Jeffery J. Sattler
January, 2019

Turning Back The Hands Of Time With Chapter 11 Bankruptcy

            A debtor can feel helpless after its secured loan matures and the bank demands payment.  For a business that cannot pay the bank’s demand, relief can be found in the Bankruptcy Code.[1]  Section 1123(a) of the Bankruptcy Code permits a debtor to reinstate its loan and extend the maturity date for years.

            Chapter 11 bankruptcy offers a business the chance to maintain operations, and at the same time maximizes assets available for its creditors.  Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434, 435 (1999).  This arises in a confirmed chapter 11 plan of reorganization.  A plan of reorganization is often the product of collaboration between the debtor, its creditors, and other interested parties, and confirmed when the court affirms that it complies with the Bankruptcy Code.  See In re Trenton Ridge Investors, LLC, 461 B.R. 440, 458 (Bankr. S.D. Ohio 2011) (“[T]he Court has an independent duty to determine compliance with each of the Bankruptcy Code’s confirmation requirements.  This is true even for those confirmation requirements that are not the subject of an objection.”).

            Section 1123 dictates the contents of a plan of reorganization.  Subsection (a) provides, notwithstanding any nonbankruptcy law, a plan shall “(5) provide adequate means for the plan’s implementation, such as . . . (G) curing or waiving of any default; [or] (H) extension of a maturity date . . . of outstanding securities[.]”  A “security” is defined by the Bankruptcy Code to include a promissory note.[2]

            Thus, a debtor may use a plan of reorganization to “rewrite” a fully matured loan.  For example, in Mutual Life Ins. v. Patrician St. Joseph Partners, Ltd. Partnership (In re Patrician St. Joseph Partners, Ltd. Partnership), 169 B.R. 669, 673 (D. Ariz. 1994), the lender refused to extend a medical plaza’s $7.8 million note’s five-year term.  Id.  After the note matured, the plaza faced imminent foreclosure.  Id.  The plaza subsequently filed for chapter 11 bankruptcy protection.  Id.  Once in the friendly confines of bankruptcy, it proposed a chapter 11 plan of reorganization proposing to reinstate the five-year note and extend its term by another ten years.  Id.

            The lender objected to the plan’s confirmation, and argued that rewriting the loan was both unfair and inequitable.  Id. at 673, 680.  The Mutual Life court disagreed.  Id. at 680, 684.  The court held that the plan’s proposed payment was fair and equitable, because it provided the “indubitable equivalent”[3] of the lender’s secured claim, albeit over ten years.  Id. at 680-81, 684. 

            In another example, in In re Arden Properties, Inc., 248 B.R. 164, 173 (Bankr. D. Ariz. 2000), the court overruled an objection to plan confirmation by a secured creditor facing similar treatment.  The debtor in Arden owned a parcel of real property, which it leased to various tenants.  Id. at 166.  In its chapter 11, the debtor proposed a plan of reorganization to extend the creditor’s fully matured $1 million note by fifteen years.  Id. at 173.  In overruling the creditor’s objection to confirmation, the Arden court saw the issue differently than the Mutual Life court, and disregarded the creditor’s “fair and equitable” argument.  Cf. at 173.  The Arden court held that “the term of the repayment is not generally regarded as a ‘fair and equitable’ issue, but rather merely limited by the proponent’s ability to satisfy the ‘feasibility’ requirement of § 1129(a)(11).  When feasibility can be shown and the collateral is not depreciable . . . numerous cases have approved plans with repayment terms of 15 years or longer.”  Id. (citing and quoting numerous cases). 

            Another example of a court reinstating and extending a fully matured loan is In re Lighthouse Lodge, LLC, 2010 Bankr. LEXIS 4574, at *3, *8, and *20 (Bankr. N.D. Cal. 2010).  The debtor in Lighthouse owned a lodge and hotel.  Id. at *2.  In its chapter 11 plan of reorganization, the debtor proposed to extend a fully matured $8 million note by three years.  2010 Bankr. LEXIS 36663, at *3 (Bankr. N.D. Cal. 2010).  Unlike the secured creditors in Mutual Life and Arden, the secured creditor in Lighthouse argued that the proposed treatment failed the “good faith” test of § 1129(a)(3).  2010 Bankr. LEXIS 4574, at *3.  Regardless of the nature of its argument, the court ruled that “[e]xtending the maturity date of the loan is consistent with § 1123(a)(5)(H), and a plan may contain any provisions consistent with the bankruptcy code.  The proposed treatment of the [claim] does not violate § 1129(b)(2) [(requiring a plan to be fair and equitable)].”  Id. (citation omitted).  The Lighthouse court ended up confirming a competing plan, but its holding is nonetheless relevant here.  Id. at * 33.

            Not everyone is eligible to take advantage of § 1123(a) like the debtors in Mutual Life, Arden, and Lighthouse.  Section 1123(b)(5) expressly prohibits the modification of claims secured by a principal residence.  Thus, a “chapter 11 plan’s modification of a fully mature loan secured by the debtor’s principal residence by extending the terms and due date is not permitted.”  In re Crump, 529 B.R. 106, 112 (Bankr. D.S.C. 2015). 

            Section 1123(a) is also not available to debtors, who seek merely to play a game of “keep away” with the bank’s collateral.  In In re 250-260 L.P., 2015 Bankr. LEXIS 1702, *13-15, *17 (Bankr. W.D.N.Y. 2015), a debtor had failed to make a payment on a secured note for nearly ten years, and yet proposed a plan of reorganization extending the fully matured note by another ten years.  Id. at *14-15.  The 250-260 L.P. court matter of factly sustained the objection.  Id. at *14-18. 

            Aside from these exceptions, § 1123(a) offers debtors the opportunity to rewrite loans and effectively turn back the hands of time to reinstate the loan.

            Schafer and Weiner has extensive experience in formulating confirmable plans of reorganization for debtors in a variety of industries.  Do not hesitate to contact one of our attorneys to discuss whether a chapter 11 bankruptcy could “turn back the hands of time” for your business.


[1] 11 U.S.C. §§ 101, et seq.

[2] Section 101(49)(A)(i).

[3] “Indubitable equivalent” is a term of art in bankruptcy.  Its relevancy here stems from § 1129(b)(2) and the confirmation requirement that a plan be fair and equitable.