Court Opinion

ID: 3172453
Source: CourtListenerOpinion
Date Created: 2016-01-27 16:00:59.582878+00
Date Added: 2024-06-11T12:47:17.268596
License: Public Domain

RECOMMENDED FOR FULL-TEXT PUBLICATION
                            Pursuant to Sixth Circuit I.O.P. 32.1(b)
                                   File Name: 16a0018p.06

                  UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT
                                 _________________

 In re: VILLAGE GREEN I, GP,                          ┐
                                     Debtor.          │
 __________________________________________           │
                                                      │
 VILLAGE GREEN I, GP,
                                                      │
                                   Appellant,          >      No. 14-6521
                                                      │
       v.                                             │
                                                      │
 FEDERAL NATIONAL MORTGAGE ASSOCIATION, dba           │
 Fannie Mae,                                          │
                                  Appellee.           │
                                                      ┘
                    Appeal from the United States District Court for the
                         Western District of Tennessee at Memphis.
                 Nos. 2:14-cv-02351—S. Thomas Anderson, District Judge.

                                Argued: October 15, 2015

                           Decided and Filed: January 27, 2016

                    Before: GUY, MOORE, and KETHLEDGE, Circuit Judges.

                                   _________________

                                       COUNSEL

ARGUED: John L. Ryder, HARRIS SHELTON HANOVER WALSH, P.L.L.C., Memphis,
Tennessee, for Appellant. Daniel H. Slate, BUCHALTER NEMER, Los Angeles, California, for
Appellee. ON BRIEF: John L. Ryder, Michael F. Rafferty, HARRIS SHELTON HANOVER
WALSH, P.L.L.C., Memphis, Tennessee, for Appellant. Daniel H. Slate, BUCHALTER
NEMER, Los Angeles, California, Mark Warren Bailey, Jr., HUSCH BLACKWELL, LLP,
Memphis, Tennessee, for Appellee.

                                             1
No. 14-6521            Village Green I, GP v. Fed. Nat’l Mortgage Assoc.         Page 2

                                       _________________

                                             OPINION

                                       _________________

       KETHLEDGE, Circuit Judge. In order for a bankruptcy court to approve a plan of
reorganization under Chapter 11 of the Bankruptcy Code, the debtor must propose the plan in
good faith and at least one class of creditors whose interests are impaired by the plan must vote
to accept it. Here, the only creditors who voted in favor of Village Green’s plan were its own
former lawyer and accountant, whom Village Green owed less than $2,400 in total, and whose
interests were impaired only because Village Green proposed to pay them (in full) over 60 days
rather than up front. That arrangement, the district court found, was merely an artifice to
circumvent the Code’s requirement that an impaired class of creditors approve the plan. The
district court therefore reversed the bankruptcy court’s confirmation of the plan, holding that
Village Green had not proposed the plan in good faith. We agree with the district court and
affirm its judgment.

       Village Green owes Fannie Mae $8.6 million pursuant to loan agreements executed when
Village Green purchased an apartment building in Memphis. Under those agreements, Village
Green’s mortgage payment is about $55,000 per month. Village Green missed its payment in
December 2009; four months later it filed for bankruptcy under Chapter 11 of the Bankruptcy
Code. The bankruptcy court promptly stayed any creditor action against Village Green, see
11 U.S.C. § 362(a), which prevented Fannie Mae from foreclosing on the apartment building.
The building itself is worth $5.4 million and is Village Green’s only asset in the bankruptcy.
Apart from Fannie Mae, Village Green’s only creditors are its former lawyer and accountant.
(We call their claims the “minor claims.”)

       Village Green’s proposed plan of reorganization has several features relevant here. First,
Village Green would pay down Fannie Mae’s claim relatively slowly, leaving a balance of
$6.6 million after 10 years. (In contrast, if Fannie Mae foreclosed on the property, it would
reduce its balance to $3.2 million right away.) The plan would also strip Fannie Mae of several
protections in the parties’ loan agreements, including the requirements that Village Green
No. 14-6521          Village Green I, GP v. Fed. Nat’l Mortgage Assoc.               Page 3

properly maintain the building and obtain adequate insurance for it. Finally, though Village
Green would pay the minor claims in full under the plan, it would do so in two payments (of
roughly $1,200 each) over 60 days.

       That 60-day delay, the bankruptcy court held, meant that the minor claims were
“impaired” under the plan. And that impairment, in turn, meant that acceptance of the plan by
the minor claimants (i.e., Village Green’s former lawyer and accountant) would satisfy the
requirement that “at least one class of claims that is impaired under the plan has accepted the
plan[.]” 11 U.S.C. § 1129(a)(10). The bankruptcy court thus confirmed the plan.

       Fannie Mae appealed to the district court, which vacated the confirmation order and
remanded for a determination whether, among other things, Village Green had proposed the plan
in good faith. On remand the bankruptcy court found that Village Green had done so, and hence
the court confirmed the plan again. But the district court again vacated and remanded, which in
turn caused the bankruptcy court to dismiss the case and lift the automatic stay. This appeal
followed.

       We review the bankruptcy court’s decisions directly, reviewing its factual findings for
clear error and its legal conclusions de novo. In re Mitan, 573 F.3d 237, 241 (6th Cir. 2009).

       Two of the bankruptcy court’s determinations are at issue here. The first is that, under
Village Green’s plan, the minor claims were “impaired” for purposes of § 1129(a)(10). Section
1124(1) provides, in relevant part, that “a class of claims . . . is impaired under a plan unless” the
plan “leaves unaltered the legal, equitable, and contractual rights to which such claim or interest
entitles the holder of such claim or interest[.]” Here, the plan undisputedly would alter the minor
claimants’ rights, because these claimants are legally entitled to payment immediately rather than
in two installments over 60 days. That this impairment seems contrived to create a class to vote
in favor of the plan is immaterial. Section 1124(1) by its terms asks only whether a plan would
alter a claimant’s interests, not whether the debtor had bad motives in seeking to alter them.
Accord In re Vill. at Camp Bowie, 710 F.3d 239, 245-46 (5th Cir. 2013); but see In re Windsor
on the River Assocs., Ltd., 7 F.3d 127, 130-32 (8th Cir. 1993). The debtor’s motives instead are
expressly the business of § 1129(a)(3), which requires that “the plan has been proposed in good
No. 14-6521          Village Green I, GP v. Fed. Nat’l Mortgage Assoc.            Page 4

faith and not by any means forbidden by law.” And given that § 1129(a)(3) expressly requires an
inquiry into the debtor’s motives in proposing the plan, there is no reason to graft that inquiry
onto the plain terms of § 1124(1).

       So we turn to the question whether Village Green proposed its plan in good faith, which
is the second of the determinations at issue here. The bankruptcy court found that the plan was
proposed in good faith, reasoning that “Village Green was economically justified in rationing
every dollar” under the plan.        But that rationale is undermined by Village Green’s own
projections in support of the plan’s feasibility, see § 1129(a)(11), which were that Village Green
would earn roughly $857,000 in net operating income during its first year after the plan’s
confirmation. That averages out to net income of $71,400 per month, which renders dubious at
best Village Green’s assertion that it could not safely pay off the minor claims (total value: less
than $2,400) up front rather than over 60 days. On these points—the projections, and the
assertion—Village Green cannot have it both ways. Moreover, that the minor claimants (Village
Green’s former lawyer and accountant) are closely allied with Village Green only compounds
the appearance that impairment of their claims had more to do with circumventing the purposes
of § 1129(a)(10) than with rationing dollars. And the “rationing” rationale falls away altogether
when one considers that, during litigation regarding the plan’s confirmation, Fannie Mae itself
sought to pay the minor claimants up front—by tendering each of them checks for full payment
of their claims—and yet the minor claimants refused to accept that payment. On this record, the
minor claims’ impairment was transparently an artifice to circumvent the purposes of
§ 1129(a)(10). We therefore agree with the district court that the bankruptcy court clearly erred
when it found that Village Green proposed its plan in good faith.

       The district court’s December 1, 2014 order and judgment are affirmed.