## Facts

- Arnold & Baker Farms (A&B), an Arizona farming partnership, acquired farmland subject to a senior deed of trust and later experienced financial distress.
- The Farmers Home Administration (FmHA), a federal lender, financed crops and advanced funds to cover prior installment obligations; in exchange, FmHA obtained a deed of trust on A&B’s real property (with Western Cotton holding a junior deed of trust).
- After foreclosure pressure and Chapter 11 filings (the individuals in 1984 and the partnership in 1986), a court-approved sale of acreage satisfied the senior secured creditor; following a buyer default and settlement, much of the land returned to A&B.
- After these transactions, FmHA held a note of approximately $3.84 million secured by a first deed of trust in about 1,320 acres.
- A&B proposed a Chapter 11 “dirt-for-debt” plan to satisfy FmHA’s secured claim by transferring 515 acres to FmHA, valuing the land at about $7,300 per acre; FmHA contended the land was worth about $1,381 per acre.
- The bankruptcy court confirmed the plan over FmHA’s objection using cramdown, modifying the plan to give FmHA 10% more acreage than proposed.
- The Bankruptcy Appellate Panel (BAP) reversed, concluding the plan did not provide FmHA the “indubitable equivalent” of its secured claim; A&B and Western Cotton appealed.

## Issues

1. Whether a Chapter 11 plan can be confirmed over a secured creditor’s objection under 11 U.S.C. § 1129(b)(2)(A)(iii) by conveying only part of the real property collateral as the “indubitable equivalent” of the creditor’s secured claim.
2. Whether substantial valuation uncertainty and market risk associated with a partial collateral transfer prevents the plan from providing the creditor the “indubitable equivalent” required for cramdown.

## Decision

- The Ninth Circuit affirmed the BAP and denied confirmation of the plan.
- The court held that A&B’s proposed transfer of only part of the collateral did not provide FmHA the “indubitable equivalent” of its secured claim under § 1129(b)(2)(A)(iii).
- The court reasoned that forcing the creditor to accept a partial land conveyance amid sharply disputed valuation shifted significant downside risk to the creditor and impaired the creditor’s secured position compared to its original bargain.

## Legal Principles

- Under § 1129(b) cramdown, a plan treating a secured claim under § 1129(b)(2)(A)(iii) must provide the secured creditor the “indubitable equivalent” of its secured claim.
- “Indubitable equivalent” requires treatment that preserves the creditor’s economic position with a high degree of certainty and does not materially increase the creditor’s risk of nonpayment.
- A forced conveyance of only part of a secured creditor’s real property collateral generally fails § 1129(b)(2)(A)(iii) where valuation is sharply contested and the creditor is left bearing a meaningful risk that the transferred property will not realize value sufficient to satisfy the secured claim.
- In assessing “indubitable equivalent,” the creditor’s protection includes maintaining the benefit of its full collateral package until the secured debt is satisfied, not merely receiving property assigned an appraised value by the plan.

## Conclusion

The Ninth Circuit held that a Chapter 11 debtor may not confirm a “dirt-for-debt” cramdown plan under § 1129(b)(2)(A)(iii) by transferring only a portion of disputed collateral when the transaction increases the secured creditor’s exposure to valuation and market risk and fails to assure payment with the certainty demanded by the “indubitable equivalent” standard.


In re Arnold & Baker Farms, 85 F.3d 1415 (9th Cir. 1996)