REASONS FOR DECISION
WESLEY W. STEEN, Bankruptcy Judge.
I. Jurisdiction of the Court
This is a proceeding arising under Title 11 U.S.C. The United States District Court for the Middle District of Louisiana has original jurisdiction pursuant to 28 U.S.C. § 1334(b). By Local Rule 29, under the authority of 28 U.S.C. § 157(a), the United States District Court for the Middle District of Louisiana referred all such cases to the Bankruptcy Judge for the district and ordered the Bankruptcy Judge to exercise all authority permitted by 28 U.S.C. § 157.
This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(L); pursuant to 28 U.S.C. § 157(b)(1), the Bankruptcy Judge for this district may hear and determine all core proceedings arising in a case under Title 11 referred under 28 U.S.C. § 157(a), and the Bankruptcy Judge may enter appropriate orders and judgments.
No party has objected to the exercise of jurisdiction by the Bankruptcy Judge. No party has filed a motion for discretionary abstention pursuant to 28 U.S.C. § 1334(c)(1) or pursuant to 11 U.S.C. § 305. No party has filed a timely motion for mandatory abstention under 28 U.S.C. § 1334(c)(2). No party has filed a motion under 28 U.S.C. § 157(d) to withdraw all or part of the case or any proceeding thereunder, and the District Court has not done so on its own motion.
II. The Facts
The principal creditors are Louisiana National Bank ("LNB") and Livingston Bank.
The appraisers who testified about the value of the assets differed in their opinions of value. In tabular form, the Debtor's assets and secured liabilities are as follows:
Appraisers' Range of
Property Fair Market Value Lien Lienholder Rank1. Brightside $1.1-$2.4 million $2.4 million LNB First 2. Port Vincent $260,000-$1.1 million $2,500 C.V. Richards First $560,000 Livingston Bank Second $100,000 LNB Third 3. Miscellaneous principally $138,000 no lien assets of sewer equipment 4. A lender unknown value no lien liability lawsuit against LNB
The Debtor proposes a liquidating plan of reorganization in which "[i]t is clear that the unsecureds, Class 6, will not be paid one hundred (100%) percent . . ."
There are seven classes of creditors established in the plan:
Only the tax claimants (Class 2) and Clay Richards (Class 5) accepted the plan. The plan proposed to pay tax claims in full (including interest) by the sale of real estate; presumably the liens remain and thus these creditors, although technically impaired, are not seriously affected adversely. Clay Richards is also technically impaired, but not seriously; his claim of $2,500 is to be paid in cash ". . . from property not of the estate, but to be paid by an individual, within thirty days following the signing of the order of confirmation." The plan does not identify the "individual" who will pay Clay Richards or whether that individual will be subrogated to Clay Richard's claim. Presumably Clay Richards retains his lien until payment, but the plan does not so state. Thus the plan meets the § 1129(a)(10) requirement only by providing for two classes to be paid in cash shortly after, rather than on, the effective date of the plan; the debt owed these accepting classes is less than 0.33% of the total debt: $12,500 of $3.74 million.
III. Cramdown on a Secured Class Paid With Transfers of Tangible Property
Bankruptcy Code § 1129(b)(2) requires confirmation of a Chapter 11 plan on request of the proponent despite rejection of the plan by one or more classes if the plan does not discriminate unfairly and if the plan is "fair and equitable." There is no substantial question raised in this case about unfair discrimination. With respect to secured creditors, the phrase "fair and equitable . . . includes" the satisfaction of one of the following three tests by the provisions of the plan:
But "fair and equitable" means more than merely meeting these specific tests. The statute so provides: "In this title `includes' and `including' are not limiting."
The legislative history of the Code also supports an expansive reading of the phrase "fair and equitable."
Although it is thus clear that to be "fair and equitable" a plan must do more than merely meet the specific requirements of § 1129(b)(2)(B), it is not clear what those additional requirements might be. It appears from the referenced House report that Congress was primarily concerned with assurance that senior classes not receive more than 100% of their claims if there were dissenting junior classes; that question will be discussed in more detail below. The question addressed at this point in this opinion is whether a plan is fair and equitable if it requires a secured creditor to take real estate in satisfaction of his claim. The evolution of the bill in its journey through Congress shows a lack of complete agreement between the House and Senate over the use of property to pay secured creditors. H.R. 8200, the original House bill, provided that a plan could be crammed down:
The report of the House Judiciary Committee elaborated on this concept of payment of secured claims with tangible property.
However, this language about payment of secured creditors with property was not enacted. As noted above, the statute contains three provisions for payment of secured creditors; two involve payments in cash and the third calls for the realization of the "indubitable equivalent"; the only explanation in the legislative history about indubitable equivalence is a reference to abandonment of collateral. There is no explicit statement in the statute as enacted for cramdown of a plan on secured creditors calling for payment in property.
The deletion of the H.R. 8200 language and enactment of language calling for payment in cash or the indubitable equivalence, is significant. If Congress wanted to provide for payment of secured creditors in property, it could have left H.R. 8200 alone.
I conclude that Congress refined its language to the result that payment in cash is specifically authorized and that payment in property is permissible in cramdown only if that transaction is the indubitable equivalence of cash paid on sale or in installments secured by a lien.
IV. Analysis of § 1129(b)(2)(A)(iii)
No one contends that these plans can be confirmed under § 1129(b)(2)(A)(i) or (ii). Therefore, this discussion will be limited to § 1129(b)(2)(A)(iii). That section requires that the secured creditor realize the indubitable equivalent of a claim.
Section 1129(b)(2)(A)(iii) uses the concept of "realization" of full value by the creditor. Assuming that property can be transferred to a secured creditor in satisfaction
Not only must the Court conclude that the equivalent will be "realized", but that conclusion must be "indubitable." One is impressed with the burden that such a test involves when one considers that "indubitable" connotes a conclusion more certain than proof by a preponderance of the evidence and even beyond "a reasonable doubt"; the conclusion must be in dubitable. If reasonable people can differ on the valuation of property, the valuation might be proved by a preponderence of the evidence but the conclusion would not be "indubitable." It is hard to imagine an appraisal that is "indubitable."
This conclusion is supported not only by the words used by the statute but also by a fair reading of the other subsections of the statute. If the "equivalence" need not truly be "indubitable", then § 1129(b)(2)(A)(ii) becomes much less meaningful. That provision allows the Debtor to provide in the plan for the sale of property and the payment of the proceeds to the secured creditor. The provision is much less meaningful if the cramdown can be achieved instead by a battle of the appraisers at the confirmation hearing.
V. Does Sun Country
14 Illuminate the Issue?
Since Sun Country is cited by the Debtor as the sole circuit court authority on this issue, close examination of the case is appropriate. In Sun Country, the creditor received "property" in satisfaction of his claim, but the "property" was not tangible property involving highly imprecise and difficult valuation; the "property" in Sun Country was a right to payment in cash: a right represented by promissory notes. The valuation of such an asset involves only two real questions: (i) creditworthiness and (ii) prevailing interest rates. There was apparently no question raised in the case about the latter. The decision discussed the former; the Court concluded that the creditor would realize "indubitable" equivalence, but the Court reached that conclusion only after the Court determined that there was no real probability of loss on collection; this finding was based on the collection history of these notes and on the finding that the value of the collateral for the notes was about 200% of the debt.
Sun Country, therefore, is not authority for the proposition that tangible property can be transferred in satisfaction of secured debt merely by producing appraisal testimony that the property has value equal to the amount of the claim. The holding of Sun Country is that a creditor who receives promissory notes with a value equal to his claim has received the indubitable equivalent of his claim. The Court held that the value of the notes was equal to the value of the claim because it concluded that the creditor would eventually receive cash equal to the present value of its claim.
It would be possible to design a plan calling for a transfer of tangible property that would be failsafe for confirmation under § 1129(b)(2)(A)(iii). But there is a reason, purely from the Debtor's perspective, why such a provision is not appropriate; there is also a reason why such a provision could not be crammed down on a dissenting junior creditor. To confect such a transfer, the plan would necessarily include a surplus of value, a margin of allowance for error, so that the realization of equivalence would be indubitable. Thus, if the creditor were owed $154,000, the plan might meet the § 1129(b)(2)(A)(iii) test by transferring to the creditor $287,000 worth of tangible property. Sun Country involved a very similar provision; the $154,000 promise to pay was secured by $287,000 of collateral; but Sun Country does not involve 200% payment, but rather 200% security for 100% payment. It stretches the imagination to hypothesize a debtor financially troubled enough to file a bankruptcy petition yet financially flush and generous enough to pay 200% dividends to creditors. The example is exaggerated only to emphasize
A provision for forced payment in property that is generous enough to satisfy the test of "indubitable equivalence" would necessarily include substantial margins for valuation error that will result in a transfer of more value to the creditor than necessary to satisfy the secured claim. While such a plan might be confirmed with the consent of junior classes in some circumstances, overpayment of senior creditors apparently cannot be crammed down over junior dissenting creditors.
The Debtor has argued that these conclusions pretermit confirmation of plans in which property is transferred in satisfaction of secured claims. Such a conclusion is unwarranted.
The Debtor has argued vigorously that the denial of confirmation of this plan would be contrary to law since the Bankruptcy Code permits a plan provision for the transfer of property to other entities.
The most recent case on point is In re Walat Farms, Inc.
VI. In re Mural Holding Corporation
In discussing "indubitable equivalence" it is de rigueur to cite Murel Holding. That case involves an apartment house appraised at $540,000. The first lien was about $20,000, for taxes; Metropolitan Life held the first mortgage for about $480,000. The plan called for the creditor to be paid in cash, with interest, a balloon payment due in ten years; the court held that a safety factor of 10% equity above the claim did not provide adequate protection of the creditor's right to receive the "indubitable equivalence" of his claim. Judge Hand made it clear that a speculative benefit to the creditor ($11,000 improvements to the building) "based upon the expectations of those who have everything to gain and nothing to lose"
VII. The Debtor's Memorandum
Counsel for the Debtor has proposed variants of this plan in many cases and in most has submitted a memorandum for the proposition that a secured creditor may be forced to accept tangible property in satisfaction of its claim. In some of these memoranda counsel employs two steps in reasoning to his conclusion and supports the conclusion with citation of jurisprudence involving lien transfers followed by asset transfers; the two-step analysis is:
A. Abandonment of Collateral to a Secured Creditor Is the Realization By That Creditor of the Indubitable Equivalent of His Claim
No one (at least in this case) disputes the proposition that abandonment of collateral to a secured creditor is the realization by that creditor of the indubitable equivalent of his secured claim. A respected Bankruptcy Judge said so.
But although one frequently hears the phrase "abandon to . . . creditor", abandonment is not a judicial sale or transfer of
This case, therefore, does not involve the simple issue of whether a plan of reorganization could be crammed down on a secured creditor if the plan provided that the property were simply to be abandoned. If the plan so provided, the creditor could foreclose under state law, and all parties concede that the creditor would have realized indubitable equivalence. Rather than simply provide for satisfaction of the secured claim by abandonment of the collateral, this Debtor insists that the creditor accept a transfer of the collateral in full satisfaction of his entire claim.
B. Transfer of Title Is Superior Treatment of a Creditor and Is Indubitably Equivalent to Abandonment
Having established (the conceded point) that abandonment would meet the § 1129(b)(2)(A)(iii) requirements, the memorandum then contends that transfer of title of property to a creditor is more beneficial to the creditor than abandonment and, therefore, forced transfer is also sanctioned by the Code. The statement is baldly made, without cited authority; it may or may not be correct. The existence of this doubt has a profound effect on use of the transfer in cramdown of a plan.
First, absent some special feature of bankruptcy law, a transfer to a secured creditor in Louisiana is subject to all liens and encumbrances, even those otherwise inferior to the creditor receiving the transfer. While the Bankruptcy Code has provisions for selling property free and clear of liens, a plan provision, without more, is apparently not enough to avoid liens, at least absent some special notice to the parties whose liens are to be avoided and possibly an adversary hearing on that issue.
Second, the transfer might bar the creditor from asserting deficiency rights against guarantors. The issue with regard to guarantors and endorsers is more complex than it might first appear because there are really two issues involved. First, there is the question of whether the guarantors, endorsers, or co-makers are released merely by the act of transfer provided for in the plan. Second, assuming that these guarantors are released only to the extent of payment received, there is the question of how to determine the amount that the creditor has been paid and hence the remaining liability, if any: i.e. whether the bankruptcy court's determination of transfer "in full payment" means that the value is conclusively established for future litigation by the creditor against the guarantors and endorsers. These issues are briefly considered, in turn, as follows:
Although La. CC Art. 3062 only extinguishes a guarantor's obligation if the creditor voluntarily receives a dation en paiement, the deficiency judgment act might still bar a judgment against the guarantor notwithstanding its amendment.
The second and far more significant aspect of "guarantor/co-maker" liability is whether there is any de facto collateral estoppel effect of the payment accomplished by the plan. The question is best put by an example: if a plan calls for transfer of Blackacre to a creditor "in full payment" of a debt, is the debt truly paid in full? If not, then how much of the debt remains and what is the meaning of "transfer in full payment"? If "payment in full" really means what it says, then how can the creditor pursue the guarantors for a debt that has been paid? It is clear that confirmation of a plan normally discharges the debtor of debts satisfied by the plan;
The difference between what the Debtor proposes to do by asset transfer and what would be accomplished by abandonment is also best explained by example. If the Debtor were to provide for the abandonment of Brightside to LNB, the plan could be crammed down on LNB as a secured class under § 1129(b)(2)(A)(iii) and the authority cited above.
These questions are fascinating; the resolution of the legal principles can only be accomplished by Congress or the Supreme Court. Until then, the issue remains in doubt; so long as there is doubt, the conclusion is not indubitable.
C. Asset Payment Plans in the Jurisprudence
The Debtor cites eleven cases for the proposition that the courts have confirmed asset payment plans by cramdown: Upshaw, Adcock, Iverson,
Iverson does not involve payment in property. It does involve substitution of liens. Iverson is very much like Sun Country in that the creditor is to be paid a sum certain in cash; the court holds that the creditor is adequately protected because the security for the obligation to pay is almost twice the amount to be paid. Iverson holds only that the promise to pay secured by one collateral is indubitably equivalent to the promise to pay secured by other collateral.
In Griffiths the plan was not confirmed. Griffiths discusses whether a § 1111(b)(2) electing creditor can be "cashed out" by a plan provision for "surrender" of part of
Fursman Ranch did indeed allow a credit against the debtor's obligation achieved by "surrender" of collateral. The decision is not as clear as one might hope. For one thing, it is not clear what "surrender" means in this context. However, it is abundantly clear that the transfer was indeed the indubitable equivalent of the creditor's claim because the secured creditors were to to sell the property in a "commercially reasonable transaction", and the debtors remained liable for any deficiency, regardless of the court valuation of the collateral.
In Elijah the debtor proposed "to surrender part of the property to the creditors to satisfy their secured positions in full."
It appears that the court was directing the "surrender" of property to the creditor to permit a sale of property by the creditor and payment to the creditor in cash, with the creditor to refund any excess to the estate. This confirms the § 1129(b)(2)(A)(ii) characterization of the case.
All that Wieberg held is that a Chapter 11 plan does not meet the fair and equitable requirements for nonconsensual confirmation with respect to a secured creditor when the property to be transferred to the secured creditor, even valued by resolving all doubts in the Debtor's favor, is more than $300,000 less than the value of the secured claim. The plan in Wieberg was not confirmed and, as a result, the case was dismissed "for failure to confirm a plan and continued loss to the estate." Sloan and Walat Farms also deny confirmation of plans calling for forced transfer of land to lien creditors.
Hollanger is not authority for the cramdown of a plan on a secured creditor under § 1129(b)(2)(A)(iii) by payment in tangible property; there are several reasons for this conclusion:
Tipps held only that a plan is not fair and equitable to a secured creditor when it provides for the transfer of property to that creditor burdened with the obligation to develop that property; it is not a decision holding that the plan would be confirmed if the burden did not exist. Sandy Ridge argues otherwise. Even if Sandy Ridge were correct, the Tipps case is authority for denial of the Sandy Ridge plan. The Sandy Ridge appraisal is premised on the development of the property. Therefore, the value asserted by Sandy Ridge does not exist unless the creditor undertakes the burden of development. Tipps holds that such a burden causes the plan to fail the "fair and equitable" test.
Wise does not involve plan confirmation: § 1129. In the Wise case the plan had already been confirmed. More important, Wise does not involve cramdown: § 1129(b). In Wise the creditor had accepted the plan and the opinion simply involves enforcement of the provisions of a plan confirmed with the consent of the creditor.
VIII. Supplemental Findings
This opinion has concentrated on the issue of whether a plan of reorganization can be confirmed by cramdown under § 1129(b)(2)(A)(iii) by the forced transfer to a secured creditor of tangible property involving highly imprecise valuation under circumstances in which there is not sufficient margin for valuation error to permit the conclusion that the secured creditor will indubitably realize the equivalent of his claim. In summary, I conclude that the appraisal testimony in this case was (and is always likely to be) "dubitable" and, therefore, transfer in satisfaction of a claim, as opposed to mere abandonment, is not the realization of indubitable equivalence. Therefore, I conclude that the requirements of § 1129(b)(2)(A) are not met regarding Classes 3 and 4 of the plan in this case.
For the following additional reasons, I conclude that the plan in this case cannot be confirmed.
(1) The plan does not meet the requirements of § 1129(a)(1) because it has as a principal objective, by appraisal and transfer of property, an effect that is prohibited by 11 U.S.C. § 524(e), the discharge of non-debtor guarantors. The analysis is set forth in more detail in paragraph 5 below.
(2) The value of Brightside is about $1.7 million and declining and, therefore, LNB will not realize the indubitable equivalent of its claim. There was conflicting valuation testimony about Brightside. While Dr. Aguilar provided a very sophisticated valuation model, I find the underlying assumptions of market demand for the hypothetical development to be unconvincing, for reasons stated by Messrs. Bahlinger and Pugh. I therefore conclude that the value of Brightside is $1.7 million or less. I accept as very convincing the testimony of Messrs. Pugh and Bahlinger that real estate values are declining at an unknown rate but approximately 6-10% per year. No matter what valuation I establish for the property, LNB will not realize that value since the value is constantly declining.
(3) The plan is not feasible because it is completely unworkable. The principal difficulty
(4) If either LNB or Livingston Bank is overpaid, then the plan is not fair and equitable to Class 6 unsecured creditors under the implicit "fair and equitable" criteria discussed above which holds that a plan that overpays a senior class is not fair and equitable to a junior class.
(5) I conclude that the plan was not filed in good faith; it therefore does not meet the requirements of § 1129(a)(3). Counsel for the Debtor has devoted substantial energy to the proposition that use of cramdown does not constitute bad faith. That proposition is correct and is not really subject to debate.
I thus conclude that the plan in this case should not be confirmed because it does not meet the requirements of § 1129(a)(1), (3), (7), and (8) and that the plan does not meet the requirements of § 1129(b).
For these reasons, a separate order was entered denying confirmation.