Fourth Circuit Approves Partial Dirt for Debt Plan

by Poyner Spruill LLP

Poyner Spruill LLP

Do you want to own that rural timberland you financed a few years back? Well, what if I told you that not only are you taking ownership, but you’re taking it in exchange for a credit of three times its appraised value? The reason is your borrower filed Chapter 11 bankruptcy and convinced the court that timber tract is prime for a new subdivision.

This nightmare scenario is a possible reality in the Eastern District of North Carolina, where “dirt-for-debt” plans are a common strategy of debtors’ counsel. And, based on recent guidance from the Fourth Circuit Court of Appeals, you should not expect help on appeal if the trial court does not share your opinion of value.

The dirt-for-debt trend started from practical origins in the wake of the Great Recession, when developers were caught with a surplus of inventory. There was limited or no market for the flood of properties coming into bank REO departments. So, rather than force an auction or foreclosure for a fire sale price, debtors sought to transfer the property to the bank for fair market value. This is permitted under the “cram-down” provisions of the Bankruptcy Code.

Section 1129(b)(2)(A)(iii) allows payment of a creditor’s claim through surrender of collateral. In sum, a debtor in the context of a Chapter 11 reorganization can compel a creditor to accept its collateral in full or partial satisfaction of its claim. What makes this treatment “fair and equitable” is the requirement that the surrendered property be the “indubitable equivalent” of the creditor’s claim. This means that in situations where less than all of the creditor’s collateral is surrendered, the assigned value must be certain to compensate the creditor for the credit the debtor receives in return.

On the surface, this sounds reasonable enough. The creditor is taking its collateral for value and the parties are avoiding the legal process of liquidation. In reality, however, it’s not always as it seems. Dirt-for-debt is often employed strategically where the debtor believes it can put on a case for a value that exceeds the creditor’s valuation. After all, if the objective was merely to monetize collateral, there are mechanisms to do so under the Bankruptcy Code. The parties are always free to construct a sale procedure.

The debtor, however, prefers to have the court assign a value based on an evidentiary hearing, where it believes it might obtain a more favorable outcome than what might be realized from a sale. And it’s through this process that Cinderella meets her fairy godmother. Using expert testimony, the debtor makes the case that the property has substantially appreciated in value because the market has turned in favor of a new “highest and best use” for development.

Under the indubitable equivalent standard, anything less than certain should be rejected. This heightened standard of proof is the check to protect the creditor’s interest and requires a conservative valuation. This is what distinguishes a dirt-for-debt analysis from an ordinary valuation analysis, where signs of ambiguity such as widely variant appraisals and disputed uses might be considered with less reservation.

The bankruptcy court in the Eastern District, however, has taken a softened view of this standard in recent rulings. The court references the standard’s high bar, but then undertakes an indistinguishable valuation analysis, taking into account all evidence and competing opinions as to possible uses. In doing so, the court strips away the safeguard of certainty and functions, in a sense, as the appraiser itself. This approach has resulted in valuations at multiples of the creditor’s appraisal.

In December, the Fourth Circuit reviewed one of these rulings for the first time in In re: Bate Land & Timber LLC. In this case, the debtor successfully convinced the bankruptcy court that vacant timberland should be valued for residential development. On appeal, the creditor argued that the disputed feasibility of this use and the related variance in appraisals could not satisfy the standard of indubitable equivalence. This was based on precedent in this and other jurisdictions finding widely variant appraisals constitute proof of uncertainty.

On appeal, the Fourth Circuit found that “application of the indubitable equivalence standard involves more flexibility than the term suggests” and that “a bankruptcy court, acting as a fact-finder with specialized expertise, is well-equipped to arrive at a valuation that represents the indubitable equivalent of a secured creditor’s claim, in the face of disputed valuations.” It further found that review on appeal is limited to a “clear error” standard, meaning the bankruptcy court’s ruling is reviewed only for overt mistakes.

In sum, the Fourth Circuit refused to adopt a bright-line rule against dirt-for-debt approval and held that the bankruptcy court is sufficiently capable to assess the evidence before it, even in the face of widely disparate opinions of value. It further held that it would not second guess this determination except in the most egregious circumstances. Thus, though indubitable equivalence remains the black letter standard, the Fourth Circuit’s ruling affords the bankruptcy court significant discretion in its consideration.

For creditors, the take away from this ruling is that the stakes are higher than ever to win the valuation battle before the bankruptcy court. This phase is critical since the appellate court is unlikely to disturb the outcome. Selection of capable counsel and credible experts are of the utmost importance. Creditors who fail to appreciate this might find themselves the owner of a can’t-miss development opportunity . . . ahem, overvalued timberland.

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.

© Poyner Spruill LLP | Attorney Advertising

Written by:

Poyner Spruill LLP

Poyner Spruill LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.