COMM 2013 CCRE12 Crossings Mall Road, LLC
Filing
13
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT: The Court AFFIRMS the Bankruptcy Courts orders overruling COMM 2013's objections and approving Tara Retails settlement of the claims at issue. Signed by Senior Judge Irene M. Keeley on 8/30/18. (jss)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
COMM 2013 CCRE12
CROSSINGS MALL ROAD, LLC,
Appellant,
v.
//
CIVIL ACTION NO. 1:18CV11
CIVIL ACTION NO. 1:18CV47
BANKRUPTCY NO. 1:17BK57
(Judge Keeley)
TARA RETAIL GROUP, LLC,
Appellee.
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
COMM 2013 CCRE12 Crossings Mall Road, LLC (“COMM 2013"),
appeals two orders entered by the United States Bankruptcy Court
for the Northern District of West Virginia (“Bankruptcy Court”),
overruling COMM 2013's objections to the settlement of certain
claims by the debtor, Tara Retail Group, LLC (“Tara Retail”). The
primary question presented is whether the debtor may compromise a
claim by allowing the claim in its entirety, but agreeing to
satisfy the claim, in part, through payment of a smaller sum. For
the following reasons, concluding that debtors may do so, the Court
AFFIRMS the Bankruptcy Court.
I. BACKGROUND
The parties do not dispute the factual and procedural history
relevant to the pending appeals. Tara Retail owns and operates
Elkview
Crossings
Shopping
Mall
in
Elkview,
West
Virginia
COMM 2013 V. TARA RETAIL
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
(“Crossings Mall”). Among the Crossings Mall’s tenants are Dollar
Tree Stores (“Dollar Tree”) and The Elswick Company d/b/a Anytime
Fitness (“Elswick”). COMM 2013 is Tara Retail’s principal creditor
due to a $13,650,000 commercial loan, which is secured by a lien on
the Crossings Mall, as well as an assignment of its rents.
In June 2016, catastrophic flooding destroyed the bridge and
culvert that provided the only public access to the Crossings Mall,
which remained inaccessible and inoperable for over a year. As a
result, Tara Retail defaulted on its financial obligations. COMM
2013 scheduled a deed of trust sale of the Crossings Mall, but on
January 24, 2017, Tara Retail filed a voluntary petition for
bankruptcy pursuant to Chapter 11 of the Bankruptcy Code.
On May 22, 2017, Dollar Tree filed a proof of claim for
$276,969.28, which consisted of $26,969.28 in overpaid rent from
June 2016 through November 2016; $150,000 in lost profits; $95,000
to reopen for business; and $5,000 in legal fees (D.T. No. 20).1
1
As discussed in more detail below, this is a consolidated
appeal regarding the settlement of claims by Dollar Tree and
Elswick. Citations to the designated record on appeal regarding
Dollar Tree are “D.T. No. X,” referencing the item numbers assigned
by the Bankruptcy Court (Civil No. 1:18cv11, Dkt. Nos. 3; 6).
Citations to the designated record on appeal regarding Elswick are
“E. No. X,” also referencing the item numbers assigned by the
Bankruptcy Court (Civil No. 1:18cv47, Dkt. No. 6). As necessary,
pin cites are provided using the internal pagination of designated
record items. Unless otherwise noted, other citations throughout
this Memorandum Opinion and Order refer to the docket of the lead
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Tara Retail objected, arguing that Dollar Tree’s claim should be
disallowed in its entirety because Tara Retail did not have a duty
or obligation to repair the bridge or provide access to the
Crossings Mall given that the culvert was owned and maintained by
the State of West Virginia (D.T. No. 1). Thereafter, Tara Retail
stipulated to three, month-long extensions of time for Dollar Tree
to respond to the objection (D.T. Nos. 22; 23; 24).
Ultimately, on October 31, 2017, Tara Retail and Dollar Tree
filed a stipulation to resolve the disputed proof of claim. In
relevant part, the stipulation provided:
Debtor and Dollar Tree agree that: (a) for plan voting
purposes only, Dollar Tree shall have an estimated
allowed claim for $276,969.28 (the “Voting Claim”), which
is comprised of $26,969.28 in post-June 2016 flood rental
payments and $250,000 as the estimated expense to repair
the condition of the Property to the condition
immediately preceding the June 2016 flood; (b) for
distribution purposes, the Claim is hereby allowed in the
reduced amount of $26,969.28.
(D.T. No. 6 at 3). Dollar Tree agreed to accept $26,969.28 as a
credit against rent payments, which would begin to accrue when
Dollar Tree reopened for business. Id. at 4. Dollar Tree further
“agree[d]
to
vote
in
support
of
the
Debtor’s
plan
of
reorganization,” so long as its terms required Tara Retail to
assume the lease agreement entered in 2000. Id. at 1, 5.
case, Civil Action No. 1:18cv47.
3
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
COMM 2013 objected to the stipulation between Tara Retail and
Dollar Tree (D.T. No. 8). It argued that the stipulation was
“nothing more than [a] disguised settlement agreement which should
only be approved as part of a proper Rule 9019 motion.” Id.2 As
evidence that the stipulation should be reviewed as a settlement,
COMM 2013 contended, in part, that the stipulation “appear[ed] to
be designed to gerrymander a class of consenting impaired claims.”
In other words, rather than simply assume the lease in exchange for
Dollar
Tree’s
concessions,
Tara
Retail
had
structured
the
stipulation to require Dollar Tree to vote for its plan. Id.
During a hearing on November 14, 2017, the Bankruptcy Court
acknowledged that Rule 9019 may have provided a better framework
for
addressing
the
stipulation.
After
reviewing
the
relevant
factors, however, the Bankruptcy Court concluded that the parties
had adequate notice and that the stipulation represented a sound
business judgment by Tara Retail (D.T. No. 9 at 28-34). It thus
2
Pursuant to Fed. R. Bankr. P. 9019, “[o]n motion by the
trustee and after notice and a hearing, the court may approve a
compromise or settlement.” “A court reviews a Rule 9019 motion to
compromise against ‘the outcome of four factors: (1) the
probability of success in litigation; (2) the likely difficulties
in collection; (3) the complexity of the litigation involved, and
the expense, inconvenience and delay necessarily attending it; and
(4) the paramount interest of the creditors.’” In re Fairmont Gen.
Hosp., Inc., 510 B.R. 783, 790 (Bankr. N.D.W.Va. 2014) (quoting In
re Buffalo Coal Co., No. 06-366, 2006 WL 3359585 (Bankr. N.D.W.Va.
Nov. 15, 2006)).
4
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
found the stipulation acceptable with the exception of the voting
rights issue raised by COMM 2013 in its objection. Therefore, the
Bankruptcy Court ordered additional briefing on whether allowing
Dollar Tree to vote the full amount of its claim would violate the
Bankruptcy Code or voting process (D.T. No. 10).
In its supplemental brief, COMM 2013 argued that a creditor’s
voting rights must be identical to its payment rights, and that the
stipulation improperly locked up votes in violation of 11 U.S.C.
§ 1125(b) (D.T. No. 11).3 During a further hearing had on December
19, 2017, in a thoroughly reasoned oral ruling, the Bankruptcy
Court overruled COMM 2013's objection and approved the stipulation
between Tara Retail and Dollar Tree (D.T. No. 13). When COMM 2013
noted its appeal from the ruling (D.T. No. 14), the Bankruptcy
Court entered a “memorandum opinion restating its justification for
approving the Debtor’s resolution of its objection to Dollar Tree’s
proof of claim” (D.T. No. 19 at 1).
First,
the
Bankruptcy
Court
disagreed
with
COMM
2013's
contention that voting rights must be identical to payment rights.
The court “viewed the stipulation as allowing Dollar Tree’s claim
in the full amount despite Dollar Tree’s agreement to accept . . .
3
Section 1125(b) provides that “[a]n acceptance or rejection
of a plan may not be solicited after the commencement of the case”
and before approval of a written disclosure statement.
5
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
merely a percentage payment on its allowed claim.” Id. at 5.
Indeed, “unsecured creditors often receive a fraction of their
claims in bankruptcy.” Id. In addition, the Bankruptcy Court
thought it significant that Dollar Tree was “not receiving any
benefit that it would not otherwise possess in the absence of an
objection,” and that the stipulation did not result in prejudice to
similarly situated unsecured creditors. Id. at 4-5.
Second, the Bankruptcy Court disagreed that the stipulation
constituted an impermissible solicitation under § 1125(b). Id. at
5. In its view, “solicitation” should be construed narrowly to
avoid “inhibit[ing] free creditor negotiations” such as those
between Tara Retail and Dollar Tree. Moreover, Dollar Tree’s vote
is not “locked up” by virtue of the stipulation because it is
contingent on Tara Retail proposing a plan that includes its
assumption of the pre-existing lease agreement. Id. at 5-6.
Also at issue in this appeal is an unspecified proof of claim
filed by Elswick on May 22, 2017 (E. No. 19). The basis of its
claim was “[d]amages as tenants of the shopping center, including
but not limited to interruption of business, loss of revenue, loss
of business value, loss of good will, and other damages, as a
result of the culvert failure” Id. at 2. Tara Retail objected to
Elswick’s claim on the same grounds upon which it objected to
6
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
Dollar Tree’s claim (E. No. 22). After full briefing on the
objection (E. Nos. 30; 32), on December 18, 2017, Tara Retail and
Elswick moved the Bankruptcy Court to approve a compromise of
Elswick’s claim (E. No. 1).
The motion to compromise included provisions similar to those
at issue with Dollar Tree:
a.
For plan voting purposes, Elswick shall have an
estimated allowed claim for $835,888.00 (the
“Voting Claim”), which is comprised of Elswick’s
historical and future damages, as set forth in the
demand letter and expert report provided by
Elswick’s counsel.
b.
Under Tara’s plan of reorganization, and provided
such plan of reorganization is confirmed, Elswick
will receive in full satisfaction of its Allowed
Claim (i) $21,431.65, representing one month of
rent paid for the month of July, 2016, and four (4)
month’s rent for period accruing after August 1,
2017; and (ii) assignment of Tara’s claim under its
Commercial Insurance policy issued by Travelers
Indemnity Company for the period 9/11/2015 to
9/11/2016, to the extent of the claim for business
interruption, loss of revenue, loss of goodwill,
and any other claims asserted by Elswick against
Tara.
Id. at 3. As with Dollar Tree, Elswick would recover the $21,431.65
through “a contingent right of recoupment against rent due” under
its lease agreement with Tara Retail. Id. at 4. In addition,
Elswick “agree[d] to vote in support of the Debtor’s plan of
reorganization
so
long
as
it
incorporate[d]”
Tara
assumption of Elswick’s 2013 lease agreement. Id. at 5.
7
Retail’s
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
COMM 2013 objected to the compromise, again arguing that
voting rights must be identical to payment rights, and that the
agreement impermissibly locked up votes under § 1125(b) (E. No. 5).
In addition, COMM 2013 argued that “a right of recoupment for postpetition rents” constituted an impermissible use of its cash
collateral. Id. at 4-5. Following a hearing on February 13, 2018
(E. No. 11), the Bankruptcy Court overruled COMM 2013's objection.
It incorporated its reasoning with regard to the Dollar Tree
stipulation and further disagreed that Tara Retail was improperly
using COMM 2013's cash collateral. Rather, it viewed Elswick’s
right of recoupment as superior to both Tara Retail and COMM 2013's
interest in post-petition rents (E. Nos. 17; 33).
On February 26, 2018, COMM 2013 timely noted its appeal from
this ruling (E. No. 12), placing both the Dollar Tree and Elswick
compromises before this Court. At the parties’ request, on March 9,
2018, the Court consolidated COMM 2013's appeals regarding the
Dollar Tree stipulation and the Elswick compromise (Dkt. No. 3).
The consolidated appeal is now fully briefed.
II. JURISDICTION
District courts have jurisdiction to hear appeals “from final
judgments, orders, and decrees . . . of bankruptcy judges entered
in cases and proceedings referred to the bankruptcy judges under
8
COMM 2013 V. TARA RETAIL
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
section 157.” 28 U.S.C. § 158(a). Such proceedings include “core
proceedings,” which encompass “allowance or disallowance of claims
against the estate.” Id. § 157(b)(2)(B); see also In re Johnson,
960 F.2d 396, 401 (4th Cir. 1992).
III. STANDARD OF REVIEW
A district court sitting in its capacity as a bankruptcy
appellate court reviews “findings of fact only for clear error, but
consider[s] the relevant legal questions de novo.” In re Varat
Enters., Inc., 81 F.3d 1310, 1314 (4th Cir. 1996). Therefore, when
the parties do not dispute the relevant facts, the Court’s review
is de novo. See In re Jones, 591 F.3d 308, 310 (4th Cir. 2010).
IV. DISCUSSION
A.
COMM 2013 is a party in interest with standing to object to
the compromises and maintain this appeal.
The parties first dispute whether COMM 2013 had standing to
challenge the compromises in the Bankruptcy Court, as well as
whether it has standing to bring the instant appeals (Dkt. Nos. 4
at 19-20; 11 at 28-21). “A party in interest, including the debtor,
the trustee, . . . a creditor, [and] an equity security holder . .
. may raise and may appear and be heard on any issue in a case
under this chapter.” 11 U.S.C. § 1109(b); see also id. § 502(a) (“A
claim or interest . . . is deemed allowed, unless a party in
9
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
interest . . . objects.”). “Although the Code does not define the
term ‘party in interest,’ the term ‘is generally understood to
include all persons whose pecuniary interests are directly affected
by the bankruptcy proceedings.’” In re Hutchinson, 5 F.3d 750, 756
(4th Cir. 1993) (quoting White Cty. Bank v. Leavell, 141 B.R. 393,
399 (Bankr. S.D. Ill. 1992)); see also In re Alpha Nat. Res. Inc.,
544 B.R. 848, 854-55 (Bankr. E.D. Va. 2016) (collecting cases).
Tara Retail argues that “COMM 2013 does not have and has not
even alleged that it has an interest that would be diminished as a
result of the” compromises (Dkt. No. 11 at 18).4 This contention is
spurious, at best, in light of COMM 2013's interest in both the
bankruptcy proceeding as a whole and the compromises at issue here.
As Tara Retail’s principal secured creditor, COMM 2013 plainly
holds a pecuniary interest that is directly affected by the
bankruptcy proceeding. See In re Hutchinson, 5 F.3d at 756. Indeed,
it is difficult to imagine a party with a greater interest in the
bankruptcy proceeding than the creditor from whom Tara Retail
borrowed $13,650,000.
4
The Bankruptcy Court did not actually hold that COMM 2013
lacked standing to object to the compromises, and indeed it
thoroughly addressed COMM 2013's objections. The court mentioned
only in dicta that, if “COMM 2013 is fully secured or even
oversecured,” it is “unlikely that COMM 2013 could establish
sufficient standing to object to the Debtor’s resolution of
unsecured proofs of claim” (D.T. No. 19 at 5).
10
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
Moreover, the compromises themselves directly affect COMM
2013's pecuniary interest. That COMM 2013 is a secured creditor
does
not
necessarily
mean
that
it
cannot
be
affected
by
an
agreement between Tara Retail and an unsecured creditor. For
example, as the parties and the Bankruptcy Court recognized below,
the disposition of rent credits under the compromises impacts the
amount of COMM 2013's security interest in Tara Retail’s collection
of rent (E. No. 17); see also
In re Panache Cuisine, LLC, No. 13-
17027-JS, 2013 WL 5350613, *3 (Bankr. D. Md. Sept. 23, 2013)
(recognizing standing of “a creditor of the bankruptcy estate
holding a pecuniary interest that will be diminished if the Trustee
obtains authorization to pay [a] claim”).
In addition, the compromises involve contingent agreements to
vote in support of Tara Retail's plan of reorganization. Notably,
Tara Retail’s first amended plan included such things as the
cancellation and discharge of loan documents related to COMM 2013
and the execution of new documents (Dkt. No. 8-1 at 51). According
to COMM 2013, the new loan documents include a significant balloon
payment and a new interest rate that it opposes (Dkt. No. 12 at 8).
To the extent that Tara Retail intends to advocate in favor of a
plan that would adversely affect COMM 2013, an agreement to vote in
favor of the plan plainly affects the lender’s pecuniary interest.
11
COMM 2013 V. TARA RETAIL
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In sum, the Court readily concludes that COMM 2013 holds a
pecuniary interest affected by both the bankruptcy proceeding and
the compromises at issue in these appeals. It thus finds that COMM
2013 has standing to object to the agreements between Tara Retail
and the unsecured creditors.
B.
The Bankruptcy Court did not err by allowing the claims in
full but permitting Tara Retail to settle in a lower amount.
COMM 2013 primarily takes issue with one salient feature of
the parties’ agreements. In both the Dollar Tree stipulation and
the Elswick compromise, Tara Retail allowed the claim in full “for
plan voting purposes,” but agreed to satisfy the claim in a lower
or different amount (D.T. No. 6 at 3; E. No. 1 at 3). COMM 2013
contends that such arrangements should not be countenanced by the
Court because they 1) divorce voting rights from payment rights
under the Bankruptcy Code, 2) permit fully paid claims to be voted
during plan confirmation, and 3) allow the debtor to manipulate
plan voting to the prejudice of other creditors (Dkt. No. 4 at 1221). Each of these contentions is unavailing.
First, COMM 2013 contends that a creditor’s voting rights
cannot be different than its payment rights. Id. at 12. The
Bankruptcy Code defines a “claim” as a “right to payment” or a
“right to an equitable remedy for breach of performance if such
12
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breach gives rise to a right of payment.” 11 U.S.C. § 101(5).
Whether
the
Bankruptcy
Court
“allow[s]”
a
claim
against
the
bankruptcy estate depends on the resolution of objections to the
validity of the claim. Id. § 502. The existence of a valid claim
and
the
amount
of
the
claim
that
ultimately
is
allowed
are
important. “The holder of a claim or interest allowed under section
502 of this title may accept or reject a plan.” Id. at § 1126(a).
Voting power for plan confirmation is calculated by reference to
the amount of each allowed claim. Id. § 1126(c).
Contrary to COMM 2013's contention, the Bankruptcy Court did
not allow the claims in different amounts for voting purposes than
for payment purposes. As the Bankruptcy Court explained on the
record, it allowed the Dollar Tree claim in only one amount: “the
estimated amount of $276,000" (D.T. No. 13 at 39). The claim was
not “allowed . . . for distribution purposes” in a different, lower
amount. Rather, from the Bankruptcy Court’s perspective, Dollar
Tree agreed to accept $26,000 in satisfaction of the fully allowed
claim. Id.
Second, COMM 2013 contends that, because rent credits will be
applied in advance of plan confirmation, the claims will be paidin-full and non-voteable (Dkt. No. 4 at 13-14). COMM 2013 is
correct that one’s voting power is based on his “right to payment”
13
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
or “right to an equitable remedy.” See 11 U.S.C. § 1126(a). But
both Dollar Tree and Elswick will still have fully allowed claims
against Tara Retail when it comes time to confirm a plan of
reorganization. The Elswick compromise clearly indicates that
satisfaction of the allowed claim will not take place until Tara
Retail obtains approval of a corresponding plan of reorganization
(E. No. 1 at 3). The Dollar Tree stipulation is contingent, in
part, on Dollar Tree’s vote for a plan that includes Tara Retail’s
assumption of the parties’ lease agreement (D.T. No. 6 at 5). In
other words, the proposed plan and creditors’ votes are part of
settling the allowed claims, which will still constitute rights to
payment at the time that creditors vote on Tara Retail’s plan.5
Third, COMM 2013 contends that “[t]he Bankruptcy Court’s
reasoning in both the Oral Ruling and Memorandum Option [sic]
contains several errors of law which contributed to its decision to
approve the Stipulations” (Dkt. No. 4 at 14). COMM 2013 argues that
the Bankruptcy Court erroneously assumed that Tara Retail 1) could
have declined to object to the claims, 2) concluded that creditors
were not prejudiced by the stipulations, and 3) concluded that
5
At
Bankruptcy
creditors’
reduced by
the time of voting, it will be incumbent upon the
Court to determine the extent to which, if at all, the
“right to payment,” and thus voting power, has been
credits against rent.
14
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there was no evidence of an intent to manipulate plan voting. Id.
at 14-18.
Pursuant to Rule 9019, “[o]n motion by the trustee and after
notice and a hearing, the court may approve a compromise or
settlement.” “A court reviews a Rule 9019 motion to compromise
against ‘the outcome of four factors: (1) the probability of
success in litigation; (2) the likely difficulties in collection;
(3) the complexity of the litigation involved, and the expense,
inconvenience and delay necessarily attending it; and (4) the
paramount interest of the creditors.’” In re Fairmont Gen. Hosp.,
Inc., 510 B.R. at 790 (quoting In re Buffalo Coal Co., No. 06-366,
2006 WL 3359585).
The Bankruptcy Court conducted a Rule 9019 analysis for both
the Dollar Tree and Elswick compromises, considering “whether the
debtor [was] exercising sound business judgment in comprising a
particular claim” (D.t. No. 9 at 32).6 First, it reasoned that
Dollar Tree was almost certain to succeed on its claim for postflood rent, and that there were risks associated with litigating
6
One of COMM 2013's primary objections below was that Tara
Retail did not seek approval for the Dollar Tree stipulation under
Rule 9019 (D.T. No. 8). At the hearing on the stipulation, however,
the Bankruptcy Court concluded that the creditors had received
sufficient notice and considered the stipulation under Rule 9019
(D.T. No. 9 at 31). COMM 2013 does not challenge this ruling.
15
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the claim for business interruption damages. Id. at 32-33. The
court reasoned that the second factor, difficulty of collection,
did not apply because the debtor was not attempting to recover. Id.
at 33. As for the third factor, complexity of the litigation, the
Bankruptcy Court acknowledged that the compromise would prevent the
debtor from engaging in expensive and complex litigation regarding
the business interruption claim. Id. at 33-34. Finally, the court
concluded that the creditors would substantially benefit from
Dollar Tree’s willingness not to pursue monetary compensation for
its business interruption claim. Id. at 34. COMM 2013 has not
challenged this analysis on appeal, and its brief does not cite
Rule 9019.
Rather, before the Bankruptcy Court and now on appeal, COMM
2013 has argued that the compromises should not be approved because
the claim is allowed in a different amount than the creditors
agreed to accept in satisfaction. In essence, COMM 2013 contends
that the compromises should be presumed impermissible because there
is no valid reason to agree that a claim be allowed in its entirety
but satisfied by a lower figure. In support, it relies primarily on
the contents of a footnote from an unpublished opinion:
The parties originally agreed to compromise these claims
at (1) for purposes of voting on a plan of
reorganization, a total of $70 million for the Class
Claims and $121 million for Morning Star, and (2) for
16
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purposes of distribution, a total of $10.5 million for
the Class Claims and $18.15 million for Morning Star. In
other words, the claims would be allowed at one amount
for purposes of voting and a much lower amount for
purposes of distribution—an amount equal to 15% of the
voting amount.
At the initial hearing, the court expressed its concern
that allowing the claims at one amount for distribution
purposes but at an amount more than six times higher for
voting purposes appeared designed to manipulate the
voting process; that is, it appeared to give these
claimants voting power disproportionate to their true
economic interests in the case and unfairly greater than
the voting power of the other general unsecured
creditors.
In re SK Foods, L.P., No. 09-20162-D-11, 2011 WL 10715382, at *1
(E.D. Cal. Jan. 27, 2011).
Indeed, the Bankruptcy Court expressed a similar concern
during the Dollar Tree hearing (D.T. No. 9 at 56), but ultimately
rejected COMM 2013's argument as an independent basis to reject
Tara Retail’s proposed settlements (D.T. No. 19). In doing so, it
reasoned
that
settlement
of
the
claims
correlates
with
the
creditors’ voting power and possible recovery in the absence of any
objection. Id. at 4-5. Tara Retail has an obligation to object to
the allowance of improper claims, 11 U.S.C. §§ 1106(a), 1107(a),
but COMM 2013 has not argued that the full amount of the claims was
invalid, that they were arrived at through fraud or collusion, or
that Tara Retail improperly spurned its duty to object to invalid
claims. Because no party opposed the settlement on these grounds,
17
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
the Bankruptcy Court had little reason to reject allowance of the
full claims; other creditors are not impermissibly prejudiced
simply because another valid claim is allowed in full.
Although COMM 2013 argues that allowing a claim in a different
amount than it is satisfied constitutes de facto vote manipulation
(Dkt. No. 4 at 18), there certainly are non-manipulative reasons a
debtor and creditor might enter such an agreement. A creditor may
decide that ensuring the presence of a particular provision in the
debtor’s proposed plan of reorganization is more important to it
than receiving full monetary compensation, especially when the
bankruptcy estate will not likely be sufficient to satisfy the full
claim. For instance, both Dollar Tree and Elswick bargained for
plan provisions that include the assumption of their existing lease
agreements (D.T. No. 6 at 1, 5; E. No. 1 at 5).
In
conclusion,
COMM
2013
attacks
the
reasonableness
of
allowing two unsecured claims in full, but it does so without
presenting any concrete argument or evidence that the claims are
improper.7 COMM 2013's abstract concern with the disparity between
the allowed claims and the monetary amounts accepted as partial
7
COMM 2013 points only to the fact that Tara Retail objected
to the claims and that the creditors accepted payment in reduced
amounts as evidence that the claims were overstated (Dkt. No. 4 at
15). But these facts are true of any settled claim.
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settlement is insufficient to outweigh the Bankruptcy Court’s
careful analysis of the Rule 9019 factors. Therefore, the Court
AFFIRMS the Bankruptcy Court’s decision to approve the compromises
between Tara Retail and its unsecured creditors, Dollar Tree and
Elswick.
C.
The compromises do not constitute impermissible agreements in
violation of § 1125(b).
COMM
2013
also
contends
that
the
stipulations
are
impermissible “lock up” agreements in violation of 11 U.S.C.
§ 1125(b) (Dkt. No. 4 at 21-22). Under that section,
[a]n acceptance or rejection of a plan may not be
solicited after the commencement of the case under this
title from a holder of a claim or interest with respect
to such claim or interest, unless, at the time of or
before such solicitation, there is transmitted to such
holder the plan or a summary of the plan, and a written
disclosure statement approved, after notice and a
hearing, by the court as containing adequate information.
According to COMM 2013, the compromises directly violate the plain
language of the statute because they amount to an impermissible
“solicitation” of “votes in favor of a plan prior to approval of a
disclosure statement” (Dkt. No. 12 at 12).
As
other
courts
have
recognized,
however,
there
is
an
appreciable difference between permissible “post-petition plan
support
agreements”
and
lock-up
agreements
that
violate
the
prohibition on solicitation under § 1125(b). See In re Residential
19
COMM 2013 V. TARA RETAIL
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
Capital, LLC, No. 12-12020, 2013 WL 3286198, at *19-20 (Bankr.
S.D.N.Y. June 27, 2013). In other words, the term “solicitation,”
which is not defined in the Bankruptcy Code, “should relate to the
formal polling process in which the ballot and disclosure statement
are actually presented to creditors with respect to a specific
plan, and the term should not be read so broadly as to chill the
debtor’s
postpetition
negotiations
with
its
creditors.”
Id.
(quoting 7 Collier on Bankruptcy ¶ 1125[1])). This is consistent
with the very purpose of § 1125, which “was designed to ‘discourage
the undesireable practice of soliciting acceptance or rejection at
a time when creditors and stockholders were too ill-informed to act
capably in their own interests.’” In re Heritage Org., LLC, 376
B.R. 783, 294 (Bankr. N.D. Tex. 2007) (quoting In re Clamp-All
Corp., 233 B.R. 198, 208 (Bankr. D. Mass. 1999)).
As did the Bankruptcy Court, the Court finds persuasive the
reasoning in In re Heritage Org., LLC, where the Bankruptcy Court
for the Northern District of Texas acknowledged that
“[t]he majority of courts to have considered the contours
of [solicitation] have defined it narrowly.” Zenter GBV
Fund IV v. Vesper, 19 F. App’x 238, 247 (6th Cir. 2001)
(unpublished disposition) (the terms “solicit” and
“solicitation” must “be interpreted very narrowly to
refer only to a specific request for an official vote
either accepting or rejecting a plan ... [t]he terms do
not encompass discussions, exchanges of information,
negotiations, or tentative arrangements....”); Century
Glove, Inc. v. First American Bank of New York, 860 F.2d
20
COMM 2013 V. TARA RETAIL
1:18CV11/1:18CV47
MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
94, 101–02 (3d Cir. 1988) (the term “solicitation” must
be read narrowly. A broad reading of § 1125 can seriously
inhibit free creditor negotiations ... we find no
principled, predictable difference between negotiation
and solicitation of future acceptances. “We therefore
reject any definition of solicitation which might cause
creditors to limit their negotiations”); In re Kellogg
Square P'ship, 160 B.R. 336 (Bankr. D. Minn. 1993). As
the Third Circuit noted in Century Glove,
“A narrow definition might allow a debtor to send
materials seeking to prepare support for the plan, ‘for
the consideration of the creditors,’ without adequate
information approved by the court. Though such
preparatory materials may undermine the purpose of
adequate disclosure, the potential harm is limited in
several ways. First, a creditor still must receive
adequate information before casting a final vote, giving
the creditor a chance to reconsider its preliminary
decision. The harm is further limited by free and open
negotiations between creditors.”
Id. at 791-92. Consistent with this authority, the court concluded
that
a
plan
support
agreement
is
not
an
impermissible
“solicitation” if “it [is] clear that arm’s length negotiations, in
fact, had occurred, even where the creditor agreed to support the
debtor’s plan . . . as consideration for the agreed treatment of
the creditor’s claim under the debtor’s to-be-filed plan.” Id. at
792-93
(quoting
Robert
J.
Keach,
A
Hole
in
the
Glove:
Why
“Negotiation” Should Trump “Solicitation”, 22-JUN Am. Bankr. Inst.
J. 22 (June 2003)).8
8
The two contrary decisions relied upon by COMM 2013 are In
re NII Holdings, Inc., 288 B.R. 856 (Bankr. D. Del. 2002), and In
re Stations Holding Co., Inc., 2002 WL 31947022 (Bankr. D. Del.
21
COMM 2013 V. TARA RETAIL
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
Here, the compromises do not run afoul of the majority, narrow
interpretation of “solicitation” under § 1125(b). As an initial
matter, the agreements were the product of arms-length negotiations
regarding the claims of two unsecured creditors. Tara Retail
objected to the proofs of claim filed by Dollar Tree and Elswick,
but the parties continued to cooperate and repeatedly stipulated to
extensions of time for the creditors to respond (D.T. Nos. 22; 23;
24; E. Nos. 28; 31). Briefing only occurred with regard to Tara
Retail’s objection to Elswick’s proof of claim, and the Bankruptcy
Court did not rule on either objection (E. Nos. 30; 3). Instead,
following a months-long “effort negotiating with Dollar Tree and
Elswick,” Tara Retail reached an agreement with both creditors to
avoid further litigation (Dkt. No. 11 at 21-22).
Importantly, the parties reached their compromises after Tara
Retail filed its first proposed plan and disclosure statement, and
both Dollar Tree and Elswick were represented by counsel throughout
the negotiation process. Taken together, the circumstances indicate
2002), in which the court refused to honor plan support agreements.
“These cases generally have been distinguished on the grounds that
the agreements at issue included specific performance provisions,
expressly providing that monetary damages could not compensate a
breach of the agreement, meaning the creditors could not later
reconsider their preliminary decision after receiving adequate
information.” In re Residential Capital, LLC, No. 12-12020, 2013 WL
3286198, at *20 (internal quotation omitted). The agreements among
Tara Retail, Dollar Tree, and Elswick contain no such provision.
22
COMM 2013 V. TARA RETAIL
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
that the compromises resulted from informed negotiations between
parties capable of acting in their own interest. Such actions
simply fall outside the scope of ill-informed solicitations that
Congress meant to avoid with § 1125(b). See In re Heritage Org.,
LLC, 376 B.R. at 792-93; In re Residential Capital, LLC, No. 1212020, 2013 WL 3286198, at *19-20.
Finally, the parties’ agreements in this case do not truly
“lock up” any votes in favor of Tara Retail’s plan. Both the Dollar
Tree and Elswick compromises are contingent upon Tara Retail
seeking approval of a plan that conforms to certain terms (D.T. No.
6 at 5; E. No. 1 at 3-5). In that regard, this case is akin to In
re Kellogg Square P’ship, where the court reasoned:
[The creditor’s] agreement to accept the Debtor's plan,
made post-petition but before approval of the disclosure
statement, remained executory until [the creditor]
actually filed its accepting ballot with the clerk of
this Court. Neither the recitation in the disclosure
statement, nor the parties' execution of the written
memorandum, constituted an acceptance of the plan as
such. The agreement did not purport to exempt the Debtor
from its statutory obligation to present [the creditor]
with a court-approved disclosure statement.
The resultant status of the agreement, then, is crucial:
had the final, court-approved disclosure statement
revealed information that materially bore on [the
creditor’s] interests, and had the Debtor previously
failed to disclose that information to [the creditor],
[the creditor] would have had a right under general,
nonbankruptcy law to repudiate the agreement via
rescission, and then to cast a rejecting ballot.
23
COMM 2013 V. TARA RETAIL
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MEMORANDUM OPINION AND ORDER AFFIRMING BANKRUPTCY COURT
160 B.R. 336, 339-40 (Bankr. D. Minn. 1993).
For these reasons, the Court concludes that Tara Retail did
not engage in impermissible “solicitation” under § 1125(b). Rather,
the compromises at issue are the result of well-informed, armslength negotiations between Tara Retail and its creditors.
V. CONCLUSION
For the reasons discussed, the Court AFFIRMS the Bankruptcy
Court’s orders overruling COMM 2013's objections and approving Tara
Retail’s settlement of the claims at issue.
It is so ORDERED.
The Court directs the Clerk to transmit copies of this
Memorandum Opinion and Order to counsel of record, to enter a
separate judgment order, and to strike the consolidated cases from
the Court’s active docket.
DATED: August 30, 2018.
/s/ Irene M. Keeley
IRENE M. KEELEY
UNITED STATES DISTRICT JUDGE
24
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