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In re 203 N. LaSalle Street Partnership

September 29, 1997

IN THE MATTER OF:

203 N. LASALLE STREET PARTNERSHIP, AN ILLINOIS LIMITED PARTNERSHIP, DEBTOR-APPELLEE,

APPEAL OF:

BANK OF AMERICA ILLINOIS, APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.

Nos. 95 C 7144 & 96 C 238 Paul E. Plunkett, Judge.

Before CUMMINGS, RIPPLE and KANNE, Circuit Judges.

RIPPLE, Circuit Judge.

ARGUED NOVEMBER 6, 1996

DECIDED SEPTEMBER 29, 1997

This case involves Bank of America Illinois' ("Bank America") appeal of the confirmation of a bankruptcy reorganization plan. 203 N. LaSalle Street Limited Partnership ("LaSalle"), which owns fifteen floors of office space in a Chicago building, failed to pay a secured note held by Bank America, and Bank America attempted to foreclose on the property. LaSalle filed for bankruptcy under Chapter 11, 11 U.S.C. sec.sec. 1101 et seq. LaSalle eventually filed a reorganization plan that the bankruptcy court approved, as modified, despite Bank America's opposition to the plan. The district court upheld the bankruptcy court's order confirming the plan. For the reasons set forth in the following opinion, we affirm the judgment of the district court.

I. BACKGROUND

A. Facts

The debtor in this case, LaSalle, is an Illinois limited partnership that owns fifteen floors of office space in a building in the central business district of Chicago. The property was encumbered by a lien in favor of Bank America; LaSalle owed Bank America more than $93 million. LaSalle's loan was secured by a first non-recourse mortgage on the property that came due on January 3, 1995. LaSalle was unable to repay the loan, so Bank America started a foreclosure action in state court on January 20, 1995. In response, LaSalle filed for bankruptcy under Chapter 11. Bank America elected to have its secured claim, which was significantly greater than the value of the security, treated as a secured claim and an unsecured claim under 11 U.S.C. sec. 1111(b). *fn1 In addition to the debt held by Bank America, LaSalle had several other debts outstanding: One of the general partners held a second non-recourse mortgage on the property; $2.3 million in real estate taxes remained unpaid; and other non-inside creditors held $90,000 in trade claims. *fn2 In addition to the property, LaSalle held the right to a cash account consisting of pre-petition rents that amounted to $3.1 million. By filing for bankruptcy rather than having Bank America foreclose on the property, LaSalle's partners postpone significant tax liabilities estimated at $20 million.

Before the bankruptcy court, the debtor filed a plan for reorganization on April 13, 1995, which it amended on May 12. Bank America objected to the amended plan, and the bankruptcy court rejected it because, in the court's view, the plan was not feasible. LaSalle further revised the plan and filed another reorganization plan on September 11, 1995. Under the new plan, Bank America was the only party to object, and at least one impaired class of claims, the unsecured trade debt class, voted to approve the plan. The bankruptcy court conducted a hearing and confirmed the plan (with slight modification). *fn3 In its thorough opinion, the bankruptcy court found that the plan met all of the necessary requirements under 11 U.S.C. sec. 1129. It therefore confirmed the plan, finding the value of the property at that time to be $55.8 million.

Under the confirmed plan, the debtor's partners would contribute new capital: $3 million the day after the effective date of the plan and five annual installments of $625,000 thereafter. LaSalle would pay the non-insider trade creditors in full without interest. Upon confirmation, the insiders would waive their general unsecured claims. The priority and state tax claims under the plan would be paid within 30 days of approval. Bank America's secured claim ($54.5 million) *fn4 would be paid partly in cash, $1.1 million within 5 days of the effective date of the plan, and the rest as a 7-10 year interest-bearing note secured by the property. Monthly payments would be made on a 30-year amortization schedule, and any excess payments would be applied to the principal. At the end of that time, if the property were sold or refinanced, any additional proceeds, after the secured claim is paid, would be applied toward Bank America's unsecured claim, $38.5 million. The plan also provided that, in the case of default, the debtor's deed held in escrow would be conveyed to Bank America.

B. District Court Proceeding

Bank America appealed the bankruptcy court's confirmation of LaSalle's reorganization plan to the district court and raised 14 objections. The district court reviewed Bank America's objections and upheld the decision of the bankruptcy court in its entirety. The district court rejected Bank America's objection that the plan was not proposed in good faith, as required by sec. 1129(a)(3), because that provision focuses on the content and effect of the plan, not the subjective motivation of the plan's proponent. The court further reasoned that, even if sec. 1129(a)(3) were concerned with the filer's motivation, here the avoidance of tax consequences, LaSalle's proposal was not filed in bad faith. The district court also found that the bankruptcy court's factual findings that the plan was accepted by an actual impaired class, as required by sec. 1129(a)(10), was not clearly erroneous. The district court agreed with the bankruptcy court that the plan met sec. 1129(a)(7)(A)'s "best interest" test because, under the proposed plan, Bank America receives property of a value not less than the amount Bank America would receive if the debtor had proceeded under Chapter 7: The present value of the plan for the secured claim is the same under the plan as Bank America would receive in a Chapter 7 liquidation. In addition, Bank America's deficiency claim, its unsecured claim, is treated more favorably under the proposed plan than under Chapter 7 because, under Chapter 7, Bank America would have received nothing for its unsecured deficiency claim. Further, according to the court, because the best interest test is met and the plan is carefully tailored to fulfill the requirements of that test, the plan does not unfairly discriminate against Bank America. Indeed, said the court, the discrimination from which Bank America claimed to suffer--other unsecured claims are paid off 100%, but Bank America gets only 16% of its unsecured claim--is not unfair. The district court agreed with the bankruptcy court that the Bankruptcy Code did not abolish the Bankruptcy Act's "new value" corollary to the absolute priority rule. In addition, the district court agreed with the bankruptcy court that the requirements for the new value corollary were met in this case. Therefore, the court found, the property held by the partners under the proposed plan did not violate the absolute priority rule. The court also upheld the bankruptcy court's determination that, despite the potential cash shortfalls in years 7 and 8 of the plan, the plan was feasible. Finally, the district court upheld the bankruptcy court's finding that the plan was fair and equitable in its treatment of Bank America's unsecured claim; the plan therefore met sec. 1129(b)(2)'s "cramdown" requirements. The district court, in short, upheld the bankruptcy court in toto, and Bank America appeals.

II. DISCUSSION

For a reorganization plan to be confirmed, the plan must meet the requirements of 11 U.S.C. sec. 1129. *fn5 Bank America makes many of the same arguments to us that it did on appeal to the district court. Bank America alleges that the plan should not have been confirmed because it did not meet a number of sec. 1129's requirements. Success on the merits of any one of these claims would dictate a reversal of the bankruptcy court's confirmation order, unless, as LaSalle maintains, the appeal is moot. We shall deal with each of these issues in turn.

However, before we turn to the specifics of the case, a quick overview of the process for the confirmation of a reorganization plan may prove useful. For a bankruptcy court to approve a proposed reorganization plan, the plan's proponent must show that the plan satisfies the 13 requirements of sec. 1129(a), if they are applicable. With one exception, to be discussed, a plan must meet all 13 requirements. They are: (1) the plan's compliance with Title 11, (2) the proponent's compliance with Title 11, (3) the good faith proposal of the plan, (4) the disclosure of payments, (5) the identification of management, (6) the regulatory approval of rate changes, if applicable, (7) the "best interest" test, (8) the unanimous acceptance by impaired classes, (9) the treatment of administrative and priority claims, (10) the acceptance by at least one impaired class of claims, (11) the feasibility of the plan, (12) the bankruptcy fees, and (13) retiree benefits. See 11 U.S.C. sec. 1129(a)(1)-(13). If, however, a plan is not approved by all of the impaired classes, as generally required by 11 U.S.C. sec. 1129(a)(8), it is still possible for a plan to be confirmed. If at least one of the non-insider, impaired classes of claims approves the plan, then a plan may be confirmed if two additional requirements are met. See 11 U.S.C. sec. 1129(b). If the bankruptcy court finds that all of the applicable requirements of sec. 1129(a) are met except for sec. 1129(a)(8), and also that the plan does not discriminate unfairly between impaired classes and is fair and equitable to the rejecting classes, then the court may confirm the plan. See 11 U.S.C. sec. 1129(b)(1)-(2).

In our review of the district court and bankruptcy court decisions, we review both courts' conclusions of law de novo. In re Chappell, 984 F.2d 775, 779 (7th Cir. 1993). We review the determinations of fact by the bankruptcy court for clear error. In re Andreuccetti, 975 F.2d 413, 419-20 (7th Cir. 1992). A "'finding is clearly erroneous when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.'" FDIC v. Bierman, 2 F.3d 1424, 1431 (7th Cir. 1993) (quoting Anderson v. Bessemer City, 470 U.S. 564, 573 (1985)) (internal quotation and citation omitted).

A. Mootness

As a preliminary matter, we must respond to LaSalle's contention that the appeal should be dismissed as moot. LaSalle submits that, because the reorganization plan has been confirmed and LaSalle has implemented the plan, it would be very difficult now to reverse all the necessary transactions without harming a number of innocent third parties. Specifically, LaSalle contends: Investors have already put their capital into the reorganized debtor (thus foregoing other investment opportunities); LaSalle has renegotiated a lease with one of its two largest tenants; that tenant has spent a significant amount of money to redecorate its leased space; and numerous other payments have been made. In short, LaSalle concludes, under the circumstances, it would be very difficult for the bankruptcy court to "unscramble the eggs" now.

The mere fact that Bank America was unable to obtain a stay from either the district court or this court does not necessarily lead to the conclusion that, once the plan has been confirmed and implemented, all issues related to the confirmation of the plan are moot. See In re Envirodyne Indus., 29 F.3d 301, 303-04 (7th Cir. 1994); In re Andreuccetti, 975 F.2d at 418. In In re Envirodyne, we held that a court's ability to provide at least partial relief satisfies the Article III mootness issue. 29 F.3d at 303-04. With respect to the principle that courts will frequently refuse to modify a bankruptcy plan if it has already been implemented (formerly known as the "equitable mootness" doctrine), we noted that our inquiry is "whether modification of the plan of reorganization would bear unduly on the innocent." Id. at 304; cf. In re Lloyd, 37 F.3d 271, 273 (7th Cir. 1994) (holding in bankruptcy proceeding that, because court could fashion some relief for the debtor, appeal was not moot, despite estate's sale of property to good faith purchaser). "So if modification of a plan of reorganization would upset legitimate expectations, it may be refused . . . ." In re Envirodyne, 29 F.3d at 304 (emphasis added).

Many of the transactions that have occurred to date easily can be reversed without significant harm to third parties. Bank America seeks to foreclose on the property; doing so would not affect the monies that the trade creditors and state taxing authority have received. Bank America also does not seek to reverse the lease agreement reached between LaSalle and its tenant. Moreover, Bank America has agreed to return any payments and documents to LaSalle necessary to reverse the transaction. Finally, Bank America has consented to repay to the investors their investments plus reasonable interest. We believe that, if we were to reverse the decisions of the district and bankruptcy courts, the bankruptcy court could fashion some form of relief that would not unduly burden innocent third parties. Therefore we, like the district court, do not agree with LaSalle that the appeal is moot.

B. Feasibility

Bank America insists that the plan fails to meet the feasibility requirement of sec. 1129(a)(11), which requires that, in order for a plan to be confirmed, the "[c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization of the debtor . . . ." 11 U.S.C. sec. 1129(a)(11). In determining that the plan was feasible, the bankruptcy court need not find that it is guaranteed to succeed; "[o]nly a reasonable assurance of commercial viability is required." In re T-H New Orleans Ltd. Partnership, 116 F.3d 790, 801 (5th Cir. 1997) (brackets in original); accord In re Acequia, Inc., 787 F.2d 1352, 1364 (9th Cir. 1986); In re Monnier Bros., 755 F.2d 1336, 1341 (8th Cir. 1985). Bank America, in arguing that the plan will not succeed, focuses on years 7 and 8 of the plan. In those years, LaSalle expects that it will experience cashflow shortfalls.

The bankruptcy court scrutinized the plan very carefully and, despite these shortfalls, determined that the plan was feasible. It reasoned that the cashflow under the plan would be sufficient to pay all the debtor's expenses and the debt service to the bank for the first six years of the plan. By that time, the bankruptcy court concluded, LaSalle will have paid down the principal on the note by $7.5 million. In years 7 and 8 of the plan, however, there will be some cashflow shortages because of likely costs expended to renew the lease of one of the major tenants in the property. In years 9 and 10, the court predicted, projected cashflow will again exceed expenses and debt service. This cashflow shortfall would not make the plan unfeasible, stated the court, because it was likely that, after six years of successful implementation of the plan, Bank America voluntarily would lend the needed capital to LaSalle. If, on the other hand, the bank at that time decided not to lend LaSalle the money, LaSalle could sell its interest in the property and prepay the balance of the loan. The bankruptcy court, after hearing expert testimony on the improving market for office space in Chicago's central business district, determined that, at the time of the cashflow shortfall, the value of LaSalle's property would significantly exceed the remaining ...


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