Case No. 10-74467 Chapter 11.
United States Bankruptcy Court, E.D. Michigan
November 9, 2011.
OPINION SUSTAINING CREDITOR’S OBJECTION TO CONFIRMATION
Hon. Walter Shapero United States Bankruptcy Judge
The matter before the Court is Evangelical Christian Credit Union’s Objection to Debtor’s Second Amended Combined Plan and Disclosure Statement (Docket No. 66). For the indicated reasons, the Creditor’s Objection is sustained.
I. BACKGROUND
Christian Love Fellowship Ministries, International (“Debtor”) filed its Chapter 11 bankruptcy petition on November 12, 2010. On May 25, 2011, Debtor filed its Second Amended Combined Plan and Disclosure Statement (Docket No. 61) and on May 27, 2011, the Court entered an Order Granting Preliminary Approval (Docket No. 63) of such. On July 5, 2011, Evangelical Christian Credit Union (“ECCU”) filed an Amended Objection to Debtor’s proposed Plan (Docket No. 68). The Court held a confirmation hearing on July 7, 2011, at which it heard that objection.
Debtor’s Plan is confirmable except for ECCU’s objection, which relates to its classification in the Plan. ECCU holds mortgages on Debtor’s properties located at 1601 Stamford Road, Ypsilanti, Michigan and 3936 Palisades Boulevard, Ypsilanti, Michigan, with reference to which it filed a secured proof of claim for $4,139,966.49. The secured portion of ECCU’s debt is treated in the plan in a manner that payments thereon, slightly in excess of accruing interest, would be paid monthly for five years, at which time the entire balance will become due and payable – it being Debtor’s expectation that it will be able to refinance at that time, notwithstanding the fact that the principal balance of the secured debt will be fairly close to
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what it is today. The unsecured portion of ECCU’s claim, representing its deficiency claim, is approximately $2,671,966.49.
Debtor’s Plan contemplates the availability of $250,000 to be paid to all unsecured creditors over the five-year life of the plan. Debtor classified the unsecured creditors as follows: (1) Class II – all unsecured creditors other than ECCU, and (2) Class III – the unsecured deficiency claim of ECCU. As originally filed, Debtor’s Schedule F listed some 20 unsecured creditors, most, if not all of which could be called trade creditors, whose claims total $73,462.28. On Debtor’s Schedule F, included in that group of unsecured creditors was a single claim of JP Morgan Chase Bank covering an unsecured line of credit of $42,400.59. The post claims filing deadline claims register shows eight filed claims, two of which are the secured claim of ECCU and a secured claim filed by JP Morgan Chase Bank, and the remaining six claims are unsecured and are essentially those of trade creditors, such as a lawn service provider, phone systems, and a pest control provider, totaling some $24,785.39 (and included in that amount is some $10,000 owed to one creditor and some $13,000 owed to another, both appearing to cover leased office equipment). ECCU argues that it is improper for its claim to be separately classified in Class III and that it should be classified along with the other unsecured claims in Class II, the result of which would be that ECCU would likely receive a materially larger distribution over the life of the plan. The issue is whether ECCU’s claim can be separately classified from the other unsecured claims under 11 U.S.C. § 1122.
II. DISCUSSION
A plan of reorganization may be confirmed if all of the requirements of 11 U.S.C. § 1129(a) have been met. Section 1129(a)(8) requires that all impaired classes vote in favor of the plan. That requirement can be avoided if a Debtor proposes confirmation under § 1129(b), which imposes the same requirements as § 1129(a), except for (a)(8), but requires that the plan: (1) “not discriminate unfairly”; and (2) be “fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan,” and further requires that at least one impaired class vote in favor of the plan. In this case, Class II as proposed voted in favor of the plan.
11 U.S.C. § 1122 provides:
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(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 interests 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 parties do not disagree with the proposition that “[i]n classifying claims, the general rules are that ‘[d]issimilar claims may not be classified together; [and] similar claims may be separately classified only for a legitimate reason.” In re Griswold Bldg., LLC, 420 B.R. 666, 707
(Bankr. E.D. Mich. 2009) (quoting In re Chateaugay Corp., 89 F.3d 942, 949
(2nd Cir. 1996). “The proponent of the plan must demonstrate a justification for its classification scheme and that the classification is not motivated by the purpose of gerrymandering an affirmative vote of an impaired class.”Id. (quoting In re Porcelli, 319 B.R. 8, 10 (Bankr. M.D. Fla. 2004). “[T]o warrant having a separate classification of similar claims, the debtor must advance a legitimate reason supported by credible proof.” Id. (quoting In re Chateaugay Corp., 89 F.3d at 949).
Debtor argues that its proposed separate classification is justified because Class II consists of all of its trade creditors with which, during the course the plan period and thereafter, it expects to continue to do business. Therefore, to justify a separate classification, it argues that those claims are of a sufficiently different nature or character than ECCU’s deficiency claim.
To appreciate the practical ramifications of the issue in this case, it is noted that, based on originally scheduled claims (1) Class II would consist of scheduled potential claims amounting to some $73,462.28, one half of which ($36,731.14) would be paid in sixty equal monthly payments; and (2) the Class III deficiency claim held by ECCU of some $2,671,966.49 would receive a 5% payment, totaling $133,598.32, which would be paid in twenty equal quarterly payments. Debtors have indicated that there is a total of $250,000 for distribution to unsecured creditors. A calculation of the distribution to Class II and Class III under the express terms of the proposed plan, based on the scheduled claims, would leave an additional $79,670.54 (out of the total distribution of $250,000) to be distributed to unsecured creditors. It is clear that, at the time the proposed plan was drafted, Debtor anticipated a higher total of general unsecured debt in Class II. If those two classes were combined, based on the scheduled claims, the total amount of claims would be $2,745,428.80, of which ECCU’S portion would be about 97%. That percent of the available $250,000 would be approximately $242,500, which is substantially more (some
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$108,901.68) than what ECCU would receive as a member of Class III under Debtor’s proposed Plan. The remaining 3% of the available $250,000, totaling approximately $7,500, would go to the other members of that class, and that is a sharp decrease from what they would receive as a member of Class II under the Debtor’s proposed Plan.
To further fully appreciate the potential ramifications based on actually filed claims[1] (as opposed to originally scheduled claims): Class II would consist of actually filed unsecured claims amounting to $24,785.39, one half of which ($12,392.70) would be paid in sixty equal monthly payments; and (2) as noted, the Class III deficiency claim held by ECCU of some $2,671,966.49 would receive a 5% payment, totaling $133,598.32, which would be paid in twenty equal quarterly payments. A calculation of the distribution to Class II and Class III under the express terms of the proposed plan, based on the filed claims, would leave an additional $104,008.98 (out of the total distribution of $250,000) to be distributed to unsecured creditors. As already noted above, it is clear that, at the time the proposed plan was drafted, Debtor anticipated a higher total of general unsecured debt in Class II.[2] If those two classes were combined, based on the filed claims, the total amount of claims would be $2,696,751.90, of which ECCU’S portion would be about 99%. That percent of the available $250,000 would be approximately $247,500, which is substantially more (some $113,901.68) than what ECCU would receive as a member of Class III under Debtor’s proposed Plan. The remaining 1% of the available $250,000, totaling approximately $2,500, would go to the other members of that class, and that is a sharp decrease from what they would receive as a member of Class II under the Debtor’s proposed Plan.
As this Court views the unsecured claims classification law in this circuit, it is that (a) section 1122(a) does not demand that all similar claims be in the same class; (b) the bankruptcy court has substantial discretion to place similar claims in different classes if there is a reason to do so; and (c) where it appears that the classification sought is primarily to create a class of consenting creditors to be able to assure acceptance and confirmation, separate classification is impermissible See Teamsters National Freight Industry Negotiating Committee v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581, 586 (6th Cir. 1986); In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002). One commenter has stated that:
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the clear trend in the courts of appeals is that the unsecured mortgage deficiency claims of an undersecured mortgage lender cannot be classified separately from unsecured trade creditors’ claims when the sole purpose for the separate classification is to manipulate class voting and to create an impaired class of unsecured claims willing to accept a proposed plan. These courts have held that the mere fact that some claims arise as a result of undersecured portions of claims does not distinguish such undersecured claims from other unsecured claims so as to justify separate classification.
6 Norton Bankruptcy Law and Practice 3d § 109.4 (citations omitted). In the noted U.S. Truck case, the separate classification of a claim arising out of a collective bargaining agreement and the debtor’s relationship with the union involved was justified because of the “virtually unique” interest of the union employees in their ongoing relationship with the debtor and continuing collective bargaining process. U.S. Truck, 800 F.2d at 586. In this case, Debtor argues that its anticipated ongoing relationship with its indicated trade creditors over the life of the plan is likewise to be distinguished from its relationship to ECCU, justifying a different claim treatment and consequent separate classification.
This Court disagrees for a number of reasons. First, there are trade creditors in most Chapter 11 cases and in many, if not most, of those same cases there are also undersecured claims giving rise to deficiency claims. If the separate classification were to be upheld in this case, it would be the rare case where it would not be. Second, the facts with regard to the small number and identity and type of the unsecured creditors and the amounts of their claims lend credence to the argument that the proposed classification in this case is primarily for the purpose of obtaining a consenting class which approves the proposed plan. Third, with respect to the ECCU deficiency claim and the claims of the other unsecured creditors, there is little to differentiate them other than by their source or how they arose, and there are not the kind of “unique” differences as, for instance, justified the separate classification in the U.S. Truck case. It appears to be the case that the Debtor’s rationale for the difference is the potential of a continuing relationship with the other unsecured creditors over the life of the plan. In this case, Debtor has also built a continuing relationship with ECCU, one that the plan proposes will continue for the life of the plan. If it wants to, Debtor can continue to do business with the small number of other unsecured creditors, whose services are not unique and are readily available in the market place, and, if the service providers want to continue to do business with the Debtor (neither of which is required), they free to continue or discontinue any ongoing relationship
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(unlike the continuing essentially mandated collective bargaining agreement relationship in U.S. Truck). Indeed, the fact that some or all of those relationships may or could easily end during the normal course of post-confirmation business and during the life of the plan militates against the Debtor’s argument in this case, which would afford to the more certain continuing relationship an inferior result. In any event, the differences, if any, between ECCU’s deficiency claim and the other unsecured creditor’s claims, do not sufficiently justify either overcoming the gerrymandering purpose (evident from the indicated claims analysis and other facts) in this case, or the conclusion that whatever differences one can articulate are of insufficient substance and materiality to justify distinguishing between them requiring or permitting dissimilar treatment.
III. CONCLUSION
For those reasons, the Court concludes that ECCU’s objection to confirmation of Debtor’s Second Amended Combined Plan must be sustained. In view of this result, a status conference on the future of this case will be held on November 30, 2011 at 9:45 a.m.