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Seventh Court of Appeals Further Strengthens Rights of Secured Lenders in Chapter 11 Cases

On January 19, 2012, the Seventh Circuit in In re River East Plaza, LLC, (No. 11-3263), held in favor of a secured lender further strengthening the rights of secured creditors in bankruptcy cases.

After the secured creditor made the election under 1111(b) to have its entire claim be treated as a secured claim, the debtor proposed a cram down plan that would pay the secured creditor's secured claim (which was allowed in the amount of $38.3 million) in full by substituting the creditor's lien on a downtown Chicago office building for US Treasury bonds that would pay the full amount of the creditor's claim—but in 30 years. The current value of the Treasury bonds was $13.5 million and the bonds paid 3% interest.

Judge Posner affirmed the dismissal of the case and held that the proposed plan could not be confirmed over the objection of the secured creditor. The court held that the proposed substitute collateral was not the "indubitable equivalent" of the existing collateral because it took away the creditor's potential upside in the event of a subsequent default.

The case is further evidence of the resistance of courts to weaken secured creditors' rights in Chapter 11 cases.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume II, Number 31
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About this Author

David A. Zdunkewicz, Bankruptcy Attorney, Andrews Kurth Law Firm
Partner

David's practice includes workouts and commercial bankruptcy proceedings in a wide range of industries. He has represented debtors, secured creditors, and individual creditors as well as creditors committees and equity committees. His bankruptcy practice also involves substantial experience in prosecuting and defending avoidance adversary proceedings.

713-220-4128
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