The matter before this Court is the confirmation of the Second Amended Plan of Reorganization filed by Gramercy Twins Associates, debtor and debtor in possession, (the “Debtor”), in its chapter 11 case. Massachusetts Mutual Life Insurance Company (“Mass Mutual”), the debtor’s largest secured and unsecured creditor objects to the confirmation of the plan. For the reasons discussed below, this Court denies confirmation of the plan.
I. BACKGROUND
The Debtor filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) . on August 21, 1992. Pursuant to §§ 1107 and 1108 of the Bankruptcy Code, the Debtor has continued to operate its business. Its only asset consists of a 10-story commercial office building located at 35 East 21st Street in New York City (the “Property”).
The Property is subject to two hens. The first hen is in favor of the City of New York (the “City”) for unpaid pre-petition real-estate taxes as well as water and sewer charges in the amount of approximately $1 million at the time of confirmation (the “NYC Lien”).
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The second hen is in favor of Mass Mutual which secures the indebtedness of the Debtor to Mass Mutual, in the approximate amount of $17.9 million, consisting of principal interest, costs and fees, as evidenced by a Consohdation of Notes and an Assignment of Rents and Leases (the “As
In September 1993, in response to the Debtor’s chapter 11 filing, Mass Mutual moved, pursuant to §§ 362 and 363 of the Bankruptcy Code, to enjoin the Debtor from using the rents generated by the Property, to compel the rents to be turned over to Mass Mutual and to lift the automatic stay in order to allow Mass Mutual to proceed with the foreclosure action that was pending at the time of the Debtor’s filing (hereinafter the “Lift Stay Motion”). Prior to this Court’s adjudication of the Lift Stay Motion, the parties reached an agreement in October 1992, resolving their disputes. This agreement was reflected in an order of this Court dated March 17, 1993, (the “Cash Collateral Order”) that called for the Debtor to: 1) apply rents according to an agreed upon budget; 2) turn over additional rents to Mass Mutual to protect its interest; and 3) submit its plan of reorganization and disclosure statement no later than February 16, 1993. The Cash Collateral Order also allowed Mass Mutual to proceed with its foreclosure proceeding to the point of judgment but not to execution. Since its approval, the Debtor has twice moved to have the Cash Collateral Order amended to increase the carve-out provisions for professional fees and/or strip the lien. 3
On February 16, 1993, the Debtor filed its disclosure statement and plan of reorganization as required by the Cash Collateral Order. The Debtor has twice amended its disclosure statement and plan. By order dated May 26, 1993, the Debtor’s Second Amended Disclosure Statement was approved, as modified therein.
The only remaining issue is the confirmation of the Debtor’s Second Amended Plan of Reorganization (the “Plan”). Integral to this issue is the valuation of the Property. Pursuant to an agreement between the Debtor and Mass Mutual on March 26,1993, the fair market value of the Property was established at $7,350,000. However, both parties agreed that this valuation would remain subject to reconsideration after ninety days. Thereafter, on September 2,1993, Mass Mutual filed a motion for an order to alter the agreed upon valuation. Both parties then entered a second agreement fixing the value of the Property at $7,650,000 for the purposes of confirmation (the “Valuation”).
A. The Plan
The Plan separates claims into eight different classes. Of these eight classes, seven are impaired and, thus, entitled to a vote on the Plan.
Class I is comprised of the NYC Lien. This Class is impaired. 4 The Plan contemplates a distribution equal to 95% of the value of the NYC Lien claim on the effective date of the Plan.
Class II
consists of Mass Mutual’s first mortgage claim. Class II is impaired. The specific amount of Mass Mutual’s secured claim will be determined by subtracting the amount of the NYC Lien (which will collect post-petition interest until the effective date of the Plan) from the value of the Property.
Class III consists of Mass Mutual’s unsecured deficiency claim. 5 Class III is impaired. Under the Plan, Mass Mutual’s deficiency claim will receive identical treatment as the other general unsecured claims in Class IV.
Class FV is impaired and consists of the general unsecured claims other than those in Class V and VI, totaling approximately $2,809,706.24. Pursuant to the Plan, unsecured claims in Classes III and IV will receive a distribution equal to approximately 2% of their claims, in four annual payments. Those unsecured creditors in classes III and IV with recourse against the former general partners of the Debtor may opt to receive an additional 97% of their claims in full satisfaction of their claim or retain any recourse they might have had.
Class V consists of a convenience class of seven unsecured claims each aggregating less than $1,000 (or voluntarily reduced to that level) and collectively totalling $7,482.86. Class V is impaired. Under the Plan, members of Class V will receive 50% of their claim payable on the effective date of the Plan. Additionally, Class V creditors with recourse against the former general partners have the option of either: (1) retaining any and all rights against the former partners; or (2) receiving a payment from the former general partners in an amount equal to 49% of their claims up to a maximum of $2,000, in full release of such recourse against the former general partners.
Class VI is comprised of security deposit claims by the tenants of the Property total-ling approximately $149,375.66. Class VI creditors are unimpaired. Pursuant to the Plan, members of this class will receive the full amount of their claims. As an unimpaired class, it was excluded from the vote on confirmation.
Class VII consists of two limited partners, Peter Catalano (“Catalano”) and Michael Kornblum (“Kornblum”), and a former limited partner, Irwin Polivy (“Polivy”), (collectively, the “Class ‘A’ Limited Partners”). Catalano, Kornblum, Polivy and Atrium Management Corp. (“Atrium”) — the general partner of the Debtor — (the “Participating Partners”) collectively possess 100% of the existing equity in the Debtor. The Participating Partners are to contribute new capital (the “Capital Contribution”) totaling $500,000, each paying the pro rata share in exchange for a subordinated claim of 8% per annum on the payment and equity in the reorganized Debtor. This Capital Contribution would be returned to each partner only after all of the Debtor’s obligations under the Plan are fulfilled.
The Plan states that the Class ‘A’ Limited Partners in Class VII will transfer 80% of their equity in the reorganized Debtor to a certain Joseph Simone or his entity (“Simone”)
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in exchange for a contribution of approximately $950,000 to pay 95% of the NYC lien as contemplated by the Plan. In addition to the 30% of equity, Simone will also be entitled to a preferred return of 15%
Class VIII is comprised of Atrium, a general partner, who controls a .5% interest in the Debtor. The Plan contemplates that Atrium will retain its equity interest in the Debtor and will be treated as a Participating Partner.
In connection with the Plan, all unsecured creditors were provided the opportunity to examine the individual financial statements of Catalano and Kornblum. Mass Mutual also had the opportunity to examine both limited partners.
B. The Vote
Classes I, IV, VII and VIII unanimously voted to accept the Plan. Of these, only Classes I and IV were comprised of non-insiders. It appears that Class V would have voted for the Plan were it not for the efforts of Mass Mutual to reshape the voting.
As ballots were being distributed to creditors in early June, 1993, attorneys for Mass Mutual made a concerted effort, through calls and mailings, to garner additional votes for the rejection of the Plan. As a result of Mass Mutual’s efforts, it was able to obtain six additional votes (four in Class V and two in Class TV) by purchasing the claims of unsecured creditors for their full value. Mass Mutual then elected to switch the two claims from Class IV to Class V by reducing the claim to $1,000. Consequently, Mass Mutual was able to swing the voting in class V to a rejection of the Plan. Mass Mutual cast six rejection votes in Class V, leaving only one vote of acceptance. 7 In total, Mass Mutual casted votes in opposition to the Plan that resulted in its rejection by Classes II, III and V.
Both parties presented arguments at hearings held on October 22 and 25, 1993, November 1, 1993, and December 17 and 20, 1993, pertaining to the confirmation of the Plan. 8 Throughout these proceedings, the Debtor seeks to “cram down” its Plan pursuant to § 1129(b) of the Bankruptcy Code. Mass Mutual claims that the requirements of § 1129 have not been satisfied because the Plan is not in the best interest of creditors, the cram-down requirements of § 1129(b) have not been met, and the Plan is not feasible. In the alternative, Mass Mutual argues that 1129(b) is not applicable because the Plan has not been accepted by at least one Class of creditors, as required by § 1129 of the Bankruptcy Code, and because the Plan was proposed in bad faith.
II. ARTIFICIAL IMPAIRMENT OF THE CITY TAX LIEN
A threshold issue that must be resolved is whether the City’s claim is properly impaired pursuant to § 112-9(a)(10) of the Bankruptcy Code which requires at least one impaired consenting class. If it is not, this Court need not reach the other confirmation issues in this case.
Mass Mutual has opposed the vote of the City at other times during the confirmation process. Hearings have previously been held on the issue of whether the City’s vote was properly solicited. This Court has determined that it was properly solicited and allowed the City’s vote.
This Court must now consider whether the tax lien is properly impaired to determine whether the City’s affirmative vote on the plan will be the necessary impaired class vote
In the seminal opinion, the Eighth Circuit held that “for the purposes of section 1129(a)(10), a claim is not impaired if the alteration of the rights in question arises solely from the debtor’s exercise of discretion.”
In re Windsor on the River Assoc., Ltd.,
Mass Mutual directs this Court’s attention to the fact that Simone has agreed, and is still willing, to pay the NYC Lien in full. 9 Since Simone is willing to pay 100% of the tax hen in exchange for a 30% equity in the Property, Mass Mutual argues that Class I is artificially impaired because it is within the discretion of the Debtor to pay 100% of the NYC Tax Lien.
However, the cases Mass Mutual relies upon are distinguishable in that they mostly pertain to debtors who delay payment for a relatively brief period of time after the plan becomes effective or pay 99% of the claims in order to create an impaired class that will accept the plan. 10 To be sure, this type of impairment is “de minimis”, especially when the debtor has sufficient funds to pay the claims on the effective date of the plan.
In this case, it is not entirely within the Debtor’s discretion to pay the City’s lien in full. First, the Debtor itself does not have the ability to make such payments. Second, while Simone did agree to pay 100% of the NYC Lien, the Debtor was under the obligation to negotiate with the City for the least amount that the City would take to satisfy its lien. Moreover, the City will never see the 5% of the tax lien (plus interest) that it has voluntarily negotiated for and agreed to forfeit. Although as a percentage, a 5% impairment may — on the surface — appear to be insignificant, 5% of approximately $1.0 million amounts to $50,000 in absolute amounts. Certainly, $50,000 is not a “de minimis” amount. Accordingly, this Court finds that the Plan comports with § 1129(a)(10) of the Bankruptcy Code. 11
III. CREDITING THE DEBTOR’S POST-PETITION PAYMENTS TO MASS MUTUAL
Prior to addressing the “cram-down” requirements, this Court must resolve the dispute over the amount of Mass Mutual’s secured claim. This entails deciding the allocation of post-petition payments made to Mass Mutual pursuant to the Cash Collateral Order. The Debtor claims that its post-petition payments
12
to Mass Mutual should
Mass Mutual counters that its interest in the rents is separate from its mortgage on the Property and, therefore, the payments should not be credited against its lien which was determined in reference to the value of the Property. This issue is important to the Debtor’s Plan because it directly affects feasibility. If the payments are credited against Mass Mutual’s secured claim, an immediate “equity cushion” is created that can be used by the Debtor to provide Mass Mutual with “payments totaling at least the present value of its allowed claim as of the date of confirmation of the plan.” 11 U.S.C. § 1129(b).
Unfortunately, there is no Second Circuit case on point. However, the Second Circuit stated in
In re Vienna Park
that “rents ... are ‘cash collateral’ when they are ‘subject to a security interest as provided in section 552(b),’ ” recognizing that § 552(b)
15
“creates an exception to the general rule that property acquired by the estate after the commencement of bankruptcy is not subject to any security interest arising from an agreement entered into prior to the commencement of the bankruptcy case.”
In re Vienna Park Properties,
Analysis of the issue must begin with the sound premise that money paid by the Debt- or during the pendency of the case must be applied against some portion of Mass Mutual’s claim.
See, In re Oaks Partners, Ltd.,
In support of its argument that the payments should reduce Mass Mutual’s secured claim, the Debtor refers this Court to
United Sav. Assn. of Texas v. Timbers of Inwood Forest Assocs.,
Section 552(b) therefore makes possession of a perfected
security interest in post-petition rents or profits from collateral a condition of having them applied to satisfying the claim of the secured creditor ahead of the claims of unsecured creditors. Under petitioner’s interpretation, however, the undersecured creditor who lacks such a perfected security interest in effect achieves the same result by demanding the “use value” of his collateral under § 362.
Id.
at 374,
The Debtor would have this Court read
Timbers
as prohibiting any payments from the Debtor to Mass Mutual where the Property value is not decreasing unless Mass Mutual applies such payment against the secured portion of its claim. In support of this view, Debtor cites two cases that have interpreted
Timbers
in a similar
fashion
—Matter
of IPC Atlanta L.P.,
In
Reddington,
the court was faced with a lift stay motion by a creditor who held a first lien on both the property and the rents. Relying on § 506 of the Bankruptcy Code and its interpretation of the court in
Timbers,
the court ruled that post-petition payments by the debtor to the creditor should be used to reduce the secured portion of the claim. The court reasoned that if the payments were used to reduce the creditor’s unsecured deficiency claim, the creditor would in fact be paid “use value” in violation of
Timbers
and § 506.
The reasoning in
IPC Atlanta
was nearly identical. The
IPC Atlanta
court relied heavily upon
Reddington
and a previous case decided in the same district.
See In re Beau Rivage Ltd.,
Case No. A89-13866 (Bankr. N.D.Ga.1990),
aff'd,
What these decisions fail to address is the fact that an assignment of rents represents a security interest is distinct and separate from the mortgage on the real estate.
19
As
It is this Court’s opinion that the protection of the creditor’s separate interest in rents is governed by § 552. In Vermont Investment, the court addressed whether post-petition payments by a debtor should be credited against the secured portion of the creditor’s claim. In its analysis, the Vermont Investment court acknowledged the creditor’s separate interests in the real property and the rents as well as the importance of § 552(b). The court found that because the mortgage and the assignment of rents were distinct interests of the creditor, payments made pursuant to a cash collateral order designed to protect an assignment of rents should not be deducted from the creditor’s secured claim.
In
In re Bloomingdale Partners,
In
In re Flagler-at-First Assocs.,
The Flagler court based its holding on the sound notion that §§ 506(b) and 552(b) required protection for the creditor’s interest in the property and the rents. Flagler’s holding and reasoning are persuasive and applicable to the facts before this Court. Although some courts have gone to great lengths to distinguish Flagler from the facts before them 22 , the facts in this case are not distinguishable. Courts that distinguish Fla-gler have done so by highlighting the fact that the parties in Flagler intended the payments to protect the interest in rents. It appears from the face of the Order in this case that the parties were aware that the payments served to protect Mass Mutual’s interest in the rents. Finding “I” in the Cash Collateral Order provides, “Mass Mutual is entitled to adequate protection for the Debtor’s use of the Cash Collateral” and similar wording is found in Paragraph 2 of the Court’s orders.
Although the unsecured deficiency claim is indirectly reduced by the Debtor’s post-peti
If the payments were deducted, as the Debtor proposes, improper incentives would be created. As the court stated in
Vermont Investment,
deducting payments would create a “dramatic incentive for any secured creditor to bring a single asset reorganization case to a halt at the earliest possible moment, and would create a similar incentive on the part of the debtors to delay the case as long as possible in order to reduce the amount of the creditor’s secured claim.”
Accordingly, the post-petition payments by the Debtor to Mass Mutual should not be applied against the secured portion of its claim. Rather, the payments must be considered protection for the separate interest in the rents in accord with § 552(b) and be credited only against the total allowed amount of the claim, indirectly reducing the unsecured portion of Mass Mutual’s claim.
IY. “FAIR AND EQUITABLE” AND THE INTEREST RATE
In a “cram-down” proceeding, the plan proponent bears the burden of showing by a preponderance of the evidence that the Plan satisfies all of the requirements of § 1129 of the Bankruptcy Code.
See, e.g., In re Cellular Information Systems, Inc.,
A plan confirmed under the Bankruptcy Code’s cram-down provisions must be “fair and equitable.” Section 1129(b)(2)(A) defines this to mean that secured creditors: (1) “retain the liens securing such claims,” 24 and (2) receive “cash payments totalling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property” or the “indubitable equivalent of such claims.”
As both parties acknowledge, the crucial issue in this analysis is the rate of interest to be paid. Since Mass Mutual will not receive payment of its claim immediately, this Court must decide what interest rate is appropriate in order to provide Mass Mutual with the present value of its interest.
See Rake v. Wade,
— U.S. -, - n. 8,
Pursuant to the Plan, Mass Mutual will receive a Replacement Note with a five-year term in the full amount of its allowed secured claim that will: (a) provide a pay rate of interest at the rate of 8% per annum on the principal amount of the Replacement Note, and (b) be supplemented by either (i) a 50% participation in the net proceeds of a sale or refinancing of the Property or (ii) the 9%
Therefore, this Court must determine whether the
8%
pay rate in combination with the other elements of the Plan will provide Mass Mutual with the present value of its allowed secured claim. In other words, we must ask whether the proposed rate of interest is a “market rate.” Most courts agree that the market rate is the rate which should be approximated. Of course, there are many markets and choosing which is the appropriate market to simulate is a difficult task.
See, In re E.I. Parks No. 1 Ltd. Partnership,
The Debtor in this case argues that the market rate which this Court should attempt to approximate is the market rate for work out loans.
See In re Stratford
Assocs.
Ltd. Partnership,
Many methods have been used to calculate an appropriate rate of interest under a bankruptcy plan, including but not limited to, the formula approach, the coerced loan approach, the “Mortgage-Equity/Band of Investment Analysis.”.
Of course, even when a market to approximate has been decided upon, a recurring problem is that a market for a coerced loan is often non-existent, as is the case here. However, the approaches referred to above can each provide a means for the court to approximate what the market rate would be. See,
In re Eastland Partners Ltd. Partnership,
The formula approach takes a risk-less cost of money, reflected by the interest rate paid for treasury notes,
27
to which is
Addressing these elements in this case, this Court finds that the proposed interest rate is too low. The Debtor’s Plan calls for a balloon payment at the end of five years with no amortization of principal during that time. The Debtor argues that this time frame is short and poses little potential risk. Mass Mutual will receive interest payments only while encountering much of the risk involved in the Debtor’s new operation. While the non-amortization of principal does not render the Plan unacceptable, it does increase the amount of the risk premium that is necessary to provide present value.
See, General Motors Acceptance Corp.,
Moreover, the Debtor has the option of whether to refinance or sell the property. This exclusive right takes away some of the control and consequently increases the risk to Mass Mutual. According to the Debtor itself, there is also a distinct possibility that under certain scenarios — if $6,650,000 was Mass Mutual’s replacement loan, a refinance at 75% loan-to-ratio was required and according to certain of the Debtor’s conservative assumption — a shortfall of $110,000 would result. 28
In light of these factors, we find that a risk factor of at least 425 basis points would be necessary to provide Mass Mutual with the present value of its money. The Plan would have to provide a minimum interest rate of 9.43% to approach a confirmable rate.
This minimum rate was confirmed by expert testimony at trial. Mr. Estreich testified that 500 to 575 basis points would have to be added to the T-Bill 29 rate in order to approximate a market rate of interest. (Tr. at 538). Mr. Klett, an expert who testified for the Debtor, did not address the interest rate for a new loan of this type other than to say that no such market existed. (Tr. 300-318). However, based on the numbers Klett provided, one can extrapolate that at least 425 basis points added to the T-Bill rate would be roughly appropriate. 30
Since the 8% pay-out rate under the Plan (or even the 9% option which is payable five years down the road at the earliest) does not provide Mass Mutual with the present value of its secured claim, the Plan cannot be confirmed.
V. THE BEST INTEREST OF CREDITORS
Section 1129(a)(7) requires that a Plan be in the “best interests of creditors” for purposes of a “cram-down.” This means that a plan must provide that a creditor receives or retains property under the plan which is not less than the value it would receive under a Chapter 7 liquidation of the debtor. 11 U.S.C. § 1129(a)(7)(A)(i) and (ii).
In re Drexel Burnham Lambert Group, Inc.,
A. Unsecured Creditors
Mass Mutual asserts that the Plan does not satisfy the “best interests of creditors” test for several reasons. As a holder of several unsecured, recourse claims, Mass Mutual claims that the test is not met because this class of creditors would have recourse against the partners in a Chapter 7 liquidation pursuant to 11 U.S.C. § 728(a).
In re Notchcliff Assocs.,
Although 99% is clearly numerically less than 100%, these same creditors can opt to retain their recourse against the former partners and still receive a 2% payment on their claims. Thus, they will have exactly the same remedy they would have in a Chapter 7 liquidation, plus a 2% payment on their claim. Mass Mutual counters that the retention of their recourse would not be equivalent to retention of recourse in a liquidation under chapter 7 and cites
In re Heron, Burchette, Ruckert & Rothwell,
Mass Mutual further asserts that under chapter 7, the general partners would be liable for the full deficiency and that costs associated with the litigation by the creditors would be borne by the general partners.
See,
11 U.S.C. § 723(a); House report No. 95-595, 95th Cong. 1st Sess. 381 (1977); Senate Report No. 95-989, 95th Cong.2d Sess. 95 (1978);
In re CS Assocs.,
This Court finds Mass Mutual’s argument to be persuasive. Retention of the unsecured recourse creditors’ rights against the partners does not constitute payment in full pursuant to chapter 7. Accordingly, this Court finds that the Plan does not satisfy the best interests of creditors test with regard to unsecured creditors with recourse.
B. Best Interest of the Secured Creditor’s Claim
Mass Mutual further argues that the treatment of its secured claim under the Plan does not satisfy the test. The crux of the issue is the Debtor’s accuracy of its liquidation analysis and the rate of interest proposed to be paid under the Plan.
Mass Mutual argues that the Debtor’s liquidation analysis, as to its secured claim, is so flawed that the Plan does not satisfy the best interests test as required pursuant to § 1129(a)(7)(A)(ii) of the Bankruptcy Code. The Debtor has conceded that its liquidation analysis contained certain errors. For example, it concedes that it properly charged over $760,000 in expenses to Mass Mutual
31
and that the liquidation analysis failed to reflect the revised stipulated value of the Property.
32
Mass Mutual also asserts that the Debtor’s liquidation analysis is flawed because it did not contain a liquidation analysis of the refinance option contained in the Plan. While the Debtor has attempted to address such deficiencies in its Pos1>-Trial Reply Brief, Mass Mutual has urged this Court not to consider the Debtor’s offer of a new liquidation analysis without an opportunity for Mass Mutual to examine the Debtor’s new analysis. While this Court is inclined to agree with Mass Mutual that the Debtor has failed to meet its burden pertaining to this
VI. THE FEASIBILITY OF THE PLAN
The plan proponent has the burden of showing that the plan is feasible, as required by § 1129(a)(ll).
In re Crowthers McCall Pattern, Inc.,
The Plan is not feasible for another reason. It does not provide for repayment of Mass Mutual’s payment of administrative expenses from its cash collateral. During the pen-dency of this case, over Mass Mutual’s objections, this Court has allowed the Debtor to pay, on an interim basis, its professional fees and expenses. However, this Court had reserved judgment as to whether the cash collateral may be used. While there has been no final hearing on this issue, this Court is persuaded that the Debtor will have to return approximately $385,000 so previously charged.
See, In re Grant Assocs.,
VII. NEW VALUE EXCEPTION TO THE ABSOLUTE PRIORITY RULE
Mass Mutual contends that the new value exception to the absolute priority rule did not survive the enactment of the Bankruptcy Code and that even if it did, its requirements are not satisfied by the Debtor’s Plan. This Court finds merit in the latter contention, but not the former.
In
In re One Times Square,
Although this Court recognizes the continued vitality of the new value exception to the absolute priority rule, its requirements have not been satisfied in this case.
In order to constitute “new value,” the old equity holders must contribute capital that is new, substantial money or money’s worth, necessary for a successful reorganization and reasonably equivalent to the value or interest received.
In re Bonner Mall,
Mass Mutual alternatively argues that if the new value exception exists, then the old equity’s contribution is not reasonably equivalent to the value or interest received. The Participating Partners will contribute $500,000 for retention of 70% of the equity. Mass Mutual argues that the actual amount contributed is much less than the $500,000 because $250,000 of the $500,000 will be dedicated to payment of administrative expenses, to the extent allowed. If these expenses are not allowed, then the contribu
Additionally, Mass Mutual asserts that the remaining $250,000 to be contributed will be dwarfed by the benefits to be received by the partners pursuant to the Plan. For example: (1) they will receive $80,000 as a distribution under the Plan for their prepetition claims; (2) an entity owned by the partners will manage the Property and receive a 4% annual management fees pursuant to the Plan; (3) the Debtor will accrue an interest obligation to the partners at 8% on the entire $500,000 contribution. While this Court disagrees that the management fees to be received by the entity affiliated with the partners should be counted against the old equity’s contribution, this Court is in agreement with Mass Mutual that the old equity’s contribution amount is not reasonably equivalent to the 70% interest received. Such contribution by the Participating Partners is also not “substantial.” 34
The Debtor argues that the contribution by the Participating Partners and Simone should be considered in total when determining the adequacy of the “new value,” citing
In re Bjolmes Realty Trust,
This Court is not persuaded by the rationale of these cases but is instead persuaded by the case relied upon by Mass Mutual.
See, Case v. Los Angeles Lumber Products,
If a new participant is allowed to purchase an equity interest in a reorganized debtor based upon the new value exception when a dissenting major creditor strenuously objects to the confirmation of the Plan, then this Court believes that it would be inequitable in this case. The new investor could as easily seek Court approval for his purchase of an interest in the reorganized debtor pursuant to § 363 of the Bankruptcy Code. Through such a process, the creditors will be given due process to voice any objections to any new entity wishing to participate in the Plan process. This is not to say that Simone’s contribution is insubstantial in this case. Clearly, $1.0 million is a substantial contribution; however, for the purposes of satisfying the “new value” exception, his contribution should not be counted towards the contribution of the old equity.
Accordingly, the Participating Partners’ contribution does not satisfy the new value exception and the Plan cannot be confirmed because it violates the absolute priority rule. 35
For the aforementioned reasons, the Debt- or’s Plan cannot be confirmed. Thus, the automatic stay is further modified to allow Mass Mutual to execute on its judgment of foreclosure.
Mass Mutual is to settle an order consistent with this decision on five (5) days notice.
Notes
. The Debtor projects the NYC Lien to be in excess of $1.0 million at the time of confirma
. The Mortgage and the Assignment of Rents and Leases were dated April 19, 1990. Both agreements were recorded in the Office of the Ciiy Register, New York County on April 24, 1990; the former in Reel 1687, page 1403, and the latter in Reel 1687, page 1398.
. By an order of this Court made in response to the first motion, the carve-out provisions were subsequently increased pending review at the final hearing. The Debtor’s second motion was to increase the carve-out provisions to allow it to meet its professional expenses and to strip the lien in order to allow it to meet its administrative expenses subject to a final determination by this Court. This motion was also granted.
On or about August 16, 1995, Mass Mutual moved to prohibit the Debtor's use of cash collateral, or alternatively moved for relief from the automatic stay or an appointment of a chapter 11 trustee. Its motion was prompted by the Debtor’s failure to comply with several provisions of the Cash Collateral Order. At the hearing held before this Court on August 2, 1995, the Court denied Mass Mutual’s motion but modified the Cash Collateral Order on the record.
.Mass Mutual claims that the impairment is improper, an issue that will be addressed later.
. Since Mass Mutual's claim against the Debtor is in the approximate amount of $17,937,734.80, and the valuation stipulated to by the two parties is significantly less than that, it is clear that Mass Mutual will have a large deficiency unsecured claim.
. Simone is referred to as the Class B limited Partner.
. The Debtor claims that one vote in Class V, that of Strauss Paper Co., should not be counted in opposition (which would alter the result to 5-2 in opposition) because the Debtor received an affirmative vote from Strauss on June 24, 1993 which was changed by Mass Mutual after they purchased Strauss' claim and submitted a negative vote on the next day. In light of the larger issue in this case, i.e., whether the claim purchasing by Mass Mutual was proper, we find this issue to be of little influence to this Court’s decision.
. This Court reserved decision on this matter in the belief that the parties were negotiating a settlement and continued to believe that negotiations were ongoing until 1994.
. Trial Tr. at 234-235.
.
E.g., In re Windsor on the River Assocs., Ltd.,
. There is an issue as to whether the Plan's classification scheme is proper because the Debt- or separately classified Mass Mutual’s unsecured deficiency claim from all other unsecured claims. Classification of claims under a plan is governed by § 1122 of the Bankruptcy Code. Section 1122 only prohibits a plan proponent from classifying dissimilar claims in the same class and does not specify if similar claims may be classified in different classes.
However, courts have overwhelmingly held that separate classification of an unsecured creditor's deficiency claim is not allowed if motivated solely by an attempt to create an impaired class of creditors.
In re D & W Realty Corp.,
.The payments to Mass Mutual comprise of "net rents” only, representing the difference between gross rents and the operating expenses of the building as agreed upon by the parties in the Cash Collateral Order. Because the issue of whether Mass Mutual is entitled to gross or net rents is not raised by the parties before us, we have no need to consider several cases raised by the Debtor that were pertinent to this point.
See, In re Cardinal Indus.,
. The Order specifically provided that it was "subject to a reservation of rights as to the application of the payments.”
. The Debtor bases this assumption on the increase in the stipulated value of the Property between the two parties. Originally in this case, the parties stipulated a $7,350,000 value and later to a value of $7,650,000.
. § 552(b)(1) of the Bankruptcy Code provides in relevant part that:
Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to proceeds, product, offspring, or profits of such property, then such security interest extends to such proceeds, product, offspring, or profits acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise.
11 U.S.C. § 552(b)(1).
. Joint Pretrial Order at 4-5.
. The court in Oaks indicated that it was wrestling with the bank's argument that it was entitled to keep the net rents and not apply it to any portion of its claim. The court specifically stated that it was not deciding whether the rents had to be valued separate and apart from the real estate in fixing the amount of the bank’s allowed secured claim. Although the court indicated that it leaned toward reducing the secured portion of the claim, it never formally addressed the issue. Thus, the only holding applicable to this case is that referred to above. Id. at 451.
. Debtor also cites several cases merely for the proposition that post-petition payments which exceed the depreciation of the collateral should be credited to the secured portion of the claim.
See In re Maun,
In re Spacek,
. This was also the case in
In re B & B West 164th Corp.,
.
. Although not expressly termed a "cash collateral agreement,” the court states that the parties entered into an agreement that the debtor would provide the creditor with net rents or cash collateral.
.See Bonnie Kay Donahue and W. David Edwards, The Treatment of Assignments of Rents in Bankruptcy: Emerging Issues Relating to Perfection, Cash Collateral, and Plan Confirmation, 48 Bus. Law. 633, 690 (1993).
. The unsecured portion will be reduced because the overall claim of Mass Mutual will be reduced by the payments made, since the creditor is not allowed in any circumstances to receive more than the amount of its total claim. When the secured portion (based on the value of the properly) is subtracted from the reduced total claim, the unsecured portion that remains is correspondingly reduced by the amount of the payment.
. Neither party claims that Mass Mutual will not retain its lien under the terms of the Plan. This Court will therefore focus on the second requirement of § 1129(b)(2)(A).
. Debtor’s Post-trial Br. at 65.
. The work-out situation is inappropriate for other reasons as well. Approving the work-out rate would allow a debtor to propose a lower rate of interest by simply making a small portion of its plan participatory. Not only would this be manipulative, allowing debtors to force creditors into involuntary partnerships with them, it would also allow the debtor to satisfy a lower rate of interest at the same time — a completely improper result.
.The five year treasury note rate on the first day of the confirmation hearing was 4.75%. The current rate is 5.98%. Courts have used rates from different key dates in the proceedings as the relevant date.
See In re Landing Assocs.,
.Debtor’s Post-Trial Br., fn. 22.
. Treasury bills are short-term with a maturity date less than one year, where as, treasury notes have a maturity of one to ten years. See Black’s Law Dictionary (6th ed. 1990).
. For instance, Mr. Klett testified that the interest rate for a new loan on a commercial office building with a loan-to-value ratio of 50-60% would be roughly 300-350 basis points above the T-Bill rate. Tr. at 315.
. Tr. at 441-445.
. Debtor's Post-Trial Reply Br. at 32.
. This Court is joined by a host of others who have reached a similar conclusion. See
In re SM 104 Limited,
. This contribution is especially inadequate in light of the amount of the unsecured claims in this case. Mass Mutual alone holds over $11 million in unsecured claims.
. In light of this Court’s holding thus far, this Court need not reach the issue raised by Mass Mutual that the Plan was proposed in bad faith.