MEMORANDUM OF DECISION RE TREATMENT OF MINORITY VOTING TRUST'S CLAIM AND MODIFICATIONS TO CHAPTER 11 PLAN

MEREDITH A. JURY, Bankruptcy Judge.

On July 7, 2016, this court entered its Order re Valuation of Minority's Claim, finding that the value of the claim ("Valuation Claim") is $2,419,888. In accordance with two District Court Appellate Orders, this court recognized that it must treat the Valuation Claim as a claim, not an interest, but that the claim must be subordinated to the same priority as common stock1. Therefore, the court invited briefing by the parties on the remaining issues in this chapter 11 case, including how the subordinated claim should be treated in the plan and what modifications, if any, needed to be made to the plan to accomplish that treatment. Briefs on those issues were filed by the parties on September 6 and 20, 2016; the matter was argued on September 29, 2016, and then submitted for this written ruling. To the extent that findings of fact and conclusions of law are required for this court's ruling, this memorandum shall serve as those findings and conclusions as allowed by Rule 7052.2

The Minority Voting Trust (MVT) argued in its briefs that, although subordinated to the priority of common stock, its claim must be separately classified3. Then, to retain the unique "claim" aspect of its position, a value quantified in money as of the petition date, vis-à-vis the other shareholders' interests in common stock, quantified in a percentage of value on the Effective Date4, it posited that one of two approaches could be taken. The first would be to pay the Valuation Claim in cash before the treatment of other equity interests of Class 7 shareholders ("off the top"). The second would be to reduce the non-MVT shareholders' claims to a liquidated amount (based on the Effective Date value of the corporate debtor), use the amount of the Valuation Claim in cash on the petition date, then redistribute the shares of OCN based on these values. The result of this recalculation of equity would be that, if OCN has declined in value after the petition date, MVT's percentage interest in OCN will increase and the Majority's and other shareholders' interests will decrease. As authority for these proposals, MVT cited a bankruptcy court opinion from Minnesota, In re SendmyGift.com, Inc., 280 B.R. 667 (Bankr. D. Minn. 2002), and a law review article, Nicholas L Georgakopoulos, Strange Subordinations: Correcting Bankruptcy's §510(b), 16 Bankr. Dev. J. 91 (1999-2000).

MVT clarified that if the court does not follow the separate classification/pay off the top methodology, then a conversion ratio will need to be established, whereby MVT obtains new shares in respect to the value of the Valuation Claim, resulting in the diminution of equity for others. For this proposition it cited a Fifth Circuit case, Schaefer v Superior Offshore Int'l, Inc. (In re Superior Offshore Int'l, Inc.), 591 F.3d 350 (5th Cir. 2009), which affirmed a plan with a conversion mechanism which allowed a claim subordinated under §510(b) (denominated in dollars) to share in surplus funds with common equity (denominated in percentage shares), which resulted in a pro rata sharing in the same priority.5

MVT's proposal was not precise as to the equation for the conversion mechanism, and it only suggested the manner by which the court would determine the residual value of the shares as of the Effective Date, which is critical to the ratable distribution. It submitted that a lengthy valuation proceeding could be avoided by using current financials (balance sheets) and obtaining a stipulation of the parties.

As to the separately classified claim for attorneys' fees and expenses6, MVT recognized that this court has already ruled that the fee claim must also be subordinated to the same priority as common stock7, meaning it would not be treated in Class 5B as proposed in the plan, but would be added to the Valuation Claim for the purposes of the ratable distribution. MVT submitted that further liquidation of the attorneys' fees claim would not be required8 because the currently allowed sum of $907,098.13, when added to the Valuation Claim, would be sufficient to give MVT the majority controlling shares in OCN.

MVT also argued that the plan should be modified by the court to provide for the ratable distribution as well as to place the attorneys' fees claim in Class 7 rather the Class 5B.

Not surprisingly, like everything else in this case, OCN, controlled by the Majority, took a contrary view in its briefs. It argued that, as a result of the second District Court ruling that the Valuation Claim is subordinated under §510(b) to the priority of common stock, MVT has only an equity interest in common stock and therefore should be treated like all other shareholders in Class 7. In the confirmed plan, Class 7 interests may either be retained as equity or, at the choice of the holder, canceled in exchange for their pro rata share of the liquidation value of the debtor as of the Confirmation Date. Calling the Valuation Claim an "Equity Claim", OCN submitted that as a result of its subordinated status, MVT's claim cannot be paid ahead of the rest of Class 79. Citing a series of cases, OCN argued that a chapter 11 plan may properly provide that subordinated claims and common stock retain their interest in a reorganized corporation but receive no distribution of money or property and that this outcome applies to the Valuation Claim. In other words, if the lowest class (here, equity) receives nothing, then a subordinated claim receives nothing; MVT merely retains its equity interest in OCN. In keeping with these arguments, OCN asserted that the Valuation Claim need not be placed into a separate class since it will be adequately treated in Class 7 and that the plan needs no modification because the plan properly provides for Class 7. In addition, OCN submitted that the court has no power to modify the plan, since such modification must come from a plan proponent.

This court's task is to treat the Valuation Claim in a manner that is consistent with the two District Court rulings which presently provide the law of the case. The first ruling firmly holds that MVT has a claim, not an interest, which is distinct from other shareholders: "From the moment the Superior Court entered the decree, the Minority had an enforceable right to payment for its shares — . . . . . In this way, the Minority did not `retain all of the indicia of any other shareholder.'" When OCN did not make the prepetition payment for the shares, "the Minority has a claim for the value of its shares had OCN been dissolved."10 Notwithstanding that in its second ruling the District Court found the claim should be subordinated to the priority of common stock, it still preserved its status as a distinct claim, different from the other shareholders: "This conclusion does not conflict with the Court's determination that `[t]o the extent the Bankruptcy Court's subsequent orders — including its order adopting OCN's reorganization plan — treat the Minority's interest as equity, these orders will need to be vacated or modified consistent with this Order.' [quoting its first ruling]. . . . . But this conclusion does not affect the Court's prior determination that Minority has a "claim" or right to payment as defined by 11 U.S.C. §101(5). . . ."11

To make these controlling rulings mesh, MVT argued that whereas the priority of the claim is determined by the subordination ruling, the value of the claim is addressed by the original claim ruling. OCN, on the other hand, made no attempt to mesh the two rulings. From its perspective, the first ruling is irrelevant because once the claim is subordinated to the priority of equity, it totally loses its "claim" status and MVT may only share in the effective date equity measured by its 40.25% shares.

This court does not agree with OCN's assertion that after two District Court rulings, intervened by an interlocutory appeal to the Ninth Circuit, and followed by a contested valuation hearing which determined the amount of the Valuation Claim on the petition date, MVT has only a residual equity interest like all other shareholders. This conclusion gives no weight to the valuation of MVT's equity as of the petition date, the "claim" part of its interest. MVT is correct when it contends that subordination determined only priority, but the valuation hearing determined value; that value must be accounted for when the equity interest in the debtor is determined on the Effective Date.

This court does agree with OCN that because MVT shares in priority with the other shareholders, it cannot be put into a separate class. Further, based on the priority scheme of the Bankruptcy Code, payment for the value of MVT's equity in cash is forbidden if the other shareholders do not receive cash. As a consequence, the only way to give due credit to the petition date value of the shares, represented by the Valuation Claim, is to accomplish some type of ratable redistribution of the shares as posited by MVT. As apparently recognized by both parties, because the residual value of OCN is substantially less than the value of equity on the petition date, the result may well be that MVT is no longer the Minority and all other shareholders will slip in percentage.12

The Court recognizes there is no precedential case law which supports this treatment of the Valuation Claim. However, the Majority/OCN has cited no binding authority which prevents such redistribution of shares to give weight to the petition date value of MVT's claim. Therefore, the court finds and concludes that a ratable redistribution formula will provide to MVT what it holds in the Valuation Claim.

Having reached that decision in concept, the court, however, is left with open questions which must be addressed before the court can enter a final order and certify its rulings to the Ninth Circuit. As the court sees it, the following are the open issues:

Based on the foregoing memorandum and the open issues above, the court requests the parties to file simultaneous statements with the court addressing the open issues 14 days after entry of this Memorandum of Decision. Depending on the parties' submissions, the court will then either set a hearing or finalize all matters without further hearing.