570 B.R. 4
Bankr. D.N.H.2017Background
- Debtor Hanish, LLC (owner of a Fairfield Inn in Hooksett, NH) filed Chapter 11; Phoenix REO, LLC is the largest creditor with an undersecured claim (~$6.7M) secured by the Hotel and partly guaranteed by the Debtor’s principal.
- Debtor repeatedly revised plans; in the Amended Third Plan it treated Phoenix’s secured portion in Class 2, Phoenix’s unsecured deficiency in unimpaired Class 2A (paid in full on the effective date), and other general unsecured creditors split into Class 4A (administrative convenience, impaired) and Class 4 (impaired).
- Phoenix objected that the separate classification of unsecured claims (and an impaired administrative convenience class) was gerrymandering designed to manufacture an accepting impaired class and to disenfranchise Phoenix’s deficiency vote.
- The bankruptcy court denied approval of the Amended Third Disclosure Statement because the plan’s classification scheme violated the First Circuit’s strict Granada Wines rule—similar unsecured claims cannot be placed in different classes absent a legal distinction.
- Debtor moved to alter or amend under Fed. R. Civ. P. 59(e) (Bankr. R. 9023), arguing §1123(a)(4) permits separate classification when some holders agree to less favorable treatment; Phoenix objected. The court denied the motion.
Issues
| Issue | Debtor's Argument | Phoenix's Argument | Held |
|---|---|---|---|
| Applicability of Rule 59(e) to reconsideration | Rule 59(e)/9023 applies to orders entered within 14 days; Debtor timely sought reconsideration | Rule 59(e) does not apply to interlocutory orders from which no immediate appeal lies | Court: Interlocutory orders remain open to trial-court reconsideration; Rule 59(e) standards apply to the timely motion, but Debtor failed to meet those standards |
| Standing to object to classification | Phoenix, being unimpaired on its unsecured claim, lacks standing to object to classification of other unsecured creditors | Phoenix can object because the classification directly affects its voting status and possible cramdown; court has independent duty to police compliance | Court: Phoenix’s status does not bar it from raising the issue; classification affects Phoenix and court must ensure plan complies with Code |
| Permissible classification under §1122(a) | Debtor: §1123(a)(4) and other attributes (guaranty, §1111(b) election) justify separating Phoenix’s unsecured claim | Phoenix: Separate classification of similar unsecured claims is impermissible gerrymandering under Granada Wines; guaranty/§1111(b) do not change legal character | Court: Follows First Circuit’s strict Granada Wines approach; guaranty and §1111(b) rights do not render Phoenix’s unsecured claim legally distinct enough to permit separate classification; scheme patently unconfirmable |
| Use of §1123(a)(4) to permit "less favorable treatment" as justification for separate classes | Debtor: §1123(a)(4) allows particular holders to agree to less favorable treatment, so separate classification is permissible | Phoenix: §1123(a)(4) cannot be used to impair a subset of an otherwise unimpaired class or to disenfranchise a creditor; impairment and voting are class-based and established before solicitation | Court: §1123(a)(4) does not authorize carving out sub-classes to be impaired when the best treatment in the class would render the class unimpaired and deemed to accept; Debtor’s reliance on §1123(a)(4) fails |
Key Cases Cited
- Granada Wines v. New England Teamsters & Trucking Indus. Pension Fund, 748 F.2d 42 (1st Cir. 1984) (First Circuit’s strict rule: creditors of equal rank against same property should be in the same class unless legal character is different)
- Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1991) (prohibits separate classification to disenfranchise unsecured creditors; §1111(b) election cannot be used to nullify unsecured voting rights)
- Boston Post Rd. Ltd. P’ship v. FDIC (In re Boston Post Rd. Ltd. P’ship), 21 F.3d 477 (2d Cir. 1994) (debtor must show legitimate justification for separate classification; protects large unsecured creditors’ voting rights)
- Nieves-Luciano v. Hernandez-Torres, 397 F.3d 1 (1st Cir. 2005) (interlocutory orders remain open to reconsideration by trial court until final judgment)
- Teamsters Nat’l Freight Indus. Negotiating Comm. v. U.S. Truck Co., Inc. (In re U.S. Truck Co., Inc.), 800 F.2d 581 (6th Cir. 1986) (discusses ambiguity in §1122(a) and the correlative problem of similar claims being placed in different classes)