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Section 1129(a) of the Bankruptcy Code states that the Court shall confirm a plan of reorganization only if all 16 of the requirements of that subsection are met.
Cheerview Enterprises, Inc. was a Michigan corporation that owned a gas station and convenience store in Michigan (“Property”). Mohamad Berro, owner of an oil change business, purchased Cheerview’s stock and became its sole owner. At the time of the purchase, SSB Bank and U.S. Oil held respective mortgages on the Property. SSB Bank and U.S. Oil began foreclosure proceedings on their respective mortgages in mid-2017. As the foreclosure proceedings brought by Stockbridge and U.S. Oil came to a head, Cheerview filed its Chapter 11 petition. However, just before it filed the petition and even though Cheerview had no income — since both the gas station and convenience store remained closed — Cheerview decided to have some work done on the Property by a contractor owned by Fadi Elghoul, i.e., installment of an ice machine, repairment of the compressor, and some other work. Cheerview was unable to pay Eighoul. Cheerview’s Third Amended Disclosure Statement and Plan stated that Cheerview intended to reopen its gas station and convenience store. The secured creditors filed a motion for relief from the automatic stay.
Should the court grant Cheerview’s combined disclosure statement and plan of reorganization?
No; only the Disclosure Statement.
The court noted that Section 1125(b) of the Bankruptcy Code stated that acceptance or rejection of a Chapter 11 plan of reorganization may not be solicited unless at the time or before such solicitation, there was transmitted to the holder of a claim the plan or a summary of the plan, and a written disclosure statement approved by the court as containing adequate information. Section 1125(a)(1) defined adequate information as meaning "information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor's books and records that would enable a hypothetical investor of the relevant class to make an informed judgment about the plan.” In this case, the court found that Cheerview’s Disclosure Statement contained an extended discussion of the agreements it entered into after bankruptcy, and also contained relevant financial statement and tax returns. Thus, the court concluded that the Disclosure Statement contained adequate information under § 1125(a)(1). However, the Court held that the Plan cannot be confirmed. The court noted that under Section 1129(a)(8), each class of impaired claims must vote to accept the plan. In this case, the court found that U.S. Oil was not eligible to elect under § 1111(b)(1)(A) to have its entire claim allowed as a secured claim under § 1111(b)(2) since its interest as the holder of the second mortgage on the Property was of inconsequential value. The court further held that Cheerview’s projections in its Third Amended Disclosure Statement and Plan were not realistic, and thus, the Plan was not feasible. Moreover, the court held that the Plan was not fair and equitable with respect to Class 4 unsecured claims, as required for a cram down under § 1129(b)(2)(B).