Opposition Brief — One Times Square Associates Ltd. Partnership v. Banque Nationale de Paris, 115 S. Ct. 1107 (1995) (No. 94-1126)

No. 94-1126 ge

IN THE | ee

Supreme Court of the Anited States

OCTOBER TERM, 1994

In re:

ONE TIMES SQUARE ASSOCIATES LIMITED

PARTNERSHIP,

Debtor.

ONE TIMES SQUARE ASSOCIATES LIMITED

PARTNERSHIP,

Petitioner,

VS.

BANQUE NATIONALE DE PARIS,

Respondent,

NORMA ORTIZ,

Trustee.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF IN OPPOSITION OF RESPONDENT

BANQUE NATIONALE DE PARIS

JOHN S. KINZEY*

JOHN P. CAMPO

TIMOTHY W. WALSH

LEBOEUF, LAMB, GREENE &

MACRAE L.L.P.

125 West 55th Street

New York, New York'10019-5389

(212) 424-8000

*Counsel of Record for Respondent

Banque Nationale de Paris

VW

BEST AVAILABLE COPY "amma

QUESTIONS PRESENTED

1. In light of the Court’s recent decision to deny the

petition for a writ of certiorari in Boston Post Road Ltd.

Partnership v. Federal Deposit Insurance Corp. (In re Boston

Post Road Limited Partnership), 21 F.3d 477 (2d Cir. 1994),

cert. denied, _U.S. __ (No. 94-442, Jan. 17, 1995), does the

Second Circuit’s per curiam, unpublished opinion in this

case, in which the Second Circuit merely followed Boston

Post Road on an essentially identical set of facts, present an

issue of sufficient importance to warrant consideration on the

merits by this Court?

2. Given the fact that the bankruptcy reorganization plan

proposed by the Debtor in this case did not separately classify

the “deficiency” claim of its undersecured mortgagee, does

this case present an appropriate occasion for the Court to

consider the arguments, advanced by the Petitioner, that such

separate classification is mandated by the Bankruptcy Code?

3. Where the bankruptcy court found, in factual findings

that were affirmed as not “clearly erroneous,” that the

Debtor’s separate “classification” of one group of its

unsecured creditors “serves no legitimate purpose” and was

done “solely to create a separate, non-insider impaired class

guaranteed to accept the [Reorganization] Plan” (ASO,

emphasis supplied), should this Court consider the Debtor’s

arguments that are premised on the contrary factual

proposition that “overriding legitimate reasons for separate

classification” had been demonstrated at the confirmation

hearing? ,

a,

iii

TABLE OF CONTENTS

Page

88 ope BOG 6 oy oS 1

pp ee ee 6 ill

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ARGUMENT:

THE PETITION FOR A WRIT OF

CERTIORARI SHOULD BE DENIED ........ 5

EER ec 10

TABLE OF AUTHORITIES

CASES Page(s)

Boston Post Road Ltd. Partnership v. Federal

Deposit Ins. Corp. (In re Boston Post Road Ltd.

Partnership), 21 F.3d 477 (2d Cir. 1994), cert.

denied, U.S. ___ (No. 94-442, Jan. 17, 1995)... 5,6

Hanson vy. First Bank of South Dakota, N.A., 828

ee BE GRE, WED dasscsecasceseviecesseonuseiensnencoes 6n

In re Jersey City Medical Center, 817 F.2d 1055 (3d

Cir. 1987)....... Be eet eicdideddaenisobsdinaicndbmsconecesies 6n

In re Mcorp Fin. Inc., 139 B.R. 820 (S.D. Tex.

a tatichiasdeiadidlccashatisbiaiaaeddensacsintsenvevienenesetes 4n

In re Woodbrook Assocs., 19 F.3d 312 (7th Cir.

oc cal ddcgaiilaiinigeaetnniinvessewenaene 6,7

Lomas Fin. Corp. v. Northern Trust Co. (in re

Lomas Fin. Corp.), 932 F.2d 147 (2d Cir. 1991)... Sn

iv

CASES | Page(s)

Olympia & York Florida Equity Corp. v. Bank of

New York (In re Holywell Corp.), 913 F.2d 873

CET Ga Se cirtainivstnttcisdctenteaealenetaaiins 6n

Phoenix Mut. Life Ins. Co. v. Greystone III Joint

Venture (In re Greystone III), 995 F.2d 1274 (Sth

Cir. 1991) cert. denied, US.__,113 S.Ct. 72

OF isirssciinsi:ckasAcadsieandiesndhnuasobocdgudanvamtanes etieraetanden 6n

Sonnax Indus. v. Tri Component Prods. Corp. (In re

Sonnax Indus. Inc.), 907 F.2d 1280 (2d Cir.

FUE viel’ vies nna thipnaghnndanaaianebanniindiaamaaadaan ts Sn

Teamsters Nat'l Freight Indus. Negotiating Comm.

v. U.S. Truck Co. (In re U.S. Truck Co.), 800

Fk Fee aes Fe haesissesaacinvidlainnelaendatines 6n

Travelers Ins. Co. v. Bryson Props, XVIII (In re

Bryson Props. XVIII), 961 F.2d 496 (4th Cir.),

cert. denied, U.S. __,113 S.Ct. 191 (1992)..... 6n

STATUTES

Bankruptcy Code, 11 U.S.C. § 101 et seq.

Sorte FOE, 10 U.G.C, © Pi icsccsevtaiscetisssccenesanien: 2

Section 1129(b)(2)(A), 11 U.S.C.

§ aI ois cs visa cu rinse sicisonaveieubacccunecaieanaae 3

OTHER AUTHORITIES

Collier on Bankruptcy (15 Ed. 1993)...........ccccccceeeeee 4n

No. 94-1126

IN THE

Supreme Court of the United Htates

OCTOBER TERM, 1994

In re:

ONE TIMES SQUARE ASSOCIATES LIMITED

PARTNERSHIP,

Debtor.

ONE TIMES SQUARE ASSOCIATES LIMITED

PARTNERSHIP,

Petitioner,

vs.

BANQUE NATIONALE DE PARIS,

Respondent,

NORMA ORTIZ,

Trustee.

ON PETITION FOR A WRI

STATES COURT OF APPE

BRIEF IN OPPOSITION OF RESPONDENT

BANQUE NATIONALE DE PARIS

T OF CERTIORARI TO THE UNITED

ALS FOR THE SECOND CIRCUIT

ationale de Paris (“BNP” or the

the petition of One

Limited Partnership (“OTS” or the

Respondent Banque N

“Bank”) submits this brief in opposition to

Times Square Associates

Debtor”) for a writ of certiorari to the United States Court of

Appeals for the Second Circuit.

STATEMENT

1. This case arises from the bankruptcy court’s decision

to lift the “automatic stay” imposed by the Bankruptcy Code

to allow the Bank to proceed with a foreclosure sale of OTS’s

only significant asset, a commercial office building that was

mortgaged to the Bank to secure a loan that has been in

default since 1991.

2. The Bank’s predecessor in interest’ loaned OTS

approximately $28 million. This loan was secured by a

mortgage on the Debtor’s real property located at One Times

Square in New York City. OTS defaulted on the loan, and in

October, 1991, the Bank initiated foreclosure proceedings

against OTS in the New York Supreme Court.

3. On March 11, 1992, OTS filed a bankruptcy petition

pursuant to Chapter 11 of the Bankruptcy Code in the United

States Bankruptcy Court for the Southern District of New

York. Pursuant to Section 362 of the Bankruptcy Code, this

filing automatically stayed the Bank from proceeding with its

foreclosure action. Thereafter, the Bank and OTS entered into

a stipulation in the bankruptcy court that allowed the Bank to

go forward with the foreclosure action through the entry of

judgment with the understanding that the Bank would return

to the bankruptcy court to seek further relief from the

automatic stay before conducting a foreclosure sale. A

' The loan to OTS was originally made by BNP’s subsidiary, Banque

Arabe et Internationale d’Investissement (“BAII”). During the course of

the litigation, BAII assigned the loan to BNP. For convenience, BNP and

BAII are interchangeably referred to as the “Bank,” except where the

context requires otherwise.

Ol

judgment of foreclosure and sale was ultimately entered in the

state trial court on April 8, 1993.

4. In July, 1992, OTS filed a proposed plan of

reorganization (the “Pjan”) in the bankruptcy court. Although

OTS argues in this Court that, as a matter of law, the Bank’s

undersecured “deficiency” claim must be placed in a separate

“class” of creditors, the Plan proposed by OTS did not

classify the Bank’s claim separately from OTS’s general class

of unsecured creditors. Instead, OTS grouped the Bank’s

deficiency claim with other unsecured creditors, and sought to

classify separately the claims of two advertising “signage”

companies whose existing contractual arrangements with OTS

were being rejected and renegotiated as part of the proposed

Plan.

5. The Bank opposed confirmation of the Debtor’s Plan

on a number of grounds and moved for complete relief from

the automatic stay. The bankruptcy court conducted a 10-day

evidentiary hearing, and held that the proposed Plan did not

meet the requirements of the Bankruptcy Code for three

separate reasons.

6. First, the bankruptcy court found that OTS’s scheme

for the classification of creditors was improper because the

separate classification of the signage companies “serves no

legitimate purpose in the financial restructuring of the

Debtor” and was done “solely to create a separate, non-insider

impaired class guaranteed to accept the Plan.” (A50). Second,

the bankruptcy court held that the proposed Plan was not “fair

and equitable” to the Bank because it did not provide for

payments to the Bank with a present value equal to the $19

million stipulated value of the Bank’s security interest in the

Debtor’s real property, as required-by Section 1129(b)(2)(A)

of the Bankruptcy Code. Third, the bankruptcy court held that

the additional capital which OTS’s partners were proposing to

inject into the reorganized Debtor was too insubstantial to

allow the partners to retain their equity interests under the

purported “new value” exception to the Bankruptcy Code’s

“absolute priority” rule.

7. Having denied confirmation on these three alternative

grounds, the bankruptcy court granted the Bank’s motion to

lift the automatic stay so the Bank could proceed with its

foreclosure sale.

8. On November 5, 1993, OTS moved for reconsider-

ation or reargument of the bankruptcy court’s decision.

Appended to its motion papers was a so-called “Alternative

Plan” of reorganization that, inter alia, proposed for the first

time to place the Bank’s unsecured deficiency claim in a

separate class of creditors. On November 17, 1993, the

bankruptcy court entered an order adhering in all respects to

its original decision. OTS has never submitted a proposed

disclosure statement for the Alternative Plan; never asked its

creditors to vote on it; and never sought a confirmation

hearing, all of which are prerequisites under the Bankruptcy

Code to determining whether the Alternative Plan can be

confirmed.

9. OTS appealed the bankruptcy court’s decision to the

United States District Court for the Southern District of

New York. Because the denial of confirmation of the Debtor’s

original Plan did not foreclose the possibility that the Debtor

might ultimately confirm the Alternative Plan or some other

reorganization plan, the bankruptcy court’s denial of

confirmation, in itself, was interlocutory and non-appealable.”

However, the notice of appeal properly brought before the

district court the issue of whether the bankruptcy court abused

its discretion by granting the Bank relief from the automatic

? See In Re Mcorp Fin. Inc., 139 B.R. 820, 822 (S.D. Tex. 1992); Collier

on Bankruptcy § 3.03, 3-197 (15 Ed. 1993).

stay.” On March 31, 1994, the district court affirmed the

bankruptcy court’s order lifting the automatic stay on the

grounds that OTS had adopted a creditor classification

scheme for the improper purpose of “gerrymandering” its

creditors’ vote on confirmation of the Plan. The district court

found it unnecessary to reach the two alternative grounds for

denying confirmation on which the bankruptcy court based its

order.

10. OTS further appealed to the United States Court of

Appeals for the Second Circuit. The court of appeals affirmed

on September 27, 1994 in an unpublished, per curiam opinion

of no precedential effect. The court of appeals based its

affirmance in this case on its recent holding in Boston Post

Road Ltd. Partnership v. Federal Deposit Ins. Corp. (In Re

Boston Post Road Ltd. Partnership), 21 F.3d 477 (2d Cir.

1994), cert. denied, __ U.S.__ (No. 94-442, Jan. 17, 1995), in

which the Second Circuit adopted the prevailing majority

view that separate classification of creditors’ claims is

improper when undertaken for the purpose of securing the

affirmative vote of an “impaired” class of claims to allow a

debtor to “cram down” the confirmation of. its plan of

reorganization.

ARGUMENT

THE PETITION FOR A WRIT OF CERTIORARI

SHOULD BE DENIED

1. In its decision in the Boston Post Road case, the

Second Circuit joined the Third, Fourth, Fifth, Sixth, Eighth

and Eleventh Circuits in holding that in © bankruptcy

reorganization cases, creditors’ claims “may not be separately

3 See Lomas Fin. Corp. V. Northern Trust Co. (In re Lomas Fin. Corp.),

932 F.2d 147, 151 (2d Cir. 1991); Sonnax Indus. v. Tri Component Prods.

Corp. (In re Sonnax Indus. Inc.), 907 F.2d 1280, 1284 (2d Cir. 1990).

——_—__SS-- sr

classified solely to engineer an assenting impaired class” to

allow confirmation by “cramdown” of the debtor’s plan of

reorganization. 21 F.3d at 482.* In the case now before this

Court on the pending petition, the Second Circuit merely

applied the rule of Boston Post Road, based on the bankruptcy

court’s factual finding that OTS had separately classified the

two signage companies’ claims solely to “gerrymander” the

confirmation vote to obtain approval from at least one

“impaired” class. This Court has now denied the petition for a

writ of certiorari in Boston Post Road, and the Second

Circuit’s decision in this case, which is unpublished and may

not be cited as authority under the Second Circuit’s rules (see

A4); is of no precedential effect; adds nothing to the holding

previously allowed to stand unreviewed by this Court in

Boston Post Road; and is of insufficient importance to merit

plenary review by the Court.

2. OTS argues that this Court should issue a writ of

certiorari to resolve the purported conflict between the Second

Circuit and other Courts of Appeal listed above, and the

decision of the Seventh Circuit in Jn re Woodbrook

Associates, 19 F.3d 312 (7th Cir. 1994). Woodbrook does

indeed contain a discussion suggesting that the separate

classification of an undersecured mortgagee’s non-recourse

* In so holding, the Second Circuit followed these prior decisions of its

sister circuits: /n re Jersey City Medical Center, 817 F.2d 1055 (3d Cir.

1987); Travelers Ins. Co. v. Bryson Props., XVIII (In re Bryson Props.,

XVIII), 961 F.2d 496 (4th Cir.), cert. denied, U.S. _, 113 S. Ct. 191

(1992); Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re

Greystone III), 995 F.2d 1274 (Sth Cir. 1991), cert. denied, US. _,

113 S. Ct. 72 (1992); Teamsters Nat'l Freight Indus. Negotiating Comm.

v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581 (6th Cir. 1986);

Hanson v. First Bank of South Dakota, N.A., 828 F.2d 1310 (8th Cir.

1987); Olympia & York Florida Equity Corp. v. Bank of New York (In re

Holywell Corp.), 913 F.2d 873 (11th Cir. 1990).

deficiency claim is mandatory under the Bankruptcy Code,

regardless of the debtor’s intent to “gerrymander” voting on

its plan of reorganization. However, there is no compelling

reason in this case for resolving this “conflict” between the

circuits because (1) the discussion in Woodbrook iS

technically dicta, since the Seventh Circuit affirmed the

denial of confirmation of the debtor’s plan of reorganization

on other grounds and (2) this is not the typical case of

conflicting circuit court authority because no fewer than seven

of the twelve courts of appeal have held that creditor

classification for the purpose of “gerrymandering” voting on

reorganization plans is impermissible under the Bankruptcy

Code. In this context, the Seventh Circuit decision in

Woodbrook is clearly aberrational, and its precedential value

will in all likelihood be limited to that single Circuit. To the

extent that future paneis of the Seventh Circuit feel obliged to

follow Woodbrook’s dicta, this Court, should it so desire, will

have the opportunity to resolve the conflict in an appropriate

future case arising in that Circuit.

3. This case, however, is clearly not an appropriate

vehicle for resolving the purported conflict between the

Seventh Circuit and the seven other circuits, for the simple

reason that OTS did not employ the classification scheme that

the Seventh Circuit suggested was mandatory under the

Bankruptcy Code. The Plan which the Debtor presented to the

bankruptcy court did not separately classify the Bank’s

undersecured deficiency claim from the general class of

unsecured general creditors, as OTS now argues is required

by the Woodbrook decision. Instead, OTS. separately

classified the two signage companies’ claims, arguing

unsuccessfully that their “unique” continuing interest in the

future operation of the One Times Square property justified

their separate creditor status. It was only after the bankruptcy

court rejected OTS’s arguments and found, as a factual

matter, that OTS’s only motive for separately classifying the

signage companies was to gerrymander the confirmation

voting that OTS brought forward its Alternative Plan,

separately classifying the Bank’s deficiency claim. However,

as discussed above, OTS never obtained a ruling from the

bankruptcy court on whether the Alternative Plan was

confirmable, and no evidentiary hearing was even held to

determine whether, as OTS now claims, the Alternative Plan

in fact corrected any of the three fatal defects the bankruptcy

court identified in the original Plan. This Court should not

adjudicate whether the Alternative Plan complies with the

requirements of the Bankruptcy Code, when the issue of

whether the Alternative Plan can be confirmed has not even

been tried by the bankruptcy court.

4. Not only does this case fail to present squarely the

issue of whether a mortgagee’s undersecured deficiency claim

must be separately classified, but granting a writ of certiorari

would unfairly prejudice the Bank, whose efforts to foreclose

on its mortgage have already been delayed for over three

years, without raising any realistic prospect that OTS will

ultimately obtain relief from the bankruptcy court’s decision

to lift the automatic stay. The Bank has noticed a foreclosure

sale for January 24, 1995, so this case will become moot

unless this Court or the Second Circuit issues a stay of that

sale. Any stay application, however, would raise the issue of

OTS’s probability of success on the merits, not only on the

classification issue, but on the ultimate issue of whether the

bankruptcy court abused its discretion in lifting the automatic

stay, after the bankruptcy court had found that the Debtor’s

original Plan violated the Bankruptcy Code on not one, but

three, independent grounds. Although the lower appellate

courts found it unnecessary to consider any issue but

classification, the bankruptcy court’s holdings that the Plan

was not “fair and equitable” and that the Plan violated the

“absolute priority” rule were more than adequate to sustain its

decision to lift the automatic stay, even assuming arguendo

that the bankruptcy court and the lower appellate court$ erred

in rejecting OTS’s classification scheme. This, then, is mot an

appropriate case for the issuance of a writ of certiorari

because OTS would not be entitled to relief from the

bankruptcy court’s order lifting the stay even if this Court

granted certiorari and reversed the lower courts’ decision on

the classification issue raised in OTS’s petition.

5. Finally, there is no merit in OTS’s argument that this

Court should issue a writ of certiorari to consider whether

separate classification of the signage companies is justified by

“overriding legitimate reasons.” As indicated above, the

bankruptcy court expressly found, as a factual matter, that

OTS’s classification scheme served no legitimate purpose,

and the lower appellate courts affirmed this finding as not

clearly erroneous. Obviously, this Court ought not exercise its

jurisdiction merely to review alleged errors in the lower

courts’ factual findings. :

10

CONCLUSION

The petition for a writ of certiorari should be denied.

Dated: January 19, 1995

Respectfully submitted,

JOHN S. KINZEY*

JOHN P. CAMPO

TIMOTHY W. WALSH

LEBOEUF, LAMB, GREENE &

MACRAE L.L.P.

125 West 55th Street

New York, New York 10019-5389

(212) 424-8000

* Counsel of Record for Respondent

Banque Nationale de Paris