Matter of Homestead Partners, Ltd., Bankruptcy No. A95-76964-WHD.

• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Georgia
• Writing for the Court: W. HOMER DRAKE, Jr.
• Citation: 197 BR 706
• Parties: In the Matter of HOMESTEAD PARTNERS, LTD., Debtor.
• Decision Date: 25 June 1996
• Docket Number: Bankruptcy No. A95-76964-WHD.

197 B.R. 706 (1996)

In the Matter of HOMESTEAD PARTNERS, LTD., Debtor.

Bankruptcy No. A95-76964-WHD.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

June 25, 1996.

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John A. Christy, Schreeder, Wheeler & Flint, Atlanta, Georgia, for Debtor

Sarah Robinson Borders, Darryl S. Laddin, King & Spalding, Atlanta, Georgia, for Condor One, Inc.

IN PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

W. HOMER DRAKE, Jr., Bankruptcy Judge.

ORDER

Currently before the Court in this proceeding is the Motion for Termination of Exclusivity of Condor One, Inc. (hereinafter "Condor") and a related Motion to Extend Exclusivity by Homestead Partners, Ltd. (hereinafter "the Debtor"). Forming an integral part of the Debtor's Chapter 11 reorganization, these motions give rise to a core proceeding within the Court's subject matter jurisdiction. See 28 U.S.C. § 157(b)(2)(A), (L) & (O). As such, a final disposition of each shall be rendered in accordance with the following reasoning.

Discussion

The instant controversy forms but one part of an ongoing discord between the Debtor, as owner/operator of a three-hundred unit apartment complex in Clarkston, Georgia, and Condor, the holder of a first priority lien on the Debtor's principal asset. Responding to Condor's acquisition of a receivership over its affairs, the Debtor filed the instant bankruptcy case on November 30, 1995.¹ Subsequently, on March 20, 1996, the Debtor filed a plan of reorganization and related disclosure statement, wherein it separately classifies the secured and unsecured components of Condor's interest and proposes to leave the latter deficiency substantially unpaid.

Notwithstanding its incomplete satisfaction of Condor's claim against the estate, the Debtor also has structured its plan to allow the acquisition of new equity by its former shareholders in exchange for a $500,000.00 capital contribution. Acknowledging its reliance upon a controversial new value "exception" to the absolute priority rule, the Debtor nevertheless professes to have formulated a confirmable plan which merely awaits the solicitation of approving votes. As such, the Debtor has filed its present Motion to Extend Exclusivity, contending that sufficient "cause" exists for continuing its opportunity to seek confirmation without the threat of competing plans.

Responding to the Debtor's plan submission and request for more time, Condor concedes the existence of an exception to the rule of absolute priority, based upon an infusion of new value by former holders of equity.² Nevertheless, the creditor vigorously contests the appropriateness of continued exclusivity,

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given that the Debtor has filed a reorganization plan which contemplates new value contributions from its former shareholders. Specifically, Condor argues that satisfaction of the new value exception so predicates itself upon the existence of a competitive plan-making environment that, in addition to precluding contemplation of further extensions, the submission of a new value plan automatically warrants termination of the exclusivity period. To that end, Condor has filed a separate Motion for Termination of Exclusivity

Given the nature of their dispute, the Debtor and Condor agree that settlement of the exclusivity question turns upon an application of the "absolute priority rule," as it has been codified at 11 U.S.C. § 1129(b)(2)(B)(ii) and possibly augmented by a new value exception. The parties having so framed the issue before it, the Court will turn its attention to the intersection of absolute priority with new value, moving therefrom to examine how those combined principles should impact the plan exclusivity decision.

I. An Introduction to Absolute Priority.

Since the development of consensual reorganizations lies at the heart of Chapter 11 policy, the Bankruptcy Code necessarily incorporates certain measures geared to equalize the bargaining position of debtors vis-a-vis their creditors.³ Perhaps chief among these efforts to level the reorganizational playing field, the option of "cramdown" allows debtors to pursue the confirmation of their reorganization plans over the dissent of one or more creditor classes, "if the plan does not discriminate unfairly, and it is fair and equitable, with respect to each class that is impaired under, and has not accepted, the plan." See 11 U.S.C. § 1129(b)(1). Laying more definite parameters upon its "fair and equitable" requirement, the Code then elaborates, in pertinent part:

(2) For the purposes of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:

* * * * * *

(B) With respect to a class of unsecured claims —

(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or

(ii) 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.

* * * * * *

11 U.S.C. § 1129(b)(2)(B)(ii). Through this mandate that creditors not receiving full payment must enjoy the consolation of "absolute priority," the Bankruptcy Code's "fair and equitable" provisions codify a pre-Code measure designed to prevent collusion between senior creditors and the holders of pre-bankruptcy equity interests.⁴ This act of codification,

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however, has proven itself to be a flashpoint of controversy, generating much debate and extensive litigation on the validation of related pre-Code practices and the extent to which junior creditors should participate in non-consensual plans of reorganization. In particular, the passage of section 1129(b)(2)(B)(ii) has given rise to concern that this provision of the Code serves to alter, rather than merely to codify, absolute priority's traditional allowance of new stock purchases by the debtor's former shareholders through contributions of fresh capital, or "new value."⁵

Further compounding the aforementioned debate, the instant case demonstrates that yet a second generation of inquiry will face those courts that acknowledge the continued viability of such new value reorganizations — determining the circumstances under which the new value option may be pursued. Fortunately,

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however, like the basic inquiry demanded by its predecessor, this second generation of debate should find substantial guidance within the plain language of section 1129(b)(2)(B)(ii). Pennsylvania Pub. Welfare Dep't v. Davenport, 495 U.S. 552, 557, 110 S.Ct. 2126, 2130, 109 L.Ed.2d 588 (1990) (statutory interpretation must begin with the language's plain meaning); United States v. Ron Pair Enter., Inc., 489 U.S. 235, 240-41, 109 S.Ct. 1026, 1029-30, 103 L.Ed.2d 290 (1989) (when faced with a coherent and consistent statutory scheme, a court should work directly from plain meaning). Thus, in order to determine the circumstances, if any, under which the Code will countenance pursuit of a new value plan, the Court will turn its attention to the text of section 1129(b)(2)(B)(ii) and its mandate of absolute priority in all distributions pursuant to a "cramdown" plan of reorganization

A. The Plain Meaning of Section 1129(b)(2)(B)(ii) and Absolute Priority's Impact upon the Confirmability of New Value Plans of Reorganization.

Under a plain meaning analysis, section 1129(b)(2)(B)(ii) parses into two components, each of which must be given effect before any discovery of the statute's plain meaning may be had. See Bonner Mall Partnership v. U.S. Bancorp Mortgage Co. (In re Bonner Mall Partnership), 2 F.3d 899, 908 (9th Cir.1993) (citing Negonsott v. Samuels, 507 U.S. 99, 104-06, 113 S.Ct. 1119, 1123, 122 L.Ed.2d 457 (1993)); see also Moskal v. United States, 498 U.S. 103, 109, 111 S.Ct. 461, 465-66, 112 L.Ed.2d 449 (1990) (quoting United States v. Menasche, 348 U.S. 528, 538-39, 75 S.Ct. 513, 519-20, 99 L.Ed. 615 (1955) (courts must "give effect, if possible, to every clause and word of a statute") (citations omitted)). First, the plan must provide a junior creditor with some item of "property," in contradiction of strict priority distribution. See 11 U.S.C. § 1129(b)(2)(B)(ii). As is the case with similar references throughout the Code, however, section 1129(b)(2)(B)(ii)'s reference to "property" warrants a broad construction, and it consequently should be read to include an option to purchase stock in the reorganized debtor. See Bonner Mall, 2 F.3d at 911 n. 27 (citing Kham & Nate's Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351, 1360 (7th Cir.1990)); In re Modern Glass Specialists, Inc., 42 B.R. 139, 140-41 (Bankr.E.D.Wis. 1984). Indeed, "even where the debts far exceed the current value of assets, a debtor who retains his equity interest in the enterprise retains `property'" as defined by reference to section 1129(b)(2)(B)(ii). See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206-08, 108 S.Ct. 963, 969, 99 L.Ed.2d 169 (1988). Thus, all stock options or acquisitions of the type implicated by new value reorganization constitute "property" as sanctioned by the absolute priority rule.

In view of this "property" reference's unwavering applicability to stock distributions, any franchise of new value reorganization under section 1129(b)(2)(B)(ii) necessarily must arise from its secondary mandate — that such equity interests may not be issued "on account of" the recipient's prior interest. Under its uniformly accepted definition, the term "on account of" means simply "because," or "because of" the phrase's prepositional object. See WEBSTER'S II NEW RIVERSIDE DICTIONARY 71-72 (3d ed. 1994); see also THE OXFORD ENGLISH DICTIONARY 64 (4th ed. 1978) (defining "on account of" to mean "in consideration of, for the sake of, by reason of...