On February 7, The Arizona Bankers Association joined 10 other western state bankers associations along with the American Bankers Association on a brief (the associations’ brief) to the Ninth U.S. Circuit Court of Appeals urging the reversal of a Ninth Circuit Bankruptcy Appellate Panel (the BAP) decision with far reaching and negative implications for real estate lenders in the western United States.
The lower court decision essentially would allow small creditors in chapter 11 bankruptcies to make the decision on whether to accept the reorganization plan, disregarding the needs of the holder of the largest claim. It does this by segregating claims with potential and speculative third party sources of payment from the rest of the unsecured class of claimants.
“Allowing a third party guarantee to actually diminish a real estate lender’s rights in bankruptcy makes responsible underwriting that much more difficult,” said Paul Hickman with the Arizona Bankers Association. Having a third party source of repayment adds flexibility to underwriting and ultimately allows real estate lenders to qualify more borrowers. “Now we potentially have case law in this district that not only makes that inconsequential, but could make the deal less attractive to a lender,” said Hickman.
The lower court’s decision allows the debtor to gerrymander the creditor classes to permit a small class of unsecured claimants with a relatively small aggregate claim to accept the reorganization plan over the objection of the single asset real estate lender with a much larger claim. The associations’ brief asserts that the lower court’s “theory . . . contradicts historical bankruptcy policy, drowns plan classification in an interpretive swamp with no logical bottom, and undermines policies on good lending practice.”
The case is In re Loop 76, LLC, Case No. 12-60021, which appeals a BAP decision, In re Loop, LLC, 465 B.R. 525 (9th Cir. BAP 2012). The BAP decision affirmed four orders of the Arizona bankruptcy court, In re Loop 76, LLC, 442 B.R. 713 (Bankr. D. Ariz. 2010).
The 109-year-old Arizona Bankers Association represents commercial and community banks operating in the State of Arizona, irrespective of asset size or deposit base.