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Holding: The court held that the secured and allegedly unsecured claims of a creditor (Delta) were not substantially similar to the secured and unsecured claims of another creditor whose claims were totally subordinate to Delta's claims in the same assets.
vi. Wells Fargo Bank, N.A. v. Loop 76, LLC (In re Loop 76, LLC), 465 B.R. 525 (B.A.P. 9th Cir. 2012)
Issue: 1) "Did the bankruptcy court err in holding that a factor a court may consider in determining whether a creditor's claim is "substantially similar" to other unsecured claims is whether the creditor has a third-party source for payment of its unsecured claim?" 2) "Did the bankruptcy court err in determining that a contract existed for the Genesee Claim and that the Genesee Claim was not contrived warranting designation under § 1126(e)?" 3) "Did the bankruptcy court clearly err in determining that the Plan was feasible?"
Holding: The BAP affirmed the decision of the bankruptcy court. The BAP first affirmed the bankruptcy court's holding that Ninth Circuit case law (namely Steelcase Inc. v. Johnston (In re Johnston), 21 F.3d 323, 327 (9th Cir. 1994)) supports the conclusion that a third-party source for recovery on a creditor's unsecured claim is a factor the court can consider when determining whether claims are substantially similar for purposes of classification under section 1122(a). The court noted that if claims are substantially similar (a determination the bankruptcy court has broad discretion in making), the debtor may classify such claims separately only if the debtor can show a business or economic justification; separate classification solely to gerrymander an affirmative vote is impermissible. Thus, the BAP noted that the first (often over-looked) step in analyzing a gerrymandering argument is to determine whether the claims are substantially similar. Here, the BAP agreed that the claims were not similar. The BAP rejected Wells Fargo's argument that the Ninth Circuit requires classification to be based narrowly on the nature of the claim as it relates to the assets of the debtor. The BAP concluded that "[t]he bankruptcy court here engaged in the same analysis as the Ninth Circuit did in In re Johnston and In re Barakat, but, unlike the court in In re Barakat, it found that Wells Fargo's deficiency claim did have distinguishing characteristics [or "special circumstances"] that rendered it dissimilar from the unsecured trade claims." The BAP agreed with the bankruptcy court that "In re Johnston allows the bankruptcy court to consider the existence of a third-party source for payment, including a guarantor, when determining whether unsecured claims are substantially similar under § 1122 (a)." Next, the BAP held that the bankruptcy court had not erred in overruling Wells Fargo's objection to Genesee's claim. The BAP found that under Arizona law the parties' (the debtor's and Genesee's) actions showed conclusively that they intended to form a binding agreement. Thus, Genesee had a valid security agreement and Wells Fargo's objection to Genesee's claim had to be overruled. Finally, the BAP addressed Wells Fargo's argument that the debtor's plan was infeasible. The BAP concluded that Wells Fargo had not met its burden of showing that the bankruptcy court had clearly erred when it found that the debtor's plan (as amended) was feasible. The BAP thus affirmed the bankruptcy court's factual findings regarding the plan's feasibility.
©2014 William L. Norton III
