by Eugene Kim
In a recent Fifth Circuit decision, Western Real
Estate Equities, LLC v. Village at Camp Bowie I, L.P., No. 12-10271 (5th
Cir. 2013) [an enhanced version of this opinion is available to lexis.com
subscribers], the court held that the acceptance vote from a minimally and
"artificially impaired" class of claims meets the 11 U.S.C. § 1129(a)(10)
requirement for the confirmation of a non-consensual "cramdown" chapter 11
involved a single asset real estate debtor, Village at Camp Bowie I, L.P.
("Debtor"), who filed a Chapter 11 petition that stayed the nonjudicial
foreclosure sale of its property scheduled for the following day. As of the
petition date, Debtor owed Western Real Estate Equities, LLC ("Western")
approximately $32 million secured by a lien on Debtor's real property and
approximately $59,000 to thirty-eight unsecured trade creditors ("Unsecured
Creditors"). Debtor filed a plan of reorganization designating two impaired
creditor classes consisting of Western and the Unsecured Creditors. Under
Debtor's plan, (1) Western would receive a new five year note for the secured
claim amount and interest, with a balloon payment of the remaining principal
and accrued interest due at maturity; (2) the Unsecured Creditors would be paid
in full within three months from the effective date without interest; and (3)
Debtor's pre-petition owners and related parties would make a capital infusion
of $1,500,000 for newly issued preferred equity. Unsurprisingly, the Unsecured
Creditors voted for the plan, whereas Western voted against the plan.
In objecting to the plan, Western argued that the plan
did not receive the vote "of at least one class of claims that is impaired
under the plan" required under § 1129(a)(10). This was, Western argued, because
the Unsecured Creditors' claims were "artificially impaired" and thus an
inadequately impaired class to meet the voting requirement of an impaired
class. Western argued that Debtor minimally and "artificially impaired"
Unsecured Creditors' claims by delaying payment for three months instead of
paying them in full at plan confirmation, which Debtor had sufficient cash flow
to do. In the alternative, Western argued that such "artificial impairment"
violated the good faith requirement of § 1129(a)(3).
The bankruptcy court rejected Western's objections and
confirmed the plan, which the Fifth Circuit affirmed on appeal. While reviewing
for "clear error," the Fifth Circuit held "that § 1129(a)(10) does not
distinguish between discretionary and economically driven impairment." The
court explained that this was because the plain meaning of impairment under §
1124 contains no "motive inquiry" or "materiality requirement." The court
reasoned that impairment is not required to be driven by economic motives and
can be discretionary, which was the case here. Further, the court found that
the three month delay in full payment to Unsecured Creditors without interest
sufficiently impaired their claims because the Bankruptcy Code does not
recognize a distinction between de minimis and material impairments.
Moreover, the court held that artificial impairment does
not constitute bad faith as a matter of law. Rather, the court stated that a
debtor's artificial impairment would be one factor in the totality of
circumstances analysis for a finding of good faith. Because Debtor "proposed a
feasible cramdown plan for the legitimate purpose of reorganizing its debts,
continuing its real estate venture, and preserving its non-trivial equity in
its properties," the court held that the good faith requirement was met.
While the impact of Camp Bowie upon the
restructuring community remains to be seen, there exist two clear takeways.
First, debtors have greater leeway when designing an impaired class of
creditors for the purpose of a cramdown plan of reorganization, which is
particularly helpful in the context of single asset real estate cases. Second,
secured lenders and distressed real estate investors can no longer rely upon
the expectation that a de minimis impairment of claims is enough to
block a cramdown plan of reorganization, but must employ more robust planning
strategies to protect against a cramdown plan.
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