When I attended the ABI Caribbean Insolvency Forum in San
Juan, P.R., back in February, a panel of lawyers from Indiana, where the case
had taken place, delivered a presentation about it, and forecast that the
debtor would lose on remand, but would appeal the result. At the time of the conference, the bankruptcy
court had sub judice a revised plan
and the secured creditor’s motion to dismiss the case, which the court
ultimately granted on February 11, 2014.
Whereupon, the debtor did, indeed, appeal directly, with leave, to the
Seventh Circuit earlier this month (Case No. 14-1735). Briefs are to be completed by early June. Per order of the bankruptcy court, the secured
creditor’s exercise of rights is stayed pending resolution of the appeal.
Reading the debtor’s notice of appeal and its argument
against dismissal in the bankruptcy court, I thought it would be interesting,
as sort of a post-script to the Till
posts earlier this year, to examine the position being taken by the debtor,
which depend on the extension of Till
to chapter 11, although there are other fallacies as well.
The debtor’s revised plan was remarkable for its
brazenness. Notwithstanding the
emphasis in Judge Easterbrook’s opinion on the need for an auction where a
debtor proposes to sell new equity to an existing equity holder, the revised
plan did not contemplate one. Rather,
the debtor revised the treatment of the secured creditor, the claim of which had
been bifurcated under the original plan, with the deficiency being discharged
at less than par, to provide that it was now fully secured (I discuss later on
that this is more a matter of the debtor’s “ipse
dixit” than actual economic fact). The
revised plan further proposed a repayment of the secured claim over 10 years on
a 30-year amortization schedule with a “fixed market rate of seven percent”
(quoting the revised plan).
The debtor then argued, first, that Judge Easterbrook’s
opinion was merely an application of the absolute priority doctrine, but the
absolute priority doctrine can only be invoked by a dissenting class of unsecured creditors; since the objecting
creditor was fully secured, it could therefore not be heard to complain about
the continuing lack of an auction.
Second, the debtor argued, its proposed treatment of the
secured claim was “payment in full” because it complied with Till; further, it argued (in one of the
most ridiculous arguments I can recall seeing), because a Till-compliant cram-up is within a debtor’s legal rights, then being crammed-up in accordance with Till is within the “legal, equitable and
contractual rights to which such claim or interest entitles the holder of such
claim or interest” and, presto, the secured creditor was actually “unimpaired”
within the meaning of section 1124, and thus deemed to accept the plan.
The second argument is obviously wrong, regardless what
one thinks of Till-in-chapter-11 in that it misreads the word “and” in § 1124(a)’s
litany of “legal, equitable and
contractual rights” to mean “or”. Unimpairment requires that all three kinds of
rights be left “unaltered”, not merely one subset of them. The secured creditor’s debt had come due by its
terms and thus the creditor has, but for the automatic stay, a host of
contractual, legal and equitable rights to pursue outside of bankruptcy court that
the plan, by substituting an extended payout and discharging the terms of the
old debt, “alters”. Also, fairly obviously, to conclude that a
cram-down/up leaves a creditor class “unimpaired” would eliminate the role of
The first argument is more competent, also I think it is
also wrong, because the “cramdown” section of the Bankruptcy Code, § 1129(b)(2),
does not contain the “only if there is a dissenting unsecured creditor class” logic
that the debtor reads into it. Rather,
it says the bankruptcy court shall confirm the plan “if the plan … is fair and
equitable with respect to each class of claims or interests that is impaired
under, and has not accepted, the plan.” The
secured claim is such a class under the revised plan, so clearly gets to invoke
the “fair and equitable” standard. The only question is whether the content of
that standard is 100% different for different classes, or do overlaps exist.
The Code then specifies that the “fair and equitable”
standard “includes” – which is statutorily defined to be non-limiting – certain
criteria which differ by class, but by virtue of the word “includes”, courts
can impose additional requirements, and it is clear from Judge Easterbrook’s
opinion that it was not tied to the deficiency claim that the original plan would
have imposed on the mortgage holder. And
that makes perfect sense as a matter of economic substance because these small
to midsize commercial real estate cases are generally all battles between the
mortgage holder and the equity holder; there is rarely any unsecured debt to
speak of. In Castleton
Plaza, it seems pretty clear that any unsecured debt that existed in the
case was consciously created by the debtor’s strategic non-payment of certain
trade creditors whose loyalty it could count on (subject to designation of
their votes under § 1126 (e)).
But, suppose you disagree with my position on that last
issue, and instead believe there are no “cram-up” criteria for secured
creditors outside of the ones explicitly specified in § 1129(b)(2)(A)(i). Then you must confront the “Till in chapter 11” issue. The proceedings below, it is clear, never
proved by way of evidence that the proposed repayment actually delivered to the
secured creditor a “value, as of the effective date of the plan, of at least
the value of the holder’s interest in the estate’s interest in such property…”,
i.e., the foreclosure value of the
collateral here. There was no
evidentiary hearing on that issue. Rather,
the debtor simply contended a payout formula compliant with Till delivers that value as a matter of
law.
The plan uses the phrase “fixed market rate of interest”,
and thus one might wonder if in fact the repayment terms could be supported by expert
evidence, and thus dodge the Till
issue, but that phrase is frankly absurd and misleading. The value of the collateral that was
referenced in the proceedings before the bankruptcy judge earlier this year,
$8.2 million, is only about 90% of the principal amount of the note to be
issued under the plan to the secured creditor (approximately $9.1 million). There is no credible “market rate of interest”
for a 10-year note with a 110% loan-to-value ratio and a 30-year amortization;
if there were, the debtor would have found a lender willing to provide it and
dispensed with the multi-year cram-up battle. Thus, to obtain confirmation, the debtor would
ultimately have to argue for a rule of law that a note complying with Till satisfies § 1129(b)(2)(A)(i)[1]. As I explained in my posts earlier this year,
I think that would be an error of law, not a rule of law, and it will be
interesting to see if the Seventh Circuit seizes on the chance to explain why Till should not be applied in chapter 11
cases.
[1] Technically speaking, the proposed rate of interest is
375 bps above the prime rate, so slightly more than the conventional Till range of 100-300 bps, but that does
not seem to affect the analysis as the LTV ratio is still too high for the note
to be equal in value to the secured creditor’s claim.
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