Case No. 97-11162-SSMUnited States Bankruptcy Court, E.D. Virginia
October 14, 1997
Russell W. Craig, Alexandria, VA, of Counsel for the Internal Revenue Service
James Collins, Quinto Wilks, Lake Ridge, VA, of Counsel for George L. Gladys C. Schlegel
Jill D. Caravaggio, Esquire, Silverman Associates, L.L.C., Bethesda, MD, of Counsel for Virginia Concrete Co., Inc.
James D. Fullerton, Esquire, James D. Fullerton Associates, P.C., Clifton, VA, of Counsel for Vulcan Materials Co.
MEMORANDUM OPINION AND ORDER
STEPHEN MITCHELL, Bankruptcy Judge
A hearing was held in open court on October 8, 1997, on confirmation of the debtor’s Amended Plan of reorganization filed on July 15, 1997. At the hearing, the debtor filed a Second Amended Plan in open court and requested that it be confirmed without further solicitation or voting. Upon reviewing the modified plan and the evidence presented at the hearing, the court reluctantly concludes that the modified plan cannot be confirmed.
Background
Faught Construction Company, Inc., which is in the business of building roads and has been in business since 1970, filed a voluntary petition under chapter 11 of the Bankruptcy Code in this court on February 19, 1997. It has continued to operate since that date as a debtor in possession. On July 15, 1997, it filed an amended plan of reorganization, which was subsequently set for a confirmation hearing to be held on August 12, 1997. A number of objections were filed,[1]
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and an evidentiary hearing was set for October 8, 1997. In the interim, the debtor negotiated with all the objecting creditors and reached agreements resolving the objections. At the hearing, the debtor filed in open court a Second Amended Plan and tendered a proposed order of confirmation which, together, embody those agreements.[2] As a result of the agreements reached, all the objections to confirmation have been withdrawn.
The plan classifies claims in seven classes but does not specify a class of equity security holders. General unsecured claims are placed in Class 7 and will receive 25 cents on the dollar over five years. The debtor has three shareholders: Charles Faught, Jr., the president, who owns approximately 80% of the company’s stock; David Faught, the secretary-treasurer; and Don Faught. Charles Faught, Jr. and David Faught are both active in the business and receive salaries of $800 per week. Don Faught is apparently retired and does not receive payments from the company. No dividends have been paid on the stock in recent years. Although the plan does not specifically address the treatment of the shareholder interests, the evidence at the hearing established that the shareholders would retain their equity interests.
Discussion
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The evidence at the hearing established that the plan satisfied all the requirements for confirmation set forth in § 1129(a), Bankruptcy Code, except for the requirement of § 1129(a)(8) that all impaired classes accept the plan. In this instance, Class 7 has not accepted the plan because less than two-thirds in dollar amount of the claims for which ballots were cast accepted the plan[3] Section 1129(b), Bankruptcy Code, nevertheless allows the court to confirm the plan notwithstanding the lack of acceptance by an impaired class ” a process commonly, if inelegantly, referred to as “cramdown” — if the court finds that the plan is fair and equitable to, and does not discriminate unfairly against, the dissenting class. In order for a plan to be found “fair and equitable” with respect to a dissenting class of unsecured creditors, the Bankruptcy Code requires, at a minimum, that the plan satisfy one of the following requirements:
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.
§ 1129(b)(2)(B), Bankruptcy Code. The latter requirement is commonly referred to as the “absolute priority rule.”
In the present case, the plan proposes to pay class 7, the general unsecured creditors, twenty-five cents on the dollar, which is less than “the allowed amount” of their claims. Accordingly, the plan cannot be confirmed over the dissenting vote of class 7 if the shareholders,
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whose interests are junior to the claims of such class, “receive or retain under the plan on account of such junior . . . interes any property” (emphasis added). Here, although the plan does not expressly state that the shareholders are retaining their equity interest, neither does the plan cancel such interests, and the evidence taken at the confirmation hearing makes it clear that the shareholders are in fact retaining their interests.
When the court, sua sponte, raised the issue of the apparent violation of the absolute priority rule, debtor’s counsel suggested that, since no formal objection to confirmation had been raised on that basis, the issue was waived. However, before confirming a chapter 11 plan of reorganization, the court is required, even in the absence of a formal objection, to make an affirmative finding that the statutory requirements for confirmation have been met. In re Economy Cast Stone Co., 16 B.R. 647 (Bankr. E.D. Va. 1981) (Shelley, J.). Second, debtor’s counsel suggested that the debtor’s president, who owns 80% of the stock, would be willing to waive his claims for back salary in exchange for retaining his shareholder interest in the reorganized debtor. Aside from the fact that no such provision is contained in the plan, the fact remains that two other shareholders, neither of whom holds a claim against the debtor, are also retaining their stock.
None of this is to suggest that the debtor cannot propose and obtain confirmation of a plan. It may be that further negotiation with the creditor who voted against the plan may result in that creditor’s agreement to the treatment embodied in the current proposed plan or that the debtor may be able to increase the payout on unsecured claims in an amount sufficient to obtain the acceptance of class 7. In addition, the shareholders may “an issue the court need not decide on the present record” be able to retain their interest in the debtor by making a “new value”
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capital contribution. See, Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939) (decided under former Bankruptcy Act); Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988) (expressly declining to rule on whether infusion-of-new-capital exception survived enactment of Bankruptcy Code). However, as presently proposed, the plan cannot be confirmed over the rejecting vote of the class 7 creditors.
ORDER
For the foregoing reasons, it is
ORDERED:
1. Confirmation of the debtor’s Second Amended Plan filed in open court on October 8, 1997, is DENIED.
2. The clerk will mail a copy of this memorandum opinion and order to counsel for the debtor in possession, counsel for George L. and Gladys C. Schlegel, counsel for the Internal Revenue Service, counsel for Virginia Concrete Co., Inc., counsel for Vulcan Materials Co., and the United States Trustee.