In re Deed and Note Traders, LLC

Deed and Note Traders, LLC (DNT) (debtor) was engaged in buying and selling real estate in Arizona. DNT filed a Chapter 11 bankruptcy petition in 2007. DNT attested that it owed about $30 million to secured claimants and about $41 million in real estate. DNT filed a reorganization plan (first plan). Secured claims were recognized as Class 4 secured claims (creditors). Under the first plan, the Class 4 secured claimants would retain their security interests, receive monthly payments, and ultimately be paid in full. The bankruptcy court confirmed the first plan in October 2008. Meanwhile, the real estate market was declining. In September 2008, financial markets collapsed, followed by a nationwide freeze on the availability of credit. During the year after the first plan’s confirmation, multiple creditors’ filings asserted that DNT had not made payments due. In February 2010, the court finalized the first bankruptcy proceeding. Four days later, DNT filed a second Chapter 11 petition. DNT attested in the second filing that it owed about $27 million in secured claims and about $20 million in real estate. DNT filed a second reorganization plan (second plan). Under DNT’s second plan, Class 4 secured creditors’ claims would be allowed only to the extent of the market value of each of the secured creditors’ collateral. DNT proposed to cram down the second plan over the creditors’ objections. The bankruptcy court found that only undersecured creditors were impaired under the second plan. The court further found that DNT’s serial filings and second plan did not represent an attempt to circumvent the prohibition of the United States Bankruptcy Code (code) on modification of substantially consummated plans because the second plan arose from an extraordinary and unforeseeable circumstance, that is, the freeze in credit markets. The court crammed down and confirmed the second plan, describing the decision as a close call. The Class 4 secured creditors appealed.