United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
EDMOND E. CHANG, District Judge.
Creditor Polite Enterprises appeals from the bankruptcy court's order confirming North American Safety Products's Chapter 11 reorganization plan. For the reasons discussed below, the bankruptcy court's order is affirmed.
The debtor in this case, North American Safety Products, designs, manufactures, and sells safety products to industrial users. R. 21-2, Am. Disclosure Statement at 9. Between 2008 and 2010, North American lost two lawsuits, resulting in substantial judgments against the company. Id. The first was in 2008, when Polite Enterprises Corporation prevailed against North American in a patent infringement suit, which ended in a $325, 638.83 award against North American. Id. Two years later, Janelle Gedmin, a former North American employee, prevailed against the company in an employment discrimination suit; the judgment in that case was $290.742.14. Id. Pursuant to an installment-payment agreement between Gedmin and North American, the total balance owed Gedmin is $340, 742.14. Id.
Unable to satisfy the $665, 000 in judgment debts, which were beyond the debts generated in the ordinary course of business, North American filed for voluntary relief under Chapter 11 of the Bankruptcy Code in January 2012. Id. at 10. Polite did not file a timely proof of claim, and the case proceeded without it. R. 1-5 at 47. North American filed its original reorganization plan and disclosure statement in June 2012. Id. The plan identified one secured creditor, First Midwest Bank (FMB), and six classes of unsecured claims: general unsecured claims (Class 2); the Gedmin judgment (Class 3); a convenience class of claims under $500 (Class 4a); a convenience class of claims between $501 and $1, 000 (Class 4b); insider loans (Class 5); and equity interests (Class 6). R. 1-3, Bankruptcy Record on Appeal at 62.
Under the proposed plan, FMB would be repaid in full in monthly installments which would continue beyond the term of the plan. Id. at 63. With the exception of the convenience classes, unsecured creditors would receive 20% of their claims in ten quarterly installments. Id. at 62-63. Class 4a creditors would be paid in full on the initial distribution date. Id. at 63. Class 4b creditors could choose to receive a 20% distribution or to reduce their claims to $500 and receive payment with Class 4a. Id. at 64.
North American's disclosure statement disclosed its insiders as follows: President Martin Mobeck and his wife jointly held 85% of the company's shares; Mr. Mobeck held an additional 13.5% in his own name; Nicole Pfeiffer (Mr. Mobeck's daughter) and Sylvia Smusziewicz each held 1%; and Janelle Wozniak held 0.50%. Id. at 77. Under the proposed plan, existing shares would be cancelled and new equity in North American would be sold at auction. Id. at 64. In the absence of outside bids, the plan provided that Nicole Pfeiffer (who had assumed management responsibilities after her father suffered a stroke) and her husband James would acquire 100% of North American's equity for $35, 000 in new value. Id.; R. 19, Appellee Br. at 3.
In August 2012, Polite filed a motion to extend the time to file its proof of claim and objections to the proposed plan and disclosure statement. R. 1-3 at 4. By this time, three of the impaired, non-insider classes had voted to accept the plan, and notice of the auction had been published in the Chicago Sun Times. Appellee Br., Exh. 3 at 1; R. 1-7 at 36. The addition of Polite's claim, however, required amendment to North American's reorganization plan. North American filed an amended plan and disclosure statement in September 2012.
The amended plan added Polite as a new Class 7 and prescribed the same treatment as for the unsecured creditors: 20% repayment over fourteen installments, instead of the original ten. R. 1-8, Am. Reorganization Plan at 14. The plan retained the sale and auction procedures outlined in its predecessor, establishing again the Pfeiffers' $35, 000 bid as the default sale in the absence of outside bidders. Id. at 14-15. A second notice of sale was published in the Chicago Sun Times on August 8, 2012. R. 26-6 at 2. The bankruptcy court notified all creditors and parties in interest of the impending sale and bidding procedures. R. 21-5 at 11. Ultimately, no bids were submitted outside of the Pfeiffers'. Appellant Br. at 10.
Though the exclusivity period had passed, no creditor submitted a competing plan. Appellee Br. at 4. In the second round of voting, the same three non-insider classes accepted the amended plan, that is, Class 2 (general unsecured claims) and Classes 4a and 4b (the two convenience classes). R. 26-7 at 1. Polite, as the sole member of Class 7, rejected the plan and renewed its objections. R. 21-8, Appellant Br., Exh. 8 at 2. In light of Polite's rejection, North American sought so-called "cramdown" confirmation of its plan pursuant to Section 1129(b) of the Bankruptcy Code.
The bankruptcy court held a confirmation hearing in December 2012, during which the court considered Polite's objections to the amended disclosure statement and reorganization plan. R. 21-5 at 2. The objections relevant to this appeal allege (1) North American's disclosure statement was inadequate; (2) North American improperly classified its unsecured creditors to ensure creation of a consenting, impaired class; (3) the proposed auction violates the absolute priority rule; and (4) the proposed plan is not feasible. R. 1-10 (Polite Objections) at 39-44. Overruling North American's objections, the bankruptcy court concluded "the creation of a convenience class is an appropriate division of the unsecured debt, and... the auction is an appropriate method for maximizing the value of the right to possess property of the debtor in response to the absolute priority rule." R. 21-5 (Confirmation Hearing Tr.) at 135. On December 18, 2012, the bankruptcy court entered an order approving the disclosure statement and confirming the reorganization plan. On appeal, Polite renews the objections described above.
II. Standard of Review
A federal district court has jurisdiction, pursuant to 28 U.S.C. § 158(a), to hear appeals from the rulings of a bankruptcy court. On appeal, the district court reviews the factual findings of the bankruptcy court for clear error and reviews the bankruptcy court's legal findings de novo. Wiese v. Cmty. Bank of Cent. Wis., 552 F.3d 584, 588 (7th Cir. 2009). Decisions left to the discretion of the bankruptcy court, however, are reviewed "only for an abuse of discretion." Id. This is an exacting standard: "a court abuses its discretion when its decision is premised on an incorrect legal principle or a clearly erroneous factual ...