In re: VPR Operating, LLC et al
Filing
20
IT IS ORDERED that Appellee VPR Liquidation Trust, by and through Gregory S. Milligan, Trustee's Motion to Dismiss Appeal as Equitably Moot [#12] is GRANTED IN PART and DENIED IN PART as described in this opinion; Order on Bankruptcy Appeal Affirming appeal. Signed by Judge Sam Sparks. (os)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
T;
VICTORY PARK CREDIT OPPORTUNITIES,
LP,
and
VICTORY
PARK
CREDIT
OPPORTUNITIES INTERMEDIATE FUND, LP,
Appellants,
Case No. A-14-CA-682-SS
-vs-
VPR LIQUIDATION TRUST, by and through
GREGORY S. MILLIGAN, Trustee,
Appellee.
ORDER
BE IT REMEMBERED on this day the Court reviewed the file in the above-styled cause, and
specifically Appellee VPR Liquidation Trust, by and through Gregory S. Milligan, Trustee's Motion
to Dismiss Appeal as Equitably Moot [#12], Appellants Victory Park Credit Opportunities, LP and
Victory Park Credit Opportunities Intermediate Fund, LP ' s Response [#15] thereto, and Appellee' s
Reply [#16] thereto; Appellants' Brief [#10], Appellee's Brief [#13], and Appellants' Reply Brief
[#14]. Having reviewed the documents, the governing law, the arguments of the parties at hearing,
and the file as a whole, the Court now enters the following opinion and orders.
Background
This case is an appeal from a final order of the United States Bankruptcy Court for the
Western District of Texas, Austin Division, confirming a Chapter
11
cramdown plan (the Plan).
Appellants Victory Park Credit Opportunities, LP and Victory Park Credit Opportunities
Intermediate Fund, LP, as well as a third company not party to this appeal, Delfinco, LP, extended
M
credit to the debtors, VPR Corp. and three affiliated entities (collectively, VPR),' in connection with
VPR's acquisition of various oil and gas properties and operation of an unsuccessful multi-well
drilling program. Appellants claim the Bankruptcy Court erred in confirming the Plan because the
Plan unfairly discriminates against them in violation of
11
U.S.C.
§
1129(b)(l) and improperly
classifies their claims. Appellee VPR Liquidation Trust, by and through Gregory S. Milligan,
Trustee, contends Appellants' appeal must be dismissed as equitably moot, and alternatively, that
the Plan neither unfairly discriminates against Appellants nor improperly classifies their claims.
In May2011, VPR, Appellants, and Delfinco executed a series of agreements and promissory
notes in favor of Appellants and Delfinco. Appellants and Delfinco were not issued separate
promissory notes; all of the debt was reflected in the same debt instruments, but owned in part by
Appellants and in part by Delfinco. To secure the indebtedness, VPR granted Appellants and
Delfinco a security interest in all or substantially all of VPR's real and personal property. As of the
date VPR filed its bankruptcy petition, the VPR debt owned by Appellants and Delfinco totaled
approximately $83.3 million; ultimately, Appellants filed secured proofs of claim in the bankruptcy
action totaling $50,444,824.71, while Delfinco filed secured proofs of claim totaling $34,518,108.34.
See
Appellants' R.2 17-Victory Park-2A-2H (Victory Park Proofs of Claim); id. 17-Victory Park-
3A-3D (Delfinco Proofs of Claim).3 Other, unsecured creditors hold unpaid claims against VPR
totaling approximately $16 million.4
The debtors are: VPR Corp.; VPR Operating, LLC; VPR (OK), LLC; and VPR (NM), LLC.
2
Citations to the record on appeal will be designated as "Appellants' R. [Designated Item Number]" and
"Appellee's R. [Designated Item Number]" in this opinion. The parties' designated items, which were too voluminous
to scan and make available on CM/ECF, are on file with the Court.
Each party filed four identical proofs of claim pertaining to each of the four debtor VPR entities; thus,
Appellants filed eight in total, while Delfinco filed four.
The $16 million figure is Appellee' s approximation, based on its review of the lengthy claims registers for
each debtor entity. See Appellee's Br. [#13] at 4; Appellee's R. 2A-2D (WDTX Bankr. Claims Registers).
-2-
In addition to their lending relationship with VPR, Appellants, along with another Victory
Park entity not party to this appeal, Victory Park Capital Advisors, LLC, hold a significant ownership
stake in VPR Corp., the parent VPR entity. See Appellee's R. 1-B (List of Equity Security Holders)
at 1; id. (Schedules of Assets & Liabilities) at Schedule B-13. Specifically, Appellants own a total
of 90.9% of VPR Corp.'s non-voting shares, and Victory Park Capital Advisors owns 100% of VPR
Corp.'s voting shares. Additionally, three Victory Park Capital Advisors officers, Richard Levy,
Brendan Carroll, and Matthew Ray, served on the board of directors for VPR Corp. Appellants' R.
5
(First Am. Disclosure Statement) at 33.
VPR filed for bankruptcy under Chapter
11
on March 29, 2013, and on April 15, 2013, the
United States Trustee appointed the Official Creditors' Committee (the Committee). Appellants'
R. 20 (Bankr. Ct. Order Confirming Plan) at 1. On July 26, 2013, the Committee filed a separate
adversarial lawsuit (the Adversary Suit) against Appellants and several other Victory Park entities
in the Bankruptcy Court. See Appellee's R. 41-A (Adversary Compi.). Based on alleged fraud,
breach of fiduciary duty, undercapitalization, gross negligence, and inequitable conduct by
Appellants as corporate insiders of VPR, the Adversary Suit seeks re-characterization of the
transactions between VPR and Appellants not as extensions of credit creating debt, but as infusions
of capital in exchange for equity. See id. ¶J 51-54. In the alternative, the Adversary Suit seeks
equitable subordination of Appellants' claims to the claims of general unsecured creditors to the
extent the Bankruptcy Court finds the transactions between VPR and Appellants should not be recharacterized as equity. Id. ¶J 55-59. The Adversary Suit remains pending and is presently set for
docket call on April 13, 2016. See Order of July 15, 2015 [#35], VPR Liquidation Trust v. Victory
-3-
Park Credit Opportunities, LP, No. 13-01 106-TMD (Bankr. W.D. Tex., filed 2013) (available on
PACER).
In the Chapter
11
action, in October 2013, substantially all of VPR' s operational assets were
liquidated with the approval of the Bankruptcy Court. See Appellee's R. 10, 11, 18. VPR
subsequently moved the Court for proportionate distribution of the proceeds from the liquidation to
Delfinco and Appellants. See id. 24, 25. The Court granted the motion as to Delfinco, but denied
it as to Appellants, citing "the pending adversary proceeding" as the reason for the denial.
Appellee's R. 39 at 87:25-88:1. The approximately $2.6 million which would have been paid to
Appellants, identified in the bankruptcy proceeding as the "Disputed Sales Proceeds Cash," is being
held in trust pending the outcome of the Adversary Suit. See Bankr. Ct. Order Confirming Plan ¶ 10
(Plan Modification).
Following liquidation of VPR's operational assets, on February 14, 2014, the Committee
filed its First Amended Chapter 11 Plan and First Amended Disclosure Statement. Bankr. Ct. Order
Confirming Plan at
1.
The Plan sets forth a framework for administration of VPR's remaining
assets, the bulk of which are litigation causes of action; the Plan directs the Trustee to liquidate those
causes of action, creating the pool of cash, or "Distributable Litigation Proceeds," out of which
allowed claims will be paid. See id. Ex.
1
(Plan) at 1; Plan Ex.
1
(Definitions) ¶ 29 (defining
"Distributable Litigation Proceeds"). The Plan classifies four separate classes of interests: (1) Class
1,
priority claims; (2) Class 2, general unsecured claims; (3) Class 3, Appellants' claims; and (4)
Class 4, equity interests. See id. at 4-5; Plan Modification. The Plan treats Class 2 claims as
follows:
Class 2: General Unsecured Creditor Claims
[.
.
.1
4.6
Treatment: After payment in full of Allowed Class 1, with funds remaining
from the Distributable Litigation Proceeds, if any, each holder of an Allowed General
Unsecured Claim shall receive, in full and final satisfaction of such claim, its Pro
Rata portion of Distributable Litigation Proceeds.
Plan at 4. Appellants'
claimsClass 3 claimsare treated as follows:
Class 3: Subordinated Claims
[.
.
4.6
Treatment: After payment in full of Allowed Classes 1 and 2, with funds
remaining from the Distributable Litigation Proceeds, if any, the subordinated Claim
of [Appellants], if any, shall be satisfied from the Distributable Litigation Proceeds.
[Appellants] shall not receive a distribution on account of their Allowed subordinated
Claims unless and until (i) the [Litigation] Trustee resolves the [Adversary Suit] in
a manner that yields a subordinated claim (and not a characterization as equity) and
(ii) holders of Allowed Class 1 through 2 Claims have been paid in full on account
of such Claims.
In the event the "Claims" asserted by [Appellants] are characterized as equity, this
class is vacant. In the event Claims of [Appellants] prevail in the [Adversary Suit]
such that their Claims are neither subordinated nor deemed equity, Claims of
[Appellants] shall be considered Secured Claims with respect to the Disputed Sales
Proceeds Cash and any other of the Debtors' assets subject to Claims of [Appellants']
Liens, if any. In such event, with respect to Claims of Victory Park Credit
Opportunities Intermediate Fund, LP and Victory Park Credit Opportunities, LP['s]
Allowed deficiency Claim, if any, such Allowed Claim will be paidpan passu with
the Allowed Claims in Class 2. [. .
Unless and until the Litigation Trustee prevails in or resolves by agreement with
[Appellants] the [Adversary Suit], the VPR Litigation Trustee shall not be authorized
to utilize in any manner the Disputed Sales Proceeds Cash and such funds shall
remain subject to the alleged.. . Claims of [Appellants] and held in trust pending the
conclusion of the [Adversary Suit] by the Litigation Trustee.
Plan Modification. The Plan classified all four classes as impaired and eligible to vote. Plan ¶ 2.2.
At least one of the four impaired classes had to vote in favor of the Plan in order for the Plan to be
confirmable, see
11 U.S.C. §
1
129(a)(1O); only Class 2 voted to accept the Plan. See Bankr. Ct.
Order Confirming Plan ¶ 14 (setting forth the ballot tabulation).
-5-
Unlike Appellants, Delfinco was not separately classified in the Plan; rather, Delfinco settled
with the Committee and that settlement was incorporated into the Plan. See Plan at 1 (discussing
the "Delfinco Compromise"). Pursuant to the settlement, Delfinco's secured claim was allowed as
filed, and Delfinco received all of the cash from VPR's sale of its operating assets less the Disputed
Sales Proceeds Cash and certain administrative costs. See Appellants' R. 16 (Hr'g Tr.) at 20:6-21:7.
In exchange, Delfinco waived its approximately $10 to $15 million unsecured deficiency claim. See
id. at 21:9-23. On March 24, 2014, the court approved the Delfinco settlement. See Appellants' R.
15.
While Appellants did not object to the Delfinco settlement, Appellants objected to
confirmation of the Plan, raising the same discrimination and classification issues presently on
appeal.5
Following two hearings, on April 23, 2014, over Appellants' objections, the Bankruptcy
Court entered an order confirming the Plan. See Bankr. Ct. Order Confirming Plan at 2-3.
Appellants filed their notice of appeal on May 7, 2014; however, Appellants did not seek a stay of
the Bankruptcy Court's order, and the Plan took effect on May 8, 2014. See Appellants' R. 21
(Notice of Appeal); Mot. Dismiss [#12-1] Ex. 1-A (Notice of Effective Date).
On the day the Plan took effect, VPR, the Committee, and Gregory Milligan, as Plan Trustee,
executed the "VPR Liquidation Trust Agreement." See Notice of Effective Date Ex. A (VPR
Liquidation Trust Agreement). Under the Agreement, VPR and the Committee assigned all of their
interests in all the assets comprising VPR's bankruptcy estate to the VPR Liquidation Trust, which
is tasked with liquidating all such assets and distributing the proceeds in accord with the Plan. See
Appellants also raised a third issue related to feasibility of the Plan in the Bankruptcy Court which they chose
not to appeal. See Appellants' Br. [#10] at 1 n.2.
id. at 3. Since establishment of the Trust, the following events have taken place: (1) the sole officer
and board member of VPR resigned, the VPR entities were substantively consolidated, and
bankruptcy counsel concluded its representation of VPR; (2) the Committee was disbanded and
dissolved; (3) the Trustee established bank accounts for the Trust and a trust account for the
Disputed Sales Proceeds Cash; (4) pursuant to a compromise approved by the Bankruptcy Court,
Archer Wireline, LLC, a creditor of VPR not party to this appeal, loaned the VPR Liquidation Trust
$85,000; (5) the Trustee obtained counsel to represent the Trust; (6) pursuant to the Bankruptcy
Court's approval, the Trust paid $16,147.48 to administrative creditor Summit ESP, LLC; (7) the
Trust paid a mediator $2,805; (8) the Trust was substituted as the real party in interest in the Chapter
11
proceeding; and (9) the Trust filed a second adversary action against Appellants and others.6
Mot. Dismiss [#12-1] Ex.
1
See
(Milligan Dccl.).
The record on appeal was transmitted to this Court on July 23, 2014.
See Transmission
of
R. on Appeal [#1]. Appellee filed its motion to dismiss on January 16, 2015. On February 13,2015,
the Court heard oral argument on both the motion to dismiss and the merits of the appeal. Both the
motion and the appeal are now ripe for decision.
Analysis
I.
Standard of Review
On appeal, "[a] bankruptcy court's findings of fact are subject to review for clear error, and
its conclusions of law are reviewed de novo."
In reMorrison,
555 F.3d 473, 480 (5th Cir. 2009).
"Under a clear error standard, this court will reverse only if, on the entire evidence, we are left with
the definite and firm conviction that a mistake has been made." Id. (quotation omitted).
6
See Milligan
v.
Levy, No.
15-01004-TMD (Bankr. W.D. Tex., filed Jan. 5, 2015) (available on PACER).
-7-
II.
Application
As set forth below, the Court turns first to Appellee's motion to dismiss and finds while
Appellants' improper classification claim is equitablymoot, Appellants' unfair discrimination claim
isjusticiable. Turning to the merits of the unfair discrimination claim, the Court affirms the decision
of the Bankruptcy Court.
A.
Equitable Mootness
Equitable mootness authorizes a reviewing court to decline review of an otherwise viable
appeal of a Chapter 11 bankruptcy plan, but only when the reorganization has progressed too far for
the requested relief practicably to be granted. In re Blast Energy Servs., Inc., 593 F.3 d 418, 424 (5th
Cir. 2010). Unlike the more familiar concept of Article III mootness, equitable mootness is
prudential, not jurisdictional; it recognizes "that there is a point beyond which [reviewing courts]
cannot order fundamental changes in reorganization actions." In re Manges, 29 F.3d 1034, 1038-39
(5th Cir. 1994). In determining whether an appeal of a confirmation plan is equitably moot, the Fifth
Circuit considers three factors: "(i) whether a stay has been obtained, (ii) whether the plan has been
substantially consummated, and (iii) whether the relief requested would affect either the rights of
parties not before the court or the success of the plan." Blast, 593 F.3 d at 424 (quoting Manges, 29
F.3d at 1039). While the factors have no individual set weights, "if no stay has been obtained and
the plan has been substantially consummated, the more likely the third prong indicates equitable
mootness." Id. However, although substantial confirmation "is a momentous event, it is not
necessarily fatal to the appeal of a confirmed reorganization plan"; only when the requested relief
"will likely unravel the plan" should the court abstain from reviewing the appeal. Id. at 424-25.
Here, both parties agree Appellants did not seek a stay and the Plan has been substantially
consummated.7 See
Resp. [#15] ¶ 2; Reply [#16] ¶ 1. Whether this appeal is equitably moot thus
turns upon "whether the relief requested would affect either the rights ofparties not before the court
or the success of the plan." Mindful that "equitable mootness applies to specific claims, not entire
appeals," see In re
Pac. Lumber,
584 F.3d 299, 241 (5th Cir. 2009), the Court must examine each
of the two issues presented on appeal8( 1) whether the Plan unfairly discriminates against
Appellants in violation of
11
U.S.C.
§
1
129(b)(1) and (2) whether the separate classification of
Appellants' claims under the Plan is properindividually to determine whether they are equitably
moot.
Appellee itself suggests the unfair discrimination issue is not equitably moot (without quite
conceding the point).
See
Reply [#16] at 2 n.1 ("In contrast to the classification issue, the issue
regarding the alleged unfair discrimination vis-à-vis Delfinco is more targeted. Fundamentally, this
issue deals with a finite sum of money which is being held by the Trust in a segregated account
pending the outcome of litigation.
. . .
[I]t is perhaps conceivable [if Appellants prevailed] the
reviewing court could fashion relief that would not harm third parties or eviscerate the Plan."). The
Court agrees Appellants' unfair discrimination issue, which concerns treatment of the secured
portion of Appellants' claim versus treatment of the secured portion of Delfinco's claim, is
"Substantial consummation" is defined by the Bankruptcy Code as: "(A) transfer of all or substantially all of
the property proposed by the plan to be transferred; (B) assumption by the debtor or by the successor to the debtor under
the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and
(C) commencement of distribution under the plan." 11 U.S.C. § 1101(2).
Appellants articulate four separate questions on appeal, the Court agrees with Appellee that those four
questions raise only two issues. See Appellants' Br. [#10] at 1 (listing in their statement of issues "[w]hether the
Bankruptcy Court erred in confirming the [Plan]"; "[w]hether the plan unfairly discriminates against Appellants in
violation of 11 U.S.C. § 1 129(b)(1)"; "[w]hether the Plan impermissibly treated and classified Appellants' debt as
subordinated, and whether Appellants' debt can be treated differently from the balance of the secured debt"; and
"[w]hether the Plan improperly classified the deficiency claim of Appellants from other unsecured claims").
justiciable. The gravamen of the claim is that Delfinco has been paid its portion of the sales
proceeds, while Appellants have not: their portion remains in the Disputed Sales Proceeds Cash trust
account. Relief would require nothing more than payment of the Disputed Sales Proceeds Cash to
Appellants,9
which would have no significant adverse effect on the success of the Plan or the rights
of parties not before the Court.
The real meat of the equitable mootness dispute concerns Appellants' improper classification
claim. According to Appellee, because Appellants' challenge to their separate classification rests
in part upon a contention the classification amounted to illegal gerrymandering to obtain the sole
class-wide vote in favor of the
Planand since at least one impaired class of creditors must vote to
accept the Plan in order for the Plan to be legally confirmableremedying that alleged wrong would
require undoing confirmation of the Plan in its entirety.
See
Reply [#16] ¶ 4; Appellants' R. 16
(Objection to Confirmation) ¶ 6 (arguing separate classification of Appellants was "nothing more
than impermissible gerrymandering in order to obtain an affirmative vote in Class 2"); see
U.S.C.
§
1
also 11
129(a)(10) (requiring at least one impaired class to accept the Plan); Bankr. Ct. Order
Confirming Plan ¶ 14 (ballot tabulation indicating Class 2 was the only impaired class that voted to
accept the Plan). Appellants, on the other hand, take the position very little has actually occurred
since confirmation of the Plan, as only Archer Wireline, LLC has acted in reliance on the Plan (by
giving Appellee the $85,000 loan), and less than $19,000 has been paid from the Trust to other
creditors.
Appellees do state that Appellants "seek only the wholesale reversal of confirmation" and not a "limited or
targeted" form of relieffor the alleged unfair discrimination. The Court notes, however, that Appellants' brief seeks both
reversal of the confirmation order and "such other and further relief to which Appellants may be justly entitled."
Appellants' Br. [#10] at 12.
-10-
The Court agrees with Appellee that the improper classification claim is equitably moot. As
noted in the Plan itself, if Appellants' claims were indeed improperly classified, Appellants' potential
allowed Class 2 unsecured deficiency claim "could be as high as $47,775,793.71," which would
"substantially dilute[]" the distributions available to current Class 2 unsecured creditorsraising the
question whether the current Class 2 unsecured creditors would vote to confirm the Plan. See Plan
Modification (explaining the possibility in detail). Remedying the alleged improper classification
would require wholly unwinding the Plan in order to reclassify creditors and take a new vote.
Although Appellants are correct that few distributions have been made since confirmation of the
Planwhich
makes sense, given that the creditor classes are to be paid from the Distributable
Litigation Proceeds, which have yet to come into existencewholly unwinding the Plan would
necessarily seriously threaten its success. Consequently, this claim is equitably moot. See Pac.
Lumber, 584 F. 3d at 251 (finding misclassificationlgerrymandering claim equitablymoot because "no
remedy.
. .
is practicable other than unwinding the plan"); In re Charter Commc 'ns, Inc., 691 F.3d
476, 488 (2d Cir. 2012) (same, citing Pac. Lumber).
B.
Unfair Discrimination Claim
As all of the impaired creditor classes did not vote to accept the Plan, the Committee had to
"cram down" the Plan on Appellants (and the other dissenting classes) pursuant to
§
11
U.S.C.
1129(b). In order to be confirmable over the objection of a dissenting class, a plan must not unfairly
discriminate against the dissenting class. See
Note that
§
11
U.S.C. § 1 129(b)(1); Pac. Lumber, 584 F.3d at 251.
1129(b) permits "discrimination,' so long as it is not 'unfair."
7 COLLIER ON
BANKRUPTCY ¶ 1129.03[3]; In re Cypresswood Land Partners, 1,409 B.R. 396, 434 (Bankr. S.D.
Tex. 2009). The Bankruptcy Code, however, does not define "unfair discrimination," and courts in
-11-
this Circuit have articulated at least two tests aimed at determining when discrimination against a
dissenting class is impermissibly unfair. See In re Sentry Operating Co. of Tex., Inc., 264 B.R. 850,
863-64 (Bankr. S.D. Tex. 2001); In re Mortg.
mv. Co.
of El Paso,
111 B.R. 604,
614-15 (Bankr.
W.D. Tex. 1990) (citing In reAztec Co., 107 B.R. 585, 590 (Bankr. M.D. Tenn. 1989)). The Sentry
Operating court applied a test which creates a rebuttable presumption ofunfair discrimination where
there is (1) a dissenting class; (2) another class of the same priority; and (3) a difference in the plan's
treatment of the two classes that results in either a materially lower recovery for the dissenting class
or an allocation of materially greater risk to the dissenting class in coimection with its proposed
distribution. Sentry Operating, 264 B.R. at 863-64 (quoting Bruce A. Markell, A New Perspective
on Unfair Discrimination in Chapter 11,72 AM. BANKR. L.J. 227,227(1998)). The presumption may
be rebutted by showing a lower recovery for the dissenting class "is consistent with the results that
would obtain outside of bankruptcy, or that a greater recovery from the other class is offset by
contributions from that class to the reorganization." Id. at 864 (quoting Markell at 227).
In Mortgage Investment Co., this District applied a test which directs courts to consider four
factors in determining whether unfair discrimination exists: (1) whether the discrimination is
supported by a reasonable basis; (2) whether the plan could be confirmed and consummated absent
the discrimination; (3) whether the discrimination is proposed in good faith; and (4) the treatment of
the classes discriminated against. Mortg. Inv. Co., 111 B.R. at 614-15 (citing Aztec Co., 107 B.R.
at 590).
Here, the Bankruptcy Court applied the four-factor Mortgage Investment Co. test and made
the following findings concerning the absence of unfair discrimination:
-12-
The first factor is whether the discrimination is supported by a reasonable basis. And
Iand I think clearly it is. Thethe creditors arearehave a different standing
and most significantly,. . . one creditor has settled and the other has not.
Second, whether the Debtor can confirm and consummate a Plan without the
discrimination. What the Plan does in this case is it attempts to move on. It attempts
to make this transition from a Debtor-In-Possession into a liquidating trust. At the
same time, it attempts to preserve the ability to pursue the lawsuit against the Victory
Park parties while at the same time preserving the rights of the Victory Park parties,
regardless of how that lawsuit comes out.
And the only way to do that is to withhold distribution of the $2.6 million and to
withhold distributions to the Victory Park parties, vis-à-vis the Class II creditors, until
we know how that lawsuit is going to come out. That preserves the rights of the
Victory Park parties in the event they actually win the lawsuit. It preserves the rights
of the other parties in the event that the Victory Park parties lose the lawsuit.
On that basis, it's necessary for the Debtor to effect that discrimination in order to
confirm and consummate the Plan. In other words, the Debtor can move on, can get
the Plan confirmed, but at the same time, can preserve the rights of the parties pending
resolution of the pending lawsuit.
The third factor is whether the discrimination is proposed in good [faith]. There's
been no suggestion that it has not been proposed in good faith. . . [a]nd I find that it
has been proposed in good faith.
And then significantly, the fourth factor is the treatment of the classes discriminated
against. The class discriminated against would be Class III, the Victory Park parties.
And if they win their lawsuit, they will get exactly the same treatment with respect to
their secured claim as did Delfinco. Ifand likewise, if they win the lawsuit, they'll
get the exact same treatment as the unsecured creditor class, Class II, with respect to
their unsecured deficiency claim.
inin
And so in that respect,
essence, if you look at the lawsuit as preserving the
rights of the parties, you could say there's been no discrimination at all. To the extent
. that the lawsuit is the discrimination, I think that.. . discrimination is appropriate
and called for under this four-factor test set forth in Judge King's decision.
Hr'g Tr. at 82 :24-84:20.
Appellants argue the Bankruptcy Court applied the fourth factor of the Mortgage Investment
Co. test in a manner inconsistent with the Sentry Operating test by relying on the possibility
-13-
"Appellants might wind up in the same position as Delfinco" in finding the Plan treated Appellants
reasonably. Appellants' Br. [#10] at 8. In Appellants' view, under Sentry Operating, "this is the very
essence" of unfair discrimination, because in making Appellants' distribution reliant on the outcome
of the Adversary Suit, the Plan allocates materially greater risk to Appellants in connection with their
proposed distribution. See Sentry Operating, 264 B.R. at 863-64.
The parties' disagreement on this point highlights the confusion in this area ofbankruptcy law.
Courts in this and other Circuits have struggled to consistently articulate a precise standard for
determining whether a plan unfairly discriminates against a dissenting class. See, e.g., In re
Crawford, 324 F.3d 539, 542 (7th Cir. 2003). The Fifth Circuit has provided no clear guidance,1° and
as explained above, lower courts in this Circuit have applied varying tests. In In re Crawford, a
Seventh Circuit panel considering unfair discrimination in a Chapter 13 action noted this difficulty,
described four different tests for unfair discrimination which have been floated in the jurisprudence,
pointed out the flaws in all four, and concluded: "We haven't been able to think of a good test
ourselves." Id. In the Crawford panel's view, "this is one of those areas of the law in which it is not
possible to do better than to instruct the first-line decision maker, the bankruptcy judge, to seek a
result that is reasonable in light of the purposes of the relevant law
.
.
.
;
and to uphold his
determination unless it is unreasonable (an abuse of discretion)." Id. (citing In re Bentley, 266 B.R.
229, 239-40 (B.A.P. 1st Cir. 2001); 8 COLLIER ON BANKRUPTCY
§
1322.05[2]). Echoing that
sentiment, Collier on Bankruptcy concludes that "[r] egardless of the test used, most cases tend to look
10
Specially concurring in In re Ramirez, one Fifth Circuit judge indicated in a footnote that "[b]ankruptcy
courts generally use the. . four-part test to determine whether the plan unfairly discriminates[.]" 204 F.3d 595, 598
n.2 (5th Cir. 2000) (Benavides, J., specially concurring).
-14-
at the disparity of treatment proposed in the plan, and whether such disparity can be justified under
the Code."
7 COLLIER
ON BANKRUPTCY ¶ 1129.03 [3][a].
Here, no matter which test is applied, the Court agrees with the Bankruptcy Court that the Plan
does not unfairly discriminate against Appellants, as to the extent the Plan treats Appellants
disparately, that disparity is justified. Applying the four-part Mortgage Investment Co. test, the Court
agrees with the conclusions of the Bankruptcy Court. The Court declines to disturb the Bankruptcy
Court's findings that Appellants' materially different position relative to VPR, both givenAppellants'
affiliation with VPR and Delfinco ' s settlement, is a reasonable basis for any discrimination and that
the discrimination effected by the Plan was proposed in good faith. The differing treatment of
Appellants and Delfinco enabled the liquidation of VPR to proceed while preserving Appellants'
alleged right to the Disputed Sales Proceeds Cashwhich Appellants will receive if they prevail in
the Adversary Suit. While it is true Appellants are deprived of the capital pending resolution of the
Adversary Suit, the Court finds any discrimination inherent in that deprivation does not rise to the
level of unfairness. Cf In re Le Blanc, 622 F.2d 872, 879 (5th Cir. 1980) (finding plan did not
unfairly discriminate against insider unsecured creditors although it classified them in a separate class
which received nothing under the plan).
Applying the Sentry Operating test, even if the Plan allocates a materially greater risk to
Appellants vis-à-vis Delfinco by withholding the Disputed Sales Proceeds Cash until resolution of
the Adversary Suit, the presumption of unfair discrimination that arises is rebuttable because
Delfinco's "greater recovery. . . is offset by [its] contributions.
. .
to the reorganization." See Sentry
Operating, 264 B.R. at 864. As the Bankruptcy Court noted, Delfinco settled its claims, and in so
doing, agreed to waive its
$10is million unsecured deficiency claim in
-15-
exchange for immediate
payment of its share of the sales proceeds. Removing that deficiency claim from the unsecured
creditors' pool benefitted the unsecured creditor class, and in exchange for providing that benefit,
Delfinco received different treatment than did Appellants. Any discrimination in that result is not
impermissibly unfair.
While Appellants' briefing is not entirely clear, it appears Appellants may further claim unfair
discrimination based on "the treatment provided to Appellants' unsecured deficiency claim [versus]
other unsecured creditors." Appellants' Br. [#10] at 10; compare id.
with Appellants'
Reply Br. [#14]
at 2 (discussing unfair discrimination claim solely with reference to Delfinco). This argument bleeds
into Appellants' misclassification claim, and is equitably moot to the extent Appellants seek to
unwind the plan such that they may be reclassified in Class 2. However, as "[a] finding that the plan
classflcation scheme is proper does not necessarily resolve the question of unfair discrimination,"
see
Mortgage mv. Co., 111 B.R. at 614, the
Court considers and rejects Appellants' argument (to the
extent raised) that the Plan unfairly discriminates against Appellants vis-à-vis other unsecured
creditors. The Court agrees with the Bankruptcy Court that the Plan preserves Appellants' legal rights
pending the outcome of the Adversary Suit; if Appellants' claims are ultimately characterized as debt
and not subordinated debt or equity, Appellants will be paidparipassuon equal footingwith the
Class 2 unsecured creditors. Additionally, as Appellee points out (and Appellants do not dispute),
there are currently no Distributable Litigation Proceeds to be paid to any unsecured creditors and there
will be no such proceeds until the Adversary Suit is resolved. Thus, payment of the Class 2 creditors
and Appellants pursuant to the Plan will occur after the propriety of subordinating or re-characterizing
Appellants' claims has been conclusively resolved. If Appellants win the suit, they will be paid as
would any other Class 2 creditor; if their claims are deemed subordinated or their debt is re-16-
characterized as equity, they will be paid in accord with their legal right to any distribution.
Assuming this scheme is at all discriminatory, it is not unfair.
The decision of the Bankruptcy Court concerning Appellants' unfair discrimination claims
is affirmed.
Conclusion
Accordingly:
IT IS ORDERED that Appellee VPR Liquidation Trust, by and through Gregory S.
Milligan, Trustee's Motion to Dismiss Appeal as Equitably Moot [#12] is GRANTED IN
PART and DENIED IN PART as described in this opinion; and
IT IS FINALLY ORDERED that the judgment of the Bankruptcy Court concerning
Appellants' unfair discrimination claims is AFFIRMED.
SIGNED this the
day of September 2015.
U
SAM SPARKS
UNITED STATES DISTRICT JUDGE
682 mtd appeal ord ba
frrn
17
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