March 30, 2009
Vincent Mauer

 

The debtor was a residential real estate development business. The land to be developed into 92 lots was worth an estimated $22,000,000. When the debtor could not pay or refinance its $12,000,000 first mortgage debt, a single asset bankruptcy case was initiated.

Since it could not pay accruing interest on the first mortgage debt, the debtor filed its plan of reorganization within 90 days as required by the special provisions applicable to single asset real estate plans. 11 U.S.C. Section 362(d)(3). The court’s opinion denying confirmation includes several good reminders of plan confirmation standards.

The court reminded us of several legal requirements, including:

(1) the plan made no unconditional promise to pay some portion of the general unsecured claims. Therefore, the affirmative vote of this class of creditors could not be considered when determining what classes of claims supported the plan. 11 U.S.C. Section 1126(g);

(2) since, by law, a class of unsecured claimants rejected the plan, the court went on to analyze whether the equity interest received or retained anything of value under the plan. In this case, the plan stated that equity interests were “extinguished.” But, those equity interests could be “revived” if the reorganized debtor came into money (i.e. a successful sale). In addition, the holders of the certain extinguished equity interests would control the reorganized debtor by forming the majority of its board of directors. Those provisions provided value to the equity interest holders under the plan and thus made the plan not fair and equitable to the unsecured creditors who (despite the affirmative vote) were by law deemed to have rejected the plan; and

(3) finally, the plan provided that the bankruptcy case would remain open post-confirmation and that newly acquired property will be property of the estate and the bankruptcy code rules such as the automatic stay would continue to impact the property of the reorganized debtor. Somewhat inconsistent with these plan provisions, the plan transformed the debtor into a reorganized debtor which is required to get the desired discharge. 11 U.S.C. Section 1141(d)(3). The court held these provisions untenable because the allegedly open bankruptcy estate would be left with no responsible party – no trustee and no debtor. The court stated that the debtor could not continue to be a debtor and simultaneously be a reorganized debtor.

After that legal analysis, the court provided a good factual discussion of when negative amortization plans can be confirmed. The plan is a negative amortization plan because it did not require the payment of the interest accruing in favor of the primary secured creditor. Despite an equity cushion that might approach $10,000,000, a “hold and wait” plan was not fair and equitable to the mortgagee.

The full opinion is a good reminder of what cannot be done in a plan of reorganization for a single asset real estate debtor. See, In re Quail Lake estates Associates, No. 08-41296 (Bankr. N.D. Calif. Oct. 6, 2008).