623 B.R. 578
Bankr. E.D. Wash.2021Background:
- Claar Cellars LLC (winery) and RC Farms LLC (vineyards) are affiliated debtors; both and members of the Whitelatch family guaranteed loans from HomeStreet Bank.
- Beginning in 2019 debtors defaulted on HomeStreet loans; HomeStreet accelerated debts and obtained a state-court custodial receiver over some property; debtors filed Chapter 11 in Jan. 2020.
- Debtors proposed a five‑year reorganizational plan to merge entities, transfer trust-held land into the reorganized debtor, and repay creditors over time (relying on operational recovery, sale, or refinancing).
- HomeStreet filed a competing Chapter 11 plan that appoints a plan agent (the state‑court receiver) to operate/monetize assets and distribute proceeds; the parties litigated plan confirmation in an eight‑day evidentiary hearing.
- The court found the debtors’ witnesses credible but their projections and implementation mechanics speculative; the court concluded the debtors’ plan fails multiple statutory requirements and that HomeStreet’s plan satisfies §1129 and is confirmable.
Issues:
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| §1129(a)(3) — Good faith of debtors’ plan proposal | Debtors: proposed in good faith to rehabilitate business and pay creditors | HomeStreet: plan contains impermissible provisions and tactical vacillation | Court: Debtors proposed the plan in good faith (§1129(a)(3) satisfied) |
| §1129(a)(1) / §1123(a)(3),(5) — Adequate means / specified treatment | Debtors: payments will come from operations, sale, or refinancing | HomeStreet: plan is indeterminate, lacks milestones, triggers, or binding sale/refinance mechanics | Court: Plan fails — lacks adequate means and specificity (§1123(a) violation) |
| §524(e) — Treatment of nondebtor guarantors and trust property | Debtors: proposal keeps guaranties and transfers trust assets into reorganization to preserve business | HomeStreet: plan would alter guarantors’ liabilities and shield trust property from creditors | Court: Debtors’ provisions impermissibly affect nondebtors and violate §524(e) (not confirmable without consent) |
| §1129(a)(11) — Feasibility (reasonable probability of success) | Debtors: revenues will recover to prior levels; sale or refinancing will fund payments | HomeStreet: projections are overly optimistic; no evidence of refinancing or committed buyer; market remains weak | Court: Debtors failed to show feasibility; projections speculative and sale/refinance unlikely within plan term |
| §1129(a)(16) — Transfer of trust property under nonbankruptcy law | Debtors: may revoke trust and contribute property under plan | HomeStreet: Washington receivership law and trust statutes prevent such transfer while property is in custodia legis | Court: Proposed transfer conflicts with Washington receivership law and §1129(a)(16); plan not confirmable on this ground |
| Confirmability of HomeStreet’s plan / cramdown (§1129(b)) | Debtors: HomeStreet filed in bad faith, plan unfair to equity, other objections (liens extension, agent capability) | HomeStreet: plan is a permissible liquidating Chapter 11 plan, protects creditors’ rights and preserves residual equity; plan agent fiduciary safeguards included | Court: HomeStreet’s plan satisfies §1129 (including cramdown/fair & equitable rules); plan confirmable; court will enter confirmation order |
Key Cases Cited
- Garvin v. Cook Invs. NW, SPNWY, LLC, 922 F.3d 1031 (9th Cir. 2019) (limits §1129(a)(3) inquiry to manner of proposing a plan).
- Blixseth v. Credit Suisse, 961 F.3d 1074 (9th Cir. 2020) (§524(e) prevents a plan from altering nondebtor guarantors’ liability).
- Bank of Am. Nat’l Tr. & Sav. Ass’n v. 203 N. Lasalle St. P’ship, 526 U.S. 434 (1999) (courts generally prefer market‑driven valuations over judicial valuation).
- First S. Nat’l Bank v. Sunnyslope Hous. L.P., 859 F.3d 637 (9th Cir. 2017) (feasibility under §1129(a)(11) requires reasonable probability of plan success).
- RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012) (statutory interpretation and interplay of plan provisions).
- United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988) (statutory construction requires harmonizing related Code provisions).
- VFB LLC v. Campbell Soup Co., 482 F.3d 624 (3d Cir. 2007) (preference for market outcomes in valuation disputes).
- In re Jorgensen, 66 B.R. 104 (B.A.P. 9th Cir. 1986) (creditors may propose liquidating Chapter 11 plans in good faith).