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Summarizing by Amir Shachmurove

Diwan, L.L.C. v. Maha-Vishnu Corp. (In re Diwan, L.L.C.)

Case Type:
Case Status:
No. 16-1317 (8th Circuit, Nov 16,2017) Published
Eighth Circuit affirmed district court (S.D. Iowa), which affirmed bankruptcy court orders denying confirmation and dismissing chapter 11 case. Debtor's plan subordinating secured claim to sole principal's equity failed absolute priority rule, and plan was not feasible. Creditor was impaired and opposed plan. Proposed treatment of creditor, including impermissibly low interest rate, gave no reasonable possibility of confirmation.
Procedural context:
Bankruptcy court denied chapter 11 plan confirmation and granted trustee's motion to dismiss. Debtor appealed to district court and district court affirmed. Debtor appealed to 8th Circuit.
Diwan owned two gas stations in Davenport, Iowa. Its sole owner and manager (Ranbir) formed Thakur LLC, which entered into sales contract with Maha-Vishnu Corp. (MVC) to purchase a motel. Ranbir personally guaranteed the sales contract. As collateral for the guarantee, Ranbir pledged a mortgage on one of Diwan's gas stations (Springs Street). Thakur LLC defaulted, and MVC foreclosed and purchased motel at sheriff's sale for $1.00. MVC failed to redeem tax debt, and tax sale deed was issued to third party. In 2012, Iowa Court of Appeals affirmed a deficiency judgment against Ranbir and Thakur LLC for $667,067.91. Diwan filed for chapter 11 bankruptcy, and MVC filed proof of claim. Diwan objected to claim and filed chapter 11 plan subordinating Diwan's claim and releasing mortgage on Springs Street property. MVC objected, amending its claim slightly downward. The bankruptcy court equitably subordinated MVC's secured claim to all creditor claims, due to an inflated sales price of motel and $1 foreclosure bid. Diwan filed three modified plans subordinating Diwan's claim to Ranbir's equity interest. At confirmation hearing, bankruptcy court sustained MVC's objections to plan proposed interest rate and to feasibility, and determined that plan failed to meet best interest of creditors' test. On appeal, district court rejected Diwan's impairment-of-collateral argument and also found that the bankruptcy court presented alternate, independent grounds sufficient for denying confirmation and dismissing case.
Colloton, Beam, Gruender

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