CWCapital Asset Management LLC v. Burcam Capital II, LLC

Filing 38

ORDER denying 24 Motion aid in enforcement of order; denying 26 Motion to Stay; denying 27 Motion to Stay. Counsel is reminded to read the order in its entirety for detailed information. Signed by Senior Judge James C. Fox on 6/24/2014. Copy emailed to the Bankruptcy Court and counsel of record. (Edwards, S.)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
No. 5:13-CV-278-F
No. 5:13-CV-279-F

CWCAPITAL ASSET
MANAGEMENT, LLC, solely in its
capacity as Special Servicer to
U.S. BANK, et al.,

)
)
)
)
)
Appellants,
)
)
v.
)
)
BURCAM CAPITAL II, LLC,
)
Appellee.
)
___________________________________ )

ORDER

CWCapital Asset Management, LLC (“CWC”) appeals the bankruptcy court’s order
denying its motion to dismiss Burcam Capital II’s (“Burcam”) Chapter 11 bankruptcy
reorganization plan and the order confirming the plan. The appeal has been fully briefed and is
ripe for resolution. For the reasons that follow, the bankruptcy court’s order confirming the plan
is REVERSED and this matter is REMANDED to the bankruptcy court for further proceedings.
In addition, the CWC’s motion to stay the adversary proceedings below [DE-26], Burcam’s
motion to stay this appeal pending determination of standing [DE-27], and the CWC’s motion to
aid in enforcement of order [DE-24] are all DENIED without prejudice to raise these issues with
the bankruptcy court in the first instance.

FACTUAL AND PROCEDURAL HISTORY
Burcam Capital owns a large commercial real estate development in Raleigh, North
Carolina. Burcam obtained two sizeable loans from Archon Financial to purchase the
development and, in return, Burcam executed two promissory notes secured by deeds of trust on
the property in favor of Archon.1 Burcam filed for Chapter 11 bankruptcy protection on June 28,
2012. In its schedules, Burcam lists the two loans, referred to as “Note A” and “Note B” as
totaling $11,453,808.08 on Note A and $782,245.37 on Note B. The Note Holders have filed
proofs of claims in the amount of $14,014,329.16 on Note A and $1,115,569.43 on Note B.
CWC is the only secured creditor in the case, and the property is valued at between $17.3 and
$18.5 million. The unsecured nonpriority claims in this case total approximately $46,000.2
In a Chapter 11 reorganization, the debtor places creditor claims into separate classes and
each class votes to either confirm or reject the debtor’s reorganization plan. At least one
impaired class must vote to accept the plan.3 11 U.S.C. § 1129(a)(10). Burcam’s original

1

After a complex series of assignments, the notes are now apparently held in a mortgage trust by
Greenwich Capital Commercial Funding Corporation. U.S. Bank currently serves as the trustee and
CWC operates as the “Special Servicer” on behalf of the Noteholders. For purposes of simplicity, the
court refers to all of the Appellants as “CWC.”
2

There is a slight discrepancy in the total amount of nonpriority unsecured claims in this case.
CWC’s brief indicates the total “filed proofs of claim” is $45,597.49. The bankruptcy court’s order
indicates that the nonpriority unsecured claims total $41,798.54. Burcam notes that the “amount of the
claim and value of the collateral is not at issue in this appeal.” Burcam Brief [DE-20] at 2. The court
will use the $45,597.49 amount because it is more favorable to Burcam in light of the discussion below.
3

A class of claims is impaired unless, among other things, the chapter 11 plan “leaves unaltered
the legal, equitable, and contractual rights [of each claimant in the class].” 11 U.S.C. § 1124(1). The
parties do not dispute that each class of unsecured creditors is “impaired” under the plan. A class votes
to accept the plan if the yes votes constitute two-thirds in amount and one-half in number of the total
claims held by claimants in the class who voted on the plan. § 1126(c). Neither party disputes that
Burcam’s accepting impaired class also meets this requirement.
2

Chapter 11 plan divided the unsecured claims into two separate classes:4 general unsecured
claims in class 5 and small unsecured claims in class 6. The plan provided for payment in full to
all creditors. After receiving the plan, CWC filed a motion to dismiss the bankruptcy case
arguing, among other things, that Burcam could not propose a confirmable plan under the
Bankruptcy Code. While the motion to dismiss was pending, voting on the plan proceeded. In
an effort to block confirmation of the plan, CWC purchased sixteen unsecured claims,
representing approximately 68% of the unsecured claims (approximately $31,280 of the total
$46,000), and filed rejecting ballots on behalf of each of those claims. Of the remaining
unsecured claims, only two creditors, whose claims total approximately $6,000 in this nearly $14
million bankruptcy case, voted to accept the plan. The majority of the unsecured creditors failed
vote on the plan.
When Burcam realized it did not have sufficient votes to confirm the plan, Burcam
requested a continuance of the confirmation hearing, which the bankruptcy court granted.
Burcam used the additional time to modify its Chapter 11 plan. It created a third class of
unsecured claims consisting entirely of the unsecured claims purchased by CWC. Burcam
proposed transforming the CWC-purchased unsecured claims into claims secured by a deed of
trust on the property and repaying those claims in full with interest at 3.75% over the course of
ten years. This arrangement allowed for potential confirmation because it placed all the rejecting
votes in one class and, of the remaining “impaired” classes, at least one voted to accept the plan.
§ 1129(a)(10). The process is known as a “cramdown” under § 1129 because the impaired class
of CWC-purchased claims was forced to accept the plan despite their dissenting votes. Thus,

4

The secured claims were placed in a separate class.
3

Burcam’s classification allowed for confirmation over the dissenting votes of a creditor who
owned approximately 68% of all the unsecured claims and who possessed a secured claim that
represented nearly 80% of the total value of the estate.

At the confirmation hearing, CWC

renewed its argument that the plan should be dismissed. Among other things, CWC argued that
Burcam created the separate class of “no votes” solely for purposes of manipulating the vote to
confirm the plan, which is prohibited under Fourth Circuit precedent. See In re Bryson Props.
XVIII, 961 F.2d 496, 502 (4th Cir. 1992). Burcam argued that it separately classified the CWCpurchased claims because it needed to pay trade creditors (who owned most of the non-CWCpurchased claims) on a shorter time frame than claims owned by the secured creditor to maintain
business goodwill with the trade creditors. In a written order, the bankruptcy court accepted this
argument, finding that Burcam articulated a “legitimate business reason” for the separate
classification and denied CWC’s motion to dismiss. In re Burcam Capital II, LLC, No. 1204729-8-JRL, 2013 WL 593709 (Bankr. E.D.N.C. Feb. 15, 2013) [DE-1-1]. By separate order,
the bankruptcy court confirmed Burcam’s Chapter 11 plan. In re Burcam Capital II, LLC, No.
12-04729-8-JRL (Bankr. E.D.N.C. Feb. 26, 2013) (slip opinion) [DE-1-1, case no. 5:13-CV-279F]. This appeal followed.
STANDARD OF REVIEW
Federal district courts have jurisdiction to hear appeals from a bankruptcy court’s final
orders. 28 U.S.C. § 158(a). The bankruptcy court’s findings of fact must be premised upon oral
or documentary evidence and are reviewed for clear error. Fed. R. Bankr. P. 8013. A factual
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
4

committed.” Anderson v. Bessemer City, N.C., 470 U.S. 564, 573 (1985). The bankruptcy
court’s conclusions of law are reviewed de novo. Sartin v. Macik, 535 F.3d 284, 287 (4th Cir.
2008).5 Mixed questions of law and fact are reviewed under a hybrid approach: the ultimate
conclusion of law is reviewed de novo but the supporting factual findings are reviewed for clear
error. See DHHS v. Smitley, 347 F.3d 109, 116 (4th Cir. 2003).
DISCUSSION
The issue presented by this appeal is whether Burcam’s separate classification of the
CWC-purchased claims is permissible under In re Bryson Properties XVIII, 961 F.2d 496, 502
(4th Cir. 1992). Subsection 1122(a) of the Bankruptcy Code provides that a plan may place a
claim or an interest in a particular class only if such claim or interest is substantially similar to
the other claims or interests of such class. § 1122(a). However, this language does not prohibit
separate classification of similar claims, so long as all claims placed in a particular class are
substantially similar. Bryson Props., 961 F.2d at 502. In Bryson Properties, the Fourth Circuit
considered a Chapter 11 plan similar to this case, in which the debtor separately classified the
unsecured claim held by a secured creditor from the other secured claims. Id. at 499. The Fourth
Circuit held that although a debtor has some flexibility to place unsecured claims into different
classes, the debtor’s discretion is not unlimited:
Although the proponent of a plan of reorganization has considerable discretion to
classify claims and interests according to the facts and circumstances of the case, this
discretion is not unlimited. There must be some limit on the debtor’s power to

5

The standard of review is different when the district court reviews bankruptcy court decisions
in “non-core proceedings.” However, the bankruptcy orders at issue in this appeal arise out of core
proceedings. Wood v. Wood, 825 F.2d 90, 97 (5th Cir. 1987) (“If the proceeding is one that would arise
only in bankruptcy, it is also a core proceeding . . . .”). Of course, a Chapter 11 confirmation is a
proceeding that would only occur in bankruptcy.
5

classify creditors . . . . The potential for abuse would be significant otherwise . . . . If
the plan unfairly creates too many or too few classes, if the classifications are
designed to manipulate class voting, or if the classification scheme violates basic
priority rights, the plan cannot be confirmed.
Id. at 502 (quoting In re Holywell Corp., 913 F.2d 873, 880 (11th Cir. 1990)). “Thus, although
separate classification of similar claims may not be prohibited, it ‘may only be undertaken for
reasons independent of the debtor’s motivation to secure the vote of an impaired, assenting class
of claims.’” Id. (quoting In re Greystone III Joint Venture, 995 F.2d 1274, 1279 (5th Cir. 1991)).
Because the debtor in Bryson “failed to offer any reason for separate classification of the
unsecured claims which will withstand scrutiny[,]” the Fourth Circuit held that “[t]he
classification is clearly for the purpose of manipulating voting and it may not stand.” Id.
As a general rule, if a debtor can articulate a legitimate business justification for separate
classification of unsecured claims, the courts will allow separate classification. In re Briscoe
Enters., Ltd., 994 F.2d 1160, 1167 (5th Cir. 1993); Greystone, 995 F.2d at 1281 n.7; In re Deep
River Warehouse, Inc., No. 04-52749, 2005 WL 2319201, a *6 (M.D.N.C. Sept. 22, 2005). The
most frequently-advanced “legitimate business justification” (and the one advanced here) is the
need to pay trade creditors on a different timetable than other unsecured creditors. In re Adelphia
Commc’ns Corp., 368 B.R. 140, 247 (Bankr. S.D.N.Y. 2007); Deep River, 2005 WL 2319201, at
*6-7. A bankruptcy court finding that the debtor has offered a legitimate business justification is
a factual finding, reviewable only for clear error. Briscoe Enters., 994 F.2d at 1167; Greystone,
995 F.2d at 1281 n.7.
A. Clearly Erroneous Standard
Because the bankruptcy court’s finding that Burcam articulated a legitimate business
justification in this case implicates clear error review, the court explains this aspect of the
6

standard of review in more detail. The clearly erroneous standard is highly deferential to the
bankruptcy court’s findings of fact. As noted, 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.” Anderson, 470 U.S. at 573; United
States v. Hall, 664 F.3d 456, 462 (4th Cir. 2012). The appellate court may not reverse a finding
of fact based solely on its conviction that it would have decided the case differently. Anderson,
470 U.S. at 573. Instead, “[i]f the [bankruptcy court’s] account of the evidence is plausible in
light of the record viewed in its entirety [the finding must be upheld]” or “[if] there are two
permissible views of the evidence, the factfinder’s choice between them cannot be clearly
erroneous.” Id. at 573-74; United States v. Stevenson, 396 F.3d 538, 542 (4th Cir. 2005). The
standard applies to findings based on credibility determinations and findings based on
documentary or other objective evidence. Anderson, 470 U.S. at 574-75. The Supreme Court
has also noted that credibility determinations receive even greater deference:
[O]nly the trial judge can be aware of the variations in demeanor and tone of voice
that bear so heavily on the listener’s understanding of and belief in what is said. This
is not to suggest that the trial judge may insulate his findings from review by
denominating them credibility determinations, for factors other than demeanor and
inflection go into the decision whether or not to believe a witness. Documents or
objective evidence may contradict the witness’ story; or the story itself may be so
internally inconsistent or implausible on its face that a reasonable factfinder would
not credit it. Where such factors are present, the court of appeals may well find clear
error even in a finding purportedly based on a credibility determination. But when a
trial judge’s finding is based on his decision to credit the testimony of one of two or
more witnesses, each of whom has told a coherent and facially plausible story that
is not contradicted by extrinsic evidence, that finding, if not internally inconsistent,
can virtually never be clear error.
Id. at 575 (citations omitted); Hall, 664 F.3d at 462.

7

B. Bankruptcy Court’s Finding
The bankruptcy court found that Burcam articulated a legitimate business justification for
separate classification of these claims, accepting Burcam’s argument that separate classification
was warranted because Burcam needed to pay the trade creditors more quickly than CWC. As
the bankruptcy court explained, “[t]he justifications given for classifying the [CWC] purchased
claims separate from the other classes included the debtor’s desire to maintain trade and
professional relationships with the creditors contained in classes 5 and 6. Paying such creditors
quickly fosters relationships for future business. That rationale simply does not apply to the
claims which were purchased by [CWC].” In re Burcam Capital II, LLC, 2013 WL 593709, at
*4. The bankruptcy court also noted that “[t]he impetus to pay an off-duty police officer’s claim
quickly is no longer a driving force once an institutional creditor such as [CWC] purchases the
claim. Therefore, the desire to pay the unsecured claims not purchased by [CWC] more quickly
is a legitimate business purpose.” Id.
The court agrees that in the appropriate case paying trade creditors on a shorter time
frame than larger institutional creditors is a legitimate business justification for separate
classification of otherwise similar unsecured claims, especially if such treatment is necessary for
an effective reorganization. However, in the context of this case, the finding is clearly erroneous.
The only evidence supporting Burcam’s purported justification in this case was counsel for the
debtor’s proffer at the confirmation hearing that Burcam “desired” to pay trade creditors first and
testimony from the debtor’s principal, Neal Coker. See In re Burcam Capital II, LLC, 2013 WL
593709, at *2. At the confirmation hearing, Mr. Coker testified as follows: “[t]hey [CWC] are
different from the cops, and frankly other trade creditors that we want to continue using. We’ve
8

got to keep those guys happy. We don’t have to keep—we don’t have the same articulable
business reason for these guys, to keep [CWC] happy, so we classify it separately.”
Tr. of Hr’g on Confirmation [DE-19-49] at 699. Later, the following exchange between
Burcam’s counsel and Mr. Coker occurred:
Q: [W]hy do you want to pay the vendors you’re still working with on a different
time frame?
A: Because, I mean, it was painful enough to have to file bankruptcy and never had
to do anything like that before. And so, being able to pay [our] debts on a timely
basis and maintain good business relationships is important.
Tr. of Hr’g on Confirmation [DE-19-51] at 809.
This evidence cannot be viewed in a vacuum, especially in light of the overwhelming
evidence of gerrymandering in this case. As CWC stresses, Burcam initially placed the majority
of the unsecured creditors into a single class and proposed payments to all of them on the same
timetable. It was only after Burcam learned that CWC had purchased a majority of the unsecured
claims and used these votes to reject the plan that Burcam modified the plan to segregate all the
“no votes” into a single class, allowing for ultimate confirmation. This is obvious
gerrymandering. If paying the trade creditors first was so important to Burcam, it could have
classified them differently from the beginning. Burcam’s segregation of the no votes after it
discovered the results of the voting is substantial evidence of voting manipulation and the
bankruptcy court inexplicably failed to address this evidence, preferring instead to wholly credit
the debtor’s self-serving business justification.
Moreover, in finding that Burcam advanced a legitimate business justification for
separate classification, the bankruptcy court relied on evidence provided by the debtor’s counsel
and Mr. Coker, two persons who cannot speak for the trade creditors and with strong incentives
9

to oversell Burcam’s business justification. In fact, Mr. Coker affirmatively testified that he has
limited (at best) knowledge of Burcam’s current relationships with the trade creditors. See, e.g.,
Tr. of Hr’g on Confirmation [DE-19-52] at 825-27 (“I’ve always had third party management
that separately bids out maintenance . . . .”; “Q [from CWC’s counsel]: The things that I’m going
to ask you about, specific vendors, you don’t have any personal knowledge of those or are all
those issues ones that would need to be asked of a management company? A [from Mr. Coker]: I
am aware of [the vendors], but I didn’t negotiate [the contracts] and some of these vendors I have
no direct contact with.”). Thus, any finding that separate classification was necessary to maintain
goodwill with the trade creditors is highly suspect given the debtor’s only evidence on this point
came from a person with limited knowledge of the trade creditor relationships. Although a
finding of fact may receive considerable deference, when the finding is not supported by the
record, it cannot stand. See In re Kmart Corp., 359 F.3d 866, 868 (7th Cir. 2004) (refusing to
credit bankruptcy court finding where “the record contains only some sketchy representations by
counsel plus unhelpful testimony by Kmart’s CEO, who could not speak for the vendors.”).
The bankruptcy court also failed to consider a number of other aspects of the record that
conflict with Burcam’s proffered business justification. For one thing, most of the trade creditors
failed to even vote on the plan. In re Burcam Capital II, LLC, 2013 WL 593709, at *1 (noting
that prior to the modification only two of the non-CWC-purchased claims voted to accept the
plan, and the remaining fifteen claimants failed to submit ballots). The trade creditors’ lack of
interest in the bankruptcy or the payment schedule for their own claims—which was known to
Burcam prior to modification—strongly suggests different treatment was not necessary to

10

maintain business relationships with these creditors.6 This fact, which the bankruptcy court did
not consider, suggests the separate classification was designed solely for purposes of
manipulating the vote on the plan. Furthermore, the unsecured claims in this case total at most
$46,000, of which CWC purchased 68% or $31,280. That means Burcam’s remaining trade
creditor claims in this case total approximately $14,720.7 The amount of these claims, as well as
the relatively limited amount of total unsecured debt relative to the total value of the estate, also
cast doubt on Burcam’s suggestion that it needed to pay these claims on a quicker time frame to
maintain important relationships with trade creditors.
For the foregoing reasons, the bankruptcy court’s finding entirely fails to account for the
substantial evidence of gerrymandering in this case, and this court “on the entire evidence is left
with the definite and firm conviction that a mistake has been committed.” Anderson, 470 U.S. at
573. This is not a case where “there are two permissible views of the evidence” or the
bankruptcy court’s finding “is plausible in light of the record viewed in its entirety.” Id. at 57374. This court also finds that Mr. Coker’s testimony is not credible in light of the record as a
whole. The bankruptcy court observed this witness and credited the testimony and ordinarily that
determination is entitled to considerable deference. Id. at 574-75. However, the evidence of
gerrymandering in this case is overwhelming and amply contradicts Mr. Coker’s testimony. See
id. at 575 (explaining appellate court may overturn a credibility determination where

6

The two accepting votes came from insiders of the debtor, who presumably have a personal
stake in an effective reorganization.
7

The court also notes that at the time of confirmation, the debtor had approximately $650,000
cash on hand, which it could have used to pay the trade creditors immediately. Of course, that was not
done.
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“[d]ocuments or objective evidence may contradict the witness’ story; or the story itself may be
so internally inconsistent or implausible on its face that a reasonable factfinder would not credit
it.”); see also Kmart Corp., 359 F.3d at 868 (refusing to credit bankruptcy court finding where
“the record contains only some sketchy representations by counsel plus unhelpful testimony by
Kmart’s CEO, who could not speak for the vendors.”). The bankruptcy court’s legitimate
business justification finding is clearly erroneous.
The failure to consider the evidence of gerrymandering also produced an error of law,
which this court reviews de novo. See Smitley, 347 F.3d at 116 (explaining that conclusions of
law are reviewed de novo when the alleged error involves mixed questions of law and fact). The
bankruptcy court’s opinion, which wholly credited the debtor’s proffered justification despite
substantial record evidence of gerrymandering, suggests that paying trade creditors more quickly
is essentially a per se permissible business justification. That is not the law in the Fourth Circuit:
Although the proponent of a plan of reorganization has considerable discretion to
classify claims and interests according to the facts and circumstances of the case, this
discretion is not unlimited. There must be some limit on the debtor’s power to
classify creditors. . . . The potential for abuse would be significant otherwise. . . . If
the . . . classifications are designed to manipulate class voting . . . the plan cannot be
confirmed.
Bryson Props., 961 F.2d at 502 (quoting Holywell Corp., 913 F.2d at 880). If a debtor may
simply state on the record that it separately classified trade creditor claims because it “desires” to
pay them more quickly than institutional creditors, without any documentary or other evidence
that separate classification will actually enhance the chances for an effective reorganization, see
Briscoe Enters., 994 F.2d at 1167, the debtor’s classification discretion is not meaningfully
limited. This is amply demonstrated by the facts of this case. If the bankruptcy court’s finding is
not overturned, Burcam will be allowed to propose a plan, learn after the votes are cast that the
12

plan is not confirmable, re-classify the unsecured claims such that all the no votes are in one
class, and thereby develop a confirmable plan that crams down the interests of the
overwhelmingly largest creditor in the case. Such obvious gerrymandering cannot “withstand
scrutiny” under Bryson nor is it supported by the Bankruptcy Code itself, which aims to protect,
not disenfranchise, the creditors holding the largest stakes in the bankruptcy. See In re Boston
Post Rd. Ltd. P’ship, 21 F.3d 477, 482-83 (2d Cir. 1994) (“A key premise of the Code is that
creditors holding greater debt should have a comparably greater voice in reorganization.”).
C. Separate Treatment and Similarity of the Unsecured Claims
Burcam also argues that separate classification was warranted because the CWCpurchased claims and the trade creditor claims received different treatment under Burcam’s
modified plan. In Bryson the Fourth Circuit noted “[w]here all unsecured claims receive the
same treatment in terms of the Plan distribution, separate classification . . . is, at a minimum,
highly suspect,” 961 F.2d at 502. However, that statement does not mean different treatment
under the plan is sufficient, standing alone, to warrant separate classification of similar claims.
Bryson’s holding is that separate classification “‘may only be undertaken for reasons independent
of the debtor’s motivation to secure the vote of an impaired, assenting class’” and the debtor’s
proffered justification must “withstand scrutiny.” Id. (quoting Greystone, 995 F.2d at 1279). As
the bankruptcy court recognized, both different treatment and a legitimate business purpose are
required. See In re Burcam Capital II, LLC, 2013 WL 593709, at *4.
Burcam also submits that once CWC purchased the unsecured claims, those claims were
not “substantially similar” to the trade creditor claims and therefore the Bankruptcy Code
requires separate classification. See § 1122(a) (“[A] plan may place a claim or interest in a
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particular class only if such claim or interest is substantially similar to the other claims or
interests of such class.”); In re Loop 76, 465 B.R. 525, 536-37 (9th Cir. BAP 2012) (explaining
the “legitimate business justification” inquiry is unnecessary if the claims are not substantially
similar as a threshold matter). Burcam’s position is essentially that all general unsecured claims
are not created equal. Trade creditor claims, according to Burcam, require payment on a shorter
time frame than other unsecured claims to foster goodwill with those creditors who remain
involved in business dealings with the debtor. Conversely, unsecured claims held by large
secured creditors are not “substantially similar” to trade creditor claims because there is no need
to protect an ongoing business relationship with secured institutional creditors. Thus, according
to Burcam, differences in the identities of the holders of unsecured claims renders the claims
themselves dissimilar and warrants separate classification.
Contrary to Burcam’s position, the general rule is that the identity of the holder does not
render the claims themselves dissimilar. The Code itself refers to the similarity of the claims, not
the similarity of the holders of the claims. See § 1122(a) (“[A] plan may place a claim or interest
in a particular class only if such claim or interest is substantially similar to the other claims or
interests of such class.”); In re Woodbrook Assocs., 19 F.3d 312, 318-19 (7th Cir. 1994)
(allowing for separate classification of deficiency claims based on the “legal difference between
the two claims”). In this case, both the trade creditors and CWC own general unsecured claims.
There is no difference between the claims themselves, all of which remain typical general
unsecured debt Burcam incurred in the course of doing business; the only distinguishing feature
is the identity of the holders. While in the appropriate case the identity of the holder may provide
a legitimate business justification for separate classification of similar claims, the identity of the
14

holder standing alone is not a basis for finding the claims themselves are dissimilar. See In re
Johnston, 21 F.3d 323, 327 (9th Cir. 1994) (explaining substantial similarity analysis requires
evaluation of “the nature of each claim, i.e., the kind, species, or character of each category of
claims”); In re Sentinel Mgmt. Grp., Inc., 398 B.R. 281, 297 (Bankr. N.D. Ill. 2008) (“This
determination should focus on the nature or legal attributes of the claims and not on the status or
circumstances of the claimants.”); In re Frascella Enters., 360 B.R. 435, 442 (Bankr. E.D. Pa.
2007) (“The similarity of claims is not judged by comparing creditor claims inter se. Rather, the
question is whether the claims in a class have the same or similar legal status in relation to the
assets of the debtor.”).
To support its contrary argument, Burcam cites to In re Coram Healthcare Corp., 315
B.R. 321 (Bankr. D. Del. 2004), in which the bankruptcy court approved separate classification
between “noteholders” and trade creditors, finding that the claims were not substantially similar.
Id. at 350-51. The Coram court held that “[t]he Noteholders do represent a voting interest that is
sufficiently distinct from the trade creditors to merit a separate voice in this reorganization case.”
Id. However, that determination was made on the basis of the nature of the legal claims
themselves, as opposed to the identity of the holders of the claims. See id. at 348-51. As the
Coram court emphasized, the Noteholder’s claims in that case “arose from the purchase of notes
[before the bankruptcy], not the provision of services to the debtor.” Id. at 349. Thus, in Coram,
the Noteholders purchased corporate debt notes from the debtor prior to the bankruptcy and, as a
result of the nature of the claims, the voting interests of the Noteholders were different than the
voting interests of the trade creditors. Id. at 350-51. The Coram court simply did not address
assignment of claims that took place after the bankruptcy.
15

Unlike Coram, CWC in this case purchased the trade creditor claims after the bankruptcy
petition. Therefore, at the time CWC purchased the claims, the legal nature of the claims were
precisely the same: general unsecured debt owed to trade creditors. The nature of the claim is not
altered by post-petition assignment. See In re Enron Corp., 379 B.R. 425, 435-36 (S.D.N.Y.
2007) (explaining “an assignee stands in the shoes of an assignor” and “[t]hese [principles] apply
with the same force to [post-bankruptcy] transfers of debt and claims” (internal quotation marks
omitted)); In re KB Toys, Inc., 470 B.R. 331, 335 (Bankr. D. Del. 2012) (“[A] claim in the hands
of a transferee has the same rights and disabilities as the claim had in the hands of the original
claimant.”). Thus, the only distinguishing feature between the CWC-purchased debt and the
trade creditor debt in this case is the identity of the holder. As the Coram court itself repeatedly
noted, “a proper determination of what claims are ‘substantially similar’ focuses on the legal
attributes of the claims, not who holds them.” See, e.g., Coram, 315 B.R. at 350. The CWCpurchased claims and the trade creditor claims are therefore substantially similar under the
Bankruptcy Code.
To summarize, the court holds that the bankruptcy court’s legitimate business
justification finding was clearly erroneous and that separate classification in this case is not
otherwise permitted under the Bankruptcy Code. Accordingly, the bankruptcy court’s orders
denying CWC’s motion to dismiss and confirming the plan are REVERSED.
D. Remand for Further Proceedings is Necessary
Although CWC requests that the court reverse with instructions to the bankruptcy court
to dismiss Burcam’s Chapter 11 case, in the court’s view such an order would be premature. As
CWC acknowledges, Burcam can mount other challenges to CWC’s voting on the plan. For
16

example, Burcam may wish to pursue an argument that CWC’s no votes were submitted in a bad
faith attempt to block confirmation of the plan. See § 1126(e). However, because the evidence
of gerrymandering in this case is overwhelming, Burcam should not be permitted to segregate the
CWC-purchased claims on remand.
The court recognizes this outcome is somewhat unfair to Burcam. Burcam has proposed
full repayment to all its creditors and there is every indication in the record that it will be able to
successfully reorganize. Despite the fact that the plan proposes to pay it in full, the largest
secured creditor is attempting to block confirmation of the plan, presumably because it wishes to
foreclose on the property. But this fact does not absolve Burcam of its responsibility to comply
with the statutory requirements of Chapter 11 and the Fourth Circuit law interpreting them. If
Burcam wishes to argue that the “no votes” were cast in bad faith, the remedy for that is a motion
under § 1126(e), not a transparent attempt to gerrymander the votes under § 1122.
E. Remaining Motions
Despite the court’s prior order staying the Bankruptcy proceeding pending appeal, the
parties have become embroiled in a number of ancillary disputes while the court considered the
appeal. These disputes produced the following motions: (1) motion to aid in enforcement of [the
stay] order [DE-24]; (2) motion to stay adversary proceedings [DE-26]; and (3) motion to stay
entry of order pending determination of standing8 [DE-27]. All of these motions are DENIED
without prejudice to raise them in the first instance with the bankruptcy court on remand.

8

Burcam does not challenge the court’s jurisdiction to hear the appeal in this motion. Instead, it
appears Burcam’s standing argument is actually a “real party in interest” challenge under Federal Rule of
Civil Procedure 17(a), which is not a jurisdictional challenge. See Lincoln Prop. Co. v. Roche, 546 U.S.
81, 90 (2005).
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With respect to the motion to aid in enforcement of order [DE-24], the court recognizes
that it may have caused some confusion in its order allowing CWC’s motion to stay. Therein, the
court stated “[i]n general, the parties should resume their respective bankruptcy positions held
immediately before the Chapter 11 plan was confirmed.” The court’s intention was to ensure
that the plan did not become substantially consummated before it ruled on the underlying merits
of the appeal. However, the court did not intend to require the return of every payment made
between the time the plan was confirmed and the stay was granted. As Burcam notes, it could
not have predicted that the stay would be granted and it was not in violation of this court’s order
when it made the payments, because the court had not ruled at that time. Therefore, to the extent
CWC’s motion relies on a purported violation of the court’s stay order, that argument should not
be pursued on remand. However, CWC raises a number of other arguments that the payment was
improper under the Bankruptcy Code and prior orders of the bankruptcy court. Those arguments
should be pursued in the bankruptcy court in the first instance.
CONCLUSION
The bankruptcy court’s orders denying CWC’s motion to dismiss and confirming the plan
are REVERSED. The remaining motions [DE-24, -26, -27] are DENIED without prejudice to
raise the issues with the bankruptcy court on remand. This case is REMANDED to the
bankruptcy court for further proceedings consistent with this opinion. The Clerk of Court is
DIRECTED to close this case and case number 5:13-CV-279-F (the consolidated appeal).

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SO ORDERED.
This

"day of June, 2014.

the~

enior United States District Judge

19