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Dirt for Debt Chapter 11 Plan of Reorganization

The firm’s bankruptcy practice recently concluded a Chapter 11 bankruptcy reorganization that confirmed a “dirt for debt” plan of reorganization. The plan required a secured creditor to accept its real estate collateral in full satisfaction of its debt.

Under the Bankruptcy Code, if the court finds that property to be surrendered to a creditor pursuant to the plan provides the creditor the “indubitable equivalent” of the creditor’s claim, a plan may be confirmed over the creditor’s objection. Valuation of the collateral by the Bankruptcy Court is a critical predicate to confirmation of the plan.

The case involved a Chapter 11 debtor which owned approximately 7,000 acres of unimproved real property that it purchased with financing from the bank. The debtor executed three promissory notes in favor of the bank, which were in turn secured by mortgages on the real property and approximately $400,000 of cash from partial sales of the real estate.

The debtor defaulted on the repayment of the notes and filed for bankruptcy. The debtor’s Chapter 11 plan proposed a transfer of the real property to the bank in exchange for full satisfaction of the notes and the return of the $400,000 cash collateral free and clear of the lender’s claim.

The bank voted against the Chapter 11 plan and objected to confirmation. The debtor argued that the plan was confirmable under 11 U.S.C. § 1129(b)(1) – the “cram down” provisions – because the real property collateral offered the bank the indubitable equivalent of its claim. The bank argued the value of the land was considerably less than the debt.

The bankruptcy court held a five-day trial and heard testimony from five experts on valuation. The bankruptcy court concluded that the real property was worth $4.653 million more than the bank’s claim- and the indubitable equivalent of the bank’s claim- and confirmed the debtor’s Chapter 11 plan.

The bank appealed, and the United States District Court affirmed the bankruptcy court’s confirmation order, holding that (1) the appropriate standard of review of an indubitable equivalence finding was clear error and (2) that the bankruptcy court’s findings regarding (i) the highest and best use for the real property, (ii) the fair market value of the real property and (iii) whether the plaintiff would realize the full value of its claim, were not clearly erroneous. The District Court’s decision is published, In re Sugarleaf Timber, LLC, 529 B.R. 317 (M.D. Fla. 2015).

The debtor also joined guarantors as parties in the proceedings to determine value, providing the guarantors the benefit of issue preclusion on the issue of valuation.

No further appeal was taken by the bank. Pursuant to the confirmed plan, the bank accepted a deed to the real property in full satisfaction of its claim and was required to return approximately $400,000 of cash collateral proceeds to the debtor.

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