Partial “Dirt-for-Debt” Plans in Chapter 11: the “Indubitable Equivalence” Debate

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One consequence of the depressed real estate market has been numerous Chapter 11 bankruptcy cases wherein the debtor seeks confirmation of a “dirt-for-debt” plan. In such a plan, instead of paying the secured creditor the value of the real property securing the debt through restructured loan terms, the debtor proposes to convey part or all of the real property securing the debt to the creditor in full satisfaction of its secured claim. Not surprisingly, dirt-for-debt plans often are met with substantial opposition from the affected secured creditor, and a contested hearing seeking to cram the plan down over the creditor’s objection ensues.

Partial dirt-for-debt plans, wherein only a portion of the real property securing the debt would be conveyed to the secured creditor in full satisfaction of the debt, raise particular concerns for the parties and the court. The core issue with a partial dirt-for-debt plan is whether it is “fair and equitable” under the Bankruptcy Code to force the secured creditor to accept title to part of its collateral and release the remaining collateral when there is no certainty that the property

conveyed to the creditor will turn out to be worth as much as the debt upon a subsequent sale. Will the property to be conveyed to the creditor enable the creditor to realize the “indubitable equivalent” of its claim, as the Code requires? The risk of loss to creditors is especially pronounced in today’s uncertain real estate market.

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Published In: Bankruptcy Updates, Conflict of Laws Updates, Finance & Banking Updates, Commercial Real Estate Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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