Opinion
No. 78 B 190
May 21, 1979
Real Property Arrangements — Dissenting Secured Creditor — "Cram Down"
A real property arrangement plan could not be confirmed where it failed to provide adequate protection for a sole dissenting first mortgagee. The plan could not be "crammed down" since it did not provide the dissenter with the "indubitable equivalent" of the security denied to it.
The debtor partnership was the owner of an apartment house. At the time the Chapter XII petition was filed the property was encumbered by three mortgages. In its plan, the debtor provided that the first mortgagee was to surrender its mortgage notes that had matured and were past due and owing. Instead, it was proposed that the first mortgagee be paid interest at a reduced rate (from 9% per annum to 6% per annum), with the mortgage to be amortized over a period of twenty years. The first mortgagee rejected the plan. However, junior mortgagees "accepted" the plan. It should be noted that the court deemed the junior mortgagees unsecured creditors whose claim were not affected by the plan.
Initially, the court held that, under proper circumstances, Chapter XII rehabilitation may be extended to a debtor confronted with a sole affected mortgagee who has rejected the debtor's proposed arrangement.
The court next examined the debtor's plan in order to determine whether it provided the mortgagee with the "adequate protection" required by Section 461(11) of the Bankruptcy Act. In order to effectuate a "cram-down", noted the court, the plan must provide the dissenting secured creditor with the "indubitable equivalent" of the security sought to be retained by the debtor.
The proposed plan contemplated the payment of interest at a reduced rate and the amortization of the mortgage over a period of twenty years. Accordingly, observed the court, the debtor was doubtless proceeding under the last alternative method set forth in Section 461(11)(d). A valuation hearing was held and three appraisers testified. For purposes of an appraisal under Section 461(11)(d), on the basis of evidence, the court concluded that $105,000 represents a fair estimate and judgment of the value of the mortgaged premises. The debt owed to the bank, approximately $123,000, exceeded the value of the property. Thus, reasoned the court, adequate protection would be satisfied if the mortgagee will recover the value of the secuirty.
The court found that the debtor could not realistically guarantee that the mortgagee would receive the value of the property with interest. There was nothing in the record to indicate that the debtor, under its plan, would have the wherewithal to retire its debt to the bank in twenty years even at the "ludicrously" low interest of 6% per annum as proposed in the plan.
Clearly, observed the court, such a proposed arrangement would impermissibly allow the debtor to speculate with the bank's funds. The court thus concluded that the debtor's offer to the first mortgagee did not provide the adequate protection required under Section 461(11). Accordingly, the mortgagee's motion to dismiss the Chapter XII case was granted. See Sec. 461 (11) (d) [§ 1129(b)] at ¶ 12,138.