Recent developments in the federal bankruptcy courts for the Ninth Circuit have brought to light an interesting and potentially troubling issue for lenders in the real estate finance industry. The issue in Wells Fargo Bank v. Loop 76 (In re Loop 76),1 focuses on application of the Bankruptcy Code’s prohibition against unsecured claims being classified with dissimilar types of claims and the degree to which non-debtor sources of repayment for a secured lender’s deficiency claim constitute justification to deem such claims dissimilar and compel the segregation of such an unsecured claim from other unsecured claims in a plan of reorganization.
To the extent that the existence of a third-party guarantee is sufficient for a bankruptcy court to conclude that a secured lender’s deficiency claim is dissimilar from the other general unsecured claims, Section 1122 of the Bankruptcy Code (the Code)2 would prohibit such a deficiency claim from being placed in the same class as the rest of the unsecured claims. Until this point, most practitioners have understood that lenders’ deficiency claims, whether or not backstopped by a principal guaranty, were substantially similar to other unsecured claims, generally allowing lenders to control the voting amongst unsecured creditors and permitting such lenders to control whether a reorganization plan is approved.
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