Elimination of Junior Liens, Valuation Issues and Burden of Proof for Secured Claim Valuations

July 2012Articles ABI Journal

On May 14, 2012, the U.S. Court of Appeals for the Third Circuit issued its opinion in Heritage Highgate Inc., et al. concerning the lien of a junior secured creditor and the creditor’s treatment under the debtor’s chapter 11 reorganization plan. The opinion addressed the Third Circuit’s holding on the use of § 506(a) and (d) of the Bankruptcy Code outside of liquidation to eliminate liens under a reorganization plan, the relevant time and standards for valuation of the creditor’s collateral and the burden of proof in a proceeding brought under Bankruptcy Rule 3012. In addition to the precedential impact of the decision within the Third Circuit, the opinion provided clarity on these important chapter 11 plan issues. Also, the opinion may impact treatment of second-lien debt in reorganization cases, as well as potentially reinvigorate unsecured creditors’ committees and their constituencies, which in recent times have proved unable in most circumstances to assert meaningful impact on the bankruptcy reorganization process.

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