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Unusual situation - Could c11 Debtor get a dividend when unsecureds
Chapter 11 debtor owns a house that is in terrible condition - overrun by
squatters, perhaps a crack house. The value of the house is severely
depressed - $350K. A knowledgeable realtor says that an investment of $50K
in repairing this house will increase the value of the house by as much as
$200K for a final value of $550K. However, even with the $200K increase in
FMV, the house will be upside down.
There is an investor who is willing to invest the money ($50K) in this
house. The plan is to sell the house in a short sale after it is repaired.
From the short sale proceeds, the investor will get his investment back
plus interest. The investor and the bank can agree how to split the $200K
increase in any way they choose.
This sounds like a good plan, but why should the debtor do this if he gets
nothing out of it?
I would like to get my debtor something from this opportunity. If I try to
get a cut for the debtor, there may be objections why the debtor should get
anything when unsecureds are not paid in full.
So I want to propose a plan where the $200K increase is split 4 ways:
bank, investor, debtor, unsecureds. This is a net benefit to the
unsecureds which would not result unless the debtor made it a condition of
going along with the investment that unsecureds get a dividend. Could
debtor get a dividend for requiring that unsecureds also get a dividend?
Does this violate the absolute priority rule, any other rule of law, or
common decency that debtor should get a financial benefit from such a plan.
Debtor's dividend from this plan can be modest. For example, debtor could
receive only a reimbursement of his attorney's fees, including the
prepetition deposit. What about a plan where debtor not only has his
attorney's fees repaid but also walks away with a cash dividend?
Alik Segal
Alik.Segal@gmail.com
310-362-6157
California Central District
Chapter 11 debtor owns a house that is in terrible condition - overrun by squatters, perhaps a crack house. The value of the house is severely depressed - $350K. A knowledgeable realtor says that an investment of $50K in repairing this house will increase the value of the house by as much as $200K for a final value of $550K. However, even with the $200K increase in FMV, the house will be upside down.
There is an investor who is willing to invest the money ($50K) in this house. The plan is to sell the house in a short sale after it is repaired. From the short sale proceeds, the investor will get his investment back plus interest. The investor and the bank can agree how to split the $200K increase in any way they choose.
This sounds like a good plan, but why should the debtor do this if he gets nothing out of it?I would like to get my debtor something from this opportunity. If I try to get a cut for the debtor, there may be objections why the debtor should get anything when unsecureds are not paid in full.
So I want to propose a plan where the $200K increase is split 4 ways: bank, investor, debtor, unsecureds. This is a net benefit to the unsecureds which would not result unless the debtor made it a condition of going along with the investment that unsecureds get a dividend. idend? Does this violate the absolute priority rule, any other rule of law, or common decency that debtor should get a financial benefit from such a plan.
Debtor's dividend from this plan can be modest. For example, debtor could receive only a reimbursement of his attorney's fees, including the prepetition deposit. What about a plan where debtor not only has his attorney's fees repaid but also walks away with a cash dividend?
-- Alik SegalAlik.Segal@gmail.com310-362-6157California Central District
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