THOMAS J. TUCKER, Bankruptcy Judge.
This Chapter 11 case presents a dispute over confirmation of the proposed plan of reorganization filed by the Debtor, BWP Transport, Inc. ("BWP"). BWP's largest creditor, JPMorgan Chase Bank, N.A. ("Chase,") which also is a secured creditor, objects to confirmation on numerous grounds. Among these, Chase argues that BWP's plan unfairly discriminates against Chase, because the plan proposes to treat its secured claim less favorably than several other secured creditors. Chase also argues that BWP is a solvent debtor whose plan fails to meet the requirements that case law imposes on solvent debtors.
For the reasons stated in this opinion, the Court will deny confirmation of BWP's plan.
As BWP says in its combined plan and disclosure statement,
The Court held a hearing on May 18, 2011, regarding confirmation of BWP's proposed plan, contained in the document entitled "Debtor's Third Amended
Soon after the confirmation hearing, on June 6, 2011, BWP's sole shareholder, Sandra J. Lickwala, filed a voluntary Chapter 7 case in this Court, jointly with her husband, Donald P. Lickwala (Case No. 11-55831). On July 14, 2011, the Chapter 7 Trustee in the Lickwala bankruptcy case, Charles L. Wells, III, filed an objection to confirmation in this case.
In his objection to confirmation of the BWP Plan, the Trustee stated that "he is conducting due diligence regarding the debtor [Sandra Lickwala] and may, among other things, attempt to negotiate an amendment to the plan regarding the treatment of [Chase] to provide for entry of a consensual confirmation order."
In response to the Trustee's objection, the Court entered an order requiring BWP, the Lickwala Trustee, and Chase to file a joint status report, "describing the status of, and prospects for, negotiation of a possible consensual plan of reorganization for BWP Transport, Inc."
There has been much motion activity in the Lickwala bankruptcy case during the last few months. Recently, however, the Trustee and the Lickwalas have agreed to a settlement of numerous disputes between them. One of the terms of the settlement is that the Trustee will abandon the Lickwala estate's ownership interest in BWP. The Trustee has filed a motion for approval of the settlement. Chase, which is also a creditor in the Lickwala case, has objected to the settlement. A hearing is scheduled for January 11, 2012.
This Court has subject matter jurisdiction over this bankruptcy case under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This matter is a core proceeding under, among other possible provisions, 28 U.S.C. § 157(b)(2)(L).
BWP is liable to Chase, either directly or as a guarantor, on four promissory notes. BWP's Plan bifurcates the claim of Chase. In Class E.4 of the Plan, BWP says that "Chase's claim is secured [by] Debtor's cash, inventory, chattel paper, accounts,
The Plan proposes to pay Chase's $1,531,500.00 secured claim in full over 6 years with 6.25% interest, with 72 monthly payments of $25,562.50 in principal and interest, starting 30 days after the Plan's "Effective Date." The Plan also states that Chase will retain its liens until its secured claim is paid in full.
The Plan places Chase's $478,672.60 unsecured claim in a class by itself, Class E.11. The Plan proposes to pay Chase's unsecured claim in full over 5 years with 7.575% interest, with 60 monthly payments of $9,608.67 in principal and interest, starting 30 days after the Plan's "Effective Date."
In addition to grouping and treating administrative claims and priority tax claims, BWP's Plan contains 12 classes of non-priority claims. The first 8 classes, E.1 through E.8, are secured claims, including Chase's secured claim in Class E.4. Each of these classes contains the claim of a single secured creditor. Six of these secured creditors have first liens in specified trailers and/or tractors owned by BWP. The remaining secured creditor, other than Chase, is the United States Small Business Administration, Class E.8. That creditor has a security interest in "certain cleaning system equipment" valued by the Plan at $79,000.00.
The other Plan classes are three classes of unsecured claims, E.9 through E.11, and a class for BWP's equity interests, E.12. The three unsecured claim classes contain (1) all unsecured claims less than $10,000.00; (2) all unsecured claims equal to or greater than $10,000.00 except the unsecured claim of Chase; and (3) the unsecured claim of Chase.
BWP's Plan proposes to pay every claim in every class, secured and unsecured, in full, and with interest, with variations among the classes regarding the interest rate and length of time for payments. The Plan also proposes that BWP's equity interest holder retain her interest.
Except for the two classes populated by Chase, every class of secured and unsecured claims under BWP's Plan voted to accept the plan.
Chase argues that the Plan discriminates unfairly against Chase's secured-claim class, because the Plan proposes to pay Chase's secured claim in full over a longer period—6 years—than the 5-year period in which some of the other secured-claim classes will be paid in full.
As noted above, under the Plan Chase's secured claim is to be paid, with interest, by equal monthly payments over 6 years. But five of the other secured claims are to be paid, with interest and by equal monthly payments, over a period of only 5 years.
Among the secured claim classes in the BWP Plan, there are variations in claim amount, collateral, payment period, and interest rate. The following table details these differences:
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Secured
Claim Payment Interest
Class: Creditor; Amount: Collateral: Period: Rate:
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E.1 Eastern Michigan Bank $ 320,833.31 8 trailers 6.25 years 5.5%
(75 months)
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E.2 Fifth Third Bank $ 511,944.07 15 trailers 5 years 6.0%
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E.3 General Electric Capital Corp. $ 234,144.96 8 trailers 5 years 6.0%
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E.4 Chase $1,531,500.00 cash, inventory, 6 years 6.25%
chattel paper,
accounts,
equipment,
general intangibles
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E.5 JX Financial, Inc. $ 321,601.43 18 trailers, 5 years 5.5%
10 tractors
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E.6 PACCAR $1,000,783.55 2 trailers, 5 years 6.0%
29 tractors
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E.7 Seaway Community Bank $ 196,840.79 10 trailers, 5 years 5.0%
3 tractors
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E.8 Small Business Admin. $ 79,000.00 cleaning 6 years 5.0%
system
equipment
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As the table shows, BWP's Plan would pay off the secured claims of five of the secured creditors in 5 years, while paying Chase's secured claim and the claim of the Small Business Administration in 6 years, and the claim of Eastern Michigan Bank in 6.25 years.
Chase argues that the shorter payment period for the "5-year" secured creditors is unfair discrimination against Chase, because stretching Chase's payment period out for a year longer imposes a greater risk of default by BWP and loss by Chase than the risk borne by the secured creditors who are to be paid in 5 years.
To determine whether BWP's Plan "does not discriminate unfairly" within
Dow Corning, 244 B.R. at 702 (citations and footnote omitted, emphasis added); see also In re Armstrong World Indus., Inc., 348 B.R. 111, 122 (D.Del.2006); In re Aleris Int'l, Inc., No. 09-10478, 2010 WL 3492664, at *31 (Bankr.D.Del. May 13, 2010); In re Unbreakable Nation Co., 437 B.R. 189, 202 (Bankr.E.D.Pa.2010).
BWP and Chase have not discussed the "unfair discrimination" issue in the specific terms of the Dow Corning standard, quoted above. With respect to the three elements necessary to establish the rebuttable presumption of unfair discrimination, Chase meets the first element—it is a dissenting class.
And Chase meets the second element—the "5-year" secured claim classes are of "the same priority" as Chase, within the meaning of the Dow Corning standard. Although Chase and the other secured creditors all have security interests in different collateral, for purposes of the "unfair discrimination" test, all of the secured creditors are considered to have the same priority level. See Corestates Bank, N.A. v. United Chem. Technologies, Inc., 202 B.R. 33, 47 n. 12 (E.D.Pa.1996) ("the comparison called for by the unfair discrimination provision of § 1129(b)(1) relates to the category of similarly situated claimants" and "[t]he appropriate inquiry focuses on discrimination among categories of creditors who hold similar legal claims against the debtor, i.e. `Administrative Claims,' `Secured Claims,' `Priority Claims,' etc."); In re Trenton Ridge Investors, LLC, Nos. 09-62570, 09-63160, 2011 WL 4442270, at *41 (Bankr.S.D.Ohio June 23, 2011) (the purpose behind the unfair discrimination test is that "a dissenting class will receive value equal to the value given to all other similarly situated classes" and "[i]n the context of unfair discrimination, the phrase `similarly situated' suggests an `inquiry focuse[d] on discrimination among categories of creditors who hold similar legal claims against the debtor, [such as] `Administrative Claims,' `Secured Claims,' [and] `Priority Claims'").
Whether Chase meets the third element is unclear on the present record. That element requires one of two things—either (a) the shorter payment period for the "5-year" secured claim classes results in "a materially lower percentage recovery for [Chase,] the dissenting class (measured in
Chase has not argued the first prong of the third element—i.e., that it will receive a materially lower percentage recovery on its secured claim than the "5-year" secured claim classes. With respect to the present value of payments, the Court notes that while Chase's 6-year payment period is longer, Chase also is to be paid interest at a higher rate than the "5-year" secured creditors. As the table above shows, Chase's secured claim is to receive interest at 6.25%, while all of the "5-year" secured creditors are to receive a lower rate of interest—6.0, 6.0, 5.5, 6.0 and 5.0%. And unlike all of the other "5-year" secured creditors, Chase's claim is bifurcated, and the $478,672.00 unsecured portion of its claim is to be paid over 5 years at 7.575%, a rate significantly higher than any other class of claims, secured or unsecured, is to receive. None of the "5-year" secured claims are to be paid at an interest rate higher than 6.0%, and as the following table illustrates, the unsecured creditor classes other than Chase's class are to be paid a much lower interest rate than Chase:
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Unsecured creditor(s) Total amount Payment Interest
Class: in class: of class claims: Period: Rate:
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E.9 claims less than $10,000 $ 51,824.32 1 year 3.5%
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E.10 claims $10,000 or greater $507,310.20 5 years 4.25%
(excluding Chase, includes
S.B.A. unsecured claim)
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E.11 Chase $478,672.00 5 years 7.575%
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Chase's unfair-discrimination argument invokes the second prong above, namely that the longer payment period for Chase allocates to Chase a "materially greater risk . . . in connection with its proposed distribution" than the risk facing the "5-year" secured claim classes. Presumably, Chase is arguing, at least in part, that if BWP makes all of its Plan payments to all the secured creditors for a time, but then defaults on its Plan payments at any time before reaching the 6-year payoff date for Chase's secured claim, Chase will end up receiving payment of a lower percentage of its secured claim than the "5-year" secured creditors, who are to be paid at a faster rate under the Plan. Whether the risk of such a plan default actually occurring is high enough to be "material," and whether the differences in the ultimate percentage payments under such a default scenario would be material, are not issues the Court can decide on the present record. Rather, BWP and Chase must first have the opportunity to present evidence and briefing on these issues.
The same is true regarding whether BWP can rebut the presumption of unfair discrimination, if it does arise. Under Dow Corning, "[t]he plan proponent [can] overcome the presumption of unfair treatment based on different risk allocation by showing that such allocation [is] consistent with the risk assumed by parties before the bankruptcy." Dow Corning, 244 B.R. at 702. BWP's counsel argued at the confirmation hearing that the nature of Chase's collateral—chiefly, accounts receivable—justifies allocating the greater risk of a one-year longer payoff to Chase, compared to the other secured creditors, whose collateral is tractor trailers and
For these reasons, the Court cannot presently make a final ruling on Chase's "unfair discrimination" objection. Further factual development, and possibly an evidentiary hearing, and briefing, would be required. All of this is unnecessary at present, however, because the Court must deny confirmation of BWP's Plan on other grounds, discussed below, and will allow BWP to file a new plan. Whether this "unfair discrimination" issue will recur when BWP files a new plan remains to be seen.
As noted above, one of the requirements for confirmation on a "cramdown" basis under § 1129(b) is that the Plan "is fair and equitable, with respect to each class of claims . . . that is impaired under, and has not accepted the plan." 11 U.S.C. § 1129(b)(1). Chase argues that BWP's Plan is not "fair and equitable" to Chase.
Chase argues that BWP is a "solvent" Chapter 11 debtor. The Sixth Circuit has held that when the debtor is solvent, the "fair and equitable" requirement for confirmation and the "absolute priority rule" mean that, "absent compelling equitable considerations," the Chapter 11 plan must pay creditors in full, in accordance with their pre-petition rights, including all of their contractual rights. See In re Dow Corning Corp., 456 F.3d 668, 679 (6th Cir. 2006). This means full payment of each secured and unsecured claim, with post-petition interest at the rate specified in the parties' contracts, including any default rate of interest. See id. at 678 (quoting legislative history), 680. Thus, in a solvent-debtor case, there is a presumption that even unsecured claims must be paid default-rate interest. Id. at 680. And even unsecured claims "may recover their attorneys' fees, costs, and expenses from the estate of a solvent debtor where they are permitted to do so by the terms of their contract and applicable non-bankruptcy law." Id. at 683. And such fees, costs and expenses are not necessarily "limited to those incurred in enforcing the contract." Id. at 685. That depends on the terms of the parties' contract and what the applicable non-bankruptcy law say on that subject. But "[b]ankruptcy courts remain free, of course, to limit recovery to those attorneys' fees, costs and expenses which are reasonable under the circumstances." Id. at 686 n. 4 (italics in original).
Chase argues that because BWP is a solvent debtor, the Dow case requires the Plan to pay Chase in full with interest at its contractual default rates of interest, and to pay Chase for its attorney fees and expenses, as permitted by Chase's contracts and by Michigan law. Because the Plan does not propose this, Chase says, the Plan is not "fair and equitable" and therefore may not be confirmed under § 1129(b).
At the confirmation hearing, BWP's attorney would not take a position as to whether or note BWP is a solvent debtor, arguing that this is an "open question." But he argued that even if BWP is solvent, BWP's Plan meets Dow's requirements for solvent debtors, described above.
In the Dow case, the Sixth Circuit did not define what it means for a Chapter 11 debtor to be "solvent." In Dow, the parties agreed that the debtor was at all times "fully solvent."
11 U.S.C. § 101(32)(A) (emphasis added).
BWP is "solvent," therefore, if the "sum of [its] debts" is not "greater than all of [its] property, at a fair valuation."
BWP's schedules listed BWP's assets and their values, as of the date this case was filed on September 3, 2010, as having values totaling $7,745,000.00. The schedules
The liquidation analysis that BWP attached to its Plan, filed April 20, 2011, states what the creditors in this case would receive upon a hypothetical liquidation under Chapter 7 occurring as of the effective date of the plan.
The "Fair Market Value" of BWP's assets, according to BWP, is such that after deducting the value of all liens in BWP's assets, BWP has equity in its assets (called "TOTAL EQUITY") of $3,731,851.89. Taking this total value, BWP subtracts the "Total Priority Claims" of $34,942.12, and the "Total Unsecured Claims" of $985,982.16.
Because BWP is a solvent debtor, and based on the Dow case discussed above, the Court concludes that BWP cannot confirm a plan over Chase's objection, unless the plan proposes to pay Chase in full with interest at its contractual default rates of interest, and to pay Chase for its attorney fees and expenses, as permitted by Chase's contracts and by Michigan law. BWP does not argue, and the Court does not find, that there are any "compelling equitable considerations" for requiring less than this from BWP. Dow Corning Corp., 456 F.3d at 679. But, as Dow permits, and as Michigan law requires,
BWP's counsel argued at the confirmation hearing that BWP's Plan meets the requirements of Dow. The Court disagrees.
First, BWP's counsel is incorrect in arguing that the two interest rates in the Plan provide Chase with the equivalent of Chase's contractual default-interest rates. The parties have not presented any calculations on this specific issue, but the Court has done some calculations.
As noted earlier, BWP's Plan proposes to pay Chase's secured claim, which the Plan sets at $1,531,500.00, in full over 6 years, with interest at 6.25%. The Plan proposes to pay Chase's unsecured claim, which the Plan sets at $478,672.64, in full over 5 years, with interest at 7.575%.
But BWP's debt to Chase consists of four major parts, each with a different contractual default rate of interest. Chase filed an amended proof of claim on May 24, 2011. As labeled and described in the first attached page to Chase's amended claim, the claim includes the four following parts, with the following default rates of interest:
Chase claim and default interest rates default interest rate: BWP Note 6.25% principal balance $711,075.41 (prime plus 3%) interest through 8-27-10 $ 25,029.20 ate fees and charges $ 333.26
total: $736,437.87 Trust Note A 9.15% principal balance $611,594.00 interest through 8-26-10 $ 21,075.00 late fees and charges $ 1,567.32 total:$634,236.32 Trust Note B 6% principal balance $366,910.21 (prime minus .25 plus 3%) interest through 8-26-10 $ 25,587.00 late fees and charges $ 1,444.26 total:$393,941.47 Trust Note C 10.275% principal balance $226,441.00 interest through 8-26-10 $ 16,129.00 late fees and charges $ 1,009.50 total:$243,579.50
These debt amounts total $2,008,195.16, but they do not include pre-petition interest from August 26, 2010 to the petition date of September 3, 2010, and they do not include any post-petition interest. Nor do they include Chase's claim for attorney fees, discussed below.
The Court has done some calculations to see whether the interest that BWP's Plan would pay Chase is equal to or greater than the interest that Chase would receive at its contractual default rates. The Court has calculated the total interest that Chase would receive in the first year of BWP's Plan, and compared that to the total interest that Chase would receive on its four-part claim using Chase's contractual default rates of interest listed above. The Court calculated all of the interest using a 5-year amortization—i.e., assuming that each component of Chase's debt is paid over 5 years. Even though the Plan proposes to pay part of Chase's claim—the secured claim—over 6 years, in order to fairly compare the interest that would be paid in Year 1 under the two scenarios (BWP Plan rates vs. Chase contract rates), all have to be amortized over the same length of time.
For comparison purposes, another, minor adjustment had to be made, in the amount of Chase's unsecured claim under the BWP Plan. That is because the total amount of Chase's claim being used in this comparison is slightly higher in the BWP Plan ($2,010,172.64) than it is in Chase's amended proof of claim (adjusted for this exercise, as described above) ($2,008,195.16). The Court therefore adjusted the Plan's amount of Chase's unsecured claim downward by the amount of this difference ($1,977.48), to $476,695.16.
The Court's comparison shows that BWP's plan would pay Chase total interest of $121,408.20 in Year 1. If Chase's default interest rates were used for each of the four parts of Chase's claim, on the other hand, Chase would be paid total interest of $141,020.93 in Year 1. The Plan, therefore, would fall $19,612.73 short of paying interest
Plan's blended interest rate,
vs. contractual default rates:
Year 1 interest
BWP Plan: interest rate: @ 5 year amort.
secured claim $1,531,500.00 6.25% $88,089.86
unsecured claim $476,695.16 7.575% $33,318.34
Total: $2,010,172.64 $121,408.20
Chase claim and default interest rates Year 1 interest
default interest rate: @ 5 year a mort.
BWP Note 6.25%
principal balance $711,075.41 (prime plus 3%)
interest through 8-27-10 $25,029.20
late fees and charges $333.26
total: $736,437.87 $42,358.93
Trust Note A 9.15%
principal balance $611,594.00
interest through 8-26-10 $21,075.00
late fees and charges $1,567.32
total: $634,236.32 $53,708.47
Trust Note B 6%
principal balance $366,910.21 (prime — .25 plus 3%)
interest through 8-26-10 $25,587.00
late fees and charges $1,444.26
total: $393,941.47 $21,741.81
Trust Note C 10.275%
principal balance $226,441.00
interest through 8-26-10 $16,129.00
late fees and charges $1,009.50
total: $243,579.50 $23,211.72
Total of Chase's claim, at petition date: $2,008,195.16
Total interest at default rates, Year 1: $141,020.93
BWP Plan's interest pays less in Year 1
to Chase by this amount: $19,612.73
This demonstrates that BWP's Plan proposes to pay interest to Chase that is materially less than the contractual default rate of interest.
Nor does BWP's Plan propose to pay Chase any attorney fees. BWP has not disputed that if BWP is solvent, as the Court has now found, the Plan must pay Chase its reasonable attorney fees as part of its allowed claim, under Dow, because Chase is contractually entitled to such fees. Chase claims that its attorney fees total $64,256.90 as of May 19, 2011.
BWP's counsel indicated at the confirmation hearing that BWP may be willing to pay Chase's reasonable attorney fees. But there is no provision for them in BWP's Plan. The Plan says nothing about them, and the total amount of BWP's claim as set by the Plan, secured plus unsecured, does not include any attorney fees. The Plan's total amount for BWP's claim obviously was taken directly from Chase's originally-filed proof of claim, the first page of which stated a total claim amount of $2,010,172.64.
Chase objected to confirmation of BWP's Plan on additional grounds, not discussed above, and also objected to final approval of BWP's disclosure statement. The Court finds it unnecessary to discuss these other objections now, for the following reasons. First, the Court is denying confirmation on other grounds, for the reasons stated in this opinion. Second, the Court will allow BWP another opportunity to try to confirm a plan, by filing a new plan and disclosure statement. The Court anticipates that BWP will file a plan and disclosure statement that will make some or all of BWP's other objections moot. Third, at least some of Chase's other objections may be mooted, and some of the important facts underlying some of the objections may have changed, in the time after the confirmation hearing. Important post-hearing developments include the Lickwala's filing of their Chapter 7 case, and recent events in that case.
For the reasons stated in this opinion, the Court will deny confirmation of BWP's Plan. The Court will enter a separate order. The order will allow BWP to file a new plan and disclosure statement, and will set a deadline for doing so.
And being a corporation, BWP has no exemptions under Code § 522. Only an "individual" debtor may claim exemptions under § 522, see 11 U.S.C. § 522(b)(1), and "individual" as that term is used in the Bankruptcy Code means a human being. It does not include a corporation. See, e.g., Friedman v. Comm'r, 216 F.3d 537, 548 n. 7 (6th Cir.2000) ("individual" as used in Code § 727(a)(1) does not include a corporation); In re Sayeh, 445 B.R. 19, 27 (Bankr.D.Mass.2011) ("individual" as used in Code § 362(k) means a human being, and does not mean an entity); In re JAC Family Found., 356 B.R. 554, 556-57 (Bankr.N.D.Ga.2006) ("individual" as used in Code § 109(e) means a natural person); Farm Fresh Poultry, Inc. v. Hooton Co. (In re Hooton Co.), 43 B.R. 389, 390-91 (Bankr. N.D.Ala.1984) ("individual" as used in Code §§ 523 and 1141(d)(2) means a human being, and not a corporation or partnership).
