Does the Full Repayment Plan Satisfy LaSalle
The next day, you quickly analyze the plan. You discover that while the plan does provide for full repayment, the plan places your client's secured claim and deficiency claim in the same class. At the same time, the plan creates a second separate class consisting of all other general unsecured creditors, which totals about $20,000. Like the claims of your client, the plan also proposes to pay these unsecured claims in full. You search the plan, but you do not see any provision providing for competing bids, an apparent LaSalle violation.
Before long, your phone rings. It is your client. He is demanding that you march into bankruptcy court to demand enforcement of your client's right to make a competitive bid as required by LaSalle. You're about to agree, but hesitate. Something does not seem quite right. But you cannot immediately identify the cause of your anxiety. After calming your client and promising to immediately return his call, you close your office door to take a closer look at the plan.
As you reread the plan, you again conclude that a LaSalle violation exists because it precludes competing bids. But before you return the call to your client, you reread LaSalle one more time. Almost immediately, you get that sinking feeling as you realize that you may have misread and misapplied LaSalle. It has occurred to you that LaSalle does not apply because the debtor's plan is a full repayment plan.
In LaSalle, the Supreme Court determined that equity owners of a debtor cannot maintain the exclusive right to acquire equity in the reorganized debtor. However, La Salle did not involve a proposed full repayment plan where the "fair and equitable" standard of Bankruptcy Code §1129(b)(2)(B)(ii) would not apply. In fact, you realize that LaSalle only applies in cases where the so-called "absolute priority rule" applies, and that this rule does not apply where full repayment is proposed. In response to LaSalle, you realize that the era of the "full repayment plan" has begun.
You prepare to deliver the bad news to your client, but it hits you that all may not be lost. You were so intent on finding LaSalle violations that you neglected to review the plan for other violations, many of which could provide more immediate relief to your client.
First, the plan classifies the client's secured claim and deficiency claim in the same class. A review of Bankruptcy Code §1111(b)(2) confirms that only the creditor can elect to have its bifurcated claim treated as one entirely secured claim. See, e.g., In re D & W Realty Corp., 165 B.R. 127 (S.D.N.Y. 1994); In re Coventry Commons Assoc., 155 B.R. 446 (E.D. Mich. 1993); In re 266 Washington Associates, 141 B.R. 275 (E.D.N.Y. 1992). You also notice that the debtor fails to provide any justification for separately classifying your client's deficiency claim from the other general unsecured claims. The terms "gerrymandering" and "bad faith" come to mind. See, e.g., In re Barakat, 99 F.3d 1520, 1522-1529 (9th Cir. 1996). Although you wonder if a creditor can vote to reject a full payment plan in good faith, you recall the veto power of Bankruptcy Code §1129(a)(10) and the Supreme Court's decision in United Savings Assoc. of Texas v. Timbers of Inwood Forest Assoc. Ltd., 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). Your litigation strategy begins to take shape.
Armed with a new strategy, you finally return your client's call to deliver both the "good news" and the "bad news." Fearing the worst, the client requests the bad news first. You explain that although his initial impression of the LaSalle decision was correct, the case simply does not apply to the debtor's plan because it proposes to make full payment to all creditors. And even if LaSalle did apply, the bidding process it contemplates would not occur until a plan confirmation hearing, which would most likely be months away.
Then you deliver the good news—a two-pronged attack that, if successful, will enable your client to acquire ownership of the office building long before any confirmation hearing is held. First, you intend to file a Bankruptcy Rule 3013 motion, which allows you to immediately challenge the validity of the plan's classification scheme. At the same time, you propose filing a motion for stay relief under Bankruptcy Code §362(d)(2). The combination of the two motions will force the debtor to correct the plan's classification scheme. First, the debtor will be forced to separately classify your client's secured and deficiency claims, and second, the debtor will be forced to place the deficiency claim in the same class as the other general unsecured claims. You are convinced that once the plan's classification scheme is corrected, you will be able to easily demonstrate that reorganization is not possible at any time without the consent of your client. You realize that unless your client votes for the plan, the debtor will be unable to obtain an impaired consenting class. See "Even an Act of Congress Can't Stop the Fight Over Artificial Impairment," ABI Journal, November 1998. The client is pleased to hear that with a little luck, he can begin foreclosure proceedings in 15-20 days.
You proudly file your motions later that afternoon. But immediately after the filing, you get another uneasy feeling that you dismiss as neurotic until days later when you review the debtor's opposition to your motions. You realize that you made the technical mistake of not requesting that the office building be valued in support of your motions. The debtor contends that unless and until the office building is valued and a deficiency claim judicially determined, the court's consideration of the stay relief and classification motions is premature.
Finally, as you anticipated, the debtor also contends that your client's vote rejecting the plan should be disqualified as being cast in bad faith. You realize that the era of the full repayment plan may spawn a mass of new litigation intended to disqualify votes that reject full repayment plans. LaSalle may have solved one problem, but it may have created others. Consider the following practice pointers:
- LaSalle does not apply to chapter 11 plans proposing full repayment to all creditors, including those plans with extended pay-out periods. In this case, the consequences of LaSalle may result in immediate attention focusing on feasibility issues and the related issue of pay-out periods.
- A creditor opposing a full repayment plan should be prepared to defend charges of bad faith under §1126(e).
- When filing a motion for relief from the automatic stay based on the inability to confirm a plan because of a controlling deficiency claim, make sure there is some binding acknowledgment as to the value of the underlying collateral.
- Pursuant to Bankruptcy Rule 3013, a plan's classification scheme can be challenged prior to a confirmation hearing. See In re 183 Lorraine Street Assoc., 147 B.R. 827 (E.D.N.Y. 1992); In re Constitution Plaza Assoc. L.P., 161 B.R. 563 (Bankr. D. Ct. 1993).
- Controlling plan confirmation issues can be argued on a stay-relief motion. For example, issues regarding the debtor's inability to comply with §1129(a)(10) may be appropriately raised in that context. See, e.g., In re Deluca, 194 B.R. 797 (Bankr. E.D. Va. 1996). A plan's failure to comply with LaSalle may now be used as a basis for stay relief.