In re Madison Hotel Associates

Prudential Insurance Company of America (Prudential) (creditor) held a $7 million mortgage on a hotel owned by Madison Hotel Associates (MHA) (debtor). The note and mortgage stated that Prudential had the right to accelerate the entire balance due if MHA defaulted. MHA defaulted. Prudential accelerated the loan, declared the entire amount due, and obtained a judicial order of foreclosure from a United States district court. MHA filed a petition for bankruptcy under Chapter 11 of the Bankruptcy Code (code), staying the foreclosure action. MHA filed a reorganization plan (the plan) in which it proposed to pay Prudential the missing payments and Prudential’s costs and fees, thereby curing the default. The plan was to reinstate the original maturity date of the loan. MHA’s other creditors voted to accept the plan, but Prudential did not. Section 1124(2) of the code provided that a reorganization plan that cured a default, reinstated the loan’s original maturity date, compensated the creditor for costs, and left other contract terms intact did not impair creditors’ interests even if the reinstatement overrode an acceleration clause. Applying this provision, the bankruptcy court found that the plan did not impair Prudential’s interests, and the court confirmed the plan. Prudential appealed to the district court, where the case was assigned to the same judge who had authorized Prudential’s foreclosure. The district-court judge reversed the bankruptcy court’s approval of the plan on grounds that the plan impaired Prudential’s interests. The district court reasoned that because Prudential’s right to foreclose arose from a court order, not merely from contractual language, the right fell outside of § 1124(2).