Appeal from the United States District Court for the District of Idaho. D.C. No. 92-0023-N-HLR Bkr. No. 91-00801-11. Harold L. Ryan, District Judge, Presiding.
Before: Eugene A. Wright, William C. Canby, Jr., and Stephen Reinhardt, Circuit Judges. Opinion by Judge Reinhardt.
REINHARDT, Circuit Judge:
This case requires us to decide whether the new value "exception" to the absolute priority rule survives the enactment of the Bankruptcy Reform Act of 1978 (better known as the Bankruptcy Code), which replaced the Bankruptcy Act of 1898.*fn1 The new value exception allows the shareholders of a corporation in bankruptcy to obtain an interest in the reorganized debtor in exchange for new capital contributions over the objections of a class of creditors that has not received full payment on its claims. Whether this doctrine is viable under the Bankruptcy Code has significant implications for the relative bargaining power of debtors and creditors in Chapter 11 cases. Although no circuit court has taken a definitive position on this question, dicta in several opinions demonstrate intra- and inter-circuit disagreements. District and bankruptcy courts are sharply divided on the question, as are the commentators. The question will in all probability ultimately be decided by the Supreme Court. In the meantime, we conclude that the new value exception remains a vital principle of bankruptcy law.
In 1984-85, Northtown Investments built Bonner Mall. The project was financed by a $6.3 million loan, secured by the mall property, from First National Bank of North Idaho, which later sold the note and deed of trust to appellant U.S. Bancorp Mortgage Co. ("Bancorp"). In October 1986 the mall was purchased by appellee Bonner Mall Partnership ("Bonner"), subject to the lien acquired by Bancorp. Bonner is composed of six partners, five trusts and one individual investor, and was formed for the express purpose of buying the mall. Unfortunately, the cash-flow from the mall was much smaller than Bonner expected. When Bonner failed to pay its real estate taxes to Bonner County, Idaho, Bancorp commenced a nonjudicial foreclosure action. After several unsuccessful attempts to renegotiate and restructure Bonner's debt, Bancorp set a trustee's sale for March 14, 1991.
On March 13, 1991, Bonner filed a Chapter 11 (reorganization) bankruptcy petition, which automatically stayed the foreclosure sale. 11 U.S.C. § 362(a). Bancorp moved for relief from the stay under section 362(d)(2).*fn2 As a condition to obtaining relief under that provision, Bancorp was required to show that Bonner had no equity in the mall and that Bancorp's claim against Bonner was undersecured. United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assoc., Ltd., 484 U.S. 365, 377, 98 L. Ed. 2d 740, 108 S. Ct. 626 (1988). Because Bancorp established these facts, the burden shifted to Bonner to prove 1) that its retention of the mall was necessary to an effective reorganization,*fn3 and 2) that there was a reasonable possibility of a successful reorganization within a reasonable time.*fn4 See id. After two hearings on Bancorp's motion, the bankruptcy court denied it without prejudice. In his order denying relief the bankruptcy Judge assumed the continued existence of the new value exception, noted its strict requirements, and expressed doubts whether Bonner could satisfy them. Nevertheless, he allowed Bonner thirty days to propose a plan.
Bonner filed a reorganization plan relying on the new value doctrine. In response Bancorp renewed its motion to lift the stay. Bancorp argued 1) that the new value exception did not survive the enactment of the Bankruptcy Code; and 2) even if it did, Bonner's plan was still unconfirmable as a matter of law. The parties stipulated that the motion involved only legal questions, so no evidence was taken. The bankruptcy court accepted Bancorp's first argument but did not reach the second. The bankruptcy Judge noted that after his original order the Fifth Circuit had concluded in its "convincing" decision in Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (In re Greystone III Joint Venture), 948 F.2d 134 (5th Cir. 1991), petition for rehearing granted in part and opinion withdrawn in part, 948 F.2d 142 (5th Cir.) (per curiam), cert. denied, 113 S. Ct. 72 (1992), that there is no longer a new value exception. On that basis, the Judge granted Bancorp's motion for relief from the automatic stay. After the bankruptcy Judge stayed his order at Bonner's request, Bonner appealed to the district court.
On appeal, the district Judge determined that the only issue before him was whether the Bankruptcy Code had eliminated the new value exception. He found that it had not. In doing so he relied on the Supreme Court's ruling in Dewsnup v. Timm, 116 L. Ed. 2d 903, 112 S. Ct. 773 (1992), which was handed down after the bankruptcy court's decision and which emphasized the Court's reluctance to overturn pre-Code practice (see infra). Moreover, by the time of the district court's opinion the relevant portion of the Fifth Circuit's Greystone opinion had been withdrawn.*fn5 The district court reversed the judgment of the bankruptcy court and remanded for further proceedings consistent with its opinion. It refused to address Bancorp's alternative argument that Bonner's plan was unconfirmable as a matter of law even if the new value exception survived. Instead, its order stated: "Confirmation of the plan proposed by the Debtor must be addressed by the bankruptcy court on remand." Bancorp filed a timely appeal to this court. Like the district court, we resolve only the question whether the new value exception survives.*fn6 The issue is one of law. Accordingly, our review is de novo. See Home Sav. Bank, F.S.B. v. Gillam, 952 F.2d 1152, 1156 (9th Cir. 1991).
The parties agree that we have jurisdiction to hear Bancorp's appeal. Nevertheless, we have an independent duty to examine our own subject matter jurisdiction. Pizza of Hawaii, Inc. v. Shakey's Inc. (In re Pizza of Hawaii, Inc.), 761 F.2d 1374, 1377 (9th Cir. 1985). Twenty Eight U.S.C. section 158(d) provides that "the courts of appeal shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees entered under subsections (a) and (b) of this section." Subsection (a) states in relevant part that:
The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees, and with leave of the court, from interlocutory orders, of bankruptcy Judges entered in cases and proceedings referred to the bankruptcy Judges under section 157 of this title.
28 U.S.C. § 158(a).*fn7 For us to have jurisdiction, both the bankruptcy court's and district court's orders must be final. Allen v. Old Nat'l Bank of Wash (In re Allen), 896 F.2d 416, 418 (9th Cir. 1990) (per curiam). Here, the bankruptcy court's order granting relief from the automatic stay was clearly final.*fn8 Packerland Packing Co. v. Griffith Brokerage Co. (In re Kemble, 776 F.2d 802, 805 (9th Cir. 1985). Moreover, if Bancorp had foreclosed on the mall, Bonner's sole significant asset, for all intents and purposes the bankruptcy case would have ended; therefore, the bankruptcy court's order required immediate appellate review. See Elliot v. Four Seasons Properties (In re Frontier Properties, Inc.), 979 F.2d 1358, 1363 (9th Cir. 1992); Allen, 896 F.2d at 418.
The more difficult question is whether the district court's order was final.*fn9 The unique nature of bankruptcy procedure dictates that we take a pragmatic approach to finality. Vylene Enter. Inc. v. Naugles (In re Vylene Enter. Inc.), 968 F.2d 887, 894 (9th Cir. 1992); Mason v. Integrity Ins. Co. (In re Mason), 709 F.2d 1313, 1318 (9th Cir. 1983). Our cases hold that 28 U.S.C. section 158(d) affords a more liberal finality standard than does 28 U.S.C. section 1291.*fn10 Vylene, 968 F.2d at 893-94.*fn11
Under Ninth Circuit law, if the district court affirms or reverses a final bankruptcy court order, its order is final. King v. Stanton (In re Stanton), 766 F.2d 1283, 1287 (9th Cir. 1985). However, difficult questions regarding finality sometimes arise when a district court reverses a final order of a bankruptcy court and remands. Vylene, 968 F.2d at 895. In such circumstances we balance two important policies: avoiding piecemeal appeals and enhancing judicial efficiency. Id. ; Zolg v. Kelly (In re Kelly), 841 F.2d 908, 911 (9th Cir. 1988). We also consider the systemic interest in preserving the bankruptcy court's role as the finder of fact. Stanton, 766 F.2d at 1287.*fn12 On the basis of our analysis of these factors, we have concluded that when the district court remands for further factual findings related to a central issue raised on appeal, its order is ordinarily not final and we lack jurisdiction. Id. at 1286.
However, Stanton suggests that we should assert jurisdiction even though a district court has remanded a matter for factual findings on a central issue if that issue is legal in nature and its resolution either 1) could dispose of the case or proceeding and obviate the need for factfinding;*fn13 or 2) would materially aid the bankruptcy court in reaching its Disposition on remand. 766 F.2d at 1288 n.8; see also Farm Credit Bank of Spokane v. Fowler (In re Fowler), 903 F.2d 694, 696 (9th Cir. 1990) (citing second Stanton criterion with approval). We believe that the Stanton principle is sound and we adopt it here. The present case falls squarely within the first Stanton criterion. The central question is a legal one that is clearly potentially dispositive. It involves the very existence of the rule pursuant to which the bankruptcy court would be required to make factual findings on remand. If we hold that the new value exception no longer exists, no further factual proceedings will be necessary and Bancorp will be entitled to the relief it seeks as a matter of law.
The instant case presents a situation analogous to the one we faced in Pizza of Hawaii, which was cited with approval in Stanton and Fowler. In Pizza of Hawaii the bankruptcy court confirmed Pizza's proposed plan (a final order) over Shakey's objection that the plan did not make sufficient provision for a debt that Pizza might owe Shakey's on account of a pending civil case. On appeal, the district court 1) vacated the order of confirmation; 2) ordered the bankruptcy court to grant Shakey's leave to amend its proof of claim; 3) ordered the bankruptcy court to value the claim; and 4) ordered the bankruptcy court to reconsider the plan's feasibility in light of the value of Shakey's claim. 761 F.2d at 1376. Pizza appealed the order to this court. Despite the fact that the district court had remanded for proceedings of a factual nature, we held that we had jurisdiction. 761 F.2d at 1378, 1382. Here, as in Pizza of Hawaii, the policy of judicial economy, which militates in favor of our asserting jurisdiction, strongly outweighs the need to avoid piecemeal appeals.
For the above reasons, we conclude that we have subject matter jurisdiction over Bancorp's appeal under 28 U.S.C. section 158(d).
III. BONNER'S PLAN, CONFIRMATION, AND THE NEW VALUE EXCEPTION
Bonner's proposed reorganization plan ("the Plan") provides for the transfer of all of Bonner Mall Partnership's assets (the mall for all practical purposes) to a new corporation, Bonner Mall Properties, Inc., created by the Plan to carry out its provisions. One of the most significant features of the Plan is the treatment of Bancorp's $6.6 million claim, for which the mall is collateral. In the course of his original order denying Bancorp's motion for relief from the stay, the bankruptcy Judge valued the mall at $3.2 million. This meant that Bancorp's claim against Bonner was undersecured: it was secured as to $3.2 million and unsecured as to $3.4 million. See 11 U.S.C. § 506(a). The unsecured portion of Bancorp's claim represents the vast majority of Bonner's unsecured debt. Under the Plan, the $3.2 million debt to Bancorp secured by the mall would be paid 32 months after the Plan's confirmation, with interest payments payable monthly in the interim. Payment of all other secured debt would be deferred. All unsecured creditors of Bonner who are owed more than $1000 would be paid according to a pro-rata distribution of 300,000 shares of preferred stock in the new corporation. Each share would be valued at $1.00.*fn14 The preferred stock would be convertible to a maximum of 300,000 shares of common stock once Bonner paid off the secured part of Bancorp's claim.
Under the Plan the equity owners, i.e. the partners, would receive nothing on their claims. However, to raise additional capital for the new corporation, the partners would contribute a total of $200,000 in cash to Bonner Mall Properties in exchange for 2 million of the 4 million authorized shares of the new corporation's common stock. No other persons are designated to receive stock in exchange for such contributions. The Plan also states that the partners would subsidize any shortfall in working capital during the first 32 months after confirmation of the plan.*fn15 Moreover, the trustee for the five trust-partners of Bonner Mall Partnership is to contribute a collateral trust mortgage on a 4500-acre property as a guarantee of payment of the debts assumed by Bonner Mall Properties.*fn16 In exchange, the new corporation is to service part of the trustee's debt on the property.
Section 1129(a) of Chapter 11 establishes thirteen requirements for confirmation of a reorganization plan, all of which must generally be satisfied. One such requirement is set forth in subsection (a)(8), which mandates that "with respect to each class [of claims], A) such class has voted to accept the plan or B) such class is not impaired under the plan." 11 U.S.C. § 1129(a)(8).*fn17 Under Bonner's Plan all claim classes are impaired and, therefore, all must accept the plan for a consensual confirmation. It is a foregone Conclusion that at least the unsecured class of which Bancorp is the principal member will vote not to confirm the plan in view of the minimal return Bancorp will receive on the unsecured fraction of its claim.
However, the Code provides that where all requirements for confirmation but section 1129(a)(8) are met, the bankruptcy court shall confirm a Chapter 11 reorganization plan over the objection of an impaired class or classes "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." 11 U.S.C. § 1129(b)(1) (emphasis added). This form of confirmation is commonly known in bankruptcy parlance as a "cramdown" because the plan is crammed down the throats of the objecting class(es) of creditors. The issue before the bankruptcy Judge in deciding whether to grant Bancorp's motion for relief from the stay was whether Bonner's Plan had a reasonable possibility of confirmation in a cramdown, i.e., whether the standards set forth in section 1129(b)(1) could feasibly be satisfied.
The resolution of this question turns on whether there is a reasonable possibility that a bankruptcy Judge could find Bonner's Plan "fair and equitable." Section 1129(b)(2) of the Code defines "fair and equitable" as including several enumerated requirements. The section, which is at the heart of the controversy between the ...