nonetheless be confirmed so long as it is, among other things, “fair and equitable.” ⁶

Before the enactment of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”),⁷ “fair and equitable”, as applicable here, required that

the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.⁸

Because Debtor is the holder of an interest that is junior to Class 8, the impaired class of unsecured claimants, and she proposes to retain the Property on account of her interest, the Plan could not be confirmed under the prior version of the statute unless the so-called “new value exception” was satisfied.⁹ However, BAPCPA added language to the subsection specifically addressed to the individual Chapter 11 debtor, some of which I have added here in italics:

The holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115.... ¹⁰

This change has resulted in a variety of decisions from courts regarding whether the Absolute Priority Rule still applies to individual chapter 11 debtors. To answer the question, we must next examine the meaning of “property included in the estate under section 1115” which is hardly free from doubt.

Section 1115(a) provides (emphasis added)

In a case in which the debtor is an individual, property of the estate includes, in addition to the property specified in section 541—

(1) all property of the kind specified in section 541 that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first; and

(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first.

In the Shat decision, Judge Markell provided us with an extensive study of this issue. In connection with an interpretation of “included,” which is the key to the interpretive problem, he said

If “included” means only property which is added by Section 1115, then Section 1129(b)(2)(B)(ii) has a very narrow meaning: it refers only to postpetition income from services—and not to property originally specified in Section 541. Section 1115, however, itself includes Section 541(a) property. Thus, “included” could refer to all property Section 1115 itself references, and this would then be a reference to the superset of Section 541(a) property and the debtor's postpetition service income. Put another way, if Section 1115 entirely supplants Section 541 by specifically incorporating it and adding to it, the “included” has a very broad meaning, essentially exempting individuals from the absolute priority rule as to unsecured creditors.¹¹

I have several problems with this characterization. First of all, Section 1115 deals with something more than post-petition income from services–––it also brings in property described in section 541 but which is acquired post-petition. Second, because it deals with post-petition section 541(a) property (a most awkward construction), Section 1115 does not include section 541(a) property as such.

In any event, Judge Markell concludes that

Given the relatively straightforward reading of the statute supporting the broader reading, and the general rehabilitative aim of chapter 11, the court understands the phrase “in addition to the property specified in section 541” to mean that Section 1115 absorbs and then supersedes Section 541 for individual chapter 11 cases. This construction, in turn, leads to the position that Section 1129(b)(2)(B)(ii)'s exception extends to all property of the estate, including such things as prepetition ownership interest of non-exempt property.¹²

I must disagree. I join instead with Judge Tchaikovsky, who held that

Notwithstanding the thorough and thoughtful analysis by the Shat court, the Court is unable to agree with its conclusion. If the Court were writing on a clean slate, it would read the phrase “included in the estate under section 1115” to be reasonably susceptible to only one meaning: i.e., added to the bankruptcy estate by § 1115.

Section 103(a) provides that § 541 applies in a chapter 11 case, including an individual chapter 11 case. Section 541 provides that, when a petition is filed, a bankruptcy estate is created, consisting of the debtor's pre-petition property. Section 1115 provides that, in an individual chapter 11 case, in addition to the property specified in § 541, the estate includes the debtor's post-petition property. If the clause referring to § 541 had not been included in § 1115 and if § 1115 had merely stated that an individual chapter 11 debtor's estate included post-petition property, the argument could have been made that an individual chapter 11 debtor's estate did not include his pre-petition property.¹³

Debtor flatly asserts that the Rule is inapplicable.¹⁴ As I have concluded otherwise, and assuming the existence of a dissenting class, Debtor will be required to confirm her plan by satisfying § 1129(b).¹⁵

The Dragnet Clauses

Debtor and various trusts in which she had an interest granted three mortgages to Cape Cod Cooperative Bank (“Cape Cod Bank”) covering various of the Properties. The first (“CCC 1 Mortgage”) secured a note (“CCC 1 Note”) in which “Borrower” is defined as the Debtor individually and as trustee of the Cape Cod Vacation Realty Trust (“CCVR Trust”).¹⁶ The CCC 1 Mortgage defines “Grantor” as the Debtor in her capacity of trustee of the CCVR Trust and the “Borrower” as the Debtor and the CCVR Trust as...