Somerset Properties SPE, LLC

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
SOMERSET PROPERTIES SPE, LLC
DEBTOR
CASE NO.
10-09210-8-SWH
ORDER REGARDING EXISTENCE OF ACCEPTING IMPAIRED CLASS
This case came before the court for a hearing on confirmation of the debtor’s Chapter 11 plan
on June 14, 2012, in Raleigh, North Carolina. On behalf of CSFB 2001-CP4 Falls of Neuse, LLC,
and CSFB 2001-CP4 Bland Road, LLC, the secured lenders and largest creditors in this case, their
special servicer, LNR Partners, LLC (hereinafter “Lenders”) filed an objection to confirmation. At
the hearing, the parties identified the threshold issue of whether the debtor’s plan had the acceptance
of at least one impaired class of creditors. 	That question was taken under advisement and, on
June 15, 2012, the court notified the parties by email of its ruling that an impaired accepting class
does exist in this case. 	This order sets out the bases for the court’s decision.
SO ORDERED.
SIGNED this 23 day of August, 2012.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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BACKGROUND
Somerset Properties SPE, LLC filed a petition for relief under Chapter 11 of the Bankruptcy
Code on November 8, 2010. The debtor owns and operates six office buildings in Raleigh, North
Carolina, known as “Somerset Park” and “Somerset Center and Place.” On February 17, 2011, the
debtor filed its initial plan of reorganization. The Lenders hold a security interest in the debtor’s real
property, and filed an objection to confirmation of the plan on April 20, 2011. On May 3, 2012, the
debtor filed its first amended plan, which does not change the classification of the claims at issue.
Here, the debtor’s amended plan includes six (6) classes that are impaired and thus entitled to vote;
specifically, Classes 2, 3, 4, 5, 6, and 7, comprised as follows:
• 	Class 2 includes allowed secured tax claims and allowed priority tax claims.
• 	Class 3 is comprised of the allowed secured claim of CSFB 2001-CP4 Bland Road,
LLC.
• 	Class 4 is comprised of the allowed secured claim of CSFB 2001-CP4 Falls of
Neuse, LLC.
• 	Class 5 is comprised of all allowed unsecured claims in amounts less than $10,000.
• 	Class 6 is comprised of all allowed unsecured claims other than those treated in other
classes.
• 	Class 7 is comprised of the allowed unsecured claims of the Lenders.
The Lenders are the only members of Classes 3, 4, and 7, and have voted to reject the plan.1 As
Classes 5 and 6 are impaired and accepting, the requirements of § 1129(a)(10) appear, facially, to
be met. On June 11, 2012, the Lenders filed an objection to confirmation setting out its position
1 Whether the Class 2 members, if any, would vote to accept the plan is irrelevant for present
purposes because priority tax claimants cannot serve as the required impaired class to accept the
plan under § 1129(a)(10). See In re Bryson Props., 961 F.2d 496, 505 (4th Cir. 1992) (“We agree
that priority tax claimants, which receive preferential treatment under the Code . . . are not an
impaired class that can accept a plan and bind other truly impaired creditors to a cram down.”).
2
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that there was no proper accepting impaired class and that confirmation was precluded by
§ 1129(a)(10).
DISCUSSION
Section 1129(a)(10) of the Bankruptcy Code requires that “[i]f a class of claims is impaired
under the plan, at least one class of claims that is impaired under the plan [must have] accepted the
plan, determined without including any acceptance of the plan by any insider.” The Lenders contend
that the debtor’s proposed plan fails the requirements of § 1129(a)(10) on two grounds. First, the
Lenders argue that the creation of a separate class, Class 7, for the Lenders’ deficiency claim
violates § 1122 and does not provide the requisite accepting impaired class under § 1129(a).
Second, the Lenders dispute the separate classification of the administrative convenience class,
Class 5. They argue that it is artificially impaired, and contend that acceptance by an administrative
convenience class alone cannot be sufficient for confirmation. For the reasons that follow, the court
concludes that acceptance by the impaired administrative class is sufficient to satisfy the requirement
that at least one impaired class accepts the plan.
1. 	Separate Classification of the Lenders’ Deficiency Claim
The court turns first to the issues surrounding classification of the Lenders’ deficiency claim
separately from the general unsecured claims. The Lenders assert two objections to confirmation
regarding the separation and treatment of Classes 6 and 7: 	First, the Lenders argue that the
separation of substantially similar unsecured claims into two classes is improper, and second, the
Lenders note that inasmuch as the treatment of Classes 6 and 7 is virtually identical, there can be
no legitimate basis for the separation of the Lenders’ deficiency claim from the general unsecured
claims and, therefore, no valid accepting class under § 1129(a)(10).
3
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In response, the debtor, relying heavily on In re Deep River Warehouse, 2005 WL 2319201
(Bankr. M.D.N.C. 2005), points to perceived inherent differences between the deficiency claim and
the claims of trade creditors, describing those claim holders as “at odds” with one another because
“[u]nsecured creditors have no collateral that motivates them in the decision-making process.” Deep
River, 2005 WL 2319201 at *5. As these two sets of creditors possess diverging goals and interests,
the debtor asserts, separation is appropriate and permissible under the Bankruptcy Code. The court
ultimately concludes on this issue that the debtor has failed to discharge its burden to show that there
is a legitimate basis for the separate classification of Classes 6 and 7, and thus the accepting vote
of Class 6 cannot satisfy § 1129(a)(10). The court’s decision rests primarily on the failure of the
debtor to give different treatment to those classes.
There is no mandate found in the Bankruptcy Code requiring that a plan place all similar
claims in a single class. 	However, it is well-established that separate classification may not be
created with the sole intent to achieve cram-down and, in most cases, classification must be
accompanied by differential treatment. 	See, e.g., Bryson, 961 F.2d at 502 (holding that where
separate classes were created but received identical treatment, the classification was impermissible);
In re Trimm, Inc., 2000 WL 33673795 at *4 (Bankr. M.D.N.C. 2000) 	(noting that the Second,
Third, Fourth, Fifth, Eighth, Sixth, and Ninth Circuits have held that “classification schemes
designed solely to engineer compliance with the cram-down provision” shall not be allowed); In re
Elmwood, Inc., 182 B.R. 845, 849 (D. Nev. 1995) (holding that a creditor’s unsecured deficiency
claim could permissibly be classified separately from other unsecured claims when each class was
assigned a different repayment method).
4
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In the present case, the court finds that the treatment afforded to each of these classes is, for
all intents and purposes, identical. 	The debtor’s plan outlines the treatment of Classes 6 and 7 as
follows:
Class 6 Claims. The Debtor shall pay quarterly installments of $31,250 to be
split Pro Rata among Allowed Claims in Classes 6 and 7. 	Such payments shall
commence to Class 6 three months after the Effective Date. Such payments shall
continue until Class 6 Claimants have been paid 100% of their Class 6 Claims.
Class 6 Claims shall accrue interest at the Federal Judgement Rate on the
Confirmation Date.
Class 7 Claims. The Debtor shall pay quarterly installments of $31,250 to be
split Pro Rata among Allowed Claims in Classes 6 and 7. 	Such payments shall
commence to Class 7 three months after a final judgment is rendered and all appeals
are complete in Adversary Proceeding number 11- 00053-8-SWH. Such payments
shall continue until Class 7 Claimants have been paid 100% of their Class 7 Claims.
Class 7 Claims shall accrue interest at the Federal Judgment Rate on the
Confirmation Date.
As both classes of claims shall be paid from the same quarterly installment amounts on the
same practical time line, there is no appreciable difference in the treatment of these two unsecured
classes. 2 The standard promulgated by the Fourth Circuit in Bryson is binding on this court, and the
debtor’s classification is improper under its guidance. Although the Bryson court acknowledged
some degree of flexibility afforded to the debtor in proposing a plan, it clearly established the limits
of such discretion as follows: where all unsecured claims receive the same treatment, yet are
classified separately, the classification scheme at issue is “at a minimum, highly suspect.” Bryson,
961 F.2d at 502; see also In re Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1991) (as
2 The payment to Class 7 deficiency claims would be delayed until a final judgment on the
amount of that deficiency, if any, but the same would hold for any Class 6 claim holder whose claim
was objected to by the debtor. 	The plan provides for payment to Allowed Claims, and neither
Class 6 nor Class 7 claimants will be paid from the quarterly installment until their respective claims
are finally allowed.
5
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amended) (stating “thou shalt not classify similar claims differently in order to gerrymander an
affirmative vote on a reorganization plan”). In the present case, as in Bryson, the debtor has failed
to discharge its burden to demonstrate a legitimate basis for separating the relevant classes of
unsecured claims, while treating them similarly. 	Thus, in the absence of a showing of such
legitimacy, the debtor’s proposed classification scheme is clearly “for the purpose of manipulating
voting and it may not stand.” Bryson, 961 F.2d at 502.
Because the debtor has failed to provide a legitimate justification for the classification and
treatment of these two unsecured classes, their separation is impermissible under the Bryson
standard, which governs in this matter. Accordingly, the existence of an accepting impaired class
hinges on the validity of the administrative convenience class’s accepting vote.
2. 	Sufficiency of the Accepting Vote of an Administrative Convenience Class
The Lenders dispute the plan’s creation and treatment of the administrative convenience
class on multiple grounds. First, the Lenders argue that as an administrative convenience class,
Class 5 must meet the “reasonable and necessary” standard set forth in § 1122(b) in order to warrant
separate classification, and that it does not meet that standard. Further, even if Class 5 does meet
the test, the Lenders contend it cannot serve as the sole impaired, accepting class in satisfaction of
§ 1129(a)(10) of the Bankruptcy Code. 	Finally, even if the acceptance of Class 5 is capable of
carrying the plan to confirmation, the Lenders argue that these claims are not properly impaired
pursuant to § 1124. The debtor disputes all three contentions.
The Lenders claim that the separate classification of the administrative convenience class
is neither “reasonable” nor “necessary” as required by § 1122(b), which states that “[a] plan may
designate a separate class of claims consisting only of every unsecured claim that is less than or
6
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reduced to an amount that the court approves as reasonable and necessary for administrative
convenience.” According to the Lenders, the debtor is required to, but cannot, prove that treating
such a small number of claims would be “truly burdensome.” In re S & W Enter., 37 B.R. 153, 162-
63 (Bankr. N.D. Ill. 1984). The debtor argues in response that the “truly burdensome” test is not the
applicable standard for an administrative convenience class but that even if the test were found to
apply, the classification of the present plan nevertheless successfully meets such a standard.
The court finds the heightened standard for classification asserted by the Lenders is
inapplicable, within the Fourth Circuit, to claims classified separately under § 1122(b). See Trimm,
2000 WL 33673795 at *5 (explaining that separate classification of similar claims must meet a
reasonableness standard unless such classification falls within “the exception afforded under
§ 1122(b) authorizing separate classification of smaller unsecured claims when reasonable and
necessary for administrative convenience”). 	Rather, the debtor only bears the burden of proving
that he or she has some legitimate basis for separately classifying a claim or collection of claims.
See, e.g., In re AG Consultants Grain Div., Inc., 77 B.R. 665 (Bankr. N.D. In. 1987); In re Aztec
Co., 107 B.R. 585 (Bankr. M.D. Tenn. 1989); In re Jersey City Med. Ctr., 817 F.2d 1055 (3rd Cir.
1987).
Instead, if “a plan proponent can articulate legitimate differences among otherwise
substantially similar claims and if separate classification is in the best interest of the creditors and
will foster reorganization, then separate classification may be proper.” 	In re Simon, 2008 WL
2953471 at *2 (Bankr. E.D. Va. 2008); see also Trimm, 2000 WL 33673795 at *5 (noting that
“[n]umerous courts have recognized that if there is a valid business justification then creditors which
otherwise have the same priority status under the bankruptcy system may be classified and treated
7
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differently”). 	The court finds such a legitimacy standard to be met, based on the timetable of
payment of the claims and the interest of the debtor in expedient compensation of holders of very
small unsecured claims.
Pursuant to § 1122(b) of the Bankruptcy Code, “[a] plan may designate a separate class of
claims consisting only of every unsecured claim that is less than or reduced to an amount that the
court approves as reasonable and necessary for administrative convenience.” The consolidation and
separate treatment of such claims “does not diminish the fact that they may be impaired and does
not preclude them from being an impaired class of claims” 	for Chapter 11 plan confirmation
purposes. In re Patrician St. Joseph Partners Ltd. P’ship, 169 B.R. 669, 678 (D. Ariz. 1994).
The Lenders rely heavily on cases that do not adequately support their position,3 and the
court is of the view that the Lenders’ argument on this particular issue does not accurately reflect
the current state of the law, which has decidedly shifted to recognize the acceptance of an
administrative convenience class as sufficient for confirmation. 	See William L. Norton, Jr., 6
Norton Bankr. L. & Prac. 3d. ed. § 113:5 (explaining that cases reflecting the Lenders’ position
“may have lost their precedential impact” over the past decade due to the “Supreme Court’s more
recent insistence on adherence to literal interpretation absent an ambiguity”).
The court also considers Class 5 to be a properly impaired class pursuant to the requirements
of § 11129(a)(10), as the thirty-day delay in payment specified in the treatment of these claims
constitutes a valid form of impairment under the Bankruptcy Code. Unlike in the plan in Dunes,
which the Lenders cite as comparable, the debtor’s plan in the present case contemplates the infusion
3 In re Dunes Hotel Assocs., 188 B.R. 174 (Bankr. D.S.C. 1995); In re Willows
Convalescent Ctrs. Ltd. P’ship, 151 B.R. 220 (D. Minn. 1991).
8
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of funds sufficient to pay the administrative convenience class during the month following the
effective date from the collection of rents.4 See Dunes,188 B.R. at 3. The debtor has presented a
compelling basis for delayed payment, which satisfactorily demonstrates that this class is
permissibly impaired.5
CONCLUSION
In sum, the court determines that the administrative convenience class is permissibly
separated from the other classes identified in the debtor’s plan and constitutes a valid impaired
accepting class under § 1129(a)(10). 	Thus, while the accepting vote of Class 6 will not satisfy
§ 11129(a)(10), Class 5 constitutes a valid impaired accepting class for the purposes of confirmation.
SO ORDERED.
END OF DOCUMENT
4 In Dunes, the court found artificial impairment to be present where the debtor’s plan
proposed to repay an unsecured class in full over a six-month period even though the debtor had
been demonstrated to have “enormous financial resources available” on the effective date. As the
debtor was capable of paying the full value owed to the unsecured class on the effective date, the
court determined that the debtor’s classification scheme evidenced a “gross manipulation of the
Chapter 11 process.” Dunes, 188 B.R. at 3.
5 In this case, as in In re Swartville, 2012 WL 112990 (Bankr. E.D.N.C. 2012), the question
of whether a debtor may “artificially impair” a class is not dispositive and thus not ripe for
consideration. Accordingly, this court, like the court in In re Schwarzmann, 103 F.3d 120 at *3 (4th
Cir. 1996) (unpublished disposition), “need not decide whether the vote of an artificially impaired
class to accept a plan counts under § 1129(a)(10) because the impairment to [the creditor’s] claim
is not artificial or insignificant.”
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