Focus on Single Asset Real Estate (Series: Chapter 11 Special Issues)

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DISCLAIMER
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MEET THE FACULTY
Moderator:
Thad Wilson – King & Spalding LLP
Panelists:
Mark Melickian – Sugar Felsenthal Grais & Helsinger LLP
Dale Schian – Schian Walker PLC
Hank Waida – Equity Partners HG
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ABOUT THIS WEBINAR:
Focus on Single Asset Real Estate
There are some special rules for single asset real estate cases in the Bankruptcy Code; but
even without those special rules, such chapter 11 cases proceed quite differently than other
cases. Motion to dismiss or convert early in the case, and motions to lift the automatic stay
to permit a single lender to foreclose on all of the debtor’s assets, are common. More
generally, single asset real estate cases are far more likely to be dominated by litigation
early as compared to other chapter 11 cases. Plan confirmation issues tend to focus on
claim classification issues. This webinar addresses these issues.
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ABOUT THIS SERIES:
Chapter 11 – Special Issues
As of this writing (January, 2019) many people (economists) with crystal balls (relevant
training, experience, and tools) predict that the economy is turning, and not for the better.
If correct, one likely result will be a significant uptick in the number of Chapter 11
bankruptcy cases filed by businesses across the American Landscape. Designed for the
corporate attorney, litigator, and anyone else who is not a Chapter 11 bankruptcy expert
who finds herself stepping into bankruptcy for the first time or only on occasion, each
episode in this Financial Poise webinar series takes a deep dive into one aspect of a chapter
11 bankruptcy case at a level that can be understood by the non-expert.
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EPISODES IN THIS SERIES
4/17/19 Episode #1:
Focus on Retail
5/15/19 Episode #2:
6/19/19 Episode #3:
Focus on Health Care
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #2:
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HISTORY OF THE SPECIALIZED RULES FOR
“SINGLE ASSET REAL ESTATE” DEBTORS
• Enacted in 1994; expanded in 2005
• Legislative History: “This amendment will ensure that the automatic stay provision is not
abused, while giving the debtor an opportunity to create a workable plan of
reorganization.” S. Rep. No. 168, 103d Cong., 1st Sess. (1993)
• Specialized rules were enacted to assist secured creditors (i.e., mortgage lenders). See In
re LDN Corp., 191 B.R. 320, 327 (Bankr. E.D. Va. 1996)
✓ Gives secured lenders (often the only significant creditors in a SARE case) leverage to
expedite disposition of bankruptcy.
• Rules accelerate bankruptcy process to prevent perceived abuses by real estate owners to
delay foreclosures indefinitely when little prospect of a successful reorganization exists
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THE 2005 AMENDMENTS
• Prior to 2005, a SARE debtor’s noncontingent, liquidated secured debts could not
exceed $4 million.
• Congress eliminated the secured debt ceiling restriction in the Bankruptcy Abuse and
Creditor Prevention Act of 2005 (“BAPCPA”)
✓ Real estate ventures typically segregate real estate projects into separate, legally
distinct entities
✓ Amendment significantly expanded scope of specialized SARE rules
• The changes were made to “to put additional responsibility on a single asset real estate
debtor and prevent a perceived abuse of the bankruptcy process on the part of these
ventures.” In re 652 West 160th LLC, 330 B.R. 455, 460 (Bankr. S.D.N.Y. 2005) (citing
S. Rep. No. 103-168 (1993)).
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WHAT IS A “SINGLE ASSET REAL ESTATE”
ENTITY
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“SINGLE ASSET REAL ESTATE” DEFINED – 11
U.S.C. § 101(51B)
• Real property constituting a single property or project, other than residential real
property with fewer than 4 residential units, which generates substantially all of the
gross income of a debtor who is not a family farmer and on which no substantial
business is being conducted by a debtor other than the business of operating the real
property and activities incidental thereto. – 11 U.S.C. § 101(51B)
• “Single asset real estate” is only used in § 362(d)(3) of the Bankruptcy Code.
✓ Establishes a procedure whereby a secured creditor can get expedited relief from the
automatic stay unless the debtor meets certain enumerated conditions.
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WHO QUALIFIES AS “SINGLE ASSET REAL
ESTATE” DEBTOR
• Debtor qualifies as a “single asset real estate” entity if debtor’s real property:
✓ Constitutes a single property or project;
✓ Generates substantially all of debtor’s gross income; and
✓ On which debtor’s only business is operating the real estate and activities incidental
to its operation.
• In re Scotia Pac. Co., 508 F.3d 214, 220 (5th Cir. 2007) (creating three-prong test)
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SATISFYING THE TEST
• Single property or project
✓ To be a single project, two or more properties must be linked together in some fashion in
a common plan or scheme involving their use. 2 Collier on Bankruptcy ¶ 101.51B (16th
2019)
• Generating substantially all of the debtor’s gross income
✓ Gross income, in contrast to net income, suggests that “it is irrelevant whether, prior to
the Petition Date, the Debtor has had net income or losses; the focus is on all revenues
received by the Debtor from the real estate asset. Most importantly, the statute uses the
verb ‘generates,’ denoting that it is the property itself, not the fruit of workers’ labor and
management’s services, that is responsible for substantially all of the gross income.” In
re Club Golf Ptnrs., Ltd. P’ship, No. 07-40096-BTR-11, 2007 Bankr. LEXIS 1225, at *13-
14 (Bankr. E.D. Tex. Feb. 15, 2007)
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REAL ESTATE BUSINESS
• Active v. Passive Ownership
✓ “[W]hether the revenue is the product of entrepreneurial, active labor and effort–
and thus is not single asset real estate–or is simply and passively received as
investment income by the debtor as the property's owner– and thus is single asset
real estate.” Id. at *12.
✓ “Real property that, for the generation of revenues, requires the active, day-to-day
employment of workers and managers other than or additional to the principals of
the debtor, and that would not generate substantial revenue without such labor and
efforts, should not be regarded as single asset real estate.” Id.
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WHAT QUALIFIES AS A SARE?
• Commercial real estate owner – In re Whispering Pines Estate, Inc., 341 B.R. 134 (Bankr.
D.N.H. 2006) (holding that payment of electric and telephone services, insurance, taxes,
trash removal, and landscaping was sufficiently passive to be considered incidental to
owning and operating a commercial real estate building)
• Individualized Land Developer – In re Kara Homes, Inc., 363 B.R. 399 (Bankr. D.N.J.
2007) (holding that each debtor, consisting of a developable piece of land with a
corresponding housing plan, was a SARE because each debtor’s business operations were
incidental to the marketing and sale of the homes)
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WHAT QUALIFIES AS A SARE? (cont’d)
• Housing co-operative corporation – In re 83–84 116th Owners Corp., 214 B.R. 530
(Bankr. E.D.N.Y. 1997) (56-unit co-operative did not have any employees and did conduct
other substantial business)
• Housing Development Owner – In re Spencer Creek Properties, 2010 Bankr. LEXIS 3799
(Bankr. M.D. Tenn. Oct 25, 2010) (debtor, owning 25 of 28 separate residential lots in a
subdivision qualified as SARE because the sale and maintenance of the lots awaiting sale
constituted passive land ownership).
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PROJECTS AS SARES
• If debtor owns two or more properties, the properties must comprise a common plan or
development scheme to be considered SARE
✓ Common plan – In re Rear Still Hill Road, L.L.C., 2007 Bankr. LEXIS 3501 (Bankr.
D. Conn. Oct. 5, 2007) (debtor owning two parcels of land with unified single-family
home development plan satisfied SARE definition); In re Pioneer Austin East
Development I, Ltd., 2010 Bankr. LEXIS 2160 (Bankr. N.D. Tex. July 1, 2010)
(despite purchasing and financing each parcel differently, debtor owning 8 separate
parcels of land satisfied SARE definition because parcels were part of “cohesive and
interdependent” housing development).
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PROJECTS AS SARES (cont’d)
✓ No common plan – In re McGreals, 201 B.R. 736 (Bankr. E.D. Pa. 1996) (debtor
properties did not constitute SARE where debtor owned two adjacent parcels of
land, one was rented to a tenant, while the other, mere raw land, was not, because
debtor had no intention of combining the properties and thus did not constitute a
single property or project.); In re Scotia Pacific Co., LLC, 508 F.3d 214 (5th Cir.
2007) (holding that owner of 200,000 acres of timberland located in 9 different
watersheds did not constitute a single property or project because operations were
conducted on separate sites under separate harvesting plans, and debtor had
contractual rights (not real property rights) to harvest timber from it’s subsidiaries
timberland)
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CONSOLIDATED REAL ESTATE ENTERPRISES
AS SARES
• In re Meruelo Maddux Properties, Inc., 667 F.3d 1072 (9th Cir. 2012)
✓ Each debtor in a network of 54 debtors owned by a single parent debtor, which
shared administrative, management and financial costs on a consolidated basis,
constituted single-asset real estate
✓ Absent substantive consolidation, each debtor entity passively holding real estate in
the corporate group will be considered a SARE entity.
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WHAT DOES NOT QUALIFY AS A SARE?
• Hotel – In re Whispering Pines Estate, Inc., 341 B.R. 134 (Bankr. D.N.H. 2006) (86-room
hotel was not single-asset real estate because services, including room cleaning, breakfast
service, and maintenance of amenities, were sufficiently active); but see In re CBJ Dev., 202
B.R. 467, 472 n.7 (B.A.P. 9th Cir. 1996) (disagreeing with assertion that no hotel could ever
be SARE because “whether a hotel is ‘single asset real estate’ depends upon the amount of
services provided by and the number of persons employed by the hotel in question.”)
✓ Owning the land and leasing to hotel operator qualifies as SARE
• Golf and ski resort – In re Prairie Hills Golf & Ski Club, 255 B.R. 228 (Bankr. D. Neb. 2000)
(debtor owned more than mere incoming-producing property and raw land because debtor,
among other activities, developed and sold residential lots, sold liquor in clubhouse and
provided snow removal services; rental income only produced 35% of debtor’s income).
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WHAT DOES NOT QUALIFY AS A SARE? (cont’d)
• Golf and country club - In re Larry Goodwin Golf, Inc., 219 B.R. 391 (Bank. M.D.N.C.
1997); In re Club Golf Partners, L.P., 2007 WL 1176010 (E.D. Tex., Jan. 23, 2007).
• Marina - In re Kkemko, Inc., 181 B.R. 47 (Bankr. S.D. Ohio 1995) (debtor rented marina
slips, repaired and maintained boats, sold gas, and maintained concessions).
• Timber Company – In re Scotia Pacific Co., LLC, 508 F.3d 214 (5th Cir. 2007) (timber
business was not single-asset real estate where debtor had over 60 employees, engaged in
soil conservation, road planning and construction, and where timber sales extended
beyond sale of the land because debtor engaged in substantial business other than mere
passive ownership of land).
• Senior Living Facility – In re Appleridge Retirement Community, Inc., 422 B.R. 383
(Bankr. W.D.N.Y. 2010) (debtor generated revenue from services to senior residents
provided through debtor’s employees)
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DESIGNATION AS A SARE DEBTOR
• Debtor Election
✓ Debtor “checks the box” on bankruptcy petition indicating SARE designation.
✓ Expedited timelines automatically apply.
• Creditor Motion
✓ Creditor moves to have court designate debtor as a SARE entity.
✓ In most cases, debtor will vehemently contest motion.
✓ Secured lender should move as quickly as possible to realize full benefit of expedited
timelines.
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AUTOMATIC STAY AND APPLICATION OF
SARE EXCEPTION
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AUTOMATIC STAY – 11 U.S.C. § 362
• “The automatic stay in one of the fundamental debtor protections provided by the
bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all
collection efforts, all harassment, and all foreclosure actions. It permits the debtor to
attempt a repayment or reorganization plan, or simply to be relieved of the financial
pressures that drove him into bankruptcy.” H.R. Rep. No. 595, 95th Cong., 1st Sess. 340
(1977).
• § 362(a) – codifies automatic stay, which enjoins virtually all actions against the debtor or
estate property (e.g., mortgaged land)
• §362(d) – enumerates grounds for relief from automatic stay; court can terminate, annul,
modify or condition the stay “for cause”
✓ 362(d)(3) – codifies specialized rule for “single asset real estate” that significantly
expedites bankruptcy process
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OUTCOMES WHEN “LIFT STAY” MOTION
FILED
• Depending on the circumstances of the case, bankruptcy courts can terminate, annul,
modify or condition the stay
• Modification Example – Court authorizes lender to commence foreclosure action but
not conduct the actual foreclosure sale; protects lender against delay in foreclosure
process
• Termination Example – Court authorizes lender to commence foreclosure action and
conduct foreclosure sale; termination authorizes lender to enforce all of its pre-
bankruptcy rights against debtor
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SPECIALIZED SARE RULES – EXPEDITED
“PLAN OR PAYMENT” DEADLINE
• In the non-SARE context, the automatic stay is effective against all creditors until the
earlier of when the (i) court grants lender relief from stay or (ii) case is closed.
✓ Theoretically, stay will remain in effect through pendency of debtor’s bankruptcy
case.
• In the SARE context, the court must grant the secured lender with a security interest in
the real estate (i.e., mortgage lender) relief from the stay after the latest of:
✓ 90 days after the order for relief (i.e., petition date);
✓ Such longer period as the court determines for cause during the initial 90-day
period; or
✓ 30 days after the court determines debtor is subject to SARE provisions.
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SPECIALIZED SARE RULES – EXPEDITED
“PLAN OR PAYMENT” DEADLINE (cont’d)
• Secured creditor is entitled to stay relief unless debtor has either:
✓ Filed a reorganization plan that has a reasonable possibility of being confirmed
within a reasonable time; or
✓ Commenced monthly payments equal to interest at the then applicable nondefault
contract rate of interest on the value of a creditor’s interest in the consensual lienon
the property.
• 11 U.S.C. § 362(d)(3)
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SPECIALIZED SARE RULES – TERMINATION
OF STAY
• Although technically the court may condition or modify the stay, legislative history
suggests Congress intended for courts to terminate there stay when a SARE debtor
neither proposes a viable plan nor makes interest payments to the secured party. 3
Collier on Bankruptcy P 362.07 (16th 2019).
• In re LDN Corp., 191 B.R. 320, 327 (Bankr. E.D. Va. 1996) (reasoning that “relief under
§ 362(d)(3) to be mandatory where its provisions are not strictly complied with.”)
✓ Majority of courts recognize Congress intended to create a strong presumption in
favor of terminating the stay
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SPECIALIZED SARE RULES – Plan or Payment
• Reorganization Plan
✓ Court must determine whether debtor’s plan “has a reasonable possibility of being
confirmed within a reasonable time.”
✓ Comparison with language found in Bankruptcy Code § 1112(b) – “reasonable
likelihood plan will be confirmed” – suggests SARE standard is less burdensome
(i.e., possibility is lower standard than likelihood)
• Monthly Payments on Secured (mortgage) Claim
✓ Only a “creditor whose claim is secured by such real estate” (i.e., mortgage lender) is
entitled to receive payments
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SPECIALIZED SARE RULES – Monthly Interest
Payments
• Amount – nondefault contractual rate of interest based on “value of creditor’s interest in
real estate” (i.e., secured portion of creditor’s claim)
✓ If creditor is undersecured, interim monthly payments will be less than amount paid
under the note and mortgage
• Source – Notwithstanding cash collateral restrictions in Bankruptcy Code, payments are
made from pre-petition or post-petition rental income or other income otherwise
generated by the real estate
✓ In non-SARE cases, debtor must either get creditor or court consent to use cash
collateral (i.e., rental revenue)
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ALTERNATIVE RELIEF – BAD FAITH FILING &
CONVERSION
• Creditor may also move to have bankruptcy case dismissed or converted to a Ch. 7 liquidation for
lack of good faith
• Though the good faith filing requirement is not expressly enumerated in the Bankruptcy Code,
bankruptcy courts have, nonetheless, uniformly held that the Code implicitly requires bankruptcy
petitions be filed in good faith. Carolin Corp. v. Miller, 886 F.2d 693, 702 (4th Cir. 1989) (goal of
good faith standard “is to determine whether the petitioner’s real motivation is ‘to abuse the
reorganization process’ and ‘to cause hardship or to delay creditors by resort to the Chapter 11
device merely for the purpose of invoking the automatic stay, without an intent or ability to
reorganize his financial activities.’ ” (citation omitted))
• SARE cases are vulnerable to such claims, but courts have held that the doctrine should be used
sparingly and reserved for extraordinary circumstances. Toibb v. Radloff, 501 U.S. 157 (1991)
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CLAIMS, ADEQUATE PROTECTION & CASH
COLLATERAL
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DETERMINATION OF SECURED STATUS – §
506(a)
• Bankruptcy Code bifurcates secured creditor claims to the extent the secured creditor is
undersecured (i.e., debt claim exceeds value of collateral) into:
✓ Secured claim equal to the value of the property; and
✓ Unsecured (i.e., deficiency) claim for the amount by which the debt exceeds the
property value.
• Example: Creditor has $2 million claim against debtor, secured by property with a value
of $1.5 million. Under the Bankruptcy Code, the creditor has:
✓ A secured claim in the amount of $1.5 million; and
✓ An unsecured claim in the amount of $500,000.
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SECURITY INTEREST IN RENTAL PAYMENTS
• Typical secured lender will hold both (i) a mortgage (i.e., security interest) in the real
estate, and (ii) an assignment of rents
• Assignment of rents gives the creditor title to, or a “floating” lien on, rental income
generated from the property
• Lock-box requirement for rental income?
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INVALIDITY OF PRE-PETITION SECURITY
INTEREST IN AFTER-ACQUIRED PROPERTY – 11
U.S.C § 552
• §552(a) – Establishes general rule that property acquired by the debtor or estate post-petition is
not subject to pre-petition security interest.
✓ In other words, this section invalidates clauses in security agreements typically referred to as
“after-acquired property clauses”
✓ Enables debtor to achieve “fresh start”
• § 552(b)(2) – Creates exception to general rule in § 552(a) by giving post-petition effect to pre-
petition security interest in rental income
✓ Encompasses income generated by hotel and similar properties that generate “fees, charges,
accounts, or other payments for use or occupancy of rooms and other public facilities.”
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CASH COLLATERAL
• If secured lender has properly perfected security interest in rental income under state
law, rent is considered cash collateral and § 552(b)(2) gives post-petition effect to such
security interest
• Pursuant to § 362(d)(3)(B)(iii), SARE debtor is authorized to use such rent to make
monthly payments to secured creditor
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ADEQUATE PROTECTION - 11 U.S.C. § 361
• Adequate Protection allows creditors to protect their (secured) interest in real or personal
property (including cash collateral) up to the aggregate value of the collateral
✓ No protection for post-petition interest; no compensation for foreclosure delays
• Forms of adequate protection – (i) cash payments, (ii) replacement liens, or (iii) relief that is the
“indubitable equivalent” of such interest
✓ Court must determine meaning of indubitable equivalent as it is not defined under the
Bankruptcy Code; generally means debtor must provide creditor with substitute collateral that
protects creditor’s right to payment to the same extent
• Maintenance Expenses – If debtor uses rent for routine maintenance expenses, creditor may not
be entitled to adequate protection payments
✓ Maintenance prevents deterioration of project and enhances value of property and, thus,
serves as adequate protection
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PLAN CONFIRMATION
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PLAN CONFIRMATION RULES – 11 U.S.C. §
1129(a)
• Consensual Confirmation – Court can confirm plan if each class of claims accepts the
plan. § 1129(a)(8)
• Voting – A class is deemed to vote in favor of a plan if at least (i) 1/2 in number and (ii)
2/3 in amount of the claims in the class vote to accept the plan.
✓ Class vote is determined based on claimants that actually vote, not aggregate total of
claims
• “Impaired and accepting class” requirement – A condition to confirmation of a plan is
that at least one class of non-insider, impaired (i.e., not paid in full when due) claims
vote in favor of the plan. § 1129(a)(10)
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PLAN “CRAMDOWN” RULES – 11 U.S.C. §
1129(b)
• Cramdown (nonconsensual) Confirmation – Court can confirm plan over objections of
creditors if the plan (i) satisfies the impaired and accepting class requirement and (ii) is
“fair and equitable.” § 1129(b)
✓ Cramdown provision incorporates all the typical plan requirements under § 1129(a),
but excludes subsection (a)(8) – requiring that all class accept the plan.
• Absolute Priority Rule – Subset of fair and equitable requirement; claims of impaired
class that objects must be paid in full before a junior class of claims (i.e., equityholders)
are allowed to retain any interest in the reorganized debtor under the plan.
✓ Exception may be available for “new value” plans
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COMMON SARE FACTUAL SCENARIO
• Single Secured Creditor – SARE debtor’s sole secured creditor has security interest in
real estate and rental income; secured lender asserts that claim is severely undersecured
• Debtor Intends to Retain Property – SARE debtor and its equityholders insist that
restructuring the mortgage loan and retention of the property post-bankruptcy is
appropriate
• Divergent Views – Secured lender and SARE debtor have divergent views because
lender has lost confidence in debtor’s ability to manage property profitably
✓ Lender prefers to either (i) liquidate the property, or (ii) credit bid its loan and
subsequently own and operate property (until sale is economically attractive).
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COMMON SARE FACTUAL SCENARIO (cont’d)
• De minimis unsecured trade creditors – Trade creditors with de minimis claims in
comparison to mortgage lender for services and products provided to debtor (e.g.,
utilities, landscaping, insurance, etc.)
✓ Debtor typically tries to separately classify claims for “cramdown” purposes
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CLASSIFICATION OF CLAIMS – 11 U.S.C. §
1122
• Debtor must establish classes of claims in reorganization plan.
• Plans can only place “substantially similar” claims in the same class.
✓ Claims that are not substantially similar must not be placed in the same class.
• Courts have discretion in determining whether claims are substantially similar.
• Courts typically focus on the nature of the claim and its effect on debtor’s estate. In re
Tribune Co., 476 B.R. 843, 855 (Bankr. D. Del. 2012) (citing cases).
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SEPARATE CLASSIFICATION
• Bankruptcy Code does not expressly require classifying all substantially similar claims
together, BUT claims cannot be separately classified to gerrymander an affirmative vote on a
plan for cramdown purposes. In re Greystone III Joint Venture, 995 F.2d 1274, 1279 (5th
Cir. 1991).
• Debtor is required to have economic or reasonable justification for separate classification.
See In re LightSquared, Inc., 513 B.R. 56, 83 (Bankr. S.D.N.Y. 2014).
✓ 2nd, 3rd, 4th, 5th, 8th, and 9th Circuits – Debtor is required to demonstrate business,
economic or administrative reason for separate classification;
✓ 1st Circuit requires all legally similar claims be placed in the same class, regardless of
economic or business justifications.
• Exception: Administrative Convenience Class – typically claims under $10,000
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IMPAIRMENT
• A class of claims is impaired under a plan if:
✓ Claimholder’s legal, equitable or contractual rights are altered; or
✓ Claim is not paid in full on effective date of plan.
• See In re Woodbrook Assocs., 19 F.3d 312, 321 n.10 (7th Cir. 1994) (“A class is impaired
if there is ‘any alteration of a creditor’s rights, no matter how minor.’”); In re Windsor
on the River Associates, 7 F.3d 127, 132 (8th Cir. 1993) (holding unsecured trade
creditors were not impaired due to a 60-day delay in payment because “a claim is not
impaired if the alteration of rights in question arises solely from the debtor’s exercise of
discretion.”); but see In re Village at Camp Bowie I, L.P., 710 F.3d 239 (5th Cir. 2013);
Matter of L&J Anaheim Associates, 995 F.2d 940 (9th Cir. 1993)
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IMPAIRED AND ACCEPTING CLASS – “PER
PLAN” V. “PER DEBTOR”
• Per Debtor – each debtor to a joint plan (i.e., both parent and subsidiary) must have at
least one impaired and accepting class to confirm plan.
• Per Plan – Joint plan only needs a single impaired and accepting class despite lack of
substantive consolidation of debtors to joint plan
✓ This approach can undermine structural protections and benefits creditor intended
to create by taking distinct security interests in separate legal entities within a
consolidated corporate real estate venture.
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TYPICAL ATTEMPTED SARE CLASSIFICATION
• Class 1 – Mortgage lender’s secured claim;
• Class 2 – Mortgage lender’s unsecured (deficiency) claim
• Class 3 – Trade creditors unsecured claims
• Classification Fight = Principal fight in SARE case
✓ Lender’s Deficiency Claim Generally Exceeds Aggregate Of Other Unsecured Claims
✓ Secured Lender Would Have Blocking Position If Deficiency Claim Is Classified In
Same Class As Trade Creditors
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SARE CLAIM CLASSIFICATION
• Competing views on whether deficiency claim may be separately classified from general
unsecured claims
✓ Separate – In re Loop 76, LLC, 465 B.R. 525, 541 (B.A.P. 9th Cir. 2012) (personal
guarantee allows unsecured deficiency claim to be classified separately).
o Other justifications may exist; for example, where continued provision of services
or products from unsecured trade creditor is necessary for reorganization.
✓ Combined – In re 18 RVC, LLC, 485 B.R. 492 (Bankr. E.D.N.Y. 2012) (“the existence
of a personal guarantee, without more, is not a legitimate reason for separately
classifying the unsecured deficiency claim of a secured lender”)
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PURCHASE OF CLAIMS TO CONTROL VOTING
• Secured lenders often attempt to purchase blocking portion (i.e., at least 1/2 in number
and/or 2/3 in amount of claims) of class to control voting and defeat confirmation over
its objection
✓ Typically seeking to purchase claims to satisfy numerosity
• Debtors counter this strategy and argue that purchased claims should be designated
(i.e., disregarded) under Bankruptcy Code § 1126(e) for voting purposes because lender
lacked good faith when purchasing the claims
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CLAIM DESIGNATION - § 1126(e)
• Court may designate vote on a claim if the voting entities’ “acceptance or rejection of
such plan was not in good faith, or was not solicited or procured in good faith . . . .” §
1126(e)
• Party seeking claim designation bears heavy burden of proving lack of good faith. See,
e.g., In re Indianapolis Downs, LLC, 486 B.R. 286, 296 (Bankr. D. Del. 2013).
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CLAIM DESIGNATION STANDARDS
• While standards vary across jurisdictions, courts generally do not find creditors voting
selfishly acted in bad faith. Therefore, purchasing a blocking position, without more, is
generally not considered bad faith. In re Lichtin/Wade, LLC, 2012 Bankr. LEXIS 5785
(Bankr. E.D.N.C. Dec. 17, 2012)
✓ Some courts have held that offer to purchase claims must extend to all claims in a
class to constitute good faith.
✓ In contrast, other courts have held that “while offering to purchase all claims is
certainly an indicator of good faith, failing to do so cannot be evidence of bad faith.
In re Fagerdala USA-Lompoc, Inc., 891 F.3d 848, 855 (9th Cir. 2018)
• Bad faith is usually reserved for circumstances where creditor obtains a benefit to which
it otherwise would not be entitled. Id.
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STRATEGIC, ECONOMIC CLAIMS PURCHASING
• If the jurisdiction does not require the secured lender offer to purchase extend to all
claims, creditors will often only purchase 50% in number of unsecured claims, which
may only constitute a nominal percentage in amount of claims.
✓ This makes purchasing a blocking position much cheaper.
• The Ninth Circuit vindicated this strategy. In re Fagerdala USA-Lompoc, Inc., 891 F.3d
848, 855 (9th Cir. 2018) (finding purchase of claims constituting 50% in number yet
only 10% in amount, without more, did not constitute bad faith).
• Debtor Strategy – have a “friend” purchase claims
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6

CRAMDOWN
5
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CRAMDOWN – § 1129(b)
• § 1129 authorizes the confirmation of a plan over the objection of a class of creditors.
• Protects debtors from unreasonable holdout creditors
• Powerful tool because it enables a SARE debtor to bind its lender to a plan it voted to
reject
• A “cramdown” plan must:
✓ Not “discriminate unfairly” against a class of creditors;
✓ Be “fair and equitable;” and
✓ Satisfy the “impaired and accepting” class requirement
• § 1129(b)(1)
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“CRAMDOWN” ELEMENTS
• Unfair Discrimination
✓ Plans do not discriminate unfairly if, among other things, the objecting class receives
a distribution of equivalent value to all other similarly situated classes
✓ A plan may not classify two similarly situated claims in separate classes and provide
for disparate treatment for those classes
• Fair and Equitable
✓ Three tests in Code to determine whether a plan is fair and equitable depending on
whether the dissenting class is comprised of secured, unsecured, or equity interests
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“CRAMDOWN” SCENARIOS
• Unsecured Creditor Cramdown – 11 U.S.C. § 1129(b)(2)(B)
✓ Plan is fair and equitable as to a class of objecting unsecured creditors if either:
o The class members receive cash, property, or securities equal to the full amount
of their claim or interest; or
o No junior class receives, or retains, any property or interest in the debtor (i.e.,
absolute priority rule)
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“CRAMDOWN” SCENARIOS (cont’d)
• Secured Creditor Cramdown
✓ Plan is fair and equitable as to objecting secured creditor if:
o New loan – Secured creditor retains its lien on the collateral and receives
deferred cash payments equal to the present value of its liens as of the effective
date;
o Sale – If property (i.e., collateral) is sold, receives liens on the proceeds of its
collateral and receive deferred cash payments equal to the present value of its
liens as of the effective date; or
o Return of Collateral – Realize the indubitable equivalent of its claims (i.e., liens)
✓ In the event of a sale, secured creditors may credit bid their claims.
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SECURED CREDITOR CRAMDOWN – NEW
LOAN
• Retention of lien and deferred cash payments presents greatest risk lender will not
receive full recovery
• Interest Rate – New note must bear sufficient interest rate to discount the payment
stream to the allowed amount of the claim
• Two Methodologies:
✓ Prime-Plus (i.e., Till Rate or Formula Rate) – Interest rate set at prime rate (as of
plan’s effective date) plus a nominal margin accounting for reorganized debtor’s
creditworthiness and Till risk factors; or
✓ Market Rate – If efficient market exists for type of loan offered, the interest rate
should be set at the market rate.
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SECURED CREDITOR CRAMDOWN – TILL
RISK FACTORS
• In absence of an efficient market, courts default to the Till Rate – named after the Supreme
Court Case, Till v. SCS Credit Corp., 541 U.S. 465 (2004) – which accounts for the following
risk factors:
✓ Nature of collateral (volatile or stable)
✓ Feasibility of plan (i.e., reasonable probability of payment; confirmation will not be
followed by subsequent liquidation or reorganization)
✓ Reorganized Debtor’s Business Plan (i.e., capitalization, retention or sale of equity,
projected cash flows, etc.)
✓ Duration and terms of plan proposal (i.e., extension of loan maturity, covenant
modifications, and amortization, etc.)
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THE SECTION 1111(B) ELECTION
• In certain circumstances, an undersecured creditor can elect to have its entire claim
(secured and deficiency claims) treated as a fully secured claim.
• If election is made, creditor is entitled to:
✓ Retain lien to the extent of fully secured claim;
✓ Payments over life of plan totaling amount of fully secured claim; and
✓ Payments over time equal present value of actual security interest (i.e., excluding
unsecured deficiency claim)
• In re Weinstein, 227 B.R. 284, 294 (B.A.P. 9th Cir. 1998) (discussing § 1111(b) requirements)
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TIMING OF § 1111(b) ELECTION
• A creditor may make the election at “‘at any time prior to the conclusion of the hearing on the
disclosure statement or within such later time as the court may fix.” Fed. R. Bankr. P. 3014.
• There is divergent case law on whether the election must made at the outset of the case, at
confirmation, or at a subsequent confirmation hearing; whether once the election is made the
creditor can modify or withdraw the election. See Troy Savings Bank v. Travelers Motor Inn,
Inc., 215 B.R. 485, 492 (N.D.N.Y. 1997) (refusing give effect to 1111(b) election made post-
confirmation because creditor had acquiesced to modification of plan at confirmation); In re
Scarsdale Realty Partners, L.P., 232 B.R. 300, 302 (Bankr. S.D.N.Y. 1999) (“The debtor’s failure
to disclose this material information at the time [lender] made its election is sufficient
justification for [lender’s] withdrawal of its election, particularly where [lender] seeks to do so
within the time limit in which it initially could have made the election under Bankruptcy Rule
3014”).
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SECTION 1111(b) ELECTION – AN EXAMPLE
• Secured creditor’s pre-petition loan – $25m
• Value of collateral – $20m
• Secured Claim – $20m; Unsecured Claim – $5m
• § 1111(b) Election: Creditor treated as if fully secured for $25m
• Creditor must:
✓ Retain lien for $25m;
✓ Receive deferred cash payments (a) totaling at least $25m and (b) with a present
value of $20m
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SECTION 1111(b) ELECTION – PROS AND
CONS
• Pros
✓ Protects creditor if collateral’s market value is temporarily or artificially depressed
✓ Enables creditor to potentially realize value from post-confirmation appreciation of
collateral (in the event of sale or refinancing)
✓ Avoid court valuation
• Con
✓ Creditor cannot vote unsecured deficiency claim to block plan confirmation
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FAIR AND EQUITABLE – OWNERSHIP CLASS
• A plan is fair and equitable as to a class of ownership or equity interests, if:
✓ Class members receive the greatest of any fixed liquidation preference, any fixed
redemption price, or the value of such interest; or
✓ No holder of a junior interest may receive anything.
• § 1129(b)(2)(C)
6
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NEW VALUE COROLLARY
• Absolute Priority Rule – Equityholders cannot receive anything on account of their
equity interest unless unsecured creditors are paid in full. See, e.g., In re GAC Storage
El Monte, LLC, 489 B.R. 747, 766 (Bankr. N.D. Ill. 2013).
• New Value Corollary – Equityholder may retain interest in reorganized debtor if it
contributes new value to the debtor, not on account of their status as existing
equityholders. See Bank of America Nat. Trust & Sav. Assoc’n v. 203 North LaSalle
Street P’ship, 526 U.S. 434 (1999) (refusing to decide whether exception exists).
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NEW VALUE COROLLARY - ELEMENTS
• For new value corollary (to the absolute priority rule) to apply, capital contribution by old
equity must be:
✓ New;
✓ Substantial (as compared to total prepetition debt and amount of discharged debt);
✓ Money or money’s worth (i.e., an asset pursuant GAAP);
✓ Necessary for a successful reorganization;
✓ Reasonably equivalent to the property the old equity is retaining or receiving (easier
where efficient market exists for such interests);
✓ Liquid; payable on a present basis (not a future contribution); and
✓ Depending on the applicable jurisdiction, subject offer to market test.
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NEW VALUE COROLLARY – ELEMENTS
(cont’d)
• In re RAMZ Real Estate Co., LLC, 510 B.R. 712, 718 (Bankr. S.D.N.Y. 2014); see Bank of Am.
Nat'l Trust & Savs. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 441-42, 119 S. Ct. 1411,
143 L. Ed. 2d 607 (1999) (“whether a market test would require an opportunity to offer
competing plans or would be satisfied by a right to bid for the same interest sought by old
equity is a question we do not decide here.”)
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NEW VALUE COROLLARY – MARKET TEST
• California bankruptcy court canvassed the limited case law on the new value corollary
and made the following observations concerning when an equity interest has been
sufficient exposed to the market:
✓ Suitability of “market test” must be determined on case by case basis
✓ Independent committee soliciting bids from over 100 financial firms during
reasonable bid period is sufficient
✓ Soliciting a bid from a single outside investor is insufficient
✓ An appraisal or expert opinion alone is not a “market test”
✓ Limited pre-petition solicitation is insufficient
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2

NEW VALUE COROLLARY – MARKET TEST
(cont’d)
✓ Bare-bones non-targeted advertising is likely insufficient
✓ Employment of investment banker not required, but beneficial
✓ Requires demonstration of a systematic effort designed to market test the deal
• In re NNN Parkway, 400 26, LLC, 505 B.R. 277, 283 (Bankr. C.D. Cal. 2014).
7
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ABOUT THE FACULTY
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Thad Wilson – ThadWilson@kslaw.com
Thad Wilson is a partner in the Atlanta office of King & Spalding and a member of the firm’s Financial Restructuring
practice. Thad has represented a broad spectrum of clients in financial restructuring, corporate and insolvency
matters, including bankruptcy-related government investigations and appeals. He has represented debtors, secured
and unsecured creditors, and other parties in interest in major Chapter 11 bankruptcy cases.
Thad has substantial experience representing litigants in contested matters, adversary proceedings and other high
stakes litigation in significant Chapter 11 bankruptcy cases and insolvency proceedings involving creditors’ rights,
fraudulent transfers, and alter ego, as well as representing buyers and sellers of distressed assets in Chapter 11
bankruptcy proceedings.
Thad is a member of the American Bankruptcy Institute, the Turnaround Management Association, the Atlanta Bar
Association and the State Bar of Georgia. He is a founding member of the Atlanta chapter of the Turnaround
Management Association NextGen organization and is the immediate past-president of its board. He was elected to
the initial class of Barristers of the W. Homer Drake, Jr. Georgia Bankruptcy American Inn of Court, of which he is
currently a member.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/thaddeus-d-wilson/
7
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Mark Melickian – mmelickian@sfgh.com
Mark Melickian leads Sugar Felsenthal Grais & Helsinger LLP’s restructuring practice. Over the past 20 plus years,
he has worked primarily on business transactional and litigation matters with a focus on chapter 11 commercial
bankruptcy cases and non-bankruptcy distressed situations. His practice includes both debtor- and creditor-side
representations and include financial institutions, indenture trustees, trade creditors, asset purchasers, investors,
commercial real estate interests, corporate officers, and other parties in interest in chapter 11 cases throughout the
country. In addition, a significant focus of his practice is the representation of committees and other estate
fiduciaries in bankruptcy cases – over the past two decades, he has counseled dozens of official and unofficial
bankruptcy committees, liquidating trustees, litigation trustees, and plan administrators charged with pursuing and
liquidating assets for the benefit of estate creditors.
Mark has written extensively on bankruptcy and insolvency law and other topics, having contributed materials on
these subjects to American Bankruptcy Institute Journal, Bankruptcy Strategist, Wiley Bankruptcy Law Update,
Ginsberg & Martin on Bankruptcy, Norton Bankruptcy Law Adviser, the Cornell University Legal Ethics Library, and
dozens of professional conferences and seminars. For several years, he wrote a monthly legal affairs column
for Student Lawyer, an America Bar Association publication, for which he received the Peter Lisagor Award for
Exemplary Journalism from the Chicago chapter of the Society of Professional Journalists. He is a graduate of
Colorado State University and Northwestern University School of Law.
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Dale Schian – Dale@biz.law
Dale C. Schian is a long-time member of Arizona’s bankruptcy community, with an emphasis in Chapter 11 reorganizations
and corporate restructurings. Mr. Schian has written and lectured extensively in the areas of bankruptcy law and
receiverships. Recent presentations and articles have included considerations in restructuring Single Asset Real Estate
properties and the implications of In re Loop 76, where he served as debtor’s counsel. Based upon a certification from the
Arizona Bankruptcy Court, he recently argued before the Arizona Supreme Court for the proposition that managers and
controlling members of limited liability companies owe fiduciary duties to the LLC.
Mr. Schian is a past chair of the Bankruptcy Section of the State Bar of Arizona and is a member of the State Bar’s Business
Law and Business Law Sections. He is also an active member of the American Bankruptcy Institute. He was one of the
original Masters of the Arizona Bankruptcy American Inn of Court. He continues to be an active alumnus on that origination
and was recognized with Hon. Daniel P. Collins Mentorship Award in 2018. His support of Arizona's legal community
includes being a Fellow of the Arizona Foundation for Legal Services.
Mr. Schian has been selected multiple times to Super Lawyers, The Best Lawyers in America, Arizona’s Finest Lawyers and
Corporate Counsel's Top Lawyers in Bankruptcy Debtor-Creditor Rights Law.
He earned his J.D. degree cum laude from the American University, Washington College of Law and his B.A. from Michigan
State University. Mr. Schian is a co-founder and managing member of Schian Walker, P.L.C. He may be contacted at
dale@biz.law or via www.biz.law.
7
7

Hank Waida – HWaida@equitypartnershg.com
Hank Waida is a Managing Director with Equity Partners HG, a boutique investment banking firm located in
Easton, Maryland. Hank has been in the industry since 1996 and his specialties include business analysis,
marketing, complex deal structure, contract negotiations, creditor interfacing, 363 sale facilitation, Article 9
sales, DIP financing, court testimony, and joint venture partnerships. Hank has worked on over 90
engagements in a variety of manufacturing industries including pharmaceutical, metal processing, biofuel,
food, window, wood frame, candle and textile, as well as apparel distribution, energy, meat packing and single
asset real estate, both in and out of bankruptcy. He has recently completed the sale of a multifamily property
portfolio operating under an approved plan of reorganization. Hank has testified in and had transactions
approved in numerous bankruptcy courts across the country. He is an active member, author and upcoming
speaker for the American Bankruptcy Institute, and an active member of the Turnaround Management
Association.
7
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QUESTIONS OR COMMENTS?
If you have any questions about this webinar that you did not get to ask during
the live premiere, or if you are watching this webinar On Demand, please do
not hesitate to email us at info@financialpoise.com with any questions or
comments you may have. Please include the name of the webinar in your email
and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
7
9

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