Chapter 11 practice â like so many other professional service specialties â is regrettably jargon-laden.Â Businesses that need to get their financial affairs in order âenter restructuring.âÂ Those that must re-negotiate their debt obligations attempt to âde-leverage.âÂ And those facing resistance in doing so seek the aid of Bankruptcy Courts in âcramming downâ their plans over creditor opposition.
Likewise, the Bankruptcy Code â and, consequently, Bankruptcy Courts â employ what can seem an entirely separate vocabulary for describing the means by which a successful âcram-downâ is achieved.Â 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 debtorâs apple, for example, the debtor may simply give the creditor the apple â or may even attempt to replace the creditorâs interest in the apple with a similarÂ interest in the debtorâs 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 âbankruptcy-eseâ as providing the creditor with the âindubitable equivalentâ of its claim â and it is a concept employed perhaps most frequently in cases involving real estate assets (though âindubitable equivalenceâ is not limited to interests in real estate).Â For this reason, plans employing this concept in the real estate context are sometimes referred to as âdirt for debtâ plans.
A recent bankruptcy decision out of Georgiaâs Northern District issued earlier this year illustrates the challenges of âdirt for debtâ reorganizations based on the concept of âindubitable equivalence.â
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. Riddleâs proposed plan of reorganization, initially opposed by a number of his creditors, went through five iterations until only one objecting creditor â Northside Bank â remained.Â 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 âHighway 411/Dodd Blvd Property,â and a second-priority claim secured by a condominium unit generally referred to as the âHeritage Square Property.âÂ It also held a judgment lien recorded against Mr. Riddle in Floyd County, Georgia.
A key feature of Mr. Riddleâs plan involved freeing up the Heritage Square Property in order refinance one of his companies, thereby generating additional payments for his creditors.Â To do this, Mr. Riddle proposed to give Northside Bank his Highway 411/Dodd Blvd Property as the âindubitable equivalent,â and in satisfaction, of all of Northsideâs claims.
Northside Bank objected to this treatment, respectfully disagreeing with Mr. Riddleâs idea of âindubitable equivalence.âÂ Bankruptcy Judge Paul Bonapfel took evidence on the issue and â in a brief, 9-page decision â found that Mr. Riddle had the better end of the argument.
Judge Bonapfelâs decision highlights several key features of âindubitable equivalentâ plans:
–Â Â Â Â Â Â Â Â The importance of valuation.Â The real challenge of an âindubitable equivalenceâ plan is not its vocabulary.Â It is valuing the property which will be given to the creditor so as to demonstrate that value is âtoo evident to be doubted.âÂ As anyone familiar with valuation work is aware, this is far more easily said than done.Â Valuation becomes especially important where the debtor is proposing to give the creditor something less than all of the collateral securing the creditorâs claim, as Mr. Riddle did in his case.Â In such circumstances, the valuation must be very conservative â a consideration Judge Bonapfel and other courts recognized.
–Â Â Â Â Â Â Â The importance of evidentiary standards.Â Closely related to the idea of being âtoo evident to be doubtedâ is the question of what evidentiary standards apply to the valuation.Â Some courts have held that because the propertyâs value must be âtoo evident to be doubted,â the evidence of value must be âclear and convincingâ (the civil equivalent of âbeyond a reasonable doubtâ).Â More recent cases, however, weigh the âpreponderance of evidenceâ (i.e., does the evidence indicate something more than a 50% probability that the property is worth what itâs claimed to be?).Â As one court (confusingly) put it: âThe level of proof to show âindubitablyâ is not raised merely by the use of the word âindubitable.ââÂ Rather than require more or better evidence, many courts seem to focus instead on the conservative nature of the valuation and its assumptions.
–Â Â Â Â Â Â Â The importance of a legitimate reorganization purpose.Â Again, where a creditor is receiving something less than the entirety of its collateral as the âindubitable equivalentâ of its claim, it is up to the debtor to show that such treatment is for the good of all the creditors â and not merely to disadvantage the creditor in question.Â Judge Bonapfel put this issue front and center when he noted, in Mr. Riddleâs case:
[I]t is important to recognize that Â§ 1129(b), the âcram-downâ subsection, âprovides 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.â 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 âfair and equitable,â 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).