Oxford Life Insurance v. Tucson Self-Storage, Inc. (In Re Tucson Self-Storage, Inc.)

SELF-STORAGE, INC., In re TUCSON corporation,

an Arizona Debtor. LIFE INSURANCE

OXFORD

COMPANY, Appellant,

v. SELF-STORAGE,

TUCSON

INC., Appellee.

BAP No. AZ-93-1114-RVMe.

Bankruptcy No. 91-2130-TUC-LO. Appellate Bankruptcy

United States Panel

of the Ninth Circuit.

Argued Sept. and Submitted on 1993.

Decided March 1994. May Opinion

Amended

violated the absolute RE- rule. We VERSE and REMAND.

I. FACTS 1991, May Debtor/Appellee, On the (“Tucson”), Self-Storage, Tucson Inc. was incorporated formed and under the laws of the oper- State of Arizona. Tucson owns and asset, ates a mini-storage facility Tucson, (“Storage Facility”). Arizona date, On that acquired Storage the Facility Building Corpo- from Villa Catalina transfer, part ration. As Tucson as- outstanding Storage sumed all debts. The Facility subject was to a first deed of trust Merabank, favor a of Federal Bank Savings (“Merabank”).3 Storage Facility The was subject also to a second deed of trust in favor (“PLF”).4 of Point Loma Foundation 17, 1991, On Chapter June Tucson filed a petition. March On Tucson filed proposed plan disclosure statement and a reorganization. The disclosure statement provided for a reduction of the secured claims to market Storage the fair value of the Facility. Both PLF and Merabank/RTC deficiency were holders of were which also separately classified. indebted was to Merabank/RTC $1,642,917.35 interest, for plus accrued Phoenix, AZ, Clemency, R. John appel- charges, attorneys’ costs and

lant. fees. Tucson $400,000. was also to PLF indebted Altfeld, Tucson, AZ, B. Clifford appel- Storage court Facility valued the at $1.5 lee. deficiency million. The claim Mer- RUSSELL, Before: VOLINN and was listed at The class abank/RTC MEYERS, Bankruptcy Judges. $400,- 7 deficiency of PLF claim was listed at AMENDED OPINION1 . RUSSELL, BARRY Bankruptcy Judge: Initially, was to receive Merabank/RTC claim, percent ten its deficiency appeals A creditor from the PLF twenty-five was percent to receive of its confirming Chapter court’s order reorganization, plan eventually claim. The was arguing im- properly placed provide payoff similar claims in amended to a 10% respectfully classes, plan unfairly the discriminated to and claim to Merabank/RTC’s prior Opinion lender, 1. The original filed on March 1994 is 3. Merabank was the construction adopt subsequently placed receivership to which amended the standard of into review dis- ("RTC”). Corporation Trust Resolution cussed in In re subsequent All to will be (9th Cir.1994). references Merabank ' 'Merabank/RTC.'' indicated, chapter, 2. Unless otherwise all section religious college 4. PLF is a which foundation Code, Bankruptcy and Rule references are Herder, money loaned Peter and Recie who §§ U.S.C. seq. et the Federal Rules subsequently Storage Facility sold to Villa Procedure, Bankruptcy seq. Rules 1001 et Corporation. Building Catalina interest filed. court continued PLF, trade creditors while the unsecured hearing. full. were to be confirmation a first On December Tucson filed 21, 1992, July On Merabank/RTC provided amended The amended objection Mera- filed an (1) improper objected to: clas for identical treatment PLF and OLIC’s bank/RTC (2) claims; discriminatory 6,1993, January sification of claims. On (3) claims; violation of the objection treatment confirmation which filed (4) rule; application absolute essentially previous raised Merabank/RTC’s (5) terms; interest rate below-market objections. claims; secured improper calculation of 14,1993, January ordered the On (6) (7) being feasibility; and confirmed, January with 1993 as addition, good faith. Mera- proposed 25, January plan. of the effective date On objected the classification of to bank/RTC 1993, appeal notice of the OLIC filed a as an administra trade creditors unsecured confirmation order. disparate the class and to tive convenience 29, 1993, January On borrowed treatment, Tucson allowing to the trade creditors5 $92,000 Kujawa Olga Daniel and and the from plan, under receive 100% distribution deficiency Trust.6 On that receive 10% dis the Felkner Children’s “S” date, ($30,- Tucson disbursed checks OLIC tribution. 026)7 deficiency as of the payment Class 6 Merabank/RTC, objection of Despite the ($75,531) payment claim and as of the PLF voting that vot- reported all Tucson claim.8 All Class except ed in favor of the Mera- paid the claims were in full on administrative 28, 1992, July the On court held bank/RTC. plan. the effective date of hearings. the first of nine confirmation date, stay filed On OLIC a motion by its note secured sold Merabank/RTC stay pending the appeal to execution Life the deed of trust to Oxford Insur- first (“OLIC”). 23, plan with court. On Febru- the Company On October ance 4, ary party in that motion was denied. a notice of of real substitution disputed Additional appears Tucson has not this fact. 5. It from the record Class (1) particular relationship the were facts of are: unsecured trade creditors owed this $2,124.27 (“Felk- they Sidney attorney, and that the under debtor’s Lex Felkner they paid days ner”) impaired in full 60 negotiated as were to be behalf on with Merabank/RTC plan. PLF, Life the effective date of the Oxford attempting after the economic lessen Company the that since Class 5 (2) Insurance asserts negotiations impact project; of a failed after full, paid are to be unsecured trade creditors failed, Storage, up Inc. to set Tucson Self Felkner Congress impaired has they not an class. PLF”; (3) damage to Felkner’s "lessen the possible impairment broadest defined directors; (4) daughter Tucson's is one of definition, "any altera terms. Under broad provided a new Children’s "S" trust Felkner impairment rights if constitutes even tion of was and to be loan to Tucson which secured rights In re enhanced.” L & J the value of is the record Tucson. It is unclear from Associates, (9th Cir. 995 F.2d Anaheim Olga Kujawa to Tuc- relationship Daniel and 1993) (quoting Acequia, In re Kujawa is son. The fact known that Daniel (9th Cir.1986)). Since the Class 5 daughter Tucson. are directors of Felkner's days wait trade creditors must unsecured full, paid in we to be after the effective date by the cashed the check sent 7. OLIC has not impaired they permissible are a class believe Debtor. 1129(b)(1). purposes under "cram down" separate proper Class 5 is Because Class 6 claim 8. Merabank/RTC's (as below), unnecessary for us to discussed it is $355,000. deficiency claim Class 7 PLF’s impairment of Class 5 resulted determine if the to PLF Tucson has tendered was for good being proposed in faith. only pay- approximately a distribution while 19% ing Sur- an distribution 8.5% Merabank/RTC. dealings PLF are somewhat in- Tucson's with pay proposed to prisingly, as amended OLIC contends Tucson formed bred. identical both and PLF an 10% benefitting junior purpose Merabank/RTC lien- for the sole highly ques- appears PLF, to be a holder, distribution. This legitimate and not for business PLF, subject but testimony tionable it is not purpose. has that this offered appeal. of this PLF and claims filed for the benefit of case was 12, 1993, appellate an court is February OLIC filed an When unable On relief, stay pending appeal grant appeal for a emergency motion effective must be 19, 1993, February Green, with the BAP. On dismissed as moot. Mills v. 159 U.S. stay pending appeal. granted 651, 653, BAP 16 S.Ct. 40 L.Ed. 293 Carroll, (1895); 903 F.2d

II.ISSUES (9th Cir.1990); re Combined Re Metals (9th Cir.1977); appeal A. of the order Whether the duction Blumer, 109, 113 since the debtor has confirmation is moot 66 B.R. Cir. BAP payments pursu- 1986), commenced the issuance aff'd, 826 F.2d 1069 plan. ant to the then, question, is whether effective relief precluded in would be the event of reversal segregation B. Whether the unsecured by the Panel. claims into classes from other unse- accepting to obtain an cured claims in order $92,000 from borrowed insiders. impaired improper class constitutes classi- Although alleges that its sharehold- fication. loan, obligated ers are under is Tucson repaying through C. treatment of the loan Whether the cash beginning constitutes flow in the ninth month unfair under discrimination bearing Tucson’s shareholders are no burden, cost, risk, pledging or Tucson’s money D. advance of Whether the principal assets to receive interest by equity holders constituted “new payments years.10 for next fifteen with the new value” accordance value ex- ception rule. to the absolute money by The repre disbursed portion sents a small of the total amount OF III. REVIEW STANDARD to be under the This Panel is still finding a bankruptcy A court’s that by able to structure relief effective remand substantially claim is or is not similar to ing with instructions to order the return of claims, finding other a of constitutes fact any erroneously disbursed funds. have We “ clearly reviewable under the erroneous stan past: issued such instructions ‘[T]his (9th 21 dard. In re F.3d at 327 Panel could structure effective relief re Cir.1994) re (quoting In Commercial West manding with instructions to the trial court (9th ern Corp., Fin. 761 F.2d 1334 any erroneously of order the return dis Cir.1985)). bankruptcy court’s conclu Blumer, bursed funds.’” In re 66 B.R. at sions of law are reviewed de novo. In re (quoting 113 In re Intern. Environmental Inc., 761 Pizza F.2d 1377 Hawaii (9th Dynamics, 718 F.2d 326 Cir. (9th Cir.1985). 1983)). Additionally, payments may future adjusted prospectively be order to arrive IV. OF DISCUSSION ISSUES9 result, at the As a settled amount. we are of opinion appeal A. Mootness that the of the confirma tion order is moot and that we appeal Tucson contends that this consider the merits. should be as moot dismissed because it has substantially plan by consummated the com Improper B. Classification mencing payments pursuant Al 1122(a) provides Section for though stay pending appeal was obtained those plan, ap together after the of the claims other than classified effective date peal convenience, plan may is not moot. nonetheless administrative “a asserts, projections, 9. OLIC raised issues in their brief 10. OLIC on Tucson's other which based fully opinion. are not in this principal addressed Essen- that the amount of the loan will be tially, these issues are repaid years, three after the first share- confirming erred in proposed feasible, because: it the faith, was not $36,000 per year holders at least will receive good is not remaining years under the 12 for a total and that was not fair and equitable upon interest rates and based valuation of claims.

«97 (6th 581, 586 particular In re U.S. Truck in a place claim or interest Cir.1986); Holywell Corp., is claim or interest substan- see also class if such Cir.1990); or Hanson v. tially to the other claims interests F.2d similar 1122(a). Dakota, N.A., § Courts F.2d U.S.C. of such class.” First Bank South complete agreement on whether “Separate are classifi- 1122(a) permits only justi- classification are cations for unsecured creditors claims, mandating only substantially similar legal their claims fied ‘where the character of be that are classified sub- that those claims as them different is such to accord a status ” 1122(a) similar, re- stantially whether Gra- from the unsecured creditors.’ other substantially quires simi- the classification Wines, England New Teamsters nada Inc. v. Greystone, lar in the same class. See Fund, Trucking Indus. Pension 1122(a) is Cir.1984) omitted). Even if read to (1st (citation 995 F.2d 1274. classification, it is not permit separate with- and PLF asserts out limitation: separated of their because the nature proponent Although the reor- claims, fully right has a to be since OLIC discretion ganization has considerable 1111(b)(2) This secured under a election. according classify claims interests argument inconsistent with the Code’s is case, and circumstances the facts any legal elimination of distinction between “[T]here not unlimited. this discretion other claims and non-recourse power limit on a debtor’s must be some Washington Associ unsecured claims. In potential classify ... [sic] (E.D.N.Y.1992); ates, significant If otherwise.” abuse would Venture, F.2d at Greystone III Joint unfairly many too or too creates Bankruptcy Code has (holding classes, if the classifications are de- few non-re legal eliminated distinction between voting, manipulate or if the signed to deficiency claims unsecured course and other basic classification scheme violates Assoc., claims); re Executive In Fairfield .confirmed. rights, the cannot be (D.N.J.1993) (“Unse 161 B.R. 600 n. 6 Holywell Corp., 880 In re 913 will, com generally speaking, cured claims omitted). Cir.1990) (citations tort, class, trade, publicly prise one whether Greystone III Fifth Circuit in In re The deficiency credi debt of a secured held Venture, law prior viewed case as es- Joint tor, equal legal they are claimants of because termed the “one tablishing what rata.”) pro (quoting rank to share entitled “classify that a cannot clear rule” Corp. Newark Air Realty v. FGH Credit differently gerry- in order to similar claims B.R. 99 port/Hotel Partnership, 155 Ltd. reorganiza- affirmative vote on mander an (D.N.J.1993)); Ltd. re Assoc. Cantonwood at Greystone, 995 F.2d plan.” tion (Bankr. B.R. Partnership, 138 657 1122(a) permits if § clas- We conclude D.Mass.1992) separate (holding that debtor’s “substantially similar” claims sification of deficiency credi and trade classification of classes, such classification different Moreover, the election improper). was tors only indepen- undertaken for reasons creditor, by the not' is to be exercised the debtor’s motivation secure dent of Assoc., Coventry debtor. In re Commons impaired, assenting of an class of the vote (E.D.Mich.1993). seeWe 155 B.R. 450 claims. Code, provision other than the no basis in the Id. claims in convenience” for “administrative potential right 1122(b), Circuit warned of § The Sixth an assertion that reading: 1111(b)(2) any wholly permissive election, of a without § abuse make a reason, justifies treatment of different requirement keep- other there is some Unless classifica nothing separate claims. hold that We ing together, claims would similar right solely on their seeking way of tion unsecured a debtor out stand 1111(b)(2) imper (or an election is to make a even one such impaired few creditor) violation missible classification who will vote for 1122(a). class. placing them their own us, Toy Sports lar before Tucson and treatment. See &

In the case Warehouse, Inc., no business or economic B.R. PLF have offered (Bankr.S.D.N.Y.1984). justification separate for the classification claims, which includes not the unsecured Chap Courts have denied confirmation of separate of trade creditors classification plans widely proposed disparate ter separate from the claims but the similarly treatment of situated creditors as respective deficiency classification of Caldwell, unfairly discriminatory. See In re claims of PLF and OLIC. The claims are (Bankr.E.D.Tenn.1987) (de B.R. similarly general situated otherwise nying Chapter confirmation where every respect. unsecured other plan proposed pay class of cred legal There is no distinction between the 100%, proposed pay card claims but justify separate claims that would classifica of all 22.- class other unsecured claims Therefore, separately tion. classified 7%); Corp., B.R. In re Johns-Manville purpose gerry PLF sole claim for the (Bankr.S.D.N.Y.1986), aff'd, 78 B.R. mandering accepting impaired class in (2d (S.D.N.Y.1987), aff'd, 843 F.2d 636 1129(a)(10). violation of Cir.1988) (“[A] proponent seg may not separate The classification of four regate groups claims or two similar of claims justified unsecured trade creditors cannot be separate provide disparate into classes as an convenience.”11 “administrative Gen Jartran, classes.”); treatment for those erally, an administrative convenience class (Bankr.N.D.Ill.1984); B.R. 331 one where are so small in the claims amount Apartment Village Pine Lake large dealing as to number make with (Bankr.S.D.N.Y.1982) 819, 831 (holding that them burdensome. unsecured debt ow plan place a cannot secured creditor’s defi ing approximately trade creditors ciency receiving claim in dif $2,124.27, which to be in full under ferent treatment from other unsecured The PLF unsecured claims). $400,000, approximately claim was Here, there is treatment ap OLIC unsecured claim was legal rights. classes that have identical Tuc- proximately No pre evidence was plan provides son’s for 100% showing hearing sented at the confirmation creditors, interest, allowed trade without on of the trade creditors should be sixty days or within of the effective date classified as an administrative convenience PLF, The claims of OLIC and 1122(b). amended, plan, under as however, paid only would in full be 10% treats in claims the exact same brief, satisfaction of debt. In their Tucson’s (10% distribution). Thus, sepa manner argues that “small trade creditors who rate classification of the PLF claim is an provided goods actual services are impermissible made for classification the sole in pursuant public policy recog- full to purpose gerrymandering an affirmative Bankruptcy nized in the Courts for the Dis- vote of an impaired class. However, trict of Arizona.” no evidence was presented supporting the unsecured trade C. Discrimination Unfair “public policy” creditor rule. impermis the issue of Similar to that Chapter We therefore hold sible classification is the issue of unfair dis plan plan cannot be confirmed where the argues plan crimination. pro OLIC a proposes pay to unsecured viding that an trade creditor who 10%, pay proposes but to other unse- 100%, receives a while creditor full, only justifica- cured with the only 10%, unfairly receives In discriminates. tion is offered for the treatment 1129(b), order to be confirmed under recognized policy” “public pay to ac- requires Code that a “not discriminate 1129(b)(1). goods tual in full. unfairly.” and services Such a planA U.S.C. unfairly unfairly” singles if it “discriminates violation discriminates out the 1129(b)(1) holder particu- of some claim or interest for be and cannot confirmed. 11. See discussion of class in footnote 4. priority Priority tion of the absolute rule or whether

D. Rule Absolute genuine exchange is a and fair of new there argues vio capital equity for an interest. The Ninth priority rule. The absolute lates absolute if proposed Circuit has stated incorporated into the priority is Bank rule v. Lum- Angeles satisfies all of the Case Los 1129(b)(2)(B)(ii). ruptcy ab Code requirements, it ber will not violate the abso- requires dissenting that a priority rule solute Mall, priority lute rule. Bonner 2 F.3d 899. provid creditors must class of unsecured any junior can ed for in full before clearly propo on the The burden under a property reor receive or retain satisfy require to all the nent Worthington v. ganized plan. Norwest Bank Ahlers, exception. ments of the new value Tucson 108 S.Ct. 485 U.S. (1988); re 99 L.Ed.2d 169 In has not its burden. Tucson asserts met 1992); BAP B.R. Cir. money,” by providing “actual has met 1989). Green, BAP Cir. exception. the new value recog The Ninth now Circuit plan provides that the: Tucson’s exception nizes new value absolute security new equity holders or Debtor’s Mall Partner rule. Bonner $50,- will contribute a total of investors (9th Cir.1993), ship, 2 F.3d cert. Reorganized on the Debtor — -, granted, 114 S.Ct. U.S. Any equity security hold- Effective Date. (1994). excep- value The new L.Ed.2d money to ers who do not contribute new equity of a tion allows the owners debtor have extin- the Debtor will their claims in the bankruptcy to obtain an interest reor- guished will hold no interest thereafter ganized exchange capital for new Any security equity in the hold- Debtor. objections over the of class of contributions money ers who contribute new will retain full that have received Debtor, Reorganized in the their interest on its Id. at claims. proportionate to the amount of new funds pre-Code Bankruptcy Act Under Prior by all new investors. contributed (e.g. practice, equity owners stockholders of contributions will be counted corporation) in a that had business filed Reorganized Debtor. protection required meet were requirements in to take advan several order reality value a loan alleged new is in tage equity owners of the doctrine. Former pledged its assets. There was (1) required to offer that was: were value In- present value. no contribution new new; (2) substantial; (3) money money’s or stead, merely adding another (4) worth; necessary reorga for a successful liability that must be to its balance sheet (5) nization; reasonably equivalent earnings of repaid from the accumulated v. Los An value interest received. Case or fact, reorganized debtor.13 Tucson’s Co., Ltd., 308 geles U.S. Lumber Products cost, risk, bearing no shareholders 106, 121-22, 1, 10, L.Ed. 60 S.Ct. 110 burden, pledging Tucson’s assets denied, (1939), 60 reh’g S.Ct. 308 U.S. for principal payments receive interest (1939); Bonner 84 L.Ed. 529 Mall years. the next 15 Partnership, 2 F.3d at 908. addition, showing of there no In evaluating In whether satis necessity this so “new value.” any called excep value requirements fies of the new the Merely pay priorities funds to using the tion, determining in fact a court is whether claimants is not a sufficient administrative unjustifiably attempt are equity old holders in reason. ing ownership powers viola- retain their on Tucson's why asserts that based explanation as to investment. OLIC has been offered No

12. $92,000 apparently principal projections, amount of the loan will contributed. years, repaid after the first three be essence, will receive the new investors re- paid continue to be new investors will $3,000 per loan at month before of their years under the next twelve they begin return on their will to receive substantially Thus, not new claims in class must Tucson has satisfied the be priority exception similar, not, terms, value to the absolute rule. by so that does its being in Tucson equity Since interests similarly require that situated clas- claims be while unsecured creditors are not retained Meltzer, together. Disenfranchising sified full, being paid in is in violation Dissenting Through Creditor Artificial priority absolute rule. See Impairment, Classification Artificial 1129(b)(2)(B)(ii). § (1992). Am.Bankr.L.J. Y. CONCLUSION in As the Panel noted (9th appeal 1992), this is not § We conclude that moot BAP B.R. 526 1122: Cir. and that the erred con- “expressly only substantially provides firming reorganization Tucson’s placed similar same claims following plan improperly reasons: ..., expressly prohibit it does not classifies claims in violation of being placed sepa- similar from 1122(a); § unfairly discriminates Many courts, recogniz- rate classes. disparate its treatment of the unsecured ing explicitly that Section does not 1129(b)(1); § claims in violation and that placing forbid a from similar claims equity being interests in Tucson are retained classes, imposed have limits on while unsecured creditors are not in full power debtor’s do so.” 1129(b)(2)(B)(ii). in violation of confirming We order REVERSE the plain 140 B.R. at language 529. Given the plan and REMAND matter to the bank- § 1122 I imposed believe limits to be ruptcy proceedings court for consistent here- regarding classification of similar claims with. should be on the based dictates of other statutory provisions excep and should be the MEYERS, Bankruptcy Judge, concurring: rule, tion to the An the rule itself. I concur decision with the announced example appropriate of an limitation would Judge must reverse the confir- Russell. We pow proponent’s be one that restricts a mation order because discriminates classify er to the extent that classi unfairly in treatment of the designed fications are to manipulate class 1129(b)(1), violation unsecured claims in voting (“gerrymandering”). Grey See In re and the debtor has satisfied the new Venture, stone III Joint exception value absolute rule Cir.1991); In U.S. Truck Co. (ii). 9(b)(2)(B) under However, separately I so as to write disa vow majority opinion discussion My disagreement majority with the dealing with “improper classification.” I do by seeming adopt the Granada Wines necessary not believe it is for us to add our approach, making separate the Panel is clas- continuing voice to prop debate over the face, suspect plain sification on its when the approach er on the classification of similar language of suggest. the statute would not so primary claims. There are two schools thought on classification. See In re Wash Associates,

ington 147 B.R.

(E.D.N.Y.1992); re Boston Harbor Mari

na (Bkrtcy.D.Mass. 1993). generally One school adheres to the 1122(a) requires similarly

view that

situated claims be classified in must accor

dance legal with the of the claims.

See England Granada v. New Wines Team (1st sters and Trucking, that, The other school notes when 1122(a) literally, requires only

read if class,

a claim placed given ain all other

Case Details

Case Name: Oxford Life Insurance v. Tucson Self-Storage, Inc. (In Re Tucson Self-Storage, Inc.)

Court Name: United States Bankruptcy Appellate Panel for the Ninth Circuit

Date Published: May 10, 1994

Citation: 166 B.R. 892

Docket Number: BAP No. AZ-93-1114-RVMe. Bankruptcy No. 91-2130-TUC-LO

Court Abbreviation: 9th Cir. BAP