Judge Rejects Debtor's Attempt to 'Cram Down' Secured Lender Through Artificial Impairment

In his recent decision inIn re All Land Investments (D. Del. March 9, 2012), U.S. Bankruptcy Judge Kevin J. Carey of the District of Delaware refused to confirm a Chapter 11 plan of reorganization that sought to "cram down" a secured lender. Carey found that the two classes that had accepted the plan were "artificially impaired." Therefore, there was no impaired accepting class of creditors to support a cram-down under 11 U.S.C. §1129(b). Carey’s decision demonstrates that there are limits to a debtor’s ability to successfully manipulate plan distributions so as to "impair" a class of creditors likely to vote to accept a plan.

InAll Land Investments , the debtor was a developer that had sought to develop a subdivision in Kent County, Del. According to the opinion, RBS Citizens N.A. had made loans to the debtor that were secured by substantially all of the debtor’s assets. The court found that Citizens’ claim at the time of the confirmation hearing was $14.7 million, the value of Citizens’ collateral was no more than $6.5 million and that Citizens’ deficiency claim was at least $8.2 million.