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the creditor is allowed to "credit bid," meaning to offer at the auction, not cash, but instead a part or the whole of his claim, FDIC v. Meyer, 781 F.2d 1260, 1264-65 (7th Cir. 1984), so that, for example, LNV could bid $20 million for River East's building just by reducing its claim from $38.3 million to $18.3 million. Under (iii), the lien is exchanged for an "indubitable equivalent." The court then went on to discuss the River Road case (or RadLax Gateway Hotel case), wherein the Seventh Circuit "rejected rulings by the Third and Fifth Circuits that a plan allowing sale of property free and clear of a secured creditor's lien without letting the creditor credit bid can still be crammed down, under the third rather than the second subsection, so long as the plan provides some means of assuring that the creditor receive the indubitable equivalent of its claim." The court then distinguished River Road from the case at hand, noting that "[w]hile the debtor in River Road sought to avoid the creditor's right to credit bid under subsection (ii) by invoking indubitable equivalence, River East seeks to avoid the requirement in a subsection (i) cramdown of maintaining the mortgage lien on the debtor's property by transferring LNV's lien to different collateral, also in the name of indubitable equivalence." The court concluded that "[t]he logic of River Road forbids such an end run, but even if the Supreme Court reverses River Road, River East's plan could not be confirmed because the substitute collateral that it proposed was not the indubitable equivalent of LNV's mortgage." The court noted the LNV was an undersecured creditor who had, pursuant to section 1111(b)(1)(B), exchanged its secured and unsecured claims for a single secured claim equal to the face amount of the unpaid balance of the mortgage. Thus, "instead of having a secured claim for $13.5 million and an unsecured claim for $24.8 million [LNV] ha[d] a secured claim for $38.3 million and no unsecured claim." The Debtor was not happy about LNV's 1111(b)(1)(B) election and sought confirmation of a plan that would "replace the lien on the building with a lien on $13.5 million in substitute collateral, namely 30-year Treasury bonds that would be bought by an investor in the reorganized firm. At current interest rates, River East argued, the bonds would grow in value in 30 years through the magic of compound interest to $38.3 million, thus guaranteeing that LNV would be repaid in full. The substitute collateral would be equivalent to LNV's lien." The bankruptcy court and the Seventh Circuit rejected this argument. After describing the potential risks and benefits of the proposed substitute collateral vs. the original collateral the court stated: "The substituted collateral might, it is true, turn out to be more valuable than the building and thus provide LNV with more security. But because of the different risk profiles of the two forms of collateral, they are not equivalents, and there is no reason why the choice between them should be made for the creditor by the debtor. Since LNV is undersecured, we have trouble imagining what purpose could be served by substituting collateral other than to reduce the likelihood that LNV will ever collect its mortgage debt in full." As a final thought, the court noted that "[i]t's true that a secured claim is altered by a subsection (i) cramdown because the debtor is allowed to stretch out the payments due the creditor. But at least the creditor retains his collateral. That is the quid for the quo of giving up the right to immediate payment. By proposing to substitute collateral with a different risk profile, in addition to stretching out loan payments, River East was in effect proposing a defective subsection (i) cramdown by way of subsection (iii)." Accordingly, the court affirmed the decision of the bankruptcy court rejecting the plan, lifting the stay (because the time for a single asset real estate debtor to file another plan had expired), and dismissing the case.
©2014 William L. Norton III
