and the School District of Philadelphia, and
(2) That the City of Philadelphia (as it has agreed to do) waives and declares cured all defaults claimed to exist under the Construction and Lease Agreement of May 26, 1966. The City of Philadelphia has waived all those defaults (N.T., pp. 72-76, July 23, 1971), and by my Opinion of August 9, 1971, I have removed the first condition.
Accordingly, I find that the Trustees' Plan of reorganization fully complies with § 221(1) of the Bankruptcy Act. (11 U.S.C. § 621(1))
2. § 221(2) -- Fair and Equitable and Feasible
Under § 221(2), (11 U.S.C. § 621(2)) a Plan can be confirmed only if the Plan is found to be "fair and equitable, and feasible." I have previously found pursuant to § 174 (11 U.S.C. § 574) that the Trustees' Plan is "fair and equitable and feasible" ( Opinion of October 28, 1971, 340 F. Supp. pp. 779-781), and except as modified hereinafter I reaffirm my findings.
In order for a Plan to be "fair and equitable," it must meet the absolute priority test, that is, it must provide "participation for claims and interests in complete recognition of their strict priorities . . ."
In other words, "each class in descending rank must receive full and complete compensation . . . before the next class below may properly participate."
The Supreme Court has further held that the absolute priority rule applies to insolvent corporations.
Under the Trustees' Plan of Reorganization, the holder of the first and second mortgages on the Spectrum, Fidelity, is to be paid in cash on consummation with interest of 7.5%. In a letter dated September 27, 1971 (Docket No. 228), Fidelity Bank took the position that in Fidelity's judgment, December 31, 1971, is the latest date to which Fidelity would agree for full payment of its secured claims without exercising its right to collect the default rate of interest of ten percent. Further, Fidelity has agreed that conditioned on such payments actually being received on or before December 31, 1971, it will (1) waive any claim to the "default" interest of ten percent; (2) compute its final interest claim only on principal, and not on principal and previously accrued but unpaid interest; and (3) claim only fifty percent of its total out-of-pocket charges, costs and expenses as of the date of payment. The holder of the third mortgage, ARA, will release its third mortgage claim and be paid in full subject to its agreement with Foreman-Snider to loan the new corporation $1,400,000. The Foreman fourth mortgage claim will be satisfied by the issuance of shares of stock in the new company or be wholly subordinated both to all debt incurred in financing the new company and to the claims of the present unsecured creditors. The claims of the unsecured creditors shall be paid in full as follows:
(1) Fifty percent (50%) to all unsecured creditors (except Leonard Tose) upon consummation;
(2) The balance (except Tose) in four annual equal installments;
(3) The Tose claim, as reduced to $250,000 in agreement approved by the Court, will be paid $50,000 at consummation and the balance in five annual equal installments beginning at the end of the fifth year following consummation.
All administrative costs, taxes (other than real estate taxes),
and valid mechanic's lien claims shall be paid in full. No provision is made for stockholders by reason of the Spectrum's insolvency.
As the above analysis indicates, there is no question that the Plan as proposed satisfies the "absolute priority" rule. Therefore, I find that the Plan is "fair and equitable."
In addition to finding that the proposed Plan is "fair and equitable," § 221(2) of the Bankruptcy Act, 11 U.S.C. § 621(2) also requires a Court to determine whether or not the Plan is "feasible". "Basically, feasibility involves the question of the emergence of the reorganized debtor in a solvent condition and with reasonable [probability] of financial stability and success."
Under the Trustees' Plan, there exists a total of $11,224,926 to be refinanced on December 31, 1971. (Projection of Spectrum Liabilities, Ex. T-9). To meet the above cash requirement, the Trustees' Plan proposes the following:
(1) The First Pennsylvania Bank has agreed to lend $6,500,000, payable over fifteen years at 7.5% per annum (Ex. F-S 1);
(2) ARA has agreed to lend $1,400,000 payable over twenty years at a rate 1/2% over prime (Ex. F-S 3); and
(3) The Foreman fourth mortgage claim will be contributed to the new company, either by subordination or capitalization in exchange for stock in the new company.
In addition, the Trustees will have funds available in the bank and in the accounts receivable.
Finally, the First Pennsylvania Bank has agreed to extend a $500,000 line of credit on a guarantee by Foreman, Snider and their wives, at an interest rate of 1 3/4% over prime to meet any deficit or to finance any needed capital or other improvements. Also, it should be noted that Mr. Foreman and Mr. Snider have agreed to devote their personal resources to whatever extent is necessary. (Hearing before Higginbotham, J., July 23, 1971, N.T., 98.)
To view the situation from the prospective of cash flow, I accept the Jackson-Cross estimate of December 6, 1971 of annual cash flow of $1,100,000.
As deductions against this $1,100,000, there would be a debt service to First Pennsylvania of $723,000 debt service to ARA of $150,000, payments to unsecured creditors of $55,500, and interest to Tose of $12,000 for a total of $940,500, leaving a balance of $159,500. Thus, from any point of view the Plan has the "reasonable expectation of success" which the statutory test of feasibility requires.
Accordingly, I find, pursuant to § 221(2) of the Bankruptcy Act, 11 U.S.C. § 621(2), that the Trustees' Plan is "fair, equitable and feasible."
3. § 221(3)
Under § 221(3) (11 U.S.C. § 621(3)), the judge must determine that "the proposal of the plan and its acceptance are in good faith and have not been made or procured by means or promises forbidden by this title." The trustees have explained in their Proposed Plan the circumstances under which it was developed and proposed. There is no question but that my finding that the Plan was proposed in good faith is essentially satisfied by my above finding that the Plan is "feasible."
In addition, the Trustees have provided this Court with an Affidavit certifying the mailing of ballots (Docket No. 280) and an Affidavit showing that 78% of the creditors voted in favor of the Plan and no creditor voted against the Plan. (Docket No. 261) On a view of these documents and based on the fact that no objection has been noted by anyone to the good faith manner in which the Plan was proposed or accepted, I find that the requirement of "good faith" has been met. Finally, I find that no acceptance was procured by means of forbidden promises as there is no evidence of any agreement
which violates this subsection. Therefore, I find that all requirements of § 221(3), (11 U.S.C. § 621(3)) have been fully met.
4. § 221(4)
The requirements of § 221(4), (11 U.S.C. § 621(4)) are that all expenses, and payments for services and costs arising in connection with the reorganization proceeding are reasonable and are fully disclosed to the judge prior to confirmation or if fixed after confirmation, are subject to the approval of the judge. Since the Spectrum first was placed in reorganization on May 1, 1968, I have carefully examined all requests for compensation and have approved only those which were reasonable. In addition, the Trustees' Plan para III permits payment of future costs only which the judge has approved. In addition, the Trustees' -- Foreman-Snider Brief (Docket No. 277) states for the record that all future payments will be subject to the approval of the judge. Thus, I find that the Trustees' Plan meet the requirements of § 221(4), (11 U.S.C. § 621(4)).
5. § 221(5)
The final requirement for confirmation is that provided in § 221(5) (11 U.S.C. § 621(5)):
". . . the identity, qualifications, and affiliations of the persons who are to be directors or officers, or voting trustees, if any, upon the consummation of the plan, have been fully disclosed, and that the appointment of such persons to such offices, or their continuance therein, is equitable, compatible with the interests of the creditors and stockholders and consistent with public policy."