Deming Hospitality, LLC

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
DEMING HOSPITALITY, LLC,
No. 11-12-13377 TA
Debtor.
MEMORANDUM OPINION
This opinion addresses the argument of the State Bank of Texas (“SBT”) and the United
States Small Business Administration (“SBA”) that the debtor’s Amended Disclosure Statement,
filed March 1, 2013, doc. 95 (the “Disclosure Statement”) should not be approved because the
Debtor’s reorganization plan (the “Plan”) is facially unconfirmable. 	The alleged defects in the
plan are:
1. 	The separate classification of SBA’s deficiency claim violates 11 U.S.C. § 1122(a);
2. 	The disparate treatment of SBA’s deficiency claim violates § 1129(b)(1)’s prohi-
bition against unfair discrimination;
3. 	The general unsecured claims are “artificially impaired;”
4. 	The classification and/or voting rights of Choice Hotels International, Inc. (“Choice
Hotels”) and New Mexico Taxation and Revenue (“TRD”) are improper; and
5. 	The Plan violates the absolute priority rule.
At a hearing held February 20, 2013, the Court set a briefing schedule on the Plan’s alleged
facial unconfirmability. 	SBT and SBA filed briefs, Debtor responded, and a hearing was held
March 11, 2013.
I. 	THE PLAN
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 1 of 17

-2-
Debtor’s Plan, filed January 7, 2013, provides for eight classes of claims: Four classes of
secured claims (SBT, SBA, TRD, and Luna County); a class for Choice Hotels; a class for
non-priority unsecured claims other than the SBA’s deficiency claim; a class for SBA’s deficiency
claim; and an equity class. The Plan provides, in pertinent part:
1. 	Class 2 Secured (SBA): 	SBA has a junior lien on Debtor’s real and personal property,
securing a debt of about $1,500,000. SBA’s claim is treated as wholly unsecured and re-
classified as a Class 7 unsecured claim. SBA’s lien is stripped;
2. 	Class 4 Secured (TRD): 	TRD has a junior lien on Debtor’s real and personal property,
securing unpaid gross receipts tax debt of about $27,800. TRD’s claim is treated as wholly
unsecured, and therefore as an unsecured priority tax claim;
3. 	Class 5 (Choice Hotels): 	Choice Hotels is the franchisor under a certain Licensing
Agreement, an executory contract with a $67,000 pre-petition arrearage. Debtor proposes
to assume the contract and pay Choice Hotels $50,000 in full satisfaction of the arrearage;
4. 	Class 6 (General Unsecured Claims): General unsecured claims are to be paid 75% of their
claim amounts within 30 days of the effective date;
5. 	Class 7 (SBA Deficiency Claim): SBA is to be paid $25,000 on its $1,500,000 deficiency
claim, within 30 days of the effective date; and
6. 	Class 8 (Equity Interests): Equity interests would retain their equity, in exchange for in-
vesting $150,000 of “new value” into the Debtor.
SBA and SBT stated in their briefs and in open court that they would vote to reject, and
would object to, the Plan.
II. 	THE COURT HAS DISCRETION TO DISAPPROVE THE DISCLOSURE STATE-
MENT IF THE PLAN IS UNCONFIRMABLE ON ITS FACE
It is within the Court’s discretion to deny approval of a disclosure statement if the ac-
companying plan is unconfirmable on its face. See In re American Capital Equipment, LLC, 688
F.3d 145, 154 (3d Cir. 2012) (citing Norton Bankr. Law Practice, the court stated that “[i]t appears
to be within the discretion of the bankruptcy court to withhold approval of a disclosure statement if
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 2 of 17

-3-
the accompanying plan is unconfirmable”); Alexander Properties, LLC v. Patapsco Bank, 883 F.
Supp. 2d 552, 554, 560 (D. Md. 2012) (bankruptcy court correctly declined to approve debtor’s
disclosure statement because the plan was not confirmable); In re Arnold, 471 B.R. 578, 585
(Bankr. C.D. Cal. 2012) (appropriate to deny approval of disclosure statement where plan is un-
confirmable on its face); In re GSC, Inc., 453 B.R. 132, 157, n. 27 (Bankr. S.D.N.Y. 2011), citing
In re Quigley Co., Inc., 377 B.R. 110, 115 (Bankr. S.D.N.Y. 2007) (same); In re Main St. AC, Inc.,
234 B.R. 771, 775 (Bankr. N.D. Cal. 1999) (same).
III. 	CLASSIFICATION OF SBA’S DEFICIENCY CLAIM
SBT and SBA argue that the separate classification of SBA’s deficiency claim from other
unsecured claims violates § 1122(a).1
There is no controlling Tenth Circuit law on whether substantially similar claims may be
separately classified. As stated in In re City of Colorado Springs Spring Creek General Imp. Dist.,
187 B.R. 683, 687 (Bankr. D. Colo. 1995) (“Spring Creek”):
The express language of § 1122(a) imposes only one requirement—that claims in a
given class be substantially similar to each other. There is no requirement that all
substantially similar claims be placed in the same class nor is there a prohibition
against classifying substantially similar claims separately. 	Almost all courts in-
terpreting § 1122(a) recognize that it does not prohibit separate classification of
similar claims, yet many courts, including seven Circuit Courts of Appeal, have
augmented § 1122(a) to impose restrictions on a plan proponent's ability to separate
similar claims. FN3
FN3. The Second, Third, Fourth, Fifth, Sixth, Eighth and Eleventh Circuit
Courts of Appeal have imposed such restrictions. See, e.g., Boston Post Road
Ltd. Partnership v. F.D.I.C. (In re Post Road Ltd. Partnership), 21 F.3d 477,
483 (2nd Cir.1994); John Hancock Mut. Life Ins. Co. v. Route 37 Business
1 SBT also argues that it is improper to classify SBA’s claim twice, first as a secured claim (Class 2) and
then as a wholly unsecured deficiency claim (Class 7). The Court is not particularly troubled by this, since
under Debtor’s proposal SBA would only be allowed to vote once (as a Class 7 unsecured creditor), and the
classification scheme makes Debtor’s proposed treatment of SBA’s claim clear.
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 3 of 17

-4-
Park Assoc., 987 F.2d 154, 159–60 (3d Cir.1993); Lumber Exch. Bldg. Ltd.
Partnership v. Mutual Life Ins. Co. (In re Lumber Exch. Bldg. Ltd. Partner-
ship), 968 F.2d 647, 649 (8th Cir.1992); Travelers Ins. Co. v. Bryson Prop-
erties, XVIII (In re Bryson Properties, XVIII), 961 F.2d 496, 502 (4th
Cir.1992); Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (Matter
of Greystone III Joint Venture), 995 F.2d 1274, 1278–1279 (5th Cir.1991);
Olympia & York Florida Equity Corp. v. Bank of N.Y. (In re Hollywell Corp.),
913 F.2d 873, 880 (11th Cir.1990); Teamsters Nat'l Freight Indus. Negoti-
ating Committee v. U.S. Truck Co. (In re U.S. Truck Co.), 800 F.2d 581, 586
(6th Cir.1986).
The main judicial gloss on § 1122(a) is that the subsection prohibits a debtor from sepa-
rately classifying similar claims to “gerrymander” a consenting class:
When objections to classification under § 1122(a) arise, courts are usually pre-
sented with allegations that the plan proponent separately classified similar claims
only to ensure acceptance by at least one class of impaired claims as required by §
1129(a)(10). Such manipulation is viewed as an abuse of Chapter 11. In the oft
cited case of Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture (Matter of
Greystone III Joint Venture), 995 F.2d 1274 (5th Cir. 1991), the Fifth Circuit held
that “one clear rule” has emerged from the otherwise muddled § 1122 case law:
“[T]hou shalt not classify similar claims differently in order to gerrymander an af-
firmative vote on a reorganization plan”. Greystone, 995 F.2d at 1279.
Spring Creek, 187 B.R. at 687-88. 	See also In re SunCruz Casinos, LLC, 298 B.R. 833, 837
(Bankr. S.D. Fla. 2003) (collecting 19 cases); In Dean, 166 B.R. at 953.
If a creditor objects to the classification scheme on gerrymandering grounds, most courts
require the plan proponent to justify the classification. See In re Dean, 166 B.R. at 949 (Bankr.
D.N.M. 1994) (debtor must demonstrate reasons apart from gerrymandering to separately classi-
fy); In re Barakat, 99 F.3d 1520, 1526 (9th Cir. 1996), cert. denied, 520 U.S. 1143 (1997) (business
or economic justification required); In re Tucson Self-Storage, Inc., 166 B.R. 892, 898 (9th Cir.
BAP 1994) (placed justification burden on debtor); In re Heritage Organization, LLC, 375 B.R.
230, 303 (Bankr. N.D. Tex. 2007) (discussing when separate classification justified). 	See also
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 4 of 17

-5-
Spring Creek, 187 B.R. at 683, n. 4 (collecting cases).
A few courts have been reluctant to read anti-gerrymandering (or other) restrictions into §
1122(a). See, e.g., Spring Creek, 187 B.R. at 689; In re ZRM–Oklahoma Partnership, 156 B.R. 67,
70 (Bankr. W.D. Okla. 1993); Principal Mut. Life Ins. Co. v. Baldwin Park Towne Center, Ltd. (In
re Baldwin Park Towne Center, Ltd.), 171 B.R. 374, 377 (Bankr. C.D. Calif. 1994); In re Dow
Corning Corp., 244 B.R. 634, 650 (Bankr. E.D. Mich. 1999), aff’d, 255 B.R. 445 (E.D. Mich.
2000) (citing ZRM-Oklahoma). These courts argue that the restrictions imposed are not found in
the language of § 1122(a), which is plain and unambiguous. They also argue that reading such
restrictions into § 1122(a) is unnecessary, given the safeguards found in § 1129, e.g. the prohibi-
tion against “unfair discrimination” in § 1129(b), the “fair and equitable” requirement of §
1129(b), and the “good faith” requirement of § 1129(a)(3).
The Court will adopt the “one clear rule” against gerrymandering to satisfy § 1129(a)(10),
whether the source of the rule is § 1122(a) or § 1129. Since the plan proponent has the burden of
proving compliance with § 1129 in any event,2 the Court will place the burden on the plan pro-
ponent to justify any separate classification of substantially similar claims, if a party in interest
objects on gerrymandering grounds.
If the plan proponent carries its burden of showing that substantially similar claims were
not separately classified to gerrymander a consenting class of impaired claims, the Court will make
no further inquiry into whether the separate classification of similar claims violates § 1122(a); any
2 See, e.g., Heartland Fed. Sav. & Loan Assn. v. Briscoe Enter., Ltd., II (In re Briscoe Enter., Ltd., II), 994
F.2d 1160, 1165 (5th Cir. 1993), cert. denied, 510 U.S. 992 (1993); Beal Bank, S.S.B. v. Waters Edge Ltd.
Partnership, 248 B.R. 668, 690 (D. Mass. 2000), citing Landing Assocs. Ltd., 157 B.R. 791, 818 (Bankr.
W.D. Tex. 1993).
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 5 of 17

-6-
remaining confirmation issues would be addressed under § 1129.
Analyzing separate classification objections in this way protects creditors from gerry-
mandering and/or other improper classification attempts, while not taking undue liberties with the
text of § 1122(a).
Using the foregoing framework, the Court concludes that the Plan is not facially uncon-
firmable because it classifies SBA’s deficiency claim separately. 	Debtor has the burden of
showing that SBA’s deficiency claim was not separately classified to gerrymander a consenting
class or for some other improper purpose, and should be given the opportunity to do so. It could
well be SBA’s deficiency claim was classified separately to gerrymander the vote, but the Court
will not rule on the issue until Debtor is given the opportunity to present evidence to explain its
classification scheme.
IV. 	DISPARATE TREATMENT OF SBA’S DEFICIENCY CLAIM
Under the Plan, general unsecured creditors would be paid 75% of their claims within 30
days of the Plan’s effective date. In contrast, by the same deadline SBA would receive a lump sum
payment of $25,000 on its approximate $1,500,000 claim, or about 1.67%. SBT and SBA argue
that this disparate treatment violates 11 U.S.C. § 1129(b)(1)’s prohibition against “unfair dis-
crimination.”3
There is no controlling Tenth Circuit authority on what “discriminate unfairly” means.
Other courts have developed a variety of tests to distinguish between “fair” and “unfair” dis-
3 Section 1129(b)(1) provides that “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
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 6 of 17

-7-
crimination. Some have followed In re Aztec Co., 107 B.R. 585, 590 (Bankr. M.D. Tenn. 1989),
and considered (1) whether the discrimination is supported by a reasonable basis; (2) whether the
debtor can confirm and consummate a plan without the discrimination; (3) whether the discrimi-
nation is proposed in good faith; and (4) the treatment of the classes discriminated against. See,
e.g., In re Riviera Drilling & Exploration Co., 2012 WL 6719591 (Bankr. D. Colo. 2012); Ownby
v. Jim Beck, Inc. (In re Jim Beck, Inc.), 214 B.R. 305, 307 (W.D. Va. 1997), aff’d, 162 F.3d 1155
(4 th Cir. 1998); In re Sea Trail Corp., 2012 WL 5247175 (Bankr. E.D.N.C. 2012).
A refinement of the test changes the fourth factor to “the degree of the discrimination is
directly related to the basis or rationale for the discrimination.” In re Ambanc La Mesa L.P., 115
F.3d 650, 656 (9th Cir.1997), cert. denied, 522 U.S. 1110 (1998); In re TCI 2 Holdings, LLC, 428
B.R. 117, 157 (Bankr. D.N.J. 2010), In re Hawaiian Telcom Communications, Inc., 430 B.R. 564,
605 (Bankr. D. Haw. 2009); In re American Trailer and Storage, Inc., 419 B.R. 412, 443 (Bankr.
W.D. Mo. 2009); In re Snyders Drug Stores, Inc., 307 B.R. 889, 894–95 (Bankr. N.D. Ohio 2004);
In re Internet Navigator Inc., 289 B.R. 128, 132 (Bankr. N.D. Iowa 2003).
A condensed version of this test is whether there is a reasonable basis for the discrimination
and whether the debtor can confirm a plan without it. 	See In re Lernout & Hauspie Speech
Products, N.V., 301 B.R. 651, 660 (Bankr. D. Del. 2003), aff’d, 308 B.R. 672 (D. Del. 2004), citing
In re Ambanc La Mesa; In re Crosscreek Apartments, Ltd., 213 B.R. 521, 537 (Bankr. E.D. Tenn.
1997) (“at a minimum there must be a rational or legitimate basis for the discrimination and the
discrimination must be necessary for the reorganization”).
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.”
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 7 of 17

-8-
Other courts have adopted a “rebuttable presumption test” proposed by Professor Bruce
Markell.4 See In re Tribune Co., 472 B.R. 223, 241 (Bankr. D. Del. 2012); In re Armstrong World
Ind., Inc., 348 B.R. 111, 121 (D. Del. 2006); In re Unbreakable Nation Co., 437 B.R. 189, 202
(Bankr. E.D. Pa. 2010), In re Quay Corp. Inc., 372 B.R. 378, 386 (Bankr. N.D. Ill. 2007), In re
Greate Bay Hotel & Casino, Inc., 251 B.R. 213, 231 (Bankr. D.N.J. 2000), In re Dow Corning
Corp., 244 B.R. 696, 701–03 (Bankr. E.D. Mich. 1999). 	For the plan proponent to rebut the
presumption, it must show that outside of bankruptcy, the dissenting class would receive less than
the class receiving a greater recovery, or that the alleged preferred class had infused new value
which offset its gain. In re Riviera Drilling, 2012 WL 6719591, at *7, citing In re Dow Corning
Corp., 244 B.R. 696.
Regardless of the standard used to determine unfair discrimination, courts agree that if the
treatment of substantially similar claims is “grossly disparate,” it is very difficult for the plan
proponent to show “fair” discrimination. See Tribune, 472 B.R. at 243 (defining grossly disparate
as a difference of 50% or more in the recovery (e.g. 10% versus 60% recovery), and saying that
courts have “roundly rejected plans” proposing such treatment); In re Sea Trail, 2012 WL
5247175 at *8 (“A crucial distinction . . . between cases in which plans have been determined to be
4 “I propose that a court should not confirm a nonconsensual plan, even if it provides fair and equitable
treatment for all classes, when there is: (1) a dissenting class; (2) another class of the same priority; and (3)
a difference in the plan’s treatment of the two classes that results in either (a) a materially lower percentage
recovery for the dissenting class (measured in terms of the net present value of all payments), or (b) re-
gardless of percentage recovery, an allocation under the plan of materially greater risk to the dissenting
class in connection with its proposed distribution. . . . In either case—disparity of recovery or disparity of
risk—the plan proponent can rebut the presumption of unfairness by proving that the difference in treat-
ment is attributable to differences in the prepetition status of the creditors. In the case of a difference in the
present value of the recovery, the presumption may also be overcome by a demonstration that contributions
will be made by the assenting classes to the reorganization, and that these contributions are commensurate
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 8 of 17

-9-
unfairly discriminatory and those that have not is the magnitude of the difference in the amount of
recovery between similarly-situated classes); In re Unbreakable Nation Co., 437 B.R. 189, 203
(Bankr. E.D. Pa. 2010) (apparently adopting the “grossly disparate” rule, but finding that the dis-
tribution proposed was not materially different); In re Greate Bay Hotel, 251 B.R. at 231 (grossly
disparate treatment is difference of 50% or more; collects cases denying confirmation because of
such treatment); In re Crosscreek Apartments, Ltd., 213 B.R. at 537-38; In re Cranberry Hill
Assocs., L.P., 150 B.R. 289, 290-91 (Bankr. D. Mass. 1993); In re Tucson Self-Storage, Inc., 166
B.R. at 898 (confirmation denied when plan proposed to pay trade creditors 100% and deficiency
claim 10%); In re Aztec Co., 107 B.R. at 591 (plan discriminated unfairly by paying insider claims
nearly in full while paying noninsider claims a de minimus amount); In re Caldwell, 76 B.R. 643,
646 (Bankr. E.D. Tenn. 1987) (confirmation denied where credit card debt was to receive 100%,
while other unsecured creditors were to receive 22.7%); In re Barney & Carey Co., 170 B.R. 17
(Bankr. D. Mass 1994) (denying confirmation where deficiency claim was to be paid 100%, while
general unsecured claims were to receive 15%).
In In re Crawford, 324 F.3d 539, 542 (7th Cir. 2003), Judge Posner, reviewing whether a
Chapter 13 plan discriminated unfairly, 5 reviewed tests developed in Chapter 13 practice, in-
cluding one very similar to the Aztec/Ambanc La Mesa test. He was critical of the test,6 and stated:
We haven't been able to think of a good test ourselves. We conclude, at least pro-
visionally, that this is one of those areas of the law in which it is not possible to do
with the different treatment. In such cases, while discrimination exists, it is not unfair.” Bruce A. Markell,
A New Perspective on Unfair Discrimination in Chapter 11, 72 Am. Bankr. L.J. 227, 249-250 (1998).
5 Section 1322(b)(1) also prohibits claim classifications that “discriminate unfairly.”
6 Judge Posner stated: “With respect, this test is empty except for point 2, which does identify an important
factor bearing on the reasonableness of a classification . . . .” 324 F.3d at 542.
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 9 of 17

-10-
better than to instruct the first-line decision maker, the bankruptcy judge, to seek a
result that is reasonable in light of the purposes of the relevant law, which in this
case is Chapter 13 of the Bankruptcy Code; and to uphold his determination unless
it is unreasonable (an abuse of discretion).
324 F.3d at 542. 	See also In re Pracht, 464 B.R. 486, 491 (Bankr. M.D. Ga. 2012) (citing
Crawford and reviewing the attempts courts have made to formulate tests for “unfair” discrimi-
nation); In re Orawsky, 387 B.R. 128, 141 (Bankr. E.D. Pa. 2008) (reviewing the various tests used
in Chapter 13).
The Court agrees with Crawford that none of the tests (in this case for Chapter 11) is
helpful or tailored enough to be adopted. 	The Aztec/Ambanc La Mesa test, for example, while
somewhat helpful, is general and vague (e.g. using “reasonable basis” and “good faith”), and
therefore gives insufficient guidance. Judge Markell’s “rebuttable presumption” test, on the other
hand, seems restrictive, and could exclude treatment that is fair.
In the Court’s opinion the only helpful general rules are (1) if the disparate treatment is
“grossly disproportionate” the plan proponent will have a heavy burden to justify the treatment,
and (2) if a plan is feasible and could be confirmed without materially disparate treatment, then the
burden on the plan proponent to justify disparate treatment will be particularly heavy. Apart from
these rules, the determination whether any discriminatory treatment is “unfair” will be left to the
sound discretion of the Court.
Here, there is a gross disparity between the proposed dividend to non-priority unsecured
creditors (75%) and the proposed dividend to SBA (1.67%).7 In addition, it appears it may be
possible to draft a plan that would not discriminate against the SBA (e.g. a plan that treats all
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 10 of 17

-11-
unsecured claims the same, which SBA would agree to vote for). Thus, while the current Plan is
not unconfirmable on its face, the Debtor will carry a heavy burden to justify SBA’s disparate
treatment.
IV. 	ARTIFICIAL IMPAIRMENT OF GENERAL UNSECURED CLAIMS
The claims pool for Class 6 totals $10,554.73. 	Disclosure Statement, p. 18. 	Under the
Plan, $7,916.04 would be paid to Class 6 creditors. The Debtor does not say why Class 6 is not
paid in full, when equity proposes to infuse $150,000 into the Debtor within 15 days of the Ef-
fective Date. SBT argues that the Plan “artificially” impairs Class 6 claims.
Before a plan proponent can attempt to “cram down” a plan on a nonconsenting impaired
class (here, SBT and SBA), at least one impaired class of claims must vote in favor of the plan
(here, Class 6). 11 U.S.C. §§ 1129(a)(10) and/or 1129(b)(1). “Artificial” impairment occurs when
the plan proponent causes the class to be impaired without an economic justification for doing so,
for the apparent purpose of obtaining the required vote of an impaired claim. 	See In re Dunes
Hotel Associates, 188 B.R. 174, 184-89 (Bankr. D.S.C. 1995). Artificial impairment has generally
been held to violate §§ 1129(a)(10) or § 1129(a)(3) (good faith). In re Cottonwood Corners Phase
V, LLC, 2012 WL 566426, at *15 (Bankr. D.N.M. 2012), citing In re Village at Camp Bowie I,
L.P., 454 B.R. 702, 708–09 (Bankr. N.D. Tex. 2011) and In re Quigley Co., Inc., 437 B.R. 102,
126 (Bankr. S.D.N.Y. 2010). Regardless of the Code section, the practice generally is condemned.
In re Windsor on the River Associates, Ltd., 7 F.3d 127, 132 (8 th Cir. 1993); Cottonwood Corners,
at *15; In re Dean, 166 B.R. 949, 954 (Bankr. D.N.M. 1994).
7 In other words, other non-priority unsecured creditors are preferred over the SBA at a rate of almost 45 to
1.
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 11 of 17

-12-
Like the issues of separate classification and disparate treatment, there may be legitimate
business reasons for Debtor’s proposed treatment of Class 6. If there is no economic justification
for failing to pay Class 6 in full after confirmation rather than the proposed 75%, then the im-
pairment of the class likely would be “artificial” and impermissible.
Because Debtor should be given a chance to present evidence to explain the reason for
Class 6’s treatment, the treatment does not render the Plan facially unconfirmable.
V. 	CLASSIFICATION OF CHOICE HOTEL’S CONTRACT TREATMENT
The Plan sets out the treatment of Choice Hotels’ executory franchise agreement in Class 5.
Plan, p. 7. The Debtor proposes to assume the agreement as part of the Plan. Id. In the treatment
of Class 5, Debtor proposes to cure its pre-petition payment default under the agreement (about
$67,000) by paying $50,000 within 30 days of the Plan’s effective date.
The Court has no objection to Debtor attempting to negotiate a discount with Choice Ho-
tels. Nevertheless, counterparties to assumed executory contracts are not “classified” and are not
entitled to vote, even if there is a pre-petition arrearage that must be cured. See In re Greystone III
Joint Venture, 995 F.2d 1274, 1281 (5 th Cir. 1991), cert. denied, 506 U.S. 821 (1992) (“A party to
a lease is considered a “creditor” who is allowed to vote, 11 U.S.C. § 1126(c), only when the party
has a claim against the estate that arises from rejection of a lease”) (emphasis in original); In re
Mount Carbon Metropolitan Dist., 242 B.R. 18, 38-9 (Bankr D. Colo. 1999) (executory contract
holders whose contracts are to be assumed are not entitled to vote; such holders whose contracts
will be rejected are entitled to vote as unsecured creditors); In re Motel Associates of Cincinnati,
50 B.R. 196, 200 (Bankr. S.D.N.Y. 1985) (implying that, subject to proper notice to the franchisor,
the debtor can disallow the franchisor’s plan vote because the debtor proposes to assume the
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 12 of 17

-13-
franchise agreement so the franchisor will not have a claim). 	See generally 11 U.S.C. §
1123(a)(1).
So long as Debtor and Choice Hotels understand that Choice Hotels may not vote on the
Plan, the classification of Choice Hotels’ executory contract interest probably is harmless error
that can be corrected by a Plan amendment or in a confirmation order. The classification does not
render the Plan unconfirmable on its face.
VI. 	TREATMENT OF TRD CLAIM
SBT also objects to the classification of TRD’s claim. TRD filed lien notices pre-petition,
securing its gross receipts tax claim. Debtor, while classifying TRD’s claim as a secured claim,
takes the position that the value of the liened property is less than the amount of other claims se-
cured by prior liens thereon, so TRD is unsecured. 	Debtor therefore treats TRD as holding an
unsecured priority tax claim.
Priority tax claims are not classified and may not vote. See § 1123(a)(1) (classified claims
do not include §507(a)(8) priority tax claims); In re Bryson Properties, XVIII, 961 F.2d 496, 501
(4th Cir. 1992) (“[w]e agree that priority tax claimants, which receive preferential treatment under
the Code (see 11 U.S.C. § 1129(a)(9)(C)), are not an impaired class that can accept a plan and bind
other truly impaired creditors to a cram down”); In re Perdido Motel Group, Inc., 101 B.R. 289,
293 (Bankr. N.D. Ala. 1989) (same); In re Winters, 99 B.R. 658, 663-64 (Bankr. W.D. Pa. 1989)
(same). There is nothing wrong with classifying TRD’s claim, to the extent the claim is secured.
On the other hand, since Debtor’s position is that TRD’s claim is not secured, the claim should not
be classified and should not be able to vote.
Like the Choice Hotels classification, Debtor’s classification of TRD’s claim is harmless
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 13 of 17

-14-
error that can be fixed by a Plan amendment or in a confirmation order, and does not make the Plan
facially unconfirmable.
VII. 	ABSOLUTE PRIORITY RULE
SBT and SBA object that the Plan violates the “absolute priority rule” found in §
1129(b)(2)(B) and in § 1129(b)’s “fair and equitable” requirement.8 The Plan proposes that ex-
isting equity holders will invest new capital of $150,000 in exchange for retention of their equity.
Plan, p. 8. This proposal is an attempt to comply with the “new value” exception to the absolute
priority rule. 	See Bank of America National Trust and Sav. Assn. v. 203 North LaSalle Street
Partnership, 526 U.S. 434 (1999) (discussing at length, without explicitly approving, the “new
value” exception). LaSalle went on to say that the best way to determine the proper amount of
“new value” is to expose the new equity to a market:
Under a plan granting an exclusive right, making no provision for competing bids
or competing plans, any determination that the price was top dollar would neces-
sarily be made by a judge in bankruptcy court, whereas the best way to determine
value is exposure to a market.
526 U.S. at 457.
Whether a market test would require an opportunity to offer competing plans or
would be satisfied by a right to bid for the same interest sought by old equity, is a
question we do not decide here. It is enough to say, assuming a new value corollary,
that plans providing junior interest holders with exclusive opportunities free from
competition and without benefit of market valuation fall within the prohibition of §
1129(b)(2)(B)(ii).
526 U.S. at 458. From the above, it is clear from that” when a reorganization plan is proposed by
a debtor during the exclusive period and gives old equity holders the opportunity to purchase eq-
8 See, e.g. In re Maharaj, 681 F.3d 558, 560 (4th Cir. 2012) (discussing history of the absolute priority rule
and the “fair and equitable” requirement).
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 14 of 17

-15-
uity in the reorganized debtor, actual 	market testing is required of the stock in the reorganized
debtor.” H.G. Roebuck & Son, Inc. v. Alter Communications, Inc., 2011 WL 2261483, at *7 (D.
Md. 2011), citing LaSalle, 526 U.S. at 457 (emphasis in the Roebuck opinion).
The Plan does not comply with this requirement. Since it is clear that SBA will not accept
the Plan or be paid in full, the lack of LaSalle-mandated market testing renders the Plan noncon-
firmable. See In re Castleton Plaza, LP, 707 F.3d 821, 822 (7 th Cir. 2013) (reversing the bank-
ruptcy court’s plan confirmation order, the Seventh Circuit ruled that under LaSalle, if unsecured
creditors are not paid in full and reject the plan, an insider of the equity holder cannot inject new
value and obtain ownership; the debtor must expose the new equity to some type of competitive
bidding process); In re GAC Storage El Monte, LLC, 2013 WL 1124074, at *17 (Bankr. N.D. Ill.
2013) (plan has to provide an opportunity for competition); In re Graham & Currie Well Drilling
Co., Inc., 2011 WL 5909632, at *1 (Bankr. E.D.N.C. 2011) (appropriate value of new equity must
be determined by the market); In re RIM Development, LLC, 448 B.R. 280, 292 (Bankr. D. Kan.
2010) (failure to provide for LaSalle-type “competition or market valuation” renders plan “pa-
tently unconfirmable”).
Debtor argues that it is too soon to consider LaSalle’s requirements because Debtor may
still be able to convince SBA to vote in favor of the Plan, in which case no such auction would be
required. That is theoretically true, but SBA’s opposition to the current Plan is strong enough, and
Debtor’s treatment of SBA’s claim is harsh enough, for the Court to conclude that the Plan must
comply with LaSalle’s market/competition requirements, whatever they might be,9 to proceed. It
9 The Court is not ruling on what type of market exposure and/or competitive process would satisfy
LaSalle.
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 15 of 17

-16-
would be permissible to draft a plan that proposed LaSalle-compliant treatment if and only if an
impaired class of unsecured claims rejected the Plan.
VIII. 	CONCLUSION
The Court will not deny approval of the Disclosure Statement because of the separate
classification of SBA’s unsecured deficiency claim, the grossly disparate treatment of SBA’s de-
ficiency claim, or the impairment of the general unsecured claims. Although it appears Debtor will
have an uphill battle convincing the Court that these Plan provisions comply with §§ 1122(a)
and/or 1129, the Debtor should be allowed an opportunity to provide supporting evidence and
argument.
Similarly, the Court will not disapprove the Disclosure Statement because of the “classi-
fication” of Choice Hotels and TRD, so long as Debtor, Choice Hotels, and TRD understand that
the classes are nonvoting.
The Court will, however, disapprove the Disclosure Statement because, given SBA’s
commitment to vote against and object to the Plan in its current form, the Plan violates LaSalle’s
prohibition against “providing junior interest holders with exclusive opportunities free from
competition and without the benefit of market valuation.”
An appropriate order will be entered.
____________________________________
Hon. David T. Thuma
United States Bankruptcy Judge
Entered on docket: April 5, 2013
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 16 of 17

-17-
Copies to:
George M. Moore
3800 Osuna Road, NE, Ste. 2
Albuquerque, NM 87109
Trey Arvizu
P.O. Box 1479
Las Cruces, NM 88004
Marta Nesbitt
P.O. Box 2206
Albuquerque, NM 87103
Alice N. Page
P.O. Box 608
Albuquerque, NM 87103
Case 12-13377-t11 Doc 102 Filed 04/05/13 Entered 04/05/13 09:51:51 Page 17 of 17