In re Prosperity Park, LLC, 2011 WL 1878210 (Bankr. W.D.N.C. May 17, 2011)  

CASE SNAPSHOT

The bank had loaned money to two affiliated borrowers. Each loan was secured by a deed of trust on real property. After the borrowers filed for bankruptcy, each party submitted appraisals of the encumbered properties. The bank’s appraisals were significantly lower than the debtors’ appraisals. The debtors’ plan of reorganization proposed to convey one of the encumbered vacant pieces of land to the bank in full satisfaction of the unsecured portion of its claim, while proposing different treatment to the claims of similarly situated, but differently classified, unsecured creditors. The court denied the debtors’ motion to approve the plan and granted the bank’s motion to lift the automatic stay, finding that the plan unfairly discriminated against the bank, and, partly because of the wide divergence in the appraisals, failed to give the bank the indubitable equivalent of its claim.  

FACTUAL BACKGROUND

Prosperity Park, LLC and its affiliate, 10120 Prosperity Park Drive, LLC, were each self-identified single asset real estate entities. Prosperity Park owned six building pad sites, and 10120 owned two vanilla shell condominium units. Each company had borrowed from Fifth Third Bank, and each loan was evidenced by a promissory note and secured by a duly recorded deed of trust. Both borrowers filed chapter 11 petitions on the same date. The bank held a secured claim against Prosperity Park for more than $430,000, as well as an unsecured claim for more than $650,000 for Prosperity Park’s guaranty of 10120’s debt.

Prosperity Park’s appraisal of its sites was $226,643 for each of five sites, and $663,419 for the sixth site. The bank’s appraisal was $82,000 for each of the five sites, and $260,000 for the sixth site. The debtor’s appraisal of the 10120 property was $660,000, and the bank’s appraisal was $540,000. Disclosure statements indicated that the debtors had less than $1,000, had no income, and no source of income other than what might be generated from selling the properties.

The proposed plan placed the bank’s secured claim in Class 3, and the bank’s unsecured claim in Class 5. The plan also placed the unsecured claim of Hidden Utilities, a company the court determined was an “insider” of the debtor, in Class 4. Unsecured claims of other debtor insiders were placed in Class 6. The plan proposed to convey the largest pad site to the bank in full satisfaction of its Class 3 and Class 5 claims. The bank cast its ballots against the plan, while the insider classes voted to approve the plan. No other votes were cast.  

The bank filed a motion for relief from the automatic stay, and the debtors filed a motion to confirm the plan.  

COURT ANALYSIS

While the court found that the plan did not impermissibly classify the unsecured claim of Hidden Utilities separate from the bank’s unsecured claim, the court did conclude that the plan failed to satisfy several requirements of the Bankruptcy Code.

First, the plan could not be confirmed because the only impaired class of creditors voting to accept the plan was comprised of an insider of the debtors. Section 1129(b)(10) requires that, if there are any impaired classes of claims, at least one impaired, non-insider class must vote to approve the plan. Here, only insider impaired classes approved of the plan.

Second, the court found that the plan unfairly discriminated against the bank’s claim, violating section 1129(b)(1). A rebuttable presumption arises that a plan unfairly discriminates when there is: (1) a dissenting class; (2) another class of the same priority; and (3) a difference in the plan’s treatment of the two classes that results in an allocation of materially greater risk to the dissenting class. The two insider classes and the bank’s unsecured claim were of equal priority. “However, the treatment of the Bank’s claim under the Plan compared to the claims of Hidden Utilities and the insiders under the Plan will result in the Bank having to rely on estimations of value of the Real Property whereas the other creditors of the same priority rely on a liquidation of the Real Property. Thus the Bank is forced to bear much greater risk under the Debtor’s Plan.”

Finally, the court found that the plan did not satisfy section 1129(b)(2), because it failed to provide the bank with the “indubitable equivalent” of its claim. The plan proposed to convey the largest pad site to the bank as full satisfaction of both the secured and unsecured claims. The total of these claims exceeded $1 million. The appraisals of this site were $400,000 apart. The debtor bears the burden of proving that the creditor will receive the indubitable equivalence of a cash payment of its claim, and that standard of proof is akin to a clear and convincing standard. The court pointed out that any time a creditor is earmarked to receive a part of its collateral, “any such plan will be subject to extremely close scrutiny to insure that the creditor will actually receive the indubitable equivalent….” The court, relying on the holdings of other cases, concluded that it could not find indubitable equivalence where there was such a wide divergence of opinion with respect to the property appraisal. To rely solely on the debtor’s appraisal would put the bank in too precarious of a position if the appraisal was wrong, and so the debtor could not show that it was providing the bank with the indubitable equivalent of its claim.

The court denied approval of the debtor’s plan, and granted the bank’s motion to lift the automatic stay.  

PRACTICAL CONSIDERATIONS

The court did not find that one appraisal was more credible than the other; the problem was the large discrepancy between the appraisals. Debtors bear a heavy burden in proving indubitable equivalence, and because appraising real estate accurately is at best, an inexact science, courts are likely to find in favor of creditors in similar circumstances.