In re Wonder Corp. of America, Bankruptcy No. 5-86-00436.

• Decision Date: 25 March 1987
• Docket Number: Bankruptcy No. 5-86-00436.
• Citation: In re Wonder Corp. of America, 70 B.R. 1018 (Bankr. Conn. 1987)
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re WONDER CORPORATION OF AMERICA, Debtor.

70 B.R. 1018 (1987)

In re WONDER CORPORATION OF AMERICA, Debtor.

Bankruptcy No. 5-86-00436.

United States Bankruptcy Court, D. Connecticut.

March 25, 1987.

Douglas A. Strauss, David A. Greenberg, Pullman, Comley, Bradley & Reeves, Bridgeport, Conn., for debtor.

Christopher Belmonte, Kevin Preston, Lane & Mittendorf, New York City, for Waldco, Inc.

Donald Lee Rome, Stephen E. Goldman, Susan Roman, Robinson & Cole, Hartford, Conn., for Chase Manhattan Bank, N.A.

Thomas A. Gugliotti, Walter E. Paulekas, Schatz & Schatz, Ribicoff & Kotkin, Hartford, Conn., for Old Stone Bank.

Michael A. Zizka, Murtha, Cullina, Richter & Pinney, Hartford, Conn., Ethan D. Fogel, Neal Colton, Dechert, Price & Rhoads, Philadelphia, Pa., for Societe Generale.

Martin W. Hoffman, Hartford, Conn., for Unsecured Creditors' Committee.

Byron P. Yost, Evans & Baldwin, Bridgeport, Conn., for Richard E. Roy.

Richard Belford, New Haven, Conn., trustee.

Wayne Davis, Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for Dewey, Ballatine, Bushby, Palmer & Wood.

MEMORANDUM OF DECISION AND ORDER ON STANDING OF AN UNIMPAIRED CREDITOR TO OBJECT TO CONFIRMATION OF A CHAPTER 11 PLAN OF REORGANIZATION

ALAN H.W. SHIFF, Bankruptcy Judge.

On February 20, 1987, the debtor, Wonder Corporation of America and Waldco, Inc. ("the Proponents") filed an Amended Disclosure Statement and an Amended Joint Plan of Reorganization. On February 25, 1987, the Proponents filed a Statement Amending Debtor's Amended Disclosure Statement and Amended Joint Plan of Reorganization, and on that date,¹ after notice and a hearing, the court determined that the disclosure statement complied with Bankruptcy Code § 1125(b) and permitted the Proponents to proceed with a confirmation hearing, scheduled for March 3, 1987. At the confirmation hearing on that date, Chase Manhattan Bank N.A., Old Stone Bank, and Societe Generale, a French bank, ("the Banks") all of which are secured creditors with liens on and security interests in virtually all the debtor's assets, including those acquired post-petition, objected to confirmation. In response, the Proponents argued that the Banks were unimpaired and therefore lacked standing to object to confirmation.

The issues thus presented are: (1) whether the Banks are unimpaired, and (2) if they are, do they lack standing to object to confirmation?²

IMPAIRMENT OF CLAIMS

Pursuant to § 1123(a)(2), which requires that a plan shall "specify any class of claims or interests that is not impaired under the plan," the subject Plan provided as follows:

ARTICLE I

DESIGNATION OF CLASSES OF CLAIMS AND INTERESTS UNDER THE PLAN

Class 3

Class 3 shall consist of the holders of Allowed Secured Claims whose debt is secured by the real estate of Wonder.

Class 4

Class 4 shall consist of the holders of Allowed Secured Claims whose debt is secured by both real estate and personal property of Wonder.

ARTICLE II

TREATMENT OF CLASSES OF CLAIMS AND INTERESTS UNDER THE PLAN

Class 3

(a) The holders of Class 3 Allowed Secured Claims shall be paid in full on the Payment Date.

(b) Class 3 is not impaired under the Plan.

Class 4

(a) The holders of Class 4 Allowed Secured Claims shall be paid in full on the Payment Date.

(b) Class 4 is not impaired under the Plan.

The Disclosure Statement accompanying the Plan defines an "Allowed Secured Claim" as a claim "equal to the value of the interest of the holder thereof in property of the Debtor securing such Allowed Claim". The Payment Date is "the 20th business date following the date on which the Confirmation Order becomes a Final Order." "Final Order" is defined as

an order or judgment which has not been reversed, stayed, modified or amended and as to which no appeal is pending and the time to appeal and to seek leave to appeal or to seek review or rehearing has expired.

Thus, the Plan provides that the Banks, which are designated as Class 3 and Class 4 secured creditors, are to be paid the full amount of their allowed claims on the 20th business day following the date on which the confirmation order is no longer subject to appeal or other review and has not been reversed, stayed, modified or amended.

Impairment is defined by § 1124, which provides that a class of claims is impaired by a reorganization plan if it is not accorded treatment which satisfies one of the three alternative methods described in that section. The Plan here proposes to satisfy the requirements of § 1124(3) which states in pertinent part that:

a class of claims or interests is impaired under a plan unless, with respect to each claim or interest of such class, the plan —

provides that, on the effective date of the plan, the holder of such claim or interest receives, on account of such claim or interest, cash equal to —

(A) with respect to a claim, the allowed amount of such claim.

The Banks contend that the Plan does not meet the requirements of § 1124 since it does not conform to any subsection therein. In particular, the Banks charge that the Plan arguably is attempting to meet the requirements of § 1124(3) but fails to do so in that it does not provide for payments in cash, and does not provide for payment on the effective date of the Plan since the Plan does not provide for an effective date.

The Banks' assertion that the Plan does not contemplate payment in cash does not merit comment. Although "effective date" is not specifically defined in the Plan, it is apparent from the definition contained in the Amended Disclosure Statement, which accompanied the Plan, that the "Payment Date" is the effective date of the Plan and that the Banks are to be paid on that date.

Next, the Banks contend that even if the Plan were amended to provide that payment would be in cash and to define the Payment Date as the effective date of the Plan, the Banks would nevertheless be impaired because the Payment Date is an indeterminate date. In the Banks' view, keying the effective date of the Plan to the finality of the confirmation order impairs the holders of Class 3 and Class 4 claims by creating an uncertainty which violates the purpose of § 1124. Counsel for the Banks cite In re Jones, 32 B.R. 951 (Bankr.D.Utah 1983) and In re Otero Mills, Inc., 31 B.R. 185 (Bankr.D.N.M.1983) as support for that proposition. I find those decisions inapposite since their principal thrust is to hold that cure and compensation under § 1124(2) must be completed by the effective date if impairment is to be avoided. Here the Banks go a step further and assert that under § 1124(3), where cure is not contemplated and valuation is not required, the effective date must be a short period after confirmation if not the date of confirmation itself.

While this may be conceptually attractive, see In re Jones, supra, 32 B.R. at 958 n. 13, in the real world of bankruptcy reorganization, it may not be attainable. Indeed, the Jones court concluded that it may not be possible to establish the "effective date" with any more exactitude than to require that it be reasonably close to the date of the confirmation hearing, Id. See also In re Rolling Green Country Club, 26 B.R. 729, 735 (Bankr.D.Minn.1982); Klee, "All You Ever Wanted To Know About Cram Down Under The Bankruptcy Code", 53 Am.Bankr.L.J., 133 137 n. 24 (1979); 3 Norton Bankruptcy Law and Practice, § 62.06.

I agree with the Banks that the effective date in § 1124(3) cannot be indefinite or distant. In considering the relationship between the effective date and the entry of a confirmation order, courts should be mindful of the fact that a Chapter 11 plan is very often the end result of a long process marked by considerable controversy and negotiation, and that during that process, the prepetition rights and expectations of creditors are at least temporarily subordinated to the public policy of giving qualified debtors an opportunity for a fresh start.

It is common for plans to be unopposed. The lack of opposition, however, might be the consequence of statutory acceptance rather than actual creditor consent. Therefore, a creditor may be unimpaired by the literal language of § 1124(3), and yet severely impaired by the loss of favorable contract terms, but not entitled to reject the plan under § 1126(f).³ Although § 1124(3) is silent as to the timing of the effective date, Congress could not have intended to eliminate a creditor's negative vote unless § 1124(3) were meant to be read as requiring some reasonable limitation on the interval between the confirmation order and the effective date of the plan. In the absence of a specific statutory formula, courts must supply such meaning, so that the effective date is linked to the happening of a particular event and is no later than is reasonably necessary to accomplish a legitimate purpose such as the determination of administrative expenses or the resolution of objections to claims. Here the effective date is defined as the "20th business day following the date on which the Confirmation Order becomes a Final Order." That is not such an unreasonably long time as to conflict with the equitable balances set by Chapter 11. Indeed, it is not uncommon for a plan to fix the effective date to a time after the confirmation order is final in recognition of a prospective lender's reluctance to advance funds until the appeal period has passed.

The Banks further argue that by tying the effective date to the finality of the confirmation order, their collateral may erode, perhaps to levels below the allowed amount of their claims, before payment is received. Since, however, it is apparent that any procedural delay will most likely be instituted by the Banks themselves,⁴ that argument is unpersuasive as nothing more than a self-fulfilling prophecy whereby any appeal they file will delay the proposed payment and cause the interest on their secured claims to increase, thereby jeopardizing their right to full payment. This concern could be minimized if not completely avoided, since if the Banks do...