1. PROCEEDINGS ON JUNE 2, 1997- A hearing was held on June 2, 1997. At it the court considered:

(a) the debtor's motion to sell the residence of Robin Dodson and James Dodson (the debtor);

(b) cross-motions filed by Robin and James, each seeking some authority to exercise an option to purchase the other party's 25% interest in Denali Group Companies (DGC); and

(c) the decision regarding the confirmation of the plan as a result of a hearing held some months before.

The cross-motions regarding the option to purchase DGC shares arise from the Memorandum Decision and Order (the MDO) of The Honorable Mary Greene, dated September 11, 1995, in the divorce action between the Dodsons in the Superior Court in Fairbanks, Case No. 4FA-93-2693-Civil. Judge Greene valued a 25% interest in DGC and related entities at $471,110. Robin and James both got 25% of DGC's stock. Because of the animosity between them, Judge Greene gave each a mutual right to buy the other out. Obviously, if both exercise the option, it is a zero sum game since each would wind up in exactly the same position (owning 25%), only with the other party's shares.

By the terms of the MDO, the one-year option comes into effect when the residence is sold. A sale will probably close shortly. The court approved a sale on June 2, 1997.

Judge Greene's order does not provide for the situation which arose in this case, simultaneous offers to purchase. She is best able to address that situation and I will defer to her judgment on how to resolve the matter.

By the conclusion of the hearing, I:

a) approved the sale of the residence, after resolving some 5 ABR 20      accounting disputes between the Dodsons;

(b) determined that I did not have jurisdiction to order Robin to convey her shares to James, and that the impasse which arises from simultaneous offers should be resolved by Judge Greene (see, Part 3 of this Memorandum);

(c) indicated the First Amended Plan would be confirmed (Part 2); and

(d) indicated how certain pending adversary proceedings would be concluded (Part 4).

2. CONFIRMATION-

2.1. Introduction- At the hearing on June 2, 1997, I also took the opportunity to rule on the confirmation of the plan, a decision that had been pending for a number of months.

Most of the problems regarding confirmation had been resolved by negotiation by the debtor, James Dodson, with his creditors. The objection by Mt. McKinley Mutual Savings Bank will be resolved by the sale of the residence.

The principal remaining adversary is Robin Dodson.

2.2. Classification Issue- I initially had a concern about the classification of Robin into a separate class, Class H. I cited the parties to In re Barakat, 99 F3d 1520 (9^th Cir 1996), which affirmed the denial of confirmation in a case involving gerrymandering the classes of creditors under a chapter 11 reorganization plan to produce an impaired class that accepted the plan. Acceptance by an impaired class is one of the conditions of confirmation. 11 USC § 1129(a)(10).

Barakat involved a single asset real estate case in which the unsecured deficiency arising from the principal secured creditor's shortfall in collateral value was large enough to control the case and make a plan unconfirmable under § 1129(a)(10) if debtor-plan proponent was required to classify the unsecured deficiency with the other unsecured creditors. In the Dodson case, however, there are other impaired classes which have accepted the plan.

Also, there is some legal justification for treating Robin separately. Her claim is subject to being declared nondischargeable under 11 USC § 523(a)(15). There is an adversary proceeding presently pending on that issue. The present classification avoids the need to 5 ABR 21      hold a trial on the issue, which is reserved by the debtor should the present plan fail (see, Part 4 of this Memorandum). But, see, 7 Collier on Bankruptcy, ¶ 1129.04[ 3] [ b] [ viii] (Matthew Bender 15^th ed). In any event, the separate classification is not detrimental to Robin.

2.3. Avoidance of the Court-Ordered Pledge- Robin is an unsecured creditor. After issuing the MDO, Judge Greene ordered a pledge of James' DGC shares to secure: (a) his obligation to hold Robin harmless by paying debts assigned to him in the divorce and (b) payment of the 1979 promissory notes (with a balance of about $225,000) owed by James to Robin per the MDO.

James filed a petition in bankruptcy before a pledge was executed by the Clerk of the Superior Court pursuant to an order by Judge Greene. Even if the pledge was somehow automatically effective, it is avoidable as a preference in bankruptcy under 11 USC § 547(a).

This case is distinguished from the facts in In re Yerrington, 144 BR 96 (9^th Cir BAP 1992), aff'd 19 F3d 32 (9^th Cir 1994) cited by Robin. Yerrington concerned an 11 USC § 522(f) judicial avoidance for exemption purposes. Dodson is not relying on § 522(f), however, but on the 11 USC § 547(a) preference section. There is no comparable grounds for avoidance of a judicial lien under § 547(a).

Thus, the judicially mandated pledge is subject to avoidance as a preference.

2.4. The Proposed Encumbrance of the DGC Stock by Denali State Bank Is Not Unfair or Inequitable to Robin- Although the MDO covered a lot of property, debts, and conditions, the significant ones for this analysis are:

• James is required to pay about $225,000 as a result of two 1979 promissory notes;

• James is required to indemnify Robin against liability from James' nonpayment of obligations assigned to him by Judge Greene, including principally an obligation to Denali State Bank (DSB) for about $430,000;

• James was ordered to secure performance of the $225,000 debt to Robin and $430,000 DSB obligation by the order of Judge Greene that he pledge his 25% share of the DGC stock as collateral; and

• upon the sale of the residence, Robin and James have an option for a 1-year period to purchase the shares of the other 5 ABR 22      representing a 25% interest in DGC for $471,110.

Robin argues that it is unfair to her to take away the collateral which was to secure payment of the $225,000 obligation and give it to DSB instead to bail out James. James counters that this is substantially in compliance with the intent of Judge Greene's order, to secure performance of indemnifying Robin against nonpayment of debts assigned to James. The only significant debt which James was to indemnify against is the DSB claim.

Under the plan, DSB's claim against Robin will be released and DSB will obtain a security interest in the DGC shares to secure a 10-year payout of a negotiated balance of about $430,000. DSB's security interest in the shares will prime any interest Robin might be able to acquire by exercising the option to buy the DGC shares owned by James.

Robin also complains that allowing DSB to encumber the shares substantially impairs her anticipated right to exercise an option to purchase the shares for $471,110 pursuant to a provision in the MDO. The attractiveness of doing that will be substantially diminished if the shares are encumbered by an obligation to DSB.

Are the provisions in the plan as they relate to Robin unfair or discriminatory? 11 USC § 1129(b)(1) provides:

Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.

Collier's view of this section is:

The test thus boils down to whether the proposed discrimination has a reasonable basis and is necessary for reorganization. ¹⁹ Given the general policy represented by such a requirement, that of fair allocation of reorganization value among claimants with equal nonbankruptcy liquidation priorities, this seems to have some merit. Thus, as explored below, more recent cases tend to look at the disparity of proposed treatment, and whether such disparity is reasonably related to reorganization. Other cases focus on the proponent's motives in providing different treatment.

5 ABR 23 7      Collier on Bankruptcy, ¶ 1129.04[ 3] [ a] (Matthew Bender 15^th ed). Footnote 19 states:

In re 203 North LaSalle Street Limited Partnership, 190 B.R. 567, 585-86 (Bankr. N.D. Ill. 1995), aff'd, 195 B.R. 692 (N.D. Ill. 1996) ("First, any discrimination must be supported ... by a legally acceptable rationale .... Second, the extent of the discrimination must be necessary in light of the rationale.").

James has appealed certain parts of Judge Greene's decision to the Supreme Court of Alaska. Principally, he objects to the judgment against him for about $225,000 for the two 1979 promissory notes, and the award of attorney fees to Joseph Sheehan. Robin, on her part, has appealed Judge Greene's ruling that James should get 25% of the DGC shares. Robin argues that they should have been held in a trust which would have gone to Robin and not James. The Supreme Court recently heard oral argument.

The plan gives Robin the benefit of almost the full value of James' DGC shares to collateralize his obligation to indemnify against DSB seeking recovery from Robin. The value of the 25% interest in the DGC shares found by Judge Greene, $471,110, is used to cover this indemnity obligation. There is no significant value left over.

The plan provides a way to pay Robin in full for her $225,000 claim, while letting James continue to operate. Virtually all interested parties, except for Robin, question the viability or retention of value of DGC if Robin gains sufficient equity to effect the actual operations or policies of DGC. Judge Greene recognized that James and Robin probably could not peacefully exist in any business relationship. James' reorganization plan provides a way to resolve the pyrrhic battle between the parties, while giving Robin the amount she will be entitled to if she prevails in the state court appeal. It also gives James the time he needs to meet these commitments.

3. EXERCISE OF OPTIONS TO PURCHASE DGC SHARES- The parties' cross-motions seem to assume that one or the other option to purchase the other party's DGC shares would prevail. Under the MDO, however, both might be enforceable, putting the parties back in the same untenable position the option was designed to alleviate. The parties and I agreed at the June 2, 1997, hearing that Judge Greene is best situated to resolve this dispute. The court will enter an order lifting the stay to short-circuit 5 ABR 24      any question about whether this issue is subject to resolution by Judge Greene.

I will also enter an order permitting James to exercise the option to purchase Robin's shares of DGC. The mechanics of financing proposed by James to accomplish this does not, in my mind, contravene the intent of Judge Greene's order that the shares not be transferred for a year after the option comes into effect. The mechanics of exercising the option are not offensive to the obvious purpose of the restriction that no third party become involved pending the exercise.

Allowing James to exercise the option is not intended to denigrate Robin's rights under the MDO to attempt to exercise her option to purchase James' shares.

I do not feel I have jurisdiction, at least not by motion practice, to order Robin to sell her shares to James. Even if I did have jurisdiction, FRBP 7001(7) requires an adversary proceeding for such affirmative injunctive relief.

4. LOOSE ENDS- There are two adversary proceedings pending:

(a) James L. Dodson v Robin L. Dodson, Adv. No. F96-00202-001-HAR, which includes, among other things, claim that the stock pledge ordered by Judge Greene is a preference under 11 USC § 547(b); and

(b) Robin L. Dodson v James L. Dodson, Adv. No. F96-00202-002-HAR, which is a claim that James' obligations are nondischargeable under 11 USC § 523(a)(5), (6), and (15).

These adversary proceedings were consolidated for trial.

As part of the confirmation process, I heard evidence related to the § 547 preference issue, and determined that the pledge, if it went into effect would be a preference.

I have not heard sufficient evidence on Robin's nondischargeability claims, however, to rule. The parties seemed to indicate that if I confirmed the plan, the dischargeability issues might not have to be tried, but, in retrospect, that is not true. If James' plan fails or if the case is converted to chapter 7, those issues will have to be addressed.

I suggested, and the parties agreed, that I enter a judgment on the Adv. No. -001 preference issue (and any related matters in that adversary), and dismiss without prejudice the Adv. No. -002, with an express 5 ABR 25      proviso that it could be reopened at some time in the future if the issues need to be addressed. To put an outside time limit on the reopening, I will provide that if the adversary is not reopened in 4 years of the date of dismissal, the right to reopen will expire.

DATED:    June 3, 1997

HERBERT A. ROSS
U.S. Bankruptcy Judge