In Re Red Mountain MacHinery Co.
448 B.R. 1
Bankr. D. Ariz.2011Background
- Debtors are Red Mountain Machinery Co. et al., filed Chapter 11 in Aug. 2009; Comerica Bank holds a revolving line of credit secured by the Debtor's assets.
- Debtor’s First Amended Plan classifies Comerica’s §1111(b) claim as Class 2 with a present value payment of $10 million and 5% interest, over a 15-year horizon.
- Comerica entered a §1111(b) election for full secured status; the Court previously ruled that “is sold” includes pre-confirmation sales and that partial property sales require pro rata exclusion.
- Unsecured creditors (Class 8) and a disputed Class 9 are to receive distributions from a $100,000 pot, with Comerica’s deficiency claim in Class 7 and the equity of the Cowings in Class 10 involved in new value arrangements.
- The plan relies on a $1.25 million exit loan funded by the Cowings’ new money contributions and an $480,000 cash infusion to satisfy administrative claims; exclusivity had expired; confirmed plan is challenged on feasibility, classification, interest rate, and new value.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Is the plan feasible under 11 U.S.C. §1129(a)(11)? | Comerica: plan projections are unreliable; debt service and growth are uncertain. | Debtors: projections are credible; 15-year amortization and guarantees ensure feasibility. | Yes; plan feasible based on credible projections and supporting testimony. |
| Does the plan’s classification of Comerica’s deficiency claim violate §1122(gerrymandering) or §1129(a)(10)? | Comerica argues misclassification of similar claims to secure plan approval. | Debtor: claims are dissimilar; independent rationale supports separate class; not gerrymandered. | No; separate classification allowed; §1122 requires dissimilarity and §1129(a)(10) satisfied. |
| Does the plan comply with the new value corollary to the absolute priority rule? | Comerica: new value contribution is insufficient and not necessary/valued properly. | Debtors: new value contributions are new, money, substantial, necessary, and reasonably equivalent. | Yes; new value contributions satisfy the Bonner Mall five-factor test and top-dollar/necessity. |
| What is the appropriate interest rate for Comerica’s secured claim to satisfy Till v. SCS Credit Corp. and present-value requirements? | Comerica: 9.5% blended rate using 65/35 unsecured-secured segmentation is appropriate. | Debtors: cannot treat secured portion as unsecured; risk factors and guarantees support a lower rate. | 6.5% interest rate determined to be appropriate for present value of the secured claim. |
Key Cases Cited
- Barakat v. The Life Ins. Co. (In re Barakat), 99 F.3d 1520 (9th Cir. 1996) (dissimilar claims may be classified separately under §1122)
- In re Bonner Mall Partnership, 2 F.3d 899 (9th Cir. 1993) (new value corollary to absolute priority rule)
- In re Johnston, 21 F.3d 323 (9th Cir. 1994) (disputed secured deficiency not substantially similar to general unsecured claims)
- In re Tucson Self-Storage, Inc., 166 B.R. 892 (9th Cir. BAP 1994) (classification impacts under §1122; gerrymandering considerations)
- Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1991) (gerrymandering and classification principles for similar claims)
- In re Loop 76, LLC, 442 B.R. 713 (Bankr. D. Az. 2010) (analysis supporting separate classification where impaired classes exist)
- Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939) (absolute priority rule foundation; 'on account of' concept)
- Northern Pac. Ry. Co. v. Boyd, 228 U.S. 482 (1913) (early articulation of value in reorganization context)
- Bank of America Nat’l Trust & Sav. Ass’n v. 203 North LaSalle St. P’ship, 526 U.S. 434 (1999) (new value corollary and exclusivity considerations)