In re Akinpelu

530 B.R. 822

In re Jimson Tunde Akinpelu and Olayinka Alade Akinpelu, Debtors.

CASE NUMBER 13–60166–MGD

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

Signed May 1, 2015

Filed May 4, 2015

Michael D. Robl, The Spears & Robl Law Firm, LLC, Tucker, GA, for Debtors.

ORDER DENYING CONFIRMATION OF PLAN

Mary Grace Diehl, U.S. Bankruptcy Court Judge

This case presents two issues of first impression in the Eleventh Circuit: (1) whether separate classification of unsecured claimants is permissible in a Chapter 11 plan of reorganization in order to create an impaired, consenting class as required by 11 U.S.C. § 1129(a)(10) ; and, (2) whether the absolute priority rule is applicable post-BAPCPA¹ in Chapter 11 cases where the debtor is an individual. These issues arise in connection with the Amended Proposed Combined Plan of Reorganization and Disclosure Statement of Debtors named above as filed in this case on December 21, 2014 (Docket No. 94). The Court held a hearing on confirmation on February 5, 2015, at which time objections were asserted by the United States Trustee as well as an unsecured creditor, Auto–Owners Insurance Company (“Auto–Owners”) (collectively referred to as the “Objectors”). At the hearing, the Court requested briefs setting forth additional authority on the two specific legal issues set forth above.

The Court has considered the briefs as filed along with the record in connection with this matter and upon review of same, finds and concludes that Debtors' plan impermissibly classifies the unsecured deficiency claim of Auto–Owners and further, that the plan violates the absolute priority rule. Therefore, confirmation will be denied.

I. Classification of Auto–Owners' Unsecured Claim In Debtors' Plan

To confirm Debtors' plan, the Court must determine that both the plan and its Debtor-proponents have fully complied with the requirements of Section 1129 of the Bankruptcy Code. See 11 U.S.C. § 1129. Under Section 1129(a)(1), the plan must comply with “applicable provisions” of the Code including Sections 1122 and 1123. In particular, Section 1122(a) governs the classification of claims, and while it does not require that all substantially similar claims be placed in the same class, it does require that all claims or interests placed in a specific class be “substantially similar.” Debtors' plan treats the holders of general unsecured claims through three sub-classes, to wit; Class 2(a) “Small Claims,” Class 2(b) “[Other] General Unsecured Claims,” and, Class 2(c) “Special unsecured claim (deficiency claim).” Class 2(c) consists solely of the unsecured claim of Auto–Owners in the amount of $1,146,716.70.² Claims in Class 2(b) and 2(c) are treated the same: each receives a pro-rata share from a fund totaling $274,952.20. The fund will be created from quarterly payments made by Debtors over a sixty month period. See Plan, pp. 6–8 (Docket No. 94).

Objectors contend that Debtors have failed to justify the separate classification of the claim of Auto–Owners in Class 2(c) from other unsecured claims in Class 2(b). In support of the proposed classification, Debtors observe that holders of large unsecured deficiency claims like Auto–Owners can effectively control a class of unsecured claims and block confirmation of a plan.³ Debtors assert separate classification of such claims is necessary because otherwise, Debtors would be deprived of the opportunity to obtain an impaired accepting class and proceed to ‘cramdown’ under their plan.⁴ As Debtors acknowledge, under the case law that has developed such classification must be supported by a legitimate business or economic justification beyond the mere attempt to gerrymander a desired outcome.

Here, Debtors contend that separate classification of Auto–Owners' unsecured claim is warranted because the claim is not substantially similar to other unsecured claims given its legal character as a business debt, whereas the other claims are consumer debt. Further, Debtors argue that unlike the holders of those claims in Class 2(b), Auto–Owners benefits from certain guaranties, which may be taken into account under Section 1122(a). Regarding the latter contention and citing the decision of Wells Fargo Bank, N.A. v. Loop 76, LLC (In re Loop 76, LLC), 465 B.R. 525 (9th Cir. BAP 2012), Debtors assert that these guaranties distinguish the nature of Auto–Owner's claim as compared to other claimants in relation to the Debtors, and properly serve as grounds for separately classifying the claim. In Loop 76, the court determined that for purposes of examining the substantial similarity of claims under Section 1122(a), such analysis is not restricted to how the claim relates “to the assets of the debtor.” 465 B.R. at 540, discussing Steelease, Inc. v. Johnston (In re Johnston), 21 F.3d 323 (9th Cir.1994). As that court reasoned, it is appropriate to consider whether a creditor has access to means of possible recovery beyond a debtor's assets in regard to a proposed classification, as these sources could be an important, distinguishing feature when compared to the rights of other claimholders. 465 B.R. at 541.⁵

In response, Auto–Owners emphasizes that a number of circuit courts have held that a plan proponent must provide a legitimate reason for separately classifying similar claims, and it maintains Debtors have failed to do so through their proffered distinctions.⁶ In his argument, the United States Trustee cites Olympia & York Florida Equity Corp. v. Bank of New York (In re Holywell Corp.), 913 F.2d 873 (11th Cir.1990) as providing the governing standard herein. In Holywell, the Eleventh United States Circuit Court of Appeals did not directly confront the question of substantial similarity between unsecured deficiency claims and other unsecured claims, or when similar claims must be placed in the same class. See In re Holley Garden Apartments, Ltd., 223 B.R. 822, 825 n. 3 (Bankr.M.D.Fla.1998) ; see also In re SM 104 Ltd., 160 B.R. 202, 216 n. 30 (Bankr.S.D.Fla.1993). The circuit court did confirm, however, that even though a plan proponent holds “considerable discretion” in classifying claims, there are limits. 913 F.2d at 880. As this analysis has developed, to withstand challenge, a plan proponent must show that the separately classified claims at issue are sufficiently dissimilar as bearing a legal difference, or prove an underlying business reason for the separation. Such showing is required to prevent abuse in attempting to manipulate class voting and secure acceptance of the plan. See Holley Garden Apartments, 223 B.R. at 825, citing Holywell, 913 F.2d at 880.

Applying this rule with respect to an examination of alleged dissimilarity, the Court agrees with the Objectors that Debtors have not adequately explained how claims placed in Class 2(b) are consumer debt as opposed to business debt.⁷ Further, even if these claims are distinguishable along the lines suggested by Debtors, the Court concludes they have failed to present a reason for treating them differently on such basis under the plan, other than for structuring a desired outcome in the voting.⁸

The Court is also unpersuaded by Debtors' contention that Auto–Owners' right of recourse against non-debtor guaranties for satisfying its claim in this matter establishes a sufficient legal difference to support separation of its claim from those of other unsecured creditors. This is particularly so because the treatment of the two sub-classes is identical. Objectors argue that the existence of third-party sources for repaying a claim is simply not relevant to the issue of classification. Relying on the rationale that it is the nature of those claims as asserted against a debtor's assets that is properly considered—not the nature of other claims or interests a claimant may hold, they insist this Court's inquiry is similarly constrained. See In re AOV Indus., Inc., 792 F.2d 1140 (D.C.Cir.1986) ; see also In re 18 RVC, LLC, 485 B.R. 492 (Bankr.E.D.N.Y.2012).

This Court recognizes that the holding in Loop 76 allowing for consideration of a guaranty has been criticized. The grounds of such critiques, however, generally focus on the failure to take into account additional factors such as the collectability of the guaranty, the existence of any nondebtor collateral, and presence of litigation that could affect that creditor's rights. See In re 4^th Street East Investors, Inc., 2012 WL 1745500 (Bankr.C.D.Cal. May 15, 2012). Accord In re NNN Parkway 400 26, LLC, 505 B.R. 277, 284 (Bankr.C.D.Cal.2014) (alternative means of meaningful recovery through solvent guarantor could be relevant). According to the court in 4^th Street East , for instance, in the absence of such facts, the deficiency claim there at issue was held insufficiently dissimilar from other unsecured claims to require separate classification, and was, in fact, substantially similar to such claims. Finding that no legitimate business reason had been presented to do so otherwise, the court concluded that the proposed classification amounted to an impermissible attempt to gerrymander a vote for confirmation. 2012 WL 1745500 at *8–9.

In this case, no facts have been provided establishing the viability or character of the subject guaranties. Further, the Court finds that Debtors have not shown any other substantive legal difference or factual basis for distinguishing between the unsecured claim of Auto–Owner and Debtors' other unsecured claims to support their separation under Class 2. Debtors have also failed to prove a business justification for the proposed classification. Such facts are necessary for the Court to balance a debtor's ability to obtain a confirmed cramdown plan and the interest of an affected creditor to cast a meaningful vote on the plan relative to other similar claimholders. The Court concludes, therefore, that the objection of Auto–Owners and the U.S. Trustee to confirmation of the plan is sustained as Debtors' plan improperly attempts to create an...