MEMORANDUM OPINION DENYING CONFIRMATION OF SECOND AMENDED PLAN OF REORGANIZATION WITH LEAVE TO AMEND
JAMES F. SCHNEIDER, Bankruptcy Judge.
For the reasons set forth, this Court will deny confirmation of the pending Second Amended Plan of Reorganization.
FINDINGS OF FACT
1. 100 Harborview Drive Condominium ("the building") also known as The HarborView Towers, is a 29-story luxury residential high rise that stands on the shore of Baltimore's Inner Harbor. It was established in 1993 as a condominium regime and contains 249 units and a health club. Disclosure Statement [P. 190].
2. The Council of Unit Owners of the 100 Harborview Drive Condominium ("the Council") or ("the debtor"), is an unincorporated condominium association, comprised of "any person, firm, corporation, trust or other legal entity . . . holding legal title to a condominium unit" in the building located at 100 Harborview Drive. Declaration (Debtor's Ex. 8) Article I (q).
3. By-laws dated November 9, 1993, as amended, provide that "the affairs of the condominium project shall be managed by a Board of Directors" ("the Board"). Disclosure Statement [P. 190].
4. The owners of penthouse units 4A and 4C ("PH4A" and "PH4C") have been engaged in protracted litigation against the debtor. PH4C sued the debtor in the state courts of Maryland since at least 2009, regarding James W. Ancel's
5. The debtor has also been sued in a series of lawsuits brought in state and federal courts by the owners of PH4A, namely, Paul Clark, Rebecca Delorme, and their minor son, Paul Clark, Jr. Paul Clark filed Claim No. 46, asserting damages to his unit in the amount of $4,935,606.00. Rebecca Delorme filed Claim No. 47, asserting a liability of $10,307,524.00 based on contractor fees, damages for lost use and punitive damages. Paul Clark, Jr. filed Claim No. 48, identical to Claim No. 47 except in name.
6. On March 9, 2016, the Board filed the instant Chapter 11 bankruptcy petition in the name of the debtor. The petition was signed by Dr. Reuben Mezrich ("Mezrich"), who is and was at all times relevant president of the board. A document entitled "Resolution of the Board of Directors of the Council of Unit Owners of the 100 Harborview Drive Condominium" was filed with the petition. The resolution purported to provide the authority for the filing of the petition.
7. The Chapter 11 was precipitated by the litigation between the Council and PH4C, a creditor and member of the Council. Specifically, PH4C had garnished the Council's bank accounts at Howard Bank and Citizens Bank, which prevented the debtor from using its funds to continue to operate the business, including the payment "for basic services necessary to the health, safety and security to its condominium owners." Debtor's Opposition to Motion to Dismiss [P. 61].
8. As a result of the litigation that has drained its resources; the debtor is insolvent using a balance sheet test.
9. On December 21, 2016, the debtor proposed the Amended Plan of Reorganization [P. 229], which, as modified by the Second Amended Plan of Reorganization [P. 319] (the "Plan"), filed on February 23, 2017, is before the Court for confirmation. The objections of PH4A, PH4C, Baltimore Gas & Electric ("BGE") and the United States Trustee ("UST") remain after the lengthy confirmation hearing.
CONCLUSIONS OF LAW
1. This Court has subject matter jurisdiction over the confirmation of a Chapter 11 plan pursuant to 28 U.S.C. §§ 157 and 1334. Confirmation of a plan is a core proceeding under 28 U.S.C. § 157(b)(2)(L), over which this Court has exclusive jurisdiction.
REQUIREMENTS FOR CONFIRMATION — § 1129(a)
2. The requirements for confirmation of the Plan are set forth in 11 U.S.C. § 1129. The proponent bears the burden of showing that all those requirements are satisfied. 7 COLLIER ON BANKRUPTCY ¶ 1129.02 (16
APPLICABILITY OF OTHER CODE SECTIONS — § 1129(a)(1)
3. The first requirement of § 1129, that the "plan complies with the applicable provisions of this title," thereby requires that the court examine proposed plans of reorganization in light of all applicable sections of the Bankruptcy Code. 11 U.S.C. § 1129(a)(1).
PROPER CLASSIFICATION OF CLAIMS — §§ 1122 and 1123(a)
4. Pursuant to 11 U.S.C. § 1123(a), a proposed plan must designate classes of claims and specify the treatment of "any class of claims or interests that is impaired under the plan." Id. Such classification must also be consistent with the provisions of 11 U.S.C. § 1122.
5. This Court finds none of the hallmarks of abuse in the Plan. As suggested by the debtor in its memorandum in support of confirmation, the classification of claims contained in the Plan, "does not affect the outcome of voting and does not violate any priority rules." Memorandum of Law [P. 298], p. 6. Therefore, the objection is overruled.
THIRD PARTY RELEASES — § 524(e)
6. The UST objected to the release provisions in Sections 11.2, 11.3, 11.5 and 11.7 of the Plan. Pursuant to § 524(e) "discharge of a debt of the debtor does not affect the liability of any other entity on . . . such debt." 11 U.S.C. § 524(e).
7. The Fourth Circuit has explained that while § 524(e) does not prohibit approval of releases of nondebtors under a proposed plan, such releases should be granted "cautiously and infrequently" and only under "unusual circumstances." Behrmann v. National Heritage Foundation, 663 F.3d 704, 712 (4th Cir. 2011). Releases of nondebtors proposed in Chapter 11 plans must meet the standards set forth in Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning), 280 F.3d 648, 658 (6th Cir. 2002), and In re Railworks Corp., 345 B.R. 529, 536 (Bankr. D. Md. 2006). National Heritage Foundation, 663 F.3d at 712 (finding the Dow Corning and Railworks factors instructive and commending them to bankruptcy courts for consideration of nondebtor releases). In Dow Corning, the Sixth Circuit Court of Appeals considered the following factors:
Dow Corning Corp., 280 F.3d at 658.
In re Nat'l Heritage Found., Inc., 478 B.R. 216, 226 (Bankr.E.D.Va. 2012) (citing In re Railworks Corp.).
9. The first release provision exculpates the debtor, "any Affiliate or any of their respective directors, officers, employees, members, attorneys, attorneys of the members, consultants, advisors and agents (acting in such capacity)" (the "protected parties") from liability for
Debtor's Second Amended Plan of Reorganization § 11.2.
10. Section 11.3 acts to release each member of the Board from "personal liability for any and all Claims related to their service to the Debtor." Id., at § 11.3.
11. Section 11.5 enjoins all holders of claims and interests from asserting any claim against the protected parties "for which the Protected Parties are alleged to be directly or indirectly liable for the conduct of, Claims against, or demands on any of the Debtors, except for Claims that are based on willful misconduct or gross negligence." Id., at § 11.5.
12. Lastly, section 11.7 states that,
Id., at § 11.7.
13. Because the foregoing releases violate the Dow Corning and Railworks factors, the objection to the releases will be sustained. Besides broadly hindering and/or depriving unit owners of their legitimate rights to access to the courts, no cogent reason has been presented to impose such an onerous and possibly unconstitutional restriction. This Court holds that the by-laws adequately afford immunity from suit to those officers and board members acting in good faith in the performance of their official duties; and that the retention of post-confirmation jurisdiction affords an adequate forum in which to monitor, control and punish unnecessary or frivolous litigation.
PLAN MUST BE PROPOSED IN GOOD FAITH — § 1129(a)(3)
14. PH4C raises an objection pursuant to § 1129(a)(3), which requires that a plan be "proposed in good faith and not by any means forbidden by law." Id.
15. The Court has determined that the Plan was filed in good faith, having considered the totality of the circumstances. These include the necessity for filing of the instant Chapter 11, the numerous disputes and lawsuits filed against the debtor by the objecting penthouse owners, their objections to the disclosure statement and to confirmation and the abundance of evidence of good faith presented at the hearing. See National Heritage Foundation, 663 F.3d at 709 (approving the totality of the circumstances test relating to the issues presented at confirmation).
16. This Court also finds that the debtor has proposed the Plan which provides a 100% distribution to all creditors, "with the legitimate and honest purpose of reorganizing and maximizing both the value of [its] Estate and the recovery to Claimants[,]" regardless of whether or not the plan is confirmable. Id., at 709-710. Therefore, this objection is overruled.
BEST INTERESTS OF CREDITORS TEST — § 1129(a)(7)
17. Section 1129(a)(7) provides to each creditor or interest holder "an individual guaranty . . . that it will receive at least as much in reorganization as it would in liquidation." 7 COLLIER ON BANKRUPTCY ¶ 1129.02 (16
18. Regardless of whether the debtor is or is not a partnership, the Plan must satisfy the best interests of creditors test. At the hearing, Michael Wolff, qualified as an expert in the area of Chapter 7 liquidations, testified that if conversion occurred, "there would be nothing to return to unsecured creditors." Hearing Tr. P. 89, Feb. 13, 2017. On cross-examination, counsel for PH4C pressed Mr. Wolff regarding the value of debtor's future rights to make assessments against unit owners. Mr. Wolff pointed out that without court approval to operate the debtor, the debtor would cease to exist and a chapter 7 trustee would have only existing assets to administer, including assessments due or delinquent at the time of conversion. The focus in an assessment of compliance with § 1129(a)(7) is the liquidation value, not ongoing operation of a debtor in a Chapter 7. 11 U.S.C. § 1129(a)(7). There being no countervailing evidence, the objection will be overruled.
FEASIBILITY — § 1129(a)(11)
19. PH4C alleged that the Plan is not feasible because it does not account for the continuing need to make certain repairs. Specifically, PH4C maintains that the debtor must "clean the rooftop HVAC unit and the ductwork from those units through the elevator lobbies on each floor of the building in accordance with National Air Duct Cleaners Association standards . . . and replace the building's roof system, repair the exterior façade and make other repairs as set forth in a report by the Debtor's consultant, CSG." PH4C Objection to Confirmation [PP. 15-16]. PH4C also continues to stress its position that the railings on all balconies must be replaced with "code-compliant" railings. Id., at 16.
20. The penthouse owners have relied upon the Rooker-Feldman Doctrine, res judicata and collateral estoppel to control the governance of a condominium association of which 400 others are members.
21. The Plan authorizes additional special assessments "at any time" if additional funds are required "for the operation and maintenance of the Debtor." Plan [P. 229], § 6.2.3. If the debtor is required to replace all railings, or complete other unanticipated repairs, the Plan authorizes it. On this basis, the objection will be overruled.
UNFAIR DISCRIMINATION — § 1129(b)
22. Each objecting creditor has raised 11 U.S.C. § 1129(b) as a barrier to confirmation.
WHEREFORE, confirmation of the Plan will be denied with leave to amend.