FOR THE NORTHERN DISTRICT OF CALIFORNIA
FOUNTAINGROVE GROWTH No. 91-12929
Memorandum of Decision
The debtor owns a parcel of valuable unimproved property in Santa Rosa, California. It
filed its Chapter 11 petition in late 1991, when it was unable to meet its obligations to creditors
secured by the property. Those creditors are Lomas Financial Corporation, with a claim in
excess of $1 million secured by a first deed of trust; D & M Investment Partners, with a claim
of about $117,000.00 secured by a second deed of trust; and the Walter E. Terry Trust, with a
claim of about $103,000.00 secured by a third deed of trust.
The debtor has proposed a liquidating plan of reorganization. Under the plan, the debtor
will have until September 30, 1993, to find a buyer for the property at a price sufficient to
satisfy the creditors. If a buyer is found, the debtor will have a few more months to close the
escrow. If no buyer is found, the secured creditors may foreclose.
After some negotiation, the debtor obtained the consent to the plan of all creditors except
D & M. That creditor argues that the plan is not proposed in good faith, that it violates the
automatic stay, and that it violates the "absolute priority rule." For the reasons discussed below,
the court finds that the plan is confirmable as a matter of law and equity, and that the only bad
faith is in D & M's objection.
II. Absolute Priority Rule
At the first hearing on confirmation, D & M argued that the "absolute priority rule" gives
it a veto power over confirmation because the plan "allows distributions to unsecured creditors
while claims of bona fide secured creditors remain unpaid." At the second hearing, it retreated
a little and argued that a plan cannot be "fair and equitable" as to a secured creditor if unsecured
creditors are paid anything before secured creditors are paid in full. Neither position has any
The absolute priority rule provides that a plan cannot be confirmed over a dissenting class
of unsecured claims or interests if a junior class gets anything. It is codified in section
1129(b)(2)(B)(ii) of the Code as to unsecured claims and section 1129(b)(2)(C)(ii) as to
interests (i.e. shareholders, partners, etc.). The rights of secured creditors are set forth in
section 1129(b)(2)(A), which contains no such language
. The Code is specifically written so
that secured creditors, unlike unsecured creditors and interest holders, do not have a veto power.
As long as a secured creditor retains its lien and will be paid the full amount of its claim with
interest, it has no veto power just because unsecured creditors will be paid before it or along
The only cases cited by D & M in support of its position are two pre-Code Supreme Court
cases, Case v. Los Angeles Lumber Prod. Co.
, 308 U.S. 106 (1939) and Consolidated Rock
Prod. Co. v. Du Bois
, 312 U.S. 510 (1941), neither of which dealt with the rights of secured
creditors. The law review article cited by D & M, Klee, "Cram Down II," 64 Am.Bankr.L.J.
229 (1990), deals only with developments in the law as they relate to unsecured creditors and
. For the same author's discussion of the rights of secured creditors, see Klee,
"All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code," 53
Am.Bankr.L.J. 133, 150-156 (1979).
III. Violation of the Automatic Stay
D & M argues that the plan "violates the automatic stay because it allows junior unsecured
creditors to participate although the present value of distributions to the D & M Investments is
not equal to the amount of their claim." The court has not the slightest idea what this means.
The automatic stay is a temporary shield for the debtor, stopping creditor action while the
debtor reorganizes or is liquidated. The court has never seen it used by a creditor to thwart the
debtor's attempt to reorganize, nor does D & M explain how it is even relevant. The plan does
meet the requirements of section 1129(b)(2)(A)(i)(II), in that the interest rate of 10% is more
than enough, under current market conditions, to make deferred payment to it the equivalent
of cash on confirmation.
IV. Good Faith
D & M argues that the plan is not proposed in good faith because it calls for liquidation.
There is no basis for this argument. Liquidating plans are specifically authorized by section
1123(a)(5)(D) of the Code. All of the other creditors, including those secured by liens both
senior and junior to that of D & M, have agreed to the plan. Moreover, the court doubts the
good faith of D & M, since the record does not reflect much effort on its part to enforce its
security interest and the court doubts that it is in a position to cure the defaults on such a large
obligation secured by the senior lien.
V. Fair and Equitable
The plan is fair and equitable as to D & M, no less than to all the other creditors which have
approved it. As an accommodation to D & M, the senior lienholder has even agreed that
interest and other charges due to it will not accrue during the five months the debtor is given
under the plan to market the property, so that any delay will not increase the debt senior to D
& M. The interest rate to be paid to D & M upon sale is more than enough to be the equivalent
of cash today, even considering the risk factors associated with the plan. If a sale is
consummated, no payments will be made to anyone unless there are enough proceeds to satisfy
D & M's claim in full.
The court finds that the plan proposed by the debtor meets all the requirements of
confirmation set forth in section 1129 of the Code. As to the sole dissenting creditor, D & M,
the plan meets the requirements of section 1129(b)(2)(A) for confirmation over its objection.
Accordingly the plan, as amended by the stipulation of March 18, 1993, and revised on March
24, 1993, will be confirmed.
Counsel for the debtor shall submit an appropriate form of order. This memorandum
constitutes the court's findings and conclusions pursuant to FRCP 52(a) and FRBP 7052.
Dated: March 24, 1993 _______________________