Matter of Greystone III Joint Venture
| Decision Date | 31 July 1990 |
| Docket Number | A-89-CA-842.,Civ. A. No. A-89-CA-667 |
| Citation | 127 BR 138 |
| Parties | In the Matter of GREYSTONE III JOINT VENTURE, Debtor. PHOENIX MUTUAL LIFE INSURANCE COMPANY, Appellant, v. GREYSTONE III JOINT VENTURE, Appellee. |
| Court | U.S. District Court — Western District of Texas |
John Flowers, Neil L. Sobol, Dallas, Tex., for appellant Phoenix Mut. Life Ins. Co.
Adrian M. Overstreet, Kammerman & Overstreet, Austin, Tex., for appellee Greystone III Joint Venture.
This is an appeal from a final order of the United States Bankruptcy Court for the Western District of Texas, Austin Division (Clark, J.).
Phoenix Mutual Life Insurance Company ("Phoenix Mutual" or the "Appellant") presents the following issues:
Under Bankruptcy Rules 7052 and 8013, the Bankruptcy Judge's findings of fact must be upheld on appeal unless "clearly erroneous." In re Beker Industries Corp., 89 B.R. 336, 342 n. 5 (S.D.N.Y.1988); In re Silver, 46 B.R. 772 (D.Col.1985). However, the Bankruptcy Judge's conclusions of law are reviewed de novo. Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303 (5th Cir.1985).
Greystone III Joint Venture (the "Debtor" or the "Appellee") is a Texas joint venture composed of Gerald D. Kucera, Greystone Bank Building Partnership and Greystone III, Ltd. The Debtor was formed on August 30, 1983 for the purpose of developing an office building located in Austin, Texas. This project is the Debtor's primary asset.
Phoenix Mutual is the owner and holder of a promissory note (the "Note") in the original principal amount of $8.8 million, executed by the Debtor, dated September 17, 1985, and due to Phoenix Mutual. The Note is secured by a deed of trust mortgage and assignment of rents covering the Project.
On April 4, 1988, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On June 13, 1988, the Debtor filed a Plan of Reorganization and a Disclosure Statement. On September 7, 1988, the Debtor filed its First Amended Plan of Reorganization and its First Amended Disclosure Statement. On September 28, 1988, the Debtor filed its Second Amended Plan of Reorganization (the "Plan") and its Second Amended Disclosure Statement (the "Disclosure Statement"). Also on September 28, 1988, the Bankruptcy Court conducted a hearing at which the Disclosure Statement was approved.
On October 31, 1988, the Bankruptcy Court conducted a hearing on the propriety of the classification of claims under the Plan and on the valuation of Phoenix Mutual's secured claim under Section 506(a) of the Code. The aggregate amount of prepetition indebtedness owed to Phoenix Mutual totals $9,300,773.60. The Court set the value of the project at $5,825,000 for purposes of confirmation of the Plan. Therefore, pursuant to 11 U.S.C. §§ 506(a) and 1111(b), Phoenix Mutual has a secured claim of $5,825,000.00 and an unsecured claim of approximately $3,500,000.00.
The Court approved the classification scheme of the Plan, except that the Court required that two classes of unsecured creditors, Classes 5 and 6, be considered together for balloting. Objections to the Plan were filed by Phoenix Mutual and the United States Trustee ("Trustee").
On January 27, 1989, the Bankruptcy Court held a confirmation hearing on the Plan, at which the Debtor orally modified the Plan to satisfy certain objections of Phoenix Mutual and the Trustee and to clarify the Plan.
As previously noted, Phoenix Mutual's claims were placed within different classifications under the Plan, part secured and part unsecured. The secured claim of Phoenix Mutual is contained in Class 4, and provides that Phoenix Mutual would receive the value of its secured claim at a market interest rate in 360 monthly installments. The Court, as previously noted, found the amount of the secured claim to be $5,825,000, and the parties stipulated that 11 percent was a market interest rate. At the confirmation hearing, the Plan was modified to provide for a balloon payment after ten years.
The Plan confirmed by the Bankruptcy Judge separately classifies but identically treats the unsecured claims of Phoenix Mutual and the unsecured claims of trade creditors whose claims aggregate less than $10,000 ("Classes 5 and 6" or the "Trade Creditor Class"). The unsecured claim of Phoenix Mutual was placed into Class 7, as a non-recourse deficiency claim. The Plan provided that Phoenix Mutual would receive "$200,000 (or 3.82%)" in cash on the effective date of the Plan. The Plan further provides that Class 5/6 would be paid 3.82 percent of their claims in cash upon the effective date of the Plan.
Phoenix Mutual rejected the Plan as both a secured and an unsecured creditor and did not elect treatment under 11 U.S.C. § 1111(b)(2). The Trade Creditor Class accepted the Plan. At the Confirmation Hearing, a representative of Phoenix Mutual testified that Phoenix Mutual was willing to fund a reorganization of the Debtor that would pay all unsecured claims in full. The Bankruptcy Judge refused to permit Phoenix Mutual to file its plan of reorganization for the Debtor.
On June 6, 1989, the Bankruptcy Court entered its Decision on Confirmation of Debtor's Second Amended Plan of Reorganization, as modified, overruling Phoenix Mutual's objection and confirming the modified plan using the "cram down" provisions of the Code. An Order of Confirmation was entered on August 8, 1989. It is from this confirmation that Phoenix Mutual appeals.
A. Classification of Claims. The Appellant argues that the Bankruptcy Court erred in separating Phoenix Mutual's unsecured deficiency claim from that of the claims of the other unsecured trade creditors, asserting that there should have been only one class of unsecured claims allowed under the Plan.
Sections 1122 and 1123 of the Code require that a plan of reorganization designate classes of claims. Section 1123 provides in pertinent part:
The Code expressly contemplates multiple classes of claims. Section 1122 gives the Debtor substantial freedom to establish classes of claims and provides:
The manner in which claims are classified can impact confirmation of a plan. A plan may be confirmed under Section 1129(a) of the Code if all classes of creditors accept the Plan by the requisite majorities and certain other requirements are satisfied. However, if all of the classes of creditors do not consent, a plan may be confirmed under Section 1129(b) of the Code, the so-called "cram down" section, if at least one impaired non-insider class of creditors votes to accept the plan and the other relevant standards of Sections 1129(a) and (b) are met. Only the classes of creditors whose rights are impaired under a plan of reorganization are entitled to vote to accept or reject the plan. 11 U.S.C. § 1126. Voting on a plan is by the classes as established in the plan. A class accepts a plan when two-thirds in dollar amount and more than one-half in number of the creditors in such class vote to accept the plan. 11 U.S.C. § 1126(b).
Phoenix Mutual complains that the classification of its unsecured deficiency claim in a class separate from that of the unsecured trade creditors was structured purposely by the Debtor in order to nullify Phoenix Mutual's voting rights.
Section 1122 of the Code prohibits the grouping of dissimilar claims in the same class. Although Section 1122 does not specifically address the permissibility of placing similar claims in different classes, the pertinent legislative and case authority support such a flexible approach. See In re U.S. Truck Co., Inc., 800 F.2d 581, 585 (6th Cir.1986).
In re Ag Consultants Grain Division, Inc., 77 B.R. 665, 674 (Bankr.N.D.Ind.1987) (citations omitted). See also, Matter of Jersey City Medical Center, 817 F.2d 1055, 1060-61 (3rd Cir.1987); Barnes v. Whelan, 689 F.2d 193, 201 (D.C.Cir.1982).
Of course "the classification in a plan should not do substantial violence to any claimant's interest." Brinkley v. Chase Manhattan Mortgage and Realty Trust (Matter of LeBlanc), 622 F.2d 872, 879 (5th Cir.1980).
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