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Judge to Secured Creditor: The Loan has been PAID!!!!!

By Stephen Sather

In the latest opinion from a single asset real estate case which has taken on the ferocity of a cage match brawl, the bankruptcy court has told a secured lender that it must treat its credit bid under Section 363(k) the same as if it had received a cash payment. The audacious secured creditor had asserted that its credit bid applied to reduce its bankruptcy claim but not its debt, so that it was still free to pursue guarantors and other collateral. Spillman Investment Group, Ltd. v. American Bank of Texas, Adv. No. 08-1018 (Bankr. W.D. Tex. 1/29/09).

In a fact pattern which is showing up more frequently these days, the case started off with a golf course development. The debtor borrowed money from American Bank of Texas and Fire Eagle, LLC. American Bank held the first lien and also held a CD and limited guaranties. Fire Eagle held a junior lien and did not have personal guaranties. After the loans went into default and the debtor filed chapter 11, Fire Eagle bought the American bank debt so that it held both the senior and junior liens. After a bidding process in which a group lead by insiders of the debtor offered $9.2 million in cash, Fire Eagle made a credit bid in the amount of $9.3 million and acquired the property. Fire Eagle also received cash collateral in the amount of $500,000, increasing its total amount credited and paid to $9.8 million. At the time, the amount of the first lien debt was approximately $9,250,000. Thus, the combination of the credit bid and the cash collateral clearly exceeded the amount of the first lien debt.

Notwithstanding the math, Fire Eagle asserted that the senior debt (and with it the right to collect against the CD collateral and the guarantors) remained alive because the credit bid under Section 363(k) reduced its bankruptcy claim, but not the underlying debt. The Bankruptcy Court did not have any trouble rejecting the distinction between debt and claim.

Fire Eagle's claim is also its debt. "Debt" is defined as liability on a claim. 11 U.S.C. Sec. 101(12). "Claim" means "right to payment, whether or not such right is reduced to jdugment, liquidated, unliquidated, fixed, contingent, matured, unmatued, disputed, undisputed, legal, equitable, secured or unsecured." 11 U.S.C. Sec. 101(5A). Payment against the claim necessarily reduces the debt. It cannot reduce one and not the other. This is the bankruptcy court; not fantasy land.

Memorandum Opinion, p. 27.

The Bankruptcy Court also rejected arguments that language in the guaranty agreements which provided that setoffs or defenses of other parties and discharge in bankruptcy would not impair the guarantees allowed continued pursuit of the guarantors. The Court noted that payment of the debt was neither a setoff nor a discharge, so that the guarantees were extinguished when the debt was paid.

To make sure that there was no room for confusion, the Court added the following conclusion:

Fire Eagle's Senior Loan was paid in full. As such Fire Eagle has no claim against the SIG CD or the Guarantors under their respective Guarantees. Fire Eagle's feigned ability to not understand the Court's reasoning falls on deaf ears. This is not rocket science. The Senior Loan has been PAID!!!!!

Memorandum Opinion, p. 34.

First Post-Script:

Judge Monroe will be retiring this year after nearly twenty years on the bench. While Spillman is an example of his rather direct writing style, it is not the only time that he has used all capitals to make a point. In an opinion discussing allowance of late filed claims in chapter 11, he quoted from the then-recent Supreme Court opinion in Pioneer Investments v. Brunswick, followed by the exclamation: "WRONG." Judge Monroe has never had trouble telling us what he really thinks.

Second Post-Script:

This marks the 100th posting to A Texas Bankruptcy Lawyer's Blog.

Full post as published by A Texas Bankruptcy Lawyer's Blog on February 03, 2009 (boomark / email).