SE Property Holdings, LLC v. Seaside Engineering & Surveying, Inc. (In Re Seaside Engineering & Surveying, Inc.)
780 F.3d 1070
| 11th Cir. | 2015Background
- Seaside Engineering and Surveying (Debtor) filed Chapter 11 after prior transfers of Seaside stock and litigation involving Vision (a former equity holder and creditor to separate entities).
- Debtor proposed a reorganization creating Gulf Atlantic, LLC, managed and staffed by former Seaside principals; outside equity holders would receive promissory notes instead of ownership.
- Bankruptcy court approved the Second Amended Plan valuing Seaside and including releases (bar orders) that extinguished certain claims against non-debtors (insiders and managers) except for fraud, gross negligence, or willful misconduct.
- Vision objected to valuation, the exclusion from ownership, the non-debtor releases, the interest rate on promissory notes, alleged bad faith, and other procedural issues.
- District court affirmed; Eleventh Circuit reviewed (affirmed) and provided guidance on when bankruptcy courts may issue non-consensual non-debtor releases.
Issues
| Issue | Vision's Argument | Seaside's Argument | Held |
|---|---|---|---|
| Valuation method and discount rate | Bankruptcy court used forced-sale method and impermissible factors (risk of employee loss) | Court used going-concern DCF and appropriately considered employee-retention risk in discount rate | Affirmed: going-concern valuation; considering employee risk was proper |
| Authority to issue non-debtor releases/bar orders | Releases impermissible as non-consensual and overbroad under §524(e) | §105(a) empowers bankruptcy courts; releases necessary for reorganization and narrowly tailored | Affirmed: Circuit follows Munford majority approach; non-debtor releases permissible in limited, fact-specific circumstances |
| Application of factors for non-debtor injunctions | Release satisfies none of the Dow Corning factors | Bankruptcy court applied Dow Corning factors (flexibly) and made factual findings supporting release | Affirmed: factors (identity of interest, contribution of services, essential to reorg., creditor acceptance/payment, record) supported the bar order |
| Good-faith of the plan | Plan is insider-driven to benefit insiders and proposed in bad faith | Plan advances Code objectives (jobs, services, creditor payment) and has realistic chance of success | Affirmed: plan proposed in good faith under §1129(a)(3) |
| Fairness/discrimination to equity holder (Vision) | Discriminatory: Vision excluded from post-reorg ownership and not given full value | Vision was paid the full value of its equity via notes; no precedent for blocking reorg when paid in full | Affirmed: no unfair discrimination; §1129(b)(2)(C)(i) satisfied |
| Interest rate on promissory notes | 4.25% inadequate for risk | Rate derived by applying Till (prime + adjustment); court added 1% to prime | Affirmed: interest rate within Till-guided range |
Key Cases Cited
- In re Munford, 97 F.3d 449 (11th Cir. 1996) (authorizes bankruptcy court bar orders under §105(a) where integral to settlement/reorganization)
- In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002) (sets seven-factor test guiding approval of non-consensual releases)
- In re Airadigm Communications, Inc., 519 F.3d 640 (7th Cir. 2008) (supports limited third-party releases and equitable application of §105(a))
- Till v. SCS Credit Corp., 541 U.S. 465 (2004) (establishes prime-rate-plus-adjustment formula for cramdown interest rates)
- In re Jet Fla. Sys., Inc., 883 F.2d 970 (11th Cir. 1989) (distinguishes debtor discharge injunctions from non-debtor releases; not dispositive on non-debtor bar orders)