Matter of Yasparro, Bankruptcy No. 87-343-8B1.

• Decision Date: 04 May 1989
• Docket Number: Bankruptcy No. 87-343-8B1.
• Citation: 100 BR 91
• Parties: In the Matter of Pat YASPARRO, a/k/a P.T. Yasparro and a/k/a Pasquale T. Yasparro, Debtor.
• Court: U.S. Bankruptcy Court — Middle District of Florida

100 B.R. 91 (1989)

In the Matter of Pat YASPARRO, a/k/a P.T. Yasparro and a/k/a Pasquale T. Yasparro, Debtor.

Bankruptcy No. 87-343-8B1.

United States Bankruptcy Court, M.D. Florida, Tampa Division.

May 4, 1989.

COPYRIGHT MATERIAL OMITTED

Bernard J. Morse, for debtor.

Patti Medearis, for Great Western Bank.

Dennis I. Moore, U.S. Atty.

Robert Eddy, for NCNB.

Larry Foyle, for Barnett Bank of Pasco.

Daniel Rock, for Baillie Roofing Inc.

Cynthia Burness, U.S. Trustee.

Aaron Gold, for Ravel Jewelry, Inc.

ORDER ON CONFIRMATION AND DEBTOR'S MOTION FOR CRAMDOWN

THOMAS E. BAYNES, Jr., Bankruptcy Judge.

THIS CAUSE came on for consideration of confirmation of the Debtor's Amended Chapter 11 Plan and the Debtor's Motion for Cramdown. Objections were filed by unsecured creditors, Barnett Bank of Pasco County and Baillie Roofing, Inc. The Court, after hearing testimony, argument of counsel, and having considered the record, finds the relevant facts to be as follows:

The Debtor, Pat Yasparro, is the former president of Gold Center, Inc. A number of corporate debts incurred during 1985 and 1986 were guaranteed by him individually. In April, 1986, the corporation filed a Petition under Chapter 11 of the Bankruptcy Code. The corporate case was later converted to a Chapter 7. The Debtor remained primarily liable on the corporate debts by his personal guarantees. On January 23, 1987, the Debtor, individually, filed a Petition for Relief under Chapter 11 of the Bankruptcy Code.

The Debtor's original Plan of Reorganization provided for funding through the sale of certain assets, the compromise or extension of certain classes of claims, and the application of profits derived from the chartering of the vessel "Therapy." On February 1, 1988, the Debtor filed his Amended Plan of Reorganization which provided for funding through the Debtor's future income as chief executive officer of a corporate jewelry distributor. The Amended Plan called for the issuance of promissory notes in the amount of 10% of the allowed unsecured claims, payable in ten equal annual installments to Class 8 creditors.

After failing to receive the necessary vote of the impaired Class 8 unsecured creditors, the Debtor filed a Motion for Cramdown. At the confirmation hearing the Debtor announced certain modifications to the Amended Plan which were incorporated in the First Amendment to the Amended Plan of Reorganization filed on September 9, 1988. The treatment of the class of unsecured claims was modified to include interest on the promissory notes at 10% per annum.

The Plan provides the Debtor shall retain his assets, both exempt and non-exempt. The Debtor's Schedules reveal assets totalling $339,231.42. The assets include two parcels of real property held as tenants by the entirety, stock in Florida West Jewelers, Inc. with an undetermined market value, two automobiles, and a boat. The Debtor has claimed as exempt his Florida homestead and personal possessions to the extent of $1,000.00. The Plan would be funded by the salary the Debtor receives from Florida West Jewelers, Inc.

BEST INTEREST OF CREDITORS VS. CRAMDOWN

Section 1129(a) of the Bankruptcy Code sets forth the conditions for plan confirmation. The conditions are mandatory with the exception of Section 1129(a)(8) which requires acceptance of the plan by the impaired classes. If an impaired class rejects the plan, the debtor may nonetheless have the plan confirmed by utilizing the cramdown provisions of Section 1129(b).

The Bankruptcy Code makes no distinction between cramdown by a corporate debtor and cramdown by an individual debtor. An individual may be a debtor under Chapter 11. 11 U.S.C. § 109(d). No where in the provisions of Section 1129 has Congress expressly excluded, limited, or excepted individual Chapter 11 debtors from availing themselves of that subsection. Thus, if an individual meets the requirements of Section 1129(b), cramdown is an available alternative for confirmation.

Section 1129(b)(1) provides that despite the failure to meet the requirement of Section 1129(a)(8), the plan shall be confirmed if it does not "discriminate unfairly, and is fair and equitable" with respect to the impaired classes that have rejected the plan. Section 1129(b)(2) sets forth nonexclusive requirements¹ for meeting the "fair and equitable" standard. It provides,

(2) . . . the condition that a plan be fair and equitable . . . 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 junior² to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.

Debtor's counsel argues "the best interest of the creditors" test should be used as the criteria under Section 1129(b)(2)(B)(i). Debtor's liquidation analysis reflects unsecured claims in excess of $326,634.35; and assets, including the exempt assets, having a market value of $203,750.00. The liquidation value, excluding the exempt assets, is projected to be $7,500.00. Under the plan, the class of unsecured creditors would be paid approximately $32,000.00 over 10 years with 10% interest. Assuming these figures are correct, the unsecured creditors will receive under the plan a value greater than the $7,500.00 equity in non-exempt assets which would be available in a Chapter 7 case.

There is no dispute the Debtor's plan meets the best interest of the creditors test. That test, however, is not relevant to the "fair and equitable" requirement under Section 1129(b)(2)(B). In Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939), Justice Douglas discussed this issue with respect to predecessor law in Section 77B of the Bankruptcy Act of 1898:

To hold that in a § 77B reorganization creditors of a hopelessly insolvent debtor may be forced to share the already insufficient assets with stockholders because apart from rehabilitation under that section they would suffer a worse fate, would disregard the standards of fair and equitable; and would result in impairment of the Act to the extent that it restored some of the conditions which the Congress sought to ameliorate by that remedial legislation.

308 U.S. at 124, 60 S.Ct. at 12, 84 L.Ed. at 124. The requirements of Section 1129(b)(2)(B) are quite specific. While the expressed conditions of "fair and equitable" are not exhaustive, this Court finds no authority to bolster the Debtor's argument that by meeting the best interest of the creditors test, the requirements of cramdown are also met. In fact, the best interest of the creditors test arises as a separate criteria to confirmation under Section 1129(a)(7) and is separate and distinct from the requirements of Section 1129(b). In re Sawmill Hydraulics, Inc., 72 B.R. 454, 456 (Bankr.C.D.Ill.1987).

ABSOLUTE PRIORITY RULE

The "fair and equitable" requirement under Section 1129(b)(2)(B) includes the absolute priority rule.

The absolute priority rule, in its simplest terms, requires that creditors of a debtor in bankruptcy reorganization receive payment of their claims in their established order of priority, and that they receive payment in full before lesser interests— such as those of equity holders—may share in the assets of the reorganized entity.

Powlen and Wuhrman, The New Value Exception to the Absolute Priority Rule: Is Ahlers the Beginning of the End?, 93 Com.L.J. 303, No. 3 (Fall 1988); See, Norwest Bank Worthington v. Ahlers, 485 U.S. 197, ___, 108 S.Ct. 963, 969, 99 L.Ed.2d 169, 181 (1988). In this case, the Debtor does not propose to pay the unsecured creditors the full amount of their allowed claims. At the same time, he proposes to retain his assets, both exempt and non-exempt. The Debtor's plan unquestionably does not meet the absolute priority rule.

All of the Debtor's assets constitute "property." Section 1129(b)(2)(B)(ii) specifically provides to meet the absolute priority rule the Debtor may not retain "any property" if the unsecured creditors are not to be paid in full. The Code section makes no distinction between exempt and non-exempt property nor as to value. Since Congress saw fit to narrow the scope of the term "property" for purposes of other sections³, Congress could have narrowed the scope of the term "property" for purposes of Section 1129(b). Since it did not, this Court concludes the term "property" is all encompassing and is not limited by 11 U.S.C. § 541. The United States Supreme Court in interpreting Section 1129(b) has broadly construed the term. Ahlers, 485 U.S. at ___, 108 S.Ct. at 969, 99 L.Ed.2d at 180; see also, In re Stegall, 85 B.R. 510 (C.D.Ill. 1987), aff'd 18 B.C.D. 1237, 865 F.2d 140 (7th Cir.1989); In re East, 57 B.R. 14 (Bankr.M.D.La.1985); In re Pecht, 53 B.R. 768 (Bankr.E.D.Va.1985). Thus, the retention of "any property" includes the Debtor's two parcels of real property held as tenants by the entirety, the stock, the two automobiles and the boat.

The Debtor argues the minimal liquidation value of his assets equates to a lack of retention of "any property." The United States Supreme Court, with other courts concurring, has rejected the "no value theory." Ahlers, 485 U.S. at ___, 108 S.Ct. at 969, 99 L.Ed.2d at 180. (The absolute priority rule's prohibition against retaining property makes the value of the property irrelevant. As discussed subsequently, this analysis should not be confused with the exception to the absolute priority rule where the value of the property to be retained is relevant to whether the capital contribution is adequate. Ahlers, 485 U.S. at ___, 108 S.Ct. at 970, 99 L.Ed.2d at 181). Second, it is illogical to believe a debtor would retain property where he could not perceive value....