In a direct appeal to the 7th Circuit—bypassing the district court—debtor, River East Plaza LLC, appealed an adversary action ruling issued by the U. S. Bankruptcy Court for the Northern District of Illinois rejecting River East’s Chapter 11 plan and dismissing the bankruptcy case. River East Plaza, LLC, et al. v. LNV Corporation (In re River East Plaza, LLC), Case No. 11-3263 (7th Cir. Jan. 19, 2012). The 7th Circuit affirmed and found the denial of confirmation, lifting of the automatic stay and dismissal of the bankruptcy case appropriate.
River East, the owner of a building in downtown Chicago, had sought Chapter 11 bankruptcy protection just hours before its lender, LNV Corp., the holder of a first priority mortgage, foreclosed. Rather than immediately seeking relief from the automatic stay imposed by 11 U.S.C. section 362, LNV actively participated as a creditor within the Chapter 11 case.
11 U.S.C. section 1129 (b)(2)(A) provides three alternatives for cram down against a secured creditor:
- Subsection (i) allows the reorganized debtor to keep the property and modify the repayment of obligations beyond the contractual maturity date with the lien remaining against the property until the debt is repaid or the secured creditor receives at least the value of its claim.
- In subsection (ii), the debtor sells the property free and clear of the secured creditor’s lien, but the secured creditor’s lien attaches to the proceeds of sale and remains until the obligation is repaid or the creditor receives at least the value of its claim.
- Subsection (iii) allows the debtor to exchange the lien for its “indubitable equivalent.” It was this last alternative that River East invoked.
LNV was owed $38.3 million. River East’s building (by River East’s own appraisal) was valued at $13.5 million. LNV, therefore, was undersecured and held a secured claim for the value of the collateral ($13.5 million) and an unsecured claim for the balance ($24.8million).
In determining whether the substituted collateral was the indubitable equivalent of LNV’s lien, the court noted that indubitable equivalent collateral would be substitute collateral that “was no more volatile than a creditor’s current collateral even in the case of an undersecured debt.” Here, because of the different risk profiles of the two forms of collateral, they are not equivalent, and there is no reason why the choice between them should be left to the debtor to decide.
Acknowledging that LNV was undersecured, the court had trouble imagining what purpose could be served by substituting collateral other than to reduce the likelihood that LNV would ever be repaid in full. In affirming the bankruptcy court’s denial of plan confirmation, the 7th Circuit found that the lien on the 30-year Treasury bonds proposed by River East would not be equivalent to LNV’s retaining its lien on the property and the plan didn’t meet the requirements for cram down.