Court Opinion

ID: 6935553
Source: CourtListenerOpinion
Date Created: 2022-07-24 00:30:25.630564+00
Date Added: 2024-06-11T16:07:26.434412
License: Public Domain

ROTH, Circuit Judge,
concurring in part and dissenting in part.
Although I concur with the majority in Parts I — III, V and VI of their opinion, I *213cannot agree with their conclusion in Part IV that the debtor did not retain equity in the property. I must therefore respectfully dissent from the reversal of the district court’s determination in that regard.
The majority adopts the “classic test” for determining equity under § 362(d)(2): subtracting the value of all the secured hens on the property from the property’s current value. They reject the district court’s exclusion of the junior secured claims of Nantucket and FEC from the subtrahend of the calculation. However, if junior henholders are willing to concede their secured position in such a way that the senior lienholder's interest is protected, the debtor may have actual, if not hteral, equity in the property. I see no reason why that concession should not be permitted and “equity” be defined in a reorganization by the balance, reached by subtracting the security of concerned henholders from the value of the property, rather than from a calculation of figures that do not represent the reality of the commercial situation.
Nantucket urges the court to adopt the district court’s reasoning that, pursuant to the Fourth Amended Plan, the junior hen-holders effectively granted the Debtor a portion of their equity in the Property by subordinating part of their secured claims. I agree that such an interpretation of “equity” is reasonable and could permit a Chapter 11 reorganization to succeed in a situation where the junior henholders were willing to step back, at least in part, from their secured positions. For example, in a single asset reorganization, junior henholders may face the eradication of their interest in the debt- or’s property if a plan of reorganization cannot be developed. Their willingness to cooperate to save their own interest may be the factor which will permit the reorganization to succeed.
Adherents of the majority’s interpretation of “equity” have criticized the subtraction of the amounts owed to junior henholders from a determination of equity as “improperly focus[ing] upon the interests of junior henholders as opposed to the interests of the debtor or senior lienholder.” Stewart v. Gurley, 745 F.2d 1194, 1196 (9th Cir.1984). The concern is that the interests of the junior henholders will be promoted over those of the senior henholder. Id. However, if the property is necessary to the reorganization and if the senior henholder is adequately protected, it makes very good sense to me in a § 362(d)(2)(A) calculation to credit the interests of the junior henholders to equity. I would urge that we do so.
In the present case, the district court found that if it were to uphold the bankruptcy court’s grant of a stay, “the claims of both the Debtor and its affiliate FEC, along with the objecting henholder Nantucket and all of the unsecured creditors [would] be wiped out.” In re: Indian Palms Associates, Ltd. No. 93-4519, shp op. at 13 (D.N.J. Feb. 8, 1994). That consequence surely accounts for Nantucket and FEC’s concessions in the Fourth Amended Plan. If the junior hen-holders are willing to make concessions, I can see no reason why they should not be permitted to subordinate or restructure their hens so that the senior henholder is protected and the reorganization may then go through.
Moreover, as the district court stated, by recognizing the junior henholders’ concessions and finding that they gave the debtor equity in the property, the court would further “the objectives of the Bankruptcy Code of both preserving the hens of the secured creditors and, to the extent feasible, adopting plans which will protect the interests of junior henholders, unsecured creditors and equity holders.” Id. at 15.
Although they are in the minority, other courts have seen the logic of calculating “equity” without deducting the hens of junior henholders who are willing to cooperate with the debtor. See, e.g., In re Palmer River Realty, Inc., 26 B.R. 138, 139-40 (Bankr.D.R.I.1983) (in calculating equity under § 362(d)(2)(A), second mortgage had no relevance to question of equity where second mortgagee expressed desire to support reorganization attempt; “second mortgage should not be considered in determining whether there is an equity cushion in the subject property.”).
*214The majority also cites as a reason for adopting its construction of § 362(d) the “mandatory” language of the section: “the court shall grant relief”. [Typescript at 20] Inherent in this reading of the statute is the interpretation of “equity” in the “classic” manner as was done by the majority. If, however, we were to interpret “equity” as we suggest above, the elements of subsection (d)(2)(A) might not be satisfied and the mandatory language would not then be triggered.
Moreover, the majority stops its reading of § 362(d) too soon. The section goes on to provide that the form of relief granted may be “such as by terminating, annulling, modifying, or conditioning such stay — ”. The fact that the relief requested of the bankruptcy court is termination does not preclude the court from granting other relief: for example, relief which will condition the continuation of the stay on concessions by the junior lienholders. A leading bankruptcy commentator agrees that this statutory language should be construed flexibly:
The flexibility of section 362 is underscored by the language of subsection (d) which provides that relief may be granted by “terminating, annulling, modifying, or conditioning” the stay. The effect is to permit the court to fashion the relief to the particular circumstances of the case. Thus modification or conditioning of the stay may be sufficient to protect the non debtor party by permitting the exercise of certain but not all of its rights.
2 Collier on Bankruptcy, § 362.07, at 362-64 (Lawrence P. King ed., 15th ed. 1994).
Finally, the majority comments that the junior lienholders here may be protected by demonstrating to the bankruptcy court that the property is necessary to an effective reorganization. I am unwilling, however, to rely on this element of subsection (d)(2)(B) for ensuring a remedy for a junior lienholder, such as Nantucket. There is the possibility for too much interplay between subsections (A) and (B) of § 362(d)(2). I can envision a scenario in which consideration of the requirements of subsections (A) and (B) are conflated into one exercise: the bankruptcy court finds a reorganization would not be possible because of the debtor’s lack of classically construed “equity” in the property and decides to grant relief from the stay; the bankruptcy court would not then go on, as the majority discusses here, to consider whether the property was necessary for an effective reorganization and subsection (B) would not be available, in what might otherwise be a successful reorganization, to protect the interests of the junior lienholders.
For all the above reasons, I conclude that the language of § 362(d)(2) does not require the majority’s “classic” interpretation of equity. I am persuaded instead that the interests of the Bankruptcy Code in protecting all lienholders should permit junior lienholders to concede their security in order to create equity for the debtor and to permit a reorganization to go forward where, lacking that concession, it would not.