In re CE Elec. Contractors

IN RE: CE ELECTRICAL CONTRACTORS, LLC, DEBTOR.

No. 21-20211 JJT

United States Bankruptcy Court, D. Connecticut, Hartford Division

May 4, 2022

CHAPTER 11

RE: ECF NO. 427

MEMORANDUM OF DECISION RELATED TO PEOPLE'S UNITED BANK'S OBJECTION TO DEBTOR'S CHAPTER 11 PLAN OF REORGANIZATION

James J. Tancredi, United States Bankruptcy Judge.

People's United Bank, N.A. ("PUB") has objected to confirmation of the Fourth Amended Plan of Reorganization (the "Plan") filed by CE Electrical Contractors LLC (the "Debtor"). ECF No. 427 (the "Objection"). In particular, PUB's Objection assails the Debtor's treatment of its claim under the Plan, as more particularly discussed herein.

I. BACKGROUND

The Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code on March 5, 2021 (ECF No. 1, the "Petition"). PUB is the Debtor's senior, fully secured lender, holding a first priority security interest in substantially all of the Debtor's assets, including its monies, receivables, inventory, machinery, and equipment.^[1] PUB filed Proof of Claim No. 47 (the "Claim") on June 3, 2021 related to a $75, 000 loan that PUB made to the Debtor, which was issued with a variable 5.25% interest rate. The total amount of the Claim is $80, 756.58, which includes interest, legal fees, and other costs.^[2] Attached to the Claim is a copy of the promissory note and security agreement evidencing the $75, 000 loan from PUB to the Debtor, dated May 27, 2016 (the "Note"). The Debtor filed its Plan on February 10, 2022 (ECF No. 383), which contemplates impairing PUB's Claim in the following ways:

a) converting PUB's Note from a demand note into a term loan;

b) lowering the interest rate from a variable 5.25% rate with a 4% interest rate floor into a fixed rate of 4%;

c) omitting an annual loan charge;

d) waiving default interest; and,

e) modifying the terms of a non-debtor guaranty.

PUB maintains that the Debtor did not make efforts to contact PUB and discuss its proposed treatment prior to filing the Plan. PUB voted to reject the Plan and filed its Objection on March 15, 2022. In PUB's assessment, the Plan cannot be confirmed because it fails to meet the "best interests of creditors" test and fails to meet the requirements under the cramdown provisions of the Bankruptcy Code because it unfairly discriminates against PUB and does not treat PUB's impaired class as fair and equitable. In an ostensible criticism of the Plan's lack of comparative fairness, PUB takes issue with the fact that Paul Calafiore ("Calafiore"), the Debtor's principal, will continue to be compensated at approximately $180, 000 per year in salary while PUB, a fully secured senior creditor, and other creditors are impaired under the Plan.

PUB also objects to a provision in the Plan that provides for a temporary injunction in favor of Calafiore, who holds several personal guaranties in excess of $3 million on loans for the Debtor, on the basis that a third party injunction is unwarranted and unfairly prejudices PUB and other creditors.^[3] Importantly, PUB has voted against confirmation of this Plan based upon its Objection.

II. DISCUSSION

A. The Third Party Injunction is Unwarranted

The Debtor's third party injunction benefitting Calafiore is unnecessary, unwarranted and unfairly prejudices PUB and other creditors. The Court has previously addressed whether it would endorse and otherwise issue the proposed temporary injunctions under the Fifth and Sixth Amended Plans of Reorganization. See Ruling on Req. for Injunctive Relief (ECF No. 453); Mem. of Decision on Chapter 11 Plan Injunction (ECF No. 455). This Court's prior decisions unequivocally reject the issuance of such an injunction on the merits, notwithstanding the Debtor's alternative reliance upon the Consenting Ballots that acknowledge that a confirmed plan might include such an injunction. This Court will not be confirming a Plan with such an injunction, whether temporary or permanent.

B. Standard for Confirmation of a Chapter 11 Plan

The Court will now address the remainder of PUB's Objections under the standards for confirmation of a Chapter 11 plan set forth in Section 1129 of the Bankruptcy Code. "Succinctly stated, [a] plan may not be confirmed unless either (1) it is approved by two-thirds in amount and more than one half in number of each impaired class, 11 U.S.C. § 1126(c), 1129(a)(8); or (2) at least one impaired class approves the plan, § 1129(a)(10), and the debtor fulfills the cramdown requirements of § 1129(b) to enable confirmation notwithstanding the plan's rejection by one or more impaired classes." In re 499 W. Warren St. Assocs., Ltd. P'ship, 151 B.R. 307, 310 (Bankr. N.D.N.Y. 1992) (internal quotation marks omitted).

The plan proponent must prove by a preponderance of the evidence that the plan satisfies each element of § 1129(a) applicable to corporate debtors seeking to confirm a consensual plan of reorganization. In re Ditech Holding Corp., 606 B.R. 544, 554 (Bankr. S.D.N.Y. 2019). If any impaired class rejects the plan, it may still be confirmed over an objection if the plan satisfies the

Bankruptcy Code's cramdown provisions under 11 U.S.C. § 1129(b). Under the Code's cramdown provisions, the plan proponent must show that all mandatory confirmation requirements have been satisfied, except for the requirement that all impaired classes have accepted the plan, 11 U.S.C. § 1129(a)(8); that the plan does not discriminate unfairly against any impaired, non-consenting class, Mercury Cap. Corp. v. Milford Connecticut Assocs., L.P., 354 B.R. 1, 10 (D. Conn. 2006); and, that the plan is fair and equitable, In re DBSD N. Am., Inc., 634 F.3d 79, 94 (2d Cir. 2011).

C. The Debtor Cannot Achieve Confirmation of Its Plan Under 11 U.S.C. § 1129(a) Because the Plan Does Not Meet the Best Interests of Creditor's Test Under 11 U.S.C. § 1129(a)(7)

One of the most important aspects of plan confirmation is the "best interests of creditors" test found under 11 U.S.C. § 1129(a)(7)(A). "A Chapter 11 reorganization plan may not be confirmed unless it satisfies . . . the 'best interests of creditors' test." In re Wireless Data, Inc., 547 F.3d 484, 495 (2d Cir. 2008); see also 11 U.S.C. § 1129(a)(7)(A); In re Ditech, 606 B.R. at 606. Section 1129(a)(7) of the Bankruptcy Code provides that each impaired class must either accept the plan or "receive or retain under the plan on account of such claim or interest property of value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated." 11 U.S.C. § 1129(a)(7)(A); see also In re Wireless Data, 547 F.3d at 495 (holder of impaired claim must either accept plan or receive amount not less than it would receive in Chapter 7 liquidation). Thus, the test "focuses on individual creditors rather than classes of claims." In re Ditech, 606 B.R. at 606 (internal quotation marks omitted).

PUB contends that the Debtor's Plan does not meet the "best interests of creditor's" test because the Plan does not provide PUB with more than it would receive in a Chapter 7 liquidation by depriving it of fees, interest, attorney's fees, and costs of collection. As a fully secured creditor, PUB would receive the full value of its secured claim upon liquidation of the collateral in a Chapter 7 proceeding and, therefore, must receive the full value of its secured claim under the Plan. In its current form, the Plan proposes to pay PUB less than the full value of its Claim by modifying the terms of the Note, which includes eliminating accrued default interest, and eliminating an annual loan charge. Accordingly, the Plan does not meet the "best interests of creditors" test as it applies to PUB.

D. The Debtor Cannot Cramdown the Plan Under 11 U.S.C. § 1129(b)

The Plan impairs PUB's Claim and classifies it as the sole member in Class 1. Because PUB, an impaired class, has voted to reject the Plan, the Debtor is unable to achieve consensual confirmation of its Plan under § 1129(a)(8), which provides that each impaired class must accept the plan. Accordingly, confirmation of the Debtor's Plan can only be achieved under the cramdown provisions of the Code found in § 1129(b). If all requirements of § 1129(a) are met, excluding the requirement under § 1129(a)(8), the Court must confirm the Plan under § 1129(b) if it does not discriminate unfairly and is fair and equitable with respect to each impaired class which has not accepted the plan. 11 U.S.C. § 1129(b)(1).

PUB argues that the Debtor cannot succeed under the cramdown provisions of the Bankruptcy Code because the Plan unfairly discriminates against PUB and does not treat its impaired class as fair and equitable by proposing to modify the terms of its Note. The Court agrees.

1. The Plan Unfairly Discriminates Against PUB

Without a definition of "unfair discrimination" under the Bankruptcy Code, "[c]ourts have struggled to give the unfair discrimination test an objective standard." 7 Collier on Bankruptcy ¶ 1129.03 (16th ed. 2022). Although courts have developed tests that tend to vary across jurisdictions, the prevailing view is that "the purpose of the requirement is to ensure that a dissenting class will receive relative value equal to the value given to all other similarly situated classes." In re LightSquared, Inc., 513 B.R. 56, 99 (Bankr. S.D.N.Y. 2014); accord In re Sun Edison, Inc., 575 B.R. 220, 226 (Bankr. S.D.N.Y. 2017); In re 20 Bayard Views, LLC, 445 B.R. 83, 104 (Bankr. E.D.N.Y. 2011); In re Johns-Mansville Corp., 68 B.R. 618, 636 (Bankr. S.D.N.Y. 1986, aff'd, 78 B.R. 407 (S.D.N.Y. 1987), aff'd, 843 F.2d 636 (2d Cir. 1988).

One such test is the "Markell test," formulated in an article by Bruce A. Markell, A New Perspective on Unfair...