In re Burcam Capital II, LLC, Case No. 12-04729-8-JRL (Bankr. E.D.N.C., Feb. 15, 2013)

CASE SNAPSHOT

Following the vote on the chapter 11 debtor’s reorganization plan and before the confirmation hearing, the debtor modified its plan. The modified plan proposed to reclassify unsecured claims purchased by the lone secured creditor separately from unsecured trade creditor claims. Over the objection of the secured creditor, the court upheld the reclassification, holding that the debtor demonstrated a legitimate business reason for reclassifying the claims, that re-solicitation of the vote was not necessary because it is required only when the treatment of an accepting claim is materially changed, and that, as modified, the plan was fair and equitable.

FACTUAL BACKGROUND

CWCapital was the debtor’s only secured creditor, holding deeds of trust on the debtor’s real property (an office/retail building). The original reorganization plan separated unsecured creditors into two classes: Class 5 comprised of allowed general unsecured claims (to be paid in quarterly installments of $5,000), and Class 6 comprised of allowed small unsecured claims (to be paid in full 120 days after the plan’s effective date). The plan provided that all creditors would be paid in full.

Prior to voting, CWCapital purchased 16 unsecured claims in order to block plan confirmation. CWCapital filed a total of 18 ballots rejecting the plan – one for each of its secured claims (Class 3 and Class 4) and one for each of the 16 unsecured claims it had purchased or had otherwise been assigned. There were only two votes for plan approval, one each from Class 5 and 6. The remaining 15 creditors did not vote.

Subsequent to voting and prior to confirmation, the debtor modified the plan. Like the original plan, the modified plan proposed to pay all creditors in full; however, it created a separate class of allowed unsecured claims – Class 4A – into which CWCapital’s purchased claims were placed. The Class 4A claims were treated differently than Class 5 and 6, amortizing the 4A claims over 10 years, and securing these claims with a new deed of trust. The accompanying amended disclosure statement explained that CWCapital’s purchase of unsecured claims put the secured creditor at odds with the interests of the other unsecured creditors, and that part of the justification for the separate classification was the debtor’s desire to pay first the trade creditors with whom it would continue to have a business relationship.

CWCapital objected to the modified plan and moved to dismiss the chapter 11 case. The debtor’s objection to CWCapital’s claims based on CWCapital’s inclusion of more than $1 million in pre-payment penalties was not before the court.

COURT ANALYSIS

Section 1127(a) of the Bankruptcy Code permits the modification of a plan at any time before confirmation (so long as certain requirements are met), and that the "plan as modified becomes the plan." Section 1127(d) provides that any claim holder that has accepted or rejected a plan is deemed to have accepted or rejected the modified plan, unless the claim holder changes its previous vote. Federal Rule of Bankruptcy Procedure 3019(a) provides that a modification will be deemed to be accepted by claim holders who have not accepted the modification, so long as there is no adverse change to the treatment of such claim holders.

The Bankruptcy Court for the Eastern District of North Carolina stated that "the inquiry of whether a modification has materially and adversely affected the treatment of creditors is important when a creditor accepted the original plan and now is receiving different treatment." If material adverse treatment is found, then re-balloting of the plan is required. Here, the court found that an inquiry into re-balloting was inapposite because that analysis contemplates accepting ballots receiving adverse treatment, and because CWCapital had voted to reject the plan, re-balloting would not produce a different result. Further, the treatment of Classes 5 and 6 did not change, so they were deemed to have accepted the modified plan.

The court then turned to the question of whether the plan was confirmable under the cramdown provisions. First, the court examined whether the reclassification of claims was proper. Section 1122(a) provides that a claim may be placed in a class only if such claim is substantially similar to the other claims of the class, but does not require that all similar claims be included within a single class. Citing Fourth Circuit case law, the court set forth the test: separate classification requires a legitimate business justification as well as different treatment for separate classes. The court looked to Deep River Warehouse (a bankruptcy case from the Middle District of North Carolina), which noted that reasons may exist to separately classify deficiency claims and trade creditor claims. Quoting Deep River Warehouse, the Burcam court said, "If the two classes received different treatment under the Plan, for legitimate reasons, then the separate classification might be viewed in a different light."

The court concluded that debtor had articulated a legitimate business justification for its modification separating the unsecured claims purchased or acquired by CWCapital, an institutional creditor, from the debtor’s trade creditors; specifically, that separate classification would allow the debtor to maintain positive relationships with and continue conducting business with its trade creditors. Additionally, the Class 4A claims received different treatment from Classes 5 and 6, satisfying the second prong of Fourth Circuit precedent. "As such, the classification set forth in the [modified] plan will stand," the court held. The court further considered whether the debtor’s proposed treatment of the Class 4A claims was fair and equitable to CWCapital, and increased the interest rate at which the Class 4A claims would be paid.

PRACTICAL CONSIDERATIONS

The court appears to have considered not only the statutory framework and case law on plan modification after a creditor vote, but also the facts that CWCapital purchased claims to block the plan, that CWCapital was fully secured, and that all creditors would be fully paid under both the original and modified plans.