The Second Circuit Court of Appeals issued a summary order this week upholding the aggressively unfavorable treatment of a senior secured creditor under the reorganization plan (the “Plan”) of DBSD North America, f/k/a ICO North America (“DBSD”). (The Second Circuit upheld a separate challenge to the plan brought by an unsecured creditor). The summary order states that “[a]n opinion will follow in due course.”   

As previously described on this site, the bankruptcy court took the highly unusual step of “designating” (i.e., disallowing) the vote rejecting the Plan of the senior secured creditor (also a competitor of DBSD). The bankruptcy court’s finding that the vote was “not in good faith” because the senior secured creditor was acting with a “strategic purpose”, rather than merely seeking to further its interest as a creditor looking to be repaid, raised eyebrows throughout the bankruptcy community (and particularly among investment firms that regularly acquire debt with such a strategic purpose). But it was the bankruptcy court’s decision to approve the unfavorable proposed treatment of the senior secured creditor that is likely to have the most potential long term impact. 

The bankruptcy court determined that the Plan met the applicable Bankruptcy Code standards, and could be confirmed over senior secured creditor’s objection (colloquially known as a “cram down”) by providing it the with the “indubitable equivalent” of its secured claim. In an expansive interpretation of the statutory language, the bankruptcy court found such “indubitable equivalence” notwithstanding that the Plan effects the replacement of a one year loan facility secured by all of DBSD’s assets – including liquid securities – with a four year “payment in kind” facility under the same rate of interest, with a reduced collateral package that lacks such securities.   

The bankruptcy court’s determinations both to designate the vote and to approve the “cram down” treatment were alternative bases for approving the Plan. The Second Circuit’s summary order refers only to the vote designation Accordingly, it won’t be known until the Second Circuit issues its opinion whether it has ruled on both aspects of the decision. 

The unusual facts regarding the vote designation make it probable that the impact of the Second Circuit’s ruling as it relates to this issue will be relatively narrow. However, if the Second Circuit expressly affirms the “cram down” aspect of the bankruptcy court’s decision, it will have a profound impact in Chapter 11 cases. The door will be open to all manner of creative and forceful attempts to confirm reorganization plans over the objections of secured lenders.