Legend Radio Group v. Sutherland ( 2000 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
LEGEND RADIO GROUP, INCORPORATED,
Debtor-Appellant,
v.
CRAIG SUTHERLAND; RITA
SUTHERLAND; RICHARD EDWARDS;
No. 98-1720
SOUTHERN COMMUNICATIONS,
INCORPORATED,
Creditors-Appellees,
U. S. TRUSTEE,
Trustee-Appellee.
BRISTOL BROADCASTING COMPANY,
INCORPORATED,
Plaintiff-Appellee,
No. 99-1639
v.
LEGEND RADIO GROUP, INCORPORATED,
Debtor-Appellant.
In Re: LEGEND RADIO GROUP,
INCORPORATED,
Debtor.
BRISTOL BROADCASTING COMPANY,
No. 99-1640
INCORPORATED,
Plaintiff-Appellee,
v.
LEGEND RADIO GROUP, INCORPORATED,
Debtor-Appellant.
Appeals from the United States District Court
for the Western District of Virginia, at Abingdon.
Glen M. Williams, Senior District Judge.
(CA-97-165-A, BK-94-1461-7-HPA, CA-98-192-A, CA-98-195-A)
Argued: December 1, 1999
Decided: April 7, 2000
Before WILLIAMS, MICHAEL, and KING, Circuit Judges.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: John Michel Lamie, BROWNING & LAMIE, P.C.,
Abingdon, Virginia, for Appellant. Patrick Louis Hayden,
MCGUIRE, WOODS, BATTLE & BOOTHE, L.L.P., Norfolk, Vir-
ginia, for Appellees. ON BRIEF: Robert W. McFarland, Dion W.
Hayes, MCGUIRE, WOODS, BATTLE & BOOTHE, L.L.P., Nor-
folk, Virginia; Fred M. Leonard, Bristol, Tennessee, for Appellee
2
Bristol Broadcasting; Mark L. Esposito, PENN, STUART &
ESKRIDGE, Bristol, Virginia, for Appellee Edwards; David J. Hut-
ton, BOUCHER, HUTTON, KELLY & GRAHAM, P.C., Abingdon,
Virginia, for Appellee Southern Communications.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
Legend Radio Group, Inc., the debtor in this Chapter 11 bank-
ruptcy proceeding, appeals two rulings of the district court. The first,
memorialized by the district court's order of April 14, 1998, affirmed
the bankruptcy court's confirmation of a creditor's plan to sell the
assets of the bankruptcy estate. The second, entered approximately
one year later on limited remand from this court, denied Legend's
motion for modification of the confirmed plan. We conclude that the
district court did not err in either ruling, and we therefore affirm.
I.
A.
Legend owns radio stations WABN-AM and WABN-FM, both of
which broadcast from studios in Abingdon, Virginia. On June 28,
1994, Legend filed a voluntary petition for Chapter 11 reorganization,
listing just over $120,000 in assets and about $460,000 in liabilities.
The largest secured creditors were Southern Communications, Inc.
(Southern), the company that had sold the stations to Legend in 1987,
and Dickenson Buchanan (now Premier) Bank.1 The amounts owed
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1 Southern had a first deed of trust against Legend's real estate, and
Premier's loan was secured by a lien against all of Legend's equipment.
3
to Southern and Premier accounted for more than eighty percent of
Legend's total liabilities.
Among the larger unsecured creditors were Richard Edwards and
his father, Olney, who had formed Legend in association with Craig
and Rita Sutherland. The Edwardses had conveyed their ownership
interest in the company to the Sutherlands in accordance with a 1992
court settlement. Richard Edwards, however, had a continuing interest
in Legend's ability to operate at a profit. Not only was he an unse-
cured creditor, but he had also pledged substantial personal assets as
collateral for Legend's loan from Premier Bank. In the wake of the
bankruptcy petition, Edwards was required to make the loan payments
to prevent Premier from seizing the collateral.
Following the bankruptcy court's rejection of Legend's initial plan
of reorganization, Edwards submitted his own plan (the "Edwards
Plan") providing for the sale of Legend's assets (the radio stations and
associated property) to Bristol Broadcasting Co., Inc. ("BBCI") at a
price of $335,000. See 11 U.S.C. § 1121 (governing the filing of reor-
ganization plans by the debtor and other parties in interest). The bank-
ruptcy court rejected the original Edwards Plan, as well as a modified
version of Legend's initial plan (the "Legend Plan"). With respect to
the Edwards Plan, the court expressed its concern that Southern and
Premier would receive a sum certain in partial satisfaction of their
claims, without regard to the actual value of the collateral securing the
debt.2 The bankruptcy court was further concerned that there had been
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2 The Edwards Plan, as originally submitted, stipulated that Southern's
secured claim would be paid "to the extent of the value of its collateral,
($150,000)." The plan made no similar representations concerning the
value of the equipment securing Legend's debt to Premier, see supra
note 1, but it nonetheless provided for the payment of $75,000 to extin-
guish the secured portion of Premier's claim. Both of these creditors
were acknowledged to be "impaired" under the plan, see 11 U.S.C.
§ 1123(a)(3), which meant that any debt determined to be owing beyond
the above-mentioned amounts would be treated as an ordinary unsecured
claim, for which Southern and Premier would not receive full remunera-
tion.
The bankruptcy court criticized the Edwards Plan as"propos[ing]
grossly disparate treatment among unsecured creditors." In other words,
4
"no objective valuation of the real estate and the business" to assist
it in gauging the adequacy of the proposed sale price.
Thereafter, Edwards amended his plan slightly and resubmitted it.
The only substantive change related to the treatment of Premier,
which had previously been slated to receive a flat $75,000 for the
secured portion of its claim. Under the amended plan, the bankruptcy
court would instead decide the amount of Premier's secured claim; if
the debt to Premier exceeded the value of Legend's collateral as
determined by the court, Premier would have an unsecured claim for
the balance.
On March 18, 1997, the bankruptcy court conducted a confirmation
hearing on the Edwards Plan, as amended. During this proceeding, the
court heard the testimony of George I. Otwell, the managing director
of a national media brokerage firm. Otwell's firm, at the behest of
Edwards, had prepared a valuation analysis of WABN-AM and
WABN-FM. Otwell testified that the fair market value of the radio
stations was $275,000, considerably less than the $335,000 already
offered by BBCI and placed in escrow. At this same hearing, how-
ever, counsel for Legend represented that another broker, retained by
the Sutherlands, had recently appraised the stations at $690,000. On
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the plan did not account for the possibility that the value of the collateral
securing the loans from Southern and Premier might turn out to be less
than $150,000 and $75,000, respectively. In that event, the portion of
those creditors' claims representing the difference between the fixed pay-
out and the (lesser) actual value of the collateral would have been repaid
dollar for dollar, notwithstanding the unsecured status of that portion of
the claims. As the bankruptcy court correctly noted,"[t]his alone is
objectionable[;] since these amounts are subject to change and since
unsecured creditors are not paid in full, the value of those claims must
be determined under 11 U.S.C. § 506." Id. at 2-3. Section 506 requires
the value of the collateral to be calculated "in light of the purpose of the
valuation and of the proposed disposition or use of such property, and in
conjunction with any hearing on such disposition or use or on a plan
affecting [the secured] creditor's interest." 11 U.S.C. § 506(a). The stat-
ute thus contemplates that the valuation issue will, in most cases, be sub-
jected to the adversary process, with the ultimate determination made by
the court.
5
the strength of that valuation, Legend had been working with the
Small Business Administration ("SBA") to obtain a bank loan of suf-
ficient size to permit the stations to become current with their credi-
tors. Confronted with this new development, the court continued the
confirmation hearing and permitted Legend to further modify and
resubmit its plan.
On May 27, 1997, the proceedings resumed with the latest versions
of the Edwards Plan and the Legend Plan both before the bankruptcy
court for confirmation. The court heard the testimony of Charles A.
Dick, the Sutherlands' expert, in support of his $690,000 appraisal.
One basis for his valuation, Dick explained, was the ever-increasing
demand for the limited number of available broadcasting licenses, the
vast majority of which are obtained by the sale of existing stations.
A second basis, according to Dick, was that a broadcaster's "area of
influence" extends beyond that covered by its primary signal, due in
large part to the mobility of the listening audience. A significant por-
tion of the population, for example, commutes a considerable distance
between home and work, either of which might be within the signal
range. Under this analysis, the area of influence for WABN-AM and
WABN-FM extends at least thirty miles beyond the effective reach of
the stations' signals, encompassing the lucrative Tri-Cities market of
northeastern Tennessee. Other factors entered into Dick's valuation
calculus, including Legend's ownership of the real estate on which its
studios and broadcast tower are situated. Legend had been deriving
income from its tower by leasing antenna and transmitter space to
providers of cellular telephone and paging services. On cross-
examination, Dick admitted that his appraisal was heavily influenced
by the stations' potential as a profitable enterprise -- a potential that
in his opinion had not been fully realized:
Q. Your opinion as to the $690,000 figure . . . does not
address what the value of this station is today, the way it is
being run today by existing management . . .?
A. On the cash flow basis, you are 100 percent right.
The bankruptcy court rejected the Legend Plan, concluding that it
proposed payments to the estate's creditors over an unduly protracted
period (more than eleven years) and that it offered little chance of
6
success in any event. The court noted further that insofar as the Leg-
end Plan permitted the Sutherlands to retain an equity interest in the
business while payment of the unsecured claims languished, the plan
violated the "absolute priority rule."3 The Edwards Plan, by contrast,
would divest the Sutherlands of their ownership rights and provide for
the prompt disbursement of the $335,000 generated by the sale of the
business to BBCI. The proceeds would infuse significantly more cash
into the estate than the maximum new debt of $200,000 that the SBA
would guarantee under the Legend Plan. This latter fact had appar-
ently not been lost on the creditors, each class of which voted in favor
of the Edwards Plan. The bankruptcy court found the Edwards Plan
to meet all of the statutory requirements for confirmation. See 11
U.S.C. § 1129. Accordingly, on September 5, 1997, the court entered
an order confirming that plan.
B.
Legend appealed the bankruptcy court's order confirming the
Edwards Plan to the district court, which affirmed the bankruptcy
court on April 14, 1998. Legend then filed a timely notice of appeal
to this court, which was docketed as No. 98-1720. Shortly thereafter,
we ordered a limited remand for the bankruptcy court to permit Leg-
end to file a motion to modify the Edwards Plan, pursuant to 11
U.S.C. § 1127(b). The proposed "modification" was an offer from
investor Don Nicewonder (the "Nicewonder Plan") to (1) obtain a
one-third interest in Legend for $142,000 and (2) loan the company
an additional $283,000 to pay off the balance on its old debts.
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3 See 11 U.S.C. § 1129(b)(2)(B)(ii) (requirement that plan be "fair and
equitable" presupposes that "the holder of any claim or interest that is
junior to the claims of such class [of unsecured claims] will not receive
or retain under the plan on account of such junior claim or interest any
property"); In re Bryson Properties, XVIII , 961 F.2d 496, 503 (4th Cir.
1992) ("The absolute priority rule provides that a dissenting class of
unsecured creditors must be provided for in full before any junior class
can receive or retain any property under a reorganization plan."), quoting
in part Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988)
(internal quotation marks, brackets, and citations omitted). Southern and
Premier, holding unsecured claims against the estate, each voted against
the Legend Plan.
7
On October 7, 1998, the bankruptcy court ordered Legend to file
a disclosure statement with respect to the Nicewonder Plan, see 11
U.S.C. § 1125(b), and ordered that any party wishing to submit addi-
tional modifications (or a new plan) must do so within sixty days.
BBCI appealed the October 7 order and then moved the district court
to withdraw its reference of the case to the bankruptcy court. See 28
U.S.C. § 157(d). The district court granted BBCI's motion (and with-
drew the reference) on November 19, 1998.
On April 8, 1999, the district court entered an order denying Leg-
end's motion for modification, concluding that the Nicewonder Plan
did not "modify" the Edwards Plan because it was actually an entirely
new plan. Absent some identity between the two plans, the court rea-
soned, the Edwards Plan was not subject to alteration under
§ 1127(b). Legend now appeals the district court's orders (1) affirm-
ing the bankruptcy court's confirmation of the Edwards Plan and (2)
denying Legend's motion to modify the confirmed Edwards Plan by
adding the Nicewonder Plan.
II.
In reviewing the district court's decision to affirm the bankruptcy
court's confirmation order, we apply the same level of scrutiny as did
the district court. We must accept the facts as found by the bank-
ruptcy court unless we discover those findings to be clearly errone-
ous. In re Stanley, 66 F.3d 664, 667 (4th Cir. 1995) (citation omitted).
The bankruptcy court's application of the law, however, is owed no
deference, and is therefore reviewed de novo. Id. Likewise, inasmuch
as the district court's denial of Legend's motion for modification
rests, in this case, on that court's interpretation of the law, we review
that decision de novo.
A.
Legend first challenges the confirmation of the Edwards Plan. For
us to reverse on this issue, we would have to conclude that the bank-
ruptcy court clearly erred in finding that BBCI's offer of $335,000 for
Legend's assets was fair and reasonable. We do not find clear error.
8
The evidence before the bankruptcy court as to the value of the
radio stations consisted entirely of the conflicting testimony of the
two valuation experts -- Otwell, who supported the Edwards Plan,
and Dick, who testified for the Sutherlands (and Legend). Otwell's
qualifications were extensively documented. He had about thirty
years of experience in the radio industry, having personally brokered
more than two hundred sales of radio stations. In the course of his
business and "on a regular basis," Otwell had appraised radio stations
"of all sizes." Dick was similarly well qualified.
Otwell's appraisal of WABN-AM and WABN-FM at $275,000
was based on his comprehensive review of the stations' financial
reports, tax returns, schedule of assets, licensing restrictions, effective
area of broadcast, and market share as measured by several years of
Arbitron ratings. In contrast, Dick's $690,000 valuation de-
emphasized many of these same factors, relying instead on the sta-
tions' hypothetical performance under optimal management.
In confirming the Edwards Plan, the bankruptcy court accepted
Otwell's valuation. That decision was consistent with the realities and
the evidence. BBCI's offer of $335,000, which is considerably more
in line with Otwell's valuation than with Dick's, was on the table
months before either appraisal was commissioned. Moreover, as the
bankruptcy court noted, "[n]o upset bids[were] filed against the
$335,000 [BBCI] bid incorporated in the Edwards Plan despite the
fact that this offer and Plan ha[d] been pending before [the] Court for
many months." In other words, the absence of a competing bid over
that time is an indication of the fairness of the BBCI bid. Further-
more, Nicewonder's proposal (which came much later) to pay
$142,000 for a one-third interest in Legend is neither a ringing
endorsement of Dick's appraisal nor a condemnation of Otwell's.
Even if we assumed that full ownership of the company is worth three
times Nicewonder's offer (which, for a variety of reasons, we do not),
the extrapolated value of $426,000 is still closer to Otwell's projec-
tions than to Dick's and closer still to BBCI's actual bid of $335,000.
Under these circumstances, where the bankruptcy court was presented
with the valuations of two experts, we cannot say that it committed
clear error by adopting the one significantly closer to the only con-
crete offer of purchase received over the course of nine months. We
9
therefore affirm the district court's order upholding the bankruptcy
court's confirmation of the Edwards Plan.
B.
We turn now to the district court's denial of Legend's motion for
modification of the Edwards Plan, a procedure governed by Section
1127 of the Bankruptcy Code. That section provides, in pertinent part:
The proponent of a plan or the reorganized debtor may mod-
ify such plan at any time after confirmation of such plan and
before substantial consummation of such plan . . . . Such
plan as modified under this subsection becomes the plan
only if circumstances warrant such modification and the
court, after notice and a hearing, confirms such plan as mod-
ified . . . .
11 U.S.C. 1127(b).4 The parties dispute whether Legend is a "reorga-
nized debtor" with standing to modify a confirmed plan and whether
the Edwards Plan has undergone "substantial consummation," thereby
precluding it from being materially altered.5 We need not decide
either question, however, because we agree with the district court that
the Nicewonder Plan would "modify" the Edwards Plan out of exis-
tence, an outcome that we conclude is forbidden by the Bankruptcy
Code.
Under the old Bankruptcy Act, which preceded the current Code,
the changes proposed by the Nicewonder Plan would not have been
accepted as a modification of the Edwards Plan. See Matters of Inland
Gas Corp., 275 F.2d 509, 513 (6th Cir. 1960) ("We think the district
judge . . . used sound common-sense, practical judgment in declining
to permit an altogether new plan to be submitted, under the guise of
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4 Section 1127(a), in contrast, addresses pre-confirmation modifications
to proposed plans, which can only be made by the plan's proponent.
5 See In re Best Products Co., Inc., 177 B.R. 791, 802 (S.D.N.Y.) (not-
ing that after a confirmed plan has been substantially consummated,
"[t]he court cannot adopt any modification that materially alters the plan
and adversely affects a claimant's treatment") (citations omitted), aff'd,
68 F.3d 26 (2d Cir. 1995).
10
alterations and modifications, in lieu of a sound plan already con-
firmed by him . . . ."). In reaching its conclusion, the Sixth Circuit
quoted Judge Learned Hand:
[T]he court may never under the guise of "alteration" or
"modification" substitute an entirely new"plan" in place of
the original[,] although what is the line between a substitute
and an "alteration" or a "modification" is necessarily left at
large. . . . [I]t is often exceedingly difficult for a bankruptcy
court to resist the importunities . . . of those who wish to
keep the "revived debtor" indefinitely beneath its aegis . . . .
We can do no more than declare, for whatever weight it may
have, that we deem the long delay which so often occurs
between the order of "confirmation" and the"final order" a
major abuse, and that a judge who superintends such a pro-
ceeding should feel himself charged with an affirmative
duty to insist upon its early conclusion.
Inland Gas, 275 F.2d at 513-14 (quoting Prudence-Bonds Corp. v.
City Bank Farmers Trust Co., 186 F.2d 525, 528 (2d Cir. 1951)).
Inland Gas interpreted Section 222 of the old Bankruptcy Act,
which, in conjunction with Section 229(c), was the forerunner of the
statute at issue here, 11 U.S.C. § 1127(b). 6 As we have previously
noted, prior practice under the Act is accorded"significant weight"
when construing ambiguities in parallel provisions of the Bankruptcy
Code. In re Merry-Go-Round Enters., Inc., 180 F.3d 149, 156 (4th
Cir. 1999) (citing Dewsnup v. Timm, 502 U.S. 410 (1992)).
The Nicewonder Plan is clearly a new plan and not merely a modi-
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6 Section 222 provided, in pertinent part, that "[a] plan may be altered
or modified, with the approval of the judge, after its submission for
acceptance and before or after its confirmation if, in the opinion of the
judge, the alteration or modification does not materially and adversely
affect the interests of creditors or stockholders." 11 U.S.C. § 622(repealed 1978). Section 229(c) imposed the additional prerequisite that
a plan could not be modified if it had been substantially consummated.
11 U.S.C. § 629(c) (repealed 1978); see Inland Gas, 275 F.2d at 517(Miller, J., dissenting).
11
fication of the Edwards Plan. The Edwards Plan divests the Suther-
lands of their ownership interest in Legend and provides for the sale
of the company's assets to satisfy its creditors. The Nicewonder Plan
would permit the Sutherlands to retain control of the radio stations
while infusing new money into the existing corporate structure. As
the district court concluded:
The confirmed plan in this case, which was proposed by
Edwards, calls for the liquidation of Debtor's key asset --
the radio station. By contrast, the Nicewonder plan is a plan
of reorganization which would allow Debtor to continue its
ownership and operation of the radio station. The stark con-
trast between these two plans convinces the court that the
Nicewonder plan, rather than modifying a portion or por-
tions of the Edwards plan, has instead wiped the slate clean
and developed an entirely new plan, which retains none of
the key elements of the confirmed plan.
The two plans are not compatible. Accordingly, we hold that the
changes proposed by Legend (through the Nicewonder Plan) to the
Edwards Plan are not within the realm of modifications contemplated
by § 1127(b). The district court did not err, therefore, in denying Leg-
end's motion for modification. The Edwards Plan is a fair and reason-
able plan already confirmed, and we feel "charged with an affirmative
duty to insist upon its early conclusion."
The district court's orders on appeal are affirmed.
AFFIRMED
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