Opinion ID: 547585
Heading Depth: 2
Heading Rank: 1

Heading: classification and subordination of claim 502

Text: 21 As noted above, the plan of reorganization confirmed by the bankruptcy court provided for a classification scheme by which MCJV's claim 502 and O & Y's claims would be paid junior in priority to the claims of unsecured creditors not affiliated with the debtors. The bankruptcy court confirmed the plan over the objections of MCJV on grounds that the plan satisfied the requirements of 11 U.S.C. Sec. 1129(a) and (b). Specifically, the court determined that the claims of MCJV and O & Y were not substantially similar to and thus should be classified separately from the claims of other creditors under section 1122 of the Code because any distribution to MCJV would increase Gould's 50 percent equity in MCJV; because MCJV and O & Y had direct, secured recourse by set off against Gould's equity interest in MCJV's real estate, and because the MCJV claim was asserted by a creditor controlled by a debtor. The bankruptcy court held further that the following facts in this case warranted equitable subordination of this claim pursuant to 11 U.S.C. Sec. 510(c) and the standard set forth in applicable case law: Gould had engaged in misconduct, which was imputable to MCJV as a matter of Florida partnership law and agency; O & Y/MCJV was partly responsible for the undercapitalization of MCLP; and O & Y contributed to MCJV's financial difficulties, to other creditors' detriment, by failing to provide financing for phases II and III of the Miami Center Project. 22 The district court reversed, holding that the claim was not so dissimilar that it should be classified separately under section 1122 and that the evidence was insufficient to satisfy the elements of equitable subordination. The district court determined that any misconduct of Gould was not imputable to MCJV because it was outside the ordinary course and scope of partnership business. The district court also pronounced as clearly erroneous the lower court's findings that O & Y had contributed to MCJV's financial difficulties and that MCLP's undercapitalization was attributable to MCJV. 23 We note at the outset that we must affirm the factual findings of the bankruptcy court unless they are clearly erroneous. Birmingham Trust National Bank v. Case, 755 F.2d 1474 (11th Cir.1985). The test for this court, as well as for the district court, is not whether a different conclusion from the evidence would be appropriate, but whether there is sufficient evidence in the record to prevent clear error in the trial judge's findings. Highland Village Bank v. Bardwell, 610 F.2d 228, 230 (5th Cir.1980). Conclusions of law, however, are subject to de novo review. Machinery Rental, Inc. v. Herpel, 622 F.2d 709, 713 (5th Cir.1980). 24 Section 1129 of the Bankruptcy Code provides two mechanisms for confirmation of a Chapter 11 plan of reorganization. The first requires satisfaction of all subsection (a) requirements, including (a)(8), which necessitates acceptance of the plan by all impaired classes or interests. The second mechanism, the mechanism by which the plan was confirmed in this case, incorporates all the requirements of subsection (a), except for (a)(8), and requires that the plan not discriminate unfairly and be fair and equitable with respect to each class of impaired claims or interests that has not accepted the plan. 11 At issue in this appeal is whether the Bank's plan complies with the applicable provisions of title 11, namely section 1122. See 11 U.S.C. Sec. 1129(a)(1) (requiring that the plan comply with the provisions of title 11). Also at issue is whether the Bank's plan discriminates unfairly with respect to MCJV, a creditor who is impaired under, and who has not accepted the plan. See 11 U.S.C. Sec. 1129(b)(1) (requiring that the plan not discriminate unfairly with respect to classes of impaired claims). 25 Section 1122 provides that a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interest of such class. 11 U.S.C.A. Sec. 1122 (1979). The Bank argues that the fact that debtor Gould would benefit from payment of claim 502 by virtue of his interest in MCJV and the fact that MCJV could look to Gould's equity interest in MCJV and in MCJV's property to satisfy claim 502 justify its separate classification under section 1122. We disagree. 26 Although the proponent of a plan of reorganization has considerable discretion to classify claims and interests according to the facts and circumstances of the case, this discretion is not unlimited. [T]here must be some limit on a debtor's power to classify creditors ... The potential for abuse would be significant otherwise. Teamsters Nat'l Freight Indus. Negotiating Comm. v. U.S. Truck Co., 800 F.2d 581, 586 (6th Cir.1986); see also Hanson v. First Bank, 828 F.2d 1310, 1313 (8th Cir.1987). If the plan unfairly creates too many or too few classes, if the classifications are designed to manipulate class voting, or if the classification scheme violates basic priority rights, the plan cannot be confirmed. Teamsters, 800 F.2d at 586; Hanson, 828 F.2d at 1313. 27 In this case, MCJV's claim 502 is asserted against MCLP for unpaid rent under the FF & E lease agreements. This claim is entirely distinct from O & Y's claim against Gould, claim 251, as the guarantor of MCJV's debt to O & Y. Claim 251 was secured by and could be satisfied by Gould's one-half equity interest in MCJV, as acknowledged in the proof of claim itself. In contrast, claim 502 is an unsecured claim and not subject to setoff. Although the plan placed claims 502 and 251 in the same class, O & Y later released claim 251 in conjunction with entry of the Final Modified Award. 28 We agree with the district court that Gould will not pocket part of the payment of claim 502, as Gould's interest in MCJV and the rents and profits therefrom became part of the bankruptcy estate upon commencement of the case. 11 U.S.C. Sec. 541(a). We also agree that the fact that claim 502 is in part an equity interest does not justify its subordination. See In re Martin's Point Limited Partnership, 12 B.R. 721, 727 (Bankr.N.D.Ga.1981) ([A] valid claim of a creditor who is also an equity security holder is not to be subordinated to the claim of a creditor who is not also an equity security holder, but is to be treated equally.) The facts in this case thus do not warrant separate classification under section 1122. 29 The facts in this case similarly do not warrant equitable subordination of claim 502 under 11 U.S.C. Sec. 510(c). Section 510(c) provides that claims against the bankrupt estate may be subordinated to the claims of other secured or unsecured creditors if the principles of equitable subordination so dictate. Under our precedent, the proponent of the plan must demonstrate the following three elements to accord a claim inferior priority under section 510(c): 30 (1) that the claimant had engaged in inequitable conduct; 31 (2) that the conduct has injured creditors or given unfair advantage to the claimant; and 32 (3) that subordination of the claim is not inconsistent with the Bankruptcy Code. 33 Estes v. N & D Properties, Inc., 799 F.2d 726, 731 (11th Cir.1986). If the claimant is an insider, as in the instant case, 12 the proponent has the burden of presenting material evidence of unfair conduct. Id. The burden then shifts to the claimant to prove the fairness of his transactions with the debtor or the claim will be subordinated. Id. 34 The Bank argues on appeal that Gould engaged in inequitable conduct and that the bankruptcy court correctly imputed this conduct to MCJV, thus justifying the subordination of claim 502. We again disagree. Under Florida partnership law, a partnership is bound by a partner's wrongful acts if a partner acting in the ordinary course of the business of the partnership or with the authority of his copartners causes loss or injury to a third party. Fla.Stat.Ann. Sec. 620.62 (1977). The district court correctly determined that Gould's misconduct cannot be used to subordinate claim 502 because the misconduct at issue was outside the scope of the partnership business. Indeed, Gould's alleged misconduct was against the interests of MCJV and O & Y.