## Facts

- Sierra Woods Group, a California limited partnership, owned a single asset: a ten-year-old apartment complex in Sparks, Nevada.
- Sierra Woods filed for Chapter 11 reorganization.
- Bank of America held a first deed of trust securing approximately $4,098,000.
- Great Western Bank held a second deed of trust securing approximately $3,845,124.47 plus accrued interest.
- Great Western’s loan had an adjustable contract rate and a long-term amortization schedule.
- Sierra Woods’ initial plan proposed interest-only payments to Great Western at a reduced rate for three years and deferred unpaid interest and principal by adding it to the debt (negative amortization), with the deferred amounts accruing interest.
- The bankruptcy court refused to confirm the initial plan by applying a categorical rule that negative amortization could not be “fair and equitable” for cramdown purposes.
- Sierra Woods later proposed a modified plan that removed negative amortization but extended the repayment horizon; the bankruptcy court rejected it as still exposing Great Western to significant risk.
- The district court affirmed the denial of confirmation, relying on record-based risk concerns rather than deciding whether negative amortization is categorically impermissible.
- Sierra Woods appealed, seeking review of the rejection of the initial plan containing negative amortization.

## Issues

1. Whether a Chapter 11 plan proposing deferral and capitalization of interest on a secured claim (negative amortization) is per se not “fair and equitable” under 11 U.S.C. § 1129(b)(2)(A).
2. Whether the “fair and equitable” determination for such a plan must be made through case-specific factual findings evaluating creditor risk and plan structure.

## Decision

- The Ninth Circuit reversed the district court’s affirmance of the denial of confirmation.
- The court held negative amortization is not categorically prohibited in a Chapter 11 cramdown.
- The court required a case-by-case determination of whether deferring interest is “fair and equitable.”
- The court remanded for the bankruptcy court to make specific factual findings applying the correct standard to the proposed plan.

## Legal Principles

- Under 11 U.S.C. § 1129(b)(2)(A), a plan confirmed over a secured creditor’s objection must be “fair and equitable” to that creditor.
- A bankruptcy court may not adopt a per se rule that negative amortization can never satisfy the “fair and equitable” requirement.
- When a plan defers and capitalizes interest, the court must make specific factual findings addressing whether the plan’s treatment of the secured creditor is fair given the plan’s terms and risks.
- Relevant considerations include the extent and duration of the deferral, the secured creditor’s collateral position (including lien priority), and whether the plan shifts undue risk to the objecting secured creditor.

## Conclusion

The Ninth Circuit rejected a categorical ban on negative amortization in Chapter 11 cramdown plans and required bankruptcy courts to evaluate such provisions through fact-specific findings under the “fair and equitable” standard, remanding for that analysis.


Great W. Bank v. Sierra Woods Grp., 953 F.2d 1174 (9th Cir. 1992)