Opinion ID: 710247
Heading Depth: 1
Heading Rank: 4

Heading: The Plan's Compliance with 11 U.S.C. Sec. 1129(a)(10)

Text: 66 11 U.S.C. Sec. 1129(a)(10) requires that at least one non-insider impaired class of creditors accept a proposed reorganization plan before it is eligible for cramdown. The bankruptcy court found that the Wabash Plan was accepted by two such classes of creditors--Class 9 (PSI) and Class 11 (Members' Patronage Capital Claims)--thus fulfilling the requirements of Sec. 1129(a)(10). On appeal, REA objects to these findings. As Wabash points out in reply, these objections were not raised by REA until after the close of the objection period set by the bankruptcy court and the completion of the confirmation hearing. While they were raised in a post-hearing brief, the bankruptcy court apparently considered these objections waived, since it found that no objections to confirmation were filed under this section. Bktcy.Op. at 119. REA argues, however, that, since the waiver rule is applied more flexibly in bankruptcy proceedings and the court is required to ascertain whether a plan complies with the cramdown requirements, Everett v. Perez (In re Perez), 30 F.3d 1209, 1213-14 (9th Cir.1994), it may appropriately raise its objections here. 9 67 We need not determine the extent to which REA's various objections are waived by its failure to raise them in a timely fashion because we find that the Plan properly classifies PSI's claims separately from those of the other unsecured creditors and there is no clear error in the bankruptcy court's determination that PSI's claims are impaired by the Plan. 68 A debtor in bankruptcy has considerable discretion to classify claims and interests in a chapter 11 reorganization plan. In re Woodbrook Assocs., 19 F.3d 312 (7th Cir.1994). While a debtor may not separately classify claims solely in order to gerrymander an affirmative vote on reorganization, claims may be classified separately if significant disparities exist between the legal rights of the holder[§ of the different claims] which render the two claims not substantially similar. Id. at 318. Claims may also be separately classified if there are good business reasons to do so or if the claimants have sufficiently different interests in the plan. See In re U.S. Truck Co., 800 F.2d 581, 583-87 (6th Cir.1986); Heartland Fed. Sav. & Loan Ass'n v. Briscoe Enters. (In re Briscoe Enters.), 994 F.2d 1160, 1166-67 (5th Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 550, 126 L.Ed.2d 451 (1993). Because the confirmation of this Plan affects PSI's interests both with respect to its settlement of other litigation between it and Wabash and with respect to its ongoing business relationship with Wabash, its stake in the Wabash reorganization differs significantly enough from that of the other unsecured creditors to warrant the separate classification of its claims. (Indeed, REA apparently recognized this fact since its own proposed reorganization plan also classified PSI's claims separately.) 69 We review the determination whether PSI's claim is impaired for clear error. REA contends that, because PSI agreed to the terms of the PSI Settlement, it cannot remain impaired under the Wabash Plan which is, after all, in accordance with those terms. The PSI Settlement, however, is not a separate agreement entered into by the debtor prior to filing a reorganization plan. Instead, it is inextricably intertwined with and dependent on the reorganization plan. PSI's recovery under the settlement will depend on whether the Wabash Plan is approved. Thus, this is not a situation in which a claim has been settled prior to confirmation of a reorganization plan and confirmation therefore leaves the parties' rights unaffected. Cf. 5 Collier on Bankruptcy p 1124.03 (15th ed. 1994). The standard for impairment is very lenient and any alteration of the rights constitutes impairment even if the value of the rights is enhanced. Id. PSI's rights are certainly affected by the confirmation of the Wabash Plan. There is thus no clear error in the bankruptcy court's determination that PSI is an impaired creditor whose acceptance of the Plan fulfills the requirements of Sec. 1129(a)(10). 10 70 Because we find that Class 9 (PSI) is impaired under the Wabash Plan we need not decide whether Wabash's Members are insiders whose acceptance of the Plan would not be sufficient to justify a cramdown. Cf. In re EMEC, 125 B.R. at 334-35 (members of retail electric cooperative not insiders for cramdown purposes).II. The Deduction of the Prepayments from the Timbers Account from REA's Secured Claim 71 REA disputes the deduction from its secured claim of approximately $28 million of debt service paid to it by Wabash during the post-petition period. This payment resulted from an earlier dispute in this case. Wabash initially contested its obligation (and indeed its right under rate regulations) to continue to make payments to REA in service of its non-Marble Hill debt after filing its bankruptcy petition. Because Wabash believed itself relieved of the obligation of servicing its debt during the pendency of the bankruptcy petition, Wabash argued that it was therefore required to reduce its rates rather than to continue to make such payments to REA. While that dispute was under consideration by the bankruptcy court, Wabash made its payments into an escrow account (the Timbers Account). In July 1990 the bankruptcy court ordered the funds turned over to REA as a payment to reduce the principal of the non-Marble Hill debt. Timbers Order at 4-5. 72 The bankruptcy court reasoned that, since rate payments may, in principle, be used to pay for Wabash's non-Marble Hill debt, it was of no import when those payments were made. [I]n either case, the members will pay the non-Marble Hill debt through the rates they are charged. Id. at 5. The court thus concluded that it was pointless to allow Wabash's rates to be adjusted downward due to the temporary suspension of its obligation to pay the debt, only to be raised again at a later date when the obligation was reimposed. As the bankruptcy court pointed out: It can make no difference to the Debtor, and little difference to the members, whether the funds are in effect returned to the members through lower rates now or whether the members pay lower rates in the future as a result of application of the funds to the non-Marble Hill debt now. Id. 73 Pursuant to the court's order, Wabash released the money in the Timbers Account to REA and, in its reorganization plan, deducted the payment from REA's claim. The issue on appeal is whether it was appropriate for REA to deduct this payment from the secured portion of REA's claim. 74 A secured creditor is not ordinarily entitled to any property acquired by the ... debtor after the commencement of the case. 11 U.S.C. Sec. 552(a) (1995). Post-petition debt payments to an undersecured creditor which are taken from after-acquired property will thus ordinarily be used to reduce the principal amount of the secured debt. See, e.g., In re Maun, 95 B.R. 94 (Bankr.S.D.Ill.1989). There is an exception to this rule that secured creditors are not entitled to after-acquired property. The exception applies if the security agreement specifically provides that the security interest created extends to proceeds, product, offspring, or profits of the collateral or to rents paid on it. 11 U.S.C. Sec. 552(b) (1995). REA has not argued that the monies in the Timbers Account fall into any of these categories--nor would there seem to be any basis to conclude that they do. 11 75 REA also appears to take issue with the fact that the calculation of Wabash's going-concern value was based on projected revenues beginning in 1991 and did not include the revenues already earned and deposited in the Timbers Account. However, the Supreme Court's decision in United Sav. Ass'n v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) generally precludes including as part of a secured claim any value stemming from the debtor's use of the collateral during the pendency of the bankruptcy proceedings. All revenues, except for those specifically excepted under Sec. 552(b), as discussed supra, are deemed part of this unavailable use value. This holding squarely prohibits the inclusion of the Timbers Account revenues in the going-concern valuation of Wabash. The bankruptcy court thus properly treated these funds as post-petition payments for debt service, to be credited against the secured part of REA's claim.III. The Use of the Going-Concern Value Rather than the Value to the Members in Valuation of REA's Security Interest 76 The valuation of a secured claim is a question of fact which can be overturned only if it is clearly erroneous. In re Vitreous Steel Products Co., 911 F.2d 1223, 1233 (7th Cir.1990). Here the bankruptcy court carefully considered extensive expert testimony on the valuation issue. The methods used by the experts on whose testimony the bankruptcy court relied were standard methods for determining fair market value using the willing buyer/willing seller framework. This determination of the fair market value was not clearly erroneous. 77 However, REA also contends that the use of the fair market value rather than the value to the Members in determining the extent of its secured claim is incorrect under 11 U.S.C. Sec. 506(a). REA Reply Br. at 17-18. Under this statute, a secured claim reaches to the extent of the value of such creditor's interest in the estate's interest in such property as determined in light of the purpose of the valuation and of the proposed disposition or use of the property. Courts have differed as to how to value the creditor's interest pursuant to Sec. 506(a) in those cases where the debtor is to retain the property securing the debt. The issue is whether the value of such creditor's interest is the amount that a creditor could recover through a sale of the assets securing the debt (either separately or as part of a going concern). The alternative standard where there is no sale is that the security interest covers the entire value that the assets retain in the debtor's hands under the reorganization plan. Most of the cases concern whether the hypothetical costs of selling the assets should be deducted from the secured creditor's claim even though the debtor intends to retain the property after reorganization. See, e.g., In re Balbus, 933 F.2d 246 (4th Cir.1991); Metrobank v. Trimble (In re Trimble), 50 F.3d 530 (8th Cir.1995) (discussing cases). Here, REA contends that, if the Members are to retain control of Wabash, its secured claim must be valued at the value to the Members rather than at the value that could be obtained in a hypothetical sale to a third party. 78 This circuit has yet to resolve this Sec. 506(a) issue, nor need we resolve it here, because REA has waived the argument. In its brief to the district court, in fact, REA freely conceded that the value of REA's and CFC's security interests is the going-concern value of all of Wabash's assets. Dist.Ct.Rec.Doc. 7 at 44. Throughout that brief REA assumed without discussion that the willing buyer/willing seller model (an approach to determining fair market value) was the correct approach to valuing its claim (although it disputed Wabash's implementation of the model). Even in its brief to this court, REA states only that it is anomalous to fix REA's lien at the lower of Wabash's value to a third party or to its owners where the plan gives to the owners the property being valued. Appellant's Br. at 45. The brief cites neither case law nor statute in support of this statement. Only in its reply brief does REA raise the question whether the valuation approach taken by the bankruptcy court comports with the dictates of Sec. 506(a), citing only one case discussing the issue. Such minimal treatment of the issue is too little, too late. Doe v. Johnson, 52 F.3d 1448, 1457 (7th Cir.1995). The matter is not properly preserved for our consideration. We might add that, in any event, under the Wabash Plan, REA and the other secured creditor, CFC, are in fact awarded the difference between the two valuations in satisfaction of their unsecured claims; thus no inequity results. 79