Opinion
CASE NO.: 01-18257.
January 8, 2002
ORDER
The matter before the Court is a hearing on plan confirmation ("the Plan") in the Chapter 11 case filed by Cleveland Genomics, Ltd., Debtor in Possession ("The Debtor"). Upon the conclusion of a duly noticed hearing, the following findings of fact and conclusions of law are made.
As structured by the proponent Debtor, the Plan consists of ten (10) classes of claimants and interest holders. The proposed treatment for each class is addressed, including a designation of those classes which are impaired and unimpaired. Classes One and Two are deemed acceptances and provide treatment for administrative and priority tax claimants, respectively. Classes Three through Seven are impaired and provide treatments for various classifications of secured claimants, while Classes Eight and Nine, also impaired, address two classifications of general unsecured claimants. Lastly, Class Ten consists of equity holders receiving no proposed plan distribution. It, too, is an impaired class.
Two objections were filed regarding the Plan. The objection filed by the Internal Revenue Service was resolved prior to the hearing on Plan Confirmation. An objection filed by the National Bank of Oak Harbor (the "Bank") was not resolved by the parties.
Among the classes eligible to cast ballots, Classes Four, Six, Seven, Nine, and Ten voted to accept the plan. Classes Three, Five, and Eight voted to reject the Plan. Classes Four, Seven, and Ten, although impaired voted acceptance of the Plan. The Bank's claim is contained within Class Five. Specifically, the Debtor's proposed Plan provides in pertinent part:
(CLASS FIVE) SECURED CLAIM OF THE NATIONAL BANK OF OAK HARBOR
This Class shall consist of the secured claim of The National Bank of Oak Harbor. The National Bank of Oak Harbor has a secured claim by virtue of a mortgage on all of the Debtor's real estate, in the original principal amount of $615,000.00. The current balance due on this mortgage is approximately $637,000.00 including attorney's fees and costs. The National Bank of Oak Harbor shall have a secured claim in the amount of $523,984.25. The Debtor will issue an Amended and Restated Adjustable Rate Promissory Note, an Amended and Restated Adjustable Rate Rider, an Amended and Restated Collateral Assignment of Rents, an Amended and Restated Open-End Mortgage and an Amended and Restated UnConditional Continuing Guaranty . . . The Note shall be payable over sixteen (16) years with interest at the initial rate of eight and five-one-hundredths (8.05%) percent per annum. The initial monthly payment shall be Four Thousand Eight Hundred Sixty Two Dollars and Ten Cents ($4,862.10). Elsebeth M. Baumgartner, managing member of the Debtor and her husband, Joseph L. Baumgartner, will personally guarantee the obligation to The National Bank of Oak Harbor. Tariq M. Haqqi and his wife, Talat Haqqi will guarantee the Amended and Restructured obligation, and in consideration of that guarantee, The National Bank of Oak Harbor will file a release of its Judgment Lien and a Satisfaction of Judgment of its judgment in the Ottawa County Court of Common Pleas, being Case Number 01 CVE-003 against Tariq M. Haqqi and Talat Haqqi upon the Effective Date of this Plan . . .The total amount of Class Five claims will be $523,984.25.
The objection filed by the Bank was extensive. No evidence, however, was tendered for admission into evidence to support either of the Bank's points of objections. Initially, the Bank argues that the Plan is deficient as (1) the Plan proposes to reduce its state court judgment obtained prepetition against the Debtor from an amount of $637,000.00 to $523,984.25; (2) the Plan is not confirmable under § 1129(a), as Classes Three and Five have rejected the plan; (3) the Plan precludes the Bank from prosecuting its deficiency claims again certain guarantors. Further, pursuant to § 1129(b), the Bank objects to Plan confirmation on the basis that the Plan is not fair and equitable, as it requires the Bank to forfeit certain lien rights, while other claimants are not so affected; and, lastly, argues that the Plan reduces the Bank's claim, while junior claimants, including insiders, receive a distribution.
Section 502(d)
The Debtor contends that the National Bank of Oak Harbor is precluded from voting on the proposed plan pursuant to 11 U.S.C. § 502(d) because it received rents from the Debtor's tenants in the amount of $26,780.00 during the period April 2, 2001 through July 1, 2001. More specifically, the Debtor maintains that the Bank does not have standing to object to the confirmation of the proposed Chapter 11 plan or even participate in the confirmation process until the Bank's claim is allowed. Also, the Debtor avers that the subject rent payments constituted a preference under § 547 of the Code and the National Bank of Oak Harbor has not returned the subject rent payments to the bankruptcy estate. The rent payments are the subject of a pending adversary proceeding filed on November 14, 2001.
The National Bank of Oak Harbor does not contest that it received rents during the above-referenced period. It contends, however, that this Court should follow the minority judicial view construing § 502(d) which holds that a claimant may vote on the plan subject to the adjudication of an adversary proceeding under § 547(b). Section 502 of the Bankruptcy Code governs the allowance and disallowance of claims against a debtor's estate and provides in relevant part:
[T]he court shall disallow any claim of any entity . . . that is a transferee of a transfer avoidable under section . . . 547 . . . of this title, unless such entity or transferee has paid the amount . . . for which such entity or transferee is liable. . . .
11 U.S.C. § 502(d). To constitute an avoidable transfer, § 547 requires that the transfer be
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made —
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b). A preference is avoidable if it meets all the criteria set forth in Section 547(b), unless excepted under § 547(c).
The Supreme Court stated very specifically in U.S. v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989) that "the plain meaning of legislation should be conclusive, except in the `rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.'" Id. at 242. The applicable legislative history to § 502 does emphasize the requirement that preferential transfers be turned over prior to the claim being allowed:
Section 502(d) requires disallowance of a claim of a transferee of a voidable transfer, in toto, if the transferee has not paid the amount or turned over the property received as required under the sections under which the transferee's liability arises".
House Report No. 95-595, 95th Cong., 1st Sess. 354 (1977); Senate Report No. 95-989, 95th Cong., 2d Sess. 65 (1978), U.S. Code Cong. Admin.News 1978, pp. 5787, 5851, 6310(emphasis added). Courts discussing § 502(d) have consistently recognized that when an objection to a claim is based upon the ground that the claimant has failed to surrender a voidable transfer, "the claim can neither be allowed nor disallowed until the preference matter is adjudicated." In re Coral Petroleum, Inc., 60 B.R. 377, 382 (Bankr.S.D.Tx. 1986) (citing, Katchen v. Landy, 382 U.S. 323, 330, 86 S.Ct. 467, 473, 15 L.Ed.2d 391 (1966); In re Mid Atlantic Fund, Inc., 60 B.R. 604 (Bankr.S.D.N.Y. 1986)); See also In Re Independent Clearing House Co., 41 B.R. 985, 1017 (Bankr.D.Utah 1984) ("the [preference] defendants' claims are not allowable pursuant to section 502(d) until after their fictitious profits and preferences have been surrendered to the estate."); In Re First International Services Corp., 37 B.R. 856, 860 (Bankr.D.Conn. 1984) ("claims of creditors who have received void or voidable preferences must be disallowed unless the creditor surrenders the money or property transferred during the preference period."); In Re Mastercraft Record Plating, Inc., 32 B.R. 106,(Bankr.S.D.N.Y. 1983) ("[I]t cannot be disputed that a creditor's claim cannot be allowed if the creditor has received a preference or fraudulent conveyance unless and until the preference or fraudulent conveyance is surrendered."); In Re Moriarty, 22 B.R. 689, 690 (Bankr.D.Neb. 1982) ("[I]rrespective of whether a transfer is actually avoided by any appropriate entity . . . a creditor with a voidable transfer may not have its claim allowed . . . until the transferee has paid the amount or turned over the property for which it is liable. . .").
The Supreme Court in Katchen v. Landy discussed Section 57 of the Bankruptcy Act, the precursor to Section 502(d) of the Code, stating in pertinent part:
Subsection (g) forbids the allowance of a claim when the creditor has `received of acquired preferences void or voidable under this title' absent a surrender of any preference. Bankruptcy Act, § 57, sub. g, 11 U.S.C. § 93, sub. g (1964 ed.). Unavoidably and by the very terms of the Act, when a bankruptcy trustee presents a § 57, sub. g objection to a claim, the claim can neither be allowed nor disallowed until the preference matter is adjudicated. The objection under § 57, sub. g is, like other objections, part and parcel of the allowance process and is subject to summary adjudication by a bankruptcy court. This is the plain import of § 57 and finds support in the same policy of expedition that underlies the necessity for summary action in many other proceedings under the Act.
Katchen v. Landy, 382 U.S. at 330. Similarly, the court in In re McLean Industries Inc., 196 B.R. 670, 677(S.D.N.Y. 1996) opined:
Although the plain meaning of the statute is dispositive, the legislative history of Section 502(d) and pre-Code practice also support the disallowance of [the] claim. Sections 502(d) of the Bankruptcy Code is based on Sections 57g and 11e of the former Bankruptcy Act, respectively.
Id. at 676 (citing H.R. Rep. No. 595, 95th Cong., 1st Sess. 354 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 64 (1978), reprinted in 1978 U.S.C.C.A.N., 5787, 5851, 5963, and 6310. Finally, the court in theRevco case followed Coral Petroleum, supra, and held:
1990 Bankr. LEXIS 2966 (N.D.Ohio. 1990) (unpublished).
[T]he debtor, supported by the creditors' committee and a creditor bank, filed an objection to have the creditors' claims disallowed on the ground that, pursuant to section 502(d), the creditors' claims were not allowed since the creditors had not surrendered the property sought to be recovered by the estate. Although the preference actions were still pending, the Coral Petroleum court, applying section 502(d), disallowed the votes of the transferee/claimants pursuant to section 502(d). The court rejected the claimants' argument that "section 502(d) is not operative until a judgment has been rendered on the preference actions.
The court in Revco, reasoned that only creditors may vote on a plan and that a debtor-creditor relationship does not exist until the section 502(d) requirements are complied with. This Court concurs with that reasoning. The Revco court further noted that the plain language of section 502(d), its legislative history, and the case law interpreting it, clearly establish that until a preferential transfer is turned over to the estate, the preferential transferee is not a creditor. The court found that the "contingent" claimants did not have a "present financial stake in the outcome of the Plan," and should, therefore, not be permitted to defeat approval of the plan. The court recognized that, were the preference actions successfully defended, the "contingent" claimants would not, in fact, have a claim for the funds on which they sought to have their votes.
Herein, it is unrefuted that the subject property transferred to the Bank within the preference period has not been restored to the Debtor. Accordingly, the Bank's claim is disallowed pursuant to § 502(d), and the Bank is precluded from voting on the Plan.
Section 1129(b)
The Bank objects to confirmation of the plan under § 1129(b). The Bank asserts that the plan is not fair and equitable because, although the Plan allows it to retain its lien on the Debtor's properties, the Plan will force the Bank to relinquish its judgment lien in the amount of $602,238.44 plus 10.25% interest, late charges, costs, and expenses obtained in the Court of Common Pleas for Ottawa County. The Bank further objects to confirmation of the plan stating that (1) the Plan discriminates unfairly requiring the Bank to forfeit its lien rights when other creditors are not forced to give up their respective rights and (2) The Bank's claim is to be reduced, when junior claims are not reduced, which is in violation of the absolute priority rule.
The judgment lien was also entered against Elizabeth M. Baumgartner, Joseph L. Baumgartner, Tariq M. Haqqi, jointly and severally, based on guaranty agreements signed by each of them.
The Debtor, in opposition, contends that the Bank will retain its lien which secures its claim. The Debtor states that it has also agreed to make cash payments to the Bank which total the allowed amount of the Bank's secured claim. Additionally, the adjusted interest rate proposed in the Plan (8.05%), is identical to the terms and interest rate contained in the original contract between the parties. Lastly, the Debtor refutes the Bank's contention that the plan violates the absolute priority rule. Section 1129 provides in pertinent part:
(b)(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.
11 U.S.C. § 1129(b)(1). Under § 1129(b), the Debtor's plan is fair and equitable. The Bank gets the same guarantees and receives monthly payments on the Debtors' obligation. The Bank receives the agreed upon prepetition interest rate. The Debtor is simply restructuring the Bank obligation, not foregoing the obligation. The value of the Debtors' real estate is stipulated to be approximately $545,000. The Bank has a second lien on the real estate, behind that of the County Treasurer. The Bank retains its liens. The restructured payment period is over sixteen years, in contrast to the original twenty year payout period.
The Plan dividend is 100% on all unsecured claims. All insiders are paid, lastly. The plan includes a cognovit note provision, allowing the Bank to prosecute such in the event the Debtor defaults on Plan payments.
Proponents of a Chapter 11 plan bear the burden of proof with respect to whether the plan is fair and equitable, for "cram down" purposes under § 1129(b). Matter of Briscoe Enterprises, Ltd., II, 994 F.2d 1160, 1163-64 (5th Cir. 1993) (citing Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935)). Herein, an impaired class has accepted the Plan. The Bank concedes that the Plan, as structured, meets the best interests of creditors' test. 11 U.S.C. § 1129(a)(3). Moreover, the same guarantors on the original debt will guarantee the Debtor's restructured debt. Thusly, these latter objections of the Bank are not sustainable under § 1129(b). Accordingly, the Bank's objections are hereby overruled, and the Plan is confirmed.
IT IS SO ORDERED.