A couple of weeks ago, we kicked off a Bankruptcy Judges series, with the first part of the series being devoted to Georgia’s Ret. Judge W. Homer Drake, Jr. While the feedback has been very positive, I attribute at least 90% of it to readers’ affection for Judge Drake that he earned over 53 years on the bench and 10% or less to my efforts to curate those years into an interesting opening profile. We now turn to the more serious business of covering (some of) Judge Drake’s 555 bankruptcy opinions.
As we encountered in our unlikely bankruptcy profiles of Justice Scalia, Justice Ginsburg, and Justice Gorsuch, transitioning from the profile to the decisions must be, if you’re doing it right, a little underwhelming. Nevertheless, over the next couple of weeks we’ll slice and dice our “JU(Drake)” Westlaw search to find the most educational and interesting parts. In this post, we’ll cover Judge Drake’s most cited confirmation-related Chapter 11 opinions in a Top 10 format.
It’s no criticism to characterize it as a serious business. After all, Judge Drake is a serious judge who wrote serious opinions in a serious style. I can recycle for Judge Drake my observations about Justice Ginsburg: He is an excellent writer but, unlike Justice Scalia’s or Justice Gorsuch’s bankruptcy opinions, Judge Drake’s bankruptcy opinions are not very quotable. Justice Gorsuch’s “Dewsnuppian departure[s]” is a rhetorical threshold that Judge Drake did not cross.
However, he did what I wish my 11 year old daughter would do on her math homework: he showed his work. There is a sort of Euclidean elegance in Judge Drake’s opinions—decision by rigorous proof. The precision, structure, and formality in his opinions are consistent with this Valedictorian-Judge’s self-described upbringing with his younger brother Henry (by two “very educated” parents and a father who was a “scholar” and a Superintendent of Schools) for which he emphasized “deportment” and “self-control.”
Before diving into the first five opinions, though, I can’t help but wonder what would have been if Judge Drake had served on a bankruptcy appellate panel. Would a “blistering dissent” be too course for his liking? I think so. In fact, unfortunately for some lawyers, Judge Drake appears to have reserved his form of “fire and brimstone” for issues of decorum and civility. He could be impatient and devastating, but always thorough, in deciding motions for reconsideration. And I’ll never forget when Judge Drake, minutes before the start of a potentially ugly two-day trial, took the lawyers into chambers and gave us a (thankfully) private but firm scolding about the tone of our pleadings. Among other things, “Mr. Bury, these are emotional arguments for a jury. This Court decides legal issues based on the law.” Ouch. But his opinions were formal and businesslike.
On to the confirmation opinions. By my count, Judge Drake issued 20 or so opinions that dealt with pre- or post-confirmation issues for Chapter 11 plans. We’ll cover the first 5 today and the top 5 next week. And then as a bonus, we’ll cover one of Judge Drake’s most extensive confirmation opinions—a 35 page Till opinion that, inexplicably, is not on Westlaw.
Judge Drake’s Most Cited Confirmation Opinions
Pattni is a straightforward § 1122 and § 1129(b) opinion involving two (now former) Days Inn hotels in Atlanta. A portion of its petition is available if you click the photo. The hotels were liened-up, in order of priority, to a lender, to Days Inn (the franchisor), and to Mr. Patel (an insider). The second and third were out of the money and, thus, classified as unsecured creditors under the debtor’s liquidation plan.
Not surprisingly, Days Inn objected because the debtor’s proposal (i) classified it and Mr. Patel separately from trade creditors and (ii) had trade creditors getting paid 25% of their claims while Days Inn and Mr. Patel were to receive, in lieu of any cash, subordinated, non-interest bearing notes that would only become due if the purchaser of one of the hotels ever sold the hotel for a premium over the debt—a potential gerrymandering, unfair discrimination, and bad faith trifecta.
Judge Drake overruled each of the objections.
First as to classification, he recognized a split of opinion, at least one that existed at that time, on whether “similar claims must be classified together” under § 1122(a). Emphasizing that there is no such explicit statutory requirement, Judge Drake sided with the “more flexible” approach. However, he also recognized that, while a plan proponent’s classification discretion might be “considerable . . . there are limits.” In other words, the proponent can’t manipulate voting by “gerrymandering” classes. There must be “business justifications” for separate classification. And in Pattni, Judge Drake focused on the “circumstances from which the claims arose” and determined that they justified separate classification.
[Editor’s note: Eleven years ago, Austin Carter, the partner who taught me much of what I know about day-to-day Chapter 11 practice and now His Honor, had me draft a classification memo in a Judge Drake case regarding an $11.8 million statutory attorneys’ fees claim on a $109 million debt. Of course, Pattni made it into the memo, along with other classification mainstays like Club Associates and Greystone. While that memo has been passed down from associate to associate over the years, and I’m still pretty bold with separate classification, I’m not so sure the trend still supports that boldness. The business justification had better be a good one because judges are increasingly skeptical of separate classification.]
Second as to unfair discrimination, Judge Drake highlighted one of my favorite nuances in the Code: The Code prohibits “unfair” discrimination rather than all discrimination. Is there a reasonable basis for the discrimination? Can the debtor confirm the plan without the discrimination? And was it proposed in good faith? Ultimately, and rather concisely, Judge Drake held that the proposed treatment for Days Inn did not unfairly discriminate—it was “equitable for the unsecured creditors as a whole.”
Even as a debtor’s lawyer, I struggle to reconcile trade creditors getting a guaranteed and immediate 25% with Days Inn getting a subordinated, non-interest bearing note from a party who was in sole control of whether the note would ever become due and in sole control of whether the purchase price would be high enough for even a $1 payout. And if the above picture of the now independent hotel is any indicator, the sale premium may have never materialized.
[That said, the Olympic Committee and the Pattnis’ entity did enter into a recorded “1996 Summer Olympic Games Hotel Agreement” for reservations. Maybe they all got rich for a few months.]
If you practice in Georgia or have spent anytime, particularly as an associate, researching plan objections, then IPC (Noble Oaks Apartments for those who lived it) is well known to you. In this IPC opinion—there were a couple—you had an early 30s Frank DeBorde (then and now at Morris Manning ) duking it out for the debtor against a late 30s Neil Gordon (at Macey, Wilensky, et al. at the time) for Freddie Mac.
The issue: Whether a post-confirmation plan note complied with the plan and § 1111(b)(2).
As short background, some partners out of Ohio owned a modest apartment complex in Riverdale, Georgia. In 1991, the partnership filed its Chapter 11 case. Freddie Mac was owed about $1.8 million against $1.35 million in collateral. In light of the deficiency, Freddie Mac made an 1111(b)(2) election. As all good plans do, IPC’s plan had an 1111(b) failsafe provision whereby IPC agreed to pay Freddie Mac $1.8 million over the life of the plan with interest at a court-determined rate so that Freddie Mac would receive payments with a present value of $1.35 million (i.e., the stipulated property value).
Over the “strong objections” of Freddie Mac, Judge Drake confirmed the Plan and the District Court affirmed the confirmation on appeal. However, Freddie Mac later refused to accept the IPC’s tendered $1.35 million plan note (which had a 10.03% interest rate), arguing that it did not comply with § 1111(b)(2).
Judge Drake took up Freddie Mac’s objections.
First, in the specific context of the note’s prepayment formula, Freddie Mac objected to the plan interest payments counting towards satisfying the $1.8 million claim. After considering the cases that Neil and Frank relied on and at least five law review articles of his choosing, with special emphasis on David Epstein’s § 1111(b) scholarship, Judge Drake overruled Freddie Mac’s objection, confirming the “double duty” concept for interest payments in the § 1111(b) context. That is, the interest payments satisfy § 1111(b)(2) and § 1129(b)’s “fair and equitable” requirement by counting against the total claim of $1.8 million and by ensuring that the creditor receives payments with a present value equal to the estate’s interest in the collateral.
By the way, Judge Drake quoted Judge Barliant (N.D. Ill.) for the following, which might be as concise a summary of the § 1111(b) requirements as you’ll ever read:
(1) the simple, arithmetic total of the stream of payments must at least equal the total claim, and (2) those payments must have a present value equal to the value of the collateral.
Second, Judge Drake dispensed with some ancillary objections in Freddie Mac’s favor, such that IPC needed to tweak or add some note language so that the note more fully comported with the explicit, already-confirmed plan terms.
I wish I knew more about the background for Planes, Inc. because I bet it’s more interesting than it first appears. As far as I can tell, Planes, Inc. was a large executive aircraft company that Larry Block founded in 1992.
According to his obituary, Larry, who died in 2008, lived quite a life, whether in the pulpwood business, as an early Honda and Land Rover dealer in Atlanta, as Sargeant Shriver’s appointed South East Coordinator for the (no longer acceptably-named) Kennedy Foundation on Mental Retardation, as a test pilot for Bill Lear, or as Planes, Inc.’s founder.
Planes, Inc. distributed Lear Jets and Merlin prop jets for use in commercial operations out of Atlanta. David Bisbee represented the debtor while Karen Fagin White and Mark Marani (of what was then Zusmann, Small, Stamps & White) represented Landmark First National Bank.
In short, Planes is (i) a classification case (and a preview of what was more commonly understood by the time Judge Drake decided Pattni seven years later), (ii) a claims estimation case, and (iii) a § 1129(b)(2)(A) valuation case.
As to separate classification and potential vote manipulation, Judge Drake deferred a ruling pending an evidentiary hearing and a plan amendment to address fatal plan objections that he addressed next. However, he did signal that having the Blocks (equity/insiders) receive common stock for their unsecured claims was likely indistinguishable from the unfair discrimination that was at issue in In re Pine Lake Village Apartment Co., a then recent S.D.N.Y. opinion.
As to estimation, Judge Drake sustained the objection to the plan provision that would have required disputed, contingent, or unliquidated claimants to petition the court for allowance before they’d be entitled to a distribution. With limited exceptions, § 502(c) mandates that such claims be estimated prior to confirmation. And because the case had been pending for over two years without any effort by the debtor to object or seek estimation, Judge Drake stopped confirmation in its tracks, holding that estimation, no matter how time consuming, was a prerequisite for Planes’ confirmation and the only means of determining whether the separate classification had the effect of distorting or manipulating voting.
Finally, as to the plan-related valuation under § 1129(b)(2)(A), Judge Drake sustained Landmark’s objection to the plan proposal that Landmark would only receive the wholesale value of “essential inventory” used by the debtor post-confirmation, regardless of whether it was used “one day or ten years after confirmation.” That proposal, by ignoring present value, did not comply with § 1129(b)(2)(A).
There are actually two related Masnorth opinions and they’re tied for #7. Masnorth Corp. owned the Courtyard Shopping Center at 6600 Roswell Road in Atlanta (pictured here, in all its charm, from a 2020 LoopNet listing). Masnorth had a single secured creditor—Midland Mutual—and barely any other creditors.
Under its plan, the debtor proposed to cure and reinstate its mortgage with Midland pursuant to § 1124. Midland’s objection led to Judge Drake’s detailed § 1124 treatment.
First, Judge Drake addressed Midland’s potential entitlement to its attorneys’ fees under § 1124:
- How about under O.C.G.A. § 13-1-11, Georgia’s accelerated attorneys’ fees statute? No. Judge Drake ruled that the fees statute is triggered in connection with a default and an acceleration, each of which a § 1124 cure would undo.
- How about reasonable fees under § 506? Yes, because Midland’s loan docs provided for fees and it was oversecured.
- How about under § 1124(2)(C)? Yes, because § 1124(2)(C) entitled Midland to compensation for its actual pecuniary losses from the default, including its attorneys’ fees.
Second, Judge Drake addressed whether a § 1124 cure entitled Midland to pre-confirmation compensation and post-confirmation reinstatement at a “market interest rate” rather than at the contract rate. While Judge Drake acknowledged how the default damaged Midland, he held that § 1124 entitled Midland to compensation and reinstatement at the contract rate because Midland had no provision in its loan docs or other legal entitlement that it could point to as justifying a rate other than the contract rate.
Third, and perhaps most interesting, Judge Drake addressed the intersection of §§ 1124, 1126(f), and 1129(a)(10). The issue was whether Masnorth had satisfied § 1129(a)(10) even though Midland had objected to the plan. Judge Drake held that, even though Midland objected and was unimpaired by operation of the § 1124 cure, its deemed acceptance of the plan under § 1126(f) was sufficient to satisfy § 1129(a)(10) (i.e., a deemed acceptance is still an acceptance, even with the objection).
I should note that § 1129(a)(10) was worded slightly differently in 1983. Back then, it required that at least one class of non-insider claims accept the plan. Impairment was not mentioned. Under the current version of § 1129(a)(10), if a “class of claims is impaired under the plan, at least one class of [non-insider] claims that is impaired under the plan [must accept] the plan.” I don’t think that changes the outcome. That is because the Masnorth plan (somehow) had no impaired classes. Arguably, then, § 1129(a)(10) would have been irrelevant in Masnorth under its current wording.
Finally, in the second Masnorth opinion, Judge Drake followed-up on the reasonableness of Midland’s attorneys’ fees and whether Masnorth should be required to perform deferred maintenance as part of the § 1124 cure. The former was a straightforward reasonableness inquiry. The latter was important because, if Judge Drake had determined that the deferred maintenance was necessary and the debtor couldn’t perform it, then Midland would have become an impaired creditor who could block the plan rather than a “deemed to accept” creditor under § 1124. However, Judge Drake determined that no additional deferred maintenance was necessary beyond what the plan already proposed.
Brandon Mill Farms, which involved 246 garden apartments in Sandy Springs, Georgia, had Gus Small (also of then-named Zusmann, Small, Stamps & White) representing the debtor and Jim Morton (at a prior iteration of Bondurant, Mixson & Elmore) representing the creditor.
While I haven’t seen Jim since we represented a group of guarantors a number of years ago, Gus is a good friend of our firm and had some interesting post-publication backstory for our opening post. They both have that maverick, street fighting style that one must have when representing a usually-defenseless debtor or guarantor.
The issue in Brandon Mills was whether Gus’s disclosure statement (“DS”), which accompanied the debtor’s liquidating plan, satisfied § 1125. The apartments had already been sold under § 363, such that the plan was to serve primarily as a claims disbursement mechanism. Jim objected because he wanted the DS to disclose that (i) creditors could still sue the non-debtor general partners and (ii) his client had rejected the plan.
Judge Drake overruled the objections.
First, he emphasized that the debtor was liquidating rather than carrying on. Thus, the continuing liability of non-debtors was not relevant to the possible financial results of acceptance or the value of proposed payments. The objection was not helped by the fact that the heavily-involved objecting party already had so much info about the debtor and its partners.
Second, and similarly, the fact that one party rejected the plan or might being proposing an alternative plan was not relevant, especially in a liquidating plan context where all creditors were going to be paid in full.
In short, what must be disclosed under § 1125 depends on the facts and circumstances of each case.
In next week’s post, we’ll cover Judge Drake’s Top 5 confirmation opinions.
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