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.

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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.    

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."