## Facts

- Deming Hospitality, LLC (Debtor) filed a Chapter 11 bankruptcy case and proposed a plan of reorganization.
- The plan divided claims and interests into eight classes, including a class of general unsecured creditors and a separate class for the United States Small Business Administration’s (SBA) unsecured deficiency claim.
- SBA held a junior lien securing roughly $1.5 million; under the plan, SBA’s secured position was eliminated and its resulting deficiency was treated as an unsecured claim in its own class.
- The plan proposed to pay general unsecured creditors 75% of their allowed claim amounts in cash within 30 days after the plan’s effective date.
- The plan proposed to pay SBA $25,000 on its approximately $1.5 million unsecured deficiency claim within 30 days after the plan’s effective date.
- SBA objected at the disclosure-statement stage, asserting the plan was facially unconfirmable because it treated SBA far worse than other unsecured creditors and therefore violated the Bankruptcy Code’s ban on unfair discrimination.
- SBA told the court it would vote to reject the plan as drafted, and represented it would support a plan that treated unsecured claims the same.

## Issues

1. May a bankruptcy court deny approval of a Chapter 11 disclosure statement when the accompanying plan is facially unconfirmable as a matter of law?
2. Does a plan that pays general unsecured creditors 75% while paying SBA $25,000 on a $1.5 million unsecured deficiency claim discriminate unfairly in violation of 11 U.S.C. § 1129(b)(1)?
3. Is the plan facially unconfirmable because it permits existing equity to retain an ownership interest even though an impaired, dissenting class of unsecured creditors will not be paid in full, contrary to the absolute priority rule in 11 U.S.C. § 1129(b)(2)(B)?

## Decision

- The court denied approval of the amended disclosure statement.
- The court ruled it may refuse disclosure-statement approval when the plan described is facially unconfirmable and the defects are legal in nature.
- The court found the plan facially unconfirmable because the proposed treatment of SBA’s unsecured deficiency claim, compared with the proposed treatment of other unsecured claims, constituted unfair discrimination.
- The court also found the plan facially unconfirmable because it violated the absolute priority rule by allowing equity to retain its interest while an impaired unsecured class (expected to reject) was not paid in full, and the plan did not fit within any recognized new-value path on the record presented.

## Legal Principles

- A bankruptcy court may deny approval of a disclosure statement if the plan it describes is facially unconfirmable; the court need not authorize solicitation for a plan that cannot be confirmed as a matter of law.
- Under 11 U.S.C. § 1129(b)(1), a plan confirmed over a dissenting class must not discriminate unfairly; large disparities in recoveries among similarly situated unsecured creditors require a valid reorganization-related justification.
- A plan that isolates a single unsecured creditor for sharply reduced recovery, while paying other unsecured creditors a much higher percentage, supports a finding of unfair discrimination at the facial-confirmability stage when no adequate justification appears in the plan treatment.
- Under the absolute priority rule, 11 U.S.C. § 1129(b)(2)(B), if an impaired class of unsecured creditors does not accept the plan, junior interests (including equity) may not retain property “on account of” their interests unless the unsecured class is paid in full or a legally sufficient basis exists to permit equity’s retention.

## Conclusion

In re Deming Hospitality, LLC held that the bankruptcy court could deny disclosure-statement approval because the proposed Chapter 11 plan was facially unconfirmable: it proposed to pay general unsecured creditors 75% while paying SBA only $25,000 on a roughly $1.5 million unsecured deficiency claim, which amounted to unfair discrimination, and it also allowed equity to retain its interest even though an impaired unsecured class was expected to reject and would not be paid in full, violating the absolute priority rule.


In re Deming Hospitality, LLC, 2013 WL 1397458 (2013)