In re Hanish, LLC

570 B.R. 4

IN RE: HANISH, LLC, Debtor

Bk. No. 16–10602–BAH

United States Bankruptcy Court, D. New Hampshire.

Signed June 28, 2017

Deborah A. Nottinger, Esq., Steven M. Nottinger, Esq., Nottinger Law, P.L.L.C., Nashua, NH, Attorneys for the Debtor

Jeffrey D. Ganz, Esq., Alexander G. Rheaume, Esq., Riemer & Braunstein LLP, Boston, MA, Attorney for Phoenix REO, LLC

MEMORANDUM OPINION

Bruce A. Harwood, Chief Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is the "Motion to Alter or Amend Judgment Under Rule 9023 As It Incorporates Rule 59(e)"¹ (the "Motion") filed by the debtor Hanish, LLC (the "Debtor") and the objection thereto² (the "Objection") filed by creditor Phoenix REO, LLC ("Phoenix). Through the Motion, the Debtor seeks reconsideration of the Court's order dated May 31, 2017, denying approval of the "Debtor-in-Possession's Third Disclosure Statement for Third Plan of Reorganization Dated March 15, 2017 (Second Amended)"³ (the "Amended Third Disclosure Statement") based on the patent unconfirmability of the "Debtor–In–Possession['s] Third Plan of Reorganization Dated March 15, 2017 (Second Amended)"⁴ (the "Amended Third Plan") due to the improper classification of the Debtor's unsecured creditors in violation of 11 U.S.C. §§ 1122 and 1129(a)(1). The Debtor contends the Court erred as a matter of law because 11 U.S.C. § 1123(a)(4) permits the Debtor to provide assenting claimholders less favorable treatment, thus justifying separate classification along those lines. Phoenix objects, positing that Fed. R. Civ. P. 59(e) does not apply to interlocutory orders and asserting the Motion does not establish that the Court made a manifest error of law. For the reasons set forth below, the Court will deny the Motion.

II. JURISDICTION

This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 157(a), 1334, and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(L).

III. FACTS

The Debtor filed a voluntary Chapter 11 petition on April 26, 2016. It owns and operates a Fairfield Inn and Suites by Marriot hotel in Hooksett, New Hampshire. The Debtor's largest creditor is Phoenix, who holds two fully matured notes that are secured by the Debtor's hotel property (the "Hotel"). The larger of the two notes is also guaranteed by Nayan Patel, the Debtor's principal. The total amount of Phoenix's allowed claim is $6,732,462.02.⁵ It is undisputed that Phoenix's claim is undersecured, although the Debtor asserts that the value of the collateral has increased during the pendency of the case.

The classification and treatment of Phoenix's claim in each formulation of the Debtor's plan has been an ongoing point of contention between the parties. This is in no small part because Phoenix, to date, has refused to accept any of the Debtor's plans, requiring the Debtor obtain the acceptance of another impaired class in order to achieve confirmation. See 11 U.S.C. § 1129(a)(10). Although the Motion seeks reconsideration of an order with respect to the Amended Third Disclosure Statement and Amended Third Plan, a brief history of the Debtor's reorganization efforts is helpful to place the Court's ruling and present dispute in context.

A. Phoenix Classified as Fully Secured

The first several iterations of the plan shared the following characteristics.⁶ Each placed Phoenix's claim in a single class (Class 2), proposing to treat the entire claim as fully secured despite the fact that the Debtor estimated the Hotel's value was only $5,000,000.00 at that time. The Debtor proposed to pay Phoenix in full through: (1) a lump sum payment of $4,000,000.00 on the effective date from a refinancing that would prime Phoenix's position with respect to the Hotel; (2) interest only adequate protection payments for 10 years; and (3) a balloon payment of the remaining balance at the end of the 10 year period from a refinancing transaction. General unsecured claims were spilt among two classes: Class 4A, consisting of an administrative convenience class of unsecured claims under $5,000.00 which would be paid 80% of their claim on the effective date;⁷ and Class 4, consisting of unsecured claims over $5,000.00 which would be paid in full over 7–10 years. On December 1, 2016, the Court approved the Debtor's second amended disclosure statement without objection from Phoenix and scheduled the second amended plan for a confirmation hearing.

On December 27, 2016, Phoenix filed an objection to confirmation, asserting, inter alia , that the Debtor's classification scheme was designed for the sole purpose of gerrymandering an accepting impaired class.⁸ Specifically, Phoenix argued that the Debtor failed to offer a legitimate basis for a separate administrative convenience class, and curiously suggested that the true purpose was to avoid rejection by Phoenix "whose vote could control Class 4," notwithstanding the fact that Phoenix's claim was not in Class 4.⁹ On January 5, 2017, Phoenix cast two votes against the second amended plan—one as a Class 2 secured creditor and one as a Class 4 general unsecured creditor—premised on its asserted undersecured status. In response, the Debtor moved to have Phoenix's vote designated as solely a Class 2 vote, or, in the alternative, allow the Debtor to separately classify Phoenix's deficiency claim in "Class 4B" and designate Phoenix's Class 4 vote as one in that class.¹⁰

The Court conducted a two day confirmation hearing on February 16 and 17, 2017. The Court ruled that it would not honor Phoenix's Class 4 vote on the basis that Phoenix could not vote a classification scheme not reflected in the plan. At the conclusion of evidence, the Court found that the Debtor had not sustained its burden of demonstrating that the second amended plan was feasible. In light of this ruling and the need for the Debtor to re-conceptualize its plan, the Court declined to address how Phoenix ought to be classified in a future plan.

B. Phoenix Classified as Secured with an Unclassified Unsecured Claim

On March 15, 2017, the Debtor filed the first versions of its third disclosure statement and third plan of reorganization.¹¹ Notably, the Debtor alleged that a recent appraisal indicated that the Hotel's value had increased to $5,700,000.00 during the pendency of the case. The classification structure of the third plan remained the same as the prior iterations—Phoenix in Class 2; general unsecured claims under $5,000.00 in Class 4A; and general unsecured claims over $5,000.00 in Class 4. This time, the Debtor proposed to pay Phoenix in Class 2 as follows: (1) a payment of $1,000,000.00 in cash on the effective date via an equity infusion supplied by Nayan Patel; (2) application of $200,000.00 in adequate protection payments already made; and (3) payment of the remaining $5,532,462.02 in equal monthly installments of principal and interest (at 5%) for 79 months, with the balance paid off through a refinancing at the end of the term. The proposed treatment of Classes 4A and 4 also remained the same as the prior plans. Phoenix objected on various grounds,¹² and the Debtor filed revised documents in an attempt to address some of the disclosure issues raised by Phoenix.¹³

On April 12, 2017, the Court conducted a hearing on the revised third disclosure statement. During the hearing, the Court questioned the proposed classification of Phoenix's claim, noting that the third plan, based on the valuation contained therein, appeared to recognize the existence of a separate unsecured claim without classifying it as such outside Class 2. Phoenix concurred, asserting that the revised third plan classified its two claims in a manner inconsistent with the Bankruptcy Code. After a colloquy with Debtor's counsel, the Court found that the revised third plan structurally required a classification scheme consistent with the de facto bifurcation of Phoenix's claim and ordered the Debtor to file further amendments. In closing, the Court expressed its intent to address any classification issues, including any objection to Class 4A on the basis of gerrymandering, at the hearing on the further amended disclosure statement.

C. Phoenix Classified as Secured with a Separately Classified Unsecured Claim

On April 19, 2017, the Debtor filed the Amended Third Disclosure Statement and the Amended Third Plan. The Amended Third Plan is substantially similar to the prior plan except that Phoenix's unsecured claim is separately classified in Class 2A. Thus, in relevant part, the Amended Third Plan provides that: (1) Phoenix's secured claim in Class 2 will receive monthly payments of principal and interest for 78 months with the balance paid in full from a refinancing at the end of the term; (2) Phoenix's unsecured claim in Class 2A will be paid in full on the effective date from an equity infusion by Nayan Patel; (3) general unsecured claims under $5,000.00 in Class 4A will be paid 80% of their claim on the effective date; and (4) general unsecured claims over $5,000.00 in Class 4 will be paid in full in six and a half years.¹⁴ Neither the Amended Third Disclosure Statement nor the Amended Third Plan explain why the Debtor has placed its unsecured creditors into three separate classes other than to note that Class 4A is "a separate administrative convenience class."¹⁵ Nevertheless, both expressly provide that if separate classification of Class 4A is not permitted, claims in that class will be treated and paid under Class 4. As a result of this classification scheme, Classes 2, 4A, and 4 are impaired and entitled to vote to accept or reject the plan, see 11 U.S.C. § 1126(a), while Class 2A is unimpaired and deemed to have accepted the Amended Third Plan. See 11 U.S.C. § 1126(f).

On May 5, 2017, Phoenix filed an objection to the Amended Third Disclosure Statement, asserting that the Amended Third Plan improperly separately classifies unsecured claims and artificially...