## Facts

- Red Mountain Machinery Company, an equipment-rental business, financed operations through a revolving credit facility secured by its equipment and other assets.
- After an economic downturn, Red Mountain’s revenue declined, leading to covenant and other non-monetary defaults and subsequent forbearance and workout negotiations with its secured lender, Comerica Bank.
- Red Mountain alleged misconduct during the workout process and later filed an adversary proceeding seeking equitable subordination, disallowance, or offset of Comerica’s claims.
- Red Mountain filed Chapter 11 after Comerica declined to approve payment of weekly operating expenses, including payroll.
- At filing, Red Mountain owed Comerica roughly $33 million; later proceedings fixed Comerica’s secured claim at approximately $15.9 million and its unsecured deficiency claim at approximately $9.8 million.
- The First Amended Plan paid Comerica’s secured claim over time after Comerica made a § 1111(b) election and separately classified Comerica’s unsecured deficiency claim from other general unsecured claims.
- The plan allowed the existing shareholders (the Cowlings) to retain 100% equity in exchange for new contributions consisting of a cash payment of about $480,000 and a $1,250,000 loan.
- Comerica objected and voted against confirmation, requiring the debtor to seek confirmation through cramdown.

## Issues

1. Whether separately classifying Comerica’s unsecured deficiency claim from other unsecured claims violated § 1122 as impermissible vote manipulation.
2. Whether allowing existing equity holders to retain ownership while unsecured creditors were not paid in full violated the absolute priority rule, and if so whether the plan satisfied the new value doctrine.
3. Whether the plan was feasible under § 1129(a)(11).
4. Whether the plan satisfied § 1129(b) by being fair and equitable and not unfairly discriminating against Comerica.

## Decision

- The court overruled Comerica’s objections and confirmed the plan over Comerica’s dissent under § 1129(b).
- The court held that separate classification of Comerica’s deficiency claim was permissible because the claim’s legal and practical posture differed from other unsecured claims, including the existence of shareholder guarantees and pending litigation seeking to subordinate or offset the claim.
- The court held that the shareholders’ retention of equity did not bar confirmation because the plan satisfied the Ninth Circuit’s new value requirements through substantial, necessary contributions in money or money’s worth reasonably related to the interest received.
- The court found the plan feasible based on evidence and projections showing the reorganized debtor could operate and service its obligations without a likely need for further reorganization or liquidation.
- The court concluded the plan met cramdown requirements as fair and equitable and without unfair discrimination.

## Legal Principles

- Separate classification of unsecured claims is permissible when supported by legitimate business or legal reasons reflecting materially different rights or risks; classification cannot be used solely to manufacture an accepting impaired class.
- Under the absolute priority rule, equity holders generally may not retain interests over the objection of impaired unsecured creditors unless the plan complies with recognized new value requirements.
- The new value doctrine requires a contribution that is (1) in money or money’s worth, (2) substantial, (3) necessary to the reorganization, and (4) reasonably equivalent to the interest received.
- Feasibility under § 1129(a)(11) requires a showing that confirmation is not likely to be followed by liquidation or further reorganization and that the plan has a reasonable probability of success.
- For cramdown under § 1129(b), the plan must be fair and equitable with respect to the dissenting class and must not unfairly discriminate.

## Conclusion

The bankruptcy court confirmed the debtor’s Chapter 11 plan over the secured lender’s objections, holding that separate classification of the lender’s unsecured deficiency claim was justified by distinct legal attributes and pending litigation, that the shareholders’ retention of equity was permitted by a qualifying new value contribution, and that the plan was feasible and satisfied § 1129(b) cramdown standards.


In re Red Mountain Machinery Co., 448 B.R. 1 (Bankr. D. Ariz. 2011)