Modification Of Secured Loan Under Cram-Down Chapter 11 Plan Warranted Due To Plan Feasibility Threat

• Published date: 05 April 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Mr Brad Erens and Mark Douglas

Many recent court rulings concerning the treatment of secured creditors under a chapter 11 plan have focused on "cram-up" plans involving reinstatement of secured loans to avoid impairment (and the ability to vote on the plan) or "cram-down" confirmation involving either the sale of the lender's collateral, subject to the lender's right to "credit bid" its claim, and attachment of its lien to the proceeds, or treating the secured claim in a way that provides the lender with the "indubitable equivalent" of its claim.

A ruling recently handed down by the U.S. Bankruptcy Court for the District of New Jersey explores another avenue to confirmation of a plan over the objection of a secured creditor. In In re Ocean View Motel, LLC, 2022 WL 243213 (Bankr. D.N.J. Jan. 25, 2022), the court ruled that a plan could be confirmed over a secured lender's objection even though a new secured note given to the lender eliminated his prepetition contractual right to file a deed in lieu of foreclosure in the event of the debtor's default. According to the court, the terms of the new note, which was secured by collateral valued significantly greater than the amount of the debt, more than satisfied the Bankruptcy Code's minimum requirements for cram-down confirmation, and if not eliminated, the deed in lieu of foreclosure provision threatened the plan's feasibility and the debtor's prospects for a successful reorganization.

Impairment of Claims Under a Chapter 11 Plan

Creditor claims and equity interests must be placed into classes in a chapter 11 plan and treated in accordance with the Bankruptcy Code's plan confirmation requirements. Such classes of claims or interests may be either "impaired" or "unimpaired" by a chapter 11 plan. The distinction is important because, among other things, only impaired classes have the ability to vote to accept or reject a plan. Under section 1126(f) of the Bankruptcy Code, unimpaired classes of creditors and shareholders are conclusively presumed to have accepted a plan. Classes of creditors or interest holders that receive or retain nothing under a plan are deemed to reject it. See 11 U.S.C. ' 1126(g).

Section 1124 provides that a class of claims is impaired under a plan unless the plan: (i) "leaves unaltered the legal, equitable, and contractual rights" to which each creditor in the class is entitled; or (ii) cures any defaults (with limited exceptions), reinstates the maturity and other terms of the obligation, and compensates each creditor in the class for resulting losses.

Section 1124 originally included a third option, then section 1124(3), for rendering a claim unimpaired'by providing the claimant with cash equal to the allowed amount of its claim. In In re New Valley Corp., 168 B.R. 73 (Bankr. D.N.J. 1994), the court ruled that, in light of this third option, a solvent debtor's chapter 11 plan that paid unsecured claims in full in cash, but without postpetition interest, did not impair the claims. The perceived unfairness of New Valley led Congress to remove this option from section 1124 of the Bankruptcy Code in 1994. Since then, most courts considering the issue have held that, if an unsecured claim is paid in full in cash with postpetition interest at an appropriate rate, the claim is unimpaired under section 1124. See, e.g., In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 205-07 (3d Cir. 2003).

Cram-Down Confirmation Requirements

If a class of creditors does not agree to impairment of the claims in the class under the plan and votes to reject it, the plan can be confirmed only if it...