SPCP Grp. LLC v. Biggins

• Decision Date: 21 September 2011
• Docket Number: 8:10–cv–2384–T–24,8:11–cv–33–T–24,8:10–cv–2386–T–24,8:11–cv–34–T–24.,Nos. 8:10–cv–2381–T–24,s. 8:10–cv–2381–T–24
• Citation: 465 B.R. 316,66 Collier Bankr.Cas.2d 920
• Parties: SPCP GROUP, LLC, Appellant, v. James John BIGGINS, Appellee.SPCP Group, LLC, Appellant, v. Kristin R. Biggins, Appellee.SPCP Group, LLC, Appellant, v. Kimberly Rae Norton a/k/a Kimberly Rae Biggins, Appellee.SPCP Group, LLC, Appellant, v. Michael Biggins and Elizabeth Biggins, Appellees.SPCP Group, LLC, Appellant, v. James E. Biggins and Shirley R. Biggins, Appellees.
• Court: U.S. District Court — Middle District of Florida

465 B.R. 316

66 Collier Bankr.Cas.2d 920

SPCP GROUP, LLC, Appellant,

v.James John BIGGINS, Appellee.SPCP Group, LLC, Appellant,

v.Kristin R. Biggins, Appellee.SPCP Group, LLC, Appellant,

v.Kimberly Rae Norton a/k/a Kimberly Rae Biggins, Appellee.SPCP Group, LLC, Appellant,

v.Michael Biggins and Elizabeth Biggins, Appellees.SPCP Group, LLC, Appellant,

v.James E. Biggins and Shirley R. Biggins, Appellees.

Nos. 8:10–cv–2381–T–24

8:10–cv–2384–T–24

8:10–cv–2386–T–24

8:11–cv–33–T–24

8:11–cv–34–T–24.

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

Sept. 21, 2011.

Gregg W. McClosky, Kristin J. Mentzer, McClosky, D'Anna & Dieterle, LLP, Boca Raton, FL, for Appellants.

Bernard Jay Morse, IV, Morse & Gomez, PA, Riverview, FL, for Appellees.

ORDER

SUSAN C. BUCKLEW, District Judge.

This cause comes before the Court on a consolidated appeal from orders of the Middle District of Florida Bankruptcy Court, in which the Bankruptcy Court confirmed the Plans of Reorganization of individual Debtors/Appellees James John Biggins, Kristin R. Biggins, Kimberly Rae Norton, Michael Biggins, Elizabeth Biggins, James E. Biggins, and Shirley R. Biggins (collectively, “Debtors,” “Appellees,” or “the Biggins”). SPCP Group, LLC (“SPCP”), which is Debtors' largest unsecured creditor, appealed the confirmation of Debtors' reorganization plans.

I. Background

The undisputed procedural and factual history of this case is summarized as follows:

Cypress Creek Assisted Living Residence, Inc. (“the Residence”), is a company that owns an assisted living facility located in Sun City, Florida. Debtors/Appellees James John Biggins, Kristin R. Biggins, Kimberly Rae Norton, and Michael Biggins are the shareholders of the Residence, and they each own a 25 percent interest in the company. Cypress Creek Assisted Living Residence Management, LLC (“the Management company”), is the management company that manages and operates the assisted living facility.

In 2007, the Residence borrowed approximately $5,000,000.00 from American Bank for operation of the assisted living facility. In connection with the loan, the Residence executed a note in favor of American Bank, which was secured by a mortgage on the property of the assisted living facility. Debtors/Appellees and the Management company executed and delivered to American Bank personal guaranties in which each individually, absolutely, and unconditionally guaranteed the obligations and liabilities of the Residence under the note.

Through a series of transactions, American Bank assigned all of its rights, title, and interests in the note, the mortgage, and the guaranties to Appellant SPCP. In May of 2008, the note matured and became immediately due to SPCP. The Residence defaulted on the loan by failing to make the payment due when the note matured.

As a result of the default, in September of 2008, SPCP filed a civil action in state court to foreclose on the property subject to the mortgage, and for damages for breach of the note and breach of the personal guaranties. That lawsuit precipitated the Residence and the Management company filing Chapter 11 petitions for bankruptcy. The bankruptcy court later confirmed their Chapter 11 Plans of Reorganization. Those plans require the Residence and the Management company to re-pay SPCP 100 percent of the debt owed to SPCP, plus interest at a rate of 5.25 percent, in monthly payments of approximately $36,000.00. The plans further provide that the balance owed, together with any accrued interest, will balloon and be fully due and payable to SPCP 72 months after confirmation.¹ As a result of the monthly and balloon payments provided for under the reorganization plans, SPCP will be repaid 118 percent of its claim.

Since the Residence and the Management company filed their Chapter 11 petitions, they have continued to make all of the required monthly payments to SPCP under their reorganization plans. Nevertheless, SPCP proceeded with its state court action to enforce the Biggins's personal guaranties. As a result, in February of 2009, each of the Biggins filed Chapter 13 petitions for bankruptcy. Their petitions were later converted to Chapter 11 petitions. At the time of their filing, the debt owed to SPCP totaled approximately $5.8 million. Accordingly, in March of 2009, SPCP filed its Proof of Claim in each of the Biggins's/Debtors' Chapter 11 actions, asserting its unsecured claim in the amount of that debt.

In August of 2010, the bankruptcy court conducted a hearing at which it confirmed the individual Debtors' Chapter 11 reorganization plans over the objections of SPCP. Debtors' plans permitted them to retain their ownership interests in the Residence. Furthermore, the plans did not require Debtors to make monthly payments to SPCP because monthly payments instead were being made to SPCP by the Residence and the Management company under their reorganization plans, which provided for SPCP to be repaid 118 percent of the debt it was owed. However, SPCP retained the right to enforce the guaranties signed by the individual Debtors, if the Residence and the Management company defaulted on the payments due under their reorganization plans.

At the confirmation hearing, the bankruptcy court found that Debtors' reorganization plans complied with Sections 1129(a) and (b) of the Bankruptcy Code. In particular, the court found that Debtors' reorganization plans were “fair and equitable,” and thus satisfied the cramdown requirements of Section 1129(b). This meant that Debtors could properly enforce the plan provisions, which permitted Debtors to retain their interests in the Residence, over SPCP's objections. In doing so, the bankruptcy court found that the absolute priority rule of 11 U.S.C. Section 1129(b)(2)(B)(ii) no longer applies to individual Chapter 11 debtors after the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”). Additionally, the bankruptcy court found that, by separating SPCP into its own creditor class for the purpose of the cramdown of the reorganization plans, Debtors had not subjected SPCP to improper gerrymandering. Finally, the bankruptcy court found that Debtors had shown that their plans were feasible.

This appeal followed.

II. Standard of Review

Functioning as an appellate court, this Court independently reviews the factual and legal determinations of the bankruptcy court. In re Jacobs, 490 F.3d 913, 921 (11th Cir.2007). The Court conducts a de novo review of the bankruptcy court's legal conclusions, and must accept the bankruptcy court's factual findings unless they are clearly erroneous. In re Mitchell, 633 F.3d 1319, 1326 (11th Cir.2011); In re Waldron, 536 F.3d 1239, 1240 (11th Cir.2008).

The bankruptcy court's decision regarding the applicability of the absolute priority rule is a conclusion of law, which is reviewed de novo. The remaining issues are factual determinations, and are subject to the clear error standard of review.

III. Discussion

SPCP raises the following issues on appeal: (1) whether the bankruptcy court erred in ruling that the absolute priority rule no longer applies to individual Chapter 11 debtors, and therefore Debtors' plans, which permit Debtors to retain their interest in the Residence while SPCP is being paid less than its full claim, were “fair and equitable” to SPCP; ² (2) whether the bankruptcy court erred in ruling that separating SPCP into its own creditor class was not improper gerrymandering; and (3) whether the bankruptcy court erred in ruling that Debtors had shown, based on clear and convincing evidence, that their plans of reorganization were feasible.

A. Absolute Priority Rule

Generally, a plan of reorganization can be confirmed in one of two ways. In re Shat, 424 B.R. 854, 857–58 (Bankr.D.Nev.2010). If all sixteen paragraphs of Section 1129(a) are satisfied, a plan can be confirmed (with the consent of each class of creditor) under Section 1129(a). Id. If the debtor does not have the consent of each class of creditor, but satisfies the remainder of the paragraphs of Section 1129(a), as in this case, then the bankruptcy court may still confirm the plan, as long as the plan is, among other things, “fair and equitable.” Id. “This second, nonconsensual, method of confirmation is colloquially referred to as ‘cramdown.’ ” Id. at 858. Because SPCP did not consent to Debtors' proposed plans of reorganization, Debtors bore the burden of demonstrating that their plans were “fair and equitable” in order to have them confirmed. Id.

A plan is “fair and equitable” as to unsecured creditors if it satisfies the absolute priority rule of 11 U.S.C. Section 1129(b)(2)(B)(ii). That rule provides that a plan is “fair and equitable” if:

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

...

(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, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) ³ of this section. 11 U.S.C. § 1129(b)(2)(B) (emphasis added). In other words, a reorganization plan that does not pay an unsecured creditor in full is nevertheless “fair and equitable” (and can be confirmed over the unsecured creditor's objections), so long as an individual debtor does not retain property (except property included in the bankruptcy estate under section 1115).⁴ In re Gelin, 437 B.R. 435, 439–40 (Bankr.M.D.Fla.2010). The italicized portion of the statute was added in 2005 as part of the BAPCPA amendments.

Courts interpreting this new language disagree about the meaning of the phrase “property included in the estate under section 1115,” and thus also disagree as to the extent to which the absolute priority rule applies to individual debtors after the amendment. Compare In re Gbadebo, 431 B.R. 222, 230 (Bankr.N.D.Cal....