In re Village at Camp Bowie I, L.P.

Village at Camp Bowie I, LLC (Village) (debtor) obtained financing for its real estate venture by executing promissory notes that came to be held by Western Real Estate Equities, LLC (Western) (creditor). Village defaulted on the notes and filed for Chapter 11 bankruptcy. Village owed roughly $32 million on the notes and roughly $59,000 total to 38 unsecured creditors. Village proposed a reorganization plan with two impaired creditor classes: one for Western’s secured claim and one for all unsecured claims. Village’s plan proposed giving Western a new five-year note in the amount of its claim plus interest. The plan proposed paying the unsecured claimholders in full within three months of the plan’s effective date, without interest. The unsecured-creditors class voted to accept the plan, but Western voted to reject. Western argued that the plan could not be confirmed because Village had artificially impaired the unsecured-creditors class by proposing to pay the creditors after confirmation and without interest—even though Village had the money to pay the creditors in full at confirmation—so that Village could satisfy 11 U.S.C. § 1129(a)(10)’s plan-confirmation requirement that at least one impaired class vote to accept the plan. Western argued that because the class was artificially impaired, the class’s vote did not count for purposes of § 1129(a)(10). Western also argued that Village’s artificial impairment was an abuse of the bankruptcy process in violation of § 1129(a)(3)’s plan-confirmation requirement that a debtor’s plan be proposed in good faith. The bankruptcy court noted that artificially impairing a class was not per se bad faith and found that Village had satisfied § 1129(a)(3) because Village had proposed a feasible plan for legitimate bankruptcy purposes. The court confirmed Village’s plan, and Western appealed.