Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 84-1118C--S. Hugh Dillin, Judge.
Before WOOD, Circuit Judge, FAIRCHILD, Senior Circuit Judge, and GORDON, Senior District Judge.*fn*
In this case a class of unsecured creditors of the debtor Potter Material Service, Inc., challenge the reorganization plan of the debtor. The district court affirmed the bankruptcy judge's decision to confirm the debtor's plan under 11 U.S.C. § 1129(b), the "cram-down" provision of the Bankruptcy Code, over the dissent of the unsecured creditors who under the plan stand to receive an amount equal to 3% of their claims. Because the bankruptcy court's determination that Potter's Second Amended Plan was "fair and equitable" as required by section 1129(b) is supported by the record and not clearly erroneous or based decision to affirm the bankruptcy court's confirmation of Potter's Second Amended Plan.
Potter Material Service, Inc. ("Potter"), the debtor in this case, is a closely held corporation engaged in the business of purchasing, reselling, and manufacturing building supplies and materials. Since 1976, Norman B. Ochstein has been the sole shareholder, chief operating officer, and president of Potter. For various reasons, since 1978 Potter has suffered a number of financial setbacks. On June 4, 1982, Potter filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101, et seq. Potter has continued to operate its business as a debtor-in-possession.
Potter has filed several plans of reorganization. This appeal involves the Second Amended Plan of Reorganization ("Second Amended Plan") filed on February 8, 1984. The Second Amended Plan includes a reduction in the payout to the Class 8 Unsecured Creditors from 40% of their allowed claims to 3%. The plan also provides that Ochstein, the sole shareholder, will contribute the new capital necessary to fund the plan. The Class A shares which Ochstein currently holds will be cancelled and Potter will issue new Class B shares to Ochstein. In consideration for the Class B Shares to Ochstein. In consideration for the Class B Shares, Ochstein will (1) contribute $14,800 to fund the 3% payment to the Class 8 Unsecured Creditors, (2) pay the allowed compensation to Potter's attorneys (estimated at $20,000), and (3) renew his personal guarantee of Potter's repayment of $600,000 to Merchants National Bank & Trust Company ("Merchants Bank").
Anticipating the Class 8 Unsecured Creditors' opposition to the Second Amended Plan, on February 21, 1984, Potter filed an application to invoke section 1129(b)(1), the "cram-down" section of the Bankruptcy Code, 11 U.S.C. § 1129(b)(1), and confirm the plan over the unsecured creditors' objection. On March 30, 1984, the bankruptcy court issued a memorandum and order finding that Potter's Second Amended Plan met the requirements of section 1129(b)(1) and confirming the plan. The Official Creditors' Committee on behalf of Class 8 Unsecured Creditors ("Unsecured Creditors' Class") sought review in the district court. On November 8, 1984, the district court affirmed the bankruptcy court's confirmation decision.*fn1
Potter's Second Amended Plan, in order to be confirmed under section 1129(b)(1), must satisfy the requirements of 11 U.S.C. § 1129(b)(2)(B)(ii).*fn2 Subsection (ii), which is often characterized as an "absolute-priority" rule, does not allow Ochstein, as a junior claimholder, to receive or retain anything on account of his claim (i.e., stock in Potter) since the members of the Unsecured Creditors' Class received less than full value on their priority claims. The courts have recognized an exception, however, to this "absolute-priority" rule. An equity-interest owner may retain an interest in the debtor corporation so long as the owner invests new capital into the corporation. See Case v. Los Angeles Lumber Products Co., Ltd., 308 U.S. 106, 84 L. Ed. 110, 60 S. Ct. 1 (1939); In re Landau Boat Co., 13 Bankr. 788 (Bankr. W.D. Mo. 1981); In re Marston Enterprises, 13 Bankr. 514 (Bankr. E.D.N.Y. 1981). The new capital investment must (1) represent a substantial contribution and (2) equal or exceed the value of the retained interest in the corporation. See Case, 308 U.S. at 121; Landau Boat, 13 Bankr. at 792-93; Marston Enterprises, 13 Bankr. at 518. The sole issue in this case is whether Ochstein comes within this exception to the "absolute-priority" rule in section 1129(b)(2).
The Unsecured Creditors' Class raises two principal objections to Potter's Second Amended Plan: that the plan is not "fair and equitable," see 11 U.S.C. § 1129(b)(2) (standard for "cram-down" reorganization), and that the sole equity holder of Potter (i.e., Ochstein) is retaining and receiving an interest in Potter. Both the bankruptcy court and the district court rejected these objections and confirmed Potter's Second Amended Plan.
The Unsecured Creditors' Class maintains that in order for the prior shareholder to become a new investor in the debtor, the shareholder must prove (1) that the new capital contribution is necessary, (2) that the prior shareholder is the most feasible source of the new capital, and (3) that the capital contribution is new and substantial. The Unsecured Creditors' Class contends that the courts below erred in not making a finding on the first two points, and that the courts' finding on the latter point was clearly erroneous.
The Unsecured Creditors' Class bases its contention that the courts below erred in not making a finding regarding necessity or feasibility upon a misconception of the proper standard courts must use in deciding whether to "cram down" a reorganization plan. The appropriate test is the one Congress wrote into the Bankruptcy Code in section 1129(b)(2)--whether the plan is "fair and equitable." Necessity and feasibility are but two of numerous concepts subsumed under the "fair and equitable" standard. The cases cited by the Unsecured Creditors' Class, see, e.g., Marston Enterprises, 13 Bankr. at 517 (new investment must be necessary); In re Jartran, Inc., 44 Bankr. 331, 379 (Bankr. N.D. Ill. 1984) (necessary and most feasible source, do not stand for the proposition that the court, in order to confirm the plan, must make specific findings that the new capital is necessary, that the shareholder is the most feasible source, and so forth. Rather, if the creditors challenge a plan as not "fair and equitable" because the new capital is not necessary or the shareholder is not the most feasible source, then the court must make such a finding. Absent a challenge by the creditors on such a point, the court cannot be expected to examine sua sponte and issue a finding for every potential subcomponent of the "fair and equitable" standard. Once the court examined the specific challenges raised by the creditors and finds the plan "fair and equitable," the court has no duty to anticipate and rule upon factual issues which the creditors have not raised.
In this case, the Unsecured Creditors' Class did not raise the necessity and feasibility issues below. Those issues are thus not grounds for attacking the plan. Nevertheless, the record contains a sufficient basis for affirming the plan's confirmation on those grounds. A finding that the new capital contribution is necessary is implicit in the bankruptcy court's finding that the plan was "fair and equitable." Furthermore, the Unsecured Creditors' Class presented no evidence of a more feasible source for the new capital and submitted no plan of is own and might have demonstrated an ...