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In re Bate Land & Timber LLC

United States Court of Appeals, Fourth Circuit

December 6, 2017

In re: BATE LAND & TIMBER LLC, Debtor,
BATE LAND & TIMBER LLC, Debtor - Appellee. BATE LAND COMPANY LP, Creditor - Appellant,

          Argued: September 12, 2017

         Appeal from the United States District Court for the Eastern District of North Carolina, at Wilmington. Terrence W. Boyle, District Judge. (7:16-cv-00023-BO)


          Matthew Nis Leerberg, SMITH MOORE LEATHERWOOD LLP, Raleigh, North Carolina; Laurie Beth Biggs, STUBBS & PERDUE, PA, Raleigh, North Carolina, for Appellant.

          George Mason Oliver, THE LAW OFFICES OF OLIVER & CHEEK, P.A., New Bern, North Carolina, for Appellee.

         ON BRIEF:

          Kip D. Nelson, SMITH MOORE LEATHERWOOD LLP, Raleigh, North Carolina; Trawick H. Stubbs, Jr., Joseph Z. Frost, STUBBS & PERDUE, PA, Raleigh, North Carolina, for Appellant.

          Amy M. Currin, THE LAW OFFICES OF OLIVER & CHEEK, P.A., New Bern, North Carolina; Mark R. Sigmon, SIGMON LAW, PLLC, Raleigh, North Carolina, for Appellee.

          Before NIEMEYER, DUNCAN, and FLOYD, Circuit Judges.


         Bate Land Company LLC ("BLC") challenges the district court's dismissal of BLC's appeal of the bankruptcy court's confirmed reorganization plan (the "Confirmed Plan") for Bate Land & Timber LP (the "Debtor"). In addition to appealing the district court's conclusion that the appeal was equitably moot, BLC further urges us to hold that the bankruptcy court both failed to provide BLC with the indubitable equivalent of its secured claim and erred in reducing the amount of post-petition interest awarded. For the following reasons, we reverse the district court's dismissal of BLC's appeal and affirm the bankruptcy court.


         The complexity of the proceedings below mirrors the parties' contentious relationship. Because we reach the merits of BLC's appeal, and because indubitable equivalence is an inherently fact-bound inquiry, we first consider with particular attention the bankruptcy court's detailed findings of fact.


         In 2006, BLC sold the Debtor seventy-nine tracts of land in eastern North Carolina for $65 million.[1] Of this amount, the Debtor paid $9 million in cash and financed the remaining $56 million through a purchase money promissory note secured through a purchase money deed of trust encumbering the property.

         In the years that followed, the Debtor paid BLC over $60 million. However, the Debtor failed to repay its debt in full by the maturation date. The parties negotiated new deadlines, but the Debtor failed to meet the revised deadlines as well. The Debtor attempted to convey two tracts of land back to BLC to satisfy its debt, but BLC rejected this proffer.


         The Debtor filed for Chapter 11 bankruptcy in 2013, and BLC filed a secured claim in the Debtor's bankruptcy proceeding for approximately $13 million. The Debtor's proposed reorganization plan (the "Proposed Plan") included several other creditors, but BLC accounted for the vast majority of all debts owed.[2]

         With regard to BLC, the Debtor submitted a partial dirt-for-debt provision in its Proposed Plan, by which the Debtor offered to satisfy BLC's secured claim through conveyance of the two tracts of property described above. In a dirt-for-debt plan, a creditor accepts all of its real-property collateral in satisfaction of its bankruptcy claim. In a partial dirt-for-debt plan, a debtor may transfer part of the collateral to satisfy the bankruptcy claim. See, e.g., In re SUD Props., Inc., No. 11-03833-8-RDD, 2011 WL 5909648, at *2-3 (Bankr. E.D. N.C. Aug. 23, 2011) (defining partial dirt-for-debt). The Proposed Plan estimated that the combined worth of these two tracts of land was approximately $13.5 million. After this transfer of collateral, the Debtor proposed that it would retain the remaining tracts of land free and clear of any liens. The bankruptcy court circulated the Proposed Plan to its creditors on August 30, 2013. Most of the Debtor's other creditors accepted the Proposed Plan. BLC objected, however, arguing that it would not provide full compensation.[3]

         A bankruptcy court has the authority to "cram down" a plan over a creditor's objections under certain circumstances. 11 U.S.C. § 1129(b)(2)(A)(iii). One such circumstance exists when the plan provides the creditor with the "indubitable equivalent" of its claim. Id. Bankruptcy courts purport to consider the plain meaning of this term. See In re SUD Props., Inc., 2011 WL 5909648, at *5. However, application of the indubitable equivalence standard involves more flexibility than the term suggests. In the bankruptcy context, "[t]he phrase 'indubitable equivalent' . . . means in essence, that the treatment afforded the secured creditor must be adequate to both compensate the secured creditor for the value of its secured claim, and also insure the integrity of the creditor's collateral position." 4-506 Collier on Bankruptcy § 506.03 (16th ed. 2017).

         In response to BLC's objections, the bankruptcy court initiated "cramdown" proceedings and conducted several hearings to ensure that the final reorganization plan would provide BLC with the "indubitable equivalent" of its claim. During these proceedings, the bankruptcy court valued the land that the Debtor proposed to transfer to BLC in satisfaction of BLC's claim.

         As the bankruptcy court noted, valuing the property is the most challenging aspect of a dirt-for-debt scenario. The bankruptcy court therefore heard extensive expert testimony regarding the properties' value. The ultimate determination is significant because the higher the valuation, the less the Debtor would have to pay in cash to satisfy BLC's claim.

         In valuing property, a bankruptcy court may choose to consider a property's "highest and best use" instead of its current physical condition. See In re Thoburn Ltd. P'ship, 513 B.R. 887, 888 (Bankr. E.D. Va. 2013). Courts have favored this approach in a dirt-for-debt setting. See, e.g., In re Sailboat Props., LLC, No. 10-03718-8-SWH, 2011 WL 1299301, at *2 (Bankr. E.D. N.C. Mar. 31, 2011). The bankruptcy court thus decided to consider the property's highest and best use.

         Here, the parties vigorously disagreed about the highest and best use of the subject parcels. BLC contended that their highest and best use was for the production and harvesting of timber. The Debtor, on the other hand, argued that at least some of the parcels had a highest and best use as residential property and were thus more valuable. The experts' respective opinions led to significantly different valuations.


         The bankruptcy court first evaluated evidence related to the two tracts of land that the Debtor initially offered BLC in satisfaction of its secured claim. The bankruptcy court determined that these two tracts featured desirable waterfront property with "navigable depths and lacking vertical hindrances" situated in a location "ideal" for watersports. Order at 32, In re Bate Land & Timber, LLC, No. 13-04665-8-SWH (Bankr. E.D. N.C. Jan. 15, 2015). The properties were also located in an area with a growing population and a "rebounding" residential housing market. Id. Accordingly, the bankruptcy court determined that the highest and best use of these two tracts was ...

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