Daily Development for
Wednesday, January 7, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

The Reporter for today's DD is Jim Stillman of the L.A. office of Murphy, Weir & Butler.

BANKRUPTCY; REORGANIZATION; CONFIRMATION; "NEW VALUE;" CLASSIFICATION AND DISCRIMINATION: The"new value" corollary to the absolute priority rule has survived the enactment of the Bankruptcy Code.

In re 203 N. LaSalle Street Partnership, 126 F.3d 955 (7th Cir. 1997).

The secured creditor's $93 million claim was bifurcated under Section 506(a) into a secured claim of about $54 million and an unsecured claim of about $39 million, as to which the creditor declined the 1111(b) election. In a divided opinion, the Seventh Circuit held that (a) $4.1 million to be contributed by the general partners under the plan was sufficiently significant and proportionate to the size of the case to satisfy the "new value" corollary, (b) the creditor's huge unsecured deficiency claim could be separately classified from the $ 90,000 in general unsecured claims in the case, so that (c) the deficiency claim could be given a "hope certificate" payable upon the successful sale or refinancing of the property, if ever, while the remaining unsecured claims were paid off in full, thus (d) motivating the small general unsecured class to carry a "cramdown" confirmation by voting to accept the plan (see section 1129(a)(10)), and (e) the plan was not proposed in "bad faith," even though the debtor's general partners admitted that the case had been filed for the primary (if not exclusvie) purpose of staving off the recognition of enormous phantom gain.

Reporter's Comment: Can you imagine how shocked the bank's law firm must have been by this opinion? The secured creditor gambled almost half its loan, declined the 1111(b) election in a rising real estate market, and paid litigation expenses over two years that must have topped half a million dollars, on a bet that it could tank the debtor's plan on principle, rather than simply block confirmation by buying-out a controlling interest in the tiny unsecured class in this case, which would have cost $45,000 or less. The Seventh Circuit's opinion is weakest in its conclusion that the plan's discrimination between the deficiency class and the general unsecured class was not "unfair;" the plan's very gross discrimination was justified, the Court of Appeals held, since the deficiency claim existed only by leave of statute (per section 1111(a)) and because the deficiency class got at least what it would get in Chapter 7.

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