Appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division. No. 11 B 05141--Eugene R. Wedoff, Bankruptcy Judge.
The opinion of the court was delivered by: Posner, Circuit Judge.
Before POSNER, FLAUM, and SYKES, Circuit Judges.
This is an appeal directly to us, skipping the district court, from the dismissal of what is called a "single asset real estate" bankruptcy proceeding. The debtor, River East Plaza, LLC, is the principal ap- pellant. The appellee, LNV Corporation, is River East's principal creditor and had successfully urged the dismissal of the proceeding.
Section 158(d)(2)(A) of the Judicial Code authorizes a court of appeals to permit the district court to be bypassed if, so far as relates to this case, the order ap- pealed from involves a question of law that has not been definitively resolved, or involves a matter of public importance, or if an immediate appeal "may ma- terially advance the progress of the case." The first and last of these considerations point to our allowing this appeal--the last because, as we'll see, the Bankruptcy Code directs speedy resolution of single asset real estate bankruptcies for reasons well illustrated by this case. 11 U.S.C. § 362(d)(3); see River Road Hotel Partners, LLC v. Amalgamated Bank, 651 F.3d 642, 645 (7th Cir. 2011), cert. granted under the name RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, 2011 WL 3499633 (Dec. 12, 2011).
A single real estate asset, within the meaning of the Bankruptcy Code, is a nonresidential property, or a residential property containing five or more apartments or other residential units, "on which no substantial busi- ness is being conducted by a debtor other than the busi- ness of operating the real property and activities in- cidental thereto." 11 U.S.C. § 101(51B). The single asset in this case is a building in downtown Chicago called River East Plaza that houses offices and a restaurant. LNV Corporation, a banking firm, has a first mortgage on the building.
The building's owner and mortgagor, River East Plaza, LLC, defaulted on the mortgage in February 2009, and LNV promptly started foreclosure proceedings in state court, prevailed, and a foreclosure sale of the property was scheduled. That was almost three years ago, and the sale has yet to take place. For in February 2011, just hours before it was to occur, River East filed for bank- ruptcy under Chapter 11 (reorganization, as distinct from liquidation), and the filing automatically stayed the sale. 11 U.S.C. § 362(a)(4).
As a secured creditor, LNV could have bypassed the bankruptcy proceeding and continued its efforts to enforce its secured claim in state court. In re Penrod, 50 F.3d 459, 461-63 (7th Cir. 1995). But stymied by the auto- matic stay, it decided to become a party to the bank- ruptcy proceeding so that it could ask the bankruptcy judge, as it did, to lift the automatic stay. But by becoming a party it subjected itself to the authority of the bankruptcy judge to approve a plan of reorganiza- tion that might affect its lien. Id. at 462; In re Airadigm Communications, Inc., 519 F.3d 640, 647-48 (7th Cir. 2008). Normally a mortgage lien remains a lien on the mortgaged property until the mortgage is paid off, even if the property is sold, because a lien runs with the property. But if the bankruptcy judge confirms a plan of reorganization that removes the lien of a participating creditor, the lien is gone. Id. at 648.
The creditor can try to protect himself against such a fate by objecting to the plan, and his objection will block it, see 11 U.S.C. § 1129(a)(8)(A), unless it can be crammed down his throat under one of the three subsections of 11 U.S.C. § 1129 (b)(2)(A). Under (i), the reorganized debtor keeps the property and may be allowed to stretch out the repayment of the debt beyond the period allowed by the loan agreement, but the lien remains on the property until the debt is repaid. Under (ii), the debtor auctions the property free and clear of the mortgage but the creditor is allowed to "credit bid," meaning to offer at the auction, not cash, but instead a part or the whole of his claim, FDIC v. Meyer, 781 F.2d 1260, 1264-65 (7th Cir. 1984), so that, for example, LNV could bid $20 million for River East's building just by reducing its claim from $38.3 million to $18.3 million. Under (iii), the lien is exchanged for an "indubitable equivalent." In re Philadelphia Newspapers, LLC, 599 F.3d 298, 304-05 (3d Cir. 2010); In re Sun Country Development, Inc., 764 F.2d 406, 409 (5th Cir. 1985); In re Murel Holding Corp., 75 F.2d 941, 942 (2d Cir. 1935) (L. Hand, J.). The last subsection is the one River East invoked in its proposed plan of reorganization--unsuccessfully. The bankruptcy judge rejected the plan, lifted the automatic stay, and dismissed the bankruptcy proceeding.
A question before the Supreme Court in the River Road case (the case, cited earlier, now called RadLAX Gateway Hotel), but unnecessary to try to answer in this case, is whether the third form of cramdown, the "indubitable equivalent" cramdown, can be used to eliminate a creditor protection imposed under the second subsec- tion, which allows encumbered property to be auctioned free and clear of an existing lien only if the lien creditor is allowed to credit bid at the auction. In River Road we rejected rulings by the Third and Fifth Circuits that a plan allowing sale of property free and clear of a secured creditor's lien without letting the creditor credit bid can still be crammed down, under the third rather than the second subsection, so long as the plan provides some means of assuring that the creditor receive the indubitable equivalent of its claim. See In re Philadelphia Newspapers, LLC, supra, 599 F.3d at 311-13; In re Pacific Lumber Co., 584 F.3d 229, 246-47 (5th Cir. 2009). We said that to allow the debtor in such a case to elude credit bids by convincing the bankruptcy court that it has given the creditor an indubitable equiva- lent in the form of substitute collateral would circum- vent the procedure established by subsection (ii), and by so doing deprive the creditor of the opportunity con- ferred by that subsection to benefit from an increase in the value of the property if, the credit bid having been the high bid, the creditor becomes the owner of the en- cumbered property.
While the debtor in River Road sought to avoid the creditor's right to credit bid under subsection (ii) by invoking indubitable equivalence, River East seeks to avoid the requirement in a subsection (i) cramdown of maintaining the mortgage lien on the debtor's property by transferring LNV's lien to different collateral, also in the name of indubitable equivalence. The logic of River Road forbids such an end run, but even if the Supreme Court reverses River Road, River East's plan could not be confirmed because the substitute collateral that it proposed was not the indubitable equivalent of LNV's mortgage. (Later we'll explain when substitute collateral can be indubitably equivalent to the original collateral.)
LNV is owed $38.3 million but River East's building is currently valued at only $13.5 million (this is River East's valuation, and may as we'll see be too low). So LNV's secured claim is undersecured, and an under- secured creditor who decides, as LNV has decided, to participate in his debtor's bankruptcy proceeding has a secured claim for the value of the collateral at the time of bankruptcy and an unsecured claim for the balance. 11 U.S.C. § 1111(b)(1)(A). But generally he can exchange his two claims for a single secured claim equal to the face amount of the unpaid balance of the mortgage. §§ 1111(b)(1)(B), (2). LNV made this choice, so instead of having a secured claim for $13.5 million and an unse- cured claim for $24.8 million it has a secured claim for $38.3 million and no unsecured claim.
The swap is attractive to a mortgagee who believes both that the property that secures his mortgage is under- valued and that the reorganized firm is likely to default again--which often happens: between a quarter and a third of all debtors who emerge from Chapter 11 with an approved plan of reorganization later re-enter Chapter 11 or have to restructure their debt (that is,
default--"restructure" is just a euphemism for default) by some other method. See, e.g., Lynn M. Lopucki, Courting Failure 97-1222 ...