Opinion ID: 219843
Heading Depth: 1
Heading Rank: 4

Heading: Overview of Section 1129(b)(2)(A) and Relevant Precedents

Text: Before attempting to decipher Section 1129(b)(2)(A)'s proper meaning, a brief review of the statute and the way it has been construed by the courts is merited. Section 1129 of the Code sets forth the criteria that a debtor's Chapter 11 reorganization plan must satisfy to be confirmed by a bankruptcy court. While the Code generally requires that reorganization plans be accepted by each class of claimants (or, alternatively, leave the claims of non-assenting classes unimpaired), see 11 U.S.C. § 1129(a)(8), Subsection (b) of Section 1129 excepts certain plans from this requirement. Plans that are confirmed under Section 1129(b) are often referred to as cramdown plans because they have been crammed down the throats of objecting creditors. Kham & Nate's Shoes No. 2, Inc. v. First Bank, 908 F.2d 1351, 1359 (7th Cir.1990). Subsection (b)(1) states that, in order for a plan to be confirmed over the objection of a class of creditors, it must be fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. Subsection (b)(2)(A) defines what constitutes fair and equitable treatment in the secured creditor context. It states that a plan is fair and equitable if it provides: (i) (I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and (II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder's interest in the estate's interest in such property; (ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or (iii) for the realization by such holders of the indubitable equivalent of such claims. 11 U.S.C. § 1129(b)(2)(A). Traditionally, the majority of cramdown plans have sought confirmation under Subsection (ii) of 1129(b)(2)(A). Given the detailed and carefully tailored language used in this subsection, it has rarely been difficult for courts to determine whether plans qualify for fair and equitable status. Plans that propose selling an encumbered asset free and clear of liens could be confirmed over the objections of secured creditors so long as the debtor's asset sale complies with Section 363(k) of the Code. Sales comply with Section 363(k) if they permit parties with secured claims to offset [their] claim against the purchase price of [the asset] when entering bids to purchase the asset, an arrangement that is popularly referred to as credit bidding. An increasing number of debtors, however, have begun to seek confirmation of their plans under Subsection (iii) of 1129(b)(2)(A). Because the language used in this provision is both sparse and general, determining whether a reorganization plan can qualify as fair and equitable under this subsection is no simple task. As written, the statute does not provide guidance concerning (1) what types of plans fall within Subsection (iii)'s scope or (2) what constitutes the indubitable equivalent of a secured creditor's claim. Resolving the first issue is not easy because nothing in the text of Section 1129(b)(2)(A) indicates whether subsection (iii) can be used to confirm every type of reorganization plan or only those plans that fall outside the scope of Subsections (i) and (ii). Resolving the second issue is difficult because indubitable equivalent is not a term that has been defined by the Code or the courts. In re Pacific Lumber, Co., 584 F.3d 229, 246 (5th Cir.2009) (noting that [w]hat measures constitute the indubitable equivalent of the value of the [secured creditor's] collateral are rarely explained in case law). Two of our sister circuits recently issued opinions analyzing Section 1129(b)(2)(A). Philadelphia Newspapers, 599 F.3d 298; Pacific Lumber, 584 F.3d 229. In Pacific Lumber, the Fifth Circuit held that a plan that proposed the sale of the debtor's encumbered assets to a specified purchaser for an amount equal to the judicially-determined value of the assets qualified as fair and equitable under Subsection (iii) of Section 1129(b)(2)(A). Pacific Lumber, 584 F.3d at 249. In Philadelphia Newspapers, the Third Circuit held, in a 2-1 decision with one of the members of the majority concurring in the judgment, that a plan that proposed selling the debtor's encumbered assets free and clear of liens in an auction where credit bidding would not be allowed could qualify as fair and equitable under Subsection (iii). Philadelphia Newspapers, 599 F.3d at 318. Both majority opinions held that Subsection (iii)'s scope was not limited by its neighboring subsections and that the proceeds from the sale of encumbered assets constituted the indubitable equivalent of the secured creditors' claims. Judge Ambro's dissent in Philadelphia Newspapers rejected both of these conclusions, arguing that the majority's reading of the statute was at odds with the text of the statute itself, various canons of statutory interpretation, the statute's legislative history, interests expressed in other parts of the Code and the settled expectations of lenders and borrowers.