                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-19-2007

In Re: Machne
Precedential or Non-Precedential: Non-Precedential

Docket No. 05-5425




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Recommended Citation
"In Re: Machne " (2007). 2007 Decisions. Paper 1249.
http://digitalcommons.law.villanova.edu/thirdcircuit_2007/1249


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                                                       NOT PRECEDENTIAL

              UNITED STATES COURT OF APPEALS
                   FOR THE THIRD CIRCUIT




                             No. 05-5425




                IN RE MACHNE MENACHEM, INC.

                               Debtor.




            On Appeal from the United States District Court
                for the Middle District of Pennsylvania
                             (04-cv-01698)
             District Judge: Honorable A. Richard Caputo




            Submitted pursuant to Third Circuit LAR 34.1(a)
                           January 26, 2007




Before: SCIRICA, Chief Judge, FUENTES and CHAGARES, Circuit Judges.




                        (Filed: April 19, 2007)




                     OPINION OF THE COURT
FUENTES, Circuit Judge.

       A debtor in bankruptcy, Machne Menachem, Inc., appeals the District Court’s

decision to vacate the Bankruptcy Court’s order of confirmation. The District Court

concluded that the debtor’s confirmation plan failed to meet the requirements of 11

U.S.C. § 1129(a) because the debtor had secured confirmation by purchasing creditors’

claims through an insider. We have jurisdiction pursuant to 28 U.S.C. § 158(d) and will

affirm the order of the District Court.

                                             I.

       Because we write for the parties, who are familiar with the history of the case, we

recount only the necessary facts. Machne Menachem, Inc. (“Machne”) is a non-profit

company that operates a summer camp for Orthodox Jewish male children in Pike

County, Pennsylvania. In 2001, amidst a battle for control among its board of directors,

Machne filed a petition for bankruptcy. During the proceedings, Machne submitted a

plan for reorganization, as did one of its former directors, Yaakov Spritzer. After voting

had been conducted, the Bankruptcy Court entered an order confirming the debtor’s plan

over Spritzer’s objection.

       Spritzer had argued before the Bankruptcy Court that the confirmation plan was

secured in “bad faith” in violation of the bankruptcy code’s confirmation requirements.

See 11 U.S.C. § 1129(a)(3) (“The court shall confirm a plan only if . . . [it] has been

proposed in good faith.”). Spritzer pointed out that Levi Heber, the son of a director of

                                             -2-
the debtor, had purchased the claims of four unsecured creditors. This purchase was

apparently orchestrated by the debtor, who subsequently removed the claims from “Class

Four” (which contained non-insider, unsecured claims), and reclassified them in “Class

Five” (which contained insider, unsecured claims).1 The Bankruptcy Court rejected

Spritzer’s argument that these actions demonstrated “bad faith” under 11 U.S.C. §

1129(a)(3). In doing so, it concluded that the mere fact that the debtor purchased a

creditor’s interest for the purpose of securing approval or rejection of a plan did not

necessarily amount to bad faith.

       On appeal, the District Court vacated the Bankruptcy Court’s order of

confirmation, ruling that the purchase of claims, and their subsequent reassignment to

Class Five, made the debtor’s plan unconfirmable under the bankruptcy code. See 11

U.S.C. § 1129(a)(1) (“The court shall confirm a plan only if . . . plan complies with the

applicable provisions of this title.”). It noted that, under 11 U.S.C. § 1129(a)(10), the

debtor’s plan required approval from at least one impaired class of creditors, and that

Class Four was the only such class to accept the plan. Since Class Four did so by a vote

of seven claims to four claims,2 the four claims purchased by Heber could have altered the

outcome. Without any basis for determining whether Class Four would have actually


       1
          Heber was an “insider” under 11 U.S.C. § 101(31) (“The term ‘insider’ includes [a]
relative of a general partner, director, officer, or person in control of the debtor.”).
       2
        See 11 U.S.C. § 1126(c) (“A class of claims has accepted a plan if such plan has
been accepted by creditors . . . that hold at least two-thirds in amount and more than
one-half in number of the allowed claims of such class held by creditors.”).

                                               -3-
accepted the plan, the District Court concluded that the purchase and reclassification of

claims effectively “gerrymandered” Class Four to secure confirmation.

                                            II.

       The debtor appealed the District Court’s decision, challenging the ruling that its

plan was unconfirmable.3 The debtor, however, provides scant support for rebutting the

conclusion that its plan was confirmed by the impermissible gerrymandering of classes.4

It relies on In re P-R Holding Corp., 147 F.2d 895 (2d Cir. 1945), which suggests that the

purchase of a creditor’s claim to secure confirmation is not necessarily an indication of

bad faith. That decision, however, addressed the purchase of claims by an existing

creditor—not by a non-creditor, insider of the debtor. Moreover, the District Court relied

on cases suggesting that the purchase of claims by a debtor or insider can be an indication

of bad faith. See, e.g., Figter, Ltd. v. Teachers Ins. & Annuity Ass’n, 118 F.3d 635, 639

(9th Cir. 1997) (“[W]hen the debtor had claims against itself purchased by an insider or


       3
         Since its appeal was filed, there have been significant developments in the
Bankruptcy Court below. Upon remand from the District Court, the Bankruptcy Court
approved a Chapter 11 trustee to oversee the case. Moreover, appellee Spritzer submitted
a plan of reorganization, which was voted on and approved by the Bankruptcy Court.
Since that time, all tangible property of the debtor has been transferred to a non-profit
organization, which obtained financing to pay most of three classes of claims in
bankruptcy. Finally, the new entity has substantially improved the condition of the
summer camp through ongoing maintenance and repair. Spritzer has moved to dismiss
for equitable mootness. Because we will affirm the District Court’s decision, the motion
to dismiss for mootness is moot.
       4
         Instead, it focuses on the details of the competing plan that was originally
proposed by Spritzer but rejected by the Bankruptcy Court. Whatever the merits of that
plan, the plan actually confirmed must meet the requirements of § 1129(a).

                                            -4-
affiliate for the purpose of blocking a plan, or fostering one, that was seen as a badge of

bad faith.”).

       Furthermore, the District Court did not rely solely on the “good faith” requirement

of § 1129(a)(3) in finding the plan unconfirmable. It also explained that other

confirmation requirements were undermined by the purchase and reassignment of

creditors’ claims. The District Court found that the purchase of claims outside the plan

allowed the debtor to reclassify them in order to reduce the number of votes required for

confirmation. As we have previously stated, vote manipulation by the gerrymandering of

classes “seriously undermines” the “critical confirmation requirements set out in Section

1129(a)(8) (acceptance by all impaired classes) and Section 1129(a)(10) (acceptance by at

least one impaired class in the event of a ‘cram down’).” John Hancock Mut. Life Ins.

Co. v. Route 37 Bus. Park Assocs., 987 F.2d 154, 158 (3d Cir. 1993). The debtor does

not address these infirmities, and we agree with the District Court that the debtor’s

gerrymandering of classes in this case precluded confirmation of its plan.

       The District Court also found that the payment of creditors outside the plan of

reorganization violated 11 U.S.C. § 1123(a)(4), which requires “the same treatment for

each claim or interest of a particular class.” The plan provided for full payment of all

Class Four claimants under the plan, yet two of the four claims from Class Four,

purchased outside the plan, were paid less than in full. The debtor does not provide any




                                             -5-
explanation for this disparity in treatment among Class Four claims.5

       We agree with the District Court that the debtor’s orchestration of the purchase of

claims outside the plan of reorganization undermined the critical confirmation

requirements of the bankruptcy code. Accordingly, we will affirm the decision of the

District Court.




       5
          The District Court noted that the only explanation provided for this purchase and
reclassification of claims was the debtor’s need to maintain good relations with food vendors.
(App. 231.) Yet, only one of the four vendors from whom claims were purchased was a food
vendor, and the debtor had moved to disallow the claims of almost every other food vendor.

                                               -6-
