Memorandum of Decision Re: Impairment

DO NOT PUBLISH This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re U.S. VACATION RESORTS,                                               No. 95-10646        Debtor. ___________________________/
Amended Sua Sponte Partial Reconsideration
     While the court rarely second guesses itself, it realized just after the confirmation hearing in this case that the parties failed to address the proper issues. Upon reflection, the court sees that it cannot confirm the plan in its present form. There are three instances when a Chapter 11 plan may be confirmed over an objection of a group of creditors. The first is when those creditors constitute a minority within a class. When a majority of class members have voted in favor of a plan, the plan may be confirmed over the objection of the minority pursuant to sections 1129(a)(7) and (8) if each creditor would fare no better in Chapter 7.      The second instance when a plan may be confirmed over an objection of a group of creditors is when the "cramdown" provisions of the Bankruptcy Code are employed. Section 1129(b)(2)(B) of the Code provides that a plan may be confirmed over the objections of an unsecured class if each claim holder in the class will be paid in full on the effective date of the plan, or no junior interest will receive anything.      The third instance when a plan may be confirmed over objection is when the objecting party is left with its legal and equitable rights unaltered. In such a case, section 1124(1) provides that the claimant is unimpaired and section 1126(f) provides that such creditors are conclusively presumed to have accepted the plan.      In this case, the principal creditors are persons who purchased memberships in a campground resort operated by the debtor. Since the debtor's only method of reorganizing is to sell the resort, the memberships are treated under the plan as executory contracts and rejected. Their resulting damage claims are to be paid in full.      On June 22, 1995, the debtor presented the court with an application for an order dispensing with ballots on the grounds that no creditors were impaired under the plan. Based on that representation, the court granted the application. It is now clear to the court that the contents of the application were not true. The members are in fact impaired, since their legal and equitable rights are not unaffected by the plan. What the debtor meant was that the members' objections were subject to "cramdown" because their claims were to be paid in full. However, there is a very big difference between an unimpaired class and a cramdown class.      If a class is impaired under the plan, then section 1129(a)(10) of the Code requires that at least one impaired class accept the plan, without counting insiders. Since the member class is impaired, and no impaired class was shown to have accepted the plan, the plan cannot be confirmed.      In addition, the court has considerable discretion in deciding whether or not to confirm a plan by cramdown but no discretion at all in deciding whether to confirm a plan over the objection of an unimpaired class. By proceeding as if the member class was unimpaired, the debtor removed from consideration the equitable arguments put forth by the members.      Both the debtor and the members have taken fundamentally erroneous positions in this case. The debtor has argued that the members are unimpaired when they clearly are impaired, and have the right to vote on the plan. The members have argued that a plan is not confirmable if it substitutes a claim for damages for their membership rights when such a plan is clearly confirmable by cramdown. The case will come out right only when all parties and the court have focused on the true issues.      The court accordingly changes its mind and will not confirm the plan without further proceedings in accordance with this decision. The debtor is cautioned that before the court will consider a cramming down a plan over the members' objections the court will need to know with a fair degree of certainty exactly what the members' claims are. It should therefore begin the claims objection process immediately. Time for response to objections may be shorted as appropriate. The plan will also have to be amended to deal with the 1129(a)(10) problem, if that is possible.      The motion for appointment of a trustee will be denied. The moving party failed to produce any convincing evidence of improper conduct by the debtor, or any benefit to the estate if a trustee were put into place.      While the court has issued an order permitting the sale of the real property free and clear of the members' interests, it is not likely to approve an actual sale absent a confirmed plan. It may accordingly be advisable for the debtor to enter into a dialogue with the members if it needs to sell the resort.      The court attributes the feeble response of the creditors' committee to the plan to lack of time. Since further proceedings are necessary, the court expects the committee's counsel to take a much more active role in counseling those parties unfamiliar with bankruptcy law and attempting to reach a consensus resolution of this case.      Counsel for the debtor shall submit a form of order denying the motion for a trustee. Counsel for the creditors' committee shall submit a form of order denying confirmation without prejudice.
Dated: August 8, 1995                                                                                              _______________________                                                                                                                                              Alan Jaroslovsky                                                                                                                                              U.S. Bankruptcy