4th Street East Investors, Inc.

-1-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re:
4th Street East Investors, Inc.,
Debtor.
Case No.: 2:12-bk-17951-NB
CHAPTER 11
TENTATIVE RULINGS RE CLASSIFYING
DEFICIENCY CLAIMS ETC., IN
CONNECTION WITH MOTIONS OF
COASTLINE RE HOLDINGS CORP (1) FOR
RELIEF FROM THE AUTOMATIC STAY
AND (2) TO CONVERT CASE FROM
CHAPTER 11 TO CHAPTER 7
Date: May 15, 2012
Time: 2:00 p.m.
Courtroom: 1545
The following tentative ruling is issued with respect to the motions of Coastline
RE Holdings Corp. (“Coastline”) for relief from the automatic stay of 11 U.S.C. § 362(a)
(dkt. 59) and for conversion of this case from chapter 11 to chapter 7 under 11 U.S.C.
§ 1112 (dkt. 57).
I. BACKGROUND
The above-captioned debtor (“Debtor”) owns and operates a storage facility
consisting of 5 buildings with 240 rentable storage units, an office, and a residence for
an on-site manager (the "Property"). On March 5, 2012, Debtor filed its voluntary
FILED & ENTERED
MAY 15 2012
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	sumlin
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 1 of 16

-2-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
chapter 11 petition (the "Petition Date"). Debtor attributes its financial troubles to "the
general deterioration of the market over the past several years [that] caused several
vacancies in storage units" which created "some cash flow problems," as well as the
balloon payment on Coastline's promissory note which came due on November 1, 2011.
Decl. of K. Holmes (dkt. 68) at 20:21-25.
II. ALLEGED BAD FAITH
Coastline alleges "bad faith" by Debtor and argues that this is sufficient cause for
relief from the automatic stay (under 11 U.S.C. § 362(d)(1)) and for conversion of this
case to chapter 7 (under 11 U.S.C. § 1112(b)), citing In re Stolrow's Inc., 84 B.R. 167,
171 (9th Cir. BAP 1988). Coastline also alleges that relief is warranted because this
case is essentially a "two-party dispute," citing In re St. Paul Self Storage Ltd. P'ship,
185 B.R. 580, 582-83 (9th Cir. BAP 1985).
Coastline primarily alleges that Debtor cannot confirm a plan of reorganization
and that creditors would be better served if the funds used for Debtor's attorneys were
paid directly to those creditors. Coastline also argues that Debtor or its principals have
violated fiduciary duties by favoring insiders.
Coastline is correct that this is essentially a two-party dispute: apart from
Coastline's deficiency claim and the claims of Debtor's insiders, all other general
unsecured claims amount to less than $9000. It is also true that, although Debtor
alleges substantial insider claims, insider votes cannot be counted for purposes of
"cramdown" under 11 U.S.C. § 1129(a)(10) & (b).
But Coastline does not dispute that Debtor has been making adequate protection
payments in the dollar amount that I previously set. Nor does Coastline dispute that the
case is in its early days.
Although Coastline asserts that Debtor is delinquent in real estate taxes, it has
not established that any such delinquency is for post-petition periods.1 In addition,
1 Coastline has filed substantially identical declarations of Ms. Kimberly Davis in support of its motion to convert
(dkt. 57) and its motion for relief from the automatic stay (dkt. 59). Debtor has filed substantially identical
evidentiary objections (dkt. 71& 73) in support of its opposition papers (dkt. 72 & 68). Coastline's declarations rely
on hearsay from the Tax Collector (as defined therein). But the printouts from the Tax Collector's website are
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 2 of 16

-3-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
although ultimately I conclude that Debtor cannot cram down a plan, Debtor has
asserted colorable arguments for doing so, and as discussed below Debtor is correct
that the interests of insider claims (alleged to be approximately $1.4 million) are entitled
to some consideration.
In these circumstances it is not bad faith for Debtor’s insiders, who apparently
have invested substantial time and money, to attempt a reorganization that would
provide no less to Coastline than what it would receive upon foreclosure while
preserving a possible "up side" for themselves, if Debtor is ever able to turn around its
finances. That begs the question whether such a reorganization is realistically in
prospect.
III. DEBTOR HAS NO EQUITY IN THE PROPERTY AND NO PROSPECTS FOR
AN EFFECTIVE REORGANIZATION UNDER 11 U.S.C. § 362(d)(2)
Relief under 11 U.S.C. § 362(d)(2) requires a lack of equity in the Property (which
Debtor concedes) and that the Property is not necessary to an "effective
reorganization." In other words, there must be "a reasonable possibility of a successful
reorganization within a reasonable time." In re Timbers of Inwood Forest Assoc., Ltd.,
484 U.S. 365, 376 (1988) (citation and internal quotation marks omitted). The burden is
on Debtor to make that showing. 11 U.S.C. § 362(g).
Debtor claims that Coastline's request for relief is premature because this case is
in its early days and Debtor is complying with all of its obligations. It is true that at this
early stage Debtor should not have to show detailed plans for reorganizing.
But Debtor must at least outline how it would successfully reorganize. For two
reasons, it has not done so: (a) it has not shown any financial prospects for
reorganizing, and alternatively (b) it has not shown that it can meet the legal test to
“cram down” a plan over Coastline’s opposition.
admissible under an exception to the hearsay rule. See FRE 803(8). Those printouts support the allegations in
Coastline's declarations that Debtor owes real estate tax debts of $14,862.83 + $13,681.89 + $12,438.07.
Nevertheless, as Debtor argues (dkt. 68 n.4), the Tax Collector may have misapplied some payments to obligations
from before, rather than after, the Petition Date. Therefore it appears that Debtor may be current on its accruing
post-petition tax obligations.
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 3 of 16

-4-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
A. Debtor Has Not Shown Any Financial Prospects For Reorganizing
Debtor’s opposition papers (dkt. 68 & 73) do not show how Debtor could fund
any reorganization. Historically Debtor has lost money, and it offers no data or strategy
to change that.
Debtor reports net losses of $19,126.36 during the roughly two months prior to
the Petition Date, on top of losses of $17,250.59 in 2011 and $40,410.00 in 2010. See
Opposition to Motion to Convert (dkt. 73) Ex. B. Debtor attributes its negative cash flow
to general market conditions (Decl. of K. Holmes (dkt. 68) at 20:21-25)) and does not
suggest anything that it would do differently from what it has been doing.
Debtor’s reorganization apparently depends entirely on the hope of improved
market conditions and reducing its payments to Coastline. Debtor asserts that currently
and in the future it will generate “a positive cash flow” based on a presumed reduction in
the dollar amount of Coastline’s secured claim. Decl. of K. Holmes (dkt. 68) at 22:16-
22.
Coastline objects that there is no foundation for this assertion or for any
admissible opinion to support the projected cash flow. That objection is sustained.
See Evidentiary Objections To Declaration Of Kim Holmes [etc.] (dkt. 71 & 73); Fed. R.
Evid. 701, 901.
Debtor’s projected positive cash flow is also contradicted by the available
evidence. Although Debtor asserts that it will have positive cash flow after reducing
Coastline’s claim, Debtor’s payments to Coastline are already in the reduced dollar
amount that Debtor seeks. See Emergency Motion For Order Authorizing Use Of Cash
Collateral (dkt. 2) at 8:18-21 (proposing payments of $4,167/mo., which equals 5%
interest-only payments based on an assumed valuation of $1 million for the Property)
and Order Granting Motion For Interim Use Of Cash Collateral (dkt. 39) at 3:18-24
(ordering payments of $4,167/mo.). Despite this reduction Debtor seeks to borrow
money to fund its ordinary expenses. See Motion For Order Authorizing Debtor To
Obtain Postpetition Financing [etc.] (dkt. 61).
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 4 of 16

-5-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Although Debtor previously projected a thin profit based on assumed rental
receipts of $15,000 per month (dkt. 2 at Ex.1), it now projects rental receipts of $14,500
per month (dkt. 68, Ex.B). After expenses, Debtor projects negative cash flow (not
including a proposed $3,000 cash infusion from an insider). Id. at n. 2.
Debtor also provides no historical or current data to test these projections, so the
actual situation might be worse. The only post-petition data in the record is for the
partial month in which this case was filed, from March 6 through 31, 2012. If rents were
paid on or near the first of the month then any data for the rest of the month is probably
meaningless, but in any event it does not help Debtor. See Monthly Operating Report
(“MOR”) #1 (dkt. 56), next-to-last page (showing rental receipts of only $7,742.44 for
3/6/12 – 3/31/12).
In sum, Debtor’s projections lack any foundation, and even assuming that they
are accurate and that Debtor can reduce Coastline’s secured claim and interest rate as
it hopes, those projections apparently show that Debtor is and will be operating at a net
loss. Debtor has not suggested any additional restructuring of its finances or alternative
means to generate additional income or reduce expenses that could be the basis for a
reorganization. Based on these facts Debtor has not met its burden to show "a
reasonable possibility of a successful reorganization within a reasonable time" and
therefore relief must be granted under 11 U.S.C. § 362(d)(2). Timbers, 484 U.S. at 376.
B. Debtor Has Not Shown A Reasonable Possibility Of Being Able To
Cram Down A Plan Of Reorganization Over Coastline’s Opposition
For cramdown Debtor would need to obtain a favorable vote by at least one
impaired class, not counting the votes of insiders. See 11 U.S.C. § 1126(c) (voting) and
1129(a)(10) & (b) (cramdown). Coastline’s general unsecured deficiency claim can out-
vote any other general unsecured claims if all of those claims are classified together
(assuming that Coastline does not make the election under 11 U.S.C. § 1111(b)).
Classification is therefore critical.
Another issue, not argued by Coastline but also critical to any cramdown, is
whether any potential plan would be “fair and equitable” to the class that is being
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 5 of 16

-6-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
crammed down. 11 U.S.C. § 1129(b). That concept is worth examining in greater
detail.
Why would creditors vote against a “fair and equitable” plan? They might be
competitors who seek to drive the debtor out of the marketplace, or they might seek to
extort more than their fair share of the bankruptcy estate, or they might reject an
economically advantageous plan out of sheer spite.
A more benign example is that such non-consenting creditors might simply
disagree as to what makes economic and practical sense. For example, a creditor like
Coastline (which holds both a secured claim and an unsecured claim) might vote
against any prospective plan based on a rational economic calculation that foreclosure
is likely to give it a more certain and immediate recovery than a plan with all of the risks
inherent in a plan. Those risks might include (in that creditor’s view) that I could under-
value its secured claim, or that I could set too low an interest rate to provide the present
value of its secured claim, or that I could confirm a plan that is simply too speculative in
exchange for the promise of future dividends.
In addressing these types of concerns bankruptcy courts typically consider
whether the interests of other parties outweigh the burdens on dissenting creditors. The
interests of other secured creditors generally are not weighed as heavily because they
have the protection of their collateral. The principal focus is on unsecured creditors.
1. The Secured Claims In This Case Cannot Satisfy The
Requirement Of A Consenting Impaired Class
Debtor argues that it likely could obtain favorable votes of either the secured real
estate tax claim or the secured vehicle claim, or both. That is too thin a reed on which
to hang a cramdown. These secured claims are by definition protected by the value of
their collateral and given the other circumstances, including the relative sizes of the
claims at issue, Debtor has not shown how it could ever be “fair and equitable” to cram
down a plan on Coastline for any marginal benefit to those secured claims.
Debtor argues in the alternative that it can separately classify Coastline's general
unsecured deficiency claim from other general unsecured claims.
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 6 of 16

-7-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
2. Summary of The Parties’ Arguments On Classification Of
General Unsecured Claims
Debtor argues that it can separately classify Coastline's general unsecured
deficiency claim of approximately $200,000 to $450,000 from Debtor’s other non-insider
general unsecured claims of less than $9,000 in total. Debtor relies on the fact that
Coastline holds a guaranty, whereas other creditors apparently do not.
Debtor cites a recent decision of the Bankruptcy Appellate Panel (the “BAP”)
affirming a bankruptcy court decision to confirm a plan that separately classified a
deficiency claim. The basis for separate classification was that the creditor had a non-
debtor source of repayment, namely a guaranty. In re Loop 76, 442 B.R. 713 (Bankr.
D. Ariz. 2010) (“Loop I”), aff’d, In re Loop 76, 465 B.R. 525 (9th Cir. BAP 2012)
(“Loop II”).
Coastline replies that the facts are different in this case because Debtor’s
guarantor (Mr. DeBelling) is "pretty much judgment proof." Reply (dkt. 76) at 4:16.
"Unless it is shown that the DeBelling guaranty will give value to [Coastline] the fact that
Mr. DeBelling signed a guaranty is a distinction without a difference and will not justify
separate classification." Id. at 8:5-8.
Coastline’s argument is supported by Loop I, which suggests that if the
guarantors were insolvent (or if the creditor gave up on pursuing the guarantors) then
the existence of the guaranty might not render the claims dissimilar. Loop I, 442 B.R. at
724. But the BAP implicitly rejected this argument, in dicta, by questioning whether
collectability "is even a factor to consider." Loop II, 465 B.R. at 534 n. 7 & 541 n. 11
(citation omitted).
Therefore the initial issue is whether to follow the legal analysis in Loop I, Loop II,
or neither decision. For the reasons stated below, I respectfully disagree with the
analysis in both Loop I and Loop II regarding whether the existence of a guaranty
requires that claims be separately classified. In addition I agree with the suggestion in
Loop I that collectability does matter. In deciding not to follow Loop II I hold that BAP
decisions are not strictly binding (although they are often persuasive). See, e.g., In re
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 7 of 16

-8-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Rinard, 451 B.R. 12, 20-21 (Bankr. CD Cal. 2011), disagreed with on other grounds, In
re Hernandez (Case No. 2:11-bk-53730-NB, dkt. 40).
3. Two Step Analysis: Mandatory Separation Of Some Claims;
Sufficient Justification Required For Remaining Claims
Loop II’s legal discussion starts with a helpful description of the two step analysis
that applies to classification issues. Loop II, 465 B.R. at 536-37. First, claims have to
be separately classified if they are found as a factual matter to be not "substantially
similar." 11 U.S.C. § 1122(a). Although the Bankruptcy Court has "broad discretion" in
classifying claims, it must evaluate "the nature of each claim, i.e., the kind, species, or
character of each category of claims," sometimes also described as the "legal
character" of those claims, and if those claims are not substantially similar then they
must be separately classified. Id. at 536-37 (citations and quotation marks omitted).
Second, even if claims are substantially similar, a plan may place those claims in
different classes in some circumstances. According to the BAP, the debtor must show
"a business or economic justification for doing so." Loop II, 465 B.R. at 536 (citing In re
Barakat, 99 F.3d 1520, 1526 (9th Cir. 1996)). Cf. Barakat, 99 F.3d at 1526 (debtor must
show a “legitimate” business or economic justification). It is not a sufficient justification
that the creditor is eligible to make an election under 11 U.S.C. § 1111(b), nor can a
plan place similar claims in different classes “solely to gerrymander an affirmative vote”
for the plan. Id. at 536-37 (citing Barakat, 99 F.3d at 1525). Cf. Barakat, 99 F.3d at
1525 & 1526 (not using the word “solely”).
There is a "paucity of case law defining what constitutes either similarity or
substantial similarity of claims." Loop II, 465 B.R. at 537 (citation and quotation marks
omitted). It is also unclear where the dividing line exists between a legitimate "business
or economic justification" for separate classification and illegitimate "gerrymandering."
4. This Court Is Not Required To Approve Separate Classification
Of Coastline’s Unsecured Deficiency Claim As A Matter Of Law
The two leading Ninth Circuit decisions are In re Johnston, 21 F.3d 323 (9th Cir.
1994) and Barakat, 99 F.3d 1520. In Johnston the bankruptcy court confirmed a plan
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 8 of 16

-9-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
that separately classified the deficiency claim of a secured creditor (Steelcase) on the
basis of special circumstances (discussed below) and the Ninth Circuit affirmed. In
Barakat, 99 F.3d 1520, the bankruptcy court denied confirmation of a plan that
separately classified a deficiency claim of a life insurance company (“LICV”) and the
Ninth Circuit affirmed, distinguishing Johnston on the basis that no comparable special
circumstances existed. Id. at 1526. The question is what specific facts distinguish
Barakat from Johnston.
The BAP distinguished Barakat on the basis that, allegedly, the Ninth Circuit “had
no reason to address a third-party source of payment because none existed." Loop 76,
465 B.R. at 541. That is incorrect. The debtor in Barakat was one of four co-obligors
(two husbands and two wives) that the Ninth Circuit defined as the “Barakat Group.”
Barakat, 99 F.3d at 1522, nn.1-2 and accompanying text.
Turning to Johnston, the BAP saw “no legal distinction between whether the
claimant can recover against collateral held by a third party, or whether the claimant can
recover from a third-party guarantor, when determining the similarity of the claims.”
Loop II, 465 B.R. at 541 (citation omitted). This sounds like a conclusion of law,
especially because the BAP’s dicta suggests that any guaranty, no matter how
uncollectible, renders the associated claim dissimilar from other unsecured claims. Id.
at 534 n. 7 & 541 n. 11. Under these standards, any guaranty apparently makes a
claim dissimilar, so how could the bankruptcy court find otherwise? See also Loop I,
442 B.R. at 716 et seq. (heading states, “Johnston Holds [That] A Nondebtor Payment
Source Renders a Claim Dissimilar”). Nevertheless Loop II may permit some discretion
because it states that the bankruptcy court may “consider” the existence of “a third-party
source for payment, including a guarantor, when determining whether unsecured claims
are substantially similar under § 1122(a).” Loop II, 465 B.R. at 541.
In Loop I the bankruptcy court reached similar conclusions to the BAP while
articulating a different analysis of Johnston. First it summarized the three special
circumstances identified in Johnston and then it dismissed two of them:
[T]he Ninth Circuit concluded [in Johnston, 21 F.3d 323, 328] that
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 9 of 16

-10-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
"Steelcase is situated differently from other unsecured creditors"
[emphasis in original] for some or all of three reasons on which the
bankruptcy court apparently relied:
1. "[The unsecured claim of] Steelcase ... unlike all others, is
partially secured by collateral of [nondebtor] COS, the primary
obligor;"
2. "[Steelcase], unlike all other unsecured creditors, is embroiled in
litigation with Johnston [the debtor], and … its claim thus may be
offset or exceeded by Johnston's own claim against Steelcase;"
and/or
3. "[I]f successful in the litigation, [Steelcase] could be paid in full
before all other unsecured creditors." [Johnston, 21 F.3d at 328]
Of these three factors, only the first seems to have any bearing
on the nature of the claim or its similarity to other claims. The
second factor affects only the amount of the claim that might ultimately
be allowed. Except for the small "administrative convenience" claims that
Code § 1122(b) specifically authorizes to be classified together and
distinctly from other unsecured claims, there is no argument or authority
that similarity of claims should be determined by their relative size.
Indeed, the Code’s specific authorization for this classification based on
amount implies that but for such specific authorization classification based
on amount would not be appropriate.
The third factor identified in Johnston is based solely on how the
claim is treated under the debtor's plan, not on any characteristic of the
claim itself. No analysis or authority suggests that similarity of claims
should be determined according to how they are treated in the plan.
Both the second and third Johnston factors might provide valid
reasons for separate classification of similar claims, because they bear on
the treatment of the claim and Code § 1123(a)(4) requires claims to be
classified in different classes if they are to be treated differently. But, as
noted above, the justification for separate classification of similar claims
provides no basis on which to ascertain dissimilarity, because dissimilar
claims must be separately classified without respect to the plan
proponent's reasons or justifications.
Consequently the only factor in Johnston that seems at all relevant
to either the bankruptcy court's finding, or the Ninth Circuit's affirmance of
substantial dissimilarity, is that the creditor had a non-debtor source of
repayment of the claim. The Ninth Circuit's opinion emphasized the
particular significance of this first factor when it stated "Steelcase, unlike
other unsecured claimants, holds a partially secured interest in COS,
thereby according Steelcase different status" than the other unsecured
creditors. [Johnston, 21 F.3d at 328]
It therefore appears that the holding of Johnston is that a claim that
may be paid from a non-debtor source is not substantially similar to claims
that lack such non-debtor source of repayment. Or, more accurately, the
holding of Johnston appears to be that it is permissible for a bankruptcy
court to find, as a matter of fact, that a non-debtor source of
repayment of a claim renders it dissimilar from other claims lacking
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 10 of 16

-11-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
such a source of repayment outside of the plan. [Loop I, 442 B.R.
716-17 (italics in original, boldface added, and some citations moved from
footnotes to bracketed text)]
Respectfully, I disagree with that interpretation of each of the three special
circumstances listed in Johnston.
1. A guaranty is not the same as collateral. A guaranty of a deficiency claim
is not the same as additional collateral for that claim, for both practical and legal
reasons: (a) Although guaranties are common and often provide useful incentives, by
the time a borrower defaults the guarantors are frequently judgment proof. (b) It is less
common for an unsecured claim against a debtor to be secured by collateral of a non-
debtor, and such collateral may substantially enhance the prospect of recovery (as in
Johnston, as discussed below). (c) Various laws including the Bankruptcy Code accord
special treatment to claims that are secured by collateral. See, e.g., 11 U.S.C.
§ 1111(b) & 1129(b)(2)(A) & (B). See also Barakat, 99 F.3d at 1527 (separate
classification of tenant security deposit claims was permissible because of substantial
practical and legal differences from other claims).
2. The litigation in Johnston involved differences in rights, not just the dollar
amount of the claim. The bankruptcy court in Johnston found that the litigation “may
confer rights separate from all other unsecured creditors.” Johnston, 21 F.3d at 326
(emphasis added). The Ninth Circuit does not explain what rights might be conferred,
but it considered this finding important enough to specifically note it in describing the
litigation.
3. Collectability was a factor in Johnston. The third special circumstance
cited in Johnston is that Steelcase could be paid in full before all other unsecured
creditors. Johnston, 21 F.3d at 328.2 Loop I interprets this to refer to the treatment of
2 Admittedly, Johnston is not entirely clear about including this third special circumstance. At one point it cites all
three special circumstances in support of its statement that “Steelcase is situated differently from other unsecured
creditors.” Johnston, 21 F.3d at 328 (emphasis in original). A few sentences later, however, Johnston repeats only
the first two circumstances in summarizing why the “legal character” of Steelcase’s claim is “not ‘substantially
similar to the other claims or interests of such class[es].’” Id. (emphasis in original). In any event, with or without
the third circumstance Johnston did not hold that the existence of a non-debtor source of payment is by itself enough
to make a claim legally dissimilar from other general unsecured claims, thus requiring separate classification.
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 11 of 16

-12-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Steelcase under the debtor’s plan. But more likely the Ninth Circuit was referring to the
ability of Steelcase to collect a meaningful recovery from non-debtor sources, namely
COS and the collateral pledged by COS. In other words, Johnston was taking into
account collectability.
For these reasons the special circumstances in Johnston went beyond the mere
existence of a potential third-party source of repayment like a (possibly worthless)
guaranty. Loop I, 442 B.R. at 717; Loop II, 465 B.R. at 541. Those special
circumstances involved the rare situation of (1) a deficiency claim that is secured by
collateral, (2) pending litigation that could affect not only the dollar amount of the claims
but also the creditor’s rights, and (3) collectability of the claim at issue from non-debtor
sources.
All three special circumstances were required in Johnston. Not one such special
circumstance is present in this case, which is more like Barakat.
In Barakat there was a deficiency claim against the debtor and also against other
persons (other members of the Barakat Group), which is very similar to Coastline’s
claim against Debtor and also against the guarantor in this case. Unlike Johnston, but
similar to Barakat, (1) in this case there is no showing of any non-debtor collateral for
the debt, (2) there is no pending litigation that may establish rights of Coastline different
from the rights of general unsecured creditors, and (3) Debtor has not shown that
Coastline’s claim is meaningfully collectable from any non-debtor source.
Therefore under Ninth Circuit authority separate classification is not required.
5. Alternatively, On The Facts Presented Coastline’s Deficiency
Claim Is Substantially Similar to Other General Unsecured
Claims
Assuming for the sake of discussion that the foregoing analysis were incorrect
and that the legal analysis of Loop I or Loop II applied instead, I find that Coastline’s
deficiency claim is substantially similar to other general unsecured claims. This is an
alternative reason why there is no mandatory separate classification under 11 U.S.C.
§ 1122(a).
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 12 of 16

-13-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Debtor has not shown that as a factual matter Coastline has any realistic
alternative source of recovery, and the burden of proof is appropriately on Debtor to
make that showing under both 11 U.S.C. § 362(d)(2) and § 1123. Alternatively,
assuming for the sake of discussion that the burden of proof were on Coastline, it has
presented satisfactory evidence that relative to the size of its deficiency claim the
guarantor (Mr. DeBelling) is "pretty much judgment proof." Reply (dkt. 76) at 4:16 (and
evidence cited therein).
For all of the foregoing reasons, separate classification is not required. That
leaves step two of the classification analysis: whether it is permissible.
6. Step Two: Debtor Has Not Shown That Separate Classification
Would Be Appropriate
It is theoretically possible that there could be some "legitimate business or
economic justification" for separately classifying Coastline's deficiency claim that would
not amount to “gerrymandering.” But Debtor has not suggested any justification other
than wanting to confirm a plan.
Nor is it apparent on the facts of this case that any justification would be
sufficient, or that any resulting plan would be “fair and equitable.” Non-insider
unsecured creditors amount to a total of less than $9,000, and at best Debtor would be
able to offer them only a minimal dividend. Insiders allegedly have claims of
approximately $1.4 million, but they too would receive at best a dividend that would be
vanishingly small in comparison to that alleged debt.
This case is essentially a contest between Coastline and Debtor’s insiders acting
to protect their interests as equity holders, not primarily their interests as creditors. As
Coastline points out, Debtor's equity holders cannot retain their interests in Debtor
under the absolute priority rule of 11 U.S.C. 1129(b)(2)(B)(ii). Theoretically they might
be able to purchase new equity interests under the new value exception or corrolary to
the absolute priority rule (and sometimes it is realistic to suppose that they might be
motivated to make such a purchase, for tax purposes or other reasons). Bank of Am.
Nat. Trust & Sav. Assn. v. 203 North LaSalle St. P’ship, 526 U.S. 434 (1999). But there
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 13 of 16

-14-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
has been no intimation, let alone any evidence, that Debtor has any prospect of
obtaining funding for such new value.
For all of these reasons, Debtor has not shown how cramdown would be
possible. It has not met its burden to show "a reasonable possibility of a successful
reorganization within a reasonable time." Timbers, 484 U.S. at 376 (citation and internal
quotation marks omitted).3
7. Policy Considerations Support The Foregoing Interpretation
and Application of 11 U.S.C. § 1123
In interpreting the statute and Ninth Circuit authority, lower courts should be wary
of holding that claims of the same priority must be separately classified, which is the
consequence of holding that such claims are not “substantially similar.” Loop I, 442
B.R. at 715 & n. 6; Loop II, 465 B.R. at 536-37. As noted above, although Loop I and II
both speak in terms of the bankruptcy court’s discretion, that is difficult to reconcile with
their statements appearing to mandate that any claim for which there is a non-debtor
source of payment must be separately classified.
Such mandatory separate classification can cut against debtors as well as
creditors, depending on the voting dynamics in any given case. Such a mandatory
separation of claims also appears to be contrary to the policies underlying the
Bankruptcy Code, as summarized by the Ninth Circuit in describing a case with which it
expressed agreement:
[S]eparate classification for the purpose of preventing the undersecured
creditor from rejecting the plan is contrary to the principles underlying the
Bankruptcy Code, that is, that creditors holding greater debt should have a
comparably greater voice in the reorganization. … Although [this] will
effectively bar single asset debtors from utilizing the Bankruptcy Code’s
cramdown provisions, the court was not persuaded that a single-asset
debtor should be able to cramdown a plan that disadvantages the largest
creditor. Thus, absent a legitimate business or economic reason,
separate classification is not permitted. [Barakat, 99 F.3d at 1526
(emphasis added) (citing In re Boston Post Rd., 21 F.3d 477, 483 (2d Cir.
1994)]
3 Coastline suggests that if all else fails it would buy the other non-insider claims and vote them against any plan. In
view of the determinations in the text it is not necessary to reach that issue, or to determine the likelihood that
Coastline could purchase a sufficient number of claims, that no competing purchaser would purchase claims, and
that any such purchased claims would not be designated under 11 U.S.C. § 1126(e).
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 14 of 16

-15-
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Another concern is what limits can be applied to Loop I and II. If the existence of
a (possibly worthless) guaranty is enough to require that a claim be separately
classified, simply because there is a theoretical non-debtor source of payment, then
how about other claims that may be more or less collectible for practical or legal
reasons? Should separate classes be mandated for important trade creditors,
unimportant trade creditors, personal injury creditors with or without insurance, and so
on? For some of these creditors, separate classification might be appropriate
depending on the circumstances; but that determination can be made in step two of the
analysis – the discretionary rather than the mandatory step.
For these reasons the existence of a guaranty is an insufficient basis to classify a
deficiency claim separate from all other general unsecured claims.
IV. CONCLUSION
Coastline has not shown bad faith by Debtor or established other cause for relief
from the automatic stay under 11 U.S.C. § 362(d)(1) or for conversion under 11 U.S.C.
§ 1112. But Coastline has shown that Debtor lacks equity in the Property and Debtor
has not shown "a reasonable possibility” that it can cram down a plan and accomplish “a
successful reorganization within a reasonable time." Timbers, 484 U.S. at 376 (citations
omitted). Therefore, relief from the automatic stay is appropriate under 11 U.S.C.
§ 362(d)(2).
United States Bankruptcy Judge
DATED: May 15, 2012
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 15 of 16

This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.
August 2010 F 9021-1.1.NOTICE.ENTERED.ORDER
NOTE TO USERS OF THIS FORM:
1) Attach this form to the last page of a proposed Order or Judgment. Do not file as a separate document.
2) The title of the judgment or order and all service information must be filled in by the party lodging the order.
3) Category I. below: The United States trustee and case trustee (if any) will always be in this category.
4) Category II. below: List ONLY addresses for debtor (and attorney), movant (or attorney) and person/entity (or
attorney) who filed an opposition to the requested relief. DO NOT list an address if person/entity is listed in category I.
NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify) TENTATIVE RULINGS RE
CLASSIFYING DEFICIENCY CLAIMS ETC., IN CONNECTION WITH MOTIONS OF COASTLINE RE
HOLDINGS CORP (1) FOR RELIEF FROM THE AUTOMATIC STAY AND (2) TO CONVERT CASE
FROM CHAPTER 11 TO CHAPTER 7 was entered on the date indicated as AEntered@ on the first page
of this judgment or order and will be served in the manner indicated below:
I. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (ANEF@) B Pursuant to controlling
General Order(s) and Local Bankruptcy Rule(s), the foregoing document was served on the following
person(s) by the court via NEF and hyperlink to the judgment or order. As of 5/15/2012, the following
person(s) are currently on the Electronic Mail Notice List for this bankruptcy case or adversary proceeding
to receive NEF transmission at the email address(es) indicated below.
Craig G. Margulies: cmargulies@margulies-law.com
Scott H. Noskin: snoskin@mbnlawyers.com, krose@mbnlawyers.com;amcdow@mbnlawyers.com
Russell Clementson: russell.clementson@usdoj.gov
United States Trustee (LA): ustpregion16.la.ecf@usdoj.gov
Service information continued on attached page
II. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or
order was sent by United States Mail, first class, postage prepaid, to the following person(s) and/or
entity(ies) at the address(es) indicated below:
Service information continued on attached page
III. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment
or order which bears an AEntered@ stamp, the party lodging the judgment or order will serve a complete
copy bearing an AEntered@ stamp by U.S. Mail, overnight mail, facsimile transmission or email and file a
proof of service of the entered order on the following person(s) and/or entity(ies) at the address(es),
facsimile transmission number(s), and/or email address(es) indicated below:
Service information continued on attached page
Case 2:12-bk-17951-NB Doc 87 Filed 05/15/12 Entered 05/15/12 10:12:57 Desc
Main Document Page 16 of 16