IN RE LINDA VISTA CINEMAS, L.L.C. (Bankr.D.Ariz. 11-24-2010)

131,977.74 secured claim. Treatment for the Bank will include a reamortization of the loan over 20 years, interest only payments in months 1-24, interest and principal payments in months 25-84, with floating interest at the National Prime Rate plus 1.5%, and payment of the claim in full by the seventh anniversary of the Effective Date of the Plan.

Under the Plan, the Guarantors will provide financial and/or professional support. The Plan states that it will be funded from cash on hand and operational income, but if those funds are insufficient, then the Equity Security Holders (the Guarantors) "will contribute additional capital to make the required payments." First Amended Plan at 14, ECF No. 65. The Debtor estimates the Guarantors will contribute over $437,000 over the Plan term. See Debtor's Memorandum in support of confirmation (October 25, 2010) at 9, ECF No. 85. In addition, Kent Edwards will continue in his role as manager of the reorganized debtor. With these contributions, the Debtor anticipates that it could complete Plan funding. The evidence shows that the Guarantors are committed to the success of the Debtor. The Cutlers have already contributed approximately $4 million to the Debtor for operations and debt service, while the Debtor will benefit from Kent Edwards' experience as the manager of three movie theaters in Tucson. However, if the Guarantors are required to defend against a state court lawsuit, their assets will be diminished as well as their ability to focus on the reorganization, the Plan will be put in jeopardy, and they may be forced to file their own bankruptcy cases.

The Debtor describes the contested provision as a "temporary conditional injunction delaying the Bank's ability to enforce its guaranty actions against the Debtor's Guarantors." See Debtor's Supplemental Memorandum in Support of Confirmation (November 2, 2010) at 1, ECF No. 89. In addition, the Debtor argues that the Plan "cures" the default, which default triggered the actions against the Guarantors.

The Bank objects to this provision as violating both § 524(e) and the Court's temporary injunction order by imposing "an almost permanent injunction and release" of the non-debtor Guarantors. See Bank of Arizona's Objection to Confirmation (October 19, 2010) at 6, ECF No. 81. The Bank maintains that the injunction provision is illegal even if it is limited in time.

The issue of whether the court can temporarily delay legal actions against nondebtor guarantors for the duration of the plan, post-confirmation, has not been specifically addressed by the Ninth Circuit Court of Appeals. Although our Circuit has held that the "maximum" injunctive relief against a nondebtor is "until confirmation of a reorganization plan," In re Excel Innovations, Inc., 502 F.3d 1086, 1095 (9th Cir. 2007) ( citing American Hardwoods, 885 F.2d at 624-27), those cases involved pre-confirmation proceedings. But, in American Hardwoods, the debtor sought a permanent injunction which the Ninth Circuit found to be an invalid attempt to discharge third parties. Id. at 625-26.

In contrast, the issue here is whether a bankruptcy court has the power to take the next step beyond plan confirmation, and approve a temporary, conditional injunction in order to ensure the successful implementation and completion of the plan without collateral disruption of the Guarantors' affairs.

Both sides rely, in part, on a case in which the District Court for the District of Arizona reversed the bankruptcy court's approval of a similar plan proposal on the reasoning of a Ninth Circuit BAP opinion. See In re Regatta Bay, LLC, 406 B.R. 875 (Bankr. D. Ariz. 2009), rev'd, 2009 WL 5730501 (D. Ariz. 2009) (citing In re Rohnert Park Auto Parts, Inc., 113 B.R. 610 (9th Cir. BAP 1990)).

4. Section 105(a) and Section 524(e): Rhonert Park and Regatta Bay

The bankruptcy court may not confirm a plan of reorganization that does not comply with applicable provisions of the Bankruptcy Code. 11 U.S.C. § 1129(a)(1). The bankruptcy court's equitable power to issue an injunction is found in § 105(a), which authorizes orders necessary or appropriate to carry out provisions of the Bankruptcy Code. However, § 105(a) has a limited scope and can only be exercised within the confines of the Code. See generally Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988).

When a plan attempts to "affect the liability" of a nondebtor, the bankruptcy court's power under § 105(a) is limited by § 524(e) which provides, with a nonapplicable exception:

(e) Except as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.

11 U.S.C. § 524(e); American Hardwoods, 885 F.2d at 625-26.

The only comment in the legislative history of § 524(e) is merely that it "provides the discharge of the debtor does not affect co-debtors or guarantors." S.Rep. No. 989, 95th Cong., 2d Sess. 81 (1978); see also Star Phoenix Mining Co., 147 F.3d at 1147 n. 2 ("[D]ischarge of the principal debtor in bankruptcy will not discharge the liabilities of codebtors or guarantors.");Underhill v. Royal, 769 F.2d 1426, 1432 (9th Cir. 1985) ("Generally, discharge of the principal debtor in bankruptcy will not discharge the liabilities of co-debtors or guarantors.").

Section 524(e), of the 1978 Bankruptcy Reform Act, was a re-enactment of Section 16 of the 1898 Act which provided: "[t]he liability of a person who is a co-debtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt." Act of July 1, 1898, ch. 541 § 16, 30 Stat. 550 (formerly codified at 11 U.S.C. § 34 (1976)). "The import of Section 16 [of the 1898 Act] is that the mechanics of administering the federal bankruptcy laws, no matter how suggestive, do not operate as a private contract to relieve co-debtors of the bankrupt of their liabilities." Underhill, 769 F.2d at 1432 (quoting Union Carbide Corp. v. Newboles, 686 F.2d 593, 595 (7th Cir. 1982)).

In Union Carbide, the Seventh Circuit Court of Appeals disapproved a plan provision purporting to discharge the debtor's guarantors and held that Section 16 of the Bankruptcy Act of 1898 made "clear that the discharge of [the debtor] itself had no effect upon the liability of [the guarantors] on the note. . . ."Id. at 595. The Seventh Circuit has held that Union Carbide is no longer controlling on the issue of whether all non-debtor releases are prohibited under the current version of § 524(e). In re Airadigm Communications, Inc., 519 F.3d 640, 555-56 n. 4 (7th Cir. 2008). That opinion stated, at 656:

In any event, § 524(e) does not purport to limit the bankruptcy court's powers to release a non-debtor from a creditor's claims. If Congress meant to include such a limit, it would have used the mandatory terms "shall" or "will" rather than the definitional term "does." And it would have omitted the prepositional phrase "on, or . . . for, such debt," ensuring that the "discharge of a debt of the debtor shall not affect the liability of another entity" — whether related to a debt or not. See 11 U.S.C. § 34 (repealed Oct. 1, 1979) ("The liability of a person who is a co-debtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt.") (prior version of § 524(e)). Also, where Congress has limited the powers of the bankruptcy court, it has done so clearly-for example, by expressly limiting the court's power, see 11 U.S.C. § 105(b) ("[A] court may not appoint a receiver in a case under this title"), or by creating requirements for plan confirmation, see, e.g., 11 U.S.C. § 1129(a) ("The court shall confirm a plan only if the following requirements are met. . . ."). As a result, for the reasons set out in Specialty Equipment, § 524(e) does not bar a non-consensual third-party release from liability.

"Pursuant to 11 U.S.C. § 524(a), a discharge under Chapter 11 releases the debtor from personal liability for any debts. Section 524 does not, however, provide for the release of third parties from liability" because § 524(e) "precludes bankruptcy courts from discharging the liabilities of non-debtors." In re Lowenschuss, 67 F.3d 1394, 1401 (9th Cir. 1995). See generally Hon. Joan N. Feeney, BANKRUPTCY LAW MANUAL § 11A:67 (noting "substantial disagreement in the courts on whether, or the circumstances under which, a plan and order confirming it may provide for releases of or injunctions favoring nondebtor entities," and comparing Airadigm Comm. with Lowenschuss.

In Lowenschuss, the Ninth Circuit Court of Appeals cited well-established law such as American Hardwoods and Underhill, and rejected an exception based on circumstances, such as In re A.H. Robins Co., 880 F.2d 694 (4th Cir. 1989), as being inconsistent with the explicit and limited cases entitled to injunctions issued in connection with a reorganization plan provided by § 524(g). Id. at 1402 n. 6. The Ninth Circuit also cited the BAP's Rohnert Park decision.

In Rohnert Park, the debtor had been a partnership prior to incorporation. Creditor Seaport Automotive Warehouse, Inc. ("Seaport") sold automotive parts and supplies to the individual partners and the partnership, and was unaware of the incorporation for approximately six months. Upon learning of it, Seaport demanded personal guarantees but none were made. Seaport initiated an action in state court to collect amounts due for goods sold and delivered and attached the defendants' assets, including their stock in the debtor. The debtor filed for bankruptcy protection. Seaport filed an untimely proof of claim, which was barred, such that it would not receive any distribution under the plan.

The proposed reorganization plan contained a provision which enjoined creditors from taking any collection efforts against the debtor as well as the individual partners for a period of five years, pending completion of the plan.

Seaport objected to that provision. The bankruptcy court overruled the objection for lack of standing and confirmed the plan. On appeal to the BAP, Seaport was determined to have standing because its rights were affected by the plan.Id., 113 B.R. at 613-14. The BAP held that although the bankruptcy court had jurisdiction, it lacked the power to issue such an injunction under § 105(a) because the plan violated § 524(e). In reversing the bankruptcy court, the BAP quoted American Hardwoods, where the Ninth Circuit Court of Appeals stated:

Section 105 empowers the court to enjoin preliminarily a creditor from continuing an action or enforcing a state court judgment against a nondebtor prior to confirmation of a plan. In re A.H. Robbins Co., 828 F.2d 1023, 1026 (4th Cir. 1987), cert. denied, 485 U.S. 969, 108 S.Ct. 1246, 99 L.Ed.2d 444 (1988); A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1002-03 (4th Cir.), cert. denied, 479 U.S. 876, 107 S.Ct. 251, 93 L.Ed.2d 177 (1986). Furthermore, section 105 permits the court to issue both preliminary and permanent injunctions after confirmation of a plan to protect the debtor and the administration of the bankruptcy estate. See [ In re Burstein-Applebee Co., 63 B.R. 1011, 1020-21 (Bankr. W.D. Mo. 1986)] . . . In re Askew, 61 B.R. 87, 89 (Bankr. S.D.Ohio 1986) . . . [Debtor], however, points to no case, and we are aware of none, in which a court permanently enjoined, past confirmation of a plan, a creditor from enforcing a state court judgment against a nondebtor guarantor of a contract liability.

American Hardwoods, 885 F.2d at 624-625 (emphasis added).

The BAP held that the plan provision affected the "liability of the co-debtors of the debtor as to the debt owed to Seaport" for the five years that Seaport would be prohibited from proceeding against them, and therefore the provision violated § 524(e).Rhonert Park, 113 B.R. at 616-17. The BAP also concluded that "it would be inequitable to hold that a creditor whose claim is held time barred, and who is unable to benefit from the Plan, to be bound by a provision of the Plan enjoining pursuit of a claim against guarantors of the debtor." Id. at 617.

It is this court's opinion that the BAP, in assessing Ninth Circuit law, unnecessarily conflated the prohibition against a permanent injunction with any injunction "past confirmation."American Hardwoods, 885 F.2d at 625. The holding in Rhonert Park was largely based on equitable considerations which weighed in favor of the creditor. See, e.g., Excel Innovations, 502 F.3d at 1093-94. In addition, whether a plan provision "affects the liability" of non-debtors is a mixed question of fact and law, according to the Rhonert Park disposition.

This analysis is supported by the case cited in the parties' papers, Regatta Bay. The case is aptly summarized in Hon. Dennis Montali, Cecily A. Dumas and Ron M. Oliner, Recent Developments in Business Bankruptcy — 2009, 30 CAL. BANKR. J. 439 (2010), in a section entitled "It's OK For A Plan To Temporarily Prevent Creditors From Going After Co-Debtors":

In this case [ Regatta Bay], the debtor (a condominium developer) proposed and confirmed a plan providing for full payment all its creditors, but prohibiting a certain judgment creditor (the developer of a competing condominium) from trying to collect against the debtor's codefendant principals, who were contributing a substantial sum to fund the plan's operation, until after payments were complete on the condominium's first mortgage. The creditor considered this restriction on its ability to recover from the debtor's principals to be a violation of § 524(e), and so appealed the confirmation order and applied for a stay pending appeal. The bankruptcy court disagreed, concluding that a temporary restriction on the creditor's enforcement rights was not the equivalent of the permanent injunctions courts had invalidated under § 524(e), and predicting that the Ninth Circuit, in an appropriate case, would agree. Whether such a restriction on third-party collection was permissible in a Chapter 11 plan would instead hinge on whether the restriction was "fair and equitable." Here, the judgment creditor's immediate attempt to recover from the principals would hinder their ability to contribute toward the plan's funding, which in turn could make the entire plan fall apart and prevent what would otherwise be full recovery by the debtor's unsecured creditors. The court found that such a result would be the inequitable one, concluded that the judgment creditor's appeal therefore did not have a substantial likelihood of success, and so denied the request for a stay pending appeal. In re Regatta Bay, LLC, 406 B.R. 875 (Bankr. D. Ariz. 2009) rev'd 2009 WL 5730501 (D. Ariz. Oct. 30, 2009).

A couple of other relevant facts in the Regatta Bay case were that, although the plan proposed full repayment, it did not require monthly payments to the enjoined creditor, but rather proposed to sell the condominiums and pay the creditor from a reserve of sale proceeds upon the resolution of a pending appeal or two and one-half years after confirmation. Id., 406 B.R. at 876-77. The nondebtors in Regatta Bay were required to make a one-time contribution, none of which went to the enjoined creditor. As a result, the creditor was enjoined from taking actions against the nondebtors for 30 months without receiving any payment in the interim. Id. at 877.

The bankruptcy court in Regatta Bay did not believe it was bound by Rhonert Park because (1) Regatta Bay was not decided under § 105, but rather § 1141(a) ("The injunctive effect flows from the statute itself." Id. at 878); (2) the facts were distinguishable because "there was no showing made [in Rhonert Park] that the co-debtors would contribute to the plan or that their contributions were essential to the success of the plan"; and (3) the pending appeal was in District Court, which would not be bound by the BAP decision.

The District Court reversed the bankruptcy court on the persuasiveness of the BAP's reasoning in Rhonert Park where, it stated, the facts were "very similar." Regatta Bay, 2009 WL 5730501 at * 3. In addition, the court noted there was evidence that other creditors were involved in collection efforts against the principals and the enjoined creditor was placed "at a unique disadvantage." Id. at *2 n. 1. The District Court held that the temporary injunction "affect[ed] the liability" of the nondebtor owners with regards to the debt owed to the enjoined creditor.Id. at *4.

The District Court held that § 1141(a) "cannot serve as the substantive basis for an injunction against nondebtors," after the debtor failed to explain its relevance. See 2009 WL 5730501 at * 3 n. 2. In Regatta Bay, although the plan had already been confirmed, the bankruptcy court analyzed the probability of success of the appeal on the merits of the legality of the confirmed plan. We decline to address § 1141 as authority for the injunctive relief in that the parties have cited only §§ 105(a) and 524(e). We further note that no published cases have citedRegatta Bay for this theory, while we also acknowledge that litigants in other circuits have alternatively relied upon other Code sections as authority for the issuance of injunctions against nondebtor third parties, with mixed results.

It is clear that the appellate courts in Rhonert Park and Regatta Bay were not per se rulings, and the courts considered the factual circumstances in determining whether the plan provisions affected the nondebtors' liability and therefore violated § 524(e). In contrast to the facts in those cases, in the instant case, the facts are neither prejudicial nor onerous toward the creditor Bank. The Guarantors have already substantially paid down the Bank's debt and will continue to make substantial contributions under the Debtor's full repayment Plan, which will be used to make monthly payments to the Bank. The Bank's last payment on the seventh anniversary of the Plan will be a $2.6 million balloon payment, which is feasible. The injunction will last until the earlier of completion of payments or any default under the Plan. There was no evidence presented by the Bank that other creditors were currently pursuing the Guarantors, or that such a possibility existed in the future.

The injunction proposed by the Debtor is neither a "permanent" injunction nor is it a "release" of the Guarantors' liability. "Liability," or responsibility for a debt, is unchanged. Only collection is delayed while payments are made. The injunction simply delays the actions which are preserved under state and federal law and/or orders. See, e.g. § 108(c); In re Bernard Steiner Pianos USA, Inc., 292 B.R. 109, 115-16 (Bankr. N.D. Tex. 2002) (confirming plan with temporary injunction and tolling provision). Bank of Arizona has not stated that there is a statute of limitations problem. Nor could there be, since payments are contemplated monthly, and an Arizona six-year limitations statute runs from default (which is cured under the Plan).

An argument could be made, from the creditor's perspective, that the injunction converts a payment guaranty into a collection guaranty. In other words, the Bank is forced to wait until the Debtor has defaulted under the Plan before it can prosecute its separate claims against the Guarantors. However, the Plan provision does not, in effect, modify the Guarantors' contracts and the Bank retains its full range of remedial power under Arizona law. This is a question of federal bankruptcy court jurisdiction and power to issue the temporary injunction. The bankruptcy court has at least related-to jurisdiction over the Bank's enforcement of its rights to liquidate the collateral pledged by the Guarantors. Such actions could conceivably affect the administration of the Debtor's Plan by disrupting the Guarantors' ability to contribute to the Plan. See American Hardwoods, 885 F.2d at 624. Although the test for related jurisdiction is more restricted post-confirmation, the facts would still meet the "close nexus" test of In re Pegasus Gold Corp., 394 F.3d 1189, 1194 (9th Cir. 2005). In addition, the bankruptcy court has power to tailor the injunction to provide the necessary relief while limiting the burden on the Bank. See, e.g., Tamako Roofing Prods. v. Ideal Roofing Co., 282 F.3d 23, 40 (1st Cir. 2002).

Other Texas courts have approved temporary post-confirmation injunctions. See Weaver v. Texas Capital Bank, N.A., 2010 WL 3119397 (N.D. Tex. August 5, 2010); In re Seatco, Inc., 257 B.R. 469 (Bankr. N.D. Tex. 2001), as modified, 259 B.R. 279 (Bankr. N.D. Tex. 2001).

5. Standard for Imposing Injunctive Relief

To gain injunctive relief, post-confirmation, a debtor would be required to prove traditional injunction standards.

In order to impose the new injunction under § 105(a), the court must balance the relative hardships on the debtor and creditor and conclude that the equities favor imposition of the injunction and confirmation of the plan." In re Brotby, 303 B.R. 177, 190-91 (9th Cir. BAP 2003); Excel Innovations, 502 F.3d at 1096.

(a) Reasonable Likelihood of Reorganization

This "is not a high burden" for the debtor. Id. at 1097. As noted in this decision, the Debtor's Plan is feasible and capable of returning 100% to all major constituencies. All creditor classes, except the Bank, agreed with Debtor's Plan.

(b) Hardships

In balancing the hardships, the court finds that the Bank's collateral remains intact, as does its legal priorities therein, while it receives regular payments at a fair market rate of return. Without the temporary injunction, the Guarantors would be unable to fund the reorganization (and Bank payments), and would themselves end up in Chapter 11 proceedings. At the same time, the legal liability of the Guarantors remains unaffected by the Plan.

(c) Public Policy

Policy favors fewer reorganizations, not more. By stabilizing the Debtor here, and reorganizing its debt with principal-guarantor commitment, saves one business and 50 jobs without sacrificing other parties' assets and businesses needlessly. All told, this micro-economy then succeeds, rather than creates multiple failures. In the end, Debtor, Bank, Guarantors and other creditors come out either fully paid or with assets intact. The court perceives little or no harm to the Bank, on this record, due to a delay and receipt of monthly payments.

C. Alternatively, Section 1123 and Marshaling Doctrine

Alternatively, from the Debtor's perspective, an argument could be made that the Plan "cures" the default by modifying the loan and, in exchange, a temporary, conditional injunction against enforcing the guaranties is only fair. This theory is not "fleshed out" in the papers. The bankruptcy court lacks jurisdiction to declare the guaranties unenforceable when, under Arizona law, the guarantees were allegedly breached and the Bank already filed a complaint in state court. Instead, the court frames this issue as falling under the alternative authority of §§ 1123(b)(1) and (b)(6) and the equitable doctrine of marshaling.

Section 1123(b)(1) provides that a debtor's plan may impair, or in other words, modify the rights of creditors. Under § 1123(b)(6), a plan may "include any other appropriate provision not inconsistent with the applicable provisions of [title 11]." This court explained, above, how the plan provision temporarily enjoining collection by the Bank is not inconsistent with § 524(e). Cf. Brotby, 303 B.R. at 190 (a plan may temporarily enjoin collection by a creditor holding a claim excepted from discharge pursuant to § 1123(b)(6) notwithstanding § 1141(d)(2)).

Judge Haines has explained the application of the marshaling principle to similar facts in Regatta Bay, which this decision incorporates. See 406 B.R. at 881-82. That opinion stated:

The equitable principle of marshaling effectively means that a plan term such as that at issue here is "fair and equitable" so long as it improves the likelihood of recovery by unsecured creditors and causes no injury to any creditor.". . . . [T]he plan term is therefore permitted by § 1129(b)(1). . . .

406 B.R at 882.

The District Court did not expressly address this issue. Even if it impliedly rejected it, this court would not be bound by the District Court's decision.

Whether bankruptcy courts are bound by all of the decisions of all of the district judges within the district where the bankruptcy court sits, rather than just the district court that hears a particular case, is still an unsettled question. See In re Silverman, 616 F.3d 1001, 1005 n. 2 (9th Cir. 2010) (stating in dicta, "that, because district judges within a district do not bind each other, such a requirement could create the same problem of subjecting bankruptcy courts to a non-uniform body of law.");see also In re Barakat, 173 B.R. 672, 679 (Bankr. C.D. Cal. 1994).

With neither the Bank's collateral packages nor the liability of the Guarantors altered by the Plan, it is only fair that a temporary injunction extend only so long as the Debtor complies with each and every promise made in its Plan. In this manner, whether directly or through Guarantor contributions, the Bank receives what it would get in any event — access to voluntary payment from its Debtor and its Guarantors, resulting in reduction of its debt, while the Plan operates, with a full payoff at the end of seven years.

D. Section 1129(a) — Conclusion

After its survey of the existing state of Ninth Circuit law, however, this court finds itself bound by what it feels is the Circuit's current precedent. Thus, even though this case is deserving, on the evidence presented, of confirmation, this court cannot get past what it believes to be the Circuit's pronouncements on the § 524(e) issue. Accordingly, the court finds that the Debtor has failed to prove §§ 1129(a)(1) and (2), because the Plan violates § 524(e).

V. SECTION 1129(b) — THE CRAMDOWN PROVISIONS AND UNFAIR DISCRIMINATION

If this case proceeds further, on an appeal, then the other issues raised in the case need to be addressed and decided.

If a debtor is able to prove each of the applicable elements of § 1129(a), it then must run the gauntlet of § 1129(b), commonly known as "cramdown." What the Code attempts to do in this section is to have the court analyze, for each rejecting and dissenting class, whether the plan treats them "fairly" and "equitably," and does not unfairly discriminate against them. If a secured class objects, its treatment under the plan must pass through the fire of § 1129(b)(2)(A). Here, only the Bank has objected. As noted above, it is a fully secured creditor.

If a debtor cannot satisfy the cramdown elements, contained in § 1129(b), then a plan cannot be confirmed.

A. Class 3: The Secured Debt to Bank of Arizona — Cramdown Interest Rate 1. In General

In order for cramdown to be implemented, and the Plan confirmed over a class' vote against it, the Debtor must show that the Plan does not unfairly discriminate against that dissenter, and that its treatment is "fair and equitable." These latter terms have defined meanings, and in this case, require that its lien interests remain in place, and if payments are deferred and paid over a term, that those payments have appropriate "value." This "value" is generally understood to be a market rate of interest, considering the terms, quality of the security and any risk to be borne by the affected creditor. In re P.J. Keating Co., 168 B.R. 464, 472 (Bankr. D.Mass 1994) (quoting applicable portion of § 1129(b)(2)(A)). As a result, the interest rate paid to the secured creditor must be an appropriate rate of interest so that the creditor may realize the present value of the secured portion of the claim. In re Landscape Assocs., Inc., 81 B.R. 485, 487-88 (Bankr. E.D. Ark. 1987). If a Chapter 11 plan proposes payment of an interest rate below the "range of prevailing market rates for loans of comparable risk and duration" or which does not take into account the actual risk of that loan, confirmation must be denied because the deferred payments will not yield the present value of the claim and, therefore, the plan is not "fair and equitable" and will not satisfy § 1129(b)(2)(A)(i)(II). See, e.g., In re One Times Square Assocs. Ltd. P'ship, 159 B.R. 695, 706 (Bankr. S.D.N.Y. 1993).

Some courts calculate the permissible interest rate for a Chapter 11 plan using a "formula" approach, i.e., starting with a base rate — such as the prime rate or the rate on treasury obligations — and adding a risk factor. See, e.g., Camino Real Landscape Maint. Contractors, Inc., 818 F.2d 1503, 1508 (9th Cir. 1987); In re LWD, Inc., 332 B.R. 543, 556 (Bankr. W.D. Ky. 2005), aff'd, 340 B.R. 363 (W.D. Ky. 2006). In Till v. SCS Credit Corp., 541 U.S. 465 (2003), the Supreme Court adopted this formula approach for calculating interest in Chapter 13 cases. Under Till, interest on a secured claim is calculated based on the national prime rate and then adding a risk premium — to account for the dual risks of inflation and default. Id.

In light of the difference between the existence of a market for cramdown loans in Chapter 11 cases, and the lack of such a market in Chapter 13 cases, the Till Court acknowledged that a somewhat different analysis may be required in Chapter 11 cases. That is, it may be appropriate for a court to determine the rate of interest in an "efficient" market, assuming such a market exists. Till, 541 U.S. at 477 n. 14.

The Ninth Circuit suggests that it is the burden of the debtor in a Chapter 11 case to introduce "sufficient evidence" which will establish that the proposed adjustments to the interest rate will take into consideration "the term of deferment of present use and risk of default, as affected by any security." Camino Real, 818 F.2d at 1507.

The Supreme Court in Till places the burden of proof on the creditor in a Chapter 13 plan confirmation dispute to establish the evidentiary predicate for the appropriate "build up" on the prime rate due to the existence of identified risk factors. Till, 541 U.S. at 479.

It would not be an exaggeration to state that cases abound on this subject, and that "one size does not fit all." In other words, there are many different kinds of approaches to how this test is met, depending on the unique circumstances of a given case.

For example, some authorities in the Ninth Circuit support the use of the blended rate analysis. In re Boulders on the River, Inc., 164 B.R. 99, 105-06 (9th Cir. BAP 1994) (approving the lender's use of the blended rate methodology to determine the cramdown interest rate on a secured real estate loan under a Chapter 11 plan that provided the creditor with an 88.5% loan to value ratio); In re North Valley Mall, LLC, 432 B.R. 825, at *6-7 (Bankr. C.D. Cal. June 21, 2010) (Albert, J.) (reviewing and analyzing Till and then utilizing the blended rate approach with three "tranches" or tiers: a "senior tranche" covering the debt up to the first 65% of value, a "mezzanine tranche" covering the debt up to the next 20% of value, and an "equity tranche" covering the last 15% of value). Post-Till, in a Chapter 11 income-producing real estate case, the Court in North Valley Mall observed:

[T]he blended rate approach suggested in cases like Boulders and in the Reehl and Milner articles is not an attempt to mirror an actual market that exists. Rather, it is an attempt by principled approach to create a proxy for a market extrapolated from current data such that the court can reach the ultimate question of "present value.". . . .

. . . .

[I]t [one expert's testimony using this method] makes some reasonable attempt to recognize that the level of risk changes depending upon whether a lender is at the 66% mark on the collateral, or the 99% mark. Just because the marketplace right now does not quote on mezzanine debt does not change this reality nor should it, in the Court's view, constrain the parties from interpolating data in a principled way to recognize this difference. As stated above, the formula or blended rate approach is not merely a mirror of market conditions; rather, it is a principled derivation from current data of a proxy rate where no market currently exists.

Id. at *6 (alteration added).

For at least the last 20 years, the Ninth Circuit Court of Appeals has instructed bankruptcy courts to assess, and whenever possible use a "formula approach," and consider "the risks associated with a given debtor and the security associated with a specific debt." In re Fowler, 903 F.2d 694, 697-99 (9th Cir. 1990); see also Camino Real, 818 F.2d at 1508.

As noted, the formula approach was recognized by the United States Supreme Court in Till, 541 U.S. at 479-480. Till recognized that the factors relevant to the risk adjustment fall squarely within the bankruptcy court's area of expertise, and that the court must "select a rate high enough to compensate the creditor for its risk but not so high as to doom the plan." Id. Such adjustments recognized by other bankruptcy courts are generally approved at 1-3%. Id. at 480.

In Till, the Supreme Court rejected three alternative approaches to setting a cramdown interest rate: the coerced loan, presumptive contract rate, and cost of funds approaches. "Each of these approaches is complicated, imposes significant evidentiary costs, and aims to make each individual creditor whole rather than to ensure the debtor's payments have the required present value." Id. at 477.

As case law has evolved since Till, another approach is obtaining traction. In both In re American Homepatient, Inc., 420 F.3d 559 (6th Cir. 2005) and Mercury Capital Corp. v. Milford Conn. Assocs., L.P., 354 B.R. 1 (D. Conn. 2006), these courts urged the bankruptcy courts to first consider whether an "efficient market" exists, and if so, to utilize those rates. If no efficient market exists, then a bankruptcy court should fall back on the formula approach. See generally Gary W. Marsh, Matthew M. Weiss, Chapter 11 Interest Rates After Till, 84 AM. BANKR. L.J. 209 (Spring 2010) (review of development of cramdown interest rates since 2004).

In the final analysis, though, this court has always taken comfort in the very practical, easily-understood cases from the Ninth Circuit, Camino Real and Fowler. And this court, speaking only for itself, appreciates the understanding of the Camino Real court, where respected Ninth Circuit Judge Joseph Sneed, speaking for the Circuit, observed that the setting of cramdown interest rates carries some degree of subjectivity:

Finally, the Armour court increased the treasury bill rate by 2% for risk, then decreased it by 1% to account for the security. The government claims that the magnitude of these adjustments was arbitrary. To some degree that may be true. But rough estimates are better than no estimates. We are willing to rely on the expertise of the bankruptcy judge in a case such as this, particularly where no contrary evidence was introduced. A bankruptcy court should be accorded substantial deference in these matters because it has "almost daily experience with the rates charged by actual commercial lenders and other financier's [sic] of chapter 11 debtors." In re Fi-Hi Pizza, 40 B.R. 258, 271 (Bankr. D. Mass. 1984). We uphold the bankruptcy court's judgment here.

Camino Real, 818 F.2d at 1508. The Circuit, in Fowler, further asked the trial courts to follow the "guiding principal . . . that the bankruptcy court's findings must be sufficient to allow meaningful review, and must demonstrate to the reviewing court that the bankruptcy judge's determination was supported by the evidence." Fowler, 903 F.2d at 699 n. 7.

Although Fowler was a Chapter 12 case, the Circuit found no significant differences to distinguish it from the cramdown exercise in either that Chapter or Chapter 11. In instructing the trial courts on cramdown rates, the Circuit explained that they were to look to either "market interest rates for similar loans" or use the "formula approach" and measure the risk and the security. Id. at 698.

Nor has the Ninth Circuit's BAP questioned this logic. See In re Yett, 306 B.R. 287, 290-91 (9th Cir. BAP 2004). See generally David G. Epstein, Don't Go and Do Something Rash about Cram Down Interest Rates, 49 ALA. L. REV. 435, 439-42 (Winter 1998); C.B. Reehl, Stephen P. Milner, Chapter 11 Real Estate Cram-down Plans: The Legacy of Till, 30 CALIF. BANKR. J. 405 (2010).

In Fowler, 903 F.2d at 696-97 (citing 5 COLLIER ON BANKRUPTCY ¶ 1225.03[4][c], at 1225-21 (15th ed. 1989)), the Circuit said:

When the debtor's plan proposes to pay a secured claim in deferred cash installments, the court must find that the present value of the proposed payments is not less than the allowed amount of the secured claim. In order to make this finding, it will be necessary for the court to apply a discount factor to the proposed stream of payments to determine the present value of those payments. This is typically accomplished by ascribing an interest rate to the allowed amount of the claim and by requiring payment of the amount of the claim along with interest at the specified rate.

Whether one starts with a "base rate" and adds for risk, or just accepts that a proven market rate includes relevant risk (in an appropriate case), the result should not vary by much. A contract rate of interest may be evidence of the proper rate for a plan, but it is neither presumptive nor conclusive. See Till, 541 U.S. at 477-78 (rejecting presumptive contract rate approach in favor of the formula approach). In the final analysis, the interest rate determination is to be made on a case-by-case basis. Boulders, 164 B.R. at 105; Camino Real, 818 F.2d at 1508.

Finally, Fowler requires the bankruptcy courts to make "explicit findings" regarding (1) how it assesses the risk of default; (2) how it assesses the nature of the security; (3) what market rates exist for the type of loan at issue; and (4) what risks reduce or heighten the risks associated with a particular debtor. Fowler, 903 F.2d at 699.

With these principles in mind, the court now turns to the facts of this case, and the rate proposed in the Debtor's Plan, to determine if the interest rate meets the test for "value" required by § 1129(b)(2)(A)(i)(II).

2. Cramdown Findings

Although the Bank did not expressly object to the proposed interest rate of 4.75%, the court must still find that the rate satisfies the statutory standard of § 1129(b)(2)(A)(i)(II).

Utilizing the "explicit findings" requirement of the Fowler case, the court finds, as to the proposed interest rate and terms of the Bank's restructured Plan debt:

(a) The nature of the personal property and real property security (of both the Debtor and the guarantors) is predictable and realizable. Monthly payments add stability to the Plan. The collateral is well-managed by the Debtor, and the Bank has reasonable methods to police its collateral on a regular basis. Post-confirmation reports will be provided by the Debtor. There are appropriate safe-guards in place, under the unaltered provisions of the Bank's loan documents, to enable it to react quickly should the collateral be in danger of deteriorating. (Exs. A and B.) There was no evidence that the real property collateral is depreciating.

(b) There are no additional factors associated with this Debtor which would heighten the risk to the Bank. The Debtor has stabilized itself from past problems. Current management has promptly addressed adverse issues and has properly righted itself with regard to its financial controls. The guarantors are financially stable enough to enable them to assist the Debtor with additional capital contributions if needed. By receiving monthly interest payments (and in two years will also be receiving principal paydowns as well), the Bank can quickly react to financial difficulties which are not now anticipated, should they develop.

The rate proposed in the Plan reflects a market rate, and embedded within that rate is an appropriate risk factor. No additional risks exist which this court feels requires a premium to be added to the Plan's proposed rate. Mr. Sanders' opinion of a proper rate is accepted by the court.

(c) The court concludes, based on its finding that the Plan is feasible, that the Debtor is not likely to default or need further reorganization.

(d) The market rate, for the type of restructured loan proposed for the Bank, was proven by a preponderance of the evidence to be the rate set forth by the Debtor's expert witness, Randall P. Sanders. His years of expertise, in the area in which he testified, persuasively convinced the court that his opinion was objective and consistent with the markets today. His demeanor in providing testimony was straightforward, easy to understand, and was deeply rooted in experience.

Mr. Sanders did not stray from the path of his expertise. As a result, the court found that his testimony was credible in establishing an appropriate market interest rate, and in proving the feasibility of obtaining a new takeout loan 7 years in the future.

The court therefore concludes that the proposed interest rate, for the term set forth by the Plan, is fair and reasonable as to the Bank, and returns to it a fair rate of interest, considering all relevant factors.

3. Cramdown Interest Rate as to Secured Creditor — Conclusion

After assessment of the totality of the evidence surrounding the cramdown interest rate proposed for the Bank, and for the reasons set forth above, the court finds and concludes that the rate proposed by Debtor's Plan is fair and equitable to the Bank, and thereby §§ 1129(b)(2)(A)(i)(II) has been properly proven. This element of "cramdown" is satisfied.

B. Section 1129(b)(2)(A)(i)(I) — Retention of Liens (Cramdown)

The Plan proposes that the Bank retain its existing liens, both as to the Debtor and the guarantors. The Plan does not call for any release of guarantor liability. The continuing guarantees remain intact.

This section of the Code, § 1129(b)(2)(A)(i)(I), is therefore satisfied.

VI. MISCELLANEOUS BANK OBJECTIONS

In addition to the Bank's objections concerning § 524(e) and the feasibility of the Plan, discussed above, the Bank had other objections which will be addressed here.

A. The Absolute Priority Rule — Section 1129(b)(2)(B)(ii)

The Bank also objects to the Debtors' Plan on the basis that it violates the "absolute priority" rule. The Bank's argument on this issue is weak. In the Ninth Circuit, there is but one case supporting the Bank's assertion, a District Court case from the Central District of California, In re Monarch Beach Venture, Ltd., 166 B.R. 428 (C.D. Cal. 1993).

With respect, this court disagrees with the Monarch decision, if it is intended to apply the absolute priority rule to asecured class of creditors. This is because the statute expressly contains the solitary expression of this rule in the section thatonly deals with unsecured creditors. § 1129(b)(2)(B)(ii). The absolute priority rule must not be violated if the unsecured creditors object, which they have not. In fact, the unsecured creditor classes voted in favor of the Plan. And importantly, because the Plan calls for full payment plus interest to the principal unsecured class, the rule is not violated. See, e.g., In re Arden Props., Inc., 248 B.R. 164, 173-74 (Bankr. D. Ariz. 2000) (Haines, J.) ("[T]he absolute priority rule applies only to unsecured classes, not to secured claims, the requirements for which are separately set forth in § 1129(b)(2)(A), which says nothing about the timing of the repayment nor any comparison to the treatment of any other class."); In re Cypresswood Land Partners, I, 409 B.R. 396, 437 (Bankr. S.D. Tex. 2009) (secured creditor lacked standing to object that the plan violated the absolute priority rule).

The only statutory cramdown section that applies to the rights accorded to secured creditors is found in § 1129(b)(2)(A), and an "absolute priority" protection is nowhere to be located within that statute.

The court will not carry coals to Newcastle in further analysis of this argument. The Bank's suggestion, as a secured creditor, that it is entitled to the protections of the absolute priority rule, is rejected, and its objection on that basis will be OVERRULED.

B. Unfair Discrimination Against Bank of Arizona — Section 1129(b)(1)

This objection is somewhat difficult to follow, but the Bank appears to resent that another class of creditor, the Debtor's landlord, is receiving what it considers more favorable treatment on its claim than is the Bank.

First, the Bank, as a secured creditor, is in a class by itself. The priority of its lien claims (here, personalty) is entirely dependent upon the timing of its recording, and the extent and breadth of its security interest. As between two secured creditors with liens in the same collateral, their rights — against each other — are not impacted by the Plan. The Debtor only seeks to pay each, and the test for each (if they do not vote in favor of the Plan) is strictly decided by the application of the cramdown elements of § 1129(b)(2)(A). That analysis is performed on a class by class basis, and the treatment of any one class is not measured by the treatment accorded another. If a class' treatment is "fair and equitable," and independently complies with § 1129(b)(2), the Plan can be confirmed.

Next, it is not a valid objection, nor "unfair discrimination" to complain that other classes are being treated differently,unless their claims are substantially similar to each other. See § 1122(a). Here Marana Cinemas Associates and the Bank are not similar. While they may have liens on the same property, those liens are not equal. One will be in first place and one in second. For lienholders, that difference is substantial and significant.

Finally, as for the Bank versus a landlord, the Code treats landlords differently than other creditors. There is no similar comparison that can be made between the two. They are not similar. For a debtor to treat them differently, then, is neither unfair nor discriminatory.

This objection will be OVERRULED.

C. Alternative Treatment of the Bank, Depending Upon How It Voted

The Debtor's Plan treated the Bank differently depending upon how it voted. Although the Bank felt that something about this approach was objectionable, in the final analysis, the Bank's vote determined which treatment would be accorded it. It has cited no authority supporting that alternative treatments are unlawful

When the Bank voted against the Plan, the court then had only to consider whether that treatment of its claim was "fair and equitable" as to Class 3. The court has found that its treatment is "fair and equitable."

No party has argued, nor cited authority, that treating a creditor class in alternate ways is inappropriate, nor violative of any statute, since it is the creditor which controls which treatment it prefers.

Therefore, the objection will be OVERRULED.

V. CONCLUSION

The Debtor's Plan cannot be CONFIRMED. Except for the 11 U.S.C. § 524(e) issue, the Debtor satisfied the legal requirements for confirmation. If the court did not feel bound by the Ninth Circuit's precedent, this case would appear to present the appropriate circumstances for a temporal injunction against the Guarantors and their assets, so long as the Debtor complied with the Plan.

The Debtors shall have 30 days within which to file an amended plan. All stays will remain in effect until further hearings.

A separate order will be entered. The parties have 14 days within which to appeal. FED. R. BANKR. P. 8002.

FED. R. BANKR. P. 8001 allows for direct appeal to the Circuit in certain circumstances. Due to the evolving state of the law concerning § 524(e), perhaps it is timely for the Circuit to take a fresh look at this issue.

Dated: November 24, 2010