Appendix — Heartland Federal Savings & Loan Ass'n v. Brisco Enterprises, Ltd., 114 S. Ct. 550 (1993) (No. 93-516)
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No. q SEP 3.0 1993
In the Supreme Court of the United State} DFECE O£ Jit Clink
October Term, 1993
Heartland Federal Savings and Loan
Association,
Petitioner,
VS.
Briscoe Enterprises, Ltd., I],
Respondent.
Petition for Writ of Certiorari
to the United States Court of Appeals
for the Fifth Circuit
Appendix to
Petition for Writ of Certiorari
Douglas S. Lang
Deirdre Ruckman
Stacy R. Obenhaus*
GARDERE & WYNNE, L.L.P.
3000 Thanksgiving Tower
Dallas, Texas 75201
(214) 999-3000
Attorneys for Petitioner
*Counsel of Record
TABLE OF CONTENTS
Briscoe Enters., Ltd., II v. Heartland
Federal Savs. & Loan Ass’n (In re Briscoe
Partnership IT, Ltd.), 994 F.2d 1160 (Sth
oe GO TPP er INT Pe Te eee eee 1
Heartland Federal Savs. & Loan Ass’n v.
Briscoe Enters., Ltd., IT, 138 Bankr. 795
(N.D. Tex. Apr. 14, 1992) (final judgment) ...... 26
Heartland Federal Savs. & Loan Ass'n v.
Briscoe Enters., Ltd., IT, 138 Bankr. 795
(N.D. Tex. Apr. 14, 1992) (memorandum
rer ee ree Pere ere re 28
In re Briscoe Enters,, Lid., IT, No. 489-44447-
MT-11 (Bankr. N.D. Tex. Apr. 23, 1991)
(Order Confirming Debtor’s Fourth Amended
Pian Of ReOrgemigntion) ... 2... ccccccccevcess 67
In re Briscoe Enters,, Ltd., IT, No. 489-44447-
MT-11 (Bankr. N.D. Tex. Apr. 23, 1991) d
(Findings of Fact and Conclusions of Law) ...... 69
—
Briscoe Enters., Ltd., II v. Heartland
Federal Savs. & Loan Ass’n (In re Briscoe
Partnership IT, Ltd.), No. 92-1446 (Sth
Cir. Aug. 16, 1993) (On Petition for
Rehearing and Suggestion for Rehearing
ys ery Paria a ary 86
No. 92-1446
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
In re: Briscoe Enterprises, Ltd., II,
d/b/a Regalridge Apartments,
Debtor.
Heartland Federal Savings & Loan Association,
Appellee,
vs.
Briscoe Enterprises, Ltd., II,
d/b/a Regalridge Apartments,
Appellant.
July 13, 1993
Before Wisdom and Duhe, Circuit Judges, and
Doherty,* District Judge.
“District Judge of the Western District of Louisiana, sitting
by designation.
Wisdom, Circuit Judge:
This bankruptcy case requires the Court to confront
some very difficult problems associated with a Chapter 11
"“cramdown" reorganization.. We agree with the
Bankruptcy court’s approval of the reorganization plan; we
REVERSE the District Court.
The debtor, Briscoe Enterprises, Ltd., II, is a Texas
limited partnership formed to develop a 784-unit
apartment complex in a depressed section of Fort Worth.
It isa low-to-moderate-income community, and about 25%
of the residents received rental assistance from either the
federal government or the City of Fort Worth. This
complex, known as the Regalridge Square Apartments, was
the sole asset of the limited partnership. Construction was
in two phases. It was completed in early 1985. Financing
was non-recourse and was from two sources: _ the
predecessor of Heartland Federal Savings and Loan
“The cramdown provision allows a [reorganization]
plan to be confirmed even if the necessary consents of
each class [of creditors] are not obtained. The policy is
that the public good is served by rehabilitations and a law
that prevents creditors from getting immediate satisfaction
but gives the creditor as much as the creditor could get
upon liquidation and compensates him or her for the delay
is proper to force upon creditors.” 3 Daniel R. Cowans et
al., Cowans Bankruptcy Law and Practice § 20.26 at 419
(1989 edition).
2
Association and the city of Fort Worth.’ Heartland lent
Briscoe $18.7 million. The city which had a lien junior to
that of Heartland lent $7 million.
When the free-wheeling real estate ride of the mid-
eighties ground to a halt, Briscoe began to miss its interest
payments. Briscoe failed to make interest payments for
the last three months of 1988 and entirely ceased servicing
its debt to Heartland in July 1989. On December 29,
1989, Briscoe sought relief under 11 U.S.C. § 1101 et seq.
(Chapter 11). Briscoe filed its first amended plan of
reorganization on November 16, 1990 and its fourth on
January 22, 1991. The fourth plan is the subject of this
case.
On January 23, 1991, the bankruptcy court began
hearings to consider the confirmation of the plan. The
bankruptcy court held four days of hearings in January and
one day in March. Eight witnesses appeared. The court,
with counsel present, personally inspected the property.
During these hearings, the bankruptcy court assigned a
value to the property of $8.2 million. This was classified
as a secured claim for Heartland. Heartland’s remaining
$10 million’ and the city’s $7 million became unsecured
claims. Heartland objected, so that for the reorganization
plan to be confirmed, it would have to pass the cramdown
requirements of § 1129(b). The bankruptcy judge
confirmed the plan on April 23, 1991.
"The language of this opinion will treat Heartland as if
it had made the initial loan.
‘The bankruptcy court described Heartland’s unsecured
deficiency claim as "approximately $10 million”.
3
Heartland appealed to the district court. The
district court, without oral argument but in a lengthy
opinion, reversed the bankruptcy court’s confirmation on
April 14, 1992." Briscoe then appealed to this Court.
II.
The plan divides the claims and interests into six
Classes:
"Class 1 consists of Allowed Administrative
Claims.
Class 2 consists of Allowed Priority Claims.
Class 3 consists of the Allowed City Claim.
Class 4 consists of the Allowed Heartland
Claim.
Class 5 consists of all Allowed Unsecured
Claims asserted against the Debtor.
Class 6 consists of holders of Interests in the
Debtor."
The property is to be placed in a trust managed by
three trustees. Heartland, the city, and the Fort Worth
NAACP will each nominate a trustee. Heartland’s claim
was divided into a secured and an unsecured portion. The
secured portion is to be paid in monthly installments of
principal and interest as though amortized over thirty years
with interest at a rate of 10.25%, the rate of interest in the
loan. The secured claim is to be paid in full upon the sale
‘In re Briscoe Enterprises Ltd., I], 138 B.R. 795 (N.D.
Tex. 1992).
of the property or the expiration of fifteen years,
whichever shall first occur. At the end of fifteen years,
20% of the principal would be paid down. Heartland’s
unsecured claim is accorded the same treatment as the
city’s unsecured claim and the class 5 general unsecured
creditors. These unsecured creditors are to receive
periodic cash payments if net cash flow allows and the
trustees determine that excess cash need not be reserved
for any other purpose. The unsecured creditors would
also benefit pro rata from any sale or refinancing of the
property if there is an excess over Heartland’s secured
claim. The holders of class 6 interests will receive nothing
and their interests are cancelled.’
III.
[1] The bankruptcy appellate process makes this
Court the second level of appellate review. This Court,
however, performs the identical task as the district court.
We review the bankruptcy court’s findings of fact under
the clearly erroneous standard and its conclusions of law
de novo.’ We do benefit from the district court’s thoughts
on the matter, but as Judge Frank Johnson wrote for the
Eleventh Circuit: "The amount of persuasive weight, if
any, to be accorded the district court’s conclusion . . . is
entirely subject to our discretion."”
‘This appears to fulfill the requirements of §
1123(a)(3).
"Matter of Bennett, 970 F.2d 138, 139 (Sth Cir. 1992).
In re Sublett, 895 F.2d 1381, 1384 n.5 (11th Cir. 1990).
IV.’
A. The Debtor’s Standard of Proof.
The first question that we need to resolve is the
debtor’s standard of proof in proving that the
reorganization is confirmable under § 1129(a) and whether
the fact that this is a § 1129(b) cramdown affects the
standard.
‘Professor Elizabeth Warren was consulted as an
Outside expert in compliance with (A)(4) of Canon 3 of
the Code of Judicial Conduct for United States Judges
-which in pertinent part provides: "A judge may obtain the
advice of a disinterested expert on the law applicable to
the proceeding before the judge if the judge gives notice
to the parties of the person consulted and the substance of
the advice, and affords the parties reasonable opportunity
to respond.” Justice Roger Traynor ended an article on
appellate judging with the comment that: "There is no
reason why courts should not request in complicated cases
the disinterested expert opinion of scholars .. . We might
well develop a tradition of regarding such public service as
one of the most honorable responsibilities of the
profession." Roger J. Traynor, Badlands In An Appellate
Judge’s Realm of Reason, 7 Utah L. Rev. 157, 170 (1960).
Professor Warren is the Warren A. Schnader Professor of
Commercial Law at the University of Pennsylvania and
Robert Braucher Visiting Professor of Law at Harvard.
She is the co-author (with Prof. Westbrook) of The Law of
Debtors and Creditors (Little Brown 2nd ed. 1992) and is
preparing a handbook for the Federal Judicial Center on
Business Bankruptcy.
[2] The two options are proof by a preponderance
of the evidence or by clear and convincing evidence.
"Preponderance” means that it is more likely than not.’
"Clear and convincing” is a higher standard and requires a
high probability of success.”
A number of bankruptcy courts have used the clear
and convincing standard in a cramdown, but in none of the
cases have we found a satisfactory explanation why that is
the appropriate standard." A few hedge and state that
the plan would fail under either standard.” This is
exactly what the district court did in this case.” As we
view it, however, this is a case in which the plan would not
pass a clear and convincing standard, but, as will be
discussed below, it was not clearly erroneous for the
bankruptcy court to conclude that the plan was feasible
and the cramdown fair and equitable under a
preponderance standard.
“See _e¢.g., In re Winship, 397 U.S. 358, 371, 90 S. Ct.
1068, 1076, 25 L. Ed. 2d 368, 379 (1970) (Harlan, J.,
concurring).
“See e.g., Aetna Insurance Co. v. Paddock, 301 F.2d
807, 811 (Sth Cir. 1962).
"See e.g., In re Mcorp Financial, Inc., 137 B.R. 219, 225
(Bkrtcy. S.D. Tex. 1992) and cases cited therein.
"See e.g. In re Rusty Jones, Inc., 110 B.R. 362, 373
(Bkrtcy. N.D. Ill. 1990).
“Briscoe, 138 B.R. at 805.
7
The United States Supreme Court has on several
occasions discussed when particular standards of proof are
applicable. Chief Justice Burger in Addington v. Texas
spoke of the different factual settings which prompt a
particular standard. "At one end of the spectrum is the
typical civil case involving a monetary dispute between
private parties." In such a case the "plaintiffs burden of
proof is a mere preponderance of the evidence".” At the
other end of the spectrum is a criminal case. The nature
of a criminal proceeding has led our legal system to
require that the guilt of the accused be proved beyond a
reasonable doubt. Between these two poles is some
middle standard. "The intermediate standard, which
usually employs some combination of the words ‘clear,’
and ‘cogent,’ and ‘unequivocal,’ and ‘convincing,’ is less
commonly used, but nonetheless ‘is no stranger to the civil
law.”""* The Chief Justice noted that this standard had
typically been employed in civil cases when "the interests
at stake are deemed to be more substantial than mere loss
of money". He proceeded to cite several cases in which
the Supreme Court had used the clear and convincing
standard "to protect particularly important individual
‘Addington v. Texas, 441 U.S. 418, 423, 99 S. Ct 1804,
1807, 60 L. Ed. 2d 323 (1979).
"Id.
“Addington at 424, 99 S. Ct. at 1808 quoting Woodby
v. INS, 385 U.S. 276, 285, 87 S. Ct. 483, 487, 17 L. Ed. 2d
362, 368 (1966).
“Addington, 441 U.S. at 424, 99 S. Ct. at 1808.
8
interests"."* These concerned deportation and
denationalization. Addington, itself, concerned involuntary
commitment to a mental institution, and the Court rejected
the suggestion that preponderance was the correct burden.
This case clearly does not fit within any of the
above "liberty" categories. The Supreme Court, however,
gives further guidance in several opinions in which it held
that "clear and convincing" was the incorrect standard and
that “preponderance” should be used. In Herman &
MacLean v. Huddleston”, Justice Marshall for the
Supreme Court reversed this Court’s conclusion that the
clear and convincing standard was appropriate in a 10b-5
case, although the late Judge Rubin had suggested that
because of its analogy to civil fraud and its effect on the
defendant’s reputation, the higher standard was the correct
one. Justice Marshall’s opinion relied on some older cases
in which it seems that the Court contemplated only
preponderance or reasonable doubt.” The Court
unanimously refused, however, to depart from the
preponderance standard although the case involved fraud.
This may express a more restricted view of when clear and
"Id.
"459 U.S. 375, 103 S. Ct. 683, 74 L. Ed. 2d 548 (1983).
”U.S. v. Regan, 232 U.S. 37, 34 S. Ct. 213, 58 L. Ed.
494 (1914) (preponderance is appropriate in a civil suit
even though it involves proof of acts that expose a party to
a criminal prosecution). SEC v. C.M. Joiner Leasing Corp.,
320 US. 344, 64 S. Ct. 120, 88 L. Ed. 88 (1943)
(preponderance is sufficient to cstablish fraud under §
17(a) of the 1933 Act).
a a
convincing is appropriate than the Addington Court which
noted that clear and convincing had often been used in
civil cases involving fraud or "some other quasi-criminal
wrongdoing".”
In 1991, the Supreme Court in Grogan v. Garner”
reversed the Eight Circuit which had held that clear and
convincing was the creditor’s standard of proof to show
that a debtor’s debt was not dischargeable under 11 U.S.C.
§ 523(a) because it had been procured by fraud. The
Court, after citing the "particularly important interests”
language of Huddleston and Addington, observed that both
the language of the statute and the statutory history were
silent as to burden of proof. The Court viewed this silence
as "inconsistent with the view that Congress intended to
require a special, heightened standard of proof".”
Moreover, the Court examined the conflicting interests and
concluded that proof by a preponderance of the evidence
would reflect "a fair balance" between the conflicting
interests. “
[3] In this case, the district court found Grogan
inapplicable because it involved _ dischargeability.
Considering the other precedents and the process of the
“Addington, 441 U.S. at 424, 99 S. Ct. at 1808, 60 L.
Ed. 2d at 329.
2498 U.S. 279, 111 S. Ct. 654, 112 L. Ed. 2d 755
(1991).
“Grogan at 286, 111 S. Ct. at 659, 112 L. Ed. 2d at
764. :
“Grogan at 287, 111 S. Ct. at 659, 112 L.Ed. 2d at 765.
10
Grogan Court, we find this to be too narrow a reading of
Grogan. In this case, both § 1129 and the legislative
history are silent as to the burden of proof. This case is
solely about money. There are not even any quasi-liberty
interests at stake. It is correct, of course, as Justice
Brandeis noted during the depression in a case involving
the significant alteration of farm mortgagees’ rights, that
the Bankruptcy laws are subject to the Takings clause.”
The Code, however, has been the primary source of the
creditors’ protections, not the Fifth Amendment. Congress
provides protections for creditors, and in many instances
it allows debtors to impinge on creditor’s state law rights.
Bankruptcy frequently rewrites the secured creditor’s state
law bargain. An example of this is the automatic stay of
§ 362, as a result of which the creditor has lost the right of
foreclosure. The calculation of claims under § 502 is
another example of the Code rewriting the secured
creditor’s bargain. The combination of legislative silence,
Supreme Court holdings, and the structure of the Code
leads this Court to conclude that preponderance of the
evidence is the debtor’s appropriate standard of proof
both under § 1129(a) and in a cramdown.”
* Louisville Joint Stock Land Bank v. Radford, 295 U.S.
555, 55 S. Ct. 854, 79 L. Ed. 1593 (1935).
*Heartland suggests that because the word
"indubitable" (meaning, according to Webster, "too evident
to be doubted; unquestionable") is used in the fair and
equitable requirement of § 1129(b), a cramdown requires
more than preponderance. Heartland is confusing the
issue. § 1129(b)(2)(A)(iii) states that "With respect to a
class of secured claims, the plan provides . . . for the
realization by such holders of the undubitable equivalent
1]
B. Feasibility of the Reorganization
[4] As numerous courts have explained, "the court
need not require a guarantee of success,"” which of
course would be difficult to predict for any venture much
less one emerging from chapter 11. "Only a reasonable
assurance of commercial viability is required."* Our task
is to determine whether it was clearly erroneous for the
bankruptcy court to find that the plan provided a
reasonable assurance of commercial viability by a
preponderance of the evidence.
This case presents a difficult appellate review
because the bankruptcy court has itself acknowledged that
the reorganization has only a "marginal prospect of
success". The district court paraphrased the familiar
language from Anderson v. Bessemer City in which the
Supreme Court reiterated that the clearly erroneous
standard "does not entitle a reviewing court to reverse the
finding of the trier of fact simply because it would have
of such claims." Under this option, the debtor must show
that the creditor will receive the indubitable equivalent of
its claims by a preponderance of the evidence. The level
of proof to show indubitability is not raised merely by the
use of the word "indubitable". "Indubitable" modifies
"equivalent" not "provides". Section F discusses the
debtor’s satisfaction of the fair and equitable requirement.
"See e.g., In re Lakeside Global II, 116 B.R. 499, 507
(Bkrtcy. S.D. Tex. 1989).
"Id.
12
decided the case differently."” It does not, however,
appear to have taken these words to heart nor those of
Justice Jackson to which the Anderson Court referred, who
explained in the well-known antitrust case, U.S. v. Yellow
Cab, ® that "where there are two permissible views of the
evidence, the fact finder’s choice between them cannot be
clearly erroneous." The Anderson Court further
explained that, "This is so even when the [finder of facts]
findings do not rest on credibility determinations, but are
based instead on physical or documentary evidence or
inferences from other facts."”
The bankruptcy court found that the debtor could
fund its debt service to Heartland and pay operating
expenses out of its rental income. The bankruptcy court
noted that occupancy had increased at the property during
the pendency of this case from 55% to 85%, and that
evidence suggested that occupancy would increase to 90%.
The debtor’s historic turnover rate is considerably less than
its neighbors, and it requires a one-year lease and a
security deposit. Although economic occupancy is less
than physical occupancy because of promotions, there is no
indication that this is more than a temporary occurrence.
Heartland has further suggested that the debtor is unable
to pay for necessary repairs. The bankruptcy court found
470 U.S. 564, 573, 105 S. Ct. 1504, 1511, 84 L. Ed. 2d
518, 528 (1985).
“338 U.S. 338, 70 S. Ct. 177, 94 L. Ed. 150 (1949).
“Anderson, 470 U.S. at 574, 105 S. Ct. at 1511
paraphrasing Yellow Cab, 338 U.S. at 342, 70S. Ct. at 179.
“Anderson, 470 U.S. at 574, 105 S. Ct. at 1511.
13
that some of the repairs are urgent, and these could be
funded from insurance proceeds. The rest could be
delayed and paid out of cash flow. Although the
bankruptcy court cautioned the debtor that it "will have to
work diligently to make this Plan succeed", it found that
there was a reasonable prospect for success and that the
plan would not likely be followed by further reorganization
or liquidation. True, some triers of fact may have found
that the evidence tipped slightly against feasibility, but the
bankruptcy court’s finding that this plan was feasible
cannot be characterized as clearly erroneous.
C. Classification of Claims
Heartland argues that the debtor’s separate
classification of the unsecured creditors violated § 1122.”
Although all the unsecured creditors will receive the same
treatment, classification matters because to effect a
cramdown at least one impaired class must vote to accept
the plan. If there was only one unsecured class,
Heartland’s ten million dollar claim would prevent the
class from accepting the plan under § 1126, and cramdown
*11 U.S.C. § 1122 provides:
(a) Except as provided in subsection (b) of this
section, a plan may place a claim or an interest in a
particular class only if such claim or interest is substantially
similar to the other claims or interests of such class.
(b) A plan may designate a separate class of claims
consisting only of every unsecured claim that is less than
or reduced to an amount that the court approves as
reasonable and necessary for administrative convenience.
14
would not be allowed. We must determine therefore
whether the bankruptcy court erred in permitting this
separate classification.
Matter of Greystone™ is a recent and leading case
on classification of claims. The general rule of Greystone
is that "thou shalt not classify similar claims differently in
order to gerrymander an affirmative vote on a
reorganization plan."* Greystone, however, recognized
that there may be good business reasons to support
separate classification. | Greystone also noted that,
"Whether there were any good business reasons to support
the debtor’s separate classification is a question of fact"
and thus subject to clearly erroneous review.” The Court
of Appeals for the Sixth Circuit in U.S. Truck” enunciated
the business reason justification for separate classification.
In U.S. Truck, the court allowed the debtor to place the
Teamsters in a separate class because the Teamsters had
"a different stake in the future viability of the reorganized
company and [had] alternative means at its disposal for
protecting its claim".“ While the business justification was
sufficient in U.S. Truck, it was not in Greystone, because
there was no evidence that the debtor’s ongoing business
“Matter of Greystone, 948 F.2d 134 (Sth Cir. 1991), cert.
denied, __ US. __, 113 S. Ct. 72, 121 L. Ed. 2d 37
(1992).
“Greystone at 139.
“Greystone at 141 n.7.
"In re U.S. Truck, 800 F.2d 581 (6th Cir. 1986).
"U.S. Truck at 587.
15
would be affected if separate classification were not
permitted.
[5] These two carefully considered opinions guide
our discussion in this case. This city of Fort Worth is
distinct from other creditors including Heartland. Not only
does it have non-creditor interests relating to its urban
housing program, but it contributes $20,000 a month in
rental assistance. Heartland argues that the plan is not
feasible because there is no assurance of continued rental
assistance from the city. This argument suggests that the
relationship with the city is essential to the continued
operation of this housing complex. Its continuing
contributions and interests make it distinct from Heartland
and the trade creditors. We emphasize the narrowness of
this holding. In many bankruptcies, the proffered reasons
as in Greystone will be insufficient to warrant separate
classification. Here it seems justified. Moreover, as
Heartland nominates one of the three trustees, it has
means for protecting its interests. Therefore, we hold that
the bankruptcy court was not clearly erroneous in
separately classifying the city’s unsecured claim.
D. The Good Faith Requirement
[6] § 1129(a)(3) requires that the debtor propose
the plan in good faith. This Court has held that, "Where
the plan is proposed with the legitimate and honest
purpose to reorganize and has a reasonable hope of
success, the good faith requirement of section 1129(a)(3)
is satisfied."” The bankruptcy court found good faith
*Matter of Sun Country Development, Inc., 764 F.2d
406, 408 (Sth Cir. 1985).
16
because "the Plan provides a vehicle for restructuring the
debt of the Property and preserving the Property for the
benefit of both creditors and the Fort Worth community.
Moreover, none of the interest holders of the Debtor will
retain anything under the Plan." A plan may not be the
one that the creditors would themselves design and may
indeed not be confirmed and yet still pass the good faith
requirement. This plan which the bankruptcy court did
confirm and in which the debtor will not retain any equity
interest satisfies the good faith requirement.
E. The Best Interests of Creditors Test
[7] § 1129(a)(7) requires that each holder of a
claim in a class either accept the plan or receive at least as
much as it would receive in a chapter 7 liquidation.
Because only Heartland objects, our task is to determine
whether it will receive as much under the plan in present
value terms” as it would if the property were sold today.
The bankruptcy court assigned a value of $8.2 million to
the property. Assuming that the property could be sold
today, that is the amount the court concluded that
Heartland would receive, and that is all that Heartland
would ever receive. Under the plan, Heartland will not
only receive $8.2 million but could receive periodic
payments towards its unsecured claim.” In addition, it
will share in any appreciation in the property. We need
“In re Mortgage Investment Co. of El Paso, Texas, 111
B.R. 604, 615 (Bkrtcy. W.D. Tex. 1990).
“The absolute priority rule is not implicated because
no class junior to Heartland’s dissenting unsecured class
will receive or retain anything under the plan.
17
not concern ourselves with any additional benefits
Heartland may receive, for § 1129(a)(7) requires only that
Heartland receive the present value of $8.2 million. There
is no evidence that the property will decline in value
before Heartland is paid in full its $8.2 million secured
claim, and as explained in the next section of this opinion,
the interest rate fully compensates Heartland for the delay
in payment. Heartland may wish to cut its losses now
rather than wait and see if it may eventually receive more,
but the rationale underlying Congressional establishment
of the cramdown prevents the creditor from blocking a fair
and feasible reorganization.
F. The Fair and Equitable Requirement for a Cramdown.
§ 1129(b) requires that a cramdown be fair and
equitable.” The statute provides three alternative
minimum requirements for the plan to be considered fair
and equitable with regard to secured creditors:
1129(b)(2) For the purpose of this subsection, the
condition that a plan be fair and equitable with respect to
a class includes the following requirements:
(A) With respect to a class of secured claims, the
plan provides —
“For a recent discussion of the fair and equitable
requirement see Jack Friedman, What Courts Do To
Secured Creditors In Chapter 11 Cram Down, 14 Cardozo
L. Rev. 1495 (1993).
18
(i)(1) that the holders of such claims retain the lien
securing such claims, whether the property subject
to such lien is retained by the debtor or transferred
to another entity, to the extent of the allowed
amount of such claims; and
(Il) that each holder of a claim of such class
receive on account of such claim deferred cash
payments totaling at least the allowed amount of
such claim, of a value, as of the effective date of
the plan, of at least the value of such holder’s
interest in the estate’s interest in such property;
(ii) for the sale, subject to section 363(k) of this
title, of any property that is subject to the lien
securing such claims, free and clear of such lien,
with such lien to attach to the proceeds of such
sale, and the treatment of such lien on proceeds
under clause (i) or (iii) of this subparagraph; or
(iii) for the realization by such holders of
the indubitable equivalent of such claims.
The bankruptcy court held the pian to be feasible under
the first option. The district court reversed as it viewed
the "indubitable equivalent” language as mandatory rather
than as one of three options.®
*The district court stated that, "Fair and equitabie’ as
used in the context of a cramdown means that, at a
minimum, the secured creditor must receive the
indubitable equivalent of his secured claim." Briscoe at
810.
19
[8] While this Court has held that simple technical
compliance with one of the three options in 1129(b)(2)(A)
may not necessarily satisfy the fair and equitable
requirement,” it has not transformed the "or" in
1129(b)(2)(A) into an "and". As we hold that the plan
satisfied 1129(b)(2)(A)(i), we need not attempt to decipher
" 45
the meaning of "indubitable equivalent”.
1129(b)(2)(A)(i) requires that the secured creditor
retain its lien and receive "deferred cash payments totaling
at least the allowed amount of such claim". The district
court was concerned that the plan did not adequately
ensure that Heartland will retain its liens. We interpret
the plan as ensuring that if the debtor fails to comply with
its debt service obligations, Heartland would have the right
to foreclose. The language about the "letter and spirit of
the plan" is not intended to affect Heartland’s right to
foreclose if it does not get paid what it is due under the
plan. Deferred cash payments consist of an appropriate
“Matter of D & F Construction, Inc., 865 F.2d 673, 675-
76 (Sth Cir. 1989). In that case, the plan’s negative
amortization required the secured creditor to contribute
additional money to the plan for twelve years before
principal would be repaid. The creditor’s ability to
foreclose during this period was also impaired. This Court
assumed for purposes of the case that the requirements of
1129(b)(2)(A) had been "literally met."
“One author has commented that, "More has been
written on indubitable equivalence with less effect than on
almost any other area of bankruptcy law." Richard F.
Broude, Reorganization Under Chapter 11 of the Bankruptcy
Code, 13-24 (1986).
20
interest rate and an amortization of the principal which
constitutes the secured claim.
[9, 10] We review a bankruptcy court’s calculation
of an appropriate interest rate for clear error.“ Courts
have used a wide variety of different rates as benchmarks
in computing the appropriate interest rate (or discount
rate as it is frequently termed) for the specific risk level in
their cases.” In this case the bankruptcy court adopted
the contract rate which was 10.25%. Numerous courts
have chosen the contract rate if it seemed to be a good
estimate as to the appropriate discount rate.* Often the
contract rate will be an appropriate rate but reference to
a similar maturity Treasury rate is instructive. The
Treasury rate is helpful because it includes all necessary
factors except the risk premium.” Treasury bonds with
“In re Bryson Properties XVIII, 961 F.2d 496, 500 n.5
(4th Cir. 1992).
“A properly calculated interest rate should factor in
the appropriate risk. See e.g., In re Guildford Telecasters,
Inc., 128 B.R. 622 (Bkrtcy. M.D.N.C. 1991); In re Sherwood
Square Associates, 107 B.R. 872 (Bkrtcy. D. Md. 1989). C.
Frank Carbineer’s Present Value in Bankruptcy: The Search
for an Appropriate Cramdown Discount Rate, 32 S.D.L.
Rev. 42 (1987) is an excellent introduction to this subject.
“See e.g., In re Monnier Bros., 755 F.2d 1336, 1339 (8th
Cir. 1985); Guildford at 626.
“We assume that Treasury bonds as they are backed
by the United States Government contain zero risk.
21
15 years to maturity (the term of this reorganization) were
priced at around 6.4% in June 1993. A discount rate of
10.25% is more than 50% greater than the riskless rate.
This risk premium is comparable with that of many "junk
bonds". While it may in fact be too high a rate considering
that we only reach this stage once the plan has been
judged feasible,* it was not clearly erroneous for the
bankruptcy court to find that this risk premium adequately
compensates Heartland for not receiving its money today.
[11] Having found the interest rate to be
acceptable, we must next consider the balloon payment.
These two issues are interrelated for the balloon payment
adds some measure of risk, but the interest rate appears
adequate to cover this risk. Heartland and the district
court suggest that allowing a balloon payment is
unacceptable as there is no immediate indication from
where the funds will come to pay off the balloon. As a
general matter, many courts have held balloon payments
to satisfy 1129(b)." It is reasonable to assume that the
property itself will provide the source for the balloon
payment. There is no evidence that the property will
decline in value. Therefore, when the balloon is due,
either the property will be sold which will provide the
balloon or refinancing will be possible.” Estimating
property values fifteen years hence is_ inherently
speculative, but the evidence presented to the bankruptcy
“See In re Landmark at Plaza Park, Ltd., 7 B.R. 653,
658 n.8 (Bkrtcy. D.N.J. 1980).
"'See e.g., Bryson at 501; Guildford at 627.
"This satisfies § 1123(a)(5) which requires that the
plan provide adequate means for its implementation.
22
court did not suggest that the property would decline in
value so that the debtor would be unable to pay Heartland
its remaining principal. Therefore, we hold that the plan
satisfies 1129(b)(2)(A)(i). No other factors in this case
lead us to hold that compliance with 1129(b)(2)(A)(i) fails
to satisfy the fair and equitable requirement. Accordingly,
we affirm the bankruptcy court’s holding that the plan is
fair and equitable.
G. Administrative Claims and Use of Cash Collateral.
Heartland argues that the debtor impermissibly
hired an appraiser, an architect, and a marketing
consultant. The bankruptcy judge approved these nunc
pro tunc. Heartland suggests that this is an impermissible
use of cash collateral in violation of § 506(c), and that no
exceptional circumstances warranted the nunc pro tunc
order.
[12] We review the bankruptcy court’s implicit
finding of no violation of § 506(c) under the clearly
erroneous standard.” Its nunc pro tunc order is reviewed
for abuse of discretion.”
[13] Heartland is correct that this Court has denied
a utility bill under § 506(c). In that case, however, this
Court upheld a bankruptcy court’s conclusion because it
was not clearly erroneous to conclude that keeping the
Matter of Delta Towers, 924 F.2d 74, 77-78 (Sth Cir.
1991).
“Matter of Triangle Chemicals, 697 F.2d 1280, 1288-89
(Sth Cir. 1983).
23
lights on did not benefit the creditor of a bankrupt hotel,
whose security interest was solely in the building and
movables and had no interest in the operation. The
district judge had reversed the bankruptcy judge, and this
Court observed that while "there is evidence to support the
district court’s findings [that the utilities prevented the
deterioration of the building and maintained the going
concern value], the district court does not enjoy absolute
freedom to make its own findings.” There is also
considerable difference between utility expenses for a
bankrupt hotel and hiring an appraiser, an architect, and
a marketing consultant for an operating and expanding
apartment complex in which the creditors have a
considerable interest. Indeed, as the bankruptcy court
used the appraiser’s estimate and the occupancy rate
increased after the architect and marketing consultant
were hired, it does not seem clearly erroneous for the
bankruptcy court to have permitted these expenses. The
bankruptcy court found that the marketing consultant’s fee
of $23,000 was justified. We affirm that finding but urge
prudence on the part of debtors and careful scrutiny on
the part of bankruptcy courts to ensure that expenses are
tailored carefully to the need.
As for these orders being nunc pro tunc, the
equitable discretionary powers of the bankruptcy court are
broad; in this situation the bankruptcy court did not abuse
its discretion in granting these orders nunc pro tunc.
These expenses were incurred during a period when the
debtor’s original counsel was forced to recuse itself as a
result of a conflict and replacement representation had not
Delta Towers at 78.
24
————————<—
yet been retained. Very soon after the debtor obtained
substitute counsel, approval of the debtor’s use and
retention of these professionals was sought. Therefore,
while again encouraging bankruptcy courts to examine
carefully the grant of nunc pro tunc orders, we hold that
in this case the bankruptcy court did not abuse its
discretion.
V.
This is a difficult case and both the bankruptcy
court and the district court are to be commended for their
efforts. We REVERSE the district court and AFFIRM
the bankruptcy court’s confirmation of the plan and orders
nunc pro tunc and wish the trustees good luck in
reorganizing this property.
25
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
FORT WORTH DIVISION
In re: §
§
Briscoe Enterprises Ltd., §
II, §
§ Civil Action No.
Debtor. § 4-91-457-A
§
Heartland Federal Savings §
and Loan Association, § (Consolidated with
§
Appellant, § Civil Action No.
§ 4-91-458-A,
vs. § Civil Action No.
§ 4-91-459-A,
Briscoe Enterprises Ltd., § Civil Action No.
II, § 4-91-460-A,
§ Civil Action No.
Appellee. § 4-91-461-A)
FINAL JUDGMENT
Consistent with the memorandum and opinion of
even date herewith,
The exert ORDERS, ADJUDGES and DECREES that:
i. The bankruptcy court’s findings of fact and
conclusions of law Nos. 12, 13, 15, 17, 22, 26, 27, 31, 36,
37, 38, 41, 42 and 43 be, and are hereby, set aside;
26
a |
2. The bankruptcy court’s orders (a) confirming
debtors fourth amended plan of reorganization, (b)
employing and retaining James W. Daniels & Associates,
Inc., as appraiser, and (c) employing and retaining John R.
Horton, Inc., as architectural design and supervision
company, and the ruling of the bankruptcy judge
approving the employment of the marketing agent, nunc
pro tunc, be, and are hereby, REVERSED; and
3. These consolidated actions be, and are
hereby, REMANDED for further action consistent with
the court’s rulings in the memorandum opinion and order
signed this date and with this final judgment.
SIGNED April 14, 1992.
s/John McBryde
John McBryde
United States District Judge
27
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
FORT WORTH DIVISION
In re: §
§
Briscoe Enterprises Ltd., §
II, §
§ Civil Action No.
Debtor. § 4-91-457-A
§
Heartland Federal Savings §
and Loan Association, § (Consolidated with
§
Appellant, § Civil Action No.
§ 4-91-458-A,
vs. § Civil Action No.
§ 4-91-459-A,
Briscoe Enterprises Ltd., § Civil Action No.
II, § 4-91-460-A,
§ Civil Action No.
Appellee. § 4-91-461-A)
MEMORANDUM OPINION AND ORDER
This consolidated action encompasses appeals from
five separate orders rendered by the United States
Bankruptcy Court, Northern District of Texas, Fort Worth
Division, the Honorable Massie Tillman presiding. The
court, having reviewed the briefs of appellant, Heartland
Federal Savings and Loan Association ("Heartland"), and
appellee, Briscoe Enterprises Ltd., II ("Debtor"), the
record on appeal and applicable authorities, makes the
following determinations:
28
I.
Jurisdiction
The appeals are from orders entered by the
bankruptcy court on April 24, 1991 (one order), January
25, 1991 (three orders), and January 24, 1991 (one order).
This court’s jurisdiction exists pursuant to 28 U.S.C. $
158(a).
Il.
Undisputed Facts
Debtor, a Texas limited partnership, owns a 784-
unit apartment complex known as the Regalridge Square
Apartments ("Regalridge") in Fort Worth, Texas.
Regalridge houses low to moderate income families, many
of whom receive rent subsidies. Regalridge was
constructed in two phases with financing provided by
Heartland’s predecessor. In connection with the
development of each phase, debtor executed a non-
recourse note in the original amount of $9.5 million dollars
and a deed of trust granting a lien in that portion of the
property then being developed. Heartland is the owner
and holder of the notes and deeds of trust, dated April 11,
1983, and January 31, 1984, respectively. Additional
financing of $3.5 million dollars for each phase was
provided by the City of Fort Worth ("City"), which retained
inferior liens in the property.
Debtor defaulted on its notes by failing to make
interest payments in October, November, and December
1988. It entirely ceased servicing its debt to Heartland in
July 1989.
29
II.
Proceedings
A voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code was filed by debtor on
December 29, 1989; and, it filed its plan of reorganization
on June 11, 1990. On August 17, 1990, debtor filed an
unsigned copy of its proposed disclosure statement. It
filed its first amended plan of reorganization on November
16, 1990. The plan was later modified by the filing of
debtor’s second amended plan of reorganization on
December 12, 1990, third amended plan of reorganization
on December 20, 1990, and fourth amended plan of
reorganization on January 22, 1991. Debtor filed its first
amended disclosure statement on November 16, 1990,
second amended disclosure statement on December 12,
1990, and third amended disclosure statement on
December 20, 1990. The bankruptcy court approved the
third amended disclosure statement following a hearing on
December 21, 1990.
Beginning January 23, 1991, and continuing on four
additional days, the bankruptcy court conducted a hearing
to determine whether debtor’s fourth amended plan should
be confirmed. Before taking up the matter of plan
confirmation, the bankruptcy court heard and considered
various pending motions. First, the court considered and
granted debtor’s applications to approve the employment
of an appraiser and an architect, nunc pro tunc. The court
then considered and denied Heartland’s motions for
administrative claim and for deposit of consideration.
During the confirmation hearing, the bankruptcy court
heard the testimony of Anne Sadovsky, debtor’s marketing
agent, and approved debtor’s application to employ her,
nunc pro tunc. At the conclusion of the confirmation
30
ee ow
hearing on March 14, 1991, the bankruptcy court stated
that the prospect of debtor’s meeting the debt service
requirement of the plan was "marginal." Nevertheless, on
April 23, 1991, the bankruptcy court signed its findings of
fact and conclusions of law and rendered its order
confirming debtor's fourth amended plan of
reorganization.
Heartland filed separate appeals from the
bankruptcy court’s orders (1) confirming debtor’s fourth
amended plan of reorganization, (2) employing and
retaining James W. Daniels & Associates, Inc., as
appraiser, (3) denying motion to allow administrative
claim, (4) employing and retaining John R. Horton, Inc.,
as architectural design and supervision company, and (5)
denying Heartland’s motion for deposit of consideration.
Apparently the bankruptcy court did not sign a
separate order approving the application to employ
marketing agent, nunc pro _tunc, as it had on the
applications to approve employment of an appraiser and
an architect. The docket sheet reflects, and the record on
appeal contains, only a proceeding memorandum noting
that the application was granted. Presumably, for that
reason Heartland did not file a separate appeal as it did
with regard to the other applications and motions heard at
the confirmation hearing. In any event, Heartland did
include the approval of the marketing agent’s employment
as an issue On appeal of the plan confirmation and debtor
has not complained of the procedure followed.
‘A copy of the bankruptcy court’s findings of fact and
conclusions of law taken from the record is attached as an
appendix to this memorandum opinion and order.
31
Ee
IV.
The Plan
Dediors pian i ‘typical of Chapter 11
reorganization plans in that it begins with a list of
definitions of terms used in the plan (Article I), certain
general terms and conditions (Article II), and the
classification of claims and interests (Article II). Article
IV describes the treatment of the six classes of claims, to
wit:
Class 1 allowed administrative claims;
Class 2 allowed priority claims;
Class 3 allowed City claim;
Class 4 allowed Heartland claim;
Class 5 allowed unsecured claims; and
Class 6 holders of interests in the debtor.
In particular, it provides that City’s claim is to receive the
same treatment as the Class 5 unsecured claims. Holders
of Class 5 claims are to receive a pro rata share of the
beneficial interests in the Regalridge trust, hereinafter
described, evidenced by certificates of beneficial interest.
The Regalridge trustees are to make periodic cash
payments on at least an annual basis when they, in their
discretion, determine that the trust has available net cash
flow that is not required to be reserved for another
purpose.
As for Heartland’s claim, the plan provides that the
secured portion thereof shall be paid in monthly
installments of principal and interest as though amortized
over thirty years from the effective date of the plan, with
interest at the rate provided in the January 31, 1984,
promissory note executed by debtor. The secured claim is
to be paid in full upon the sale of the property or the
expiration of fifteen years, whichever shall first occur. If
Heartland fails to make a timely § 1111(b) election, the
unsecured portion of its claim is tO receive the same
treatment as Class 5 unsecured claims. Article IV further
provides that Heartland will retain its lien in the property
and that
all other terms and conditions of the
treatment of (Heartland’s claim] described
in the plan and the lien securing same shall
be similar to the original terms of
Heartland’s note and lien, except where
inconsistent with the letter and spirit of this
plan.
Fourth Amended Plan of Reorganization at 12, 9 4.4.c.
The plan does not contain as an exhibit or otherwise the
note and deed of trust, or any of the terms thereof, to be
executed in favor of Heartland.
Articies V and VI describe plan implementation
and formation of the Regalridge trust, to which ownership
of the property is to be transferred. The trust is to be
governed by three trustees to be selected, one each, by the
Fort Worth NAACP, City, and Heartland. The Fort
Worth NAACP is not a creditor of debtor. The pian
provides that the trustees will have exclusive power and
control over the operation of Regalridge and that they will
not be subject to any court supervision.
Articles VII through XIV contain the remaining
plan provisions. None of these is particularly pertinent to
the issues raised on appeal, except that paragraph 8.2 of
Article VIII does provide that the plan may be modified
33
following confirmation after notice and hearing.
V.
Issues on Appeal
Heartland asserts fifty-one issues on appeal, many
of which appear to present different shades of the same
matter. Heartland’s issues are:
1. Whether the Bankruptcy Court erred in
confirming the Debtor’s Fourth Amended Plan of
Reorganization.
2. Whether the Bankruptcy Court erred in
finding that the Debtor’s Plan complied with each and
every one of the requirements for confirmation under §
1129(a)(1)-(11) and § 1123 of the Bankruptcy Code.
3. Whether the Bankruptcy Court erred in
finding and concluding that the Debtor had met its burden
of proof on the requirements of §1129(a) and $1123 by the
preponderance of the evidence.
4. Whether the Bankruptcy Court erred in
finding that the debtors Plan met each of the
requirements for confirmation under § 1129(b).
a Whether the Bankruptcy Court erred in
finding that the Debtor had met its burden of proof on the
requirements of § 1129(b) by clear and convincing
evidence.
6. Whether the Bankruptcy Court erred in
approving the applications to employ professionals nunc
pro tunc.
34
7. Whether the Bankruptcy Court erred in
approving the payments made to professionals.
8. Whether the Bankruptcy Court was clearly
erroneous in its findings.
9. Whether the Bankruptcy Court erred in
entering the following orders on January 25, 1991: (a)
Order Employing and Retaining John R. Horton, Inc. as
Architectural Design and Supervision Company; (b) Order
Employing and Retaining James W. Daniels and
Associates as Appraiser for the Debtor; and (c) Order
Denying Heartland’s Motion for Deposit of Consideration
to be Distributed Under Plan.
10. Whether the Bankruptcy Court erred in
entering an Order Denying Heartland’s Motion to Allow
Administrative Claim on January 24, 1991.
11. | Whether the Bankruptcy Court erred in
entering the Order Confirming the Debtor’s Fourth
Amended Plan of Reorganization ("Plan") on April 24,
1991.
12. Whether the Bankruptcy Court erred in
approving the Debtor’s Third Amended Disclosure
Statement on December 21, 1990, and in finding that the
Debtor’s Third Amended Disclosure Statement contained
adequate information as required by 11 U.S.C. §1125.
13. | Whether the Bankruptcy Court erred in
finding that the Debtor’s modifications to the Plan, which
were included in the Plan after voting thereon, did not
adversely change the treatment of the claim of any
creditor.
35
14. | Whether the Bankruptcy Court erred in
finding that (a) a reasonable basis exists for separate
classifications of the claims and interests in each class, (b)
that the claims and interest of each class under the Plan
are substantially similar under the Plan and (c) such
classification satisfies the requirements of §1122(a) of the
Bankruptcy Code.
15. | Whether the Bankruptcy Court erred in
finding that the interest holders and the Debtor do not
receive or retain any property under or pursuant to the
Plan.
16. | Whether the Bankruptcy Court erred in
finding that Heartland was required to make an election
under § 1111(b) in order to have its secured claim
Classified separately from its unsecured claim.
17. Whether the Bankruptcy Court erred in
finding that two unsecured classes of non-insider creditors
voted to accept the Plan.
18. | Whether the Bankruptcy Court erred in
finding that ". . . the control of two classes by Heartland
effectuates a non-substantive and technical amendment to
the Plan." Record No. 152, Findings p. 4, 9 15.
19. Whether the Bankruptcy Court erred in
overruling Heartland’s objections to confirmation of the
Plan based on technical issues relating to classification.
20. | Whether the Bankruptcy Court erred in
finding that the provisions of the Plan regarding the
procedure for selection, appointment, removal,
qualifications and duties of the “"Regalridge Trustees” and
36
7
AND be tn
who was to select these trustees are consistent with the
interests of creditors and with public policy.
21. | Whether the Bankruptcy Court erred in
finding that the Plan provides for distribution to creditors
on a pro-rata basis of the cash flow on at least an annual
basis.
22. | Whether the Bankruptcy Court erred in
finding that (1) Heartland will retain its liens under the
Plan, (2) the property will probably support debt service
equal to Heartland’s secured claim, and (3) Heartland will
receive the present value of its secured claim.
23. | Whether the Bankruptcy Court erred in
finding that, ". . . over the next six years, money will be
available as cash flow for distribution to creditors whose
claims will be treated as unsecured Class 5 claims after
payment of ordinary and necessary operating expenses and
payment of debt service on Heartland’s secured claim."
Record No. 152, Findings p. 7, 1 27.
24. | Whether the Bankruptcy Court erred in
finding that Heartland’s unsecured deficiency claim is in
the approximate amount of $10,000,000.00.
25. | Whether the Bankruptcy Court erred in
finding that the Class 5 creditors accepted the Plan and
that no Class 5 creditors voted against the Plan.
26. | Whether the Bankruptcy Court erred in
finding that the Plan is feasible.
27. | Whether the Bankruptcy Court erred in
finding that the Plan has even a marginal prospect of
37
success. Record No. 152, Findings p. 7, 1 31.
28. | Whether the Bankruptcy Court erred by
failing to apply the correct legal standard in confirming the
Plan.
29. | Whether the Bankruptcy Court erred in
accepting the Debtor’s projections while cautioning that
the Debtor ". . . will have to work diligently to make the
Plan succeed." Record No. 152, Findings, p. 7, 1 36.
30. | Whether the Bankruptcy Court erred in
finding that only $250,000.00 to $300,000.00 is needed to
make repairs on the property.
31. | Whether the Bankruptcy Court erred in
finding that the value of the property and Heartland’s
secured claim is $8,200,000.00.
32. | Whether the Bankruptcy Court erred by
applying an improper legal standard to determine the
value of Heartland’s collateral and secured claim.
33. | Whether the Bankruptcy Court erred in
finding that the property will generate sufficient cash flow
to pay necessary and normal operating expenses, the
secured debt of Heartland at a market rate of interest, and
a dividend to Class 5 creditors.
34. | Whether the Bankruptcy Court erred in
finding that for the past several months the Debtor has
met or exceeded $200,000.00 per month in income and
that an income of $200,000.00 per month will be sufficient
to fund the Plan.
38
35. Whether the Bankruptcy Court erred in
finding that occupancy at the property has increased from
55% to 85% and will probably increase to 90% in the first
half of 1991.
36. | Whether the Bankruptcy Court erred in
finding that (a) the Debtor has demonstrated an ability to
make needed repairs on the property, (b) some needed
repairs to the property could be delayed until the end of
the year and, (c) cash flow will be available by the end of
the year to pay for deferred repairs.
37. | Whether the Bankruptcy Court erred in
finding that the Plan is not likely to be followed by the
need for further financial reorganization or liquidation.
38. | Whether the Bankruptcy Court erred in
finding that, notwithstanding Heartland’s rejection of the
Plan, the Plan may be confirmed pursuant to §1129(b),
that the Plan does not discriminate unfairly against and is
fair and equitable to Heartland.
39. | Whether the Bankruptcy Court erred in
finding that the treatment of Heartland’s deficiency claim
in Class 5 is identical to the treatment of all Class 5 claims.
40. | Whether the Bankruptcy Court erred in
finding that the Plan protects the Jegal rights of
Heartland’s unsecured deficiency claim.
41. | Whether the Bankruptcy Court erred in
finding that ". . . no holder of any claim or interest junior
to Heartland’s claims under the Plan will receive or retain
on account of the junior claim or interest any property
under the Plan". Record No. 152, Findings p. 10, 9 43.
39
42. | Whether the Bankruptcy Court erred in
denying Heartland’s Motion to Dismiss or Convert the
bankruptcy case.
43. | Whether the Bankruptcy Court erred in its
failure to make any finding regarding the apparent grant
of a discharge of the interest holders of the Debtor.
44. Whether the Bankruptcy Court erred in its
failure to make any finding regarding the establishment
and use of the Distribution Fund.
45. | Whether the Bankruptcy Court erred in its
failure to make a finding that the projections used by the
Debtor at the Confirmation hearing were not the same
projections mailed out to the creditors for voting on the
Plan.
46. | Whether the Bankruptcy Court erred in its
failure to make a finding that the change in projections
was a material change to the Plan.
47. | Whether the Bankruptcy Court erred in its
failure to make any findings regarding the fairness,
specificity or legality of any of the provisions of the
Regalridge Trust Agreement and Plan.
48. | Whether the Bankruptcy Court erred in
relying upon the Court’s personal observations of the
property in confirming the Plan.
49. | Whether the Bankruptcy Court erred in
denying Heartland’s Motion to Strike Affidavit of Tallying
Agent.
AOwEMIAS
ities seston acdvatantl
50. | Whether the Bankruptcy Court erred in
finding that the balloting of classification of creditors was
proper and that any error in the balloting of classification
of any creditors was harmless.
51. | Whether the Bankruptcy Court erred in
entering an Order Approving and Granting Amendment
to the Confirmed Fourth Amended Plan _ of
Reorganization.
Having thus listed the issues, Heartland proceeds to
divide its brief into categories as follows:
I. The debtor’s plan is not feasible, § 1129(a)(11).
II. The plan fails to meet the mandatory requirements
for confirmation under the Bankruptcy Code.
Ill. The plan fails to meet the requirements for
cramdown under the Bankruptcy Code, § 1129(b).
IV. The plan violates the absolute priority rule.
V. The plan fails to comply with the mandatory
provisions of § 1123.
VI. The plan expends Heartland’s cash collateral for
unallowable purposes, § 506(c).
VII. Improper approval of professionals and their fees,
nunc pro tunc.
VIII. Heartland’s administrative claim and motion for
deposit of consideration.
4]
Heartland does not state which particular issues belong to
each of these categories.
The court’s discussion of the issues will focus on the
eight categories defined by Heartland, but will be
organized in what seems to the court to be a more logical
order. The court considers that any of the issues on
appeal not specifically discussed and supported by
Heartland in the body of its briefs is waived. McGrudser
v. Necaise, 733 F.2d 1146, 1148 (Sth Cir. 1984); Ronit, Inc.
v. Block Shim Development Co. - Irving In re Block Shim
Development Co. - Irving), 118 B.R. 450, 452 n.2 (N.D.
Tex. 1990), aff'd, 939 F.2d 289 (Sth Cir. 1991).
VI.
Standard of Review
To the extent the appeal presents questions of law,
the bankruptcy court’s judgment is subject to de novo
review. Pierson & Gaylen v. Creel & Atwood (In re
Consolidated Bancshares, Inc.), 785 F. 2d 1249, 1252 (Sth
Cir. 1986). Findings of fact, however, will not be set aside
unless clearly erroneous. Memphis-Shelby County Airport
Authority v. Braniff Airways, Inc. (In re Braniff Airways,
Inc.), 783 F.2d 1283, 1287 (Sth Cir. 1986). A finding is
clearly erroneous, although there is evidence to support it,
when the reviewing court on the entire evidence is left
with a definite and firm conviction that a mistake has been
committed. Id. The mere fact that this court would have
weighed the evidence differently if sitting as the trier of
fact is not sufficient to set aside the bankruptcy court’s
order if that court’s account of the evidence is plausible in
light of the record viewed in its entirety. Anderson v. City
of Bessemer City, 470 U.S. 564, 573-74 (1985).
42
the dee
Although the parties doubtless would agree with the
foregoing recitation of the standard of review on appeal,
they disagree as to the burden of proof on debtor at the
confirmation hearing. Heartland maintains that debtor
had to prove the confirmability of its plan by clear and
convincing evidence. Debtor, on the other hand, states
that the preponderance of the evidence’ standard applies
in all bankruptcy matters, relying on Grogan v. Garner,
111 S. Ct. 654 (1991).
In Grogan, the United States Supreme Court
determined that the preponderance of the evidence
standard is the appropriate standard of proof for the
dischargeability exceptions in 11 U.S.C. § 523(a). 111 S.
Ct. at 661. Following Grogan, the Tenth Circuit
determined that the preponderance of the evidence
standard also applies to dischargeability under 11 U.S.C.
§ 727. First Nuvional Bank of Gordon v. Serafini (In re
Serafini), 938 F.2d 1156, 1157 (10th Cir. 1991). Both of
these cases recognize that a debtor has no constitutional
or fundamental right to a discharge that would entitle him
‘Evidence is clear and convincing if it places in the
factfinder an abiding conviction that the truth of the
factual contentions is highly probable. Colorado v. New
Mexico, 467 U.S. 310, 316 (1984); Kaszuk v. Bakery &
Confectionary Union, 638 F.Supp. 365, 374 (N.D. Ill.
1985), aff'd, 791 F.2d 548 (7th Cir. 1986).
‘A preponderance of the evidence means proof
sufficient to persuade the finder of fact that the
proposition is more likely true than not true. Hopkins v.
Price Waterhouse, 737 F. Supp. 1202, 1206 (D.D.C.), aff'd,
920 F.2d 967 (D.C. Cir. 1990).
43
to a heightened standard of proof. Grogan, 111 S. Ct. at
659; Serafini, 938 F.2d at 1157 n.2. The holdings in both
cases are limited to the issue of dischargeability.
The court is not convinced that Grogan was
intended to accomplish a wholesale destruction of the
precedents set with regard to the debtor’s burden of proof
in other bankruptcy contexts. Grogan speaks only to the
creditor’s, not the debtor’s, burden of proof with regard to
dischargeability. The debtor’s burden has traditionally
been one of clear and convincing evidence, at least in the
context of a cramdown. See In re Murel Holding Corp.,
75 F.2d 941, 942 (2nd Cir. 1935); B.W. Alpha, Inc. v. First
City Nat’l Bank of San Angelo, N.A. (In re B.W. Alpha,
Inc.), 100 B.R. 831, 833 (N.D. Tex. 1988); In re Future
Energy Corp., 83 B.R. 470, 481 (Bankr. S.D. Ohio 1988).
Some courts have indicated that the same standard applies
under 11 U.S.C. § 1129(a). In re Rusty Jones, Inc., 110
B.R. 362, 373 (Bankr. N.D. Ill. 1990); In re Agawam
Creative Marketing Assocs., Inc., 63 B.R. 612, 619 (Bankr.
D. Mass. 1986). The clear and convincing test is the
logical one to apply because of the stricter scrutiny
required when property and property rights are sought to
be taken. Cf. Louisville Joint Stock Land Bank _ v.
Radford, 295 U.S. 555 (1935) (recognizing the substantive
rights of a secured creditor in specific property and noting
that the bankruptcy power is subject to the Fifth
Amendment). There is no question that debtor has failed
to meet this burden of proof. Moreover, even if the
court’s analysis is incorrect and the appropriate burden of
proof is one of preponderance of the evidence, the result
would be the same.
44
ee SS eS a a
Ce Ay Oe eo Oe a
—_——e——— ee
VIL.
Confirmability of Debtor’s Plan
A. Feasibility
To be confirmed, a debtor’s plan of reorganization
must be feasible. 11 U.S.C. § 1129(a)(11); In re NS.
Garrott & Sons, 48 B.R. 13, 15 (Bankr. E.D. Ark. 1984).
The burden of proving feasibility belongs to the debtor. In
re Lakeside Global II, Ltd., 116 B.R. 499, 505 (Bankr. S.D.
Tex 1989). To demonstrate feasibility, the debtor must
show by concrete evidence that there will be sufficient cash
flow to fund the plan and maintain operations according
to the plan. In re Nelson, 84 B.R. 90, 93 (Bankr. W. D.
Tex. 1988); In re Merrimack Valley Oil Co., 32 B.R. 485,
488 (Bankr. D. Mass. 1983). Factors to be considered
include the debtor’s prior performance, the adequacy of
capital structure, the earning power of the business,
economic conditions, the ability of management, the
probability of the continuance of the same management,
and any other related matter that determines the prospects
of a sufficiently successful operation to enable
performance of the provisions of the plan. Canal Place
Limited Partnership v. Aetna Life Ins. Co. (In re Canal
Place Limited Partnership), 921 F.2d 569, 579 (Sth Cir.
1991) (per curiam approving bankruptcy court’s analysis
set forth as appendix to the opinion); Lakeside Global, 116
B.R. at 506. Plans that are mere visionary schemes based
on speculation, conjecture, or unrealistic projections
cannot be confirmed. In re Sound Radio, Inc., 93 B.R.
849, 856 (Bankr. D.N.J. 1988), aff'd in part, remanded in
part, 103 B.R. 521 (D.N.J. 1989), aff'd, 908 F.2d 964 (3rd
Cir. 1990).
45
Here, Heartland maintains that debtor’s plan is but
a visionary scheme because debtor has not been able to
meet its Own Operating projections in the past and its
expectations for future performance are unsupported. For
example, in April 1990, debtor submitted a budget in
connection with its opposition to Heartland’s motion to lift
the automatic stay, which projected expenditures of
$1,115,000.00 for 1990. Debtor’s actual expenditures for
1990 were $1,807,000.00 — thirty-eight percent more than
anticipated. As for the future, debtor projects, and its
plan’s success depends upon achievement of, a ninety
percent economic occupancy rate for 1991. Debtor has
never before been able to achieve more than an eighty-five
percent physical occupancy rate, at which time the
economic Occupancy rate was only sixty-eight and 08/100
percent. Even debtor’s own expert projected a seventy
percent economic occupancy rate for 1991.
More important than past inability to meet
expectations is the lack of evidence to support present
ability to make a plan work. Debtor’s plan provides that
Heartland is to receive, over a period of fifteen years,
installments of interest plus only twenty percent of the
principal of its secured debt. At the end of fifteen years,
debtor will make a balloon payment to Heartland of
approximately $6,500,000. It appears that virtually all of
the income generated from Regalridge will be required to
fund the plan and to keep Regalridge operating. Debtor
has not made any showing of how it will be able to make
the balloon payment to Heartland at the end of fifteen
years. Because the plan calls for debtor to be operating
on a shoestring and there has been no showing of the
source of funds for the balloon payment, it is difficult to
see how the plan could be feasible under the Code.
Lakeside Global, 116 B.R. at 507.
46
In response debtor points to other evidence
reflecting improved conditions at Regalridge and urges the
court that two different interpretations can be made from
the same set of facts. That being the case, debtor urges
that the court must defer to the bankruptcy court’s
findings. Amadeo vy. Zant, 486 U.S. 214, 223 (1988). In
order for deference to be mandated, however, the
bankruptcy court’s findings must be plausible in light of the
record viewed in its entirety. Anderson, 470 U.S. at 574.
Here, the record as a whole reflects the uncertainty
inherent in debtor’s plan. Debtor offered no evidence on
the future value of the property or on the source of funds
for the balloon payment. Debtor recognizes that ninety
percent economic occupancy is necessary in order for the
plan to be funded, yet admits that ninety percent economic
occupancy has never before been achieved.*
In sum, "feasibility" means that confirmation of a
plan is not likely to be followed by the liquidation, or the
need for further financial reorganization, of the debtor or
‘Debtor further argues that the plan is somehow made
more feasible by the voiding of appellant’s lien in debtor’s
personalty. See March 25, 1991, order signed by Judge
Mahon in CA4-90-818-E. The lien avoidance occurred
subsequent to the confirmation hearings and is not an
issue On appeal. The record reflects that personalty was
not included in the valuations of the property before the
bankruptcy court. This point is now moot in any event,
however, as the Fifth Circuit has reversed the district
court’s order and affirmed the decision of the bankruptcy
judge denying avoidance of appellant’s lien. See
Heartland Federal Savings & Loan Ass’n_v. Briscoe
Enterprises, Ltd., I], No. 91-1525 (Sth Cir. Feb. 14, 1992).
47
any successor to the debtor under the plan. 11 U.S.C. §
1129(a)(11). A plan that has a "marginal prospect of
success” because the debtor’s "prospects of meeting the
debt service required™ under the plan of reorganization
are marginal is not, as a matter of law, a feasible plan.
Therefore, the bankruptcy court’s findings and conclusions
set forth in item Nos. 31, 36, 37 and 38 of the April 24,
1991, findings of fact and conclusions of law [hereinafter
"Findings"] must be set aside.’
B. Other Requirements of 11 U.S.C. § 1129(a)
In addition to being feasible, a plan must meet a
number of other requirements, including those set forth at
11 U.S.C. §§ 1129(a)(1)-(4), (7) and (8). These
requirements are briefly that: the plan comply with
applicable provisions of the Bankruptcy Code [§
1129(a)(1)]; debtor comply with applicable provisions of
the Bankruptcy Code [§ 1129(a)(2)]; the plan be proposed
in good faith [§ 1129(a)(3)]; payments made or to be made
be approved by the bankruptcy court [§ 1129(a)(4)]; the
plan meet the best interest test [$ 1129(a)(7)]; and, each
impaired class must accept the plan [§ 1129(a)(8)].
Heartland claims that these requirements have not been
met. A brief discussion follows with regard to each of
them, except § 1129(a)(8). There is no question that each
impaired class has not accepted the plan and that the plan
‘Findings of Fact and Conclusions of Law No. 31.
‘Tr. Vol. V at 72.
’The bankruptcy court’s determination, set forth in
item 35, that the value of Heartland’s secured claim is $8.2
million dollars is discussed infra.
48
is subject to the cramdown provisions of § 1129(b). See
Findings No. 28.
1. Compliance with Applicable Code Provisions
Heartland argues that the plan fails to comply with
§ 1129(a)(1), because the plan is not feasible* and because
the requirements of §§ 1123, 506(c), and 1125 have been
violated. Heartland further asserts that the plan
improperly classifies claims in an attempt to divest
Heartland of the right to cast a vote based on its
unsecured claim.’ Heartland also maintains that debtor
itself has failed to comply with applicable provisions of the
Bankruptcy Code, in violation of 11 U.S.C. § 1129(a)(2).
Section 1123 sets forth the requirements for items
to be included in reorganization plans. Pursuant to §
1123(a)(2), a plan must specify any class of claims or
interests that is not impaired under the plan. In re
Polytherm Indus., Inc., 33 B.R. 823, 829 (W.D. Wis. 1983).
Although the better practice is to include a statement of
whether each class of claims is impaired or unimpaired, all
that is required is that there be a basis upon which a
creditor can determine whether a class of claims is
impaired. In re AG Consultants Grain Div., Inc., 77 B.R.
665, 670 (Bankr. N.D. Ind. 1987). In this case, one can
easily determine from the plan which claims are
‘See discussion of feasibility at pp. 17-20, supra.
*Although Heartland’s opening brief devotes only one
sentence to this issue, debtor’s brief and Heartland’s reply
thereto discuss the issue at some length. Accordingly, the
court considers that the issue is properly preserved.
49
unimpaired.
Section 1123(a)(3) requires that a plan specify the
treatment of any class of claims that is impaired under the
plan. This section means that if a plan provides for future
cash payments, it must set forth the dollar amount of each
payment and the date upon which it will be made. Sandy
Ridge Dev. Corp. v. Louisiana Nat’l Bank (In re Sandy
Ridge Dev. Corp.), 881 F.2d 1346, 1353 (Sth Cir. 1989).
The plan in this case does not contain the requisite
specificity as to payments to be made.” Nor does the
plan specify the terms of the note and deed of trust to be
retained by Heartland."
Section 1123(a)(4) requires that the plan provide
the same treatment to each claim or interest of a
particular class unless the holder of a particular claim
agrees to less favorable treatment. Heartland complains
that until January 22, 1991, the city was the only unsecured
“For example, the plan provides that creditors will
receive periodic cash payments at the discretion of the
Regalridge trustees "but only to the extent that such
payments do not effect the normal operations of the
Property." Fourth Amended Plan of Reorganization at 4
6.2. In other words, creditors may or may not receive any
such payments.
"Findings No. 16 addresses § 1123(a)(3), but states
only that "Article 4 of the Plan describes the treatment to
be afforded to each of the impaired classes." To the
extent that this statement implies that the requirements of
§ 1123(a)(3) have been met, it is erroneous and must be
set aside. .
50
creditor entitled to select one of the three Regalridge
trustees. The fact is, however, that the plan was amended
to allow Heartland to select a trustee as well. No other
unsecured claimants have complained of less favorable
treatment and Heartland does not have standing to assert
a complaint on their behalf in this regard. In re Orlando
Investors, L.P., 103 B.R. 593, 597 (Bankr. E.D. Pa. 1989).
Section 1123(a)(5) requires that the plan provide
adequate means for its implementation. This means that
the debtor must offer more than speculation about the
source of funding for the plan. In re Stuart Motel, Inc., 8
B.R. 48, 50 (Bankr. S.D. Fla. 1980). As previously
discussed, debtor failed to provide information about its
ability to refinance the property or sell it at a later date
for a particular price. Debtor also failed to provide the
note and deed of trust to be retained by Heartland. More
importantly, debtor failed to show how the plan would be
funded absent ninety percent economic occupancy, which
had never before been achieved. For these reasons, the
plan does not meet the requirements of § 1123(a)(5) and
Findings No. 17 will be set aside.
Section 1123(a)(7) requires that the plan contain
only provisions consistent with public policy and the
interests of creditors and equity security holders regarding
the manner of selection of any officer, director or trustee
or their successors under the plan. Heartland complains
because the plan calls for the selection of a trustee by the
NAACP, which is not a creditor of debtor. The record
reflects, however, that the NAACP has an interest in
maintaining and preserving Regalridge. Heartland fails to
show how the plan is inconsistent with, or adverse to, the
interests of the public.
5]
Heartland next complains that its cash collateral,
that is, rents from the property, has been and will continue
to be used to pay administrative expenses including
professional fees incurred by debtor. Although cash
collateral, e.g. rental income, may be used to pay ordinary
and necessary operating expenses, it may not be used to
pay administrative expenses or general costs of
reorganization, except under extraordinary circumstances.
French Market Homestead, F.S.A. v. P.C., Ltd. (In re P.C.,
Ltd.), 929 F.2d 203, 205 (Sth Cir. 1991); New Orleans Pub.
Serv., Inc. v. First Fed. Sav. & Loan Ass’n (In re Delta
Towers Ltd.), 924 F.2d 74, 76 (Sth Cir. 1991); In re
Tripplet, 84 B.R. 84. 87 (Bankr. W.D. Tex. 1988). The
exception is set forth in 11 U.S.C. § 506(c) and provides
that the debtor must show that: (1) the expenditure is
necessary; (2) the cost is reasonable; and (3) the expenses
were incurred primarily for the benefit of the secured
creditor and resulted in a quantifiable direct benefit to that
creditor. In re P.C., Ltd., 929 F.2d at 205; General Elec.
Credit Corp. v. Levin & Weintraub (In re Flaggstaff
Foodservice Corp.), 739 F.2d 73, 75 (2nd Cir. 1984). The
claim of an attorney rendering services to an estate is not
entitled to priority over the claim of a secured creditor to
its collateral. In re A.J. Lane & Co., 113 B.R. 821, 824
(Bankr. D. Mass. 1990). Therefore, to the extent the plan
calls for the payment of debtor’s attorney’s fees or any
other professional fees or extraordinary expenses out of
Heartland’s cash collateral, the plan violates $ 506 (c).
Heartland additionally complains that the plan was
improperly solicited, in violation of 11 U.S.C. § 11285,
because debtor did not mail to creditors for their review a
revised budgeted cash flow statement. Heartland
maintains that the revised statement (Heartland’s Exhibit
98) "substantially increased the expense projections beyond
52
what was described in the [third amended disclosure
statement]" (Heartland’s Exhibit 63). Heartland’s Brief at
31. Heartland fails to mention that the revised statement
also reflects a greater amount available for debt service.
As debtor points out, a bankruptcy court may permit
testimony at trial that varies from the information included
in its disclosure statement, especially where that evidence
indicates even stronger prospects for successful
reorganization. Prudential Ins. Co. v. Monnier (In re
Monnier Bros.), 755 F.2d 1336, 1342 (8th Cir. 1985).
Finally, on the subject of the plan’s failure to
comply with code provisions, Heartland complains that its
unsecured claim, the City’s unsecured claim, and the
unsecured claims of debtor’s trade creditors were
improperly placed in separate classes in "an attempt to
divest Heartland of its substantive right to cast a vote for
its unsecured claim." Heartland Brief at 30-31. By placing
the unsecured claims in separate classes, debtor made
certain that at least one impaired class would vote to
accept the plan, making a cramdown possible. See 11
U.S.C. § 1129(a)(10). Debtor attempts to justify its
separate classification of the City’s unsecured claim by
noting that the claim was originally secured and now is not.
Debtor does not offer, nor has the court found, any
support for this position. Debtor additionally argues that
its classification, if erroneous, constituted only a technical
impropriety because all unsecured claims are treated the
same way under the plan. The rule in the Fifth Circuit,
however, is that substantially similarly claims should be
placed in the same class and, further, that similar claims
cannot be classified differently in order to gerrymander an
affirmative vote on a reorganization plan. Phoenix Mutual
Life_Ins. Co. v. Greystone III Joint Venture (In re
Greystone III Joint Venture), 948 F.2d 134, 139 (Sth Cir.
53
1992). As in Greystone, there is no support in the record
for the bankruptcy court’s conclusion that a reasonable
basis exists for separate classifications of the unsecured
claims. Thus, Findings Nos. 13 and 15 must be set aside.
Heartland also argues that debtor itself has failed
to comply with the applicable Bankruptcy Code provisions,
as evidenced by debtor’s employment of, and payments to,
professionals without prior court approval. Debtor replies
that its later filing of motions for authorizations nunc pro
tunc, which were approved, vitiates its earlier
noncompliance with the Code. If that were all that was
required, there would be no need for § 1129(a)(2).”
2. Good Faith
Heartland maintains that the plan was not proposed
in good faith because there is not a reasonable likelihood
that the plan will achieve a result consistent with the
purposes and objectives of the Bankruptcy Code, i.e., the
plan does not provide for expeditious resolution of
disputes and speedy payment to creditors. See In re
Madison Hotel Assoc., 749 F.2d 410, 424 (7th Cir. 1984);
In re Hoosier Hi-Reach, Inc., 64 B.R. 34, 38 (Bankr. S.D.
Ind. 1986). Whether a plan is proposed in good faith must
be determined in light of the circumstances surrounding
the plan. In re Texas Extrusion Corp., 844 F.2d 1142,
1160 (Sth Cir.), cert. denied, 488 U.S. 926 (1988). In other
words, objective, rather than subjective, intent of the
debtor determines whether a plan is proposed in good
faith.
"The bankruptcy court did not make a specific finding
or state a conclusion with regard to § 1129(a)(2).
54
The record does not support a finding of objective
good faith, because the plan is not feasible. Moreover,
despite the debtor’s enthusiasm and the public’s interest in
maintaining Regalridge as a going concern, debtor’s actions
during the pendency of the bankruptcy call into question
its subjective good faith. For example, debtor violated the
bankruptcy court’s order regarding the use of rents by
knowingly making payments to professionals without prior
court approval. Further, at the last minute, debtor filed a
motion for approval of amendment to its fourth amended
plan of reorganization, which amendment sought to change
crucial definitions in the plan so as to enable debtor to
consummate its plan pending Heartland’s appeal to this
court.” Accordingly, Findings No. 22 will be set aside.
3. Approval of Fees and Expenses
Next, Heartland complains that the plan calls for
the payment of all fees and expenses to be within the
discretion of the Regalridge trustees, who are not subject
to court supervision. As debtor correctly notes, however,
upon plan confirmation, a debtor is no longer a debtor in
possession and the bankruptcy estate ceases to exist. In re
NTG _ Indus., Inc., 118 B.R. 606, 610 (Bankr. N.D. IIL.
1990). In other words, the reorganized debtor is a new
entity not subject to the jurisdiction of the bankruptcy
“Heartland notes that the motion was granted less
than twenty-four hours after its filing. The record does not
reflect whether debtor played any active role in presenting
the motion for signature without notice to Heartland. The
court has not considered the quick approval of the motion
as any evidence with regard to debtor’s good faith or lack
thereof.
55
Qe eS ee. Ss _, . _ =. ) - L el +. Di ‘F. ‘. * ne ee ad I ual Ae
court, except as provided in the plan. Therefore, approval
of fees for post-confirmation services is not required.
Moreover, although 11 U.S.C. § 1129(a)(4) calls for
approval of fees for preconfirmation services, Heartland
does not contend that the fees for any such services have
not been disclosed or that approval for payment of same
will not be sought. The plan need not contain a specific
provision mandating that all relevant payments be subject
to court approval. In re Future Energy Corp., 83 B.R.
470, 488 (Bankr. S.D. Ohio 1988).
4. Best Interest Test
Heartland claims that the plan fails to meet the
best interes. ©2:t, which requires that a dissenting creditor
must receive on account of his claim property of a value,
as of the effective date of the plan, that is not less than
the amount the creditor would receive under a Chapter 7
liquidation. In re Elm Creek Joint Venture, 93 B.R. 105,
109 (Bankr. W.D. Tex. 1988). Debtor responds that
Heartland will receive more on its unsecured claim under
the plan than in a liquidation,” but the record does not
support this contention. As previously stated, debtor made
no showing that the property could or would be later sold
for an amount sufficient to pay off Heartland’s secured
claim or to whom such sale would be made. Moreover,
because the plan does not set forth the terms of the new
‘Debtor further states, echoing the bankruptcy court’s
statements in item 27 of the Findings, that all unsecured
creditors are better off under the plan. The test, however,
is not how the plan affects creditors in general, but rather
whether the dissenting creditor will receive not less than
the amount he would receive under Chapter 7 liquidation.
56
deed of trust to be executed in favor of Heartland, there
is no assurance that Heartland’s rights as a secured
creditor will not be altered. Findings Nos. 26 and 27 must
be set aside.
C. Whether the Plan Meets the Requirements
for Cramdown
1. Fairness and Equity
To be confirmed over the objection of an impaired
secured creditor, a plan of reorganization mus! not
discriminate unfairly and must be fair and equitable with
respect to the secured claim. 11 U.S.C. § 1129(b). "Fair
and equitable" as used in the context of a cramdown
means that, at a minimum, the secured creditor must
receive the indubitable equivalent of his secured claim. In
re Sandy Ridge Dev. Corp., 881 F.2d at 1349-50. In other
words, mere technical compliance with § 1129(b)(2) does
not assure that the reorganization plan is fair and
equitable. Federal Sav. & Loan Ins. Corp. v. D&F
Constr., Inc. (In re D&F Constr., Inc.), 865 F.2d 673, 675
(Sth Cir. 1989). Rather, the court must consider the plan
as a whole and all of the facts and circumstances
surrounding treatment of the creditor’s claim. Id.
The concept of indubitable equivalence was
enunciated by Judge Learned Hand in In re Murel
Holding Corp.:
It is plain that "adequate protection" must
be completely compensatory; and _ that
payment ten years hence is not generally the
equivalent of payment now. Interest is
indeed the common measure of the
57
difference, but a creditor who fears the
safety of his principal will scarcely be
content with that; he wishes to get his
money or at least the property. We see no
reason to suppose that the statute was
intended to deprive him of that in the
interest of junior lienholders, unless by a
substitute of the most _ indubitable
equivalence.
75 F.2d 941, 942 (2nd Cir. 1935). The indubitable
equivalence standard is stringent. In re Future Energy
Corp., 83 B.R. 470, 496. Where a secured creditor
receives neither his money nor the property upon which he
has a lien, the debtor must show by clear and convincing
evidence that the protection provided under the plan to
the secured creditor is completely compensatory. In re
Murel Holding Corp., 75 F.2d at 942; In re Future Energy
Corp., 83 B.R. at 481.
In this case, the record does not support the
bankruptcy court’s finding that debtor met the strict
requirements of § 1129(b)(2). The record does not
contain evidence to support debtor’s contention that
Heartland will be paid in full, e.g. the record does not
reflect, because debtor failed to show, what the value of
Regalridge will be in fifteen years, that there is any
prospect for the sale or refinancing of Regalridge, or who
the purchaser or refinancer might be. Moreover,
Heartland is not assured that it will retain the liens it now
has. Despite debtor’s assurance that it intended that the
new deed of trust contain the same provisions as the old,
no new deed of trust has ever been presented. The plan
itself provides that WHeartland’s secured interest is
unaffected except to the extent that it is contrary to the
58
i
:
4
;
u
=}
.
letter and spirit of the plan, whatever that might mean.
2. The Absolute Priority Rule
The ab«“'ute priority rule provides that a dissenting
class of unse:_*~*1 creditors must be compensated in full
before any junior class can receive or retain any property
under a plan. 11 U.S.C. $ 1129(b)(2)(C)(ii); Norwest
Bank Worthington v. Ahlers, 485 U.S. 197 (1988); Case v.
Los Angeles Lumber Prods. Co., 308 U.S. 106 (1939).
Heartland maintains that the plan violates the absolute
priority rule because (1) junior creditors will receive
payment before Heartland’s secured claim is paid in full
and (2) its secured claim is not properly valued.
Heartland’s first point is well taken. As discussed
in the immediately preceding section of this opinion, the
record does not reflect that Heartland will receive the
indubitable equivalent of its secured claim. In other
words, Heartland’s claim may not be paid in full. The plan
nevertheless calls for payments to junior lienholders before
senior claims are paid. The fact that Heartland also has
an unsecured claim does not change the requirements of
the absolute priority rule.”
“In support of its first argument, Heartland
additionally points to the fact that debtor selected the
persons who would select the Regalridge trustees, and
further, the fact that a management company owned by
debtor’s general partner would qualify to be appointed by
the Regalridge trustees to manage Regalridge. Heartland
fails to show how either of these facts is relevant. The
record does not reflect that debtor will have any control
over-the Regalridge trustees or that any entity affiliated
59
As for the issue of valuation of Heartland’s secured
claim, Heartland fails to explain why such valuation is
relevant to the absolute priority rule, which addresses only
the treatment of unsecured claims." Relevancy, vel non,
Heartland fails to show that the bankruptcy court erred in
determining the amount of Heartland’s secured claim.
The value a secured creditor is entitled to receive and
must receive is the value accorded to a buyer in an arm’s
length transaction, that is, the going concern value of the
property. Lakeside Global, 116 B.R. at 513. See also
Overholt v. Farm Credit Servs. (In re Overholt), 125 B.R.
202, 215 (S.D. Ohio 1990). Tax liens and the cost of
necessary repairs must be subtracted to determine the fair
market value of the property, i.e. the allowed secured
claim. In re Groff, 131 B.R. 703, 707 (Bankr. E.D. Wis.
1991); Beacon Hill Apartments Ltd. v. Columbia Sav. &
Loan Ass’n (In re Beacon Hill Apartments Ltd.), 118 B.R.
148, 149 (N.D. Ga. 1990); Wolk v. Goldome Realty Credit
Corp. (In re 222 Liberty Assocs.), 105 B.R. 798, 801
(Bankr. E.D. Pa. 1989).
For the reasons discussed in this section VII,
Findings Nos. 41, 42, and 43 must be set aside.
with debtor will be appointed to manage the property.
Heartland further states that the plan provides, and the
disclosure statenient indicates, that "interest holders" of
debtor are to be discharged upon plan confirmation.
Heartland’s brief at 40. The plain language of the plan
and disclosure statement does not support this contention.
“Valuation of collateral would seem to be an issue
more appropriately addressed in the context of feasibility
or fairness and equity.
60
VIII.
Orders Nunc Pro Tunc
Heartland maintains that the bankruptcy court
erred in granting nunc pro tunc debtor’s applications for
authority to employ an appraiser, an architect, and a
marketing consultant. The record reflects that the
appraiser was retained by debtor in the summer of 1990
and paid a $4,000.00 retainer; the architect was retained in
April 1990 and as of the confirmation hearing had received
compensation of almost $25,000.00; the marketing
consultant had been retained in August 1990 and had been
paid approximately $23,000.00 at the time of the hearing.
In December 1990, debtor moved for the retroactive
approval of its hiring of these professionals. At the
hearing on its applications, debtor admitted that the failure
to seek prior approval was "merely an oversight" and
something that "fell through the cracks." Tr. Vol. I, 10-12.
The Bankruptcy Code and rules contain specific
requirements for the retention and compensation of
professionals. See Bankruptcy Code §§ 327 and 330;
Bankr. R. 2014 and 2016. Courts in this Circuit require
strict adherence to these provisions. See, e.g. In re
- Consolidated Bancshares, Inc., 785 F.2d at 1254 & n.3.
Moreover, nunc pro tunc applications are not to be
granted except where there are exceptional circumstances.
Fanelli v. Hensley (In re Triangle Chemicals, Inc.), 697
F.2d 1280, 1289 (Sth Cir. 1983). Mere oversight in filing
a timely application is not an extraordinary circumstance
that warrants nunc pro tunc approval. In re Aladdin
Petroleum Co., 85 B.R. 738, 739 (Bankr. W.D. Tex. 1988).
The bankruptcy court did not find that rare or exceptional
circumstances existed nor would the record have supported
such a finding. Accordingly, the court finds that the orders
61
nunc pro tunc approving the employment of professionals
must be set aside.
IX.
Denial of Heartland’s Administrative Claim
On or about January 3, 1991, Heartland filed its
motion to allow administrative claim. The motion recited
that, since January 18, 1990, when the bankruptcy court
entered an order for use of rents, debtor had paid for all
of its operations with Heartland’s cash collateral.
Heartland alleged that debtor had expended at least
$2,193,334.14 as of September 30, 1990, and that
Heartland was entitled, pursuant to 11 US.C. §
503(b)(1)(A), to recover as an administrative expense that
amount plus whatever amounts had been subsequently
expended by debtor for preserving and managing the
bankruptcy estate.
Debtor filed an objection to the motion, pointing
out that Heartland’s reading of the Code was absurd and
that Heartland was not entitled to an administrative claim
except under 11 U.S.C. § 507(b) if its collateral declined in
value during the pendency of the bankruptcy. Heartland
responded by completely altering its prior position and
asserting that it was entitled to an administrative claim for
every expense incurred by debtor that debtor could not
prove was reasonable and necessary and incurred for
Heartland’s benefit. The bankruptcy court considered the
motion at a hearing on January 23, 1991, and denied the
relief sought by order signed January 24, 1991.
Heartland includes among its issues on appeal,
almost as an afterthought, that the bankruptcy court erred
in denying its motion for administrative claim. Although
62
none too clear, Heartland’s complaint appears to be that
debtor was only entitled to use Heartland’s cash collateral
if debtor could meet the test of 11 U.S.C. § 506(c).”
Heartland maintains that debtor could not meet the test
with regard to its expenditure of at least $284,000.00,"
and that, therefore, Heartland should have been granted
an administrative claim of that amount.
Case law support debtor’s, rather than Heartland’s
interpretation of the Code. In a Chapter 11 case, a debtor
iri possession has a statutory right to use encumbered
assets to operate its business. In re Provincetown-Boston
Airline, Inc., 66 B.R. 632, 634 (Bankr. M.D. Fla. 1986).
Indeed, most real property reorganizations would fail if the
debtor could not use the income stream generated by the
property. In re Fry Road Assocs., |.td., 66 B.R. 602, 604-
05 (Bankr. W.D. Tex 1986). The right to use collateral
necessary to reorganization may not be taken away unless
the secured creditor can demonstrate that it cannot
otherwise be adequately protected. In re Provincetown-
Boston Airline, Inc., 66 B.R. at 634. In that event, the
remedy available to the secured creditor is not through §
503(b), but rather through § 507(b). First State Bank v.
"Appellant further asserts that, "under general
principles of subrogation”, it "stands in the shoes of those
administrative claimants who received its cash collateral."
Appellant’s brief at 52. The court is unable to
comprehend this argument.
"The court is unclear as to whether this amount is
supported by the record. Appellant cites its own
statement of facts in support of this figure, although the
amounts recited therein total only $84,971.00.
63
Advisory Information and Management Systems, Inc. (In
re Advisory Information and Management Systems, Inc.),
50 B.R. 627, 629 (Bankr. M.D. Tenn. 1985).
The purpose of § 503(b) is to encourage third
parties to provide goods and services necessary for
successful reorganization. In re Jartran, Inc., 732 F.2d 584,
588 (7th Cir. 1984). The Code and case law simply do not
support any argument that § 503 was intended as an
optional remedy to adequate protection provided by § 361.
In re Provincetown-Boston Airline, Inc., 66 B.R. at 634.
As one court has stated, "the secured creditor is not
contributing to the estate by allowing a debtor in
possession to use collateral which it already owns and has
a Statutory right to use." Id.
X.
Deposit of Consideration
The final section of Heartland’s appeal brief
addresses the bankruptcy court’s failure to require the
deposit of monies to be distributed upon plan confirmation
into a special account. Heartland maintains that the
special account is necessary to assure that funds generated
from the operation of Regalridge not be used to pay the
claims of junior creditors. Heartland asserts that the
denial of its motion constituted an abuse of discretion, but
cites no authority in support of this proposition. The court
is unable to find that the bankruptcy judge abused his
discretion in this regard.
a
XI.
Further Proceedings
There does not appear to be a _ reasonable
likelihood that a confirmable plan could be proposed
under the facts of this case. Accordingly, there is no
reason why the automatic stay should not be lifted to allow
Heartland to foreclose its liens in the property. Further,
orders should be made by the bankruptcy court to cause
the estate to be reimbursed for any payments it has made
to the appraiser, the a.chitectural design and supervision
company, and the marketing agent as authorized by the
bankruptcy court.
XII.
ORDER
For the reasons set forth herein,
The court ORDERS that:
l. The bankruptcy court’s findings of fact and
conclusions of law Nos. 12, 13, 15, 17, 22, 26, 27, 31, 36,
37, 38, 41, 42 and 43 be, and are hereby, set aside;
2. The bankruptcy court’s orders (a) confirming
debtor’s fourth amended plan of reorganization, (b)
employing and retaining James W. Daniels & Associates,
Inc., as appraiser, and (c) employing and retaining John
R. Horton, Inc., as architectural design and supervision
company, and the ruling of the bankruptcy judge
approving the employment of the marketing agent, nunc
pro tunc, be, and are hereby, REVERSED; and
65
The consolidated actions be, and are hereby,
remanded for further proceedings consistent with this
memorandum opinion and order.
SIGNED April 14, 1992.
s/John McBryde
JOHN MCBRYDE
United States District Judge
66
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
FORT WORTH DIVISION
In re: §
§
Briscoe Enterprises, Ltd. § Case No.
II, d/b/a Regalridge Square §
Apartments, § 489-44447-MT-11
§
Debtor. §
ORDER CONFIRMING DEBTOR’S FOURTH
AMENDED PLAN OF REORGANIZATION
In conformity with the Findings of Fact and
Conclusions of Law entered by this Court in the above
styled and numbered bankruptcy proceeding on this date,
it is
ORDERED, ADJUDGED AND DECREED that
Heartland’s Motion to Convert or Dismiss this case be and
is hereby DENIED without prejudice.
IT IS FURTHER ORDERED that the Plan
proponent’s request to confirm the Plan is GRANTED.
IT IS FURTHER ORDERED that the Objection
by Heartland and any specific objection not already
addressed explicitly or implicitly by the Court’s Findings of
Fact and Conclusions of Law are OVERRULED.
IT IS FURTHER ORDERED that the Plan be and
hereby is CONFIRMED.
67
a
IT IS FURTHER ORDERED that all further relief
not expressly granted herein be, and it is hereby DENIED.
IT IS SO ORDERED.
SIGNED:_ April 23, 1991
s/Massie Tillman
Honorable Massie Tillman
United States Bankruptcy Judge
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF TEXAS
FORT WORTH DIVISION
In re: §
§
Briscoe Enterprises, Ltd. § Case No.
II, d/b/a Regalridge Square §
Apartments, § 489-44447-MT-11
§
Debtor. §
FINDINGS OF FACT AND CONCLUSIONS OF LAW
At Fort Worth, Texas, in said District:
Debtor, Briscoe Enterprises, Ltd., II, d/b/a
Regalridge Square Apartments ("Briscoe"), filed a
voluntary petition for relief under Chapter 11 of the
Bankruptcy Code on the 29th day of December, 1989.
On the 23rd day of January, 1991, the Court
commenced a hearing on Confirmation of the Debtor’s
Fourth Amended Plan of Reorganization, continuing on
the 24th, 25th and 28th day of January, 1991 and
concluding on the 18th day of March, 1991, in the above-
styled and numbered bankruptcy case.
Debtor appeared by and through its counsel of
record, Weil, Gotshal & Manges. Heartland Federal
Savings and Loan ("Heartland"), the only party objecting
to confirmation of the Plan of Reorganization, appeared
by and through its counsel of record, Gardere & Wynne.
69
~
Pursuant to the Court’s oral ruling, confirming
Debtor’s Fourth Amended Plan of Reorganization and
after hearing the testimony and evidence presented and
reviewing the pleadings, legal memoranda, written
arguments of counsel, and legal precedent relevant to the
dispute, this Court makes the following additional Findings
of fact and Conclusions of Law:
Background
1. On December 29, 1989, Briscoe Enterprises,
Ltd. II (the "Debtor") filed a voluntary petition under
Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code").
y A The Debtor’s principal asset is a 784-unit low
to moderate income property more commonly known as
the Regalridge Square Apartments (the "Property"). The
Property is located at 4500 Campus Drive, Fort Worth,
Texas.
ae Heartland holds an undisputed first lien on
the real property comprising the Property pursuant to (a)
a Deed of Trust, Assignment of Rents and Security
Agreement dated January 31, 1984, which Deed of Trust
is recorded in Volume 7731, Page 1534, et. seq. of the
Deed of Trust Records of Tarrant County, Texas, and (b)
that certain Deed of Trust, Assignment of Rents and
Security Agreement dated April 11, 1983, which Deed of
Trust is recorded in Volume 7486, Page 2280, et. seq. of
the Deed of Trust Records of Tarrant County, Texas. The
amount owed to Heartland by the Debtor exceeds the
value of the Property. As a result, Heartland is
undersecured and holds a substantial unsecured claim
against the Debtor. Additionally, because of the value of
70
a
the Property and the amounts owed to Heartland, a
second lien exceeding $7 million on the Property in favor
of the City of Fort Worth also has become a substantial
unsecured claim.' Because of the lapse of Heartland’s
UCC-1 Financing Statement, the Debtor has sought to
avoid Heartland’s lien in and to the personalty, which
partially comprises the Property. This Court entered an
order denying the Debtor’s avoidance action and that issue
is currently on appeal to the District Court. The
Disposition of that appeal is not relevant to whether the
Plan should be confirmed.
4. In June, 1990, Debtor filed its Plan of
Reorganization. Thereafter, Debtor’s initial bankruptcy
counsel was disqualified from further representation of the
Debtor in this case. A motion to dismiss or convert this
case to a case under Chapter 7 was filed by Heartland. If
the case were dismissed or converted, one possible
outcome would be Heartland obtaining ownership of the
Property through foreclosure.
ae Debtor subsequently retained substitute
counsel and thereafter, on November 16, 1990, filed its
First Amended Plan of Reorganization, which was later
modified by the filing of the Debtor’s (a) Second Amended
Pian of Reorganization on December 12, 1990, (b) Third
Amended Plan of Reorganization on December 20, 1990,
and (c) Fourth Amended Plan of Reorganization on
January 22, 1991. The Fourth Amended Plan of
Reorganization (the "Plan") was the Plan of
'The City of Fort Worth is also the holder of an ad
valorem tax claim which is separate and distinct from its
$7 million undersecured claim.
71
Reorganization ultimately presented to the Court for
confirmation.
6. On November 16, 1990, the Debtor filed its
First Amended Disclosure Statement, which was later
modified by the filing of the Debtor’s (a) Second Amended
Disclosure Statement on December 12, 1990, and (b)
Third Amended Disclosure Statement on December 20,
1990. The Third Amended Disclosure Statement (the
"Disclosure Statement") was approved by the Court on
December 21, 1990, as containing adequate information as
required by 11 U.S.C. $1125.
r The deadline established by the Order for
voting on the Plan was January 18, 1991. On January 14,
1991, Heartland filed its objection to the Plan (the
"Objection"). No other creditor filed an objection to the
Plan. All other creditors and classes allowed to vote on
the Plan voted to accept the Plan. Heartland, the Class 4
creditor, voted to reject the Plan, both in its secured and
unsecured capacity. The Debtor and Heartland each filed
their respective memoranda in support of and in
Opposition to the Plan.
8. On January 23, 1991, the Court began the
confirmation hearing on the Debtor’s Plan and Heartland’s
Motion to Convert or Dismiss. The confirmation hearing
continued over a period of five days on January 23, 24, 25
and 28, and March 14, 1991. Closing arguments were
made by the parties at the close of the confirmation
hearing on March 14, 1991.
9. Upon consideration of the Plan and the
Objection filed by Heartland, and the Court having
considered and admitted into evidence for purposes of the
72
confirmation hearing, the documents identified in the
exhibit lists filed by the Debtor and Heartland, together
with the pleadings and other papers filed in this case, and
the evidence and arguments of counsel having been
presented to this Court, in accordance with Bankruptcy
Rules 7052 and 9014, the Court makes the following
Findings of Fact and Conclusions of Law:
FINDINGS OF FACT AND CONCLUSIONS OF LAW
10. This Court has jurisdiction over this case.
Confirmation of the Plan and Heartland’s Motion to
Convert or Dismiss are "core" matters. 11 U.S.C. § 1129;
28 U.S.C. $ 157(b)(1), § 157(b)(2)(A), (L), (O), and §
1334.
11. The modifications to the Plan, which were
included in the Plan after voting thereon, but prior to
confirmation, do not adversely change the treatment of the
claim of any creditor of the Debtor. See Bankruptcy Rule
3018.
Section 1129(a)(1)
12. The Plan complies with the applicable
provisions of the Bankruptcy Code.
13. Article 3 of the Plan designates six (6)
separate classes of claims and interests. 11 U.S.C. §
1123(a)(1). The claims and interests in each class are
based upon separate and distinct legal natures. Therefore,
a reasonable basis exists for separate classifications of
these claims and interests. The claims and interests>in
each class under the Plan are substantially similar and
their classification satisfies the requirements of $ 1122(a)
73
of the Bankruptcy Code.
14. Heartland objected to the Plan on the
grounds that the Plan did not specify whether the
Administrative Claims or the Priority Claims are impaired.
Such a designation with respect to Administrative Claims
and Priority Claims is unnecessary. Pursuant to 11 U.S.C.
§ 1129(a)(9) of the Bankruptcy Code, the Administrative
Claims and Priority Claims cannot be impaired. The class
of interest holders is also not specified as unimpaired.
Such a designation is meaningless because the interest
holders did not receive or retain any property under the
Plan and, hence, are deemed not to have accepted the
Plan. 11 U.S.C. $1126(g).
15. | Heartland also objected to the Plan on the
grounds that both its deficiency claim and its secured claim
were included in one class. If Heartland had made an
election under §1111(b) election, its unsecured claim
should technically have been classified separately from its
secured claim. The Court accepted the Plan which
provided for separate classification of Heartland’s secured
and unsecured claims. Heartland’s secured claim will
receive the treatment provided in Class 4 while its
unsecured claim will receive the same treatment as
provided in Class 5. Two unsecured classes of non-insider
creditors voted to accept the Plan; thus, the control of two
classes by Heartland effectuates a non-substantive and
technical amendment to the Plan. The Court recognizes
the "well established principle that relief under bankruptcy |
laws is not to be withheld because of technicalities." Kane
v. Johns-Manville, (In re Johns-Manville), 843 F.2d 636,
648 (2nd Cir. 1988) (cite omitted). Heartland’s objections
to confirmation of the Plan based on technical issues
relating to classification are overruled.
74
16. _—‘ Article 4 of the Plan describes the treatment
to be afforded to each of the impaired classes. 11 U.S.C.
§ 1123(a)(3).
17. Article 5 of the Plan provides adequate
means for execution and implementation of the Plan. 11
U.S.C. § 1123(a)(5). Section 5.2 of the Plan provides that
at closing, the Regalridge Trust will be established for the
purposes of owning, managing, and operating the Property.
The property will be transferred to the Regalridge Trust
upon the effective date. The Plan further provides that all
interests in the Debtor will be deemed cancelled.
18. The Plan further provides that on the
effective date, the Regalridge Trust will be executed by the
Debtor and the Regalridge Trustees. The Plan provides
for the appointment of three (3) Regalridge Trustees to
hold and manage the Property.. The Regalridge Trustees
will be appointed one each by the City of Fort Worth, the
Fort Worth NAACP, and Heartland. The third Regalridge
Trustee will be appointed by Heartland. The Plan also
specifies the minimum qualifications for the Regalridge
Trustees. Each Regalridge Trustee must be (a) a resident
of the City of Fort Worth; (b) at least 35 years of age; (c)
uninvolved in any business or partnership with Leonard E.
Briscoe, Sr. or the Debtor; and (d) unrelated to and not a
close personal friend of Leonard E. Briscoe, Sr. The Plan
further provides that the Regalridge Trustees will receive
no compensation for their services but may receive
reimbursement of their actual and necessary expenses
incurred in carrying out their responsibilities under the
Trust. In addition, the Regalridge Trustees will serve
without bond. The Court finds that the provisions of the
Plan regarding the selection of the Regalridge Trustees are
consistent with the interest of creditors and with public
75
policy.
19. The Plan provides for the distribution to
creditors on a pro rata basis of the cash flow on at least an
annual basis.
20. The Plan provides for the transfer of the
Property to the Regalridge Trust, which ‘s not a
corporation. Thus, § 1123(a)(6), made applicable to this
case by § 1129(a)(1), is not applicable.
21. The manner and selection of the Regalridge
Trustees is consistent with the interests of creditors and
with public policy. The Debtor has disclosed the identity
and affiliation of the Regalridge Trustees who have been
appointed by the Fort Worth NAACP and the City of Fort
Worth. The appointment and qualifications of the
Regalridge Trustees are consistent with the interests of
creditors and public policy.
Section 1129(a)(3)
22. The Plan has been proposed in good faith
and not by any means forbidden by law. 11 U.S.C.
§1129(a)(3). In order to determine whether a plan has
been proposed in good faith, the Court must look to the
totality of the circumstances surrounding the formation of
the Plan. In re Texas Extrusion Corp., 844 F.2d 1142,
1160 (Sth Cir.), cert. denied, 488 U.S. 926 (1988). A plan
proposed with a legitimate and honest purposes, and which
has a reasonable hope of success, satisfies the good faith
requirement. In re Sun Country Dev., Inc., 764 F.2d at
408 (Sth Cir. 1985). The Plan provides a vehicle for
restructuring the debt of the Property and preserving the
Property for the benefit of both creditors and the Fort
76
Worth community. Moreover, none of the interest holders
of the Debtor will retain anything under the Plan.
Consequently, the Plan has been proposed in good faith
and not by any means forbidden by law.
Section 1129(a)(4)
23. Section 1129(a)(4) requires that payments
for services or for costs and expenses in and in connection
with the case, or in connection with the Plan and incident
to the case, either have been approved by the Court as
reasonable or are subject to approval of the Court as
reasonable. Interim payments remain subject to review
and approval by this Court on final application. The Plan
provides that any other payments falling within the
parameters of § 1129(a)(4) will not be made without Court
approval.
Section 1129(a)(5)
24. Section 1129(a)(5) requires the Debtor to
disclose the identity of certain individuals who will hold
positions with the Debtor or its successor after
confirmation of the Plan. The Debtor will not retain any
interest in the Property after confirmation. — Instead,
Regalridge Trustees will be appointed to administer the
Regalridge Trust which will own and hold the Property.
The appointment of the Regalridge Trustees pursuant to
the provisions of the Plan and as discussed herein is
consistent with the interests of creditors and public policy.
Section 1129(a)(6)
25. There are no rates applicable to the
Debtor’s business over which any regulatory commission
77
will have jurisdiction after confirmation. 11 U.S.C. §
1129(a)(6).
Section 1129(a)(7)
26. The Plan satisfies the requirements of
§1129(a)(7), the best interests of creditors test. Under the
Plan, Classes 3, 4 and 5 are impaired. With respect to
Classes 3 and 5, each voting hoider of a claim in such class
will receive or retain under the Plan on account of the
claim property of a value, as of the effective date, that is
not less than the amount that each holder would receive
or retain if the Debtor were instead liquidated under
Chapter 7 of the Bankruptcy Code on the effective date or
has accepted the Plan.
27. With respect to satisfaction of §1129(a)(7)
regarding the claims of Heartland, the Debtor presented
evidence to the Court which shows that the Property will
probably support debt service equal to Heartland’s secured
claim of $8.2 million. In other words, Heartland will
receive the present value of its secured claim. In addition,
the Court finds, based on the evidence presented, that
over the next six years, money will be available as cash
flow for distribution to creditors whose claims will be
treated as unsecured Class 5 claims after payment of
ordinary and necessary operating expenses and payment of
debt service on Heartland’s secured claim. The unsecured
deficiency claim of Heartland, which is approximately $10
million, will receive the same treatment provided for Class
5 claims. The Debtor provided additional evidence which
showed that in the event of liquidation in a Chapter 7
case, Only the priority claim of the City of Fort Worth and
the secured claim of Heartland (Classes 2 and 4,
respectively) would receive any consideration.
78
Consequently, in a Chapter 7 liquidation case, no amounts
would be available for distribution to creditors whose
claims are treated as unsecured Class 5 claims under the
Plan.
Section 1129(a)(8)
28. Section 1129(a)(8) requires that each
impaired class of claims or interests have accepted the
Plan. The City of Fort Worth timely file a ballot to accept
the Plan based upon its Class 2 claim. The Court finds
that based on Ballots filed with this Court, the City of Fort
Worth voted its impaired Class 3 claim to accept the Plan.
The unsecured Class 3 claim of the City of Fort Worth
exceeds $7 million. The Court also finds that: (i) six Class
5 creditors also timely filed ballots to accept the Plan; (ii)
five additional Class 5 creditors voted to accept the Plan,
but such ballots were received after the deadline for filing
the ballots; and (iii) no Class 5 creditors voted against the
Plan. After considering the evidence presented, the Court
finds that based upon the timely filed Ballots by Class 3
and Class 5 creditors, such claims are sufficient in number
and amount to constitute acceptance by such classes of the
Plan pursuant to 11 U.S.C. §1126. Because both the
unsecured and secured claims of Heartland voted to reject
the Plan, the Plan does not satisfy the requirements of
§1129(a)(8). The holders of interests in Class 6 will
neither receive nor retain property under the Plan, and
therefore, are deemed to have rejected the Plan. 11
US.C. $1126(g).
Section 1129(a)(9)
29. Section 1129(a)(9) contains a number of
requirements concerning the payment of priority claims.
79
The Plan meets the requirements of two subsections of
Section 1129(a)(9) by providing for payment in full of
priority claims in cash on or before the later of the
effective date of the Plan and the date a priority claim is
allowed.
Section 1129(a)(10)
30. The holders of claims in at least one
impaired class under the Plan have accepted the Plan,
determined without including any acceptance of the Plan
by an insider of the Debtor which holds a claim in that
class. In this case, Class 3, an impaired class, has voted to
accept the Plan. None of the creditors in Class 3 are
insiders within the meaning of $1129(a)(10).
Section 1129(a)(11)
31. The Plan is feasible and has a marginal
prospect of success. The reorganized Debtor is capable of
performing under the Plan and confirmation will not likely
be followed by the need for further financial
reorganization or liquidation of the Debtor or its successor
except to the extent that the Plan provides for liquidation
and reorganization.
32. The Plan contemplates the use of operating
revenue for the success of the Plan. In order to determine
whether the Plan is feasible, the Court is required to
determine (a) the value of Heartland’s secured claims; and
(b) the likelihood that the Property can generate sufficient
cash flow to pay its ordinary and necessary operating
expenses, meet debt service and produce a surplus for
distribution to creditors.
33. Section 506(a) of the Bankruptcy Code
provides that an allowed claim of a creditor secured by a
lien on property in which the estate has an interest is
secured to the extent of the value of that creditor’s interest
in such property and is an unsecured claim to the extent
that the value of the creditor’s interest is less than the
amount of its allowed claim. The value of the creditor’s
secured claim is to be determined in light of the purpose
of the valuation and the proposed disposition of the
Property.
34. In the instant case, the Debtor has
approximately $750,000 in pre-petition ad valorem taxes
which upon sale or other disposition of the Property would
be paid before Heartland’s secured claim. In addition, the
Debtor presented evidence that approximately $250,000 to
$300,000 is needed to make repairs on the Property.
35. The Debtor presented evidence by its
appraiser, James Daniels, MAI, that the value of the
Property is $9.2 million, if the taxes are paid and if the
needed repairs have been made. The Court finds Mr.
Daniels’ testimony credible and convincing, and therefore,
finds that the value of the Property, as is, that is after
taking into consideration the $750,000 tax lien held by the
City of Fort Worth that will not be paid in full at
confirmation, and after making a deduction for repairs, is
$8.2 million. See Transcript of Hearing, pp. 38-55. The
Court finds that the value of Heartland’s secured claim is
$8.2 million.
36. | The Debtor’s financial projections showed
that with income of $200,000 per month, the Property will
generate sufficient cash flow to pay: (i) necessary and
normal operating expenses; (ii) the secured debt of
81
Heartland at a market rate of interest; and (iii) a dividend
to creditors whose claims are treated as Class 5 claims on
at least an annual basis. The Debtor’s evidence further
showed that for the past several months, the Debtor has
met or exceeded the $200,000 per month income that will
be needed to fund the Plan. The evidence further showed
that occupancy at the Property has increased from
approximately 55% at the commencement of the case to
its current level of 85%. The Debtor presented further
evidence that occupancy at the Property will probably
increase to approximately 90% within the first half of this
year. The Court accepts the Debtor’s projections but
cautions that the Debtor will have to work diligently to
make this Plan succeed.
37. The Debtor also has demonstrated its ability
to make the needed repairs on the Property. Prior to the
continuation of the confirmation hearing on March 14,
1991, counsel for the Debtor and Heartland announced to
the Court a resolution of the adversary proceeding filed by
the Debtor against Heartland for turnover of certain
insurance proceeds in order to make the repairs on the
Property. Pursuant to the agreement reached by the
parties, Heartland has consented to the Debtor’s use of
approximately $225,000 of insurance proceeds not only to
make repairs on the Property that are covered by the
insurance proceeds but also to use any excess insurance
proceeds to make additional repairs on the Property.
While some of the repairs are urgent in nature, the Debtor
presented testimony that some of the repairs could be
delayed throughout the remainder of the year and that
such deferred repairs could be paid for from cash flow that
will be available by the end of the year.
82
38. | Based on the evidence presented herein, the
Court finds that the Plan is not likely to be followed by the
need for further financial reorganization or liquidation and
is feasible.
Section 1129(a)(12)
39. All fees payable under 28 U.S.C. § 1930, and
determined by the Court at the confirmation hearing, have
been paid or the Plan provides for such payment.
Section 1129(a)(13)
40. The Debtor has no retiree plans, funds, or
programs that provide for the payment of retiree benefits
as defined in § 1141 of the Bankruptcy Code.
Section 1129(b)
41. Heartland voted its secured and unsecured
claims to reject the Plan. Notwithstanding such rejection,
the Plan may be confirmed pursuant to § 1129(b) of the
Bankruptcy Code because the Plan satisfies the
requirements of § 1129(a) except subparagraph (a)(8),
does not discriminate unfairly against Heartland, and is fair
and equitable.
42. The Plan is fair and equitable to Heartland
because Heartland will retain the lien securing its claim
and will receive on account of its claims deferred cash
payments totaling at least the allowed amount of its claim
of a value, as of the effective date of at least the value of
Heartland’s interest in the Property. The Plan provides
that Heartland’s secured claim will be paid in monthly
83
installments of principal and interest as though amortized
over thirty_years. Interest on the secured claim will be
paid at the rate of ten and one-quarter percent (10.25%)
per annum which is the same rate of interest included in -
the January 31, 1984 promissory note from the Debtor to
Heartland (or its Predecessor). The outstanding principal
balance of Heartland’s secured claim will be paid on the
earlier date of the sale of the Property or the expiration of
fifteen (15) years after the effective date. Based upon the
evidence presented at the confirmation hearing, the Court
finds that the rate of interest to be paid to Heartland on
account of its secured claim together with the scheduled
amortizing payments of principal to be made pursuant to
the Plan will provide Heartland with payments totalling the
present value of its secured claim.
43. Moreover, the treatment of Heartland’s
deficiency claim in Class 5 is identical to the treatment of
all creditors whose claims are being treated in Class 5.
Thus, the Plan protects the legal rights of Heartland’s
unsecured deficiency claim consistent with the treatment
afforded to the accepting unsecured Class 3 and Class 5
claims. The Plan also is fair and equitable to the
unsecured and secured claims of Heartland because no
holder of any claim or interest junior to Heartland’s claims
under the Plan will receive or retain on account of the
junior claim or interest any property under the Plan. In
addition, implicit in the fair and equitable standard of
§1129(b) is the requirement that single claims not receive
a recovery greater than 100% of their claims, based on the
evaluation of distribution at the time of the confirmation
hearing. No class of holders of claims that are senior to
the Class 4 claim under the Pian will receive distribution
having the value determined as of the time of the
confirmation hearing in excess of the allowed amount of
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such holder’s claim.
SUMMARY
Based upon the foregoing Findings of Fact and
Conclusions of Law, it is appropriate for this Court to
CONFIRM Debtor’s Fourth Amended Plan of
Reorganization, Overrule Heartland’s Objections to such
Plan and Deny Heartland’s Motion to Dismiss or Convert.
All further relief not expressly granted herein is
denied.
This Court shall enter an Order in conformity with
the Findings of Fact and Conclusions of Law entered this
date.
IT IS SO ORDERED.
SIGNED:__April 23, 1991
s/Massie Tillman
Honorable Massie Tillman
United States Bankruptcy Judge
85
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 92-1446
In re: Briscoe Enterprises, Ltd., II,
d/b/a Regalridge Apartments,
Debtor.
Heartland Federal Savings & Loan Association,
Appellee,
VS.
Briscoe Enterprises, Ltd., II,
d/b/a Regalridge Apartments,
Appellant.
On Petition for Rehearing and Suggestion
for Rehearing En Banc
Before Wisdom and Duhe’, Circuit Judges, and
Doherty*, District Judge.
*District Judge of the Western District of Louisiana, sitting
by designation.
EEE
Per curiam:
The petition for Rehearing is DENIED and no
member of this panel nor Judge in regular active service
on the Court having requested that the Court be polled on
rehearing en banc, (Federal Rules of Appellate Procedure
and Local Rule 35) the Suggestion for Rehearing En Banc
is DENIED.
Entered for the Court:
_s/John Minor Wisdom
United States Circuit Judge
August 16, 1993
Judges Barksdale, King and Jones did not participate in
the consideration of the suggestion for rehearing en banc.
xx Keke KK KK
Respectfully submitted,
Douglas S. Lang
Deirdre Ruckman
Stacy R. Obenhaus*
GARDERE & WYNNE, L.L.P.
3000 Thanksgiving Tower
Dallas, Texas 75201
(214) 999-3000
Attorneys for Petitioner
*Counsel of Record
87
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.