Matter of Greystone III Joint Venture

Phoenix Mutual Life Insurance Corporation (the plaintiff) loaned $8.8 million to Greystone III Joint Venture (the defendant) to purchase an office building. The loan was secured by a first lien on the property. When the defendant defaulted, the plaintiff initiated foreclosure proceedings. The defendant then filed a Chapter 11 bankruptcy petition. At that point, the defendant owed approximately $9.3 million to the plaintiff, $10,000 to other creditors, and $145,000 to taxing authorities. The bankruptcy court valued the office building at approximately $5.8 million, leaving the plaintiff with an unsecured deficiency of $3.5 million. Under Chapter 11, the defendant proposed a reorganization plan under which unsecured claims were separated into three classes: (1) the plaintiff’s deficiency claim, (2) the trade creditors’ claims, and (3) claims held by office-building tenants in their security deposits. Under the proposed plan, the plaintiff and the trade creditors would be entitled to three to four cents on the dollar but the trade creditors’ balance would be paid in full after plan confirmation. The tenants, whose leases would be assumed by the plaintiff, would receive 25% of their deposits on plan approval and 50% on the expiration of their leases. The balance would be paid on plan confirmation. The plaintiff objected to the plan. At a confirmation hearing, the defendant orally modified the plan to withdraw the post-confirmation payments to the trade creditors and tenants.

The bankruptcy court ruled that the tenants were not entitled to vote but that the plan was otherwise confirmable. The district court affirmed plan confirmation but disagreed with the bankruptcy court as to the tenants, concluding that they were entitled to vote. The plaintiff appealed.