Matter of Woodbrook Associates

Woodbrook Associates (Woodbrook) (debtor) was a real estate partnership whose sole asset was the Woodbrook Apartments. The property was financed with a $5.6 million mortgage $2 million over value, which was assigned to the United States Department of Housing and Urban Development (HUD) (creditor). Woodbrook filed to reorganize under Chapter 11 and proposed a plan with eight classes of claims and interests. As per usual, Classes 1 and 2 were reserved for professional fees and administrative costs. HUD’s secured claim valued at $3.6 million comprised Class 3, and its unsecured deficiency claim occupied Class 4, which would be paid 5 percent plus funds on hand at confirmation less a reserve. Meanwhile, the property manager and other unsecured creditors in Classes 5, 6, and 7 would be paid in full relatively quickly, while partners occupied Class 8 and would retain ownership interests in exchange for new capital contributions. Before confirmation or voting, HUD moved to dismiss the bankruptcy case because it would not accept any plan that did not pay its claim in full and accused the partnership of abusive classification intended to gerrymander a vote approving the plan. The bankruptcy court dismissed the case, reasoning the plan could not be confirmed because it unfairly discriminated among unsecured creditors, violated the absolute-priority rule, posed an unreasonable delay, and prejudiced the creditors. The partnership appealed.