Sixth Circuit Denies Bad Faith Cram Down

In the recent decision of Village Green I, GP v. Fed. Nat’l Mortgage Ass’n (In re Village Green I, GP), 2016 WL 325163 (6th Cir. Jan. 27, 2016), the Sixth Circuit held that the contrived nature of the impairment will cause the plan to fail section 1129(a)(3)’s requirement of having been proposed in good faith.

The proposed plan crammed down secured debt by paying it over 10 years and impaired unsecured claims by paying them over 60 days.  After the district court vacated and remanded twice, the case was appealed to the Sixth Circuit, which affirmed the district court.  First, the Court addressed the issue of impairment.  The Circuit Court found that “the plan undisputedly would alter the minor claimants’ rights, because these claimants are legally entitled to payment immediately rather than in two installments over 60 days.  That this impairment seems contrived to create a class to vote in favor of the plan is immaterial.  Section 1124(1) by its terms asks only whether a plan would alter a claimant’s interests, not whether the debtor had bad motives in seeking to alter them. . . .  [G]iven that § 1129(a)(3) expressly requires an inquiry into the debtor’s motives in proposing the plan, there is no reason to graft that inquiry onto the plain terms of § 1124(1).”

However, on the issue of good faith, the Sixth Circuit found that the debtor’s motives “are expressly the business of § 1129(a)(3),” which requires that “the plan has been proposed in good faith and not by any means forbidden by law.”  11 U.S.C. § 1129(a)(3).  The bankruptcy court found that the plan had been proposed in good faith, reasoning that the debtor “was economically justified in rationing every dollar.”  The Sixth Circuit disagreed, pointing out that the debtor’s own projections for feasibility purposes “render[ed] dubious at best [its] assertion that it could not safely pay off the minor claims (total value: less than $2,400) up front rather than over 60 days.”   Moreover, that the former lawyer and accountant were “closely allied” with the debtor “only compounds the appearance that impairment of their claims had more to do with circumventing the purposes of § 1129(a)(10) than with rationing dollars.”  Finally, the rationing rationale was wholly refuted by the secured lender’s offer to pay the unsecured claims in full up front – and the creditors’ refusal to accept.  “On this record, the minor claims’ impairment was transparently an artifice to circumvent the purposes of § 1129(a)(10),” and therefore failed section 1129(a)(3)’s requirement of good faith.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  You can reach Carl at (302) 622-4272 or at [email protected].