Johnston, In re
| Decision Date | 06 May 1994 |
| Docket Number | No. 92-15976,92-15976 |
| Citation | 21 F.3d 323 |
| Parties | , 25 Bankr.Ct.Dec. 745, Bankr. L. Rep. P 75,859 In re James E. JOHNSTON, dba Johnston Enterprises, Debtor. STEELCASE INC., Appellant, v. James E. JOHNSTON and Unsecured Creditors' Committee, Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Appeal from the Ninth Circuit Bankruptcy Appellate Panel.
R. Dale Ginter, Dan L. Carroll, Lisa L. Ditora, Downey, Brand, Seymour & Rohwer, Sacramento, CA, for appellant.
David M. Meegan, Roberta Lindsey Scott, Moore, Meegan, Hanschu & Kassenbrock, Sacramento, CA, for appellee.
Before: WALLACE, Chief Judge, GARTH * and WIGGINS, Circuit Judges.
We are called upon in this case to decide: (1) the proper standard for determining when an unsecured claim may be classified separately from other unsecured claims under 11 U.S.C. Sec. 1122(a) 1; and (2) whether the absolute priority rule, codified at 11 U.S.C. Sec. 1129(b)(2)(B), is violated whenever a debtor retains assets of the bankrupt estate before actual payment is made in full to all senior unsecured creditors. 2
The bankruptcy appellate panel (BAP) and the bankruptcy court determined that the claims of the appellant, Steelcase Inc., were properly classified in the plan of reorganization filed by the debtor, appellee James E. Johnston, and that Johnston's plan of reorganization does not violate the absolute priority rule.
Although the BAP failed to apply either the proper standard of review in assessing the bankruptcy court's approval of the plan's classification of claims, and read Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202, 108 S.Ct. 963, 966, 99 L.Ed.2d 169 (1988) differently than we do in interpreting requirements of the absolute priority rule, we nevertheless agree with its ultimate conclusion. We, therefore, will affirm the June 1, 1992 judgment of the BAP which affirmed the bankruptcy court's order of July 19, 1991 confirming Johnston's plan of reorganization. 3
On October 1, 1990, Johnston filed a voluntary Chapter 11 petition for reorganization of his business, Johnston Enterprises. Johnston Enterprises was engaged in the business of real estate development and investment. At that time, Johnston also was chief executive officer and majority stockholder of Capital Office Systems, Inc. ("COSI"). The day after Johnston filed his Chapter 11 petition, COS brought its own Chapter 11 petition. Steelcase filed claims in both bankruptcies in the amount of $1,913,058.90 plus interest, attorney's fees, costs and other charges. Specifically, Steelcase claimed that it was owed that amount for office furniture and related systems which Steelcase had manufactured and delivered to COS pursuant to open-credit financing personally guaranteed by Johnston.
On the same day that the COS bankruptcy petition was filed, COS and Johnston filed a civil complaint against Steelcase in the Superior Court of California for the County of Sacramento. COS and Johnston alleged in the state complaint that Steelcase had reneged on its promise that COS would be the exclusive Steelcase dealership in the Sacramento area. According to COS and Johnston, their financial risk was increased when Steelcase established a competing dealership. Steelcase responded with a counterclaim after obtaining relief from the automatic stay of 11 U.S.C. Sec. 362. 4 Steelcase's counterclaim asserted causes of action against COS for the delivered Steelcase products and against Johnston based on his personal guarantee for the cost of the products. The civil case subsequently was removed to the federal district court and thereafter transferred to the bankruptcy court, where it is pending trial.
Johnston filed his Chapter 11 reorganization plan on January 28, 1991. The plan was approved, as amended, by order of the bankruptcy court on July 19, 1991. Johnston's confirmed second amended reorganization plan lists 26 classes. The Johnston plan disputed Steelcase's claim, which is classified separately in Class 23. Although the plan provides for the payment in full, plus interest, of all unsecured creditors, payment to Steelcase is contingent upon the success of Steelcase's litigation against Johnston. If the litigation is resolved in Steelcase's favor, Steelcase will receive full payment of its claim within 120 days following entry of a judgment. All other unsecured claimants will receive monthly payments under the plan.
Johnston's own interest in estate property is classified in Class 26. Confirmation of the reorganization plan will revest the property of the bankruptcy estate in Johnston upon the effective date of the plan. 5 Under the plan, Johnston also may use up to $50,000 a month from estate assets to pay his living expenses. The plan will be implemented through the proceeds of sale and the refinancing of some of Johnston's personally-held real estate and future dividends from investments, as well as from the operation of Johnston's development business.
Only Steelcase voted to reject Johnston's plan of reorganization. Steelcase objected that the plan improperly placed similar unsecured claims in separate classes and also violated the absolute priority rule. Specifically, Steelcase argued that its claim should have been classified in either Class 19, Class 20, or Class 22, but not separately in Class 23. 6
The bankruptcy court confirmed the Johnston plan over Steelcase's objections. The separate classification of Steelcase in Class 23 was deemed proper under 11 U.S.C. Sec. 1122(a) because Steelcase was considered to be situated differently from all other unsecured creditors. In confirming Johnston's plan, the bankruptcy court also found that the absolute priority rule was not violated because Johnston's plan proposed to pay all claims in full, plus interest. The bankruptcy court also found, inter alia, that the value of the debtor's assets substantially exceeded the amount of the debtor's liabilities, and that the plan of reorganization was feasible.
The BAP agreed with the bankruptcy court that Steelcase's separate classification was in compliance with the requirements of Sec. 1122(a), because as the bankruptcy court found, Steelcase was situated differently from other creditors, and also because the separate classification of Steelcase's claim had not been proposed to manipulate the vote of an impaired class of claims. 140 B.R. 526. The BAP also determined that the absolute priority rule was not violated. Accordingly, the BAP affirmed the bankruptcy court's July 19, 1991 order confirming Johnston's reorganization plan.
The bankruptcy court had subject matter jurisdiction pursuant to 28 U.S.C. Secs. 1334 and 157. The BAP's jurisdiction to hear the appeal of the bankruptcy court's order of July 19, 1991 was under 28 U.S.C. Secs. 158(a) and (b)(1). Our jurisdiction over this timely appeal of the BAP's amended order affirming the order of the bankruptcy court vests pursuant to 28 U.S.C. Sec. 158(d).
We review de novo all decisions of bankruptcy appellate panels in cases brought before us pursuant to 28 U.S.C. Sec. 158(d). In re Bonner Mall Partnership, 2 F.3d 899, 903-904 n. 10 (9th Cir.1993), cert. granted, --- U.S. ----, 114 S.Ct. 681, 126 L.Ed.2d 648 (1994). This is so because both the BAP and the court of appeals apply the same standard of review to the underlying judgment of the bankruptcy court. In re Windmill Farms, Inc., 841 F.2d 1467, 1469 (9th Cir.1988). Consequently, we evaluate the bankruptcy court's findings of fact under the clearly erroneous standard and review its conclusions of law de novo. Id.
Steelcase contends that its separate classification under the Johnston plan violates 11 U.S.C. Sec. 1122(a) because its claim is substantially similar to those of other unsecured creditors. The bankruptcy court rejected this claim, finding that Steelcase's separate classification was justified because: (1) Steelcase alone, of all creditors, holds a security in the assets of COS, thereby creating different rights; (2) Steelcase's claim is currently being litigated, which may confer rights separate from all other unsecured creditors, and (3) if Steelcase is entitled to payment as a result of the litigation with Johnston, Steelcase could be fully paid before other unsecured creditors. The BAP, pursuant to its de novo review, affirmed the bankruptcy court's findings that the classification of Steelcase's claim in Class 23 was proper and in compliance with Sec. 1122(a).
Before turning our attention to the merits of Steelcase's argument, we must decide whether the BAP applied the proper standard of review in assessing the propriety under Sec. 1122(a) of the Johnston plan's classification of claims. Following the Fifth Circuit in In re Greystone III Joint Venture, 948 F.2d 134, 141 n. 7, as amended following reh'g en banc, 995 F.2d 1274, 1281 n. 7 (5th Cir.1991), cert. denied, --- U.S. ----, 113 S.Ct. 72, 121 L.Ed.2d 37 (1992), the BAP concluded that: BAP Op. at 3. Counsel for Steelcase also cites Greystone to support its position that the bankruptcy court's findings, as affirmed by the BAP, are reviewable de novo, and not simply for clear error. We cannot agree.
The Fifth Circuit standard, as applied by the BAP and urged by Steelcase, is apparently in conflict with this court's jurisprudence. We have held that the question of whether claims are "substantially similar" within the meaning of Sec. 1122(a) is a question of fact, and thus reviewable under the clearly erroneous standard. In re Commercial Western Fin. Corp., 761 F.2d 1329, 1334 (9th Cir.1985). The Fifth Circuit has evidently taken...
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