Evidently, most bankruptcy law is being made these days in the Middle District of Florida. In four of the last five days, our reports have covered cases from Orlando and Jacksonville.
Gerrymandering to create the sole accepting class didn’t pass muster in a case before Bankruptcy Judge Karen S. Jennemann of Orlando.
Jointly administered debtors owned hotels in seven states. Third parties operated the hotels under ground leases. Each of the hotels had a separate debtor as the owner-lessor. The debtors also included holding companies.
The debtors were not substantively consolidated.
The primary secured creditor had a claim for about $62 million. The lien included all of the assets, including the ground leases. The lender had filed a competing chapter 11 plan that Judge Jennemann previously found to be confirmable.
The lender’s plan called for liquidating the assets and distributing the proceeds in the order of priority.
In her August 20 opinion, Judge Jennemann considered and rejected confirmation of the debtors’ reorganization plan.
The debtors’ plan was to be financed by the junior secured lender, who would contribute $1 million and swap the claim for the new equity. The debtors’ plan had five classes. Class 1 was the primary secured lender. The sponsoring junior lender was Class 2.
Class 3 was a hotel management company, which had a claim that could have been as large as $2.5 million. From the $1 million contribution, the hotel manager was to receive $350,000 on confirmation and would “consider” an application to manage one of the hotels.
General unsecured creditors were in Class 4 and would receive 7% paid over five years. Equity was Class 5. In other words, the hotel manager’s minimum recovery would be 13% on confirmation while other unsecured creditors would take 7% over time.
The primary lender’s deficiency claim fell into Class 4 with unsecured creditors.
The hotel manager’s Class 3 was the only class to accept the plan. The general unsecured creditor class rejected the plan because the lender’s deficiency claim overwhelmed other unsecured claims.
The primary lender objected to confirmation of the debtors’ plan, first contending that the plan did not comply with Section 1122(a), which requires placing “substantially similar” claims in the same class. If the hotel manager’s claim were in Class 4 with other unsecured creditors, there would be no accepting class, and the plan would fail confirmation under Section 1129(a)(10).
Judge Jennemann first considered the plan’s separate classification of the hotel manager’s unsecured claim. She said that a debtor has “considerable, but not unlimited, discretion” in classifying claims. Separate classification of similar claims must also be supported by a legitimate business reason.
Quoting the Fifth Circuit, Judge Jennemann said, “thou shalt not classify similar claims differently in order to gerrymander an affirmative vote on a reorganization plan.” Phoenix Mutual Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 995 F.2d 1274, 1279 (5th Cir. 1991).
Judge Jennemann concluded that the plan “unfairly discriminates” in favor of the hotel manager by paying $350,000 on confirmation when other unsecured creditors only receive 7% paid over five years.
Moreover, the hotel manager’s commitment to “consider” an application from one of the hotels was “not a legitimate business reason” for separate classification.
Judge Jennemann found
no legal or logical reason for unsecured creditors of equal priority to receive disproportionately different pro rata portions of the Equity Infusion. The only real reason to separate the two is to gerrymander an accepting impaired class of votes.
She therefore ruled that the plan did not comply with Section 1129(a)(1).
The lender also contended that one of the administratively consolidated debtors had no accepting class, because the hotel manager was not a creditor of that debtor.
On an issue that divides the courts, Judge Jennemann said she falls into the category requiring that each debtor must have a consenting class, not each plan. On that basis also, the plan was not confirmable.
Finally, the lender argued that the plan unfairly discriminated under Section 1129(a)(8).
Unfair discrimination is not defined in the Bankruptcy Code, but Judge Jennemann said there must be a “reasonable basis” for discrimination. The hotel manager’s $350,000 recovery, compared to unsecured creditors’ 7% over five years, “is not fair or equitable and unfairly discriminates between similarly situated creditors.”
Judge Jennemann refused to confirm the debtors’ plan because it “does not meet the cramdown requirements and cannot satisfy § 1129(b).”
Evidently, most bankruptcy law is being made these days in the Middle District of Florida. In four of the last five days, our reports have covered cases from Orlando and Jacksonville.
Gerrymandering to create the sole accepting class didn’t pass muster in a case before Bankruptcy Judge Karen S. Jennemann of Orlando.
Jointly administered debtors owned hotels in seven states. Third parties operated the hotels under ground leases. Each of the hotels had a separate debtor as the owner-lessor. The debtors also included holding companies.
The debtors were not substantively consolidated.
The primary secured creditor had a claim for about $62 million. The lien included all of the assets, including the ground leases. The lender had filed a competing chapter 11 plan that Judge Jennemann previously found to be confirmable.
The lender’s plan called for liquidating the assets and distributing the proceeds in the order of priority.
In her August 20 opinion, Judge Jennemann considered and rejected confirmation of the debtors’ reorganization plan.