Summary of a Recent
Judicial
Development in
Bankruptcy
Lien Retention Requirement Should Not Be Strictly Interpreted
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Wilson, 378 B.R. 862 (Bankr. D. Mont. 2007), the United States Bankruptcy Court for the District of Montana held that Chapter 12 debtors' plan was feasible and provided adequate protection to creditors, and that the "lien retention" requirement under § 1225(a)(5) did not prohibit the debtor from using a portion of proceeds generated from the sale of part of the real estate that collateralized an oversecured creditor's claim.
Background
In January 2003, the Debtors entered into a contract with Harper Trust for the purchase of three parcels of real property consisting of 231 acres. Id. at 867. The Debtors filed their bankruptcy petition in October 2005. Id. The court approved the sale of 20 acres of the real estate for $275,000, of which $175,000 was paid to Harper Trust. Id. at 869. The Debtors' plan proposed the use of the remaining cash collateral from the sale to continue their farming operations, to which Harper Trust objected. Id.
Arguments
Harper Trust argued that the Debtors' proposed plan violated § 1225(a)(5)(B)(i) because it would not retain the lien on its cash collateral if Debtors were authorized to use the sale proceeds in excess of the $175,000 paid to Harper Trust for their operations. Id. at 879-81. Harper Trust also argued that it was not adequately protected. Id.
Debtors argued that their plan was feasible and that, because of the sale of 20 acres and payment of $175,000 pre-confirmation, Harper Trust's position was greatly benefited and it was adequately protected, and that they should be allowed to use the remaining cash collateral and their plan should be confirmed. Id. at 881.
Analysis and Holdings
Retaining liens
Section 1225(a)(5) requires confirmation of a plan if, with respect to each allowed secured claim provided for by the plan, the holder of such claim has accepted the plan or the plan provides that the holder of such claim retain the lien securing such claim, and the value of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim, or the debtor surrenders the property securing the claim to the holder. Id. at 882. The second subsection, known as the "lien retention" requirement, permits courts to confirm a proposed Chapter 12 plan over a secured creditor's objection, and without surrendering the property securing the creditor's claim, only if plan provides that creditor will "retain the lien securing such claim." Id. The court ruled that the provision could not be interpreted as prohibiting a Chapter 12 debtor from using any portion of proceeds generated from the sale of part of the real property that collateralized an oversecured creditor's claim, because such a strict construction of the "lien retention" requirement would give adequately protected oversecured creditors a veto on confirmation of proposed Chapter 12 plans. Id. at 881-82.
Cramdown interest rate
The court pointed out that it had long employed a "market approach" to determine appropriate cramdown interest rates, starting with a base rate and adding a risk factor based on the risk of default and amount of security. Id. at 885. Using that approach, the court determined that the Debtors' proposed 8.5% interest rate was appropriate. Id.
Adequate protection and cash collateral
The court noted that it had "consistently allowed the use of cash collateral for current operating expenses where the use is adequately protected by a sufficient equity cushion in the collateral under § 363(e) . . . ." Id. at 888. Harper Trust had estimated a 3.18% equity cushion, but the court pointed out that its estimate was flawed because it had included another creditor's subordinate claims and post-petition professional fees which had neither been requested nor awarded in its calculations. Id. at 890. Deducting those expenses, the court determined the actual equity cushion was around 39%, which was clearly adequate. Id.
Feasibility
Regarding 11 U.S.C. § 1225(a)(6), which requires that a debtor will be able to make all payments under the plan and to comply with the plan, the court found that the Debtors' proven ability to raise high quality Angus cattle weighed in favor of feasibility, and that the Debtors had satisfied their burden of proof to show that their plan was feasible. Id. at 890-92. Thus the court overruled Harper Trust's objection and granted confirmation of the Debtors' plan. Id. at 893.
The case was decided on November 7, 2007.