In Re L & J Anaheim Associates, Debtor. L & J Anaheim Associates v. Kawasaki Leasing International, Inc.In Re L & J Anaheim Associates, Debtor. L & J Anaheim Associates v. Kawasaki Leasing International, Inc.
We consider whether a creditor whose legal rights would be changed under a Chapter 11 plan is “impaired” under the plan as that term is defined by the Bankruptcy Code.
I
L & J Anaheim Associates (“L & J”), a limited partnership, owned a single piece of real property, a hotel. Kawasaki Leasing International, Inc. (“Kawasaki”) held a security interest in the hotel as collateral to secure a $13.2 million non-recourse note. Due to alleged mismanagement by the company hired to operate the hotel (“Trust-house”), L & J’s income declined to the point where it defaulted on its note to Kawasaki. Kawasaki moved to foreclose, and L & J filed for bankruptcy protection under Chapter 11.
When L & J failed to propose a plan of reorganization during the 120-day exclusivity period provided by section 1121(b), 1 Kawаsaki filed the plan that is the subject of this litigation (“the Plan”). The Plan proposed to auction off L & J’s assets — namely, the hotel itself and a lawsuit brought against Trust-house for its alleged mismanagement — and to use the proceeds to pay off all outstanding liens in order of their priority. The Plan also contemplated that Kawasaki would be appointed- as Estate Representative, with all the powers of a bankruptcy trustee, in order to bring lawsuits against L & J’s general partners, and so to pay any remaining claims against the partnership.
A hearing was held to determine whether the Plan should be confirmed. The bankruptcy court disallowed certain claims, and disqualified certain creditors that had voted for the Plan. Of those creditors that remainеd eligible to vote, only Kawasaki voted in favor of the Plan. The bankruptcy court, however, ordered the Plan confirmed pursuant to the Code’s “cramdown” provisions.
See
The question before us is whether the bankruptcy court erred in permitting Kawasaki to “cram down” thе dissenting creditors and in confirming the Plan. Under
[Ilf all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on requеst of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
As noted, however, cramdown is only possible where the requirements of
The bankruptcy court ruled that Kawasaki itself was an impaired сreditor under the Plan it had proposed. Since Kawasaki’s claim was placed alone in Class One under the Plan, Kawasaki’s “yes” vote on the Plan meant that one class of crеditors stood in favor of the Plan, satisfying the requirement of
Ill
On appeal, L & J contends that Kawasaki’s legal rights were improved under the Plan it proposed, and that it therefore was not an impaired creditor within the meaning of section 1124 of the Bankruptcy Code. As a consequence, L & J maintains, no impaired class voted in favor of the Plan, and cramdown under
In relevant part, section 1124 provides that “a class of claims or interests is impaired under a plan unless, with respeсt to each claim or interest of such class, the plan ... leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest.”
At first blush the idea that an improvement in one’s position as a creditor might constitute “impairment” seems nonsensical. It must be recognized, howеver, that “impairment” is a term of art adopted
In any event, the plain language of
IV
Kawasaki argues that its rights were altered under the Plan in a number of different ways. We agree with one of these arguments, and therefore need not address the others.
Under the loan agreements executed by the partiеs, Kawasaki was privileged to exercise “all rights and remedies” available to a secured party under the California Uniform Commercial Code once L & J defaulted on its repayment obligations. This was a contractual right for which Kawasaki bargained in exchange for extending financing to L & J. The Plan did away with this right — it left Kawasaki no opportunity to invoke the substantive remedies or procedural mechanisms available to it at state law. Instead, the Plan required that Kawasaki’s collateral (the hotel and the lawsuit) be sold at public auction under procedures mandated by federal bankruptcy law. The Plan thus altered Kawasaki’s prepetition contract rights, leaving it impaired within the meaning of the Code.
See In re Distrigas Corp.,
V
Since Kawasaki’s rights were altered under the Plan, the requirement ■ of
AFFIRMED.
Notes
. All citations are to the Bankruptcy Code, Title 11, United States Code, unless otherwise noted.
. L & J, citing no authority, contends that the general rule should not apply wherе it is used abusively, as where the plan proponent enhances its own position, then attempts to use this fact to show impairment and so cram down the rest of the creditors. We believe, however, that abuses on the part of a plan proponent ought not affect the application of Congress's definition of impairment. The bankruptcy court can аnd should address such abuses by denying confirmation on the grounds that the plan has not been "proposed in good faith.”
L & J does in fact argue that Kawasaki acted in bad faith, gerrymandering the Plan "solely to create an impaired class to vote in favor of the Plan and thus 'cram down’ the other impaired classes.”
See In re Club Associates,