A recent Ninth Circuit Bankruptcy Appellate Panel decision may significantly improve a Chapter 11 single asset real estate debtor’s chances of confirming its plan of reorganization.
In In re Loop 76 LLC, 465 B.R. 525 (9th Cir. B.A.P. 2012), the Panel held that a third-party source of recovery on a creditor’s unsecured claim, including a personal guaranty, may be a factor to be considered in determining whether a claim is “substantially similar” for classification purposes in a debtor’s reorganization plan.
The Debtor in this case was a developer of commercial real estate located in Scottsdale, Arizona. The Debtor was planning to an office/retail complex in Scottsdale using construction loan financing from Wells Fargo Bank. The Bank’s loan was secured by the Debtor’s real property, and Debtor’s principals provided personal guaranties. Not surprisingly, given the downturn in the Phoenix real-estate market and the tightening of the commercial lending market, the Debtor was unable to obtain permanent financing for the project. Debtor defaulted on the loan and then filed for Chapter 11 bankruptcy.
For voting purposes, the parties stipulated to a property value of $17 million. Wells Fargo’s overall claim was for approximately $23 million, of which $17 million was secured and $6 million unsecured. The Debtor’s plan proposed to separately classify the unsecured portion of Wells Fargo’s plan from the general unsecured creditor class.
Under Section 1122 of the Bankruptcy Code, a plan may place a claim in a particular class only if it is “substantially similar” to the other claims in that class.
The Panel concluded that separate classification of Wells Fargo’s unsecured claim was appropriate because unlike other general unsecured creditors, Wells Fargo could pursue third-party guarantors for repayment of the underlying obligation. The personal guaranties were a “special circumstance” unique to Wells Fargo warranting a different status for the Bank, compared to other unsecured creditors. Furthermore, the “substantially similar” determination is not restricted to only the debtor’s assets, as a bankruptcy court may properly consider sources outside the debtor’s assets.
The Loop 76 LLC case may end up having a significant impact on future single asset real estate cases. The common problem in such a case is that, particularly in today’s depressed real estate market, the secured lender voting against the plan may have a significant unsecured deficiency claim that so overwhelms the other general unsecured creditor claims in dollar amount that the debtor cannot raise the votes necessary to have a consenting impaired class for plan voting and confirmation purposes. Before Loop 76 LLC, it was generally presumed that the secured creditor’s deficiency claim had to be grouped with the general unsecured creditor class. Now, Chapter 11 debtors with guarantors as co-debtors may find greater success in getting their plan confirmed because they may be able to separately classify the non-consenting, secured creditor’s unsecured deficiency claim.
The Lasher firm’s creditor-debtor attorneys are equipped to handle your financial situation, including bankruptcy. If you have any questions about this article, please contact Phil Bednar at (206) 624-1230.