In the recent decision of Village Green I, GP v. Fed. Nat’l Mortgage Ass’n (In re Village Green I, GP), 2016 WL 325163 (6th Cir. Jan. 27, 2016), the U.S. Court of Appeals for the Sixth Circuit held that the contrived nature of the impairment will cause the plan to fail Section 1129(a)(3)’s good faith requirement.
The debtor’s proposed plan at issue crammed down secured debt by paying it over ten years, and impaired unsecured claims by paying them over sixty days. After the district court vacated and remanded twice, the case was appealed to the Sixth Circuit, which affirmed the ruling of the district court.
On the issue of impairment, the Sixth Circuit found that:
[T]he plan undisputedly would alter the minor claimants’ rights, because these claimants are legally entitled to payment immediately rather than in two installments over 60 days. That this impairment seems contrived to create a class to vote in favor of the plan is immaterial. Section 1124(1) by its terms asks only whether a plan would alter a claimant’s interests, not whether the debtor had bad motives in seeking to alter them.
However, on the issue of good faith, the Sixth Circuit stated that Section 1129(a)(3) mandates that “the plan has been proposed in good faith and not by any means forbidden by law.” 11 U.S.C. § 1129(a)(3). The Sixth Circuit found this element had not been met, stating that the debtor’s own projections for feasibility purposes “render[ed] dubious at best [its] assertion that it could not safely pay off the minor claims (total value: less than $2,400) up front rather than over 60 days.”
Moreover, because certain of the creditors were “closely allied” with the debtor “only compounds the appearance that impairment of their claims had more to do with circumventing the purposes of § 1129(a)(10) than with rationing dollars.”
Finally, the fact that the secured lender offered to pay the unsecured claims in full up front, and the creditors’ refusal to accept, doomed the rationing rationale. “On this record, the minor claims’ impairment was transparently an artifice to circumvent the purposes of § 1129(a)(10),” and therefore failed section 1129(a)(3)’s requirement of good faith.
This decision is an important read and should be taken into account by any debtor seeking to cram down claims, or any creditor, secured or unsecured, affected by such cram-down.
Carl D. Neff is a partner with the law firm of Fox Rothschild LLP. You can reach Carl at (302) 622-4272 or at email@example.com.