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Sunday, April 14, 2013

Camp Bowie

Sheppard Mullin's bankruptcy law blog alerted me to an interesting Fifth Circuit opinion dealing with several closely related chapter 11 plan confirmation issues. The February 26 opinion in Matter of Village at Camp Bowie, L.L.P. allowed a chapter 11 debtor to "cram up" a "new value" plan on its secured lender, holding that the plan satisfied the "one accepting class of impaired creditors" requirement of section 1129(a)(10) when the class of general unsecured creditors, which received only de minimis impairment of (full payment in 90 days without interest), voted to accept.  The Fifth Circuit is not traditionally associated with such a "pro-debtor" / anti-secured-lender stance, so I looked at the opinion closely to see if this was a major shift in its approach to chapter 11 battles.  I found that the case presented some fairly unusual  - and appealing - facts (which aren't fully captured by the Sheppard blog post) and the opinion ultimately struck me as a fairly sensible approach to those unusual facts.  But I think the fact pattern was sufficiently different from the Circuit's prior chapter 11 precedents, like Greystone and Sandy Ridge, that the decision is more sui generis than any kind of a doctrinal shift. Its facts actually resemble the Second Circuit's vote designation opinion in In re DBSD North America, Inc. more than the gerrymandering case law.

Village at Camp Bowie is an operating commercial real estate property in Fort Worth, Texas.  Its owners acquired and improved it in 2004, investing approximately $10 million of equity and financing the rest with a typical commercial mortgage. The mortgage matured in 2008 and apparently was not re-financeable.  The mortgage lender and borrower spent approximately 2-1/2 years in a workout / modification mode.  In July 2010, the mortgage lender sold the debt to the appellant, Western Real Estate Equities, L.P., who, according to the opinion "purchased the Notes with an eue toward displacing the Village as the owner of the underlying real estate".  (The bankruptcy court opinion states that the buyer admitted this on the witness stand at confirmation and further found that the buyer "had no interest in negotiating plan treatment acceptable to it with the debtor").  The court goes on to note that Western "posted the Village for a non-judicial foreclosure immediately after acquiring the Notes".  Village filed chapter 11 to stay the foreclosure.

At the time of filing, the debtor owed a little more than $32 million on its mortgage and also owed trade creditors about $59,000.  The bankruptcy court, at some point prior to plan confirmation, found that the value of the real estate was $34 million, meaning that the mortgage was over-secured and the estate was solvent. The opinion does not contain any indication that the valuation was appealed.

The debtor proposed one new value plan that the bankruptcy court rejected. After modifications, the bankruptcy court confirmed a plan that provided for:

(1) the mortgage to be restructured as a five-year balloon with full cash pay interest using an interest rate of at least 6.4%, which, the bankruptcy court opinion reports, was about 470 bps over comparable Treasuries at the time of confirmation (the Fifth Circuit opinion quotes the rate as 5.84% but a reading of the bankruptcy court opinion shows that that court rejected the 5.84% interest rate and required the debtor increase it to "at least 6.4%" which the Fifth Circuit does not mention);

(2) the owners to infuse $1.5 million of cash; and

(3) the general unsecureds to be repaid in 90 days without interest.

The unsecureds voted to accept, but the mortgage holder voted against the plan and objected to considering  the general unsecureds as impaired for purposes of satisfying 1129(a)(10).

So the case presented someone with an oversecured note trying to take away the debtor' s equity, by voting
against a full payout plan, while the debtor's owners were willing to infuse a meaningful amount of money to hold on to their property and further to make multiple enhancements of the secured creditor's treatment under their plan to win confirmation.   I think the court was influenced by the relative sympathies the parties' objectives evoke, although it does not say so explicitly.  Just as the opinion does not show any appeal of valuation, it shows no feasibility issue being raised on appeal either.  So the case looks just like a blatant attempt by the distressed mortgage buyer to own something worth more than its claim at the prejudice of someone willing to put up real money to enable full repayment. The case resembles DBSD quite a bit in that respect: as the bankruptcy judge wrote "If any party has a questionable motive in this case, it is Western."  However, neither the bankruptcy court nor the appellate court address the case under section 1126, and presumably the debtor did not frame its confirmation case in that fashion.  

But, in gauging the precedential value of Camp Bowie, it is essential to understand these key facts.   It is thus very different from cases like Greystone and Sandy Ridge which involved an opposite fact pattern:  under-secured mortgage lenders fighting efforts by the equity to hold on to properties by writing off the lenders' deficiency claims and imposing substantial losses on them, and solving the 1129(a)(10) hurdle with clever artificial impairment.  Here, in contrast, there was an over-secured lender trying not to achieve repayment in full, but something better than that.  In Greystone and Sandy Ridge, there were unsecured deficiency claims receiving dramatically inferior treatment to the general unsecureds, whereas in Camp Bowie, there was no deficiency claim In each of these cases, then, the legal battles brought to the appellate level were over issues of classifying and treating the small unsecured creditor class, but the good faith objectives of the litigating parties were completely different one to the other and really, I think, drive the results in all of them. 

That said, the Fifth Circuit seems, to me, to get the 1129(a)(10) analysis right.  The delayed repayment of the general unsecureds was clearly impairment, and it clearly voted to accept.  So 1129(a)(1) was clearly satisfied as a formal matter.  The substantive inquiry into whether the amount of impairment was "good enough" or done for the right motive is better handled under 1129(a)(3)'s "good faith" test, where the varying goals of the parties involved can be assessed both more directly and more flexibly; as the above shows, those goals can differ enormously from one case to another. The court correctly observed that Greystone did not turn on 1129(a)(10) but was an 1122 classification holding, and correctly notes that other decisions prohibiting "gerrymandering" plan classes to get one accepting impaired class are not applicable because there was only one class of unsecureds (because of the unusual fact that the mortgage lender was over-secured, the debtor did not have to gerrymander unsecureds to create an accepting impaired class).

The opinion rejects a stricter reading of 1129(a)(10) from the 8th Circuit about 20 years ago, creating the potential for Supreme Court review to resolve a circuit conflict.  But, because litigants and courts can frame  this kind of dispute as an 1129(a)(3) issue, and are not required to litigate under 1129(a)(10), I don't see the circuit conflict as being significant enough to require Supreme Court involvement. But we'll see.