515 B.R. 660
Bankr. N.D. Ga.2014Background
- Six related debtor entities controlled/managed by George Rohrig (Cartel Properties) filed chapter 11 after Rialto BB Acquisitions (Rialto) acquired BB&T-promissory notes securing many properties; Rialto is the largest creditor and largely oversecured.
- Debtors proposed a 10‑year reorganization plan (Debtors’ Plan) using consolidated cash flow via a proposed ‘‘Rohrig Reorganized Debtors Joint Venture’’ (RRDJV) and balloon refinancing at year 10; insiders/equity would retain interests and receive profit participation.
- Rialto filed competing liquidating plans (Rialto Plans) proposing a Liquidating Agent to market/sell assets, pay non‑insider creditors in full, subordinate management/insider claims, and treat Rialto’s secured and potential deficiency claims specifically.
- Extensive contested confirmation hearing; parties presented experts on valuation, liquidation, feasibility, and disputed treatment of management fees, insider claims, tax‑claim treatment, valuation of LLC interests, and proposed substantive consolidation.
- Court found material problems with both proposals: Rialto Plans failed feasibility and unfairly subordinated management fees; Debtors’ Plan (with or without consolidation) failed best‑interests and feasibility tests and was not fair and equitable. Court denied Debtors’ deemed substantive consolidation and set further hearing to consider appointment of a Chapter 11 trustee, dismissal/conversion, or plan amendments.
Issues
| Issue | Debtors' Argument | Rialto's Argument | Held |
|---|---|---|---|
| Compliance with §1123/§1129(a)(1) (plan contents/classification) | Debtors: Rialto Plans improperly preempt state law (POA/manager) and create impermissible claims; management fee rejection without remedy | Rialto: §1123(a) preempts conflicting nonbankruptcy law; Plans properly classify and provide for contingent deficiency claims and §506(b) items | Court: §1123(a) can preempt state law; Rialto Plans comply with §1123(a)(1) though some drafting redundancies existed; objection overruled on preemption and contingent deficiency treatment |
| Substantive consolidation / deemed RRDJV | Debtors: consolidation simplifies administration and enables full payment; RRDJV is a joint venture, not a merger | Rialto: consolidation improperly gerrymanders votes, eliminates Rialto’s negotiated cross‑collateral protections, dilutes creditors of solvent estates | Court: denied deemed substantive consolidation under Eastgroup — insufficient showing of necessity and harms outweigh benefits |
| Feasibility (§1129(a)(11)) | Debtors: projections (3% rent growth, available cash, Moreland sale) support 10‑yr plan and eventual refinancing | Rialto: projections speculative, insufficient debtor‑by‑debtor analysis, uncertain ability to make year‑10 balloon refinance; lack of reserves for capex; back‑stop funding for Rialto plans unsupported | Court: Debtors’ Plan not feasible on debtor‑by‑debtor basis; Rialto’s Plan also failed feasibility due to insufficient evidence of funding/backstop and executory contract issues |
| Best‑interests test (§1129(a)(7)) | Debtors: plan pays dissenting creditors (Rialto, State Bank) in full over time — better than chapter 7 | Rialto: some estates solvent; liquidation may yield equal or better recovery; Debtors’ treatment shifts risk to creditors | Court: Debtors’ Plan satisfies §1129(a)(7) for several debtors (creditors receive at least chapter 7 value); overall concerns remain tied to feasibility and other defects |
| Treatment of management fees / insider claims (subordination; recharacterization) | Debtors/TKP: management fees and potential rejection damages should not be disallowed or subordinated; recharacterization requires adversary proceeding | Rialto: management fees are insider/affiliate claims and may be subordinated or recharacterized; plan can address recharacterization | Court: recharacterization can be addressed in plan without mandatory adversary; evidence supported recharacterization of some insider advances; however Rialto’s blanket subordination/disallowance of management fee and rejection claims was unjustified and constituted unfair discrimination—Rialto Plans violate fair‑and‑equitable rules |
| Priority tax claims and §1129(a)(9)(D) (tax claims held by third‑party transferees) | Debtors: third‑party holders of ad‑valorem tax fufas are impaired and thus entitled to vote; payment over time permissible | Rialto: treatment under §1129(a)(9)(C)/(D) means such claims are not impaired for voting; debtor’s classification is gerrymandered | Court: §1129(a)(9)(D) applies to governmental unit claims as referenced in §507(a)(8); third‑party transferees are governed by state law redemption/foreclosure rights (Georgia law) and are impaired if plan alters statutory timing/rights; debtor’s proposed timetable impaired those claimants; court sustained need to respect statutory protections and interest requirement on tax claims unless order specifies otherwise |
Key Cases Cited
- In re Eastgroup Properties v. S. Motel Ass’n, Ltd., 935 F.2d 245 (11th Cir.) (standard and factors for substantive consolidation)
- United States v. Ron Pair Enters., Inc., 489 U.S. 235 (U.S.) (statutory interpretation begins with text)
- In re Welzel, 275 F.3d 1308 (11th Cir.) (§506(b) treatment and allowance of oversecured creditor fees)
- In re Holywell Corp., 913 F.2d 873 (11th Cir.) (treatment of equity and claims; corporate law preemption discussion)
- In re IPC Atlanta Ltd. P’ship, 142 B.R. 547 (Bankr.N.D.Ga.) (plan fairness and creditor risk shifting analysis)
- In re Diplomat Constr., Inc., 481 B.R. 215 (Bankr.N.D.Ga.) (confirmation burdens and §1129(a) analysis)