In re Oaks Partners, Ltd.

Oaks Partners, Ltd. (Oaks Partners) (debtor) filed for Chapter 11 bankruptcy. First Union Real Estate Equity and Mortgage Investments (First Union) (creditor) had a $12 million secured claim. Oaks Partners filed a proposed reorganization plan indicating that the value of the property serving as First Union’s collateral would increase over time due to significant planned capital improvements. However, Oaks Partners was not obligated to make those improvements. The plan also indicated that Oaks Partners planned to raise money to cover expected operations shortfalls. The plan permitted foreclosure by First Union if Oaks Partners failed to pay First Union as required by the plan but not if Oaks Partners failed to make the projected repairs or raise the money. The bankruptcy court found that Oaks Partners’ feasibility analysis appeared reasonable. However, First Union objected to plan confirmation, raising concerns about the cramdown interest rate (i.e., the interest rate that creditors would have to accept if the plan were confirmed over their objections) and negative amortization (i.e., the amount of deferred interest on First Union’s claim under the plan). In a modified plan responding to First Union’s concerns, Oaks Partners proposed a 10.25 percent market cramdown interest rate and a 9.85 percent interest rate for First Union. That left roughly $302,000 of deferred interest on First Union’s claim during the first seven years under the plan, to be fully paid at the end of the plan’s eight-and-a-half-year term. First Union objected to this negative amortization, asserting that it was not fair and equitable under 11 U.S.C. § 1129(b). First Union had not accepted the plan and was impaired under the plan. Oaks Partners thus asked that the plan be crammed down (i.e., confirmed despite First Union’s nonacceptance), which the bankruptcy court could not do unless it found that the plan was fair and equitable to First Union.