In cramming down on a fully secured creditor in chapter 11, the Bankruptcy Appellate Panel for the Ninth Circuit held that the plan does not provide the “indubitable equivalent” by transferring real property that may not sell for as much as the bankruptcy court’s valuation.
The creditor had a $5.2 million claim secured by virtually all of the debtor’s property. The bankruptcy court decided that the collateral was worth $7 million, making the creditor fully secured.
The plan called for paying all creditors in full over several years. The secured creditor was to receive $500,000 cash on confirmation. At the same time, the debtor would transfer 49 building lots to the creditor, which the court determined to be worth $3.7 million. To make up for the shortfall, the plan required the debtor to pay the creditor five annual installments of some $240,000 in cash. The lot transfers and cash payments would release the creditor’s lien on the debtor’s assets.
The bankruptcy court held a valuation trial, found the creditor’s expert not to be credible, and accepted the debtor’s expert’s $3.7 million valuation of the 49 lots.
Technically speaking, the plan did not modify the creditor’s liens on the debtor’s property. Nonetheless, the transfer of the lots would reduce the claim permanently by $3.7 million, leaving the collateral only to secure the $240,000 installments.
All creditors accepted the plan, but not the secured creditor. The bankruptcy court confirmed the plan using cramdown in Section 1129(b)(2)(A)(iii) after valuing the transferred lots and deciding that the plan provided the creditor with the “indubitable equivalent” of its claim.
The BAP reversed and remanded in a nonprecedential opinion on March 10. The panel consisted of Bankruptcy Judges Scott H. Gan, Laura S. Taylor and William Lafferty.
The creditor argued on appeal that the bankruptcy court erred by adopting the debtor’s expert’s “net aggregate value” model. Instead, the creditor contended that the court should have used the more common discounted cash flow method of valuation.
The BAP said that valuations are factual findings subject to the “deferential standard of review.” The BAP did not decide whether the valuation was clearly erroneous because, as we will describe below, the panel decided that a “dollar-for-dollar” reduction of the claim did not provide the “indubitable equivalent.”
To begin the cramdown analysis, the panel said that Section 1129(b)(2)(A) requires paying the secured claim in full. Fleshing out the rule, the Ninth Circuit had held decades ago that substitute collateral must not increase the creditor’s risk.
The BAP noted how the debtor’s expert estimated it would take five years to sell the lots. The expert, however, did not reduce the $3.7 million valuation to account for the five years required to sell the lots. In other words, the valuation was the aggregate sale price of the lots, not the net present value of the lots as of confirmation.
Nonetheless, the transfer of the lots permanently reduced the creditor’s claim by $3.7 million.
The plan therefore had two faults. First, the BAP said it did “not provide compensation for the necessary time to sell the [lots] . . . .”
Second, the panel said the plan “unfairly shifts the risk of selling the [lots] to [the secured creditor].” Thus, the plan did not comply with “the indubitable equivalent standard of § 1129(b)(2)(A)(iii).”
Deeming the claim satisfied by the valuation of the lots, the BAP said, “necessarily limits the creditor’s ability to look to other collateral . . . in the event that the property is ultimately sold for less than the appraised value.”
The provision in the plan stating that no liens were affected was “illusory,” the BAP said. By deeming the transfer to satisfy a portion of the claim, the panel said the creditor “is forced to assume the risk that sales of the [lots] will not yield the appraised value. [The creditor] will be unable to look to its other collateral for any shortfall.”
Confirmation had a third shortcoming. The BAP scoured the record and found no support for the feasibility finding regarding the debtor’s ability to make $240,000 annual installments.
The BAP reversed and remanded the case to the bankruptcy court.
In cramming down on a fully secured creditor in chapter 11, the Bankruptcy Appellate Panel for the Ninth Circuit held that the plan does not provide the “indubitable equivalent” by transferring real property that may not sell for as much as the bankruptcy court’s valuation.
The creditor had a $5.2 million claim secured by virtually all of the debtor’s property. The bankruptcy court decided that the collateral was worth $7 million, making the creditor fully secured.
The plan called for paying all creditors in full over several years. The secured creditor was to receive $500,000 cash on confirmation. At the same time, the debtor would transfer 49 building lots to the creditor, which the court determined to be worth $3.7 million. To make up for the shortfall, the plan required the debtor to pay the creditor five annual installments of some $240,000 in cash. The lot transfers and cash payments would release the creditor’s lien on the debtor’s assets.
The bankruptcy court held a valuation trial, found the creditor’s expert not to be credible, and accepted the debtor’s expert’s $3.7 million valuation of the 49 lots.
Technically speaking, the plan did not modify the creditor’s liens on the debtor’s property. Nonetheless, the transfer of the lots would reduce the claim permanently by $3.7 million, leaving the collateral only to secure the $240,000 installments.