MEMORANDUM
This is a contested Chapter 11 confirmation. Because the amended plan discriminates unfairly against an impaired non-consenting class, confirmation is denied. The following constitute findings of fact and conclusions of law. Bankr.R. 7052.
I.
The debtor is a joint venture organized in 1984 to own and operate the Aztec Villa Apartments in Panama City, Florida. The debtor purchased the apartment complex
The debtor financed the balance of the purchase through a note to the seller secured by a second mortgage. The Edwin B. Raskin Company (EBR) acquired this note and second mortgage. EBR is owned by Edwin B. Raskin and Herschel Katz-man, both joint venturers in the debtor. Raskin was also joint venture trustee of the debtor. EBR assigned the second mortgage to Dynamerica Investmеnts of Brentwood, Tennessee. Dynamerica is a general partnership composed of Raskin and Katzman.
At the petition, the principal amount owed on the first mortgage was $1,880,000. FHLMC asserts a total claim of $2,300,000. The full amount of the second mortgage, $350,000, was unpaid at the petition. Dy-namerica asserts a total claim of $396,000. At a prior hearing, the value of the apartments was determined to be $1,700,000.
The joint venturers of the debtor are solvent. It is stipulated that all pre-petition recourse claims would be entitled to full recovery from the principals of the debtor in a Chapter 7 ease. See 11 U.S.C. § 723.
Before the petition, EBR managed the apartments for the debtor and received a management fee. EBR ordered goods and services for the debtor and paid the debt- or’s bills. EBR used purchase orders which plainly stated that it was acting only as an agent for the owner. The debtor reimbursed EBR for some but not all pre-petition expenses of management and operations. At the petition, EBR had a claim of $83,566.62 for unreimbursed expenses.
In its first plan, the debtor classified all unsecured trade debt and the EBR claim for unreimbursed expenses in Class 5. The EBR claim constituted over 90% in amount of Class 5 claims. The FHLMC deficiency on its non-recourse first mortgage and the wholly unsecured second mortgage of Dy-namerica were classified together in Class 6. The plan proposed to pay Class 5 claims in full with interest through two-year promissory notes. Class 6 claimholders would receive three percent in cash and notes. The FHLMC secured claim was to be paid in full through a note amortized at 10%% for 30 years, with a 10 year call. To retain interests in the reorganized debtor, joint venturers were required to contribute new capital totalling $500,000.
By prior order, confirmation of the first plan was denied because the proposed interest rate failed to give FHLMC the present value of its secured clаim.
In re Aztec Co.,
The debtor presented this modified plan which effects a change only in the treatment of the secured claim of FHLMC. The modified plan fixes the interest rate on the secured portion of FHLMC’s first mortgage at 200 basis points over the 10-year Treasury bill rate at the date of the confirmation hearing. Because of movement in interest rates, this rate is actually lower than the rate proposed in the first plan. The Treasury bill rate on the date of the second confirmation hearing was 8.02% and so the proposed interest rate is 10.02%.
FHLMC objects to confirmation of the modified plan on these grounds: (1) no impaired class accepted the plan; (2) the plan improperly classifies its unsecured deficiency claim; (3) the debtor has failed to prove that the interest rate to be paid on its secured claim will provide “present value;” (4) the plan fails to satisfy the absolute priority rule; and (5) the proposed plan discriminates unfаirly against FHLMC.
II.
If there is an impaired class of claims, to accomplish confirmation at least one class of impaired claims must accept the plan. 11 U.S.C. § 1129(a)(10) (1988). Votes of insiders are not counted. Of the impaired classes, only Class 5 voted to accept the modified plan.
FHLMC asserts that the vote in Class 5 does not meet the requirements of § 1129(a)(10) because EBR’s insider vote is not counted and the “trade creditors” are
Class 5 has accepted the amended plan. The non-insider Class 5 creditors overwhelmingly voted to accept the original plan. The modified plan did not change their treatment. Pursuant to 11 U.S.C. § 1127(d) and Fed.R.Bankr.P. 3019, Class 5 is deemed to have accepted the modified plan.
See In re Sherwood Square Associates,
III.
The separate classification of FHLMC’s unsecured deficiency is permitted on the facts of this case.
The United States Court of Appeals for the Sixth Circuit has embraced a flexible approach to the classification of unsecured claims in Chapter 11 cases under 11 U.S.C. § 1122. In
In re U.S. Truck,
FHLMC’s non-recourse unsecured deficiency claim is unique. Class 5 consists of creditors that have “natural” recourse outside of bankruptcy against the joint ventur-ers. The joint venturers are solvent. They would have to pay all Class 5 claims in full under state law. They would be liable to the trustee for any deficiency in payment of the Class 5 claims in a Chapter 7 liquidation. 11 U.S.C. § 723(a) (Supp. V 1987). The “unnatural” unsecured deficiency claim of FHLMC exists only by operation of § 1111(b), and only in a Chapter 11 case. 11 U.S.C. § 1111(b) (1982). Outside of Chapter 11, the FHLMC note is non-recourse and any deficiency could not be pursued against Aztec or its joint venturers.
FHLMC has a substantial other interest that it does not share with unsecured claim-holders in Class 5: if classified with the recourse creditors in Class 5, it would have every incentive to vote its large deficiency claim to affect the treatment of its
secured
claim by defeating confirmation of any plan. On these facts, the debtor is permitted by
U.S. Truck
to separately classify the non-recourse deficiency claim. On similar facts, one court has concluded that separate classification may be mandatory.
See In re Greystone III Joint Venture,
That the debtor is permitted to separately classify does not determine whether the plan is “fair and equitable” with respect to the separate class. See Part VI, infra.
IV.
Section 1129(b)(2)(A)(i) requires that an objecting, impaired, secured claimholder receive “cash payments ... of a value, as of the effective date of the plan” at least equal to the amount of its allowed secured claim. A plan provides “value, as of the effective date of the plan” if the allowed amount of the secured claim is paid over time with interest at the “market rate” for similar loans in the region.
United States v. Arnold,
FHLMC submitted additional expert testimony on interest rates at the hearing on this modified plan. FHLMC’s new expert had nothing new to say. Like the experts before, he testified that insurance compa
The repeated testimony by experts that no market еxists for a loan like this plan is not dispositive of the issue presented. Section 1129(b)(2)(A)(i) requires that a creditor receive the present value of its allowed secured claim under the plan. Every stream of future payments with a given set of risk factors has a present value. Whitman instructs this court to use market rates to determine present value. That the proposed loan is not similar to loans made in any market does not end the inquiry. Chapter 11 does not implode merely beсause there is no “market” for loans of the sort that can be forced upon a secured claimholder under § 1129(b). Whitman indicates the preferred proof on which to rely. The unavailability of that proof only suggests that some other proof is necessary.
No evidence has been offered to upset the conclusion that 200 basis points over applicable Treasury bill rates is minimally sufficient to give FHLMC the present value of its allowed secured claim.
V.
The absolute priority rule provides “... a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property [under a reorganization] plan.”
Norwest Bank Worthington v. Ahlers,
The requirements of U.S. Truck are satisfied here. The plan requires that the joint venturers invest an additional $500,-000 in the debtor. Each joint venturer can retain an interest in the debtor only by subscribing a share of the new $500,000 investment. The uncontroverted evidence is that the debtor cannot continue to operate and cannot reorganize without new capital. There are many physical repairs that cannot be accomplished from current revenues. Many apartment units cannot be rented until new money is available. No sane outside investor would put new money in this project given its physical condition, debt structure and the difficult rental market in which it competes. Existing joint venturers have unique tax incentives to make the new investment. The $500,000 new investment is far in excess of the value of the interests that the venturers will retain in the debtor. The plan satisfies § 1129(b)(2)(B)(ii) as interpreted in this circuit by U.S. Truck.
VI.
FHLMC last asserts it is the victim of unfair discrimination because its deficiency claim will receive a 3% dividend while other unsecured claimholders, including EBR, will be paid in full. This court agrees.
Section 1129(b)(1) prohibits the plan to “discriminate unfairly” against an impaired class that has not accepted the plan. Some courts have reduced unfair discrimination to a mechanical rule that, even if appropriately placed in more than one class, all unsecured claimholders must be paid the same percentage of claims.
See In re Greystone III Joint Venture,
The legislative history of § 1129(b)(1) considers only one circumstance which would support disparate treatment, a subordination agreement.
See
REP. NO. 595, 95th Cong., 1st Sess. 416-17 (1977), U.S. Code Cong. & Admin.News 1978, pp. 5787, 6372, 6373. The Committee Reports do not address the general boundaries of unfair discrimination. Some courts have considered limiting “unfair discrimination” to cases involving subordination agreements.
See In re Acequia, Inc.,
Courts interpreting language elsewhere in the Code, similar in words and function to § 1129(b)(1), have recognized the need to consider the facts and circumstances of each case to give meaning to the proscription against unfair discrimination. 11 U.S.C. § 1322(b)(1) permits a Chapter 13 debtor to “... designate a class or classes of unsecured claims, as provided in section 1122 ...” but the plan “... may not
discriminate unfairly
against any class so designated ...” (emphasis added). Many courts have exercised discretion under § 1322(b)(1) to allow and to disallow proposed discriminations among classes of unsecured claims, depending on the totality of circumstances of individual Chapter 13 cases.
See, e.g., Friendly Finance Discount Corp. v. Bradley,
To assess the fairness of a discrimination under § 1322(b)(1), some courts consider four factors:
(1) whether the discrimination is supported by a reasonable basis;
(2) whether the debtor can confirm and consummate a plan without the discrimination;
(3) whether the discrimination is proposed in good faith; and
(4) the treatment of the classes discriminated against.
See In re Freshley,
The Chapter 13 cases interpreting the fairness of discrimination among classes under § 1322(b)(1) provide guidelines and analysis useful for § 1129(b)(1) purposes. 1 Many of the same factual considerations arise in Chapter 11 cases.
For example, does the proposed discrimination protect a relationship with specific creditors that the debtor needs to reorganize successfully?
See In re Perskin,
Does the discrimination primarily preserve assets for or otherwise benefit the debtor with no corresponding benefit for creditors?
See In re Green,
Even if some discriminаtion is necessary to accomplish confirmation or consummation of a plan, is there a meaningful recovery for creditors disadvantaged by the discrimination?
See Barnes v. Whelan,
Here, the proposed discrimination preserves assets for insiders of the debtor at the expense of FHLMC. EBR, a corporation owned by insiders of the debtor, holds $83,000 of the $88,000 of claims in Class 5. The plan will pay EBR’s $83,000 claim in full. The $1,000,000 of Class 6 claims will eventually be paid $30,000; over оne-third of that $30,000 will go to Dynamerica, another entity owned by insiders. Nothing in the record indicates that the debtor needs to protect its relationship with EBR, or with any other Class 5 creditor, to reorganize successfully. FHLMC will receive $18,000 on account of its $600,000 Class 6 deficiency. The proposed payment to FHLMC is diminimus. The proposed $500,-000 recapitalization of the debtor will enure almost entirely to the benefit of the owners and insiders. 2 On these facts, the plan unfairly discriminates.
Several Chapter 13 cases interpreting § 1322(b)(1) have concluded that it is fair discrimination to favorably classify claims that are entitled to special treatment under other sections of the Code. For example, priority claims that are entitled to payment in full under § 1322(a)(2) can be separately classified for preferred treatment under § 1322(b)(1).
In re Powell,
By analogy, the debtor argues it is fair discrimination to pay Class 5 in full while paying a small fraction to Class 6 because the claimholders in Class 5 are “natural” recourse claimholders who would have rights against the (solvent) joint venturers outside of bankruptcy, while Class 6 claim-holders are “unnatural” recourse claims by operation of § 1111(b) only in Chapter 11. In a Chapter 7 case, the debtor reasons, the trustee has a claim against the joint ventur-ers under § 723(a) to satisfy Class 5, but the Class 6 creditors would have no rights against the joint venturers directly or through the Chapter 7 trustee. Paying Class 5 in full, according to the debtor, is not only fair discrimination, it is required by § 1129(a)(7) in order to pay the Class 5 claimholders what they would receive in a liquidation under Chapter 7. 3 The debtor’s argument collides with § 1111(b).
The debtor’s argument would interrupt application of § 1111(b) in partnership Chapter 11 cases to this extent: it would always be “fair” discrimination for purposes of § 1129(b)(1) to separately classify for more favorable treatment “natural” recourse claimholders and to separately classify for less favorable treatment claimhold-ers with “unnatural” recourse only by virtue of § 1111(b). Half of the cram down barrier in § 1129(b)(1) would be automatically satisfied in every partnership case with respect to a dissenting “unnatural” recourse claimholder.
This court does not believe that §§ 1129(a)(7) and 723(a) conspire to neutralize the unfair discrimination test in § 1129(b)(1) in partnership Chapter 11 cases where § 1111(b) is operative. The applicable sections can all be given appropriate effect at cram down in a partnership Chapter 11 case as follows: the existence of “natural” and “unnatural” recourse claimants is one factor to be considered in the unfair discrimination calculus; it is not outcome determinative. 4 For the reasons discussed above, the debtor’s modified plan cannot be confirmed because it unfairly discriminates against the dissenting unsecured deficiency claim of FHLMC.
An appropriate order will be entered.
Notes
. Unfair discrimination fоr § 1129(b)(1) purposes does not exactly parallel analysis of § 1322(b)(1). For example, § 1322(b)(1) specifically authorizes a Chapter 13 debtor to treat co-signed consumer debts "differently than other unsecured claim.” There is no similar provision in Chapter 11.
. This is not to say that insider claims cannot be paid in a Chapter 11 plan. EBR appears to have a legitimate right to reimbursement of advances made for the operation of the debtor’s business.
Compare Pepper v. Litton,
. 11 U.S.C. § 1129(a)(7) provides in part:
(7) With respect to each impaired class of claims or interests—
(A) each holder of a claim or interest of such class—
(i) has accepted the plan; or
(ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retаin if the debtor were liquidated under chapter 7 of this title on such date; or ...
The question is not presented by this plan whether a Chapter 11 plan for a partnership with solvent general partners may pay objecting "natural” recourse claimholders less than the full amount of their claims.
. It may appear inconsistent to consider the special character of § 1111(b) "unnatural” recourse deficiency claims as a ground for separate classification,
see
Part III,
supra,
but not аs outcome determinative of fair discrimination under § 1129(b)(1). This is precisely the balance struck by the Sixth Circuit in
U.S. Truck,