In Re Ocean Shores Community Club, Inc., Debtor.ocean Shores Lot Owners Association, Inc.; Russell M.folino, Louis F. Doud, Kathryn M. Doud, Haroldjones, Clayton Walter, Elmer P. Lemke,winnie M. Shull, Appellants, v. Ocean Shores Community Club, Inc., Appellee, 944 F.2d 909 (9th Cir. 1991)

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U.S. Court of Appeals for the Ninth Circuit - 944 F.2d 909 (9th Cir. 1991) Argued and Submitted Sept. 11, 1991. Decided Sept. 19, 1991

Before WRIGHT, FARRIS and TROTT, Circuit Judges.


A group of creditors appeals the Bankruptcy Appellate Panel's confirmed reorganization plan, contending it violates state law and was proposed in bad faith. The BAP upheld the confirmation of the plan. We affirm.

The three issues that the creditors now appeal are whether: (1) the bankruptcy court had jurisdiction over OSLOA; (2) the court's failure to dismiss the plan for bad faith and violation of law under 11 U.S.C. § 1129(a) (3) was error; and (3) the court erred in accepting the debtor's classification of creditors.

Ocean Shores Community Club (OSCC) is a private Washington corporation, formed to provide municipal and recreational services for a residential development. Each Ocean Shores property purchaser became a member of the club and was assessed annual dues. Many property owners stopped paying dues because OSCC never provided municipal services. OSCC recorded liens against property owners for unpaid dues.

In 1981, the Cottons filed suit in state court to quiet title against the OSCC lien. They prevailed. The Ocean Shores Land Owners Association (OSLOA) then filed a class action suit to quiet title. The Washington Court of Appeals affirmed the Cotton judgment in 1987. In 1988, OSCC filed chapter 11 bankruptcy, triggering an automatic stay.

In 1989, OSCC proposed a reorganization plan and mailed notices to OSLOA members. Property owners could opt out of club membership. If they chose to do so the liens would be removed, but any claims they had against OSCC would be lost. If they did not respond to the notice or decided not to opt out, they became club members and were obligated to pay dues. The obligation was based on mutually restrictive covenants, which ran with the land.

The bankruptcy court denied OSLOA's motion to dismiss confirmation of the plan. OSLOA appealed to the BAP, which affirmed and OSLOA appeals to this court.

This court reviews the bankruptcy court's decision using the de novo standard for questions of law and the clear error standard for findings of fact. In re Acequia, Inc., 787 F.2d 1352, 1357 (9th Cir. 1986).

* OSLOA contends that the bankruptcy court lacked in rem jurisdiction. State law determines whether OSCC had a property interest in the liens it filed against OSLOA. See In re Contractors Equipment Supply Co., 861 F.2d 241, 244 (9th Cir 1988). Because the Cotton decision does not have collateral estoppel effect on the issue of the validity of the liens, see Harkins v. Del Pozzi, 50 Wash. 2d 237, 310 P.2d 532 (1957), the OSCC had a property interest in the liens. We conclude that the bankruptcy court had in rem jurisdiction.

The bankruptcy court also had personal jurisdiction. The record shows that OSCC complied with Bankruptcy Rule 2002(b), providing that the debtor, creditors and others shall be given 25 days notice by mail of the time for filing objections and for the hearing to consider plan confirmation. In addition, OSCC's use of a third class mailing, followed by a first class mailing, meets the requirements of notice under the due process clause. Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950).

OSLOA argues that the bankruptcy court did not have subject matter jurisdiction because the property owners were debtors of OSCC, not its creditors. Section 101(10) defines a "creditor" as any entity having a claim against the debtor. A "claim" is a right to payment or a "right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, ..." 11 U.S.C. § 101(5) (1988); see also Pennsylvania Dept. of Pub. Welfare v. Davenport, 110 S. Ct. 2126, 2130 (1990). Because of the broad interpretation of "claim," we find subject matter jurisdiction.


We reject OSLOA's argument that the plan violated state law. Bankruptcy Code section 1129(a) (3) bars confirmation of plans proposed in violation of law, not those that contain terms that may contravene law. In re Sovereign Group, 1984-12 Ltd., 88 Bankr. 325, 328 (Bankr.D. Colo. 1988); In re Koelbl, 751 F.2d 137, 139 (2nd Cir. 1984). Even if § 1129(a) (3) applied to the terms of the plan, there was no illegality. The articles of incorporation may be amended under § 1123(a) (5) and the new covenants were not barred by Cotton.


We find no error in the court's acceptance of the classification scheme. Section 1122(a) allows the non-arbitrary grouping of similar claims, but does not require that all similar claims be grouped together. Matter of Jersey City Medical Center, 817 F.2d 1055, 1061 (3d Cir. 1987). The BAP concluded that the classes had different interests, and that the classification was not arbitrary.



This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3