The 7th Circuit Court of Appeals reversed a Southern District Bankruptcy judge Thursday, finding the judge incorrectly ruled that competition was unnecessary in a plan of reorganization involving a shopping center.
George Broadbent owns 98 percent direct equity of Castleton Plaza, the debtor, and the other 2 percent indirectly. EL-SNPR is Castleton Plaza’s only secured lender. When Castleton Plaza’s note matured with EL-SNPR, it did not pay and instead commenced bankruptcy. About a year later it proposed a plan of reorganization, under which $300,000 of EL-SNPR’s $10 million secured debt would be paid now with the balance written down to around $8.2 million and treated as unsecured. One-hundred percent of equity in the reorganized Castleton Plaza would go to Mary Clare Broadbent, George’s wife, who would invest $375,000.
George Broadbent is CEO of the Broadbent Company Inc., in which Mary Clare Broadbent owns all of the equity, and he receives a salary from the company. Broadbent and Castleton Plaza would keep their management contract.
EL-SNPR, thinking Castleton Plaza’s assets have been undervalued, asked the bankruptcy judge to condition Mary Clare Broadbent’s plan acceptance on her making the highest bid in open competition. Judge Basil Lorch III held that competition is unnecessary and confirmed the plan as proposed.
“Competition helps prevent the funneling of value from lenders to insiders, no matter who proposes the plan or when. An impaired lender who objects to any plan that leaves insiders holding equity is entitled to the benefit of competition,” Chief Judge Frank Easterbrook wrote. “If, as Castleton and the Broadbents insist, their plan offers creditors the best deal, then they will prevail in the auction. But if, as EL-SNPR believes, the bankruptcy judge has underestimated the value of Castleton’s real estate, wiped out too much of the secured claim, and set the remaining loan’s terms at below-market rates, then someone will pay more than $375,000 (perhaps a lot more) for the equity in the reorganized firm.”
The case, In the matter of: Castleton Plaza LP; Appeal of: El-SNPR Notes Holdings LLC, 12-2639, is remanded with directions to open the proposed plan of reorganization to competitive bidding.