The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Presenting a live 90-minute webinar with interactive Q&A Leveraging Secured Lender Bankruptcy Cramdown Rules and Setting Interest Rates: Debtor and Lender Strategies Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, JULY 15, 2015 Gary L. Kaplan, Partner, Fried Frank, New York Benjamin Mintz, Partner, Kaye Scholer, New York
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Transcript
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Presenting a live 90-minute webinar with interactive Q&A
• A nonconsensual plan can be confirmed through a cramdown if:
• Plan does not discriminate unfairly
• Plan is fair and equitable
• At least one impaired class of creditors has accepted the plan (without counting insiders)
• All of the requirements for confirmation under section 1129(a) have been satisfied, other than the requirement of section 1129(a)(8) that each impaired class accept the plan
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Cramdown Requirements
• 1129(a) confirmation requirements include the following:
– Proper classification of claims (§§ 1129(a)(2), 1122)
– Equal treatment within a class (§§ 1129(a)(2), 1123(a)(4))
– Plan must be proposed in good faith (§ 1129(a)(3))
– Best interests test (§ 1129(a)(7))
– Feasibility (§ 1129(a)(11))
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1129(b) - No Unfair Discrimination
• Plan cannot discriminate unfairly against a dissenting class in relation to similarly situated creditors (in a different class).
• Courts typically apply one of two tests to determine if there is unfair discrimination:
– “Case by Case” Test – whether the proposed discrimination has a reasonable basis, is necessary for reorganization and is proposed in good faith
– “Rebuttable Presumption” Test – there will be a rebuttable presumption that a plan is unfairly discriminatory when there is (1) a dissenting class, (2) another class of the same priority, and (3) a difference in the plan’s treatment of the two classes that results in either (a) a materially lower percentage recovery for the dissenting class (based on net present value of payments) or (b) regardless of percentage recovery, an allocation under the plan of materially greater risk to the dissenting class in regard to its proposed distribution
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Fair and Equitable Requirement
• Plan Must Be “Fair and Equitable” as to Dissenting Class
– Includes statutory requirements – specifying required treatment of dissenting classes of secured creditors, unsecured creditors and equity holders.
– Includes non-statutory requirements:
• Absolute priority rule (subject to new value exception)
• No premium recovery – no distributions in excess of claim amount
• No unfair/unreasonable risk shifting
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Fair and Equitable Requirement – Statutory Treatment of Secured Creditors
• Secured Creditor treatment – 1129(b)(2)(A) provides three ways that a plan can satisfy “fair and equitable” treatment with respect to a dissenting secured creditor class.
– 1) Deferred payments: Payment over time in an amount equal to value of collateral (based on present value of payments), with lien retained on the collateral.
• Enables plan proponent to rewrite loan – i.e., principal amount based on value of collateral, new interest rate, modified market-based covenants and events of defaults.
• Loan may include nonstandard amortization payments, including a balloon payment, subject to feasibility requirements.
• An undersecured creditor receiving a note in the amount of its collateral value would be entitled to assert an unsecured deficiency claim (unless that creditor makes the 1111(b) election).
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Fair and Equitable Requirement – Statutory Treatment of Secured Creditors
• Effect of 1111(b) Election
– Secured creditor waives its unsecured deficiency claim.
– In exchange, the deferred plan payments must, in addition to having a present value equal to the value of the collateral, total (but not on a present value basis) the full allowed amount of the secured creditor’s claim.
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Fair and Equitable Requirement – Statutory Treatment of Secured Creditors
– 2) Collateral Sale: Sale of collateral with proceeds of sale subject to lien of secured creditor; also subject to secured creditor’s credit bid rights.
• Proceeds can be transferred to secured creditor or debtor can create a new loan secured by proceeds.
• In RadLAX Gateway Hotel LLC v. Amalgamated Bank, 132 S. Ct. 2065 (2012), Supreme Court held that a plan cannot eliminate credit bid right through indubitable equivalence prong.
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Fair and Equitable Requirement – Statutory Treatment of Secured Creditors
– 3) “Indubitable Equivalence” – plan must be completely compensatory of creditor’s claim, based on conservative valuation; no reasonable doubt of payment in full
• Abandonment or other unqualified transfer of collateral to secured creditor (including delayed transfer if collateral is not sold within specified time period)
• Replacement collateral of value in excess of secured claim
• “Dirt for Debt” or “Partial Dirt for Debt” plans—case by case analysis
• Sale without credit bid right—not indubitable equivalence (RadLAX)
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FINAL REPORT OF ABI COMMISSION – CONFIRMATION RECOMMENDATIONS
• Redemption Option Value – allocation of reorganization value to out of money creditors
• New Value Corollary
• Sections 506(c) and 552(b) – no waivers by trustee
• Cramdown interest rates
• No gifting or other class-skipping distributions
• One creditor/one vote
• No requirement of impaired accepting class
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CASE LAW DEVELOPMENTS
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Artificial Impairment
• Western Real Estate Equities, L.L.C. v. Village at Camp Bowie I, L.P. (In re Village at Camp Bowie I, L.P.), 710 F.3d 239 (5th Cir. 2013)
– Facts: Debtor “impaired” class of trade creditors ($60,000) by delaying payment in full for 3 months in order to cram down a $32 million secured claim with five year note.
– Fifth Circuit permitted artificial impairment, explaining that section 1123(b)(1) of the Bankruptcy Code does not require that impairment must be driven by economic motives; instead, the court would only consider motive in deciding whether the plan was proposed in good faith under section 1129(a)(3).
– Court distinguished its decision in In re Greystone III Joint Venture, 995 F.2d 1274 (5th Cir. 1991), which held that gerrymandering of creditor classes to create an impaired accepting class violates section 1122 classification rules.
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Artificial Impairment
• Ninth Circuit (L&J Anaheim Associates v. Kawasaki Leasing International Inc., 995 F.2d 940 (9th Cir. 1993)) also held that artificial impairment is not prohibited by the Bankruptcy Code.
• Eighth Circuit (Windsor on the River Associates v. Balcor Real Estate Financial Inc., 7 F.3d 127 (8th Cir. 1993)) held that artificial impairment was improper and would nullify the protections of section 1129(a)(10).
– Third Circuit (In re Combustion Engineering Inc., 391 F.3d 190 (3rd Cir. 2004) reached a similar result, in the context of asbestos-related bankruptcies. See also In re All Land Investments L.L.C., 468 B.R. 676 (Bankr. D. Del. 2012) (finding no evidence of business purpose for impairment).
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Artificial Impairment
• Lower courts in Second Circuit and elsewhere have held that artificial impairment is improper. See e.g., In re Fur Creations by Varriale, Ltd., 188 B.R. 754 (Bankr. S.D.N.Y. 1995); In re RYYZ, LLC, 490 B.R. 29, 43 (Bankr. E.D.N.Y. Apr. 4, 2013) (observing that majority view is that artificial impairment is not permitted); see also In re Akinpelu, 530 B.R. 822 (Bankr. N.D. Ga. 2015) (finding that debtor’s plan “improperly attempts to create an impaired assenting class for purpose of confirmation” through separate classification of the undersecured lender’s deficiency claim from other unsecured creditors); Federal Nat’l Mortgage Ass’n v. Village Green I, GP, 483 B.R. 807 (W.D. Tenn. 2012) (delayed cash out of $2,400 unsecured claims found to be improper artificial impairment where debtor sought to cramdown $5.4 million secured claim); Village Green I, GP v. Federal Nat’l Mortgage Ass’n, 523 B.R. 581 (W.D. Tenn. 2014).
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Claim Classification
• Wells Fargo Bank North America v. Loop 76, L.L.C. (In re Loop 76), 465 B.R. 525 (9th Cir. B.A.P. 2012), aff’d 578 Fed. Appx. 644 (9th Cir. 2014).
– Facts: Debtor placed undersecured creditor’s $6 million deficiency claim in a class separate from its other unsecured claims. Debtor justified separate classification because undersecured creditor’s claim was subject to a guaranty (which the undersecured creditor was pursuing in state court at the time). The undersecured creditor argued that the Debtor was improperly gerrymandering by separately classifying its deficiency claim from other unsecured claims.
– Bankruptcy Appellate Panel sustained separate classification, finding that the existence of the guarantee and a third party source of recovery made the undersecured creditor’s deficiency claim dissimilar from the claims of other unsecured creditors.
– On appeal, Ninth Circuit upheld confirmation based on the existence of a separate impaired accepting class and declined to address the issue of whether the separate classification was impermissible gerrymandering.
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Claim Classification
• Accord In re RTJJ, Inc., 2013 WL 462003 (Bankr. W.D.N.C. Feb. 6, 2013) (upholding separate classification of undersecured mortgage claim and other unsecured claims, noting personal guaranties in favor of mortgage claim, foreclosure rights and other distinctions justifying separate classification); In re Hyatt, 2014 WL 1652415 (Bankr. D.N.M. Apr. 23, 2014) (upholding separate classification of claim guaranteed by non-debtor and secured by non-debtor collateral, where guarantor was servicing the debt and was not in default); cf. In re NNN Parkway 400 26, LLC, 505 B.R. 277 (Bankr. C.D. Cal. 2014) (guaranty from insolvent debtor cannot support separate classification)
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Claim Classification
• Other courts have rejected the view that a third-party source of recovery, as a matter of law, mandates separate classification. See In re AOV Indus., Inc., 792 F.2d 1140 (D.C. Cir. 1986); In re 4th St. East Investors, Inc., 2012 WL 1745500 (Bankr. C.D. Cal. May 15, 2012); In re 18 RVC, L.L.C., 485 B.R. 492 (Bankr. E.D.N.Y. 2012); In re Quigley Co., 377 B.R. 110 (Bankr. S.D.N.Y. 2007).
• In In re Marlow Manor Downtown, L.L.C., 2013 WL 5567171 (Bankr. D. Alaska Oct. 9, 2013), the court rejected separate classification of note, which was to be paid from available cash flow (with balloon payment due at maturity), finding that the claim was substantially similar to claim under separate note and general trade claims.
• In Polite Enters Corp. v. North American Safety Prods., Inc., 2014 WL 321668 (N.D. Il. Jan. 29, 2014), the court upheld separate classification of ongoing trade creditors from other unsecured creditors, even though the same treatment was afforded to both classes.
• In Akinpelu, 530 B.R. 822 (Bankr. N.D. Ga. 2015), the court rejected separate classification of the holder of an unsecured deficiency claim, finding that the debtor had failed to provide a business justification. The court rejected the distinction that the deficiency claim was a business debt in contrast to the other debts which were consumer debts. The court also rejected the fact that the deficiency claim was backed by a third-party guaranty insofar as the debtor had failed to provide facts establishing the viability or character of the subject guaranties.
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Indubitable Equivalence
• In re River East Plaza, LLC, 669 F.3d 826 (7th Cir. 2012)
– Finding that substitute collateral of 30 year Treasury bonds was not indubitable equivalent of mortgage lien on real estate property of equivalent value due to different risk profiles of the collateral.
• In re Investors Lending Group, L.L.C., 489 B.R. 307 (Bankr. S.D. Ga. 2013)
– Holding that partial “dirt for debt” plans can constitute indubitable equivalence, but recognizing that valuation must be conservative.
– Finding that properties proposed to be surrendered were not of sufficient value to satisfy indubitable equivalence, but giving debtor opportunity to amend plan to provide for surrender properties of a greater/sufficient value.
• In re CRB Partners, L.L.C., 2013 WL 796566 (Bankr. W.D. Tex. Mar. 4, 2013)
– Finding that partial “dirt for debt” plan did not satisfy indubitable equivalence, recognizing the importance of providing the creditor with a sufficient collateral cushion.
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Indubitable Equivalence (cont’d)
• In re Sugarleaf Timber, 529 B.R. 317 (M.D. Fla. 2015)
– Approving “dirt for debt” plan in view of equity cushion of $4.6 million (in respect of $30.3 million property value).
• In re Colony Beach and Tennis Club, Inc., 508 B.R. 468 (Bankr. M.D. Fla. 2014), appeal dismissed sub nom. Colony Lender, LLC v. Breakpointe, LLC, 2015 WL 3689075 (M.D. Fla. June 12, 2015)
– Holding that deferred surrender of collateral without compensation for risks arising from the delay do not provide indubitable equivalence.
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