The Commercial Finance Association on February 6, 2013 submitted an amicus (friend of the court) brief to the United States Court of Appeals for the Ninth Circuit in the case styled In re Loop 76,LLC, Case No. 12-60021.
The case involves the right of an under-secured lender to weigh its deficiency claim with other general unsecured claims for purposes of voting on a proposed Chapter 11 plan of reorganization. The issue on appeal is whether, for purposes of voting on a proposed plan of reorganization in a Chapter 11 bankruptcy case, an unsecured deficiency claim should be classified separately from all other unsecured claims if the claim is guaranteed by a non-debtor.
The issue is of particular significance to secured lenders whose borrowers file Chapter 11 bankruptcy cases known as “single asset real estate cases.” In those cases, as well as in many other types of commercial bankruptcy cases, the amount of an under-secured lender’s deficiency claim will usually far exceed the total of all other unsecured claims combined. Therefore, if the lender’s unsecured deficiency claim is classified in the same class as all other unsecured claims, the lender would effectively have sufficient votes to veto any proposed plan of reorganization.
The lower courts held that an under-secured lender’s deficiency claim was required, as a matter of law, to beclassified separately from other general unsecured claims for purposes of plan voting simply because the deficiency claim was supported by the guarantee of a non-debtor third party.
Under the lower court decisions, the mere fact that a lender obtains a third-party guarantee increases thelender’s risk of being crammed down in a future Chapter 11 bankruptcy case of its borrower.
CFA believes the rulings provide a significant disincentive for lenders to obtain third-party guarantees, and in addition are inconsistent with the holdings of most every other court to have addressed the issue. CFA argued in the brief that the rulings, unless reversed on appeal, will adversely impact the cost and availability of credit for borrowers.
The Commercial Finance Association was represented by its co-general counsel, Otterbourg, Steindler, Houston & Rosen, P.C. and Goldberg Kohn Ltd.
Founded in 1944, the Commercial Finance Association is the trade group of the asset-based lending and factoring industries, with nearly 300 member organizations throughout the U.S., Canada and around the world. CFA provides education, networking opportunities and industry advocacy on a domestic and international basis to the commercial finance community.