Bankruptcy — undersecured creditors — single asset real estate

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United States Court of Appeals For the Seventh Circuit

Civil

Bankruptcy — undersecured creditors — single asset real estate

And undersecured creditor in a single asset real estate bankruptcy proceeding can convert his entire claim to a secured one, and obtain dismissal of the bankruptcy.

“The substituted collateral might, it is true, turn out to be more valuable than the building and thus provide LNV with more security. But because of the different risk profiles of the two forms of collateral, they are not equivalents, and there is no reason why the choice between them should be made for the creditor by the debtor. Since LNV is undersecured, we have trouble imagining what purpose could be served by substituting collateral other than to reduce the likelihood that LNV will ever collect its mortgage debt in full. A striking omission from River East’s brief is a description of the subsection (iii) plan itself, beyond a statement that River East hopes to attract $40 to $50 million in loans or equity investment to refurbish the building. Were that feasible River East should have been able to strike a deal with LNV. River East’s aim may have been to cash out LNV’s lien in a period of economic depression and reap the future appreciation in the building’s value when the economy rebounds. Such a cashout is not the indubitable equivalent of a lien on the real estate, and to require it would be inconsistent with section 1111(b) of the Code, which allows the secured creditor to defeat such a tactic by writing up his secured claim to the full amount of the debt, at the price of giving up his unsecured claim to the difference between the current value of the debt and of the security. It’s true that a secured claim is altered by a subsection (i) cramdown because the debtor is allowed to stretch out the payments due the creditor. But at least the creditor retains his collateral. That is the quid for the quo of giving up the right to immediate payment. By proposing to substitute collateral with a different risk profile, in addition to stretching out loan payments, River East was in effect proposing a defective subsection (i) cramdown by way of subsection (iii).”

Affirmed.

11-3263 In re River East Plaza, LLC

Appeal from the United States Bankruptcy Court for the Northern District of Illinois, Wedoff, Bankr. J., Posner, J.