Memorandum of Decision Re: Bad Faith Filing
I. Bad Faith
Underlying all of the issues in this case is the question as to whether it is proper for a debtor with a single real property asset to attempt reorganization. Many courts have hostility to such Chapter 11 filings, usually on the ground that they involve only sophisticated parties who knew the risks when they became involved. Such courts tend to find that the principal secured creditor has a veto power over confirmation, making a cramdown attempt over its objection an exercise in futility. See In re Outlook/Century Ltd., 127 B.R. 650 (Bkrtcy.N.D.Cal.1991). In essence, Connecticut General argues that it is bad faith for the debtor to even attempt reorganization. However, there are probably as many courts who view single asset real property reorganizations as proper and appropriate under the Bankruptcy Code. See, e.g., In re Triple R Holdings, L.P.. 134 B.R. 382 (Bkrtcy.N.D.Cal.1991), rev'd at 145 B.R. 57 (N.D.Cal.1992). In fact, in the early days of the Code there were many distinguished judges who viewed single asset real estate Chapter 11 cases as valid even when the debtor was a brand-new fictitious entity created and vested with the property on the eve of foreclosure. See Judge George's dissent in In re Thirtieth Place, 30 B.R. 503 (9th Cir.BAP 1983) and Judge Rainville's opinion in In re the Beach Club, 22 B.R. 597 (Bkrtcy. N.D.Cal.1982). While not always articulated, the reason for favoring such cases is simple: every confirmed plan is one less property for sale. Forcing a foreclosure sale increases the already glutted supply of real estate properties on the market and drives all real estate values down. Thus, it is more than just a simple matter of relations between sophisticated financial investors. There is absolutely no evidence of bad faith in this case. While the debtor may not be able to obtain confirmation of a plan, it is not bad faith for it to try.
Section 1129(a)(10) of the Code requires that one impaired class of creditors must accept the plan. The debtor points to River Bank America, a former general partner of the debtor, which has a junior deed of trust on the property and has accepted treatment worse than that proposed for the unsecured portion of Connecticut General's claim. Connecticut General argues alternatively that River Bank America is an insider or that its claim must be placed in the same class as Connecticut General's unsecured claim. A separate class for River Bank America seems appropriate. It is a least nominally a secured creditor which is being turned into an unsecured creditor by consent, and not litigation; secured creditors are often treated separately. Its treatment under the plan is significantly different than the treatment of Connecticut General's unsecured claim. Connecticut General itself concedes that River Bank America's interests are substantially different from those of other creditors (CIGNA brief, p.13, lines 11-13). Since there are valid reasons for treating the River Bank America claim differently, the court does not find that the classification is artificial and made solely for voting purposes. Accordingly, the separate classification is proper. The most difficult legal issue is whether River Bank America is to be considered an insider. If it is, then its vote does not count in determining if an impaired class has accepted the plan. River Bank America does not now fall within the definition of an insider under the Code. However, that definition is not exclusive. There is no doubt that if the court found that River Bank America still exercised control over the debtor or otherwise had advantages denied to other creditors it could find that it is an insider notwithstanding that it was no longer a general partner. The court notes that cases defining "insider" in relation to preference actions are not particularly helpful in deciding who is an insider for plan confirmation purposes because the equities are different. In preference actions, the equities favor a fair distribution to all creditors so that the courts tend to be liberal in determining who is an insider if that person has been given preferential treatment. The equities favor confirmation of a plan which treats all creditors fairly, so the definition of insider should not be liberally construed in this context. Otherwise, the ends of equity would be thwarted by a technicality. Under all of the circumstances of the case, including the lack of present control and the significant amount of its claim ($3.6 million), River Bank America should not be considered an insider. The fact that one of its motives for resigning as a general partner was to make it a non-insider for voting purposes does not turn it back into an insider where, as here, the court finds that its primary motive is to obtain payment of its claim and there is no indication of secret understandings by which it maintains control.
III. Feasibility and Fairness
Having determined that no legal impediment stands in the way of confirmation, the court nonetheless rejects the plan as being entirely unfair to Connecticut General. Its payments on its secured debt are not guaranteed. It is to receive no payments for one year after confirmation. There is no obligation on the part of the debtor's equity interests to infuse new capital. The interest rate to be paid is unfairly low. In short, the plan is an attempt to have Connecticut General bear the risks of reorganization. Accordingly, confirmation will be denied. The debtor indicated a desire that the court dictate new terms if it found the proposed terms to be unfair to Connecticut General. This the court is not willing to do, both because its role is adjudicator, not dictator, and because it has no way of knowing if what it would perceive as fair is feasible. As some guidance, however, it appears to the court that a proper rate of interest for Connecticut General is in the range of 8 1/2 to 10 percent, depending on the certainty of its payment stream. The court is willing to give the plan proponents an opportunity to come up with a plan which treats Connecticut General fairly, but not at Connecticut General's expense. All stays and injunctions shall remain in effect until February 5, 1993, at 4:00 P.M. The proponents may obtain an extension of the stays until the same time on March 5, 1993, provided that they pay Connecticut General the sum of $108,750.00 by the February 5 deadline as adequate protection for a one-month delay in enforcing its rights. Time for notice of a hearing on an amended plan is shortened to 15 days, with no further disclosure statement required. Counsel for Connecticut General shall submit an appropriate order forthwith which counsel for the debtor has approved as conforming to this decision.
Dated: January 26, 1993 _______________________ Alan Jaroslovsky U.S. Bankruptcy