Restructuring

Contributed by Cristine Pirro
In In re CRB Partners, LLC, the Bankruptcy Court for the Western District of Texas denied confirmation of the debtors’ chapter 11 plan in part because the partial dirt-for-debt nature of the secured creditor’s treatment under the plan did not ensure the secured creditor would receive the indubitable equivalent of its claim.  CRB confirmed that, as discussed here and here, a partial dirt-for-debt deal can satisfy the indubitable equivalent standard for cramdown purposes only if the value of the property to be surrendered to the secured creditor provides the unquestionable value of the secured creditor’s interest in that collateral.
The two affiliated debtors in CRB owned several pieces of real estate including the “Travis County Property” and the “Cameron County Property.”  These two properties, one owned by each debtor, comprised substantially all the assets of the debtors.  The debtors filed chapter 11 petitions after First National Bank, which held a mortgage on both properties, commenced foreclosure proceedings on the properties.
Several months after filing, the debtors submitted a chapter 11 plan proposing to pay the creditors of both debtors through a single liquidating fund.  The liquidating fund would be funded by (i) the debtors’ cash on deposit, (ii) proceeds from the sale of one debtor’s personal property, and (iii) additional contribution from equity holders.  The plan was unclear as to which equity holders would contribute and the amount of those contributions.  In satisfaction of First National Bank’s claim, the debtors proposed conveying to First National Bank only the Cameron County Property (the debtors would retain their interests in the Travis County Property).  To the extent that any principal, interest (at the non-default rate), and attorneys’ fees owed to First National Bank exceeded the value of the Cameron County Property, such amounts would be paid from the liquidating fund.
First National Bank rejected the plan and argued that First National Bank was not receiving the “indubitable equivalent” of its claim as required by section 1129(b)(2)(A)(iii) of the Bankruptcy Code because the Cameron County Property did not have sufficient value to allow First National Bank to recover the full amount of its claim. 
Where a creditor receives only a portion of its collateral in exchange for full satisfaction of its secured claim, the creditor bears the risk that it will end up recovering less than the full amount of its claim with no further recourse for any deficiency.  As a result, bankruptcy courts have approached these “partial dirt-for-debt” plans with a fair amount of skepticism and have refused to confirm such plans if any doubt exists over whether the creditor will likely recover its full claim from the portion of its collateral that the debtor is surrendering.
The key focus of the courts is on whether the cushion (the difference between the value of the surrendered collateral and the secured creditor’s claim) is sufficient to protect the creditor.  The CRG court weighed the two competing valuations of the property (one provided by the debtors, one by First National Bank) and found the property to be valued at $1,340,000.00.  First National Bank’s claim, on the other hand, was valued at $1,339,997.27 – only $2.73 lower than the value of the property.  This cushion, the court found, was not sufficient to ensure that First National Bank would realize the full value of the claim.
The court also considered and found problematic the plan’s shifting of the burden of sale from the debtors to the secured creditor.  This not only increased the risk of loss to the creditor, but also meant the secured creditor would be unable to earn interest on the claim until the property was sold and converted to cash.  Testimony at a valuation hearing reflected that it would take approximately two years to sell the Cameron County Property.  Moreover, even though the plan provided for the payment of any amounts owed above the value of the collateral, the court found the debtors did not establish that they would have adequate capital to pay their creditors as contemplated by the plan, and, as such, the plan was not feasible.  Specifically, the sources of funding for the liquidating fund were too uncertain to support the plan, and the debtors offered little proof that they could otherwise raise sufficient money to finance the liquidating fund. 
Had the debtors surrendered all property on which First National Bank had a lien, the “fair and equitable” requirement would have been met; because the debtors only surrendered a portion of that collateral, the plan was a “partial dirt-for-debt” plan that required the court to make a finding on the value of the real estate to ensure the secured creditor received the “indubitable equivalent” of its claim.