On an issue dividing the lower courts, a district judge in Arizona took sides with the bankruptcy court in New York by holding that every debtor in a joint plan is not required to have an accepting impaired class before the court can confirm using cramdown.
Differing with the bankruptcy court in Delaware, Chief District Judge Raner C. Collins of Tuscon, Ariz., concluded that Section 1129(a)(10) does not require every debtor in a joint plan to have an accepting impaired class. The decision is on appeal to the Ninth Circuit.
In the reorganization of a hotel involving five debtors that were not substantively consolidated, one lender held both the mortgage debt and the secured mezzanine debt . The secured lender voted both claims against the plan.
The joint plan for all five debtors had 10 classes of creditors. Five accepted the plan. Because the mezzanine lender had the only claim against two mezzanine borrowers, the lender contended that cramdown requirements were not met because those two debtors had no accepting class.
The bankruptcy judge confirmed the plan and was upheld by Judge Collins, who ruled that each debtor in a consolidated plan is not required to have an accepting class. He cited cases from the bankruptcy court in Delaware, which requires that each debtor must have an accepting class.
Judge Collins said in his June 22 opinion that the statute’s plain language is dispositive because it allows confirmation if accepted by “one class of claims that is impaired under the plan . . . .”
The decision is also important because Judge Collins did not require a cramdown plan to contain a due-on-sale clause when a secured lender takes the Section 1111(b)(2) election.
For $209 million in mortgage debt that originally had no due-on-sale clause, the plan gave the lender a new $247 million note due in 21 years, paying interest only. The new mortgage contained a due-on-sale clause. The plan was sponsored by a purchaser who invested $30 million to acquire the equity.
If the buyer sold the project between the fifth and fifteenth years, the plan provided that the due-on-sale clause would not apply. Instead, a buyer in the 10-year gap would take ownership subject to the mortgage created at confirmation.
The lender contended that the 10-year exception to the due-on-sale clause depressed the value of the Section 1111(b)(2) election. Judge Collins held that the plain language of that statute does not give the lender an “absolute right” to a due-on-sale clause. Likewise, he said, the cramdown provision in Section 1129(b)(2)(A) “also makes no reference to any such requirement.”
Judge Collins noted that the original loan had no due-on-sale clause. In addition, the lender’s right to approve a new owner was carried over from the “old” mortgage, and the lender would receive an assumption fee in the event of a sale.
Judge Collins’ decision was the progeny of JPMCC 2007-C1 Grasslawn Lodging LLC v. Transwest Resort Properties Inc. (In re Transwest Resort Properties Inc.), 801 F.3d 1161 (9th Cir. Sept. 15, 2015), where the Ninth Circuit held over a vigorous dissent that a buyer who actively participates in reorganization is not protected by the doctrine of equitable mootness should a creditor appeal but not obtain a stay, preventing consummation of the plan. Denying a motion for rehearing en banc, the circuit remanded the case to Judge Collins, who had originally dismissed the appeal as equitably moot. On remand, Judge Collins upheld confirmation on the merits.