Matter of Greystone III Joint Venture

Phoenix Mutual Life Insurance Corporation (Phoenix) (plaintiff) loaned $8,800,000 to Greystone III Joint Venture (Greystone) (defendant) to purchase an office building. The nonrecourse loan was secured by a first lien on the property. When Greystone defaulted, Phoenix initiated foreclosure proceedings. Greystone then filed a Chapter 11 bankruptcy petition. At that point, Greystone owed approximately $9,325,000 to Phoenix, $10,000 to various trade creditors, and $145,000 to taxing authorities. The bankruptcy court valued the office building at approximately $5,825,000, leaving Phoenix with an unsecured deficiency of $3,500,000. Greystone proposed a reorganization plan under which unsecured claims were separated into three classes: Phoenix’s deficiency claim, the trade creditors’ claims, and claims held by office-building tenants in their security deposits. Under the plan, Phoenix and the trade creditors would receive between three and 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 Greystone, would receive 25 percent of their deposits on plan approval and 50 percent on the expiration of their leases. The balance would be paid on plan confirmation. Phoenix objected to the plan. At a confirmation hearing, Greystone 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. Phoenix appealed.