Contributed by Elizabeth Hendee
In our recent entry on the Supreme Court’s RadLAX decision, we described the (failed) attempt by certain debtors to “cram down” their plan, which proposed to sell assets free and clear of secured creditors’ liens, on certain of their secured lenders. We note that cramdown plans must be “in season” lately as, in today’s entry, we explore a recent opinion out of the United States Bankruptcy Court for the District of New Mexico, In re Cottonwood Corners Phase V, LLC, which considered whether a debtor could cram down its plan on its secured creditor.
Section 1129(b)(1) of the Bankruptcy Code allows a bankruptcy court to confirm a chapter 11 plan of reorganization over the objection of an impaired class of creditors if the plan “does not discriminate unfairly, and is fair and equitable” with respect to the objecting impaired class or classes. Section 1129(b)(2)(A) provides certain requirements that must be included in a plan for it to be considered fair and equitable to a class of secured claims. The subsections of section 1129(b)(2)(A) are disjunctive so, although more than one may be satisfied, only one must be satisfied for a plan to be confirmable. The meaning of two of these subsections was analyzed in the Cottonwood decision. The two subsections at issue in Cottonwood were: (1) section 1129(b)(2)(A)(i), which provides that a plan may be fair and equitable to a class of secured claims if the claimants retain the liens securing the claims and receive deferred cash payments equal to or greater than the present value of the claim as of the effective date of the plan; and (2) section 1129(b)(2)(A)(iii), which provides that a plan may be fair and equitable to a class of secured claims if the claimants receive the “indubitable equivalent” of such claims.
Cottonwood, a New Mexico limited liability company that owns real estate assets, filed for chapter 11 protection in June, 2011. In March, 2012, Cottonwood proposed a modified version of its chapter 11 plan. Cottonwood’s plan calculated the claim of Jefferson-Pilot Investments, one of Cottonwood’s largest secured creditors, in three components: (1) the principal balance, including accrued but unpaid interest as of the date of default; (2) “cost arrears,” including pre- and post-petition attorneys’ fees incurred by JPI and “all reasonable and necessary costs incurred under the terms of the original loan documents from April 2010 through the effective date of the plan”; and (3) “interest arrears,” including interest on the principal at the applicable contract default interest rate from the date of default through the effective date of the plan, late fees, and interest on any “cost arrears” from the date they are paid by JPI through the effective date of the plan. Cottonwood’s plan proposed to pay post-confirmation interest on the first two categories during the seven and a half year repayment period (the principal and “cost arrears”) but did not include payment of post-confirmation interest on the third category (“interest arrears”). JPI objected to confirmation of Cottonwood’s plan, claiming that the exclusion of interest on the “interest arrears” component of its secured claim violated section 1129(b).
Cottonwood argued that the plan was confirmable because, under the proposed plan, JPI would receive the indubitable equivalent of its secured claim. According to Cottonwood, section 1129(b)(2)(A)(iii)’s indubitable equivalent standard is satisfied if the secured creditor receives the benefit of the bargain it made at the inception of the contract. Although Cottonwood conceded that “indubitable equivalent” requires the calculation of present value to determine whether or not the creditor is provided with the same benefit it would have had under the original agreement, Cottonwood argued that payment of interest according to the terms of the original contract satisfies this present value requirement. The proposed plan provided for payment of JPI’s claim in full and payment of interest calculated in accordance with the original loan documents so, according to Cottonwood, the present value requirement was met.
JPI disagreed and argued that, to satisfy section 1129(b)(2)(A)(iii)’s indubitable equivalent standard, the debtor must provide the secured creditor with the present value of its secured claim as of the effective date of the plan, in compliance with section 1129(b)(2)(A)(i). According to JPI, Cottonwood’s proposed treatment of the “interest arrears” did not provide JPI with the present value of this piece of its secured claim and thus did not satisfy section 1129(b)(2)(A)(iii).
The bankruptcy court sided with JPI on this issue. The court acknowledged that the subsections of section 1129(b)(2)(A) are disjunctive, so satisfaction of only one prong “affords a distinct basis for confirming a plan;” however, satisfaction of one prong does not mandate confirmation of a plan. Courts should consider the overarching fair and equitable requirement of section 1129(b)(1) when applying the indubitable equivalent standard. In this case, JPI would neither receive the full benefit of its original agreement with Cottonwood nor the present value of its secured claim if Cottonwood’s proposed plan were confirmed. The proposal modified substantial terms of the original loan documents, including terms related to acceleration and foreclosure. These modifications took away benefits that JPI had under the original contract.
The court also found that the proposal did not provide JPI with the present value of its secured claim. To satisfy section 1129(b)(2)(A)(i)’s present value requirement, a plan must provide for payment of the underlying claim plus interest to compensate the creditor for the decreased value of its claim over time. Cottonwood’s proposal provided for deferred payments of the “interest arrears” but did not provide for payment of interest on this component of JPI’s claim. If Cottonwood’s plan was approved, JBI would not receive the present value of its claim as defined in section 1129(b)(2)(A)(i). The court noted that that result would be unjust because “the indubitable equivalent standard does not contemplate that the Debtor may provide JPI with worse treatment than JPI would be entitled to receive under section 1129(b)(2)(A)(i)(II) to compensate it for the time value of money.”
In re Cottonwood shows that a debtor cannot use the indubitable equivalent standard to escape paying a secured creditor the present value of its secured claim. A dollar today is still worth more than a dollar tomorrow.