Fifth Circuit Adopts Flexible Approach to Collateral Valuation in Cramdown Chapter 11 Cases

By Saba, Peter | Business Credit, February 2019 | Go to article overview

Fifth Circuit Adopts Flexible Approach to Collateral Valuation in Cramdown Chapter 11 Cases


Saba, Peter, Business Credit


In In re Houston Regional Sports Network, LP., 886 F.3d 523 (5th Cir. 2018), the U.S. Court of Appeals for the Fifth Circuit held that bankruptcy courts have flexibility in selecting the date on which to value collateral, "so long as the bankruptcy court takes into account the purpose of the valuation and the proposed use or disposition of the collateral at issue," In so holding, the Fifth Circuit rejected the proposition that a bankruptcy court must value collateral as of either the bankruptcy petition date or the effective date of a cramdown Chapter 11 plan. However, because the bankruptcy court failed to consider the proposed use of the collateral in assigning it a value, the Fifth Circuit remanded the case below for additional findings.

Valuation of Collateral in Chapter 11

In situations where a creditor's claim is not fully secured by collateral, Section 506(a) of the Bankruptcy Code provides that the undersecured creditor's claim is bifurcated into a secured claim to the extent of the value of the collateral and an unsecured deficiency claim for the remainder. Section 506(a) further provides that the value of a secured claim "shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor's interest."

Unless its collateral is of "inconsequential value," an undersecured creditor in a Chapter 11 case may bypass the effects of Section 506 by making an election to have its entire claim treated as secured under Section 1111(b) of the Bankruptcy Code.

If the debtor or other plan proponent attempts to seek confirmation of a Chapter 11 plan over the objection of an electing undersecured creditor, the plan can be confirmed only if it is "fair and equitable." In most cases, by operation of Section 1129(b) (2)(A)(i), this means that the electing creditor must retain its lien on the collateral and receive deferred cash payments "of a value, as of the effective date of the plan, of at least the value" of the collateral.

Because Section 1111(b) is silent with respect to how valuations are to be conducted, courts generally look to Sections 506(a) and 1129(b)(2)(A) for guidance. Although the latter provides that the value of the collateral should be discounted to present value when considering whether a plan provides for adequate payments to a creditor, Section 506 is determinative for the purpose of making the initial valuation. This follows from the language of Section 1129(b)(2)(A), which presumes that the collateral at issue has been assigned value, However, Section 506 does not specify the date on which collateral should be valued.

Houston Regional

In 2010, affiliates of Comcast Corporation ("Comcast") loaned $100 million to Houston Regional Sports Network, L.P. (the "Network"). The loan was secured by a lien on substantially all of the Network's assets, including its rights under an agreement (the "Affiliation Agreement") pursuant to which a Comcast subsidiary agreed to carry the Network's content on its cable systems through 2032 in exchange for a monthly fee based on the number of Comcast's subscribers, The Network also entered into a media-rights agreement with the Houston Astros and Houston Rockets (together, the "Teams") for the exclusive right to broadcast their baseball and basketball games, respectively, in exchange for fees, Comcast's liens did not extend to the Teams' media-fee rights.

In 2014, creditors filed an involuntary Chapter 11 petition against the Network in the Southern District of Texas. After the bankruptcy court entered an order for relief, the Network proposed a Chapter 11 plan that contemplated a sale of the Network's equity to AT&T and DirecTV, which would also enter into separate agreements (collectively, the "agreements") to pay the Network for the right to broadcast its content. …

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Fifth Circuit Adopts Flexible Approach to Collateral Valuation in Cramdown Chapter 11 Cases
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