The Fourth Circuit widened a circuit split by holding that a finding of “indubitable equivalent” in a cramdown opinion is reviewed for clear error, not de novo.
The Dec. 6 opinion by Circuit Judge Allyson Kay Duncan also held that an oversecured creditor’s right to collect interest is subject to equitable defenses, even though Section 506(b) says that a claim for interest “shall be allowed.”
The Valuation Trial in Bankruptcy Court
The case involved a chapter 11 reorganization that was little more than a two-party dispute. The primary secured creditor held a purchase money mortgage on all of the debtor’s undeveloped real property. The debtor’s so-called dirt-for-debt plan proposed transferring eight of the tract’s 79 parcels plus $1 million to the lender in satisfaction of the fully secured claim. The principal amount of the lender’s claim was about $13 million.
The lender objected to the plan, requiring the bankruptcy court to hold cramdown hearings and determine whether the plan represented the “indubitable equivalent” of the lender’s claim under Section 1129(b)(2)(A)(iii).
The bankruptcy court conducted 10 valuation hearings and heard from multiple witnesses, including experts for both sides. Ultimately, the bankruptcy judge ruled that the eight parcels were worth $13.7 million.
The bankruptcy judge also calculated that the lender was entitled to about $1.4 million in post-petition interest. Principal and interest together, the lender had a secured claim of about $14.6 million.
Coupled with a $1 million cash payment under the plan, the bankruptcy judge confirmed the plan and ruled that the lender would receive the “indubitable equivalent” of its secured claim. Having unsuccessfully sought a stay pending appeal, the lender appealed, but the district court dismissed the appeal as equitably moot.
The Appeal Was Not Equitably Moot
On appeal to the Court of Appeals, Judge Duncan reversed on dismissal of the appeal as equitably moot but upheld confirmation and the finding of “indubitable equivalent.”
Dismissal for equitable mootness is proper, Judge Duncan said, when effective judicial relief is no longer practically available. She concluded that the case was not moot because “the parties have offered no reason for us to conclude that this court would be unable to order the debtor to surrender additional cash or tracts of land” to the lender.
Modifying the plan by giving more land or cash to the debtor, she said, would neither impact other creditors nor affect their recoveries.
Partial ‘Dirt for Debt’ Is Ok
On the merits, the lender argued that a partial dirt-for-debt plan can never provide the “indubitable equivalent.” The lender contended there can be no “indubitable equivalent” when “valuation involves some uncertainty.”
Judge Duncan rejected this contention, saying there is “uncertainty in all disputed valuations.” The lender’s theory “would eviscerate the indubitable equivalence standard,” she said.
The Appellate Review Standard
Judge Duncan then turned to the appellate standard for reviewing a finding of indubitable equivalence. She noted how the Ninth Circuit held in 1996 that valuation is reviewed for clear error, while the ultimate question of indubitable equivalence is a question of law reviewed de novo.
The Seventh Circuit, on the other hand, had held in 1992 that the deferential standard is proper because a finding of indubitable equivalence is a finding of fact.
Judge Duncan decided to follow the Seventh Circuit because the statutory standard in Section 1129(b)(2)(A)(iii) is “clear” and the “meticulous appraisal examination” entailed on indubitable equivalence “is inherently factual.”
Detailed Findings Not Reversible
Applying the deferential clear error standard, Judge Duncan noted how the bankruptcy judge had a 4,000-page record, “made detailed findings,” “weighed all of the expert testimony,” and explained why the debtor’s expert “was more credible.” The bankruptcy court’s analysis, she said, “was thorough and not arbitrary.”
Upholding the finding of indubitable equivalence left the lender with one argument based on the bankruptcy court’s decision to toll the post-petition accrual of interest for 266 days on account of the delay in ruling caused by the bankruptcy court’s own workload and litigation initiated by the lender.
Equitable Denial of Interest
Although Section 506(b) says that an oversecured lender “shall be allowed” post-petition interest, Judge Duncan said that the word “shall” does not extinguish all defenses. The “statute’s mandate,” she said, “does not prevent consideration of equitable factors in calculating the post-petition interest owed.”
She noted that the bankruptcy court did not deprive the lender of post-petition interest “altogether” because the lower court allowed almost $1.4 million in interest.
The decision to be handed down in a few weeks by the Supreme Court in U.S. Bank NA v. The Village at Lakeridge LLC, 15-1509 (Sup. Ct.), may indicate whether Judge Duncan employed the proper appellate standard of review when she held that a finding about indubitable equivalence is judged by the clear error rule.
In Lakeridge, the high court will decide whether a finding of non-statutory insider status is reviewed for clear error or de novo. Lakeridge is different, however, because it involved inferences taken from undisputed facts. In the Fourth Circuit case, the critical facts were disputed.
Nonetheless, the Supreme Court’s Lakeridge opinion may include teachings about the appellate standard on mixed questions of law and fact. To read ABI’s report on the Lakeridge oral argument, click here.
The Fourth Circuit widened a circuit split by holding that a finding of “indubitable equivalent” in a cramdown opinion is reviewed for clear error, not de novo.