Opinion
No. B-99-09162-ECF-GBN.
October 5, 2000
Carolyn J. Johnsen, Hebert, Schenk Johnsen PC, Phoenix, AZ, Attorneys for Debtor.
Thomas J. Salerno, Squire Sanders Dempsey LLP, Phoenix, AZ, Attorneys for LaSalle National Bank.
Laruel M. Isicoff, Kozyak Tropin Throckmorton PA, Miami, FL, Attorneys for LaSalle National Bank.
Michael W. Carmel, Phoenix, AZ, Attorney for Kilburg Employment, Kilburg Management and Kilburg Hotels, L.L.C.
Laurel M. Isicoff, Kozyak Tropin Throckmorton PA, Miami, FL.
Bryan A. Albue, Fennemore Craig PC, Phoenix, AZ, Attorneys for Ramada Franchise Systems, Inc.
Bret A. Maidman, Lewis and Roca LLP, Phoenix, AZ.
FINDINGS OF FACT AND CONCLUSIONS OF LAW REGARDING CONFIRMATION OF PLAN PROPOSED BY LA SALLE NATIONAL BANK
Confirmation of the chapter 11 plan proposed by La Salle National Bank, as trustee for registered holders of certain mortgage certificates serviced through Lennar Partners, Inc., ("Lennar" or "creditor") was tried before the court. Post trial briefing occurred and closing argument was presented. All appearances are reflected in the record.
The court has considered creditor's plan of February 1, 2000, as amended June 12, 2000, and further amended on August 7, 2000, post hearing briefs, the declarations, reports and testimony of witnesses, admitted exhibits, the joint pretrial statement filed June 19, 2000, and the facts and circumstances of this case. The following findings and conclusions are entered:
Findinss of Fact
1. Leeward Hotels, L.P., an Arizona limited partnership, is the debtor in possession in this case, having filed a voluntary chapter 11 petition in this judicial district on August 2, 1999.
2. Creditor is secured by a first lien position on hotels located in Kansas, Missouri, New Mexico and Texas, ("Lennar hotels"), with the exception of the Ramada Inn-East Albuquerque property ("Albuquerque hotel"). Lennar also holds a secured cross-guaranty second lien position on the Lennar hotels. Debtor and creditor have stipulated as to the fair market value and the allowed amount of the creditor's claim as to most Lennar hotels, with the exception of the fair market value of the Las Cruces, New Mexico, and the Round Rock, Texas properties. (Joint Pretrial Statement at 5-7.) For purposes of plan confirmation, the parties have stipulated to the amount of Lennar's secured claims in class 2-N of debtor's competing plan and classes 6 through 15 of the creditor's plan. Supra. Litigants have also stipulated in the joint pretrial order as to the amount of Lennar's unsecured deficiency claim in class 3-B, under debtor's plan, and class 20 of the creditor's plan. Given the dispute over valuation of the Las Cruces and Round Rock hotels, creditor calculates its net deficiency at $2,846,222, and debtor calculates creditor's deficiency claim for competing class 3-B/class 20 purposes at $1,896,222. Id.
3. Creditor's disclosure statement was approved by the court on March 6, 2000. The disclosure statement, creditor's February 1, 2000 plan, a ballot and the stipulated order establishing a confirmation hearing schedule were mailed to all creditors on the master mailing matrix on March 22, 2000.Supra, at 9-10.
4. The order approving the competing disclosure statements provided that if no valid ballot is received with respect to a particular class of claims under either of the competing plans, such class is deemed to have accepted that plan. Supra at 10.But see Bell Road Investment Company v. M. Long Arabians (In re M. Lons Arabians), 103 B.R. 211, 215-16 (B.A.P. 9th Cir. 1989). No creditor has objected to this order.
5. Debtor and Lennar employed P. Greg Curry ("Curry") of Navigant Consulting, Inc. as balloting agent to receive all ballots and report the voting result. Curry filed an affidavit on May 18, 2000, attaching ballot summaries. The litigants do not challenge the accuracy of his affidavit and summaries. Id. Classes 1 through 5 of creditor's plan are unimpaired and are deemed to have accepted the plan. Supra at 12. Impaired classes 6-15, and 18, consisting entirely of Lennar's various secured claims have voted to accept this creditor plan. Id. Impaired class 16 did not vote. Impaired classes 17, 19-22 have voted to reject the plan. Rejecting class 21, consisting of insider claims, has been deleted as a class by Lennar's plan amendment.
6. As of June 19, 2000, the prime lending rate was 9.5 percent.Supra at 13.
7. Objections to confirmation of the Lennar plan were filed by the debtor in possession, Kilburg Management L.L.C. and Kilburg Employment L.L.C. ("Kilburg"), which are both insiders of debtor; Ramada Franchise Systems, Inc. and Days Inn worldwide, Inc. ("Ramada"); the County of Taylor, City of Abilene, Abilene Independent School District, County of Williamson and Williamson County RFM ("tax objectionsn).
8. Lennar has amended its plan to address objections raised by Ramada and the tax agencies' objections. Those parties did not actively participate in the confirmation litigation. Their objections are deemed resolved.
9. The objections of insider Kilburg joined and incorporated debtor's objections and independently objected to subordination of its claim for contract rejection damages. Lennar subsequently amended its plan and placed all Kilburg claims into general unsecured claims class 20 for equal treatment. Consequently, Kilburg did not actively participate in the confirmation litigation. Objections regarding subordination are deemed resolved.
10. To the extent any of the following conclusions of law should be considered findings of fact, they are incorporated by reference.
CONCLUSIONS OF LAW
1. To the extent any of the above findings of fact should be considered conclusions of law, they are incorporated by reference.
2. Pursuant to 28 U.S.C. section 1334(a), jurisdiction of this case is vested in the United States District Court for the District of Arizona. That court has referred, pursuant to 28 U.S.C. section 157 (a), all cases under title 11 and all proceedings arising under title 11 or related to a case under title 11 to this court. Amended General Order of May 20, 1985. This case having been so appropriately referred, this court has jurisdiction to enter a final order dealing with plan confirmation pursuant to 28 U.S.C. section 157(b) (1) and (b)(2)(L).
3. Bankruptcy Code section 1129(a)(1) permits the court to confirm a plan only if the plan complies with applicable provisions of title 11, United States Code. The legislative history suggests the applicable provisions referenced in section 1129(a) (1) involve the plants internal structure and drafting, such as sections 1122 and 1123. No party has objected to the plan on such a basis. The court concludes Lennart's plan complies with section 1129(a)(1).
4. Bankruptcy section 1129 (a) (2) states that the court shall confirm a plan only if the proponent of the plan satisfies applicable provisions of the Bankruptcy Code, such as whether the plan proponent has complied with section 1125 regarding disclosure and solicitation of plan acceptances. No party has objected to the plan on this basis. The court concludes creditor has complied with section 1129(a)(2).
5. Bankruptcy Code section 1129(a)(3) requires that a plan be proposed in good faith and not for any means forbidden by law. Debtor and creditor Kilburg have objected to this plan on the basis that it is not proposed in good faith. A number of independent unsecured creditors voted in favor of the Lennar plan. No bad faith is shown by Lennar's prosecution of a creditor plan out of enlightened self interest. Fister Ltd. v. Teachers Insurance Annuity Association of America (In re Figter Ltd.), 118 F.3d 635, 638-40 (9th Cir. 1997) (discussing good faith within the context of section 1126(e)). The court concludes that proposal of this liquidating plan is consistent with the objectives and purposes of the Bankruptcy Code, is in good faith and complies with section 1129(a)(3).
6. Bankruptcy Code section 1129(a) (4) requires that any payment made or to be made in connection with the case or plan has been approved by or is subject to approval by the court. The plan satisfies this requirement. No party has objected to the contrary.
7. Bankruptcy Code section 1129 (a)(5)(A) requires the plan proponent to disclose the identity and affiliations of any individual proposed to serve after confirmation as an officer of debtor or a successor of the debtor under the plan. Creditor modified its plan to provide that debtor would continue to own and operate the Albuquerque hotel for approximately 18 months. Debtor and its management company have not agreed to do so. The creditor's plan fails to disclose a replacement management entity to serve after confirmation. Consequently, Lennar has failed to comply with section 1129(a)(5)(A) in this plan.
8. Section 1129(a)(6) requires, as a condition precedent to confirmation, that any governmental regulatory entity with jurisdiction post confirmation over the rates of the debtor has approved any rate change provided in the plan. The plan does not propose any such rate change. Accordingly, this section is not applicable.
9. Section 1129(a)(7) provides that with respect to each impaired, dissenting class, each claim holder will receive or retain property valued as of the effective date, which is not less than the amount the claim holder would receive under chapter 7 liquidation. No party has filed an objection based on this section. Classes 1 through 5 of the plan are unimpaired and thus not covered by this provision. Classes 6 through 15 and 18 are impaired, but controlled by Lennar. Each of these impaired classes voted to accept the plan, pursuant to section 1129(a)(7)(A)(i).
Impaired class 16 did not vote, but its sole member, General Motors Acceptance Corporation ("GMAC"), has consented to a prior settlement with debtor of its claim. This settlement is not modified by the Lennar plan. GMAC did not object to this plan. Thus, class 16 is deemed to have consented to the plan. Impaired secured creditor ACP Mortgage L.P., the sole member of class 17 and administrative convenience class 19, voted to reject the plan. Lennar alleges these creditors will receive or retain under the plan value not less than they would receive or retain under a chapter 7 liquidation. § 1129(a)(7)(A)(ii). These creditors have not argued or objected to the contrary. Class 20, which now includes the prior impaired insider claims under creditor's amended plan, and class 22, which contains impaired equity interest claims in debtor, have both rejected the plan. The plan proponent argues these Code subordinated interests are not to receive, under this plan, more than they would in a chapter 7 liquidation. No objections have been filed based on section 1129 (a)(7). The court concludes the plan meets this requirement.
10. Creditor concedes its plan fails to meet the requirement that each class either accept the plan or is not impaired by it. 11 U.S.C. § 1129(a)(8). Consequently, the court must consider confirmation, if at all, pursuant to section 1129(b).
11. Bankruptcy Code section 1129(a)(9) establishes rules applicable to chapter 11 priority claims. Unless the claim holder agrees to less favorable treatment, first and second priority claims are to be fully paid in cash on the effective date. 11 U.S.C. § 1129(a)(9)(A). Creditor proposes to pay the class 1 administrative claims of approximately $400,000 out of the estimated $845,000 in available cash collateral on the effective date. This appears feasible and in compliance with the statute.See Jorsensen v. Federal Land Bank of Spokane (In re Jorsensen), 66 B.R. 104, 108 (B.A.P. 9th Cir. 1986).
12. Bankruptcy Code section 1129(a) (10) requires, as a condition of confirmation, that if a class of claims is impaired under the plan, at least one impaired class has accepted the plan. The impaired classes dominated by creditor have voted to accept the plan. A creditor can impair itself under its own plan to meet the requirements of section 1129(a) (10). L J Anaheim Associates v. Kawasaki Leasins International, Inc. (In re L J Anaheim Associates, 995 F.2d 940, 942-43 (9th Cir. 1993). Further, by revised order of May 19, 2000, creditor was temporarily given the right to vote on the competing plans. Administrative docket no. 312.
13. Bankruptcy Code section 1129 (a)(11) requires that the court find that confirmation of this plan is not likely to be followed by the need for further financial reorganization of the debtor or any successor to the debtor under the plan. The feasibility standard is whether the plan offers a reasonable assurance of success, although success need not be guaranteed.Mutual Life Insurance Co. of New York v. Patrician St. Joseph Partners Ltd. (In re Patrician St. Joseph Partners Ltd), 169 B.R. 669, 674 (Bankr. D. Ariz. 1994).
Priority tax claims of $523,000 and secured tax claims of $235,000, have been asserted. The plan obligates Lennar to commence its credit bidding for each hotel at 75% of the determined value plus all unpaid taxes attributed to each hotel property. Higher bids of necessity must include sufficient, earmarked funds to pay classes 4 and 5 in full. The miscellaneous secured claim of Mavco Construction in class 5 is also to be paid out of the $845,000 cash collateral fund. These proposals meet the feasibility standard.
Creditor's amended plan proposes that the Albuquerque hotel property be held by debtor and managed by debtor's insiders until a sale or refinance of the property occurs, no later than December 31, 2001. Creditor proposes to keep in place an April 10, 2000 stipulation between debtor and secured creditor ACP Mortgage L.P ("ACP"). Trial Ex. 35. Under this stipulation, ACP retains its lien on the Albuquerque real and personal property, and receives interest only monthly payments at 10.25%, commencing the first month after the effective date. The entire balance, and a payoff fee of $38,500, is due on December 31, 2000. Extensions of the due date are available pursuant to conditions stipulated between debtor and ACP. Supra. Debtor is required to maintain a capital reserve account, provide ACP with monthly reports and meet all other terms of the existing loan and security documents.
Under creditor's modification, this stipulated treatment of ACP's secured claim, to which Lennar is not a party, is incorporated into creditor's amended plan at section 5.3. Debtor entered into this stipulation as part of efforts to confirm its own plan, where it retains and operates the Lennar hotels. There is no indication debtor will honor its stipulation, operate the Albuquerque property and pay ACP if creditor's liquidation plan is confirmed. Accordingly, the proposal to pay secured creditor ACP and unsecured creditors in this manner is not feasible. See § 5.6.2 of the amended creditor's plan.
14. Bankruptcy Code section 1129(a)(12) mandates payment of all fees required under 28 U.S.C. section 1930, including filing fees and the United States Trustee's quarterly fees. The creditor's plan provides for the payment of all unpaid United States Trustee's fees. All filing fees have been paid. This requirement is satisfied.
15. The debtor is not obligated for any retiree benefits as that term is defined in section 1114. Section 1129(a)(13) is not applicable.
16. Since the creditor's plan does not meet the requirements of 11 U.S.C. section 1129(a)(8), it can be confirmed only in accordance with section 1129(b), as set forth below.
17. For cramdown confirmation under section 1129(b), the plan must comply with all paragraphs of section 1129(a), other than paragraph (8), and meet specified standards of fairness to dissenting creditors and equity security holders. As previously noted, the court has concluded this amended plan fails to comply with sections 1129(a)(5)(A) and (11).
Debtor and the Kilburg entities have invoked section 1129(b) (1) and objected that the creditor's plan discriminates unfairly and is not fair and equitable.
18. The proponent must show that the plan does not discriminate unfairly with respect to each impaired class which did not accept the plan. 11 U.S.C. § 1129(b)(1). This requirement is separate and distinct from the fair and equitable requirement.
There can be discrimination, as long as it is fair. Discrimination between classes must satisfy four criteria in order to be fair under section 1129(b): (1) the discrimination must be on a reasonable basis; (2) the plan cannot be confirmed or consummated without the discrimination; (3) the discrimination is proposed in good faith; and (4) the degree of discrimination is directly related to the basis or rationale for the discrimination. Liberty National Enterprises v. Ambanc La Mesa Limited Partnership (In re Ambanc La Mesa Limited Partnership), 115 F3d 650, 656 (9th Cir. 1997).
Creditor amended its plan to ensure that all allowed unsecured claims, including insider claims, are classified and treated together. Given this amendment, there is no basis to argue that creditor's amended plan discriminates unfairly.
19. Having concluded that the plan's treatment of the dissenting, impaired class is not unfairly discriminatory, the court must consider whether the plan's treatment of the objecting Kilburg class is fair and equitable.
Section 1129 (b) (2) sets forth specific criteria for the fair and equitable treatment of unsecured claims. The plan must provide that each claim holder receives, on account of such claim, property valued on the effective date equal to the allowed claim amount, or junior claims receive no property on account of their claims. 11 U.S.C. § 1129(b)(2)(B). Stated more succinctly, this general rule prevents confirmation if any junior class retains any interest without also providing to senior objecting creditors property equal to the present value of their claim. In re Ambanc La Mesa Limited Partnership, 115 F.3d at 654. No dissenting unsecured class member has litigated an objection on this basis, except for the Kilburg creditors. The plan provides pro rata payment of unsecured claims in classes 19 and 20, after all senior claims are fully paid. In turn, there is a distribution to debtor's equity interests only after full payment to all other classes, including classes 19 and 20. This meets the requirements of the absolute priority rule of section 1129(b)(2)(B) and (b)(2)(C).
20. The court concludes that the first modification of creditor's plan relates only to the treatment of the secured claim of ACP. The plan now provides for the exact treatment negotiated by ACP and debtor pursuant to their stipulation for claim allowance and plan treatment of April 10, 2000. Trial ex. 35, amended plan ¶¶ 5.3.1-.2. Creditor ACP has not objected to this treatment. No other creditor or interest holder is adversely impacted by this modification. The creditor's disclosure statement, previously approved by the court, contains adequate information regarding the claims of ACP and their possible effect on the claims and interests of other parties. Since ACP has not objected and this modification leaves unimpaired the claims and interests of other parties, those who have accepted the creditor's original plan are deemed to have accepted this plan modification. 11 U.S.C. § 1126(f); Rule 3019, Fed. Bankr. R.
21. The creditor has also modified section 5.6 of its plan to include insider claims within class 20 and allow pro rata treatment of allowed insider claims. Sections 5.6.1 and .2. The amendment to 5.6.2 requires debtor to pay operating income from the Albuquerque hotel, as well as net proceeds from a sale or refinancing of the facility to ACP. Thereafter cash flow, net of debt service to ACP and effective date payments to classes 1 through 5, will be paid by debtor to unsecured creditors, until an anticipated sale or refinancing of the property by December 31, 2001.
22. Creditor explains these modifications allow debtor to continue to own and Kilburg to continue to operate the Albuquerque facility until December 31, 2001. Creditor predicts such an operation will allow full payment of unsecured claims, assuming Kilburg voluntarily subordinates its $990,000 insider claim. Creditor's post trial brief filed Aug. 7, 2000, at 11-17. Debtor has objected to creditor's proposed modifications and subordination. Debtor's response filed Aug. 11, 2000, at 4-6. Although debtor does not directly so state, apparently it and its insiders will not serve as the proposed disbursing agent and property manager. Supra, at 4, n. 1.
Given this refusal, the proposed modification impairs debtor, Kilburg and the unsecured creditors debtor must pay under section 5.6.2. The disclosure statement approved by the court did not contain adequate information regarding this material modification and the apparent refusal to serve. Accordingly, this aspect of the proposed modification fails to meet section 1127(a) and (c).See Andrew v. Coowersmith (In re Downtown Investment Club III), 89 B.R. 59, 65 (9th Cir. Bankr. 1988).
23. Creditor is not entitled to an order approving plan modification or confirming the plan as modified.
24. This disposition is stayed pending issuance of findings and conclusions re arding debtor's plan.