Monday, October 14, 2013

Classifications of Claims under 1122 - "substantially similar"

Judge Ross from Alaska, followed In re Barkat, 99 F.3d 1520 (9th Cir. 1996)in determining that separate classification of a deficiency claim was not warranted in the Chapter 11 case. 

In Barkat,  an apartment building worth $4,000,000, encumbered by a claim of $4,600,000. The debtor's plan proposed to classify the unsecured $600,000 deficiency claim separately from several other classes of unsecured creditors, including a class of trade debt.  While recognizing the possibility of classifying similar claims in different classes, the court also said that there  are limits to that right. One of the limits is that separate classification should not be condoned "in order to gerrymander an affirmative vote on a reorganization plan." A second is that, if claims are substantially similar, there must be a valid business or economic reason for separate classification. It approved a BAP decision saying that the right to make a § 1111(b)(2) election was not such a valid reason.

Similarly in this case, while the claim has a co-debtor, Marc Marlow, he is apparently not personally solvent and has many unpaid money judgments against him. He is not like the creditor in Johnston, which had viable guarantors to collect from, at least in part. Nor is there any other collateral than the real and personal property securing the two loans owed to AHFC, valued at no more than $2,700,000.
The claim on the second promissory note is very similar to a garden variety unsecured claim, notwithstanding its "easy terms." 11 USC § 502(b)(1) makes the claim presently allowable despite  [19] being an unmatured claim, the balance of which is due in 2037. Also, under the terms of the Second Loan Agreement, the second promissory note can be accelerated due to the default under the first promissory note. And, even if second promissory note had been nonrecourse (which it is not), in chapter 11 it is treated as a recourse claim.

United States Bankruptcy Court for the District of Alaska
October 9, 2013, Decided
Case No. A12-00421-HAR, In Chapter 11
In re Marlow Manor Downtown, LLC, 2013 Bankr. LEXIS 4270 (Bankr. D. Alaska Oct. 9, 2013)

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