Case reb Doc 536 Filed 03/19/09 Entered 03/19/09 23:25:29 Desc Main Document Page 1 of 31

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1 Document Page 1 of 31 UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF GEORGIA GAINESVILLE DIVISION IN RE: CORNERSTONE MINISTRIES INVESTMENTS, INC., Debtor. ) ) ) ) ) ) CASE NO reb Chapter 11 JUDGE BRIZENDINE MEMORANDUM OF LAW IN SUPPORT OF CONFIRMATION OF THE PLAN OF LIQUIDATION PROPOSED BY CORNERSTONE MINISTRIES INVESTMENTS, INC. AND THE OFFICIAL COMMITTEE OF CREDITORS HOLDING UNSECURED CLAIMS The Official Committee of Creditors Holding Unsecured Claims (the Committee or the Official Creditors Committee ) against Cornerstone Ministries Investments, Inc. (the Debtor or CMI ) files this memorandum of law in support of confirmation of the Plan of Liquidation Proposed by Cornerstone Ministries Investments, Inc. and the Official Committee of Creditors Holding Unsecured Claims, which was filed jointly by CMI and the Committee (collectively, the Plan Proponents ) on January 27, 2009 (Docket No. 488) (the Joint Plan ). 1 PRELIMINARY STATEMENT Confirmation of the Joint Plan is a significant step in this ongoing case. The Joint Plan is an appropriate mechanism to liquidate the Debtor s business, initiate appropriate actions against those responsible for CMI s demise, resolve claims filed against the estate, and, ultimately, maximize distributions to legitimate creditors of CMI. Notwithstanding the low estimated recoveries under the Joint Plan the low end of the estimated recovery range is only 9% it has received strong support from creditors. 1 Capitalized terms not defined herein shall have the meaning affixed to them in the Joint Plan.

2 Document Page 2 of 31 Over 85% of the 2327 valid votes 2 of Bondholders (Class 5) voted in favor of the Joint Plan. In addition, over 85% of the approximately $103 million in valid votes of Bondholder voted in favor of the Joint Plan. Similarly, the other two classes in which substantial numbers and amounts of votes were received (classes 4 and 6) have both voted to accept the Joint Plan. The Plan Proponents have received only one objection to the Joint Plan. See Docket No That objection was filed by a disgruntled Bondholder and requests that Bondholders be paid in full before other classes of creditors are paid anything. As discussed further below, such a result is inconsistent with the legal requirements of the Bankruptcy Code and therefore this objection should be overruled and, because the Joint Plan meets each of the requirements for confirmation, the Court should confirm the Joint Plan. OVERVIEW OF THE JOINT PLAN A. Overview The Joint Plan is a plan of liquidation. Each class under the Joint Plan will receive the treatment that is required by, and is consistent with, section 1129 of the Bankruptcy Code. Administrative Claims will either be paid in full in cash on the Effective Date, or a full reserve will otherwise be established for disputed Administrative Claims. Allowed Secured Claims and Allowed MPP Claims will either be paid in full, or otherwise receive the value of the collateral securing their claims or the collateral itself 2 Pursuant to the terms of the Solicitation Procedures Order (defined below), ballots received after the Voting Deadline; ballots that are illegible or indicate both an acceptance and rejection of the Joint Plan or neither an acceptance or rejection of the Joint Plan; unsigned ballots; ballots received by or facsimile; and ballots cast by persons or entities that are not holders of a claim in a class that is entitled to vote were not counted or considered when tabulating the votes on the Joint Plan. Duplicate ballots were only counted once. See Solicitation Procedures Order, 19,

3 Document Page 3 of 31 (and a reserve established for disputed claims). Priority Claims will be paid in full in accordance with the terms of the Bankruptcy Code prior to any non-priority unsecured class receiving any payment. Finally, the residual will be distributed to the Debtor s unsecured creditors, including Bondholders, pro rata. CMI s assets are principally (i) mortgage loans, owned property and equity in entities that own or control property and similar investments CMI held when it filed for bankruptcy or has since obtained as a result of actions taken before or during the bankruptcy case, and (ii) litigation claims that CMI holds against certain parties. The pace of the liquidation of these assets will depend on overall market factors and the course of litigation resulting from CMI s claims against certain parties. If the Joint Plan is confirmed, a Plan Administrator and Plan Committee will be appointed to oversee the liquidation process and will have the authority to make periodic distributions as the circumstances warrant, based principally on the amount of cash available to make distributions. B. Corporate governance under the Joint Plan Under the Joint Plan, CMI s current management will be displaced and a Plan Administrator will be appointed. The Plan Administrator will be supervised by the Plan Committee. Initially, the Plan Administrator will be Ron Glass, a principal of GlassRatner Advisory & Capital Group, LLC. Contemporaneous with the filing of this memorandum of law, the Committee is filing a proposed agreed form of the Plan Administrator Agreement. The Plan Committee will initially be composed of the members of the Official Creditors Committee, though, as set forth in the Joint Plan, it is anticipated that membership may shift over time

4 Document Page 4 of 31 The Plan Administrator will act as the principal fiduciary for CMI s Estate after the Effective Date. Among other things, the Plan Administrator will be responsible for resolving Claims filed against CMI, liquidating Estate Assets and Estate Litigation Claims, and making distributions to creditors. The Plan Committee will oversee the Plan Administrator s activities. Among other things, the Plan Committee will have the right to consult with, consider, and approve the resolution of certain material remaining matters in this Chapter 11 Case, as set forth in the Joint Plan. Additionally, the Plan Committee may take any action that the Plan Administrator may take under the Joint Plan. C. The objection to the Joint Plan The Plan Proponents have received only a single objection to confirmation of the Joint Plan from Edwin F. Patterson entitled Recommended disapproval of the joint plan (the Patterson Objection ). See Docket No Mr. Patterson asserts that he is a Bondholder and objects to the Joint Plan because Bondholders are not being paid ahead of other creditors and administrative claimants and because Bondholders are not receiving a 100% payout on their claims, plus interest. In his objection, Mr. Patterson further requests that a committee be appointed that will allow for input from Bondholders. The Debtor s estate is, unfortunately, insolvent and does not have sufficient assets to pay its creditors in full. And, even if Bondholders could be paid ahead of other creditors (which they cannot pursuant to section 507 of the Bankruptcy Code) CMI s assets would be insufficient to pay Bondholders in full. Additionally, the Bondholder claims are unsecured claims against the estate, and thus, by law, may only be paid from unencumbered property of the estate after administrative and priority claims have been paid in full. Because there is neither a legal nor a factual basis to sustain the - 4 -

5 Document Page 5 of 31 Patterson Objection, it should be overruled and, because the Joint Plan meets the standards set forth in section 1129 of the Bankruptcy Code, the Joint Plan should be confirmed. RELIEF REQUESTED AND BASIS FOR RELIEF The Plan Proponents request that this Court enter an order confirming the Joint Plan and overruling the one objection to confirmation of the Joint Plan. To confirm the Joint Plan, the Court must find, by a preponderance of the evidence, both that the Joint Plan and the Plan Proponents have complied with the requirements of section 1129 of the Bankruptcy Code. See In re Atlanta Southern Business Park, Ltd., 173 B.R. 444, (Bankr. N.D. Ga. 1994) (citing Grogan v. Garner, 498 U.S. 279, 291 (1991)); In re Holywell Corp., 913 F.2d 873, 879 (11th Cir. 1990) (recognizing that the two mechanisms for confirming a Chapter 11 plan are (1) proving that the plan satisfies all thirteen requirements of 11 U.S.C. 1129(a), or (2) if the only condition not satisfied is 1129(a)(8), that the plan satisfies the cramdown alternative found in 11 U.S.C. 1129(b), which requires that the plan does not discriminate unfairly against and is fair and equitable towards each impaired class that has not accepted the plan). As set forth below, because the Joint Plan complies with the requirements of section 1129 of the Bankruptcy Code, the Court should confirm the Joint Plan. I. The Joint Plan complies with all provisions of section 1129(a) of the Bankruptcy Code except for section 1129(a)(8). A. The Joint Plan complies with title 11 (section 1129(a)(1)). Section 1129(a)(1) requires that a plan comply with the applicable provisions of the Bankruptcy Code. 11 U.S.C. 1129(a)(1). The legislative history of section 1129(a)(1) explains that this provision encompasses the requirements of sections

6 Document Page 6 of 31 and 1123 of the Bankruptcy Code, which govern classification of claims and interests and the contents of a plan, respectively. See S. REP. NO , at 126 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5912; H.R. REP. NO , at 412 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6368; see also In re Johns-Manville Corp., 68 B.R. 618, 629 (Bankr. S.D.N.Y. 1986), aff d 78 B.R. 407 (S.D.N.Y. 1987), aff d, 843 F.2d 636 (2d Cir. 1988). 1. The Joint Plan complies with section 1122(a) of the Bankruptcy Code. Section 1122 of the Bankruptcy Code provides: (a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. (b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience. 11 U.S.C Section 1122(a) does not require that all substantially similar claims or interests be placed in the same class, but rather that all claims or interests within a class be substantially similar to one another. WHBA Real Estate Ltd. P ship v. Lafayette Hotel P ship (In re LaFayette Hotel P ship), 227 B.R. 445, 449 (S.D.N.Y. 1998). The Joint Plan s classification structure is proper and complies with section 1122(a) of the Bankruptcy Code. The Joint Plan segregates the various claims against CMI into the following classes: Class 1 provides for the separate classification of all Non-Tax Priority Claims. Class 2 provides for the separate classification of all Secured Tax Claims. Classes 3(a), 3(b), 3(c), 3(d), and 3(e) provide for the separate classification of all MPP claims

7 Document Page 7 of 31 Class 4 provides for the separate classification of all Secured Claims. Class 5 provides for the separate classification of all Bondholder Unsecured Claims. Class 6 provides for the separate classification of all Other Unsecured Claims. Class 7 provides for the separate classification of all Subordinated Claims. Class 8 provides for the separate classification of all Equity Interests. All claims within each class are substantially similar to the other claims in each class, thus the Joint Plan complies with section 1122 of the Bankruptcy Code. Additionally, no party in interest has objected to the classification structure as set forth in the Joint Plan and the Court has approved the classification contained in the Joint Plan in the context of approving the Disclosure Statement describing the Joint Plan. See Docket No For the foregoing reasons, the classification structure in the Joint Plan is proper and satisfies the requirements of section 1122 of the Bankruptcy Code. 2. The Joint Plan complies with section 1123(a) of the Bankruptcy Code. Section 1123(a) of the Bankruptcy Code requires that a plan: (i) designate classes of claims and interests; (ii) specify unimpaired classes of claims and interests; (iii) specify treatment of impaired classes of claims and interests; (iv) provide for equality of treatment within each class; (v) provide adequate means for the plan s implementation; (vi) provide for the prohibition of non-voting equity securities and provide an appropriate distribution of voting power among the classes of securities; and (vii) contain only provisions that are consistent with the interests of the creditors and equity security holders and with public policy with respect to the manner of selection of the reorganized - 7 -

8 Document Page 8 of 31 company s officers and directors. See 11 U.S.C. 1123(a). The Joint Plan complies with each requirement of section 1123(a). a. The Joint Plan designates classes of Claims, other than Claims of a kind specified in section 507(a)(2), 507 (a)(3), or 507 (a)(8). Section 1123(a)(1) of the Bankruptcy Code requires that a plan designate, subject to section 1122 of this title, classes of claims, other than claims of a kind specified in section 507(a)(2), 507(a)(3), or 507(a)(8) of this title, and classes of interests. The Joint Plan complies with section 1123(a)(1). Claims specified in section 507(a)(2) (Administrative Claims) and 507(a)(8) (Priority Tax Claims) are not classified under the Joint Plan. See Joint Plan, Article III.A. There are no 507(a)(3) claims in this Chapter 11 Case, as claims under this section relate only to involuntary cases and this Chapter 11 Case was commenced on a voluntary basis. All other Claims against CMI are classified in Classes 1 through 8 under the Joint Plan. See id. Article III.B. b. The Joint Plan specifies classes of Claims and Interests that are not Impaired. Section 1123(a)(2) of the Bankruptcy Code requires that a plan specify any class of claims or interests that is not impaired under the plan. The Joint Plan complies with section 1123(a)(2). Article III.A of the Joint Plan specifies that only Claims in Class 1 are not impaired under the Joint Plan. c. The Joint Plan specifies the treatment of Impaired Claims. Section 1123(a)(3) of the Bankruptcy Code requires that a plan specify the treatment of any class of claims or interests that is impaired under the plan. The Joint Plan complies with section 1123(a)(3). Article III.B of the Joint Plan specifies the - 8 -

9 Document Page 9 of 31 treatment of Claims and Equity Interests in Classes 2 through 8, all of which are Impaired under the Joint Plan. d. The Joint Plan provides the same treatment for claims in each class. Section 1123(a)(4) of the Bankruptcy Code requires that a plan provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest. The Joint Plan complies with section 1123(a)(4) of the Bankruptcy Code. All creditors with Claims in a particular class will receive the same treatment under the Joint Plan. Each Creditor in Classes 1 and 2 will receive distributions equal to the full Allowed amount of their Claims. Each Creditor in Classes 3(a), 3(b), 3(c), 3(d), and 3(e) will receive (i) if the Court determines that its MPP Claim is an Unsecured Claim, its Pro Rata Share of the Liquidation Amount, or (ii) if the Court determines that its MPP Claim is a Secured Claim, (a) its share of the underlying collateral payable under such holder s Loan Participation if such holder is able to establish an entitlement to receive such a share under the Loan Participation or applicable law, or (b) a return of the collateral that secures the MPP Claim. See Joint Plan, Article III.B. Each Creditor in Class 4 will receive (i) payment in full in periodic installments over a time period to be determined at a market rate of interest, provided however, that interest will only be paid from the cash flow of any particular property securing such Claim; (ii) Cash equal to the amount of such Allowed Secured Claim, or (iii) a return of the collateral or other property securing the Allowed Secured Claim. Id

10 Document Page 10 of 31 Each Creditor in Class 5 will receive its Pro Rata Share of the Liquidation Amount. Id. Creditors in Class 5 are also offered the opportunity to contribute their Non-Estate Claims to the Private Actions Trust. Amount. Id. Each Creditor in Class 6 will receive its Pro Rata Share of the Liquidation Creditors in Class 7 and holders of interests in Class 8 will neither receive nor retain any property under the Joint Plan. Id. As set forth above, the Joint Plan provides for the same treatment for each claim or interest of a particular class and the Joint Plan therefore complies with section 1123(a)(4) of the Bankruptcy Code. e. The Joint Plan provides adequate means for its implementation. Section 1123(a)(5) of the Bankruptcy Code requires that a plan provide adequate means for the plan s implementation. The Joint Plan complies with section 1123(a)(5) of the Bankruptcy Code. Article VI of the Joint Plan sets forth numerous provisions related to: (i) the appointment, removal, and duties of the Plan Administrator; (ii) the appointment and duties of the Plan Committee; (iii) employment of Professionals and others by the Plan Administrator and the Plan Committee; (iv) the funding of distributions under the Joint Plan; (v) the dissolution of the Debtor; and (vi) the authority to take corporate actions on behalf of the Debtor. Additionally, the Joint Plan provides for: (i) the Assets to remain with the Estate and not revest with the Debtor (Article V.A); (ii) the means to resolve Disputed Claims against the Estate as well as Estate Litigation Claims against third parties (Article V.B); (iii) the treatment of the Debtor s non-debtor subsidiaries (Article V.D); (iv) the mechanism for the distribution of Estate Assets to

11 Document Page 11 of 31 holders of Allowed Claims, establishment of the Disputed Claims Reserve, and funding of continuing expenses post-confirmation through the Operating Reserve (Article VIII); (v) the retention of jurisdiction by the Bankruptcy Court (Article X.C); and (vi) the cancellation of the Indentures, among other things (Article IX.F). Section 1123(a)(6) requires that a plan: f. The Joint Plan prohibits the issuance of nonvoting equity securities. provide for the inclusion in the charter of the debtor, if the debtor is a corporation... of a provision prohibiting the issuance of nonvoting equity securities, and providing, as to the several classes of securities possessing voting power, an appropriate distribution of such power among such classes, including, in the case of any class of equity securities having a preference over another class of equity securities with respect to dividends, adequate provisions for the election of directors representing such preferred class in the event of default in the payment of such dividends. 11 U.S.C. 1123(a)(6). Article VI.C of the Joint Plan specifically requires that the Debtor s articles of incorporation be amended to prohibit the issuance of non-voting shares of equity securities. Accordingly, the Joint Plan satisfies section 1129(a)(6) of the Bankruptcy Code. g. The Joint Plan contains provisions consistent with the interests of Creditors for the selection of the Plan Administrator. Section 1123(a)(7) of the Bankruptcy Code requires that a plan contain only provisions that are consistent with the interests of creditors and equity security holders and with public policy with respect to the manner of selection of any officer, director, or trustee under the plan and any successor to such officer, director, or trustee. Under the Joint Plan, a Plan Administrator will be appointed and will have the authority to

12 Document Page 12 of 31 administer the Estate, liquidate Estate Assets under the supervision of the Plan Committee, bring Estate Litigation Claims, and ultimately dissolve the Debtor at the close of the Chapter 11 Case. See Joint Plan, Article VI.A. The Plan Committee, which will initially be compromised of the members of the Official Creditors Committee, will oversee the Plan Administrator s activities and may remove or replace the Plan Administrator, with or without cause, by filing with the Court a notice of the proposed action and opportunity to object within ten days. Id. Article VI.D, VI.E. The Committee submits that these provisions are consistent with the interests of creditors in that, ultimately, the ability to control the disposition and activities in this Chapter 11 Case is in the hands of the Plan Committee which represents, in a fiduciary capacity, the interests of all Unsecured Creditors, including the Bondholders. Because the Debtor s Estate is insolvent and equity interests will be cancelled by confirmation of the Joint Plan, the reference in section 1123(a)(7) to the interests of equity security holders is inapplicable in this Chapter 11 Case. 3. The Joint Plan complies with section 1123(b) of the Bankruptcy Code. Section 1123(b) of the Bankruptcy Code identifies various discretionary provisions that may be included in a plan, but are not required. A plan may impair or leave unimpaired any class of claims or interests and provide for the assumption or rejection of executory contracts and unexpired leases. 11 U.S.C. 1123(b)(1) and (2). A plan may also provide for the settlement or retention and enforcement of any claim belonging to the debtor. Id. 1123(b)(3). The Joint Plan contains a number of provisions that are permissible, but not required, under section 1123(b)(3). For example, as set forth above, the Joint Plan

13 Document Page 13 of 31 provides that certain Claims will not be Impaired (Claims in Class 1), whereas other Claims will be Impaired (Claims in Classes 2 through 8). Additionally, the Joint Plan provides that any executory contract not previously assumed or rejected will be rejected on the Effective Date. See Joint Plan, Article X.A.1. Finally, the Joint Plan provides for the retention and enforcement of Estate Litigation Claims. None of these provisions, or other discretionary provisions contained in the Joint Plan, is inconsistent with the Bankruptcy Code and all of the provisions of the Joint Plan are permissible under section 1123(b) of the Bankruptcy Code. B. The Plan Proponents have complied with title 11 (section 1129(a)(2)). Section 1129(a)(2) requires the proponent of a plan to compl[y] with the applicable provisions of title 11 [of the Bankruptcy Code]. 11 U.S.C. 1129(a)(2). The principal purpose of section 1129(a)(2) is to ensure that a plan proponent has complied with the requirements of the Bankruptcy Code regarding the solicitation of acceptances of the plan. See S. REP. NO , at 126 ( Paragraph (2) [of section 1129(a)] requires that the proponent of the plan comply with the applicable provisions of chapter 11, such as 1125 regarding disclosure. ); In re Trans Max Tech., Inc., 349 B.R. 80, 86 (Bankr. D. Nev. 2006) ( Section 1129(a)(2) then elevates Section 1125(b) s prohibition into a confirmation requirement. ); In re Texaco Inc., 84 B.R. 893, (Bankr. S.D.N.Y. 1988) (holding that the principal purpose of Section 1129(a)(2) is to assure that the proponents have complied with the requirements of section 1125 in the solicitation of acceptances to the plan ). The Plan Proponents have complied with the applicable provisions of title 11, including the provision of section 1125 regarding disclosure and plan solicitation

14 Document Page 14 of 31 Section 1125 of the Bankruptcy Code prohibits the solicitation of acceptances or rejections of a plan of reorganization from holders of claims or interests 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. 11 U.S.C. 1125(b). In this Chapter 11 Case, the Court entered an order finding that the Joint Disclosure Statement contained adequate information on January 29, 2009 (Docket No. 493), which found that the Joint Disclosure Statement contained adequate information under section 1125 of the Bankruptcy Code (the Solicitation Procedures Order ). Additionally, the Court approved (i) the ballots to be transmitted to Creditors entitled to vote on the Joint Plan, (ii) the notices to be sent to those holders of Claims or interests or other parties in interest not voting on the Plan, (iii) the timing and method of delivery of the ballots, notices and all other solicitation materials, and (iv) the rules for tabulating votes to accept or reject the Joint Plan, among other things. Thereafter, the Plan Proponents promptly transmitted the approved materials to holders of Claims and interests in accordance with the Solicitation Procedures Order. The Plan Proponents did not solicit the acceptance or rejection of the Joint Plan by Creditors or holders of an interest before the approval and transmission of the Joint Disclosure Statement. 3 The Plan Proponents have thus have complied with the applicable 3 The Committee has filed an adversary proceeding against Cambridge Legacy Securities and a number of related entities and persons (collectively, the Defendants ) related the Defendants improper solicitation efforts related to a so-called supplemental plan, among other things. That action is ongoing. In its complaint, the Committee noted that it would be filing a motion pursuant to section 1126(e) of the Bankruptcy Code to designate certain votes because of this improper solicitation. Because the Plan Proponents received the requisite votes necessary to confirm the Joint Plan notwithstanding this illegal solicitation, it is unnecessary to file such a motion under section 1126(e). The adversary proceeding remains pending and the Committee seeks a judgment and award of damages from the Defendants related

15 Document Page 15 of 31 provisions of title 11, including section 1125 of the Bankruptcy Code and Bankruptcy Rules 3017 and 3018, and, as a result, the Joint Plan meets the requirements of section 1129(a)(2) of the Bankruptcy Code. C. The Joint Plan has been proposed in good faith and not by means forbidden by law (section 1129(a)(3)). Section 1129(a)(3) of the Bankruptcy Code requires that a plan be proposed in good faith and not by any means forbidden by law. See 11 U.S.C. 1129(a)(3). Although the term good faith is left undefined in the Bankruptcy Code, [w]here the plan is proposed with legitimate and honest purpose... and has a reasonable hope of success, the good faith requirements of Section 1129(a)(3) and satisfied. McCormick v. Banc One Leasing Corp. (In re McCormick), 49 F.3d 1524, 1526 (11th Cir. 1995); see also Brite v. Sun Country Dev., Inc. (In re Sun Country Dev. Inc.), 764 F.2d 406, 408 (5th Cir. 1985); In re Zenith Elecs. Corp., 241 B.R. 92, 107 (Bankr. D. Del. 1999). The Plan Proponents have proposed the Joint Plan in good faith to effectuate the terms and purpose of the Bankruptcy Code. Specifically, the Plan Proponents have proposed the Joint Plan to provide a mechanism to liquidate and distribute the Debtor s Assets, and pursue Estate Litigation Claims, with the ultimate objective of distributing the proceeds of the Estate Litigation Claims to holders of Allowed Claims. The Joint Plan does not propose reorganization, but rather liquidation of the Debtor s remaining Assets to holders of Allowed Claims on the terms set forth in the Joint Plan. The Committee submits that these provisions, among others, are proposed to maximize the to their improper conduct. Additionally, the Committee will seek certain corrective measures, such a corrective notice, to be sent to creditors based upon the Defendants illegal actions. This is particularly significant in light of the fact that the Committee understands that the Defendants illegal actions influenced the determination of certain Bondholders regarding the Private Actions Trust Election

16 Document Page 16 of 31 recovery to creditors of this estate. Therefore, the Committee submits that the Plan Proponents acted in good faith in proposing and pursuing confirmation of the Joint Plan and that the Joint Plan complies with section 1129(a)(3) of the Bankruptcy Code. D. The Joint Plan provides for Court oversight for payments made in connection with the Chapter 11 Cases (section 1129(a)(4)). Section 1129(a)(4) of the Bankruptcy Code requires that: [a]ny payment made or to be made by the proponent, by the debtor, or by a person issuing securities or acquiring property under the plan, for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable. 11 U.S.C. 1129(a)(4). Section 1129(a)(4) has been construed to require that all payments of professional fees which are made from estate assets be reasonable and be subject to review and approval by the bankruptcy court as to their reasonableness. See Johns-Manville Corp., 68 B.R. at 632. The Joint Plan complies with section 1129(a)(4) of the Bankruptcy Code. First, the Disclosure Statement discloses accrued fees owing to counsel to the Debtor, counsel to the Committee, and other retained professionals including special counsel to the Debtor and the Committee s financial advisor. See Joint Disclosure Statement, Article III.A, III.B. Furthermore, all applications for the payment of Professional Fees must be filed with and approved by the Court before they are paid, including those incurred or paid after the Effective Date. See Joint Plan, Articles X.C., VI.D. Therefore, the Joint Plan complies with section 1129(a)(4) of the Bankruptcy Code

17 Document Page 17 of 31 E. The Joint Plan identifies the individuals with oversight responsibility after the Effective Date and their employment is consistent with Creditor interests (section 1129(a)(5)). Section 1129(a)(5) requires that the Plan Proponents identify certain individuals who will hold positions after confirmation of the Joint Plan. See 11 U.S.C. 1129(a)(5). This provision focuses on the methods by which the management of the reorganized (or in this case, liquidated) corporation is to be chosen, requiring adequate representation of those whose investments are involved in the reorganization i.e., in this Chapter 11 Case, the Creditors. See 7 Collier on Bankruptcy [7] (15th rev. ed. 2006). Under section 1129(a)(5)(A)(i), the proponent of a plan must disclose the identity and affiliations of any individual proposed to serve, after confirmation of the plan, as a director, officer, or voting trustee of the debtor, an affiliate of the debtor participating in a plan with the debtor, or a successor to the debtor, under the plan. 11 U.S.C. 1129(a)(5)(A)(i). Section 1129(a)(5)(A)(ii) further requires that the service of such individuals be consistent with the interests of creditors and equity security holders and with public policy. 11 U.S.C. 1129(a)(5)(A)(ii). Section 1129(a)(5)(B) requires that the plan proponent disclose the identity of any insider that will be employed or retained by the reorganized debtor, and the nature of any compensation for such insider. 11 U.S.C. 1129(a)(5)(B). In determining whether the post-confirmation management is consistent with the interests of creditors, equity security holders and public policy, a court must consider proposed management s competence, discretion, experience and affiliation with entities having interests adverse to the debtor. See In re Sherwood Square Assocs., 107 B.R. 872, 878 (Bankr. D. Md. 1989); see also In re W.E. Parks Lumber Co., 19 B.R. 285, 292 (Bankr. W.D. La. 1982) (a court should consider whether the initial management and

18 Document Page 18 of 31 board of directors of the reorganized corporation will be sufficiently independent and free from conflicts and the potential of post-reorganization litigation so as to serve all creditors and interested parties on an even and loyal basis ). The Joint Plan discloses that a Plan Administrator, chosen and approved by the Committee, will be appointed on the Effective Date and that the Plan Administrator may be removed (i) with or without cause by the Plan Committee upon the filing of a notice with the Court, subject to objection. See Joint Plan, Article VI.D. As set forth above, Ron Glass of GlassRatner will initially be appointed as the Plan Administrator. Mr. Glass is a true third party to this case and he, with the assistance of GlassRatner, is qualified to serve as Plan Administrator. Mr. Glass has extensive real estate experience and has served as a liquidator in numerous and varied bankruptcy and non-bankruptcy cases. Additionally, Mr. Glass has extensive experience acting as a plaintiff in bankruptcy estate litigation, which will be a significant source of the overall recovery to unsecured creditors in this Chapter 11 Case. Additionally, pursuant to the Joint Plan, the Plan Administrator will be subject to sections 327 and 330 of the Bankruptcy Code and therefore must be a disinterested person within the meaning of section 101(14) of the Bankruptcy Code to receive compensation under the Joint Plan. Id. The Joint Plan also discloses that the members of the Official Creditors Committee will be the initial members of the Plan Committee. These disclosures are consistent with the requirements of section 1129(a)(5) and are in the best interests of Creditors. The members of the Plan Committee (the Official Creditors Committee members) have and will continue to represent the interests of

19 Document Page 19 of 31 Creditors. Therefore, the Joint Plan satisfies the requirements of section 1129(a)(5) of the Bankruptcy Code. F. Section 1129(a)(6) is inapplicable to the Joint Plan. Section 1129(a)(6) of the Bankruptcy Code requires that [a]ny governmental regulatory commission with jurisdiction, after confirmation of the plan, over the rates of the debtor has approved any rate change provided for in the plan, or such rate change is expressly conditioned on such approval. The Joint Plan does not provide for the change of any rates subject to the oversight of a governmental regulatory commission. Therefore, section 1129(a)(6) is not applicable to the Joint Plan. G. Each Class of Creditors has either accepted the Joint Plan or will receive not less than it would under a Chapter 7 liquidation (Section 1129(a)(7)). The Bankruptcy Code protects creditors and equity security holders who are impaired by the Plan and who have not voted to accept the Plan through the best interests test of section 1129(a)(7). Section 1129(a)(7) of the Bankruptcy Code provides that the Court shall confirm a plan of reorganization if, with respect to each impaired class of claims or interests: (A) each holder of a claim or interest of such class (i) (ii) has accepted the plan; or will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date. 11 U.S.C. 1129(a)(7). The best interests test of section 1129(a)(7) protects dissenting members of impaired, accepting classes by ensuring that such creditors receive, pursuant to a proposed plan, at

20 Document Page 20 of 31 least what they would receive if the debtor were liquidated under chapter 7 of the Bankruptcy Code. See Bank of Am. Nat l Trust & Sav. Ass n v. 203 N. LaSalle St. P ship, 526 U.S. 434, 441 n.13 (1999). The best interests test focuses on individual dissenting creditors rather than classes of claims. Id. In considering if a plan is in the best interests of creditors, a court is not required to consider any alternative to the plan other than the dividend projected in a liquidation of all of the debtor s assets under chapter 7 of the Bankruptcy Code. See In re Victory Constr. Co., 42 B.R. 145, 151 (Bankr. C.D. Cal. 1984). As set forth in the Disclosure Statement, the Joint Plan is a plan of liquidation. It follows that Creditors will receive at least as much under the Joint Plan as they would in a chapter 7 liquidation, which would accomplish the same objective as the Joint Plan, but would require an additional layer of administrative fees and compensation for a chapter 7 trustee. See In re Hendrick, 45 B.R. 976, 987 (Bankr. M.D. La. 1985) (holding that a liquidating plan that follows the liquidation process contemplated by chapter 7 satisfies 11 U.S.C. 1129(a)(7)); In re Cypresswood Land Partners, I, No H4-11, 2009 WL , at *25 (Bankr. S.D. Tex. January 20, 2009) (citing Hendrick for the proposition that liquidating plans satisfy 11 U.S.C. 1129(a)(7) and recognizing that a liquidating plan may be more cost effective than a chapter 7 liquidation). Because the Joint Plan provides for the liquidation of all of the Debtor s Assets and Estate Litigation Claims in a manner that minimizes administrative costs, the Committee believes that all Creditors will receive at least as favorable treatment under the Joint Plan as they would in a hypothetical chapter 7 liquidation. Because each holder of a Claim or equity interests in each Class has either (i) accepted the Joint Plan, or (ii) will receive at least as much

21 Document Page 21 of 31 under the Joint Plan as they would under a chapter 7 liquidation, the Joint Plan satisfies section 1129(a)(7) of the Bankruptcy Code. H. Section 1129(a)(8) is not satisfied. Section 1129(a)(8) requires a plan to be accepted by all impaired classes. A plan is accepted by a class of claims if the plan has been accepted by holders of at least twothirds in dollar amount and more than one-half in number of the allowed claims of such class that have voted on the plan. See 11 U.S.C. 1126(c). A plan is accepted by a class of interests if the plan has been accepted by holders of at least two-thirds in amount of the allowed interests in such class that have voted on the plan. See id. 1126(c). Under the Joint Plan, Classes 7 and 8 are impaired and are deemed to have rejected the Joint Plan. Additionally, no creditors in Classes 2, 3(a), 3(b), 3(c), or 3(e) voted on the Joint Plan and thus those Classes did not accept the Joint Plan. Similarly, voters in Class 3(d) did not vote in sufficient numbers to accept the Joint Plan, and have therefore rejected the Joint Plan. Classes 4, 5, and 6 did vote to accept the Joint Plan. However, because less than all the classes have voted to accept the Joint Plan, the Joint Plan does not satisfy section 1129(a)(8) of the Bankruptcy Code. The Joint Plan may nonetheless still be confirmed pursuant to section 1129(b) (as discussed below). I. The Joint Plan s provisions related to payment of certain Priority Claims (section 1129(a)(9)). Section 1129(a)(9) of the Bankruptcy Code contains a number of requirements concerning the payment of priority claims. First, section 1129(a)(9)(A) requires that claims specified in section 507(a)(1) or 507(a)(2), which give first priority to certain administrative expenses, be paid in full in cash equal to the allowed amount of such claim on the effective date of the plan. Second, section 1129(a)(9)(B)(i) requires that claims

22 Document Page 22 of 31 specified in sections 507(a)(3) through 507(a)(7) of the Bankruptcy Code receive, on the effective date, deferred cash payments equal to the allowed amount of such claims or cash equal to the allowed amount of such claims. Section 1129(a)(9)(C) requires that holders of claims specified in section 507(a)(8) of the Bankruptcy Code receive cash payments (i) in full on the effective date, (ii) over a period ending not later than five (5) years after the date of the order for relief, or (iii) in a manner not less favorable than the most favored nonpriority unsecured claim provided for by the plan. Finally, section 1129(a)(9)(D) requires that secured claims that otherwise meet the description of a section 507(a)(8) claim receive cash payments in the same manner and over the same period as prescribed by section 1129(a)(9)(C). The Joint Plan satisfies the requirements of section 1129(a)(9). The Joint Plan provides that Allowed Administrative Expenses will be paid in full in cash on (i) the later of the Effective Date, (ii) the first day that is ten (10) Business Days after such Claim is Allowed, or (iii) at such other time and in such other manner as may be agreed upon in writing between the holder of the Allowed Administrative Claim and the Plan Administrator. See Joint Plan, Article VIII.A. Claims specified in section 507(a)(3) through 507(a)(7) include: (i) certain Priority Claims of employees (sections 507(a)(3) and (a)(4)); (ii) certain claims of producers of grain and fisherman (section 507(a)(5)); (iii) certain claims of individuals for household goods (section 507(a)(6)); and (iv) domestic support obligations (section 507(a)(7)). None of the Claims against the Debtors are those specified in section 507(a)(3) through 507(a)(7)

23 Document Page 23 of 31 Claims specified in section 508(a)(8) are certain tax claims. These Claims are defined in the Joint Plan as Priority Tax Claims and will be paid (i) in full, without interest, in cash, (ii) in equal monthly installments concluding no more than five years from the Petition Date, at an interest rate to be set by the Court, or (iii) in a manner as may be agreed upon in writing by the holder of such Claim and the Plan Administrator. See Joint Plan, Article VIII.B. As set forth above, the Joint Plan complies with all of the requirements of section 1129(a)(9) of the Bankruptcy Code. J. An Impaired Class has voted to accept the Joint Plan (section 1129(a)(10)). Section 1129(a)(10) of the Bankruptcy Code requires that: If a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan has accepted the plan, determined without including any acceptance of the plan by any insider. 11 U.S.C. 1129(a)(10). In other words, if a plan has one or more impaired classes of claims, section 1129(a)(10) requires that at least one such class vote to accept the plan, excluding any acceptance of the plan by any insider. The Joint Plan satisfies section 1129(a)(10). Classes 4, 5 and 6, are all Impaired under the Joint Plan and have all voted to accept the Joint Plan. K. The Joint Plan is Feasible (section 1129(a)(11)). Section 1129(a)(11) of the Bankruptcy Code provides that a plan may be confirmed only if [c]onfirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the

24 Document Page 24 of 31 plan. 11 U.S.C. 1129(a)(11). The Joint Plan provides for the liquidation of the Debtor s remaining Assets and pursuit of Estate Litigation Claims with the ultimate objective of distributing those Cash proceeds to holders of Allowed Claims. A plan that provides for the liquidation of a debtor s assets satisfies the feasibility test of section 1129(a)(11) of the Bankruptcy Code. See In re Revco D.S. Inc., 131 B.R. 615, 622 (Bankr. N.D. Ohio 1990) ( [s]ection 1129(a)(11) is satisfied as the plan provides that the property of the Debtors shall be liquidated ); In re Cellular Info. Sys., 171 B.R. 926, 945 (Bankr. S.D.N.Y. 1994) ( [T]he plain language of section 1129(a)(11) provides that a plan is feasible if it includes a means for liquidating a debtor s property. ). Because the Joint Plan provides for the liquidation of the Debtor s Assets, the Joint Plan meets the requirements of section 1129(a)(11) of the Bankruptcy Code. L. Payment of U.S. Trustee Fees (section 1129(a)(12)). Section 1129(a)(12) of the Bankruptcy Code requires that certain fees listed in 28 U.S.C. 1930, determined by the court at the hearing on confirmation of a plan, be paid or that provision be made for their payment. Under the Joint Plan, these fees are denominated as Administrative Expense Claims and the Joint Plan provides that all such Allowed Claims will be paid in full in cash on the later of the Effective Date or the first day that is ten (10) Business Days after such Claim is Allowed. Therefore the Joint Plan meets the requirements of section 1129(a)(12) of the Bankruptcy Code. M. Retiree Benefits (section 1129(a)(13)). Section 1129(a)(13) of the Bankruptcy Code requires that a plan provide for the continuation of retiree benefits, at levels established pursuant to section 1114 of the Bankruptcy Code, for the duration of the period that the debtor has obligated itself to

25 Document Page 25 of 31 provide such benefits. The Joint Plan provides for the liquidation and dissolution of the Debtor s business. The Debtor will have no employees and no obligation to pay for retiree benefits. Section 1129(a)(13) is therefore not applicable to the Joint Plan. N. Payment of Domestic Support Obligations (section 1129(a)(14)). Section 1129(a)(14) requires that: If the debtor is required by a judicial or administrative order, or by statute, to pay a domestic support obligation, the debtor has paid all amounts payable under such order or such statute for such obligation that first become payable after the date of the filing of the petition. 11 U.S.C. 1129(a)(14). Section 1129(a)(14) is inapplicable in this Chapter 11 Case. The Debtor is not required by any judicial or administrative order, or by statute, to pay any domestic support obligation. O. Certain Payments by Individual Debtors (section 1129(a)(15)). Section 1129(a)(15) sets forth certain minimum payments necessary to be made by an individual debtor to its unsecured creditors if an allowed unsecured creditor objects to confirmation of the plan. The Debtor in this case is not an individual and therefore section 1129(a)(15) is inapplicable in this Chapter 11 Case. P. Transfers of property of a Debtor that is not a moneyed interest (section 1129(a)(16)). Section 1129(a)(16) provides that: All transfers of property of the plan shall be made in accordance with any applicable provisions of nonbankruptcy law that govern the transfer of property by a corporation or trust that is not a moneyed, business, or commercial corporation or trust. 11 U.S.C. 1129(a)(16)

26 Document Page 26 of 31 Section 1129(a)(16) is inapplicable to this case. The Debtor is a for-profit corporation and section 1129(a)(16) by its terms applies only to corporations and trusts that are not moneyed, business, or commercial. II. The Joint Plan satisfies the cramdown requirements of section 1129(b) and should be confirmed even though the Joint Plan does not satisfy section 1129(a)(8). Section 1129(b) of the Bankruptcy Code provides that if all of the applicable confirmation requirements of section 1129(a) other than subsection (8) (requiring all impaired classes to accept the plan) are met, the court, on request of the plan proponent, shall confirm the plan if it does not discriminate unfairly and is fair and equitable with respect to each class of claims or interests that is impaired under, and that has not accepted, the plan. See 11 U.S.C. 1129(b)(1). Class 2 (Secured Tax Claims), Classes 3(a) through 3(e) (MPP Claims), Class 7 (Subordinated Claims), and Class 8 (Equity Interests) have not accepted the Joint Plan. Therefore the Plan Proponents request that the Court confirm the Joint Plan pursuant to section 1129(b) of the Bankruptcy Code. A. The Joint Plan does not discriminate unfairly. The unfair discrimination standard of section 1129(b) does not prohibit all types of discrimination among holders of Claims and interests, it merely prohibits unfair discrimination. See In re Leslie Fay Cos., Inc., 207 B.R. 764, 791 n.37 (Bankr. S.D.N.Y. 1997). Although Congress did not define unfair discrimination, courts have held that a dissenting class must receive relative value equal to the value given to all other similarly situated classes. In re Johns-Manville, 68 B.R. at 636. A classification scheme does not unfairly discriminate if there are reasonable, nondiscriminatory reasons for it. See In re Elmwood, Inc., 182 B.R. 845 (D. Nev. 1995)

27 Document Page 27 of 31 There is a reasonable and nondiscriminatory reason for the separate classification of Classes 2, 3, 7, and 8, which are the only classes that have not accepted the Joint Plan. Class 2 is comprised of Secured Tax Claims. Classes 3(a), 3(b), 3(c), 3(d), and 3(e) are comprised of MPP claims arising from Loan Participations, which may be determined by the Court to be Secured Claims or Unsecured Claims. Class 7 is compromised of those Claims that are subject to subordination by order of the Court, including Claims that are subordinated pursuant to section 510(b) of the Bankruptcy Code. Class 8 is compromised of equity interests in the Debtor. Separate classification of these Classes is appropriate and is not unfair discrimination. Therefore the separate classification of these Classes is not unfair discrimination. B. The Joint Plan is fair and equitable. Section 1129(b)(2)(A), (B), and (C) of the Bankruptcy Code sets forth what constitutes fair and equitable treatment of Secured Claims, Unsecured Claims, and Equity Interests for the purposes of section 1129(b)(1). Each subsection establishes alternative requirements, only one of which must be satisfied for a plan to be fair and equitable with respect to a dissenting class of unsecured creditors or equity interests. See 11 U.S.C. 1129(b)(2)(A)(i), (ii), (iii), 1129(b)(2)(B)(i), (ii) and 1129(b)(2)(C)(i), (ii); see also In re Corcoran Hosp. Dist., 233 B.R. 449, 457 (Bankr. E.D. Cal. 1999) ( Bankruptcy Code 1129(b)(2)(B) sets out two alternatives for a plan to be fair and equitable with respect to a dissenting class of unsecured creditors. )