In re River East Plaza, LLC

Case No. 11-3263 (7th Cir. Jan 19, 2012)
A secured creditor can object to a plan to protect its lien from unfavorable treatment, but a plan can be crammed down over objection provided one of three subsections of Bankruptcy Code § 1129(b)(2)(A) is met. Subsection (i) provides the lien remains on the property until paid, but allows the debtor to keep the property and stretch payment out beyond the period allowed by the loan agreement; (ii) provides for a sale free and clear of the mortgage, but allows the creditor to “credit bid” its claim; finally (iii) provides the lien is exchanged for an “indubitable equivalent.” The Circuit Court held that the Bankruptcy Court did not abuse its discretion in denying River East’s proposed plan after finding, despite assertions to the contrary, that the plan did not provide the “indubitable equivalent” of LNV’s claim. This was primarily because the different risk profiles of the two options--the Treasury bonds proposed as the indubitable equivalent in the plan versus LNV retaining its lien on the property--are not equivalent. The Circuit found that a debtor should not be free to choose between such different risks on behalf of the creditor. The Circuit Court also acknowledged River East’s allegation that LNV’s reason in opting to treat its claim as a secured claim in the full amount was to thwart the bankruptcy. The Circuit Court took no issue with LNV’s action and further noted that forbidding substitution of collateral where a creditor is undersecured “makes good sense.” Thus, the Seventh Circuit affirmed the Bankruptcy Court’s denial of confirmation, which led to the stay relief under Bankruptcy Code § 362(d)(3)(A), after which dismissal was appropriate.
Procedural context:
This is a direct appeal from the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division. The Bankruptcy Court denied confirmation of a plan, then granted stay relief under Bankruptcy Code § 362(d)(3)(A) as more than 90 days had passed since the petition was filed without the filing of a plan with a reasonable possibility of being confirmed in a reasonable time. The Bankruptcy Court concluded by dismissing the case, since this is a SARE case and the stay relief will leave the estate with nothing to reorganize.
The Debtor and principal appellant of this single asset real estate (“SARE”) case (under Bankruptcy Code § 101(51B)), River East Plaza, LLC (“River East”), is the owner and mortgagor of a building in downtown Chicago which houses offices and a restaurant. Banking firm LNV Corporation (“LNV”) is the appellee and holds a first mortgage on the building. River East defaulted on the LNV mortgage in February 2009. LNV prevailed on foreclosure proceedings, but on the eve of the foreclosure sale in February 2011, River East filed for relief under Chapter 11, and the sale was stayed. LNV became a party to the proceeding and subjected itself to the Bankruptcy Court’s authority to affect it’s lien in a plan of reorganization. LNV is owed $38.3 million; the building is valued by River East at $13.5 million. Under Bankruptcy Code § 1111(b)(1)(B) and (b)(2), LNV opted to treat its claim as a secured claim equal to the face amount of the unpaid balance. River East proposed a plan invoking the “indubitable equivalent” provision of Bankruptcy Code § 1129(b)(2)(A)(iii), providing that LNV receive 30-year Treasury bonds in the amount of $13.5 million which could grow in value to $38.3 million, asserting that this guarantees LNV will be paid in full and is the indubitable equivalent of LNV’s lien. LNV sought stay relief and River East attempted to cramdown the proposed plan. The Bankruptcy Court rejected the plan, lifted the stay, and dismissed the case.
Posner, Flaum, Sykes

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