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“Cram-Down” Plan Denied Due to Artificial Impairment of Classes


On March 9, 2012, Judge Kevin Carey of the United States Bankruptcy Court for the District of Delaware (the “Court”) denied confirmation of a cram-down plan of liquidation (the “Plan”) in In re All Land Investments, LLC, Mar. 9, 2012 (Case No. 09-13790-KJC) because the only impaired accepting classes under 1129(a) were not in fact “impaired.”

By way of background, All Land Investments, LLC (the “Debtor”) filed for bankruptcy protection in 2009 after its proposed development of a subdivision located in Clayton, Delaware (the “Premises”) stalled significantly during the residential housing crash. RBS Citizens, N.A. (“Citizens”) had extended various prepetition loans to the Debtor totaling approximately $18 million. The loans were secured by first priority liens on the Premises.

The Debtor’s Plan proposed to convey the Premises to Citizens in a “dirt-for-debt” swap. Six classes of creditors were named in the plan, four of which were allegedly impaired. Citizens objected to confirmation, arguing the Plan cannot be confirmed under the “cram-down” provisions of 1129(b) for lack of a truly impaired accepting class. Specifically, Citizens argued that two of the four allegedly impaired classes were “artificially” impaired and that the other two, controlled by Citizens, voted to reject the Plan.

The Court agreed. Class 1 under the Plan, which consisted of a $3,000 prepetition real estate tax claim, was found to be unimpaired because the holder also held an escrow account from the Debtor in an amount greater than its claim. Moreover, even if the claim were not satisfied at closing, conveyance of the Premises was subject to the tax lien, thereby leaving the holder’s rights entirely unaltered. Class 3 was also held to be unimpaired because the holder’s claim was substantially oversecured by the collateral it was set to receive under the Plan. Finally, based on evidence presented at a valuation hearing, the Court found that Citizens controlled the two remaining impaired classes by way of a large unsecured deficiency claim and judicial designation of insider votes. Citizens, of course, voted against the Plan. Absent an impaired accepting class, confirmation of the Plan was therefore denied.

A copy of the Court’s opinion can be found here.

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