Sandy Ridge Development Corp., Matter of
| Decision Date | 05 September 1989 |
| Docket Number | No. 88-3072,88-3072 |
| Citation | 881 F.2d 1346 |
| Parties | , 19 Bankr.Ct.Dec. 1237, Bankr. L. Rep. P 73,070 In the Matter of SANDY RIDGE DEVELOPMENT CORPORATION, Debtor. SANDY RIDGE DEVELOPMENT CORPORATION, Appellant, v. LOUISIANA NATIONAL BANK, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
John C. Anderson, Jack Patrick Harris, Baton Rouge, La., for appellant.
Fredrick R. Tulley, Joseph R. Martin, Baton Rouge, La., John R. Tharp, Fredrick R. Tulley, Baton Rouge, La., for La. Nat. Bank.
James R. Austin, Stacy E. Grove, Baton Rouge, La., for Livingston Bank.
Michael Harig, Baton Rouge, La., for Evans Graves Engineers, Inc.
Ralph Hood, Baton Rouge, La., for Contractors, Inc.
Appeal from the United States District Court for the Middle District of Louisiana.
Before WISDOM, GARWOOD and JOLLY, Circuit Judges.
Debtor-appellant Sandy Ridge Development Corporation (Sandy Ridge) appeals the district court's affirmance of the bankruptcy court's rejection of its Chapter 11 reorganization plan. We reverse and remand.
Sandy Ridge was formed in 1982 by John C. Wiese (Wiese) and John B. Hamilton (Hamilton) for the purpose of developing commercial and residential real estate in the vicinity of Baton Rouge, Louisiana. Wiese and Hamilton jointly managed the corporation as fifty-percent shareholders. During 1983-84, Sandy Ridge acquired two properties, a 31.30-acre tract known as "Brightside," and a 47.60-acre tract known as "Port Vincent," both with a view to future subdivision development. Sandy Ridge financed the Brightside acquisition through a loan from Louisiana National Bank (LNB), secured by a first mortgage on the property. At the time of bankruptcy, Sandy Ridge owed LNB approximately $2.4 million on the Brightside loan. Wiese and Hamilton also signed guaranty agreements in which they became personally liable for up to $2.1 million of this LNB debt. Wiese's father, H.E. Wiese, guaranteed the remaining $300,000.
The Port Vincent transaction was more complex. Sandy Ridge purchased a number of smaller tracts and consolidated them into the Port Vincent development. Financing for these acquisitions consisted primarily of a loan from Livingston Bank (Livingston), which held a second mortgage on the property. 1 LNB held a lien on Port Vincent as well, but this lien was subordinate to Livingston's. At the time of bankruptcy, Sandy Ridge owed Livingston approximately $560,000 on its Port Vincent loan and owed LNB an additional $100,000 in respect to Port Vincent. However, unlike Brightside, the Port Vincent transaction did not involve personal guarantees.
By 1986, Sandy Ridge's financial condition had deteriorated. On January 31, 1986, Wiese (allegedly without Hamilton's knowledge) filed a petition under Chapter 11 of the Bankruptcy Code for Sandy Ridge. On February 13, 1986, Hamilton moved to dismiss the petition since he, as a fifty-percent shareholder, had not approved. 2 The bankruptcy court granted this motion on February 26. In the meantime, on February 20, 1986, LNB had filed suit against Wiese, Hamilton, and Wiese's father on the basis of the continuing guaranty agreements on the Brightside loan. Hamilton then reconsidered his opposition to bankruptcy, and on March 7, 1986, Sandy Ridge filed its current Chapter 11 petition. On March 12, 1986, Sandy Ridge filed its disclosure statement and plan of reorganization. This statement listed two major assets, the Brightside and Port Vincent properties. The statement also listed approximately $138,000 of sewer equipment, as well as one speculative asset, a pending lender liability lawsuit against LNB. 3 The listing of assets and related liens may be summarized as follows:
Sandy Ridge's plan of reorganization was in substance a liquidation. The plan named seven classes of creditors:
Creditor Amount Owed
Administrative costs $ Unknown
Taxes 10,000
LNB ($2,400,000 plus $100,000) 2,500,000
Livingston 560,000
Richards 2,500
Unsecured creditors 672,000
Wiese and Hamilton (as shareholders)
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Total $3,744,500
The plan provided that:
1. Sandy Ridge would transfer Brightside to LNB for "a credit on the indebtedness to the extent of the fair market value of [the Brightside property]" (emphasis added). 5
2. In the event that the above failed to cover the debt owed LNB, Sandy Ridge would transfer up to $100,000 worth of Port Vincent property (that portion subject to LNB's second mortgage) to LNB to make up for the shortfall.
3. Sandy Ridge would transfer "sufficient property from [Port Vincent] ... in full satisfaction of the indebtedness" to Livingston ($560,000).
4. The remaining property would be sold and the proceeds (along with any judgment proceeds from the lender liability suit against LNB) would be distributed to the holders of unsecured claims.
Of the creditors empowered to vote, only two classes, Class 2 (tax claims) and Class 5 (Richards) voted to accept the plan. 6 However, these creditors were owed only $12,500 of the total $3.74 million claim. In terms of dollar value, 99.67 percent of the creditors voted to reject the plan. Sandy Ridge then attempted a cramdown under 11 U.S.C. Sec. 1129(b). However, the bankruptcy court refused to confirm the plan. The court provided several reasons for its decision. First and foremost, the court held that Sandy Ridge failed to satisfy the requirements of section 1129(b)(2)(A)(iii) of the Bankruptcy Code, 11 U.S.C. Sec. 1129(b)(2)(A)(iii), which requires that secured creditors realize the indubitable equivalent of their claims. The court also found the plan was not a feasible reorganization, but rather that the principal objective of the plan was the discharge of nondebtor guarantors. The court concluded that the plan was not workable because of its failure to specify how Port Vincent would be divided, that the plan was not filed in good faith, and that the plan was unfair to unsecured creditors. In re Sandy Ridge Development Corp., 77 B.R. 69, 79-81 (Bankr.M.D.La.1987).
To begin, we must first clear a misconception that permeates the bankruptcy court's opinion. The bankruptcy court appears to have concluded that the plan proposes to transfer Brightside to LNB in full satisfaction of LNB's entire claim. However, this is not the case. The plan provides that the transfer of Brightside will only provide "for a credit on the indebtedness to the extent of the value of Brightside." This now being clear, we examine the application of the Code to this plan.
Unless one accepts Sandy Ridge's appraisal of Brightside at face value, LNB is a classic example of an undersecured creditor; one whose collateral is insufficient to cover the entire debt. Section 506(a) of the Bankruptcy Code bifurcates an undersecured creditor's total claim into secured and unsecured portions. 8 The Code's treatment of such creditors is determined not from the status of the party as a secured or unsecured creditor, but rather from the status of a claim as a secured or unsecured claim. H.Rep. 95-595 at 180, reprinted in 1978 U.S.Code Cong. & Admin. News 5787, 5963 at 6141. In situations involving only one creditor and one debtor, the value of the undersecured creditor's secured claim is simply the value of the underlying collateral. United Savings Association of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S.Ct. 626, 630, 98 L.Ed.2d 740 (1988). The difference between the collateral's value and the amount of the debt becomes an unsecured claim and is added to the existing pool of unsecured claims. In the present case, LNB's secured claim is equal to the value of Brightside, and for the present analysis, the exact value of Brightside is unimportant. 9
Section 1129(b), the Code's cramdown provision, requires that a plan be "fair and equitable" in order to confirm the plan over a dissenting class of creditors. Section 1129(b)(2) provides:
This "indubitable equivalent" language is at the heart of the current case, and fortunately its application is relatively straightforward. The key determination is the precise meaning of the phrase "such claims," and our inquiry concludes that "such claims" can only mean secured claims. Section 1129(b)(2) is divided into several subsections. Section 1129(b)(2)(A) deals with secured claims, while section 1129(b)(2)(B) deals with unsecured claims. Since the "indubitable equivalent" language is part of section 1129(b)(2)(A), it deals only with secured claims, and thus section 1129(b)(2)(A)(iii) can be accurately read to state "the realization of the holders of secured claims of the indubitable equivalent of their secured claims." Since the value of LNB's secured claim is equal to the value of Brightside, a plan which provides that LNB will realize the indubitable equivalent of Brightside will satisfy the requirements of section 1129(b)(2)(A)(iii). The current plan provides that LNB will receive Brightside itself, and since common sense tells us that property is the indubitable equivalent of itself, this portion of the current plan satisfies the "indubitable equivalent" requirement. 11
Furthermore, this result accords with the development of the term ...
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