RTJJ is the largest owner of low-income housing in Gastonia. Following first the closure of area textile mills and then the housing crash, RTJJ became unable to pay its debts and faced foreclosure by Community One, its largest secured creditor. Despite proposing a Chapter 11 plan that would have paid creditors substantially more than a Chapter 7 liquidation, Community One objected to the plan and pressed for the sale of the assets. (The Bankruptcy Court found that Community One, itself in dire financial straits and under the supervision of the OCC, was under regulatory pressures to quickly obtain cash rather than greater returns over a longer period.)
The first objection raised by Community One was that the allowance of two tardy votes of unsecured creditors was improper. The late vote by First National was found to be the error of its attorney and as such did not constitute excusable neglect. The late vote by Simonds Sanitation, however, was found to be excusable neglect as it maintained that legal advice to vote in favor of the plan had been give more than a week prior to the deadline and the ballot had been mailed immediately. The delay was otherwise unexplained and excused. As such, the vote by Simonds Sanitation as an impaired, non-insider class for confirmation satisfied §1129(a)(10).
Community One further complained that the plan improperly gerrymandered the unsecured portion of its mortgage claim separate from the other general unsecured claims. The Bankruptcy Court, however, held that “[t]here are inherent differences between an undersecured mortgage claim and other unsecured claims. See In re Deep River Warehouse, Inc., 2005 Bankr. LEXIS 1793 (Bankr. M.D.N.C. Sept. 22, 2005). Further, because the unsecured claim of Community One dwarfs all other unsecured claims, including “in the same class as these creditors would give Community One hegemony over the unsecured creditor vote and the ability to block confirmation of any plan.”
Applying Till v. SCS Credit Corp., 541 U.S. 465, 472 (2004) in a Chapter 11 context, the Bankruptcy Court held that a 5% interest rate, consisting of the 3.25% prime lending rate and a 1.75% “risk factor” was fair and equitable.
Community One argued that the $20,000 offered as a “new value” contribution was insufficient to overcome the absolute priority rule. The Bankruptcy Court disagreed, finding that the contribution was necessary in order to pay the attorney’s fees for RTJJ. Further, defining “substantial” as the infusion was significant for a small family business, lacking unencumbered assets, and generally limited in its cash resources. Further, no other party, including Community One, had proposed a plan with a different ownership structure or retained value of more that $20,000.
It is clear in this case that the Bankruptcy Court gave considerable weight to the terrible impact that a liquidation of the low-cost housing would have had on the City of Gastonia. The frustration is also apparent regarding Community One lack of concern, likely at the prompting of regulators, about this impact. It can only be hoped that Bankruptcy Courts will also recognize that this same terrible impact is felt, writ in only a slightly smaller font, with nearly every foreclosure against individual homeowners and work to find equitable means of compelling more rational decision making by mortgage lenders, even those Too Big to Fail.
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