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In re Diwan, L.L.C.

United States Court of Appeals, Eighth Circuit

February 17, 2017

In re: Diwan, L.L.C. Debtor
Maha-Vishnu Corporation; United States Trustee Appellees Diwan, L.L.C. Appellant

          Submitted: November 16, 2016

         Appeal from United States District Court for the Southern District of Iowa - Davenport

          Before COLLOTON, BEAM, and GRUENDER, Circuit Judges.


         Diwan, LLC appeals the district court's[1] affirmance of the dismissal of Diwan's small business Chapter 11 bankruptcy. We affirm.

         I. BACKGROUND

         The involved set of facts surrounding Diwan's bankruptcy proceedings are set out in In re Diwan, L.L.C., No. 12-00424-als11, 2013 WL 8351981, at *1-3 (Bankr. S.D. Iowa July 16, 2013), as well as in the district court's order on appeal, and will be reproduced here only as necessary. Diwan owned two gas stations in Davenport, Iowa. Its sole owner and manager, Ranbir Thakur, formed Thakur LLC, which entered into a sales contract with Maha-Vishnu Corp. (MVC) to purchase a motel. (We refer to Thakur personally as "Ranbir" and his company as "Thakur LLC.") The sales contract was secured in part by a personal guarantee from Ranbir. As collateral for the guarantee, Ranbir pledged a mortgage on one of Diwan's gas stations (the "Spring Street property"). Thakur LLC defaulted on the sales contract and in 2012 MVC foreclosed and purchased the motel at a sheriff's sale for $1.00. MVC failed to redeem an outstanding tax debt on the motel, and a Tax Sale Deed was issued to a third party. Also in 2012, the Iowa Court of Appeals affirmed a deficiency judgment awarded to MVC against Ranbir and Thakur LLC for $667, 067.91.

         Diwan filed for Chapter 11 bankruptcy in February 2012 and in June MVC filed a proof of claim for $677, 130.41. Diwan objected to the claim and filed a Chapter 11 plan subordinating MVC's claim to all creditors and releasing the mortgage on the Spring Street property. MVC and other creditors objected to the plan. After a confirmation hearing, MVC amended the claim to $688, 231.45, of which $612, 879 was secured by the mortgage on the Spring Street property, leaving an unsecured claim for $75, 352.45.[2] The bankruptcy court equitably subordinated $458, 119 of MVC's secured claim to all creditor claims, due to an inflated sale price for the motel and the $1.00 bid.[3] Diwan filed modified plans in April, August, and December of 2014, each prioritizing the subordinated portion of MVC's claim behind Ranbir's equity interest in Diwan.

         In a February 2015 bench ruling, the bankruptcy court rejected Diwan's argument that MVC's entire claim should be disallowed under the U.C.C. and common-law doctrines of impairment of collateral. It sustained MVC's objections to the plan's proposed interest rate and to feasibility, and it concluded that Diwan's latest plan in any event would fail the best-interest-of-the-creditors test. The bankruptcy court denied confirmation of the plan and granted the Trustee's motion to dismiss. On appeal, the district court affirmed. It rejected Diwan's impairment-of-collateral argument and also found that the bankruptcy court presented alternate, independent grounds sufficient for denying confirmation and dismissing the case.


         Diwan appeals the district court's affirmance, arguing that the bankruptcy court erred in overruling its objection to MVC's claim on the basis of impairment of collateral, in denying confirmation, and in dismissing its Chapter 11 case. Like the district court, we review the bankruptcy court's factual findings for clear error, its legal conclusions de novo, and issues committed to its sound discretion for an abuse of that discretion. Zahn v. Fink (In re Zahn), 526 F.3d 1140, 1142 (8th Cir. 2008). "Although the district court's conclusions about the bankruptcy court's decision may carry some persuasive weight, our appellate review of the bankruptcy court's decision is independent of the district court's opinion." United States v. Foust (In re Foust), 52 F.3d 766, 768 (8th Cir. 1995).[4]

         Under the Bankruptcy Code, a debtor's Chapter 11 plan may only be confirmed, inter alia, if any holder of an impaired claim or interest either accepts the plan or receives no less than he would under a Chapter 7 liquidation (the best-interest-of-the-creditors test), 11 U.S.C. § 1129(a)(7)(A), and so long as confirmation does not lead to unproposed liquidation or further reorganization by the debtor or successor (feasibility), id. § 1129(a)(11). Further, impaired classes of claims must vote to accept the debtor's plan (balloting), id. §§ 1129(a)(8), 1129(a)(10), 1126, and creditors holding at least one half the number and two thirds the amount of claims in a class must accept the plan in order for the class to accept the plan, id. § 1126(c).

         Diwan's briefing again primarily focuses on its impairment-of-collateral argument. It also argues that it has not waived the issues of the bankruptcy court's other reasons for denial of confirmation and dismissal and that those issues are "intertwined" with the impairment-of-collateral issue. It points to the statement in the bankruptcy court's bench ruling that because Diwan's objection to MVC's claim "is integral to the outcome of confirmation, it will be addressed first." Diwan also points to the bankruptcy court's observation, after denying confirmation and in determining whether it ought to dismiss the case, that "[i]t does appear to the Court that some of the other issues related to balloting may never be resolved due to the size of Maha-Vishnu's claim. It appears unlikely, if not impossible, for Diwan to obtain confirmation of its plan over the continued objections by Maha-Vishnu." The Trustee and MVC argue that the bankruptcy court's decision may be affirmed on the alternate grounds without considering the impairment-of-collateral issue.

         The first question, then, is whether the bankruptcy court's grounds for denial of confirmation were predicated on the allowance of MVC's claim, and whether any ground not so predicated was sufficient for denial of confirmation of Diwan's plan. It is fairly clear that if MVC's claim was eliminated in its entirety, the problems with Diwan's plan as to balloting and the best-interest-of-the-creditors test would have no longer presented an obstacle to confirmation. But as we read the bankruptcy court's ruling, Diwan's plan would still have failed to meet the requirements of feasibility. The bankruptcy court, using the monthly operating report for December 2014, found that Diwan would only have had $457 to make planned payments. Diwan does not challenge this finding on appeal. Further, Diwan's projected cash-flow statement used an amount for expenses based on the bottom end of its historical range of costs of goods sold, which had fluctuated as much as $5, 000 higher. The bankruptcy court stated, "Factoring in this [$5, 000] difference, however, could substantially affect the available cash flow for both the business operations and planned payments." These figures indicate that Diwan might not be able in some months to meet its operating expenses, let alone make plan payments to its creditors. Even without payments on MVC's claim, Diwan's plan called eventually for ...

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