Absolute Priority Rule Prevents Cram Down In Re RAMZ Real Estate Co., LLC

In a May 9, 2014 decision, Chief Judge Morris of the United States Bankruptcy Court for the Southern District of New York held that a Chapter 11 bankruptcy plan proposed by an LLC that owned two parcels of land could not be confirmed over the objection of a creditor with both secured and unsecured claims. The decision turned on whether an unsecured, junior, impaired claim relating to an ownership interest in the debtor triggered the absolute priority rule to prevent cram down. In re RAMZ Real Estate Co., LLC, 510 B.R. 712 (Bankr. S.D.N.Y 2014)

The debtor, RAMZ Real Estate Co., LLC filed a Chapter 11 bankruptcy plan with seven classes of claims, five of which were secured by liens against property owned by RAMZ and two of which were unsecured. The dispute arose from the objections of one creditor, the Community Preservation Corporation ("CPC"), which held a secured, but impaired, interest in Class 3 and an unsecured, impaired interest in Class 6.

Under Section 1129 of the Bankruptcy Code, a debtor must satisfy two conditions to confirm a Chapter 11 plan. First, section 1129(a)(8) requires that each impaired class of claim must accept the plan. Section 1124 assumes that a class is impaired unless the plan "leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest." In other words, a claim is impaired when the plan alters a legal, equitable, or contractual right held by the creditor (e.g., when the plan calls for the repayment of 50%, but not all, of an outstanding loan). Second, in the event that the first condition is not met (e.g., when another class of creditors with impaired interests objects), section 1129(a)(10) provides for the possibility of "cram down," in which, as long as at least one class of impaired claims held by non-insider creditors votes to approve the plan, the plan can still be confirmed.

In the present case, CPC filed an objection to the RAMZ Chapter 11 Plan. Thus, the court evaluated whether the RAMZ Plan could be confirmed under the cram down provisions of section 1129(a)(10).

CPC represented the controlling interest in two of the three impaired classes under the RAMZ Plan. The sole remaining impaired class, Class 4, contained the secured property tax claim of the County of Ulster. Although some authority (e.g., In re Bryson Properties, XVIII, 961 F.2d 496, 501 (4th Cir. 1992)), held that priority tax claimants were not an impaired class...