I. Introduction

Confirmation of the First Amended Joint Plan of these jointly administered debtors and Vicki Higashi's motion to dismiss duly came before the court for hearing on April 11, 1996. These matters constitute core proceedings under 28 U.S.C. § 157(b)(2)(A) and (L). This court has jurisdiction in accordance with 28 U.S.C. § 1334 and the district court's order of reference. Confirmation of the plan will be denied and the       4 ABR 359  motion to dismiss will also be denied.

     II. Background

The debtors, Nome Commercial Company (NCC) and Wayne and Carol Brown filed for chapter 11 relief after Vicki Higashi obtained an adverse tort judgment against them for $1.46 million in state superior court. National Bank of Alaska (NBA) also obtained a judgment against the debtors for $86,000. The NBA judgment was subsequently vacated by the trial court. The stay has been terminated and appeals to the Alaska Supreme Court are pending in both cases. Higashi filed two motions to dismiss the debtors' chapter 11 petitions early in the chapter 11 case. They were denied. She filed a third motion to dismiss following the debtors' failure to confirm their initial plan.

The debtors' first amended joint plan of reorganization provides for the continuance of the Higashi and NBA litigation and the liquidation of the Browns' personal assets for payment of the disputed claims as ultimately allowed. General unsecured claims of approximately $72,000 are paid in full with interest over a 24-month period. The disputed claims of Vicky Higashi and NBA, if sustained by the supreme court, will be paid their pro-rata share of $1,000,000 in proceeds from the liquidation of the Browns' personal real and personal property within two years of plan confirmation. The balance of these claims will be paid upon liquidation of the NCC and its commercial real estate, approximately three and one-half years after plan confirmation. Most creditors voting on the plan approved it, with the exception of Vicki Higashi and NBA.

Vicki Higashi has filed numerous objections to confirmation of the first amended plan as well as her third motion to dismiss. NBA has       4 ABR 360  also filed objections to confirmation. In addition to reviewing the objections of Ms. Higashi and NBA, the court retains an independent duty to review the plan for compliance with the confirmation standards of 11 U.S.C. § 1129. In re Chandler Air Park Joint Venture I, 163 B.R. 566 (Bankr. D. Ariz. 1992); In re Mid-Pacific Airlines, Inc., 110 B.R. 489 (Bankr. D. Hawaii 1990); In re Valley Park Group, Inc., 96 B.R. 16 (Bankr. N.D.N.Y. 1989). The debtors have the burden of proving that their plan complies with 11 U.S.C. § 1129 by a preponderance of the evidence. In re Arnold and Baker Farms, 177 B.R. 648 (9th Cir. BAP 1994).

     III. §1129(a)(1)

Section 1129(a)(1) requires that the plan comply with the applicable provisions of Title 11. The mandatory and optional contents of a chapter 11 plan are set forth in 11 U.S.C. § 1123. Section 1123(a)(1) requires that a plan designate classes of claims and classes of interests. These classes are subject to the classification requirements of § 1122 of Title 11. Here, the debtors' joint plan designates nine classes of creditor claims. The plan fails to designate any classes of interests, however. NCC has equity interests in the form of common stock. The Browns also have interests in property independent of NCC as sole proprietors or partners. The plan is defective because it fails to designate classes of interests as required by § 1123.

Section 1122 of Title 11 allows a claim to be placed in a class only if the claim is substantially similar to other claims of that class. Ordinarily, "substantially similar" means the claims are similar in legal character. Unsecured claims are ordinarily in a class with       4 ABR 361  other unsecured claims. Here, however, the debtors have placed unsecured trade claims in class U-2, while placing the Higashi and NBA unsecured claims in separate classes, CB-1 and CB-2, respectively. Class U-2 creditors will receive payment in full, plus interest, over a 24-month period. Class CB-1 creditor Higashi and class CB-2 creditor NBA will receive a pro-rata share of $1,000,000 if their claims are allowed by the Alaska Supreme Court. That payment would be made within two years of plan confirmation. Higashi and NBA will have to wait for the liquidation of NCC to receive the balance of their claims plus interest. This will occur approximately three and one-half years after plan confirmation.

The differing treatment for the Higashi and NBA claims appears appropriate under 1122(a). In In re Johnston, 21 F.3d 323 (9th Cir. 1994), the bankruptcy court permitted separate classification of an unsecured claim because the affected creditor, Steelcase, was partially secured, embroiled in litigation with the debtor, and had the possibility that it could be paid in full ahead of all other unsecured creditors if its claim was allowed. In the case at bar, due to defects in pre-petition execution procedures initiated by Higashi, her claim is not partially secured.⁽¹⁾ Nor is the NBA claim partially secured. Both claims are actively disputed, however. The debtors have submitted their initial brief in the Higashi appeal, raising a number of substantial allegations of error by the superior court. The NBA appeal is also in progress. Additionally, if the claims are finally determined by the Alaska Supreme Court for an amount totaling less than $1 million, there is a possibility they will be paid in a shorter amount of time than class U-2 creditors.       4 ABR 362  I conclude that the disputed claims of Higashi and NBA are not substantially similar to the claims of other unsecured creditors, and may be classified separately. However, although the plan provides the same treatment for payment of the NBA claim as the Higashi claim, NBA's claim was placed in a separate class, class CB-2. There is no apparent reason for placing these two claims in separate classes, as they are substantially similar. In that minor respect, the plan violates § 1122(a).

The plan does not comply with other provisions of the bankruptcy code. The plan provides that the Browns will receive a homestead exemption on their Nome commercial property in the sum of $62,100. The Browns have never listed the Nome property as exempt in their schedules. They listed a home in Washington as exempt property. Under 11 U.S.C. § 522(l), the debtors are required to list property claimed exempt in their exemption schedules. Because the debtors have failed to exempt their Nome commercial property, the plan violates § 522.⁽²⁾

11 U.S.C. § 1123(a)(6) provides:

(a) Notwithstanding any otherwise applicable nonbankruptcy law, a plan shall--

(6) provide for the inclusion in the charter of the debtor, if the debtor is a corporation, or of any corporation referred to in paragraph (5)(B) or (5)(C) of this subsection, 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
      4 ABR 363  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. . . .

This requirement is mandatory. NCC is a corporation. Nothing in the joint plan provides for the inclusion of such a provision in the articles of incorporation or charter of the company. The plan violates 11 U.S.C. §§ 1123(a)(6) and 1129(a)(l).

     IV. Section 1129(a)(3) and Motion to Dismiss

The debtors, as plan proponents, have complied with the applicable provisions of Title 11 as required by § 1129(a)(2). The next major issue involves compliance with 11 U.S.C. § 1129(a)(3), the good faith requirement. The court must find that the plan "has been proposed in good faith and not by any means forbidden by law." Additionally, Higashi has moved to dismiss the petition for a third time, alleging bad faith by the debtors.

The test for determining the good faith of a plan is to ascertain whether the plan will achieve a result consistent with the objectives and purposes of the Bankruptcy Code. Matter of Madison Hotel Associates, 749 F.2d 410, 425 (7th Cir. 1984); In re Mann Farms, Inc., 917 F.2d 1210, 1214 (9th Cir. 1990); In re Cory, 892 F.2d 829, 835 (9th Cir. 1989), cert. denied., 498 U.S. 815 (1990). Here, Higashi alleges that the current chapter 11 plan is simply a litigation tactic by solvent debtors attempting to avoid the cost of a supersedeas bond. Confirmation of the plan would not be consistent with the objectives of the Bankruptcy Code, she contends.

Two lines of case law have emerged on the issue of bad faith use of a chapter 11 petition as an alternative to posting a supersedeas bond. Higashi prefers a line of cases dismissing Chapter 11 cases on bad faith grounds under such circumstances. In re Wally Findlay Galleries (New York), Inc., 36 B.R. 849 (Bankr. S.D.N.Y. 1984); In re Smith, 58 B.R. 448 (Bankr. W.D. Ky. 1986); In re Karum Group, Inc., 66 B.R. 436 (Bankr. W.D. Wash. 1986); In re Business Information Co., Inc., 81 B.R. 382 (Bankr. W.D. Pa. 1988); In re Nahas, 95 B.R. 387 (Bankr. W. D. Pa. 1989). A number of other courts have not dismissed chapter 11 petitions       4 ABR 364  utilized as alternatives to a supersedeas bond. In re Alton Telegraph Printing Co., 14 B.R. 238 (Bankr. S.D. Ill. 1981); In re McLaury, 25 B.R. 30 (Bankr. N.D. Texas 1982); In re Corey, 46 B.R. 31 (Bankr. D. Hawaii 1984); In re N.R. Guaranteed Retirement, Inc., 112 B.R. 263 (Bankr. N.D. Ill. 1990), aff'd, 119 B.R. 149 (N.D. Ill. 1990); In re Askinuk Corporation, 3 A.B.R. 251 (Bankr. D. Alaska 1993). These two lines of cases can generally be reconciled. In re Holm, 75 B.R. 86, 87 (Bankr. N.D. Cal. 1987). In the cases denying dismissal motions, the judgment was large and if not reversed on appeal, would force the liquidation of the business. In those cases dismissing the petition, with the exception of Karum Group and Nahas, the judgments were smaller, and the debtor had the apparent ability to satisfy the judgments and stay in business. Karum Group dismissed a petition when dismissal would result in the liquidation of the debtor's business due to the inability of the debtor to satisfy the judgment. In Nahas, there was no business to protect as the debtors were simply wage earners.

Here, Higashi's judgment is so large, over $1.46 million, the debtors faced the demise of their businesses through her executions. The debtors also faced execution on NBA's $86,000 judgment. While the three debtors have substantial net worth, as much as $2.4 million, the bulk of their wealth, $1.4 million, is tied to the business and real estate of Nome Commercial Company. The debtors do have access to about $420,000 in non-business assets through their Merrill Lynch annuity and life insurance. Additionally, their Washington residence is worth about $400,000. These non-business assets, however, are insufficient to satisfy the Higashi and NBA combined judgments of $1.546 million and prevent dismemberment of NCC. Moreover, Mr. Brown's uncontradicted testimony was that the bonding company would not accept anything other than cash as collateral for a supersedeas bond. Clearly, under the circumstances, the Chapter 11 filings prevented severe disruption of the debtors' businesses. The filings were warranted. I regard Karum Group as an anomaly and will not follow it here. Nahas is distinguishable because the debtors had no active business to protect.

The plan calls for the liquidation of most of the debtors' non-business assets during the pendency of the appeals. Upon final resolution of the dispute, the judgments will be paid in full together
      4 ABR 365  with interest. If the judgments are allowed, the debtors' business will be liquidated and Ms. Higashi and NBA will be paid in full about four years after plan confirmation. 11 U.S.C. § 1123(a)(5)(D) specifically allows liquidating plans. I find that the plan is consistent with the purposes of the Bankruptcy Code. It is not simply a litigation device: it represents a legitimate attempt to deal with the Higashi claim in a manner consistent with the Bankruptcy Code, should the claim be sustained. The requirements of 11 U.S.C. § 1129(a)(3) have been met.

In her reply brief Higashi reverses her prior arguments for dismissal and contends "[I]t is not our intention to dismiss the corporate Chapter 11 petition or interfere with the operation of the corporation." Rather, the court should dismiss the Brown's Chapter 11 and "[W]ith exercise of its powers in equity and its ancillary powers direct the Browns to post a bond of their personal assets in state court and can direct acceptance thereof by Higashi and NBA as part of the order."

Higashi's alternative position is untenable for a number of reasons. First, it is based upon language taken from In re Holm, 75 B.R. at 87, taken out of context. In Holm, the debtor had unencumbered assets of $1.274 million and faced a state court judgment of just $230,000. Holm filed for chapter 11 even though he had the ability to post a bond. While the court found that use of chapter 11 was inappropriate under those circumstances, it did recognize that use of chapter 11 was appropriate when execution threatened to destroy a debtor's business pending appeal. Here, there has been uncontradicted evidence that the Browns lack the ability to post a supersedeas bond and faced the demise of their business prior to filing. Further, this court has no jurisdiction to force Higashi or anyone else to accept a property bond in state court. Finally, the parties have already stipulated to relief from stay. In Holm, the court imposed the state court bond requirement as a condition for obtaining relief from stay to prosecute an appeal.

Higashi's alternative position is baffling. Reading between the lines, it indicates Higashi is now amenable to a stay of state court execution proceedings if the Browns post their personal assets as security for the judgment. This contradicts Higashi's previous stance. If Higashi is sincere in this position, and not simply posturing, she should immediately present a detailed stipulation for entry of a complete       4 ABR 366  stay in the state court litigation as to all three debtors, with provision for appropriate security and a proposed order. Absent such a stipulation, her argument is simply empty rhetoric.

     V. Section 1129(a)(7), (8) and (9)

The requirements of 11 U.S.C. § 1129(a)(4), (5), and (6) are satisfied under the proposed plan. Section 1129(a)(7) contains the "best interests of creditors" test. Under this test, the results of liquidation under Chapter 7 are compared with the Chapter 11 plan results. If the plan does not provide a present value at least equal to that of a liquidation, it cannot be confirmed. Here, the present value paid to Higashi under the plan equals the amount she would receive in a liquidation. The requirements of § 1129(a)(7) are met.⁽³⁾

Two classes have rejected the plan: CB-1 (Higashi) and CB-2 (NBA). As such, the requirements of § 1129(a)(8) have not been met and the conditions of cramdown under 1129(b) apply. They will be discussed in detail in Section VII, beginning at page 369 of this memorandum.

Section 1129(a)(9) requires that certain claimants with priority under § 507 of the code receive payment in full upon confirmation or, if acceptable to the priority claimant, deferred payments plus interest. Here, the debtors' primary administrative creditor, its attorneys, have agreed to accept deferred cash payments. The Internal Revenue Service has filed a priority claim against the Browns for $9,723. The Browns will pay the claim over two years with interest. Such treatment is allowable under § 1129(a)(9)(C).

     VI. Section 1129(a)(10) and (11)

Section 1129(a)(10) requires that at least one class of impaired claims accepts the plan, exclusive of insiders. Here five impaired classes of claims have accepted the plan. Compliance with §
      4 ABR 367  1129(a)(10) is not a problem.

Section 1129(a)(11) requires feasibility of the plan for confirmation. It provides:

(a) The court shall confirm a plan only if all of the following requirements are met:

(11) Confirmation 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 plan.

This means that "visionary schemes" are not to be confirmed when the debtor cannot deliver on its promises. In re Haardt, 65 B.R. 697 (Bankr. E.D.Pa. 1986). The debtor must propose a plan that has a reasonable prospect of success. In re Guilford Telecasters, Inc., 128 B.R. 622 (Bankr. M.D.N.C. 1991).

Higashi claims that the plan is not feasible. "The plan submitted does not provide for sufficient payment of the judgment or the interest accruing for the next few years while the judgment was (sic) on appeal," she argues. This raises a series of questions relating to interest. First, are Higashi and the other unsecured creditors entitled to post-petition, pre-confirmation interest? According to the financial statements for the month of February 1996, as well as the debtors' appraisals, the Browns' estate is solvent. Here is a rough financial statement for the Browns as of February 29, 1996:

Assets
Lathrop home	$ 120,000
Snohomish home	400,000
Naknek	37,800
Cessna	48,000
Timeshare	47,000
Auto	15,000
Amway	5,600
Merrill Lynch	433,000
Nome Commercial Co.	810,000
Real estate	635,000
Total Assets	$2,551,400
Liabilities
Lathrop home	$ 73,042
4 ABR 368
Naknek	15,760
Nome Commercial Co.         current liabilities	304,000
Phillips	90,219
Chapter 11 Liabilities	1,635,914
Total Liabilities	$2,118,935
NET WORTH:	$ 442,935

While NCC is technically insolvent due to the Higashi judgment, the Browns are solvent. If the joint plan of reorganization is to pass the cramdown criteria of being fair and equitable, unsecured claims must be paid in full including post-petition interest before the Browns receive any payments as equity holders. Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510, 527 (1941); Debentureholders Protective Committee of Continental Inv. Corp., 679 F.2d 264 (1st Cir. 1982), cert. denied, 459 U.S. 894 (1982). Here, the plan is deficient. While it states that a liquidating trustee could "move for authority for payment" of such interest, by its terms payment of interest to creditors is not mandatory, and the Browns could end up with liquidation proceeds prior to payment of interest. As such, the plan violates the cramdown requirements of 11 U.S.C. § 1129(b)(1).

Assuming the debtors amended their plan to provide for payment of such interest, would the plan be feasible? Under the current plan, the estate would have $366,525 in excess proceeds following payment of all claims. Unsecured claims of approximately $1.6 million would be entitled to interest from March of 1995 through the effective date of the plan, July of 1996. Using a rate of 9.25%, interest of about $200,000 would accrue during the post-petition, pre-confirmation period. Such a plan appears feasible, given the $366,525 in excess proceeds estimated at the end of the liquidation process, subject to three significant caveats.

The excess proceeds are contingent upon receipt of interest at 5% per annum on a large portion of the liquidation funds. Mr. Brown was very vague when cross-examined about their interest rate and the nature of the liquidation fund account, i.e., who controls the money. Further evidence will be necessary in order for this court to find feasibility. Similarly, very little evidence was presented regarding the appropriate cramdown interest rate for unsecured creditors. Again, more evidence       4 ABR 369  will be necessary. Finally, my solvency determination rests on the $810,000 valuation of Nome Commercial Company made by Kenneth J. Gain as of June 30, 1995. While Higashi stipulated to this value for purposes of confirmation, there is a real question as to whether the appraisal remains accurate. The appraisal was based on a projection of $1,522,587 in annual sales. Recent developments indicate that number may be high. NCC's sales for 1995 were $1,416,170, 7% less than projected and less than any one-year period during this decade. Sales for December 1995 were down 20% from the prior year. Similarly, NCC's sales for January and February of 1996 are down 16% and 25%, respectively, from 1995.⁽⁴⁾ My analysis indicates that if this trend continues, the appraised value of NCC may be substantially overstated. This in turn could effect the solvency issue for purposes of determining allowance of post-petition, pre-confirmation interest, as well as the overall feasibility of the plan.

     VII. Section 1129(b)(2)(B)

Section 1129(b)(2)(B) deals with the cramdown of unsecured claims. It provides:

For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:

(B) With respect to a class of unsecured claims--


(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or

(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property.

The Browns are retaining their jobs and income prior to the sale of NCC.       4 ABR 370  This means that a cramdown can proceed only if the objecting class of creditors is paid full present value. In re Johnston, 21 F.3d at 329. The court must make a present value analysis to insure cramdown compliance. United Sav. Ass'n v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 377 (1988); In re Camino Real Landscape Maintenance Contractors, Inc., 818 F.2d 1503, 1505 (9th Cir. 1987). Here the plan provides for interest on the unsecured claims of Higashi and NBA at the telerate data systems prime rate plus 1%. The plan also provides the following:

E. INTEREST RATE ADJUSTMENT

Interest rates to be paid creditors under the plan, except S-1, SB-1, SB-2, and SB-3, shall be adjusted annually, on the anniversary date of the plan, to reflect changes in the applicable base or reference rate between the Effective Date and the anniversary date upon which such adjustment is to become effective; the base prime or reference rate on such anniversary date shall determine the rate of interest to be paid, allowed, or credited to creditors under the terms of the Plan until the next anniversary date. Interest rate adjustments shall be subject to the following restrictions: (1) interest rate shall not be less than the applicable base rate in effect on the Effective Date; (2) interest rate adjustments shall not exceed an increase of one and one-half (1½) percentage points in any one (1) year; and (3) interest shall not exceed an amount equal to the applicable base or prime rate in effect on the Effective Date plus four (4) points. In the event the Telerate Data System Prime Rate is discontinued or no longer published, the applicable interest rate shall be the Bank of America N.T. & S.A. Reference Rate, and if such rate is discontinued or no longer published, a rate selected by Debtors that is the reasonable equivalent of such rates.

This may be a perfectly acceptable manner for determining an appropriate interest rate. Prior to reaching that conclusion, however, the court must have expert opinion testimony justifying the rate. Mr. Brown's testimony in that regard was inadequate. Additionally, the fact that this rate was approved in another chapter 11 case is meaningless, without the same expert testimony in support of the present value analysis as was presented in the other case. Finally, the debtor must tie his cramdown rate to paragraph VII of the plan regarding default.       4 ABR 371  This provision allows the debtor to avoid default under the plan even when plan payments are not made in full. It was taken from a plan that called for continued operations and not liquidation. That provision does not apply to a liquidating case and needlessly complicates the present value analysis.

     VIII. Conclusion

The debtors' first amended joint plan of reorganization does not meet the confirmation requirements of § 1129 of the Code.

Confirmation of the plan will be denied. Vicki Higashi's motion to dismiss is not well taken. It will also be denied.

DATED: May 29, 1996.

BY THE COURT
DONALD MacDONALD IV
United States Bankruptcy Judge

1.       4 ABR 361  See order dated October 25, 1995, Adversary No. A95-00200-001-DMD, denying secured status to Higashi's execution lien on debtors' Cessna.

2.       4 ABR 362  Assuming the debtors file an amended schedule, creditors would have a thirty day period to object to the amended exemptions under Rule 4003(b), Federal Rules of Bankruptcy Procedure. Objections could be based upon lack of a domicile in Alaska at the time of the filing of the petition or upon the debtors' use of the premises as a business facility. See 40 AmJur 2d Homesteads, § 78; In re Rose, 3 A.B.R. 190 (1993).

3.       4 ABR 366  Higashi has filed a proof of claim for $1,319,365 in the NCC and Brown cases. The present value of the Chapter 11 payments to Higashi are about $1,424,000. This figure apparently contains some of the Rule 82 attorney's fees awarded to Higashi after the Chapter 11 petitions were filed, but not all. Higashi states that the total judgment is for $1,460,450.55. Higashi should file amended claims indicating the amount of her revised claims.

4.       4 ABR 369  Sales for March and April of 1996 are down 13% and 12% from the prior year. NCC has experienced a decline of 16% in overall sales December 1995-April 1996 versus the same period for the prior year.