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Second Circuit Affirms Designation of Secured Lenders' Vote and Effective Cram Down

By Michael L. Cook and Joseph E. Bain

The U.S. Court of Appeals for the Second Circuit, on Dec. 6, 2010, summarily affirmed a bankruptcy court's designation of a secured lender's vote on a reorganization plan in a two-page order, effectively enabling the debtor to cram down the lender's claim. In re DBSD North America, Inc., __ F.3d__, 2010 WL 4925878 (2d Cir. Dec. 6, 2010) (held, lower courts did not err in designating secured lender's vote, but “plan violated the absolute priority rule” in its treatment of a separate unsecured creditor). As a result, the secured lender that bought all of the debtor's senior first lien secured debt at par will be paid only interest over a period of four years before its loan matures. See In re DBSD North America, Inc., 419 B.R. 179, 207-08 (Bankr. S.D.N.Y. 2009) (confirming debtors' proposed plan). According to the Second Circuit, an “opinion” explaining its reasoning “will follow in due course.”

The DBSD ruling is important to would-be acquirers of Chapter 11 debtors. As shown below, a lender's so-called “loan to own” strategy may still be valid, but acquirers cannot overreach. Consistent with other decisions discussed below, DBSD means that a competitor's manipulating the reorganization process to block a reorganization or to destroy the debtor's business will not work.

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