FILED FEB 06 2015 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. AK-14-1122-JuKiKu ) 6 MARLOW MANOR DOWNTOWN, LLC, ) Bk. No. 12-00421 ) 7 Debtor. ) ______________________________) 8 ) MARLOW MANOR DOWNTOWN, LLC, ) 9 ) Appellant, ) 10 ) v. ) M E M O R A N D U M* 11 ) WELLS FARGO BANK, AS SERVICING) 12 AGENT FOR ALASKA HOUSING ) FINANCE CORPORATION; CAG ) 13 DEVELOPMENT, LLC; ENVISION ) INVESTORS, LLC; RISING STAR ) 14 INVESTMENTS, LLC, ) ) 15 Appellees. ) ______________________________) 16 Argued and Submitted on January 22, 2015 17 at Pasadena, California 18 Filed - February 6, 2015 19 Appeal from the United States Bankruptcy Court for the District of Alaska 20 Honorable Herbert A. Ross, Bankruptcy Judge, Presiding 21 _________________________ 22 Appearances: David Hollister Bundy argued for appellant Marlow Manor Downtown, LLC; Gary C. Sleeper of Jermain 23 Dunnagan & Owens PC argued for appellee Wells Fargo Bank, as Servicing Agent for Alaska Housing 24 Finance Corporation. _________________________ 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8024-1.
-1- 1 Before: JURY, KIRSCHER, and KURTZ, Bankruptcy Judges. 2 In the third amended plan (TAP) filed by chapter 111 debtor 3 Marlow Manor Downtown, LLC, debtor classified the two unsecured 4 deficiency claims of its lender, the Alaska Housing Financing 5 Corporation (AHFC), in class 3 and 4 as secured and unimpaired 6 and placed them in different classes from the general unsecured 7 creditors. Prior to plan confirmation, Wells Fargo Bank, as 8 servicing agent for AHFC,2 filed a motion under Rule 30133 9 (Rule 3013 Motion) seeking an order that debtor’s classification 10 of AHFC’s deficiency claims was improper on the grounds that 11 (1) the deficiency claims were unsecured and impaired and 12 substantially similar to the claims of the general unsecured 13 creditor class and (2) debtor failed to provide a business 14 justification or economic reason for the separate 15 classification. Agreeing with AHFC, the bankruptcy court 16 entered an order granting the motion. Debtor appeals from that 17 order. Finding no error, we AFFIRM. 18 19 1 Unless otherwise indicated, all chapter and section 20 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and “Rule” references are to the Federal Rules of Bankruptcy 21 Procedure. 22 2 Although Wells Fargo Bank, as servicer for AHFC, filed the 23 Rule 3013 Motion as well as other motions throughout this case, for convenience we refer to AHFC as the movant. 24 3 Rule 3013 entitled “Classification of Claims and 25 Interests” provides in relevant part: 26 For the purposes of the plan and its acceptance, the 27 court may, on motion after hearing on notice as the court may direct, determine classes of creditors and 28 equity security holders pursuant to §§ 1122 . . . .
-2- 1 I. FACTS 2 A. Prepetition Events4 3 Debtor is an Alaska limited liability company formed in 4 2002. Debtor’s manager is Marc A. Marlow (Marlow) and its 5 membership interests are owned by the Marlow Family Perpetual 6 Trust (90%) and Marlow Manor Downtown TC, LLC, an Alaska limited 7 liability company (10%). 8 Debtor owns a portion of the McKinley Tower, a 14-story 9 high rise located in downtown Anchorage which was built in 1952 10 for residential use. At one point, the building was converted 11 to office space and leased to the State of Alaska. A subsequent 12 owner began converting the building into a hotel before 13 defaulting and the lender foreclosed. Another owner all but 14 abandoned the building before selling it to Marlow in 1998. 15 Marlow, a developer, planned on restoring the building to 16 residential use. To that end, Marlow had the property legally 17 subdivided into a two unit condominium project. Unit A, owned 18 by EGAE, LLC5 and an unidentified investor, was reconstructed as 19 100 studio and one bedroom apartments and was financed through 20 HUD’s 221 D 4 Urban Revitalization Program. Unit B, owned by 21 debtor, was to be converted to a fifty-two unit senior assisted 22 living home and was financed by a $5.4 million construction loan 23 from Northrim Bank (Northrim). 24 25 4 The underlying facts are undisputed. The facts were 26 mostly taken from the second amended disclosure statement and the bankruptcy court’s memorandum decisions entered October 9, 2013, 27 and March 24, 2014. 28 5 EGAE, LLC is owned by the Marlow Family Perpetual Trust.
-3- 1 In 2007, AHFC refinanced the majority of Northrim’s loan 2 through two long term loans in the total amount of $5.450 3 million. The first loan for $4.125 million was evidenced by a 4 promissory note (First Note) and secured by a first deed of 5 trust against Unit B and a security interest in the rents, 6 equipment, inventory, security deposits, and other personal 7 property. The original terms called for interest at 7.375% per 8 year in equal monthly payments of $28,490 over a 30-year term 9 (or, to February 1, 2037). The second loan for $1.325 million 10 was evidenced by a promissory note (Second Note) and was secured 11 by a second deed of trust against Unit B and a security interest 12 in the same personal property as the First Note. The Second 13 Note bore interest at 1.5% per year in annual installments of 14 40% of “available cash flow,” as defined in the note, and due 15 and payable by February 1, 2037. Marlow guaranteed both loans. 16 After the refinancing, Northrim was left with an unsecured loan 17 balance of $575,000. 18 Construction of Unit B into senior assisted living housing 19 began in 2005. Marlow’s business plan depended on most of the 20 residents paying for their rent, meals and care through the 21 Medicaid program for lower income and disabled persons, using 22 federal and state funds administered by the State of Alaska. 23 Marlow thought he could collect $127 per resident per day which 24 was the reimbursement rate from Medicaid at the time. After 25 food and care costs, Marlow expected that the excess income 26 would cover operating expenses and the debt service on the First 27 Note. 28 In May of 2007, the Alaska Department of Health and Social
-4- 1 Services reduced the Medicaid reimbursement rate to $99.37 per 2 day, a $28 reduction from the rate on which the project had been 3 budgeted. With an anticipated thirty residents (out of fifty 4 units) receiving Medicaid benefits, this translated to a 5 reduction of almost $27,000 in monthly income, an amount almost 6 equal to the required debt service. Due to the decrease in 7 benefits, it was no longer practical to use the project for 8 assisted living. 9 Marlow decided to convert the property from assisted living 10 units to residential rentals offered on the open market. 11 Although the market for apartment housing without kitchens would 12 be limited, Marlow thought that the rent would cover the 13 operating costs with an appreciable amount remaining for debt 14 service and a reserve for insurance and capital replacements. 15 The assisted living residents were relocated, and Marlow began 16 converting the property to market rate studio apartments. 17 Conversion costs were approximately $258,000 and it took 18 almost two years to stabilize the rent. The only source of 19 funds to convert Unit B to market rentals was the income from 20 the property as units were rented, which meant that for a number 21 of months debtor made no loan payments to AHFC. 22 In April 2009, AHFC agreed to a loan modification. Under 23 the First Note, the payment terms were modified to carve out a 24 $1 million principal portion and provide payment on two tracks. 25 On the approximately $3.125 million portion, payments were 26 reduced from $28,490 per month to $21,627 per month at 7.375% 27 annual interest, still in equal monthly payments, amortized to 28 fully pay off by February 1, 2037. On the $1 million carve out,
-5- 1 interest remained at 7.375% annually, but payments were made 2 based on 30% of “available cash flow” as redefined in the 3 modification agreement. Any unpaid balance was due on 4 February 1, 2037. The modification did not make the $1 million 5 carve-out junior to the $3.125 million part of the first loan, 6 but merely described two different criteria for payment. The 7 terms of the $1.325 million Second Note were modified to require 8 an annual payment of 70% of “available cash flow,” as redefined 9 in the modification agreement. The interest remained at 1.5% 10 and a balloon payment was due on February 1, 2037. 11 In 2011 AHFC filed a state court lawsuit to impose a 12 receivership over the property. Debtor agreed to the 13 appointment of a receiver. The receiver began serving in April 14 2012 and has been collecting the rents and disbursing funds to 15 pay the operating expenses since then. 16 Early in 2012, AHFC declared debtor in default on the First 17 Note for lack of payments. AHFC commenced a non-judicial 18 foreclosure against the property after workout discussions 19 between the parties did not succeed. 20 B. Bankruptcy Events 21 Debtor filed its chapter 11 single asset real estate case 22 on July 9, 2012. In Schedule D, debtor listed AHFC’s Second 23 Note as fully unsecured and the First Note as partially secured 24 by Unit B. In Schedule F, debtor listed unsecured claims in the 25 amount of $1.5 million consisting of trade and other debt, 26 including the loan balance due Northrim in the amount of 27 $575,000 and management fees owed to NANA Management Services 28 (NANA) in the amount of $500,000.
-6- 1 Soon after the filing, AHFC moved for relief from stay. At 2 the preliminary hearing on its motion, AHFC agreed to waive the 3 ninety-day time limit for debtor to file a plan under 4 § 362(d)(3)(A). The bankruptcy court extended the time for 5 debtor to file its plan and disclosure statement. On 6 October 18, 2012, debtor filed its plan of reorganization. 7 Meanwhile, the parties attended a mediation which resulted 8 in a number of agreements. The parties agreed, among other 9 things, that the receiver would remain in place and continue to 10 disburse monies monthly to AHFC as set out in the receivership 11 order and in the cash collateral order entered by the bankruptcy 12 court. The parties also agreed to continue the final hearing on 13 AHFC’s motion for relief from stay and the confirmation hearing, 14 both scheduled for November 7, 2012. 15 Debtor filed a first amended plan on March 30, 2013. The 16 scheduled confirmation hearing for that plan was vacated to 17 allow debtor to file a second amended plan (SAP). 18 1. The SAP 19 Debtor filed its SAP on July 7, 2013. In that plan, debtor 20 placed AHFC’s various claims into classes 2, 3, and 4: 21 Class 2 - AHFC’s secured First Note claim. As of the 22 petition date, AHFC’s First Note claim had an outstanding 23 balance of $4,391.545.20. Debtor assigned a present value of 24 $2.7 million to the secured portion of AHFC’s First Note claim 25 and gave AHFC the option to elect to have its class 2 claim 26 treated as fully secured under § 1111(b). This claim was 27 impaired. 28
-7- 1 Class 3 - AHFC’s unsecured deficiency First Note claim. If 2 AHFC did not elect to have its class 2 claim treated as fully 3 secured under § 1111(b), debtor proposed making $10,000 4 quarterly payments on the unsecured deficiency First Note claim 5 beginning October 1, 2018, and continuing for five years until a 6 total of $200,000 was paid. The SAP stated that debtor would 7 not be required to make further payments on this claim. This 8 class was impaired. 9 Class 4 - AHFC’s unsecured deficiency Second Note claim. 10 As of the petition date, the outstanding balance owed on the 11 Second Note was $1.325 million. Debtor proposed to pay this 12 unsecured deficiency claim in the amount of $250,000, without 13 interest, in quarterly installments of $10,000 beginning 14 October 1, 2023. This claim was impaired. 15 Class 6 consisted of general unsecured claims. The allowed 16 class 6 claims would share pro rata a $20,000 distribution on 17 the effective date of the plan and thereafter quarterly payments 18 of $10,000 commencing October 1, 2013, for a period of five 19 years, with the final payment made on July 1, 2018. 20 AHFC voted to reject the plan as did class 6 unsecured 21 creditors, Northrim and NANA, who controlled the class vote. As 22 a result, debtor did not have an impaired class that accepted 23 the plan. After the voting, a business associate of Marlow’s 24 purchased Northrim’s claim. Debtor subsequently filed a motion 25 under Rule 3018 seeking to change Northrim’s vote on the SAP. 26 At the same time, AHFC filed an objection to confirmation 27 of the SAP arguing, among other things, that debtor’s placement 28 of AHFC’s class 4 unsecured deficiency Second Note claim in a
-8- 1 different class from the class 6 unsecured claims was improper. 2 AHFC asserted that its Second Note unsecured claim was 3 substantially similar to the general unsecured claims and that 4 debtor had no business or economic justification for the 5 separate classification. 6 AHFC also filed a Rule 3013 Motion, seeking an order that 7 the classification of AHFC’s unsecured deficiency Second Note 8 claim in class 4 was improper on the same basis. Debtor opposed 9 the motion, arguing that AHFC’s unsecured debt in connection 10 with the Second Note was not substantially similar to the 11 general unsecured claims on the basis that the payment terms 12 under the Second Note distinguished the debt from the debt owed 13 to the general unsecured creditor class. According to debtor, 14 the Second Note, as modified in 2009, did not require any debt 15 service unless the property had sufficient cash flow. If there 16 was not adequate cash flow, then no payment was required and the 17 deferred interest would be added to the balloon payment due in 18 2037. Citing several tax cases, debtor maintained that the 19 payment terms under the Second Note had the character of a 20 redeemable preferred stock or similar equity investment which 21 receives a dividend only if the issuer has the ability to pay. 22 On October 9, 2013, the bankruptcy court issued a 23 memorandum decision granting AHFC’s Rule 3013 Motion. The 24 bankruptcy court found that the separate classification of 25 AHFC’s Second Note deficiency was not proper for several 26 reasons. 27 First, the court decided that debtor’s attempted separate 28 classification of the unsecured deficiency Second Note claim was
-9- 1 a “disfavored attempt to manipulate the voting on the plan to 2 meet the confirmation standard of having at least one class of 3 non-insider claims approve the plan” — i.e., gerrymandering. 4 Second, the court found no special circumstances that 5 warranted the separate classification under the holding in 6 Steelcase Inc. v. Johnston (In re Johnston), 21 F.3d 323, 327 7 (9th Cir. 1994). In In re Johnston, the Ninth Circuit affirmed 8 the separate classification of an unsecured creditor’s claim 9 because its claim was partially secured by collateral of a 10 nondebtor company. Further, the creditor was embroiled in 11 litigation with Johnston and therefore its claim might be offset 12 or exceeded by Johnston’s own claim against the creditor, and if 13 the creditor was successful in litigation, it could be paid in 14 full before all other unsecured creditors. In re Johnston, 15 21 F.3d at 327. The bankruptcy court effectively distinguished 16 In re Johnston from the facts in this case stating: 17 Although Marlow was a guarantor on the loan, he is apparently not personally solvent and has many unpaid 18 money judgments against him. He is not like the creditor in Johnston, which had viable guarantors to 19 collect from, at least in part. Nor is there any other collateral than the real and personal property 20 securing the two loans owed to AHFC, valued at no more than $2.7 million. 21 22 Next, relying on Barakat v. The Life Ins. Co. 23 (In re Barakat), 99 F.3d 1520 (9th Cir. 1996), the bankruptcy 24 court noted that while it was possible to classify similar 25 claims in different classes, there were limits to that right. 26 Separate classification cannot be used to “gerrymander an 27 affirmative vote on a reorganization plan” and, if claims are 28 substantially similar, there must be a valid business or
-10- 1 economic reason for the separate classification. Id. at 1527. 2 The bankruptcy court concluded that AHFC’s unsecured deficiency 3 Second Note claim was substantially similar to the separately 4 classified, noninsider unsecured creditor claims: 5 The claim on the second promissory note is very similar to a garden variety unsecured claim, 6 notwithstanding its ‘easy terms.’ [Section] 502(b)(1) makes the claim presently allowable despite being an 7 unmatured claim, the balance of which is due in 2037. Also, under the terms of the second loan agreement, 8 the second promissory note can be accelerated due to the default under the first promissory note. And, 9 even if [sic] second promissory note had been nonrecourse (which it is not), in chapter 11 it is 10 treated as a recourse claim. 11 The court also decided that debtor offered no satisfactory 12 business or economic reason for the separate classification of 13 the substantially similar claims. The bankruptcy court rejected 14 debtor’s argument that AHFC should bear some of the 15 responsibility for the failure of Marlow’s plan to develop 16 Unit B into an assisted living center. Noting that AHFC was a 17 completely distinct entity from the entity that changed the 18 Medicaid subsidies, the bankruptcy court observed that both 19 debtor and AHFC had the “rug pulled out from under them” due to 20 the change in projected Medicaid subsidies. 21 Finally, the bankruptcy court was not persuaded by debtor’s 22 argument that the Second Note was akin to an equity 23 contribution. 24 Due to the court’s ruling, it found it unnecessary to 25 address the merits of debtor’s motion under Rule 3018 seeking to 26 change Northrim’s vote on the SAP. 27 2. The TAP 28 On November 12, 2013, debtor filed the TAP. According to
-11- 1 debtor, the classification of AHFC’s claims in the TAP 2 recognized that through the modification agreement, AHFC and 3 debtor in effect turned the original two loans into three: 4 (1) under the First Note, monthly installment payments were due 5 on $3.125 million; (2) under the First Note, the $1 million 6 carve out required payments only from cash flow; and (3) under 7 the Second Note, payments on the $1.325 million were required 8 only from cash flow. Following these payment terms, debtor 9 placed AHFC’s claims in class 2, 3, and 4: 10 Class 2 - Secured Claim of AHFC. Debtor stated AHFC’s 11 secured claim was for $3.125 million, with interest at 5.75%, 12 and payments would be made in monthly installments (after a 13 $30,000 payment on the effective date), increasing at various 14 intervals to June 1, 2037 (this apparently represents the 15 $3 million portion of the First Note, as defined by the 16 modification agreement). This claim was impaired. 17 Class 3 - the $1 million carve out from the First Note. 18 Debtor labeled this claim as secured and if AHFC did not make an 19 election under 1111(b) then debtor would pay this claim in 20 accordance with the terms of the modification agreement. The 21 plan further provided that the maturity of this claim — as such 22 maturity existed prior to any default — “shall be reinstated.” 23 In addition, the plan stated that no payment of any cure amount 24 or on account of any damages incurred as a result of any 25 prepetition default shall be required. Because debtor was 26 proposing to pay this claim according to its terms, debtor 27 labeled this class as unimpaired and deemed to have accepted the 28 plan.
-12- 1 Class 4 - the $1.325 million owed on the Second Note. 2 Again, debtor labeled this deficiency claim as secured and 3 stated that it would be paid in accordance with the terms of the 4 modification agreement. This class was also described as not 5 impaired and “deemed to accepted the plan.” 6 On January 17, 2014, AHFC filed its second Rule 3013 Motion 7 seeking to have the bankruptcy court find that its unsecured 8 deficiency claims in classes 3 and 4 were improperly classified 9 as secured and unimpaired. AHFC also argued that its deficiency 10 claims should be placed with the substantially similar general 11 unsecured claims in class 6 due to the bankruptcy court’s 12 previous ruling in connection with the SAP. 13 Debtor opposed, arguing that it was offering to repay the 14 two loans exactly as required by the loan documents and thus 15 class 3 and 4 were not impaired and were not entitled to vote 16 for or against the TAP. Debtor further argued that the business 17 reason for separate classification was based on the specific 18 terms of the modification agreement, which carved out $1 million 19 from the First Note, and the terms of the $1.325 million Second 20 Note, neither of which required any debt service unless the 21 property had sufficient cash flow. By limiting debt service to 22 debtor’s positive cash flow, debtor argued that AHFC 23 subordinated a total of $2.325 million of its loans to debtor’s 24 operating expenses and to debt service on the balance of the 25 First Note. The subordination of the two debts, according to 26 debtor, created a substantially different economic treatment of 27 the loans from that of the debts owed to general unsecured 28 creditors.
-13- 1 On March 5, 2014, the bankruptcy court heard the matter. 2 The court questioned debtor’s counsel about the purpose behind 3 classifying AHFC’s deficiency claim separately in class 4 even 4 though it previously ruled that separate classification was 5 improper. 6 THE COURT: And the purpose of doing that is to take it out of the voting so it would be deemed to be 7 unimpaired? 8 MR. BUNDY: Right. That is the purpose. And the same with the Class 3 claim. As now indicated, the million 9 dollars would be treated as unimpaired and wouldn’t get to vote either. If the court rules that we can’t 10 do that and we have to put all these claims together because there’s no collateral value for . . . Class 3 11 and 4 at this point, then, you know, the plan doesn’t work, and we concede that. 12 13 In the end, the court found that AHFC’s deficiency claims 14 in class 3 and 4 were improperly classified as secured and 15 unimpaired when they were both unsecured and impaired. The 16 bankruptcy court entered an order granting AHFC’s Rule 3013 17 Motion and debtor timely appealed. 18 On March 24, 2014, the bankruptcy court issued a memorandum 19 decision which elaborated on its March 5th oral ruling. The 20 court explained that class 3, the $1 million carve out from the 21 $4.125 million First Note and its collateral, and class 4, the 22 junior $1.325 million Second Note with the same collateral, were 23 improperly classified as secured and unimpaired when they were 24 both unsecured and impaired. The court further stated that 25 AHFC’s class 2 claim (the $3.125 million portion of the First 26 Note) was listed as secured up to the full value of the 27 collateral and was classified by debtor as being impaired. As a 28 simple mathematical proposition, the bankruptcy court reasoned
-14- 1 that class 3 and 4 could not be secured under § 506(a) since 2 class 2 used up all the collateral value.6 3 The bankruptcy court also concluded that AHFC’s classes 3 4 and 4 claims were improperly classified as unimpaired because 5 the rights of AHFC in each class were modified. Although debtor 6 claimed that the payment terms of classes 3 and 4 were left 7 unchanged, the court found that the TAP made changes in AHFC’s 8 contract rights which ipso facto were an impairment. 9 Finally, the bankruptcy court observed that it had 10 previously ruled that separately classifying AHFC’s general 11 unsecured deficiency Second Note claim from other general 12 unsecured creditors in debtor’s SAP was improper gerrymandering 13 for the purpose of obtaining the affirmative vote of at least 14 one class so it could possibly confirm a cramdown plan. For the 15 same reasons set forth in its previous ruling, the court found 16 there was no business or economic reason to classify AHFC’s 17 unsecured deficiency claims in class 3 and 4 in the TAP 18 separately from the other general unsecured class 6 creditors. 19 On April 22, 2014, the BAP clerk’s office issued an order 20 regarding finality, indicating that the order on appeal did not 21 appear final and requiring a response from appellant. After 22 receiving the response, the Panel entered an order granting 23 debtor leave to appeal to the extent it was necessary. 24 II. JURISDICTION 25 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 26 27 6 The bankruptcy court did not hold a valuation hearing nor 28 were appraisals submitted regarding the value of the property.
-15- 1 §§ 1334 and 157(b)(2)(L). We have jurisdiction under 28 U.S.C. 2 § 158. 3 III. ISSUES 4 Whether the bankruptcy court erred by finding that the 5 classification of AHFC’s deficiency claims was improper on the 6 bases that: 7 A. The deficiency claims were unsecured and impaired; 8 B. The deficiency claims were substantially similar to 9 the general unsecured class 6 creditor claims; and 10 C. Debtor offered no business justification or economic 11 reason for the separate classification. 12 IV. STANDARDS OF REVIEW 13 Whether a claim is impaired under § 1124 is a question of 14 law, subject to de novo review. Acequia, Inc. v. Clinton 15 (In re Acequia, Inc.), 787 F.2d 1352, 1357-58 (9th Cir. 1986). 16 Whether claims are “substantially similar” under § 1122(a) 17 is a question of fact; a bankruptcy court has broad latitude in 18 making this determination, which is reviewed for clear error. 19 In re Johnston, 21 F.3d at 327. A factual finding is clearly 20 erroneous if it is illogical, implausible, or without support in 21 inferences that may be drawn from the facts in the record. 22 Retz v. Sampson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 23 2010). 24 V. DISCUSSION 25 A. The bankruptcy court did not err in finding that AHFC’s deficiency claims were unsecured and impaired. 26 27 In its opening brief, debtor concedes that AHFC’s 28 deficiency claims under the First Note and Second Note are
-16- 1 unsecured under § 506(a). Section 506(a) divides a creditor’s 2 claim into “secured and unsecured portions, with the secured 3 portion of the claim limited to the value of the collateral.” 4 Assocs. Commercial Corp. v. Rash, 520 U.S. 953, 961 (1997). 5 Here, debtor assigned a value of $2.7 million to AHFC’s secured 6 First Note claim. Therefore, as noted by the bankruptcy court, 7 simple math confirms that AHFC’s deficiency claims under the 8 First Note and the Second Note are unsecured. Accordingly, 9 debtor’s classification of AHFC’s unsecured claims as secured is 10 in direct violation of § 506(a). 11 As the holder of both a secured and unsecured claim, AHFC 12 is entitled to vote on debtor’s plan in both capacities. 13 Because the TAP treats AHFC’s unsecured deficiency claim on the 14 First Note as fully secured even though AHFC is an undersecured 15 creditor, the plan improperly treats AHFC as if AHFC had made 16 the § 1111(b)(2) election. However, the decision whether to 17 make the § 1111(b)(2) election is controlled solely by the 18 creditor. Montclair Retail Ctr., L.P. v. Bank of the W. 19 (In re Montclair Retail Ctr., L.P.), 177 B.R. 663, 666 (9th Cir. 20 BAP 1995). Accordingly, debtor’s classification of AHFC’s 21 unsecured deficiency claim under the First Note as secured is in 22 direct violation of § 1111(b). 23 Debtor also maintains, without analysis, that AHFC’s 24 deficiency claims in classes 3 and 4 are unimpaired under § 1124 25 on the basis that it is making the same payments to AHFC as 26 those required under the modification agreement. 27 Section 1124(2) states that a class of claims or interests is 28 impaired, and thus entitled to vote, unless the treatment in the
-17- 1 plan of those claims or interests, notwithstanding any right to 2 demand accelerated payment upon default: (A) cures the default, 3 (B) reinstates the maturity of the claim or interest, 4 (C) compensates the claim or interest holder for damages for 5 relying on the acceleration clause, (D) compensates for 6 nonmonetary defaults, and (E) “does not otherwise alter the 7 legal, equitable, or contractual rights to which such claim or 8 interest entitles the holder.” If a plan can satisfy these 9 requirements, that claim or interest holder will not be 10 considered impaired. 11 Nowhere does debtor discuss these requirements, instead 12 arguing that the bankruptcy court did not explain how the 13 deficiency claims were impaired. However, the record shows that 14 the court supported its finding by citing AHFC’s brief filed in 15 support of its second Rule 3013 Motion. There, AHFC argued that 16 debtor was in default on the First and Second Notes. 17 Accordingly, debtor was obligated to AHFC for missed payments 18 and for substantial costs and attorney’s fees. As noted by 19 AHFC, the TAP specifically provides that the defaults will not 20 be cured. Thus, § 1124(2)(A) has not been met. 21 Moreover, the modification agreement entitles AHFC to 22 receive annual payments on the $1 million carve out and Second 23 Note in an amount equal to 100% of debtor’s available cash flow. 24 Instead of paying AHFC the available cash flow, the TAP will use 25 it to pay general unsecured creditors. Therefore, the TAP 26 27 28
-18- 1 alters AHFC’s contractual rights under § 1124(2)(E).7 2 Accordingly, the bankruptcy court did not err in concluding 3 that AHFC’s unsecured deficiency claims in classes 3 and 4 were 4 impaired under § 1124(2). 5 B. The bankruptcy court did not err in finding that the separate classification of AHFC’s unsecured deficiency 6 claims was improper. 7 Section 1122(a) provides that, except as provided in 8 subsection (b), which is not relevant here, “a plan may place a 9 claim or an interest in a particular class only if such claim or 10 interest is substantially similar to the other claims or 11 interests of such class.” 12 The Ninth Circuit has a two-step analysis for determining 13 whether claims have been permissibly separated into different 14 classes. Wells Fargo Bank, N.A. v. Loop 76 LLC (In re Loop 76, 15 LLC), 465 B.R. 525, 536-37 (9th Cir. BAP 2012). First, the 16 trial court should determine whether the claims are 17 substantially similar, and second, if so, whether there is a 18 business justification for separately classifying them. Id. If 19 20 7 Debtor’s third amended disclosure statement provides that 21 payments and distributions under the plan will be funded by the following: 22 23 Payments to creditors will come from cash on hand, collections of receivables, and ongoing revenue. 24 Payments on the Class 3 and 4 claims will come mostly from refinancing or sale of the Property on maturity of 25 the Claims in 2037. 26 The financial projections show that the Debtor will 27 have sufficient income to make the required payments on the Class 2 claim of AHFC and the Class 6 unsecured 28 claims. . . .
-19- 1 the claims are not substantially similar, their separate 2 classification is not only permissible, but required under 3 § 1122(a). If the claims are substantially similar, that 4 implicates the gerrymandering concern, but the debtor may still 5 separately classify them “if the debtor can show a business or 6 economic justification for doing so.” Id. The bankruptcy court 7 has broad discretion in classifying claims under § 1122. 8 In re Johnston, 21 F.3d at 327. 9 Here, the bankruptcy court evaluated AHFC’s deficiency 10 claims under the same analysis as the Ninth Circuit did in 11 In re Johnston and In re Barakat and found no distinguishing 12 characteristics rendering them dissimilar to the general 13 unsecured claims. The court found Marlow, the guarantor, was 14 not a source of recovery for AHFC’s deficiency claims because he 15 was insolvent and had multiple judgments against him. Finding 16 no special circumstances, the bankruptcy court concluded that 17 AHFC’s unsecured deficiency claims were “garden variety” 18 unsecured claims. 19 Debtor’s attempt to use the contract payment terms under 20 the modification agreement as a distinguishing characteristic 21 for classification purposes is disingenuous at best when debtor 22 proposes to use its available cash flow to pay unsecured 23 creditors rather than AHFC. Further, the contractual payment 24 terms under the modification agreement do not alter the legal 25 character of AHFC’s unsecured deficiency claims warranting 26 separate classification. AHFC’s unsecured deficiency claims and 27 general unsecured trade claims enjoy similar rights and 28 privileges within the Bankruptcy Code. Accordingly, the
-20- 1 bankruptcy court’s factual determination that AHFC’s unsecured 2 deficiency claims were substantially similar to those of the 3 unsecured creditors in class 6 was not clearly erroneous. 4 We also agree with the bankruptcy court’s assessment that 5 debtor has pointed to no legitimate business or economic reason 6 for the separate classification of AHFC’s deficiency claims. 7 Debtor has all but admitted that the separate classification of 8 AHFC’s deficiency claims as secured and unimpaired was to 9 prevent AHFC from voting against the plan. 10 [S]eparate classification for the purpose of preventing the undersecured creditor from rejecting 11 the plan is contrary to the principles underlying the Bankruptcy Code, that is, that creditors holding 12 greater debt should have a comparably greater voice in reorganization. . . . Although [this] will 13 effectively bar single asset debtors from utilizing the Bankruptcy Code’s cramdown provisions, the court 14 was not persuaded that a single-asset debtor should be able to cramdown a plan that disadvantages the largest 15 creditor. Thus, absent a legitimate business or economic reason, separate classification is not 16 permitted. 17 In re Barakat, 99 F.3d at 1526 (internal citations omitted). 18 Accordingly, the bankruptcy court did not err in finding that 19 debtor’s classification of AHFC’s deficiency claims in classes 3 20 and 4 was improper. 21 VI. CONCLUSION 22 For the reasons stated, we AFFIRM. 23 24 25 26 27 28
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