On January 19, 2012, the Seventh Circuit in In re River East Plaza, LLC, (No. 11-3263), held in favor of a secured lender further strengthening the rights of secured creditors in bankruptcy cases.
After the secured creditor made the election under 1111(b) to have its entire claim be treated as a secured claim, the debtor proposed a cram down plan that would pay the secured creditor's secured claim (which was allowed in the amount of $38.3 million) in full by substituting the creditor's lien on a downtown Chicago office building for US Treasury bonds that would pay the full amount of the creditor's claim—but in 30 years. The current value of the Treasury bonds was $13.5 million and the bonds paid 3% interest.
Judge Posner affirmed the dismissal of the case and held that the proposed plan could not be confirmed over the objection of the secured creditor. The court held that the proposed substitute collateral was not the "indubitable equivalent" of the existing collateral because it took away the creditor's potential upside in the event of a subsequent default.
The case is further evidence of the resistance of courts to weaken secured creditors' rights in Chapter 11 cases.
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