On November 5, 2015, the United States Bankruptcy Court for the Northern District of California issued a “Memorandum re Plan Confirmation” in In re Bowie, Case No. 15-10144 (Bankr. N.D. Cal. Nov. 5, 2015), holding, among other things, that a debtor was precluded from arguing that real property had a value lower than the value attributed to the property in the debtor’s schedules and sworn testimony, notwithstanding the value attributed to the property by an appraiser. 

Facts 

In 2011, James Bowie (“Bowie”) purchased certain real property from an elderly widow (the “Seller”). The Seller took back a note in favor of her revocable trust for a majority of the purchase price, secured by a first priority deed of trust encumbering the property. The maturity date of the note was August 1, 2016. 

In 2015, Bowie defaulted under the note and filed under chapter 11 after the Seller refused to modify the terms of the note and commenced foreclosure proceedings. Bowie filed his chapter 11 plan seeking, among other things, to reduce the Seller’s secured claim to the value of the property and to pay back the reduced debt at a “Market Rate of Interest” amortized over 30 years and all due and payable in 12 years. 

Bowie initially scheduled the property as being worth $500,000, but a week later amended his schedules to assert a value of the property at $450,000. A little more than five months later, in conjunction with a motion to determine the value of the Seller’s secured claim, Bowie filed a declaration restating his belief that the real property’s value was $450,000. The Seller ultimately did not contest this figure. At about the same time he filed his motion to value the secured claim, Bowie filed his plan of reorganization and related disclosure statement, the latter which also valued the property at $450,000. 

Shortly before the plan confirmation hearing, Bowie filed a declaration restating his belief that the property had a value of $450,000, but also filed the declaration of an appraiser stating that the value of the property was $300,000—a $150,000 reduction from what Bowie asserted in his amended schedule, his disclosure statement and declaration. The Seller objected to the confirmation of the plan on the grounds that: (1) the proposed valuation of the property was too low, (2) the plan was not feasible and (3) the plan was not fair and equitable as to the Seller. 

Reasoning 

In addressing the Seller’s objection to Bowie’s valuation of the property, the U.S. Bankruptcy Court for the Northern District of California held that Bowie was precluded from arguing a value lower than the value set forth in his amended schedule as the statement of value set forth therein was executed under the penalty of perjury and eligible for treatment as a judicial admission, citing Matter of Gervich, 570 F.2d 247, 253 (8th Cir. 1978). The court also held that it was manifestly unfair to seek to devalue the property at the proverbial last minute. The court held that the value of the property was $450,000, based on the figure set forth in the motion to value, Bowie’s declaration, the admission in the schedules and other evidence presented. The value of the Seller’s secured claim was therefore $450,000 less outstanding property taxes of $32,562.27. 

With respect to the feasibility objection, the bankruptcy court held that the requirements of section 1129(a)(11) were met. The court concluded that Bowie’s declaration established that his plan had a reasonable chance for success. The court also noted that the plan provided that the Seller could nonjudicially foreclose if he failed to make his proposed payments. 

The court also held that while the plan met the technical requirements of section 1129(b)(2), it was not fair and equitable with respect to the treatment of the Seller’s claim. In addition, the court noted that “[b]y using the word ‘includes’ in § 1129(b)(2),Congress made it clear that meeting the terms of § 1129(b)(2) does not necessarily mean that a plan is fair and equitable” and that “[t]he court may consider other factors on a case-by-case basis.” (citations omitted). The court found that a maturity date of five years or less was fair given the Seller’s advanced age, the original maturity date of the note and the historically low current interest rates. It also determined that delaying the maturity date to 2027, as proposed in the plan, shifted too much risk to the Seller and her estate. 

Ultimately, the bankruptcy court held that the plan as proposed was unfair and could not be confirmed, but since the plan was otherwise confirmable, it noted that it would confirm the plan if (1) the Seller’s secured claim was fixed at $417,437.23, (2) the interest rate would be 10 percent per annum until such time as the court fixes a different rate and (3) payments would be amortized as proposed with the note due in five years. The court advised Bowie’s counsel to upload an order confirming the plan if the revised terms were acceptable, which Bowie ultimately did. The plan was confirmed. 

Commentary 

There are three main takeaways from this decision. First, given the court’s reliance on the scheduled value of the property in connection with the motion to value, the scheduled value of the real property that is the subject of a valuation motion should be consistent with any other evidence to be presented by the debtor in connection with the valuation motion. If not, the scheduled value should be amended in advance of the filing of the valuation motion and the expert appraiser’s declaration should be consistent with the debtor’s position on value or, at the very least, the moving party should explain the discrepancy. 

Second, it is apparent that the Seller’s advancing age played a key role in the court’s decision that a 12-year maturity date was not fair and equitable to the Seller. It is interesting that the court relied on word “includes” in section 1129(b)(2) for its reasoning that it could consider other factors on a case-by-case basis in determining whether a proposed plan is fair and equitable. It may be prudent to consider all issues related to a particular creditor, especially a non-consenting creditor, when proposing a plan of reorganization. 

Finally, the court’s proposal to allow the debtor to confirm a plan with modified terms provided an efficient way to wrap up the case and allow the parties to move forward. Not all courts offer litigants such an option.