Alerts

Fifth Circuit Corrects Undervaluation of Secured Lender’s Priority Claim More Than Two Years After Consummation of Reorganization Plan

November 19, 2010

The U.S. Court of Appeals for the Fifth Circuit, on Oct. 19, 2010, corrected a bankruptcy court’s calculation of a secured lender group’s superpriority administrative claim more than two years after consummation of the debtor’s Chapter 11 reorganization plan. In re SCOPAC et al., __F.3d__, 2010 WL 4069525, at *2-3, *5-6 (5th Cir. Oct. 19, 2010) (Jones, Ch.J.) [“Pacific Lumber II”]; see also In re Pacific Lumber Co., 584 F.3d 229, 242 (5th Cir. 2009) [“Pacific Lumber I”] (plan “substantially consummated within weeks of confirmation”). Essentially, the court reversed the bankruptcy court’s failing to include certain asset sale proceeds as part of the lenders’ pre-bankruptcy collateral package when determining the amount of the lender group’s priority claim. That claim was based on the debtor’s failure to provide the required “adequate protection” for the lenders’ collateral. “[A]dequate protection of a secured creditor’s collateral and its fallback administrative priority claim are tradeoffs for the automatic stay that prevents foreclosure on debtors’ assets: the debtor receives ‘breathing room’ to reorganize, while the present value of [the lender’s collateral] is protected throughout the reorganization.” Pacific Lumber II at *6.