Bankruptcy in a Civil Law State (Louisiana):

Traps for the Unwary and Strategies for the Wary

Volume 2, Issue 2

August 2013

Breazeale, Sachse & Wilson, L.L.P. is pleased to announce Alan H. Goodman received high rankings in both Bankruptcy/Restructuring and Litigation: General Commercial. The firm received high rankings for four Practice Areas and had ten attorneys listed in Chambers USA: America's Leading Lawyers for Business for Louisiana.


Chambers USA ranks the leading firms and lawyers in an extensive range of practice areas throughout America. The research is in-depth and client focused and the guide is read by industry-leading companies and organizations throughout the US and worldwide. To access the Chambers USA online directory, go to



Fifth Circuit Takes Aim at Artificial Impairment


In a matter of first impression, the Fifth Circuit stated its position on artificial impairment in a recently decided case, holding that the acceptance vote from an "artificially impaired" class of claims meets the Section 1129(a)(10) requirement for the confirmation of a non-consensual "cramdown" chapter 11 plan. See Western Real Estate Equities, L.L.C. v. Village at Camp Bowie I, L.P. (In re Village at Camp Bowie I, L.P.), 710 F.3d 239 (5th Cir. 2013).


In Camp Bowie, the single-asset debtor filed a chapter 11 petition with two primary creditor classes: (i) Western Real Estate, who the debtor owed approximately $32 million secured by a lien on the debtor's real property and (ii) thirty-eight unsecured trade creditors who were owed approximately $59,000. The debtor's proposed plan, which designated each class of creditors as impaired, proposed to (a) provide Western with a new five year note for its secured claim, with a balloon payment due at maturity; (b) pay the unsecured creditors over the course of the three month period following confirmation without interest; and (c) issue new preferred equity to the pre-petition owners in exchange for a $1,500,000 capital infusion.


While the unsecured creditors voted to accept the plan, Western voted against it. Further, Western objected to confirmation of the plan, arguing that the plan did not receive the vote of "at least one class of claims that is impaired under the plan," as required by Section 1129(a)(10). According to Western, the debtor "artificially impaired" the unsecured class of creditors by delaying payment for three months instead of paying them in full at plan confirmation, which the debtor was capable of doing. Alternatively, Western argued that the debtor's "artificial impairment" violated the good faith requirement of Section 1129(a)(3).


The bankruptcy court rejected Western's objections and confirmed the plan. The Fifth Circuit affirmed. The Fifth Circuit noted that the Circuits have divided over the question of whether Section 1129(a)(10) draws a distinction between artificial and economically-driven impairment. One the one hand, in Windsor on the River Associates, Ltd., the Eighth Circuit held that "a claim is not impaired if the alteration of the rights in question arises solely from the debtor's exercise of discretion." On the other hand, the Ninth Circuit held, in L&J Anaheim Associates, that Section 1129(a)(10) does not distinguish between discretionary and economically driven impairment. After weighing these competing approaches, the Fifth Circuit, as a matter of first impression, rejected the Eighth Circuit's approach in Windsor and adopted the Ninth Circuit's reasoning in L&J Associates, emphasizing that Section 1124 provides that "any alteration of a creditor's rights, no matter how minor, constitutes 'impairment.'"


Moreover, the Fifth Circuit held that artificial impairment does not constitute bad faith as a matter of law. Rather, the Court cautioned that a debtor's artificial impairment of claims would be one factor in the totality of circumstances in analyzing a debtor's good faith. Because the debtor "proposed a feasible cramdown plan for the legitimate purpose of reorganizing its debts, continuing its real estate venture, and preserving its non-trivial equity in its properties," the Court held that the good faith requirement was met.    


Fifth Circuit Rules that Guarantors Released by Lender's Credit Bid


The Fifth Circuit recently ruled that a secured lender's credit bid for a debtor's assets resulted in the full payment of the senior debt and extinguished any claims against the guarantors of the debt. See Fire Eagle L.L.C. v. Bischoff (In re Spillman Dev. Group, Ltd.), 710 F.3d 299 (5th Cir. 2013).


In Spillman, Fire Eagle (the holder of the debtor's senior indebtedness) submitted a successful credit bid of the entire amount of the senior indebtedness. After the auction, certain individual guarantors of the senior indebtedness commenced an adversary proceeding in the bankruptcy court seeking a declaratory judgment that, as a result of the sale, the guarantors should be released from their guarantees and that a $1.2 million certificate of deposit posted to secure the debt by a third party be returned. Fire Eagle filed a motion to dismiss the proceeding arguing that only the fair market value of the assets purchased should be credited against the senior debt and that it could recover from the guarantors, because (i) "credit bidding a proof of claim in a bankruptcy auction affects only the claim in bankruptcy and not any underlying debt"; (ii) "events occurring in a debtor's bankruptcy do not typically 'inure to the benefit of nonbankruptcy guarantors'"; and (iii) "the guaranty agreements provide that the guarantors' obligations could not be affected by the bankruptcy."


The bankruptcy court held that the entire amount of the credit bid should be credited against the senior debt because a credit bid is a cash equivalent and, therefore, the guarantors should be released and the certificate of deposit returned. The Fifth Circuit affirmed. As to Fire Eagle's first argument, the Fifth Circuit found it "logically unsound" in that had the debtor accepted a higher or equal cash bid, the proceeds from such bid would have been applied to satisfy Fire Eagle's senior debt. Under such circumstances, Fire Eagle would not have been able to proceed against the guarantors. As to Fire Eagle's second argument, the Court distinguished between the present case and those where a creditor proceeds against third party guarantors, because in none of those cases was the guaranteed debt repaid in full with a credit bid. Finally, as to the debtor's third argument, the Fifth Circuit held that while the guarantees stated that they would not be affected by bankruptcy, they also stated that they would be terminated upon payment of the senior indebtedness. As the credit bid constituted payment in full of the senior debt, the right of Fire Eagle to recover under the guarantees was extinguished.

Fifth Circuit Rejects Blanket Reservation of Causes of Action in Confirmed Plan


The Fifth Circuit recently ruled that a blanket reservation in a confirmed plan of reorganization reserving "any and all claims" of the debtor for the Plan Administrator was insufficiently detailed to permit post-confirmation causes of action against certain of the debtor's outside directors and the debtor's law firm. See Wooley v. Haynes & Boone, L.L.P. (In re SI Restructuring, Inc.), 2013 WL 1688380 (5th Cir. April 18, 2013).


In Wooley, the Wooleys (creditors of the debtor) asked the Committee during the bankruptcy to pursue various state law claims against Haynes & Boone (the debtor's counsel) and five outside directors. Thereafter, the debtor filed its disclosure statement and plan which retain two types of claims: (i) Chapter 5 causes of action and (ii) "any claims, rights and causes of action that the Debtors or Estate may hold against any entity." After the plan was confirmed, the Plan Administrator refused to pursue the debtor's potential claims against Haynes & Boone and the five outside directors and the Wooleys filed a motion for authority to bring the claims.


The bankruptcy court held that the Wooleys did not have standing to bring the claims because the plan did not specifically reserve those causes of action. The Fifth Circuit affirmed. The Fifth Circuit recognized that a "debtor can preserve its standing to bring a post-confirmation action on a claim that once belonged to the estate." However, in order for a reservation to be effective, it "must be specific and unequivocal" and blanket reservations are insufficient. In other words, the reservation must be specific enough to put creditors on notice of any claim the debtor wishes to pursue after confirmation sufficiently to provide creditors with "sufficient information regarding their benefits and potential liabilities in order to cast an intelligent vote." In the instant case, the Fifth Circuit found the reservation insufficiently specific such that it did not confer standing upon the Plan Administrator to bring the claims. Therefore, the Wooleys did not have the requisite derivative standing to bring the claims.

Breazeale, Sachse & Wilson Bankruptcy Attorneys


Alan H. Goodman



Thomas M. Benjamin


Timothy S. Mehok



Joe Friend



Wesley M. Plaisance



Rachael A. Jeanfreau 




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