(Judge Drake and former SBLI/Drake Prof. Michael Sabbath)
Thanksgiving’s over, Christmas is fast approaching, and we’re finally near the finish line for our first Bankruptcy Judges segment. To start, we’ve been covering Georgia’s Ret. Judge W. Homer Drake, Jr. If you know Judge Drake, then you’ll agree that he’d likely be a little impatient at this point. “Mr. Bury, I think the Court understands your argument. Let’s wrap this up”—is something I heard a few times, especially after a third or fourth “Finally, Your Honor…” To wrap it up then, we’ll cover his three most cited Chapter 11 confirmation opinions by Monday, starting with #3 today. If you missed the introduction, you’ll find it here. We covered #10 through #6 here. And #5 and 4 here and here.
Overview and Facts
Atlanta Southern Business Park (ASBP) is an “indubitable equivalent” case, Chapter 11’s formidable “thrown ’em the keys” option. Longtime debtor’s lawyer Jimmy Paul represented the debtor. Making a second appearance on our list, David Bisbee represented Bank of America’s predecessor NationsBank. Jimmy’s clients were some California-based partners who, in 1981, purchased out of a foreclosure 200 acres of mostly industrial property located about a mile south of Southlake Mall.
The debtor filed a plan and, by confirmation, Nations was the holdout creditor. The debtor proposed to transfer to Nations a combination of cash and real estate sufficient to pay Nations in full (i.e., the “indubitable equivalent” of its claim under § 1129(b)(2)(A)(iii) of the Code). Under that section, transferring the indubitable equivalent is one way to satisfy the Code’s “fair and equitable” requirement for secured creditor cramdown.
If you’ve ever made that proposal as a debtor, you’re basically saying “Here, take it. I get a dollar-for-dollar credit. It’s your problem now.” The natural response is “Not so fast. What if I take it back but I’m left with a deficiency after disposition?” In a nutshell, that captures the tension in ASBP. Judge Drake breaks it down into four separate issues.
Burden of Proof
First, what is the burden of proof for establishing indubitable equivalent? Arguably, “indubitable” suggests a higher burden because it means “too evident to be doubted.” While Judge Drake acknowledged the line of cases providing for a “clear and convincing” standard, he sides with the “preponderance of the evidence” line of cases. If you ever wondered what drives the appropriateness of one or the other, Judge Drake points to Grogan v. Garner, where the Supreme Court teaches that the preponderance burden applies in most civil cases “unless particularly important interests or rights are at stake.” Judge Drake reasoned that Nations’ claim is important but not “liberty interest”-level important.
Debtor’s Ability to Deed Real Estate
Second, is a “deed back” of real property permitted for “indubitable equivalent” purposes? Yes. Returning a creditor’s collateral “necessarily provides the indubitable equivalent of the secured claim.” A common dispute is where the debtor offers property in full satisfaction when the property is worth less than the claim. In ASBP, Nation was oversecured and, thus, subject to the other issues, receiving a portion of its collateral was sufficient so long as it was worth at least the amount of the debt.
Third, when is the appropriate time for establishing (i.e., valuing) “indubitable equivalent”? In our experience, this is the issue and the one that really upsets creditors. We faced it in the most recent plan we confirmed and in the one before that. As the complaint goes, “Why should the debtor get an immediate dollar-for-dollar credit for the entire debt when you know my distress disposition is going to bring less than the credit and leave me with a deficiency?”
Judge Drake rejected that argument, persuaded by Sandy Ridge where the Fifth Circuit relied on the valuation truism that § 506 valuation is “determined in light of the purpose of the valuation and of the proposed disposition and use of the property.” Thus, the valuation is conducted at confirmation and “not at some other date” (e.g., not as of the creditor’s disposition date).
Risk on the Creditor
Fourth, Judge Drake acknowledges the complaint of so many creditors that they “will be receiving the burden of the sale and the attendant risk of loss should the property go for less than the valued price.” With “no margin for error in valuation,” Nations argued, it is not receiving the indubitable equivalent of its claim. Valid as that concern might be, it’s a § 506(a) valuation issue, says Judge Drake, not a confirmation issue.
However, on valuation, the court helped Nations, recognizing the risk shifting and erring on the side of a “conservative” valuation for the following reasons:
- the plan shifts the disposition burden to the creditor
- the creditor bears the risk of loss and gain
- the creditor won’t receive interest while waiting for disposition
- valuation is not an exact science, such that there is a risk of error
Ultimately, Judge Drake oversaw a routine “battle of the appraisers” but then adjusted the appraisal downward to give Nations credit for being forced to accept the “inherent risks” of a distress disposition. That said, he did not insist that Nations retain its lien on its other collateral as a “safety net.” It might be necessary in some cases, but wasn’t necessary in ASBP.
Thus, the plan was fair and equitable because it provided Nations the indubitable equivalent of its claim.
In our next post, we’ll cover #2.
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