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      Insolvency News and Analysis - Week Ending August 29, 2014
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    Posts Tagged ‘Cause of action’

    Paid in Full

    Sunday, August 10th, 2014
    American National Bank AD

    American National Bank AD (Photo credit: Wikipedia)

    One of the fundamental functions of any bankruptcy proceeding is the establishment of an amount and priority for each creditor’s claim against the debtor. A short, 5-page decision issued late last month by the Nebraska Bankruptcy Court in two related Chapter 11 cases (Biovance and Julien) serves as a reminder that although creditors are not permitted a “double recovery” on their claims, they are nevertheless permitted to assert the full value of their claims until those claims are paid in full.

     
    In the US, it is common for creditors to mitigate credit risk through two primary means: Taking a security interest in the debtor’s collateral, and/or securing a guaranty of payment from a [non-debtor] third party. Further, and in the event of a payment default, courts frequently recognize a creditor’s right to pursue simultaneous collection activity for the entirety of the debt against the debtor, the collateral, and the guarantor. In a recent decision involving two related Chapter 11 debtors, a Nebraska Bankruptcy Court was asked by the debtors to limit the amounts claimed by a creditor as the creditor had already received a portion of the payments owed to it.

     
    In this case, a business debtor (Biovance) had leased equipment from American National Bank (ANB), collateralizing one of the leases with a certificate of deposit held by that debtor.  The other lease was protected by a guarantee issued by the individual debtor (Julien) to ANB.  ANB had obtained permission to collect its collateral with respect to the first lease, and to liquidate its claims in Nebraska state court with respect to the second (which claims were subsequently settled).  The debtors argued, among other things, that as the confirmed bankruptcy plan provided for payment in full of all claims, the creditor was therefore obligated to immediately credit the amounts it had received.  ANB argued that a proof of claim filed under 11 U.S.C. § 502 need not be reduced by amounts recovered from a third party unless it stood the chance of a double recovery.

     
    The Bankruptcy Court of Nebraska agreed with ANB, noting that the confirmed plan is neither a recovery nor payment in full. It is only a promise to pay. The Court went on to hold that until such time as ANB had actually received its payment in full, it was entitled to assert the balance due against all concerned parties – including the debtors.

     
    Establishing the amount and priority for each creditor’s claim against the debtor fixes the limit of recoveries available to a creditor from the debtor’s estate. Such claims are, in the aggregate, an important factor in the creditors’ assessment of the feasibility of a debtor’s proposed reorganization – and in determining whether liquidation offers them a preferable recovery.

     
    The Biovance decision, though not surprising, nevertheless reminds creditors and their counsel to preserve all of the value of their claims, even if paid partially, until the claims are paid in full.

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    A Lesson In Vocabulary: “Indubitable Equivalence”

    Tuesday, June 7th, 2011

    Chapter 11 practice – like so many other professional service specialties – is regrettably jargon-laden.  Businesses that need to get their financial affairs in order “enter restructuring.”  Those that must re-negotiate their debt obligations attempt to “de-leverage.”  And those facing resistance in doing so seek the aid of Bankruptcy Courts in “cramming down” their plans over creditor opposition.

    Likewise, the Bankruptcy Code – and, consequently, Bankruptcy Courts – employ what can seem an entirely separate vocabulary for describing the means by which a successful “cram-down” is achieved.  One such means involves providing the secured creditor with something which equals the value of its secured claim: If the secured creditor holds a security interest in the debtor’s apple, for example, the debtor may simply give the creditor the apple – or may even attempt to replace the creditor’s interest in the apple with a similar interest in the debtor’s orange (provided, of course, that the orange is worth as much as the original apple).

    The concept of replacing something of value belonging to a secured creditor with something else of equivalent value is known in “bankruptcy-ese” as providing the creditor with the “indubitable equivalent” of its claim – and it is a concept employed perhaps most frequently in cases involving real estate assets (though “indubitable equivalence” is not limited to interests in real estate).  For this reason, plans employing this concept in the real estate context are sometimes referred to as “dirt for debt” plans.

    A recent bankruptcy decision out of Georgia’s Northern District issued earlier this year illustrates the challenges of “dirt for debt” reorganizations based on the concept of “indubitable equivalence.”

    Map of USA with Georgia highlighted

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    Green Hobson Riddle, Jr., a Georgia businessman, farmer, and real estate investor, sought protection in Chapter 11 after economic difficulties left him embroiled in litigation and unable to service his obligations.

    Mr. Riddle’s proposed plan of reorganization, initially opposed by a number of his creditors, went through five iterations until only one objecting creditor – Northside Bank – remained.  Northside Bank held a first-priority secured claim worth approximately $907,000 secured by approximately 36 acres of real property generally referred to as the “Highway 411/Dodd Blvd Property,” and a second-priority claim secured by a condominium unit generally referred to as the “Heritage Square Property.”  It also held a judgment lien recorded against Mr. Riddle in Floyd County, Georgia.

    A key feature of Mr. Riddle’s plan involved freeing up the Heritage Square Property in order refinance one of his companies, thereby generating additional payments for his creditors.  To do this, Mr. Riddle proposed to give Northside Bank his Highway 411/Dodd Blvd Property as the “indubitable equivalent,” and in satisfaction, of all of Northside’s claims.

    Northside Bank objected to this treatment, respectfully disagreeing with Mr. Riddle’s idea of “indubitable equivalence.”  Bankruptcy Judge Paul Bonapfel took evidence on the issue and – in a brief, 9-page decision – found that Mr. Riddle had the better end of the argument.

    Judge Bonapfel’s decision highlights several key features of “indubitable equivalent” plans:

    -         The importance of valuation.  The real challenge of an “indubitable equivalence” plan is not its vocabulary.  It is valuing the property which will be given to the creditor so as to demonstrate that value is “too evident to be doubted.”  As anyone familiar with valuation work is aware, this is far more easily said than done.  Valuation becomes especially important where the debtor is proposing to give the creditor something less than all of the collateral securing the creditor’s claim, as Mr. Riddle did in his case.  In such circumstances, the valuation must be very conservative – a consideration Judge Bonapfel and other courts recognized.

    -       The importance of evidentiary standards.  Closely related to the idea of being “too evident to be doubted” is the question of what evidentiary standards apply to the valuation.  Some courts have held that because the property’s value must be “too evident to be doubted,” the evidence of value must be “clear and convincing” (the civil equivalent of “beyond a reasonable doubt”).  More recent cases, however, weigh the “preponderance of evidence” (i.e., does the evidence indicate something more than a 50% probability that the property is worth what it’s claimed to be?).  As one court (confusingly) put it: “The level of proof to show ‘indubitably’ is not raised merely by the use of the word ‘indubitable.’”  Rather than require more or better evidence, many courts seem to focus instead on the conservative nature of the valuation and its assumptions.

    -       The importance of a legitimate reorganization purpose.  Again, where a creditor is receiving something less than the entirety of its collateral as the “indubitable equivalent” of its claim, it is up to the debtor to show that such treatment is for the good of all the creditors – and not merely to disadvantage the creditor in question.  Judge Bonapfel put this issue front and center when he noted, in Mr. Riddle’s case:

    [I]t is important to recognize that § 1129(b), the “cram-down” subsection, “provides only a minimum requirement for confirmation … so a court may decide that a plan is not fair and equitable even if it is in technical compliance with the Code’s requirements.” E.g., Atlanta Southern Business Park, 173 B.R. at 448. In this regard, it could be inequitable to conclude that a plan provision such as the one under consideration here is “fair and equitable,” if the provision serves no reorganization purpose. See Freymiller Trucking, 190 B.R. at 916. But in this case, the evidence shows that elimination of the Bank’s lien on other collateral is necessary for the reorganization of the Debtor and his ability to deal with all of the claims of other creditors who have accepted the Plan. No evidence demonstrates that the Plan is inequitable or unfair

    In re Riddle, 444 B.R. 681, 686 (Bankr. N.D. Ga. 2011).

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