In Re Grandfather Mountain Ltd. Partnership
MEMORANDUM OPINION
This ease came before the court on October 24, 1996, for a confirmation hearing on the Debtor’s second amended plan (“the plan”). Gene B. Tarr appeared on behalf of
JURISDICTION
The court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151,157 and 1334, and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August 15, 1984. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(L) which this court may hear and determine.
FACTS
1. The Debtor.
The Debtor is a North Carolina limited partnership formed to acquire, own and lease a Shopping Center in Boone, North Carolina, known as The New Market Center (the “Shopping Center”). The Debtor was formed in August of 1988. Seventy limited partners purchased 415 limited partner units at a price of $5,000.00 per unit for a total limited partner contribution of $2,075,000.00. The Debtor’s general partners are Benton Investment Company and K.B. Boone, Inc., each of whom contributed $10,500.00 to the capital of the partnership. The Shopping Center is located in Boone, North Carolina, and consists of a total building area of 136,-000 square feet with on-site parking for 748 automobiles. The Debtor paid a purchase price of $8,852,000.00, which included the assumption of a $6,900,000.00 non-recourse promissory note in favor of The Mutual Benefit Life Insurance Company (“MBL”). 1 The Shopping Center was new when it was purchased by the Debtor in 1988. When the Debtor acquired the Shopping Center, the two largest tenants were Rose’s Stores, Inc. (“Rose’s”) and Lowe’s Food Stores, Inc. (“Lowe’s”). Also available for leasing were 18 additional shop spaces. At the time of acquisition, Rose’s occupied 54,000 square feet and paid $229,500.00 minimum annual base rent ($4.25 per square foot) plus a percentage rental equal to 1.5% of gross annual sales in excess of $11,475,000.00. The Rose’s lease commenced in 1988 and had an original term of twenty (20) years (expiring on March 1, 2008), with renewal options for four successive five-year periods. Rose’s also was obligated to make contributions to common area maintenance expenses on a pro-rata basis, not to exceed $13,500.00 per year, during the original term. At the time of acquisition, Lowe’s occupied 31,759 square feet and paid $192,000.00 minimum annual base rent ($6.05 per square foot) and a percentage rental equal to 1.4% of gross annual sales in excess of $19,200,000.00. Lowe’s original 20-year lease term expires on February 20, 2008 with options to renew the lease for four consecutive five-year periods. Lowe’s is obligated to pay $.25 per square foot for common area maintenance for years one through five of the lease term, increasing by $.05 per square foot each five-year period thereafter.
2. The Filing of the Chapter 11 Case.
In April of 1993, Rose’s filed for relief under Chapter 11. Rose’s continued to pay the base rental required under its lease for approximately one year. However, in approximately April of 1994, Rose’s notified the Debtor that it might close the store located in Debtor’s Shopping Center or seek rent concessions in the magnitude of $100,000.00 per year for some three years, with descending reductions in later years. In approximately May of 1994, under circumstances which are in dispute between the Debtor and Rose’s, Rose’s implemented a reduction of $100,000.00 per year in its base rents to the
3. Creditors in this case.
The Debtor acknowledges that Berkeley has both a secured claim and an unsecured claim. In addition, the Debtor contends that there are two other unsecured creditors who are not insiders. According to the Debtor, Jean Winborne Boyles is a non-insider with an unsecured claim in the amount of $2,022.00. The Debtor also lists Rose’s as a non-insider with an unsecured claim. According to the Debtor, Rose’s has an unsecured contingent claim which has been estimated at $10,837.32 for voting purposes. Each of these parties has been classified separately under the plan. Ms. Boyles is the only creditor in Class 4 of the plan which is the class for general unsecured claims of unrelated parties. Rose’s is the only creditor in-Class 6 under the plan. Berkeley disputes the status and classification of both of these parties.
4. The Berkeley Claim.
On the petition date the Berkeley claim was in the amount of $7,126,665.00 and was secured by a deed of trust on the Shopping Center and an assignment of the rents from the Shopping Center. During the pendency of the case the Shopping Center was appraised at a value of $4,900,000.00 by an appraiser selected by MBL, Berkeley’s predecessor. Although the Debtor also obtained an appraisal which was less than the Berkeley appraisal, the Debtor chose to use the amount of the Berkeley appraisal for purposes of the plan. Berkeley did not elect to have its claim treated as a fully secured claim pursuant to § 1111(b) of the Bankruptcy Code. The Debtor contends that Berkeley, therefore, has a secured claim in the amount of $4,900,000.00, with the balance of the claim being an unsecured claim. During the pen-dency of this case Berkeley and its predecessor have received adequate protection payments totaling $564,968.00 through July 31, 1996. The Debtor projects that an additional $217,295.00 in adequate protection payments will be made through December 31, 1996, as a result of which the Debtor contends that the Berkeley unsecured claim is $1,444,402.00 for the purposes of the plan.
5.Treatment of Berkeley under the Plan.
Class 3 under the plan consists of the Berkeley secured claim. The plan calls for the Debtor to execute and deliver to Berkeley a new, non-recourse note in the principal amount of $4,900,000.00 and providing for interest at the fixed rate of 8.25%. The plan provides that the note is to be amortized over a 30 year period, with all principal and interest due and payable on the date which is five years after the effective date of the plan. Under the secured note to be issued to Berkeley, monthly payments of principal and interest commence on the first day of the month following the effective date and continue for a period of five years. The Debtor estimates that these monthly payments will be in the amount of $36,812.00 for the first 59 payments, with the last payment being a balloon payment for the unpaid balance of the note. Pursuant to the plan, Berkeley retains all of its prepetition liens.
The plan provides alternative treatment for the balance of the Berkeley claim. Unless Berkeley elects the alternative treatment, Berkeley retains an unsecured deficiency claim in the estimated amount of $1,444,402.00. Under this alternative, the plan provides for Berkeley to receive a cash payment of $160,000.00 on the first day of the month following the effective date, plus annual distributions equal to 30% of the net operating income of the Shopping Center during the five years of the plan. The Debtor projects that the aggregate payment to Berkeley as an unsecured creditor will range between a low of $186,440.00 to a high of approximately $552,371.00, i.e., a range from 12.9% to 38.24% of the claim. The plan provides that payment of the fifth annual payment to Berkeley constitutes payment in full of the
Under the alternative treatment offered under the plan, Berkeley may elect to participate in the reorganized Debtor as a limited partner, or as a limited partner and general partner, by “purchasing” such interests with the entire amount of its unsecured deficiency claim. The plan contains a schedule which specifies the method by which Berkeley “spends” the entire amount of its allowed unsecured deficiency claim to “purchase” a partnership interest, contributes its pro rata share of new capital, and obtains a 29.00% share of the new limited partner units. Under this alternative the limited partners’ original contributions of $2,075,000.00 have been “adjusted” to a present value of $3,437,-164.00 by compounding them at an annual rate of 9.625% for the six years since the contributions were paid by the limited partners. Utilizing this figure and $1,444,402.00, the amount of Berkeley’ unsecured deficiency claim, the plan allocates a 69% ownership interest to the limited partners, 29% to Berkeley and 2% to the general partners. Based on these allocations of ownership, Berkeley would be required to contribute 29.00% of the new capital or $58,000.00. The original limited partners would be required to contribute 69.00% of the new capital, or $138,000.00, and the general partners would contribute 2% of the new capital, or $4,000.00. Under this alternative, Berkeley is entitled to receive annual distributions equal to 29% of the net operating income and Berkeley also would be entitled to participate in any gain arising from the sale of the Center to the extent of its 29% interest. The amount of the payments from the net operating income to be received by BFBT as a limited partner is projected to range from a low $25,558.00 to a high of $379,292.00. In addition, gain arising from the sale of the Center could increase total distributions to BFBT significantly.
6. Berkeley’s objection to the plan.
In its lengthy objection, Berkeley asserts that the plan fails to comply with both § 1129(a) and § 1129(b) of the Bankruptcy Code. The principal grounds for Berkeley’s objection under § 1129(a) may be summarized as follows: (a) the plan does not comply with § 1129(a)(1) because it fails to meet the requirements of § 1122 and § 1123 of the Code; (b) the plan does not comply with the requirement § 1129(a)(3) that a plan be filed in good faith bécause it impermissibly classifies claims and attempts to gerrymander impaired accepting classes of claim, thereby evidencing a lack of good faith; (c) the plan fails to satisfy the requirements of § 1129(a)(10) because the plan has not been accepted by any legitimate impaired class of non-insiders; and (d) the plan does not satisfy the feasibility requirement of § 1129(a)(ll) because it will likely be followed by the need for further liquidation or financial reorganization. Berkeley’s objection under § 1129(b) raises three principal grounds for objection: (a) unfair discrimination in that the plan discriminates against Berkeley’s unsecured claims; (b) the plan is not fair and equitable in that Berkeley does not receive the present value of its secured claim; and (c) the plan violates the absolute priority rule in that the Debtor’s equity interest holders are retaining their interest in the Debtor while Berkeley’s unsecured claim remains unpaid.
A. Objections Related to § 1129(a).
The objections by Berkeley under § 1129(a) of the Code are without merit and will be overruled. The principal objections by Berkeley under § 1129(a) relate to the classification of claims under the plan and the assertion that the plan does not satisfy the requirement in § 1129(a)(10) that the plan be accepted by at least one class of claims that is impaired under the plan, determined without including any acceptance of the plan by any insider. Berkeley argues that the Debt- or manipulated the classification of claims and engaged in gerrymandering in order to satisfy the requirement of § 1129(a)(10) and obtain a confirmable plan. In making this argument, Berkeley points out that at most there are only three unsecured creditors in this case (Rose’s, 2 Jean Winborne Boyles and Berkeley) and that the claims of each of these unsecured creditors were placed in separate classes consisting of only a single claim. According to Berkeley, this was done because Debtor knew that if the other two unsecured claims were placed in a class with Berkeley’s unsecured claim, Berkeley would vote against the plan, “swamp” the class and prevent Debtor from satisfying the requirements of § 1129(a)(10) which, of course, would preclude confirmation of Debtor’s plan.
The section of the Bankruptcy Code dealing with classification of claims is § 1122, which provides:
(a) except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interest of such class.
(b) a plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.
The explicit language of § 1122 requires substantial similarity between claims that are placed in the same class, but does not require that all substantially similar claims be placed within the same class. Section 1122 therefore leaves some flexibility in the classification of unsecured claims. These principles are not contested by the parties in this case. Instead, the contest between the parties in this case, as in most single asset Chapter 11 cases, has to do with the amount of flexibility which is permitted with respect to the classification of unsecured claims. In dealing with this issue, this court must be guided by the controlling authority embodied in
In re Bryson Properties, XVIII,
This court does not read the
Bryson
case as holding that natural recourse claims and unnatural recourse claims arising under § 1111(b) can never be classified separately. The court found in
Bryson
that where separate classes are created but each class receives the same treatment, the classification will be regarded as done for the purpose of manipulating voting. This is not the situation in the case now before the court. In the present case, while the unsecured claims are
Under § 1129(a)(7)(A), every creditor in a Chapter 11 case is entitled to insist upon receiving as much in Chapter 11 as would be received in Chapter 7. Section 723(a) gives the Chapter 7 trustee a claim against each general partner of a partnership debtor for the full amount needed to pay any unsecured, but not non-recourse unsecured, claims which the estate otherwise is unable to pay.
See In re Overland Park Merchandise Mart,
In summary, the court concludes that the classification of unsecured claims under Debtor’s plan in this case is a reasonable classification which should be permitted under the facts of the present case. Thus, it is permissible to have the Rose’s claim, the Boyles claim and the Berkeley claim in separate classes. Whether the plan unfairly discriminates against Berkeley or is unfair and inequitable in its treatment of the Berkeley claim is a matter which the court will address in the portion of this opinion dealing with § 1129(b).
See In re Aztec Co.,
Berkeley also argues that Debt- or’s plan fails to satisfy the feasibility requirement of § 1129(a)(ll). This argument, too, is rejected. The burden is upon the proponent of a plan to establish feasibility. In order to do so, a proponent must show that its plan has a reasonable prospect of success and is workable. The test of whether the Debtor can accomplish what the plan proposes is a practical one and, although more is required than mere hopes and desires, success need not be certain or guaranteed.
See Clarkson v. Cooke Sales and Service Co.,
The financial projections relied upon by the Debtor are based on actual historical operations involving the actual expenses incurred by the Debtor in the operation of the Shopping Center over a period of five years. The income figures used in the projections represent rents actually being received under leases or from the projected leasing of some currently vacant space which it is reasonable to assume will be leased. The Debtor’s rent projections include variables ranging from Rose’s leaving its space and the space being vacant for the entire period of the plan to Rose’s remaining in its space for the entire plan period at the original rental provided in the Rose’s lease. The various scenarios contained in the Debtor’s projections all show the Debtor as being able to carry out the provisions of the plan.
The evidence regarding Debtor’s performance prior to the filing of this case also supports a finding of feasibility. Prior to August of 1994, the Debtor had not missed any payments to its mortgagee or to any non-insider creditor. Although Debtor did not make projected dividend payments to its limited partners, payments to creditors were made in a timely manner. In fact, when this case was filed, the Debtor had cash on hand in excess of $200,000.00. Debtor has remained current on its obligations since the filing of the petition in this case. With the exception of a delay in paying some property taxes in 1996 which resulted from a miseom-munication with or by the former mortgagee, MBL, Debtor has always paid its property taxes in a timely manner.
It also is appropriate for the court to consider the adequacy of the capital structure of the Debtor. In that regard, the evidence offered at the hearing, including the projections submitted by the Debtor, reflect that sufficient cash balances should exist throughout the life of the plan, even though the projections include a worst-case scenario. Regarding the income of the Debtor which is utilized in the projections, the income figures are based on the actual rent rolls except to the extent that variations are proposed regarding Rose’s and reasonable assumptions are made regarding the ability of the Debtor to rent a small amount of space which is currently vacant. In short, Debtor’s evidence, taken as a whole, established that it is reasonably likely that the Debtor will be able to make the payments provided for under the plan without the need for further financial reorganization.
The court has considered the remaining arguments contained in Berkeley’s objection related to § 1129(a), including the arguments that the plan does not comply with § 1122 and § 1128 and was not filed in good faith. This court also rejects these arguments and concludes that the plan in this case complies with all of the requirements of § 1129(a) except for the requirement of § 1129(a)(8), compliance with which is prevented by Berkeley’s rejection of the plan. This leads to the question of whether the court should confirm the plan over the objection of Berkeley pursuant to § 1129(b).
B. Requirements for cram down under § 1129(b).
In order for a Chapter 11 plan to be confirmed without the acceptance of an impaired class, the plan must meet the requirements of 11 U.S.C. § 1129(b)(1). This provision requires that before a plan can be “crammed down” the plan must not discriminate unfairly and must be fair and equitable with respect to each class of claims that is impaired under the plan and has not accepted the plan. Section 1129(b)(2) sets forth specific standards which must be met in order for a plan to be “fair and equitable.” However, the requirements of § 1129(b)(2) are not exclusive. Indeed, the requirements of § 1129(b)(2) are minimal standards only and a plan still may not be “fair and equitable” and, thus be unconfirmable, even though it meets the minimal standards of § 1129(b)(2).
Matter of D & F Construction Inc.,
C. Whether the plan is fair and equitable as to Berkeley’s secured claim.
In contending that the plan treatment for Berkeley’s secured claim is fair and equitable in the present case, the Debtor argues that the plan satisfies the requirements of § 1129(b)(2)(A)®. There are three requirements under this provision: (1) the plan must provide that the holder of the secured claim retain the lien securing such claim; (2) the plan must provide for the holder of such claim to receive cash payments which total at least the allowed amount of the secured claim; and (3) such cash payments must have a present value as of the effective date of the plan equal to the value of the collateral. The first and second of these requirements are not in dispute in the present case. The plan clearly provides for Berkeley to retain the lien which secures its secured claim. Additionally, the value of the collateral is not at issue because for purposes of the plan the Debtor used the $4,900,000.00 valuation of the Shopping Center arrived at by Berkeley’s appraiser. The plan payment proposed for Berkeley on its secured claim matches this $4,900,000.00 value, thus satisfying the second requirement under § 1129(b)(2)(A)®. However, the remaining requirement that the payments under the plan have a present value equal to the value of the collateral is in sharp dispute. Berkeley argues strenuously that the 8.25% interest rate proposed in the plan is too low and that the proposed payments to Berkeley on its secured claim therefore do not have a present value of $4,900,000.00 as required under § 1129(b)(2)(A)®, rendering the plan unconfirmable.
The concept of “present value” recognizes the time value of money and compensates the creditor for not receiving its money today by charging an additional sum based on a rate of interest called the “discount rate.” The appropriate discount rate must be determined on the basis of the rate of interest which is reasonable in light of the risks involved. Therefore, in determining the discount rate, the court should consider the prevailing market rate for a loan of a term equal to the payoff period, with due consideration to the quality of the security and the risk of subsequent default.
See In re Bryson Properties, XVIII,
961 F,2d 496, 500 n. 4 (4th Cir.1992), citing
In re S.E.T. Income Properties, III,
Before addressing the particulars of the testimony of the witnesses who testified regarding the interest rate issues, certain background facts which were shown at the hearing should be noted. There is an ongoing dispute between the Debtor and Rose’s regarding the status of Rose’s as a tenant in the Shopping Center. In approximately April of 1994, while Rose’s was still a Chapter 11 debtor in its own Chapter 11 case, Rose’s approached the Debtor regarding a reduction of the rent called for under the lease between Rose’s and the Debtor. Rose’s requested a rent reduction under which its rent would be reduced by $100,-000.00 per year for the first three years, by $75,000.00 per year for the next two years and by $50,000.00 for the sixth year. It is sharply disputed whether the Debtor agreed to this reduction. Rose’s contends that the Debtor did agree to such a modification and that Rose’s thereafter assumed the lease as modified. The Debtor, on the other hand, contends that it never agreed to any modification and that when Rose’s assumed the lease, it assumed the lease according to its original terms. This dispute is the subject matter of a pending adversary proceeding between the Debtor and Rose’s. Meanwhile, Rose’s is paying rent at the reduced rate provided for in the disputed modification. It is the position of Rose’s that if the Debtor prevails on the issue of whether the lease was modified, Rose’s will seek a modification of the order which permitted the assumption of the lease in order to be permitted to reject the lease. It is Debtor’s position that if Rose’s is successful in its contention that the Debtor agreed to modify the lease, then the Debtor may decide to reject the modified lease in the Debtor’s Chapter 11 case. Debt- or contends that these unresolved issues create uncertainty as to whether Rose’s will remain as a tenant in the Shopping Center and, if it does, the amount of rent which Rose’s will pay in the future. As a result, the Debtor chose to include in its disclosure statement five schedules setting forth five different sets of financial projections based upon five different factual scenarios that could arise, depending upon how the dispute between the Debtor and Rose’s is resolved in the future.
In Schedule 2, the Debtor sets forth financial projections for the five-year plan period which would result if the bankruptcy plan is approved on January 1, 1997; excess cash from the Shopping Center is forwarded to Berkeley through December 31, 1996; the Shopping Center operates with the Rose’s space vacant beginning January 1, 1997 for the entire five-year plan period; and the spaces currently vacant are rented in 1996 and enhance income by $50,000.00 annually beginning January 1, 1997 (“the Schedule 2 scenario”). The Debtor refers to this as the “worst case” scenario.
In Schedule 3, the Debtor sets forth financial projections for the five-year plan period which would result if the bankruptcy plan is approved on January 1, 1997; excess cash from the Shopping Center is forwarded to
In Schedule 4, the Debtor sets forth financial projections for the five-year plan period which would result if the bankruptcy plan is approved on January 1, 1997; excess cash from the Shopping Center is forwarded to Berkeley through December 31, 1996; the Shopping Center fills currently vacant space to enhance income by $50,000.00 by the end of 1996; and Rose’s accepts the Debtor’s demand to go back to its original lease terms and the Lowe’s lease remains the same (“the Schedule 4 scenario”).
In Schedule 5, the Debtor sets forth financial projections for the five-year plan period which would result if the bankruptcy plan is approved on January 1, 1997; excess cash from operations is forwarded to Berkeley through December 31, 1996; the Shopping Center fills currently vacant space to enhance income by $40,000.00 by the end of 1997; Rose’s accepts the Debtor’s demand to go back to the original lease terms; and Lowe’s expands to fill adjacent space and adds new space to increase rent by $40,-000.00 (“the Schedule 5 scenario”).
In Schedule 6, the Debtor sets forth financial projections for the five-year plan period which would result if the bankruptcy plan is approved on January 1, 1997; excess cash from the Shopping Center is forwarded to Berkeley through December 31, 1996; the Shopping Center fills currently vacant space to enhance income by $50,000.00 by the end of 1996; Lowe’s refits (at its expense) the Rose’s space and pays rent at the rate provided for in the Rose’s lease; and current Lowe’s space become vacant on 6/30/97 and remains vacant during the remainder of the five-year plan period (“the Schedule 6 scenario”).
The Debtor and Berkeley each called a witness to testify regarding the appropriate market rate of interest. Richard L. Crouse was called by the Debtor. James R. Graham was called by Berkeley. The court found both witnesses to be experts. Both witnesses arrived at their opinions regarding the market interest rate by using the rate of interest for a risk free five-year treasury bill as the starting point and adding to that rate of interest the appropriate number of basis points to reflect the risk associated with the proposed secured loan under the plan. Both witnesses referred to the amount to be added to the T-bill rate as the “spread.” Both witnesses agreed that the treasury bill yield to be used in arriving at the market rate of interest was 6.13% to 6.17%. Beyond this point the testimony of the two witnesses diverged significantly. Mr. Crouse, the witness called by the Debtor, opined that the market rate was between 8.05% and 8.65%, depending upon which of the plan scenarios was utilized. Under the Schedule 2 scenario, Mr. Crouse testified that the market rate would be 8.15% to 8.30%; that under the Schedule 3 scenario, the market rate would be 7.90% to 8.15%; that under the Schedule 4 scenario, the market rate would be 8.40% to 8.65%; that under the Schedule 5 scenario, the market rate would be 8.4% to 8.65% and that under the Schedule 6 scenario, the market rate would be 8.05% to 8.2%. According to Mr. Graham, the Berkeley witness, market rate in this case is 9.13% to 9.17%. In reaching his opinion, Mr. Graham talked to ten lenders and obtained from at least five of them the spread which they would use in making the secured loan proposed in the plan in this case. In obtaining quotes from these lenders, Mr. Graham used the description of the Shopping Center contained in the appraisal done by Martin
&
Associates in March of 1996 (Berkeley Exhibit 2), which described the Shopping Center as having a total area of 134,229 square feet, with a 54,000 square foot Rose’s store, a 31,759 square foot Lowe’s Foods Store, and the remainder of the space occupied by Rack Room Shoes, Boone Drug, and Prime Time Video and other shop type tenants including three local restaurants and having a current
Having carefully considered all of the evidence which was offered on the issue of the market rate of interest in this case, the court is not convinced that the 8.25% rate of interest which the Debtor proposes to pay Berkeley on its secured claim represents the market rate of interest. As the proponent of the plan, Debtor had the burden of showing by the greater weight of the evidence that the deferred payments to Berkeley under the plan have a present value as of the effective date of the plan equal to the value of Berkeley’s interest in the collateral, i.e., $4,900,-000.00. In order to carry this burden of proof, it was incumbent upon Debtor to show by the greater weight of the evidence that the proposed 8.25% rate of interest is not less than the market rate of interest for a loan of the type proposed in the plan. The Debtor failed to do so. Having failed to show that it was paying at least the market rate under the plan, Debtor failed to show that the deferred payments to Berkeley on its secured claim have a value of $4,900,-000.00 and thereby fell short of showing compliance with § 1129(b)(2) (A) (i).
In his testimony, Mr. Crouse gave varying opinions regarding the market rate based upon the various factual scenarios described in Schedules 2 through 6 of the disclosure statement. Some of the market rates supplied by Mr. Crouse were lower than 8.25% and some of his market rates were greater than 8.25%. However, none of the factual scenarios used by Mr. Crouse during his testimony purport to reflect the current status of the occupancy at the shopping center. For example, under one of the scenarios used by Mr. Crouse the Rose’s space was treated as vacant for the entire plan period, while another scenario involved Rose’s vacating its space and Lowe’s moving into the Rose’s space, thereby vacating the Lowe’s space. The court is not satisfied from the evidence offered by the Debtor that any of these hypothetical scenarios are anything more than conjecture. Currently, the Rose’s space is not vacant. It is occupied by Rose’s and Rose’s currently is paying base rent of $129,-500.00 per year under a lease that extends past the plan period. The specter of the space occupied by Rose’s becoming vacant is something that was raised by the Debtor. However, there was no showing of a likelihood of the Rose’s space becoming vacant unless the Debtor should voluntarily cause such vacancy to occur by rejecting the Rose’s lease and forcing Rose’s out of the Shopping Center. It is inconceivable that the Debtor would follow such a course of action unless it had a more attractive replacement tenant waiting in the wings. The scenarios involving Lowe’s moving into space vacated by Rose’s or Lowe’s moving into other vacant space were hypothetical matters which the evidence left as pure conjecture rather than events which were likely to occur. The court believes that the opinion expressed by Mr. Ingram was derived from assumptions regarding the Shopping Center which more closely resemble the actual situation at the Shopping Center. It does appear that Mr. Ingram assumed a slightly higher vacancy rate for the shop space than exists at the Shopping Center. Nevertheless, the 9.13% to 9.17% market rate expressed by Mr. Graham appears much closer to the actual market rate of interest than the market rates provided by Mr. Crouse or the 8.25% interest rate used in the plan.
The “spread” or risk premium which is appropriate in determining the market rate of interest is tied closely to the particular facts of the case. In general, the risk factor depends on the amount and quality of the collateral, the risk of default and the length of the payout period.
See In re River Village Associates,
The Debtor argues that the plan also satisfies the requirement of § 1129(b)(2)(A)(iii) because it provides for the realization by Berkeley of the indubitable equivalent of its secured claim. If, as the court has concluded, the deferred payments to Berkeley under the plan do not have a present value equal to the value of Berkeley’s $4,900,000.00 security interest then it follows that such payments are not the indubitable equivalent of the secured claim of Berkeley. See 5 Collier on Bankruptcy § 1129.03 at p. 1129-89 (15th ed. 1996) (“treatment which is less favorable than the treatment specified in § 1129(b)(2)(A)(i) and (ii) would not satisfy the test [of indubitable equivalence]”). In short, the plan treatment for the secured claim of Berkeley does not satisfy either facet of § 1129(b)(2)(A). Therefore, it follows that the plan is not fair and equitable with respect to the secured claim of Berkeley and may not be confirmed over the objection of Berkeley pursuant to § 1129(b)(2).
D. Whether the plan is fair and equitable as to Berkeley’s unsecured claim.
Where the dissenting class consists of unsecured claims, the minimum that is required in order for the plan to be fair and equitable is described in § 1129(b)(2)(B). Under this provision, the plan must satisfy one of two requirements. Either (i) the plan must provide for payment in full of the allowed amount of the unsecured claims in the dissenting class; or (ii) the holder of any claim or interest junior to the claims of the dissenting class may not receive or retain any property or interest on account of such junior claim or interest. The effect of the second requirement set forth in § 1129(b)(2)(B)(ii) is to impose a priority rule which prohibits equityholders or junior creditors from retaining “property” in the Debtor on account of their claim or interest unless senior creditors are satisfied in full. Berkeley argues that the limited partners in the present case are receiving property under the plan because of their prior interest in violation of the priority rule embodied in § 1129(b)(2)(B)(ii). The Debtor contends that the partners in this case are putting new money into the debtor and are not receiving or retaining any interest on account of their old interests in the Debtor. The Debtor also argues that the present case falls within the new value exception to the priority rule set forth in § 1129(b)(2)(B)(ii). Berkeley counters with the argument that the new value exception no longer exists. These conflicting positions require an examination of the exact nature of the priority rule contained in § 1129(b)(2)(B) as well as a consideration of the extent to which there is a new value exception to the priority rule contained in § 1129(b)(2)(B).
In
In re Bryson Properties, XVIII,
Although the court believes that the new value exception to the absolute priority rule survived the enactment of the Bankruptcy Code in 1978,
4
the existence of the exception does not alter the outcome of the present case because the Debtor failed to establish the applicability of the new value exception. In order for old equityholders to retain their interest pursuant to the new value exception to the absolute priority rule, the capital contribution must be new, it must be made in money or money’s worth, it must be necessary for a successful reorganization and the new contribution must be substantial and reasonably equivalent to the value or interest which the old equityholders are receiving under the plan.
E.g., In re One Times Square Associates Ltd. Partnership,
Finally, while it is not impermissible to . propose a plan which only adjusts the interests of one creditor, this situation certainly must cause a court to scrutinize closely the equities involved. Under the Plan or through outside payments, the claims of all creditors, other than Travelers, will be paid in full. Only Travelers is truly impaired. This combination of factors leads us to conclude that even if some limited new capital exception were viable under the Bankruptcy Code, it would not be so expansive as to apply under the facts of this ease. A plan must be fair and equitable in a broad sense, as well as in the particular manner specified in 11 U.S.C. § 1129(b)(2). Here, the debtors have carried their opportunity for self-dealing too far.
In re Bryson Properties, XVIII,
An additional reason why the new value exception may not be invoked in the present case involves the requirement that the capital contribution be reasonably equivalent to the value of the interest retained or received by the old equityholders. The very substantial disparity between the $360,000.00 contribution being made in this case and the $4,900,000.00 value of the Shopping Center raises a serious question regarding the applicability of the new value exception.
See In re Miami Center Associates, Ltd.,
CONCLUSION
For the reasons herein set forth, an order will be entered contemporaneously with the entry of this memorandum opinion denying confirmation of Debtor’s second amended plan.
Notes
. During the pendency of this case Berkeley acquired MBL's claim in this case and Berkeley is now the holder of the promissory note, deed of trust, assignment of rents and other loan documentation of the claim against the Debtor.
. Berkeley has objected to the Rose’s claim on various grounds and contends that Rose’s has no claim and is not a creditor in this case.
. Since the requirements of § 1129(a)(10) are satisfied through the acceptance of the plan by Ms. Boyles, it is not necessary for the court to deal with Berkeley's objection to the Rose’s claim.
.
See In re Bonner Mall Partnership, 2
F.3d 899 (9th Cir.1993);
In re Gramercy Twins Associates,
. See Schedules 2 through 6 which show the total payments which will be made on the secured claim and the portion of those payments
. See Second Amended Plan or Reorganization, Debtor’s Ex. 9 at p. 10, and Modified Disclosure Statement to Second Amended Plan of Reorganization, Debtor's Ex. 10 at p. 20. This provision conflicts with § 1111(b) of the Bankruptcy Code. As pointed out in
In
re
Aztec Co.,
. For example, if the
reduced
rents being paid by Rose's are added to the figures contained in Debtor's "worst case” scenario as set forth in Schedule 2, the Debtor's net rental income picture improves significantly as does the return for the partners. In 1997, the first year of the plan, the reduced base rents to be paid by Rose's total $129,500.00. After deducting the 3% rental commission being paid by Debtor, the net rental income for the Shopping Center increases by the sum of $125,615.00 as a result of the inclusion of the reduced rents being paid by Rose's. In 1998 and 1999 the rents being paid by Rose's increases by $25,000.00 each year to $154,500.00 per year, because the reduction is only $75,000.00 per year during those years. In 2000, the reduced Rose's rents increase to $179,500.00 because the reduction is only $50,000.00 that year. Beginning in 2001 Rose's begins to pay the full base rental of $229,500.00. The inclusion of the rents to be paid by Rose’s thus results in a net increase of $125,615.00 in 1997, $149,865.00 in 1998, $149,865.00 in 1999, $174,115.00 in 2000 and $222,615.00 in 2001. The partners are projected to receive 70% of the net rents which means that the partners stand to receive an additional $87,930.50 in 1997, an additional $104,-905.50 in 1998, an additional $104,905.50 in 1999, an additional $121,880.50 in 2000 and an