Diwan, L.L.C. v. Maha-Vishnu Corporation
2017 U.S. App. LEXIS 2790
| 8th Cir. | 2017Background
- Debtor Diwan, LLC owned two gas stations; its sole owner Ranbir Thakur personally guaranteed a sales contract by pledging a mortgage on one gas station (Spring Street property).
- Thakur LLC defaulted; purchaser Maha-Vishnu Corp. (MVC) foreclosed, purchased the motel for $1.00, and later obtained a large deficiency judgment against Ranbir and Thakur LLC.
- Diwan filed Chapter 11 in 2012; MVC filed/ amended a claim ultimately asserting a secured portion (mortgage) and an unsecured portion; bankruptcy court equitably subordinated a large portion of MVC’s secured claim for inequitable conduct.
- Diwan’s Chapter 11 plans proposed subordinating MVC’s claim and releasing the Spring Street mortgage; MVC and other creditors objected on multiple grounds (claim allowance, interest rate, feasibility, balloting, best-interest test).
- The bankruptcy court denied confirmation (finding feasibility problems, improper interest rate, plan would fail best-interest test) and granted the Trustee’s motion to dismiss; the district court affirmed. Diwan appealed.
Issues
| Issue | Plaintiff's Argument (Diwan) | Defendant's Argument (MVC/Trustee) | Held |
|---|---|---|---|
| Whether MVC’s claim should be disallowed under UCC/common-law impairment of collateral | MVC’s claim is impaired by foreclosure irregularities and should be disallowed | MVC’s claim is allowable; impairment arguments insufficient to eliminate claim | Court rejected Diwan’s impairment argument (did not eliminate MVC’s claim) |
| Whether bankruptcy court properly denied plan confirmation (balloting, best-interest, interest rate) | Plan was confirmable if MVC’s claim were disallowed; objections were interdependent | Even setting aside claim issue, plan failed balloting and best-interest tests and used incorrect interest rate | Court affirmed denial: independent confirmation defects existed (interest rate, best-interest, balloting) |
| Feasibility of Diwan’s plan (ability to make payments and operate) | Projected cash flow supports payments (Diwan relied on low-end historical expenses) | CFOs and monthly reports show near-zero or negative available cash; realistic expenses higher | Feasibility finding upheld: plan likely could not meet operating expenses and plan payments, even without MVC’s claim |
| Whether dismissal under 11 U.S.C. §1112(b)(4)(A) for lack of rehabilitation/continuing loss was proper | Dismissal inappropriate if impairment ruling resolved major obstacles | Continued lack of feasible plan, ongoing losses, and three-year pendency justify dismissal | Dismissal affirmed as within bankruptcy court’s broad discretion due to infeasibility and continued losses |
Key Cases Cited
- Zahn v. Fink (In re Zahn), 526 F.3d 1140 (8th Cir.) (standards of appellate review for bankruptcy appeals)
- United States v. Foust (In re Foust), 52 F.3d 766 (8th Cir.) (appellate review independent of district court’s conclusions)
- Loop Corp. v. United States Trustee, 379 F.3d 511 (8th Cir.) (bankruptcy court’s broad discretion to dismiss Chapter 11 cases)