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UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF ALASKA


In re:  

KAKE TRIBAL CORPORATION,


                                 Debtor. 

                                                                               

Case No. J99-01111-DMD 

 Chapter 11



 

 

MEMORANDUM REGARDING PLAN CONFIRMATION, MOTION TO

COUNT BALLOT AND OBJECTIONS TO CLAIMS

 

                      A hearing on confirmation of the debtor's fourth amended plan was held on November 19, 2001, and a hearing on the debtor's objections to claims was held December 27, 2001. The following parties appeared at the confirmation hearing:

 

AttorneyAppearing For
David Bundy Kake Tribal Corporation
Spencer Sneed Unsecured Creditors' Committee
Fred Odsen Fred Triem1 Footnote

Mike PariseKey Bank
Kent Sullivan (telephonic)Situk Adams
Bud Simpson (telephonic)The Martin Class of Shareholders
Sara Trent (telephonic)State of Alaska, Dept. of Law
Bernd GuetschowThe Hanson Class of Shareholders
Barbara FranklinOffice of the United States Trustee


 

At the hearing on objections to claims, David Bundy, Fred Odsen, Fred Triem and Bud Simpson appeared for their respective clients.

 

                      I have considered the testimony and arguments presented at the two hearings, and taken judicial notice of the papers and pleadings on file not only in this case, but in Adv. No. J99-01111-003-DMD [Bancap No. 00-1012], Kake Tribal Corp. v. Hanson, et al. (In re Kake Tribal Corp.). I have concluded that a further hearing on 7 ABR 199   TOP   confirmation must be held, for the purpose of presenting additional evidence which will allow the court to make a meaningful liquidation analysis as required by 11 U.S.C. § 1129(a)(7)(A)(ii). I have also concluded that Mr. Triem's motion to receive and to count ballot should be denied and that the debtor's objection to claim No. 127, filed by Mr. Triem, is well taken and that claim (as well as claim No. 123, which claim No. 127 amends), should be disallowed. A ruling on the debtor's objection to claim No. 126 will be deferred pending further proceedings.

 

Case Background

 

                      This is the second time that Kake Tribal Corporation (“KTC”) has brought a plan on for confirmation before this court. The first confirmation hearing was held on March 21, 2001. Although KTC had the support of its creditors at the time of this hearing, confirmation of its third amended plan was denied. The major impediment to confirmation was the fact that a proof of claim had not been filed on behalf of the Hanson class of shareholders. 2 Footnote The Hanson class is an impaired class 7 ABR 200   TOP   and is listed as a disputed creditor on the debtor's schedules. Because no claim had been filed, the votes submitted by the Hanson class, although in favor of the plan, could not be counted. There was insufficient evidence presented to the court to make the present value determination needed to ensure cramdown compliance, so confirmation was denied. 3 Footnote

 

                      Another issue which presented itself at the first confirmation hearing was whether the Hanson class was being appropriately represented in the bankruptcy proceeding. The court became concerned because Mr. Triem, who represented the Hanson class in the state court suit, had filed an objection to confirmation of the plan on behalf of the Hanson class. His objection did not mirror the will of the class he represented in state court, 90% of whom had voted in favor of confirmation. 4 Footnote Further, at a status conference held on May 14, 2001, after confirmation of the plan was denied, when the court questioned Mr. Triem which members of the Hanson class he reported to for direction, it became apparent that he had not been conferring with any 7 ABR 201   TOP   member of that class. 5 Footnote To address these concerns, the Office of the United States Trustee solicited membership in, and was able to form, a Hanson Class Shareholders' Committee. This committee selected attorney Bernd Guetschow as bankruptcy counsel to represent them in this proceeding. This selection was approved by the court in August, 2001. 6 Footnote

 

                      Also after confirmation of the third amended plan was denied, the debtor filed a motion to temporarily allow the claim of the Hanson class for voting purposes and determine that the Hanson class had accepted the plan. The motion was granted, insofar as it requested allowance of the Hanson class claim. The Hanson class claim was temporarily allowed, in the aggregate, as a secured claim in the sum of $1,016,930.37, strictly for voting purposes. 7 Footnote The claim allowance was granted prospectively, only, however. Because of significant events that had occurred in this case after the time of the confirmation hearing, retroactive confirmation of the plan was not permitted.

 

                      At the same time that confirmation was denied, the court granted, in part, a motion for relief from stay which Mr. Triem had filed with reference to the 7 ABR 202   TOP   three state court class action suits. 8 Footnote Triem contended that all three state court suits should be allowed to proceed. Two of these actions were at the appellate level; one was still with the Petersburg Superior Court. Relief from stay was granted solely with regard to the Hanson v. Kake Tribal Corporation appeal. 9 Footnote This appeal dealt with the award of litigation costs to Mr. Triem out of a common fund. Relief from stay was not granted as to the other two shareholder suits. The debtor filed a motion for sanctions for Mr. Triem's violation of the stay on June 12, 2001. The court granted the motion and imposed sanctions upon Mr. Triem. 10 Footnote Mr. Triem has appealed this order.

 

 

                      On October 23, 2001, over Mr. Triem's objection, the court approved the debtor's supplemental disclosure statement and scheduled a confirmation hearing on the debtor's fourth amended plan of reorganization. 11 Footnote Because the changes in the amended plan affected just two shareholder classes (the Hanson and Martin shareholder classes), and all other creditors had voted to confirm the prior plan, re-balloting of only the two shareholder classes was required. Additionally, to address Mr. Triem's allegation that Hanson class shareholders were coerced to vote in favor of the 7 ABR 203   TOP   prior plan because their votes were not confidential, an election judge was appointed to count the ballots and arrangements for private balloting were made. The court reviewed and approved two solicitation letters, which were also sent to the voting shareholders. One letter, drafted by the debtor, the Hanson Class Shareholder Committee, and representatives of the Martin class, encouraged a vote in favor of the plan. The other letter, drafted by Mr. Triem as state court counsel for the Hanson class, recommended rejection of the plan. 12 Footnote Both solicitation letters were served on the two voting classes.

 

                      The confirmation hearing on the debtor's fourth amended plan was held on November 19, 2001. Both the Hanson and the Martin classes voted in favor of confirmation. Mr. Triem again filed an objection to confirmation. He also submitted a ballot as class counsel for the Hanson class, in which he claims he is a holder of a Class 14 (Hanson class) claim against the debtor, in the approximate amount of $338,976.69. This claim comprises the 33 1/3% fee the state court awarded to Mr. Triem for his representation of the Hanson class in the state court suit. 13 Footnote Mr. Triem contends he is entitled to vote on confirmation of the debtor's plan. He argues that his 7 ABR 204   TOP   vote should be weighted proportionately to the amount of the Hanson class action judgment in the state court. In addition, Triem asserts the plan does not meet the best interest of creditors test, does not satisfy cramdown requirements, and was not proposed in good faith. Mr. Triem also filed a motion to receive and to count ballot, 14 Footnote which raises substantially the same issues that are found in his opposition to confirmation. Finally, Mr. Triem has filed five proofs of claim in this proceeding. The debtor has objected to four of the five claims he has filed: claims Nos. 124, 125, 126 and 127. A continued hearing on the objection to claim No. 124 has previously been set. Claim No. 125 will be resolved by stipulation of the parties. A ruling on claim No. 126 (which is for the accrued post-petition interest on the Hanson class judgment) will be deferred pending further proceedings in this court. Claim No. 127 (which amends claim No. 123) is for Mr. Triem's 33 1/3% attorney fee award in the Hanson class action suit. Because I have determined Mr. Triem's claim for attorney fees in the Hanson class action is not a claim against the debtor, his claim No. 127 will be disallowed.

  

Mr. Triem's Claim No. 127 will be Disallowed

 

                      A creditor is an “entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor.” 15 Footnote Mr. Triem is a creditor by virtue of his fee award in the Hanson class suit, but his claim is not against Triem was 7 ABR 205 KTC. 16 Footnote   TOP   Mr. Triem was appointed by the state court to represent a class of shareholders who filed a suit against KTC. His claim for fees is a debt of the Hanson class, which is to be paid first out of the top third of any recovery the class receives from the debtor. But, it is the Hanson class that is the judgment creditor and the entity holding a claim against KTC. Mr. Triem is not a member of the Hanson class; he is their state court class action attorney.

 

                      Triem argues that the state court's fee award resulted in a two-way allocation of the Hanson class state court judgment, in effect making him a creditor of the debtor. This contention is inconsistent with the common fund doctrine, upon which his fee is premised.

The state court awarded Triem a 33 1/3% fee from the common fund, consistent with Edwards v. Alaska Pulp Corp. 17 Footnote The distinction between a fee award under Alaska Civil Rule 82 and an award under the common fund doctrine was discussed by the court in Edwards.

 

APC's claim that Rule 82 preempts the common fund doctrine misunderstands the separate purposes served by the two rules. While the common fund doctrine is a fee-spreading mechanism which prevents unjust enrichment of those who derive benefit from the efforts of others, Rule 82 is a fee-shifting tool which provides partial reimbursement of a prevailing party's legal fees. 18 Footnote

 

7 ABR 206   TOP   The common fund doctrine is a fee shifting mechanism only to the extent that it requires all those in a prevailing class to share the fee expense; it does not shift the obligation to pay the fees to the losing party. 19 Footnote In order for Mr. Triem to enforce a portion of his fee award directly against the debtor, he would need to apply to the state court for a Rule 82 fee award against the debtor to “allow partial reimbursement for charges against the [common] fund.” 20 Footnote Triem did not do this before the debtor's petition was filed, and the stay now precludes him from doing so. Mr. Triem's claim No. 127, as well as his claim No. 123 (which is amended by claim No. 127), will be disallowed.

 

Mr. Triem is Not Entitled to a Weighted Vote

 

                      Mr. Triem also argues that he is entitled to vote in proportion to his one-third aliquot of the Martin class action judgment. This position must be rejected. As noted above, Triem is state court counsel for, and a creditor of, the Hanson shareholder class. But he is not a member of the Hanson class and is not entitled to vote with that class on plan confirmation. Nor should this court apply Fed. R. Bankr. P. 7071 and Fed. R. Civ. P. 71 in the manner suggested by Mr. Triem to permit him 7 ABR 207   TOP   to vote on the plan. 21 Footnote To do so would violate due process and effectively disenfranchise the Hanson class members.

 

All class members in a Rule 23(b)(3) action are entitled to due process, including notice. . . . The right to participate, or to opt-out, is an individual one and should not be made by the class representative or the class counsel. plan will comp. . . There is no class action rule, statute, or case that allows a putative class plaintiff or counsel to exercise class rights en masse, either by making a class-wide objection or by attempting to effect a group-wide exclusion from an existing class. Indeed, to do so would infringe on the due process rights of the individual class members, who have the right to intelligently and individually choose whether to continue in a suit as class members. 22 Footnote

  

                      Class proofs of claim are permitted in bankruptcy. 23 Footnote Mr. Triem has filed a proof of claim on behalf of the Hanson class. Although Mr. Triem was appointed class counsel in the state court Hanson class action suit, this appointment “is not tantamount to a blanket consent to any litigation the class counsel may wish to pursue.” 24 Footnote Further, notice of a compromise of a class action must be given to all members of a class. 25 Footnote The confirmation of KTC's fourth amended plan will compro- 7 ABR 208   TOP mise the claims of the Hanson class, and each member of the class was entitled to receive notice of, and vote on, confirmation of the plan. So that each class member would be well informed about the plan, the court authorized a disclosure statement and two solicitation letters to be sent to Hanson class members regarding confirmation, one of which was drafted by Mr. Triem. Secret balloting was also arranged so that the class members would not feel coerced into casting their vote in favor of the plan. In spite of Mr. Triem's recommendation to the contrary, the majority of the Hanson class has voted in favor of KTC's plan, and is willing to compromise their claim under the terms specified in the fourth amended plan. 26 Footnote Their wishes cannot be defeated by Mr. Triem. He is not a member of the Hanson class, and has no right to vote as a member of the class. His efforts to maximize his fee recovery at the expense of the class he represents will be rejected.

 

Best Interests of Creditors Test

 

                      The bankruptcy court can confirm a plan only if all of the conditions specified in 11 U.S.C. § 1129(a) are met. Mr. Triem alleges that the plan fails to meet the best interest of creditors test found in 11 U.S.C. § 1129(a)(7), which provides:

7 ABR 209   TOP  

(7) With respect to each impaired class of claims or interests –

 

(A) each holder of a claim or interest of such class –

 

(i)has accepted the plan; or

 

(ii)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; . . .

 

The Hanson class is an impaired class. Although a majority of its voting members have accepted the plan, the assurances provided by § 1129(a)(7) are individual to each member of the class. 27 Footnote Absent unanimous acceptance of the plan by all class members, the best interest of creditors test contained in § 1129(a)(7)(A)(ii) must be satisfied if this plan is to be confirmed.

 

                      Triem contends that, upon liquidation, the Hanson class judgment would be promptly paid in full, including accrued post-judgment interest at the legal rate of 10.5%, because the Hanson class's judicial lien encumbers the $5 million KTC received from the Land Exchange Fund. The debtor's plan, on the other hand, will only pay the Hanson class 6.5% interest on its claim, over an extended period.

 

                      The liquidation analysis contained in the debtor's second amended disclosure statement does not resolve this issue, and little testimony on the subject was submitted at the confirmation hearing. The court cannot determine whether the 7 ABR 210   TOP   plan satisfies the requirements of § 1129(a)(7)(A)(ii) based on the present record. There are several issues which need to be substantively addressed before the court can make a meaningful liquidation analysis, including the validity, priority and extent of the Hanson class judicial lien, the extent to which the Hanson class judicial lien encumbers land which is not exempt from execution by 43 U.S.C. § 1636(d), and whether the Hanson class judicial lien is avoidable as a preference or should be subordinated to the claims of nonpriority general unsecured creditors on the basis that the claim represents an equity interest. All of the other conditions specified in 11 U.S.C. § 1129(a) appear to have been satisfied. The debtor's final hurdle to confirmation is the liquidation analysis required by § 1129(a)(7)(A)(ii), and a continued hearing will be conducted solely for this purpose.

 

Other Objections

 

                      Mr. Triem has raised several other objections to confirmation. While some of his objections are germaine to issues that can only be resolved in conjunction with the continued confirmation hearing, the following objections will be overruled at this time. First, he argues that the plan does not satisfy the cramdown requirements of 11 U.S.C. § 1129(b). Section § 1129(b) requires the court to apply the cramdown criteria only if the provisions of § 1129(a)(8) are not met. Here, the requirements of § 1129(a)(8) have been satisfied. All classes of claims have accepted the plan. Accordingly, the cramdown arguments raised by Mr. Triem are irrelevant.

 

                        7 ABR 211   TOP   Mr. Triem alleges that the plan is not proposed in good faith for several different reasons, some of which are simply restatements of prior arguments he has made. He maintains that his 33 1/3% fee award entitles him to vote as though he were a member of the Hanson class. As noted earlier, Triem is simply a creditor of that shareholder class and does not assume their voting rights. Next, Triem maintains that the debtor's failure to provide for the payment of the Hanson class secured claim ahead of other unsecured claims, as well as claims of the debtor's professionals, constitutes bad faith. Triem's position is contra to the provisions of 11 U.S.C. § 1129(a)(9)(A), which require administrative claims to be paid in full on the effective date of the plan. Because the Bankruptcy Code specifically recognizes the need for full payment of administrative expenses, including professional fees, upon confirmation, it is not bad faith to so provide in a plan. 28 Footnote Finally, Triem argues that the debtor should pursue corporate claims against its directors and professionals and disallow the claims of the other shareholder class (the Martin class). However, a debtor has a right to propose an end to litigation and a compromise of the claims of shareholder classes. One of the core purposes of a chapter 11 reorganization is to provide a forum for the negotiation and adjustment of debtor-creditor and debtor-shareholder relationships. Just because Mr. Triem disagrees with the Hanson class's treatment does not mean that the debtor has presented a bad faith plan. Triem's bad faith allegations are 7 ABR 212   TOP   without merit and his objections to confirmation based upon bad faith will also be overruled.

 

Conclusion

 

                       A continued hearing on confirmation of the debtor's fourth amended plan must be held for the purpose of presenting additional evidence which will allow the court to make a meaningful liquidation analysis as required by 11 U.S.C. § 1129(a)(7)(A)(ii). All other confirmation issues are resolved in favor of the debtor. Mr. Triem's motion to receive and to count ballot will be denied. The debtor's objection to claim No. 127, filed by Mr. Triem, is sustained. A ruling on the debtor's objection to claim No. 126 is deferred pending further proceedings. Orders consistent with this memorandum shall be entered.

 

                      DATED: January11, 2002.

 

                                                                             BY THE COURT

 

 

 

                                                                             DONALD MacDONALD IV

                                                                             United States Bankruptcy Judge

 

 

N o t e s:

1. Mr. Triem also attended the hearing, telephonically.


2. Ongoing shareholder litigation, coupled with other events which are discussed more fully in KTC's second amended and supplemental disclosure statement( see Docket No. 376 , filed Feb. 5, 2001, and Docket No. 556, filed October 10, 2001) , precipitated KTC's bankruptcy filing. Attorney Fred Triem has been representing various classes of KTC's shareholders in these class action suits, all of which were brought against the debtor in Petersburg Superior Court for purported illegal dividend distributions.

The first class action suit, Hanson v. Kake Tribal Corporation, Case No. 1PE-90-072 CI, involved roughly 20% of the shareholders of KTC. A judgment was entered against KTC by the Petersburg Superior Court on June 19, 1998, for $2,893,244.00. The outstanding balance due on this judgment as of the date KTC filed bankruptcy was just over $1 million. The prevailing shareholder class is the “Hanson class” in this bankruptcy proceeding. The state court awarded Mr. Triem 33 1/3% of the judgment as his attorney's fee, under the “ common fund doctrine,” for successfully representing this class.


The second class action suit, Nauska v. Kake Tribal Corporation, Case No. 1PE-95-001 CI, involved approximately 73% of Kake's shareholders. Mr. Triem represented one of the initial plaintiffs who sought certification as class representative in this proceeding. However, the state court certified another individual, Harold P. Martin, as class representative, and approved a settlement proposed by Mr. Martin. A final judgment and order approving settlement and dismissing the case, with prejudice, was entered on January 20, 1999. Mr. Triem appealed the settlement and dismissal, challenging Mr. Martin's standing as the class representative in this suit. That appeal was pending at the time KTC's petition was filed. A claim has been filed on behalf of the Martin class for $7,292,619.00 in this bankruptcy proceeding.


The third suit filed prepetition by Mr. Triem, Tagaban v. Jackson, et al., Case No. 1PE-98-022 CI, is a direct and derivative action brought by certain individuals in their capacities as both shareholders and judgment creditors of KTC. KTC is named as a “nominal defendant.” The other defendants are officers and directors of KTC. The plaintiffs seek damages for dividends that KTC paid between 1993 and 1997, which they contend were in violation of state law and rendered the corporation insolvent. At the time KTC filed its bankruptcy petition, a shareholder class had not yet been certified, nor had dispositive motions been filed.


3. See Order Denying Confirmation of Plan, entered Apr. 27, 2001 [Docket No. 437].


4. See Amended Summary of Ballots, filed April 24, 2001 [Docket No. 434].


5. Nor did Mr. Triem comply with the requirements of Fed. R. Bankr. P. 2019.


6. See Order Allowing Employment of Counsel [Bernd Guetschow], entered Aug. 27, 2001 [Docket No. 538].


7. See Order Granting Motion for Order Temporarily Allowing the Claims of the Hanson Class Creditors and Denying Motion to Determine that Hanson Class has Accepted Plan, Without Prejudice, entered Aug. 27, 2001 [Docket No. 522].


8. See Order Granting, in Part, and Denying, in Part, Motion for Relief From Stay, and Continuing Remainder of Motion Pending Further Proceedings [KTC Shareholders], entered April 27, 2001 [Docket No.436].


9. Case No. 1PE-90-072-CI [S-09299].


10. See Order Granting, in Part, and Denying, in Part, Joint Motion for Sanctions [Docket No. 519] and Memorandum Regarding Motions for Sanctions [Docket No. 520], both entered August 6, 2001; Order Imposing Sanctions, entered October 15, 2001 [Docket No. 558]; and Order Granting Motion for Reconsideration and Imposing Additional Sanctions, entered October 26, 2001 [Docket No. 576].


11. See Order entered October 23, 2001 [Docket No. 566].


12. See Proceeding Memorandum filed October 24, 2001 [Docket No. 573] (hearing in which the debtor's solicitation letter was approved); and Order Approving Statement of Alaska State Court Class Action Counsel To Reject KTC's Proposed Plan, entered October 29, 2001 [Docket No. 582].


13. Specifically, the state court awarded Mr. Triem “fees from the common fund (judgment plus costs and fee award) in the amount of 33 and 1/3%. Class counsel should disburse amounts in excess of 1/3rd of the gross award. His arrangement with co-counsel [Prof. Branson] is not the Court's affair and must be resolved within the aforementioned 1/3rd award.” See State Court Fee Order (filed Feb. 9, 1999 in state court proceeding), attached to Class Counsel's Opposition to Debtor's Proposed Plan, filed Nov. 14, 2001 [Docket No. 604].


14. Docket No. 625, filed November 19, 2001.


15.  11 U.S.C. § 101(10)(A).


16. My ruling with regard to claim No. 127 has no bearing upon Mr. Triem's claim No. 124, which is for his reasonable hourly attorney's fees incurred in the second class action suit, Nauska v. Kake Tribal Corporation, Case No. 1PE-95-001 CI (which suit resulted in the Martin shareholder class claim).


17. 920 P.2d 751 (Alaska 1996).


18. Edwards, 920 P.2d at 755.


19. Boeing Co. v. Van Gemert, 444 U.S. 472, 478-482 (1980) [emphasis added].


20. Edwards, 920 P.2d at 756, n.6; see also Muni. of Anchorage v. Gentile, 922 P.2d 248, 263 (Alaska 1996).


21. Fed. R. Civ. P. 71 provides that “[w]hen an order is made in favor of a person who is not a party to the action, that person may enforce obedience to the order by the same process as if a party; and, when obedience to an order may be lawfully enforced against a person who is not a party, that person is liable to the same process for enforcing obedience to the order as if a party.”


22. Hanlon v. Chrysler Corp., 150 F.3d 1011, 1024 (9th Cir. 1998) [citations omitted].


23. Birting Fisheries, Inc. v. Lane (In re Birting Fisheries, Inc.), 92 F.3d 939 (9th Cir. 1996).


24. Reid v. White Motor Corp., 886 F.2d 1462, 1471-72 (6th Cir. 1989); see also Moore v. Ross (In re Ross), 37 B.R. 656, 658 (B.A.P. 9th Cir. 1984).


25. Fed. R. Civ. P. 23(e); Fed. R. Bank. P. 7023.


26. 36 Hanson class ballots, representing 2,752 shares of stock and $289,097.00 of the Hanson claim, voted in favor of the fourth amended plan. 4 Hanson class ballots, representing 396 shares and $44,048.00 of the Hanson claim, voted against the fourth amended plan. The debtor failed to mail all Hanson class ballots and accompanying documentation to its members in time for all Hanson class votes to be counted. However, even if all the uncounted, tardy ballots had voted against the plan, the debtor still has sufficient favorable votes to satisfy the voting requirements of 11 U.S.C. § 1129(a)(8)(A).


27. 7 Collier on Bankruptcy ¶ 1129.03[7][b] (15th ed. revised 2001).


28. The Code also recognizes the priority of administrative expenses (including chapter 11 administrative expenses) in chapter 7 cases. 11 U.S.C. § 726(a)(1), (b).