Single asset real estate (SARE) debtors typically are commercial entities formed to own and operate income producing real estate like apartment buildings, strip malls or office buildings. “Cramdown” describes the tool that enables Chapter 11 debtors to confirm a plan notwithstanding the objections of an entire class of creditors. A perquisite to cramdown is the acceptance of at least one impaired class of creditors, determined without including the votes of any insiders. In SARE cases, the debtor usually cannot cramdown because the unsecured creditor class is controlled by the mortgage holder (due to deficiency claims) or the non-mortgage claims are relatively small and can be easily paid, which renders them unimpaired and unable to vote. Under either scenario, the objecting mortgage holder controls the only voting class or classes.
However, a recent Fifth Circuit case has granted SARE debtors some leeway in creating an accepting class. In Western Real Estate Equities, LLC v. Village at Camp Bowie I, LLP, 710 F.3d 239 (5th Cir. 2013), the Court approved “artificial” impairment of a friendly creditor class in a SARE case notwithstanding that the level of impairment was not economically driven. The Court concluded that so long as the plan is proposed with a legitimate and honest purpose to reorganize and has a reasonable hope of success, the good faith requirement is satisfied. The desire to preserve equity may constitute a legitimate and honest purpose.
In SARE cases, the “accepting class” requirement presents a significant hurdle to confirmation when the mortgage holder is not friendly. In light of the Village at Camp Bowie I case, SARE debtors have the ability, at their discretion, to artificially impair more friendly creditors, which enables these friendly creditors to vote for the plan and form an accepting creditor class. Impairment may consist of deferring payments, even if the debtor has the cash to pay these creditors in full.
In sum, SARE debtors may now use friendly, relatively small unsecured creditor(s) to try to save their plan in the face of what had been the insurmountable objection of a mortgage holder.
