SAUL KLEIMAN KATZ

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IN THE UNITED STATES BANKRUPT ED & ENTERED

FOR THE DISTRICT OF PUERTO
13 AUG 2008

LERK
Rt PTcy COURT

IN THE MATTER OF ; USN IOAN, PUERTO RICO
ALMACENES LINDA, INC, : CASES CONSOLIDATED UNDER
: NO. 07-00130 (SEK)
DEBTOR IN POSSESSION ; CHAPTER 11

IN THE MATTER OF :
SAUL KLEIMAN KATZ, : CASE NUMBER 07-02609 (SEK)
DEBTOR IN POSSESSION : Chapter 11

OPINION AND ORDER

Banco Bilbao Vizcaya Argentaria (“BBVA"}), asks us to
reconsider our order given in open court, finding its section
1111(b)* election and the issue of the collateral’s
inconsequential value moot, as Almacenes Linda, Inc. (the
“Debtor”) amended its treatment of BBVA’s claim contained in its
second amended plan of reorganization, now stating it would pay
the net cash value of the insurance policy serving as collateral
for its loan with BBVA on the effective date of the plan, treat
the claim’s deficiency or recourse claim under Class six and

cancel’? or surrender it, as this asset is not needed for Debtors

* “An unsecured creditor, a creditor whose security is
worth less than the total amount owed to the creditor, may choose
to have its claim treated in two manners. First, it can have a
bifurcated claim, with a secured claim to the extent of the value
of its collateral, and an unsecured claim for the remainder of

the debt owed. 11 U.S.C. § 506(a). Second, the secured creditor
can waive its unsecured claim and elect to have its total claim
treated as secured. 11 U.S.C. § 1111(b) (2).” (Our emphasis) (cit.

omitted). In re Griffiths, 27 B.R. 873 (Bkrtcy. Kan. 1983).

* Debtors preferred to cancel the policy if allowed to do
so under the terms of the assignment and applicable non

AUTHENTICATED =
U.S. GOVERNMENT.
INFORMATION
GPO

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effective reorganization.

Relying on In re Century Glove, Inc.*, BBVA argues that the
surrender of the collateral following an 1111(b) election does
not satisfy its claim, nor make the election moot. It then asks
the court to look at the treatment of its claim under the first
amended plan filed, before the election. It claims that payment
under that plan, of the net cash value of in 120 equal
consecutive monthly installments, does not meet the criteria get
by § 1111(b) (2) and therefore, that plan cannot be confirmed
under the cram down provisions of Code Section 1129
{b) (2) {A) (iii)*.

The underlying critical question is how much Debtors will
have to pay given BBVA’s § 1111(b) election. We are not surprised
that the parties interpret the consequences of the election
differently, as practitioners and commentators are dismayed over
the ramifications of such an election.®

Because we do not agree with the Bank’s interpretation of

bankruptcy law.

* In re Century Glove, Inc., 74 B.R. 958 (Bkrtcy. Del.
1987).

* “There can be a cash payment cram down, requiring the
debtor to make cash payments of at least the allowed amount of
the claim, and the discount value of these payments must equal at
least the value of the collateral.” In re Century Glove, Ine., 74
B.R. at 876.

> See 58 Am. Bankr. L.J. 129 n. 4 (1984).

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the cited case, we deny BBVA’s motion.

We begin by narrating events preceding our decision. In
February 2007, the Bank filed a proof of claim in the case of
Almacenes Linda, Inc. for the sum of $3,017,653.12, of which
$144,919.40 were secured by an assignment of a life insurance
policy attached thereto. The remaining amount was classified as a
general unsecured debt. Debtor did not object, and the claim was
deemed allowed as filed under 11 U.S.C. § 502(a).

In December 12, 2007, the Debtors in possession (“Debtors”)
filed a joint amended plan of reorganization. BBVA’s claim was
treated under Class eight as secured for the sum of $144,919.40
to be paid in 120 equal monthly installments of $1,758.01 that
included 8% annual interest, commencing thirty days after the
effective date of the plan. About two months later, BBVA filed an
“Election Under Section 1111(b)”, acknowledging that: the secured
portion of its claim was equal to the net cash value of the
assigned life insurance policy as of July 29, 2005; the unsecured
deficiency was to be treated under the Plan’s Class six; and the
sum of the deficiency depended on the wactual present value of
the surrender value of the life insurance policy.” BBVA then
stated it was making the election allowed by Section 1111 (b) (2)
of the Code, choosing to be “treated as fully secured under
section 1111(b)”, and as a recourse creditor, the Bank argued the

full amount of the debt must be treated as secured under the

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plan. It also waived any right to vote as an unsecured creditor
because once the election was made there was no deficiency.
Finally, the Bank averred its election meant the plan must
provide for deferred cash payments equal to the present value of
the collateral and for retention of the lien until full payment.
Consequently, BBVA argued the plan could not provide for payment
of 30% of its recourse claim.

Debtor countered by stating the Bank’s election entitled it
to “receive payment equal to the value of the cash value of the
Policy in full satisfaction of BBVA’s claim against the
Debtor...”. |

BBVA replied, stating after the election its claim could not
be aitered by Code sections 506(a)&(b). For purposes of
confirmation, its debt should be considered fully secured, but
its secured claim did not need to be treated the same as a fully
secured claim. This special treatment, the Bank arques entitled
the Bank to “receive the total amount of the debt plus the
present value of its collateral through the stream of payments”.
The Bank suggested that the discount rate that would provide
present value of the deferred payments should take into account
the risk of receiving payment over time, a matter for the court
to determine in this case.

Three months later, Debtors filed a second amended plan of

reorganization. This plan also recognized BBVA’s secured portion

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of its claim, estimating it at net cash surrender value as of
December, 2007, and did not alter its classification as the sole
member of the plan’s Class eight. Debtors treated Class eight
differently. Now Debtors proposed payment of the policy’s net
cash surrender value on the effective date of the plan.® In its
sur reply Debtor disagreed with the Bank’s position. Debtor
averred that the secured portion of the BBVA’s claim was limited
to the present value of its collateral, otherwise the Bank would
obtain a windfall to the detriment of the unsecured creditors.
Debtor interpreted the consequences of the election as a waiver
of the deficiency converting a recourse claim to a non recourse
claim, entailing a loss of the right to vote in any class other
than that of its allowed claim.

During the hearing to approve the disclosure statement held
on June 13°° , we scheduled the matter to be heard together with
confirmation of. the plan, as Debtors were busy negotiating with.
other crucial creditors whose opposition might debunk
confirmation. Meanwhile, BBVA filed an objection to confirmation
claiming the second amended plan incorrectly treated its claim
given its section 1111(b} election, thereby violating the

absolute priority rule.’

* It is not clear whether Debtors intended to keep the
collateral and continue paying the premiums due on the policy.

* BBVA has not appealed our ruling concerning the absolute
priority rule.

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During the first hearing on confirmation held last July 8th,
we raised the issue of the collateral’s inconsequential value®
that would defeat BBVA’s section 1111 (b) election, citing In re
Wandler, 77 B.R. 728 (Bkrtcy. N.D. 1987). We granted BBVA’s
request for time to brief the issue, ordering the Debtor to
reply, and scheduling it to be heard during the second hearing on
confirmation set by agreement of the parties for July 30°.

BBVA’s brief addressed the split of authorities as to the
meaning of “inconsequential value". It also tried to distinguish
the Wandler decision from the circumstances at hand. BBVA
pointed out other factors showing the policy was not of
inconsequential value, such as the fact the policy (a key man
insurance policy) played a critical role in Maintaining creditors
confidence in the business. It concluded by repeating that the
second amended plan’s treatment of BBVA’s claim after the section
1ili(b) violates the absolute priority rule.

Debtor’s memorandum embraces the ruling of In re Wandier,
stating unequivocally that it would cancel the policy on the
effective date of the plan as it was not needed for Debtors’
effective reorganization of the Debtor. (Our emphasis)

We began the July 30 hearing by stating that Debtors’

* “There are two situations in which the election cannot be
made. First, if the creditor’s interest in the collateral ‘is of
inconsequential value...,‘ the election cannot be made.” {eit.
omitted) In re Griffiths, 27 B.R. at 375.

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proposal for a surrender of the policy made the entire question
of the election and the issue of inconsequential value moot.
Debtor agreed. At that point, Counsel for BBVA argued that he
believed there were cases stating that an 1111(b) election could
not be defeated by a debtor’s abandonment, foreclosure or sale of
the collateral. We answered that a surrender was not an
abandonment, foreclosure or sale. BBVA then asked the court to
rule on whether it could continue paying the premiums if the
policy were surrendered. The Court answered that it would depend
on the terms of the assignment, the policy, and applicable non
bankruptcy law; a question that we could not answer given the
information produced, and our limited jurisdiction. Counsel for
the Bank then asked for time to consult with his client who might
accept this new treatment. We ordered the Bank to reply in 24
hours®, which it did by, filing the instant motion for
reconsideration of our bench ruling under FRBP 9024,°°
Discussion
Although BBVA brings its request for reconsideration under

FPRBP 9024 and FRCP 60(b) (6), we shall consider it under FRBP 9023

* The reasonableness of this short period was confirmed
when BBVA stated during the August 4°? oral argument that it
agreed this short period was sufficient.

*° Debtors were ordered to answer immediately and oral
argument was set for August 4™* by agreement of the parties.

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and FRCP 59(e).** Under these Rules BBVA must clearly establish
we committed a manifest error of law when ruling that questions

concerning the life insurance policy’s inconsequential value and

‘consequences of BBVA’s election under Code § 1111(b) became moot,

when Debtors decided to relinguish the policy in addition to
paying its net cash value on the effective date of the plan, and
treating the Bank’s deficiency claim under Class six.

BBVA challenges our ruling even though it accepts Debtors’
offer to surrender the policy.** BBVA insists it still has the
right to payment of its deficiency claim of approximately $2.8
million dollars as a secured debt under the plan due to its
previous § 1111(b) election. Citing In re Century Glove, Inc.,

supra, BBVA argues that once the election is made, Debtors may

“4 “Federal courts have consistently stated that a motion

which challenges the prior judgment on the merits will be
treated as either a motion ‘to alter or amend’ under Rule 59(e)
or a motion for ‘relief from judgment’ under Rule 60(b). Which
rule applies depends essentially on the time the motion is
‘served. If a motion is served within ten days of rendition of
the judgment, the motion ordinarily will fall under Rule 59(e).
If the motion is served after that time, it falls under Rule
60(b).” In re Pabon Rodriguez, 233 B.R. 212, 218-19 (Bkrtcy.
P.R. 1999).

“* There is an attachment to the motion for reconsideration
Stating Debtor cannot cancel this assigned policy if the BBVA
does not agree to sign the surrender document; should the policy
owner discontinue the monthly premium payments, the Bank may keep
the policy in force; if the owner cannot make the monthly premium
payments, the Bank may use the accumulated value of the policy to
cover the premiums and keep the policy in force; and the actual
minimum payment is $980.00 per month that will increase every
January 28°° of each following year.

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not defeat the election by subsequently modifying the second
amended plan, adding a key difference: that it would relinquish
the policy through its cancellation or surrender.

It seem to us that one of the reasons why the creditor makes
the § 1111(b) election is to prevent a debtor who is retaining
collateral and using it for its reorganization from getting a
windfall, while not paying the entire sum owed according to the
initial bargain. This situation occurs when a debtor’s plan
proposes to bifurcate the secured claim into a secured portion,
based on the court’s valuation o£ its collateral, and an
unsecured claim equal to the deficiency or recourse claim,
resulting from valuation of the collateral. Retention of the
collateral and its use by the reorganized debtor for purposes
other than a sale before plan completion, may result ina
windfall. A debtor would obtain a windfall because it paid the
secured creditor less than its initial bargain under the plan,
and profits by using the collateral and keeping it with its
future appreciation in value. The section i11i11(b) election is
designed to prevent this from occurring. It calls for payment of
the entire allowed claim as secured, preventing bifurcation. If
the payment of the allowed claim is deferred, it must provide a
discount rate to account for the present value over the sum equal

to the value of the collateral.’ When a debtor surrenders the

58 Am. Bankr. L.d. 129, 136 (1984).

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collateral in favor of the lienholder, the lienholder is then
free to exercise its in rem rights in the encumbered property,
which is exactly what the creditor bargained for in the event of
default. Thus, Debtor’s decision to relinquish the policy by
surrendering it to BBVA moots its election and the question of
the collateral’s inconsequential value."

We read In re Century Glove, Inc, supra, as allowing a
debtor to treat the electing creditor differently from what the
pian expressly proposes, provided the electing creditor affected
by this modification or alteration of the plan is “given the
opportunity to change its prior [1111(b)] election.” In re
Century Glove, Inc., 74 B.R. at 961. The modified second amended
plan does just that, it relinquishes the collateral in favor of
BBVA, provides for payment of the secured portion of its claim,
and allows the deficiency or recourse portion to be placed in
Class six where it will be treated as a general unsecured claim
with a right to 28% of approximately 2.8 million U.S. dollars.

This treatment amounts to a cram down under Code section

“ “Although the language of section 1111(b) does not refer
specifically to abandonments, if the property is not sold [under
the plan[], but is abandoned or returned to the secured party,
the non recourse deficiency claim should disappear. The same
result should occur if the creditor obtains relief from stay and
forecloses prior to confirmation.” (Our emphasis) 7 Collier on
Bankruptcy, § 1111.03 [2] [b] [ii] (15th Ed. rev.).

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1129 (b) (2) (A) (iia) .*°

Conclusion
in sum, Debtors may modify their second amended plan in the
above stated manner, and such modification effectively moots
BBVA'sS prior § 111i(b) election, as well as the issue concerning
the inconsequential value of its collateral. Therefore, we deny
the motion for reconsideration as the Bank has not demonstrated
we committed a clear error of law when ruling from the Bench on

this matter.

SO ORDERED, in San Juan, Puerto Rico on August 13, 2008.

tier foo—~

ARA DE SUS
U.S/ Bankruptcy Judge

* “The debtors chose the third option of giving ... [BBVA]
‘the indubitable equivalent of such claim ...’ 11 U.S.C. §
1129 (b) (2) (A) (iii). The phrase ‘indubitable equivalent’ is
derived from Judge Lerned Hand’s opinion in In re Murel Holding
Corp. [cit. omitted]. It includes ‘abandonment of collateral’ to
the secured creditor. [cit. omitted] Indubitable equivalent cash
payments must equal at least the secured claim.” In re Griffiths,

27 B.R. at 876.

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