## Facts

- Madison Hotel Associates (MHA), a Wisconsin limited partnership, owned and operated the Concourse Hotel in Madison, Wisconsin.
- In 1972, MHA obtained construction financing secured by a promissory note, first mortgage, first security interest in the realty, and an assignment of rents; the lender later assigned these interests to Prudential Insurance Company of America.
- After assignment, MHA owed Prudential $7 million and was required to make monthly principal-and-interest payments; the loan documents included an acceleration clause upon default.
- The hotel experienced operating losses, and MHA defaulted and remained in default for years.
- In a prepetition federal action, a district court found MHA in continuous default and authorized Prudential to proceed with foreclosure and collateral sale; entry of the proposed foreclosure judgment was pending.
- On the day the proposed foreclosure judgment was due, MHA filed for Chapter 11 protection, triggering the automatic stay.
- The bankruptcy court denied motions to dismiss/abstain premised on alleged bad faith and denied Prudential’s request for stay relief for lack of “cause.”
- MHA proposed a plan that (i) cured prepetition payment defaults, (ii) paid Prudential’s costs and attorneys’ fees tied to the default and litigation, and (iii) reinstated the original maturity date and other loan terms, effectively reversing acceleration.
- All other creditors accepted the plan; Prudential rejected it.
- The bankruptcy court confirmed the plan, finding Prudential’s claim unimpaired under 11 U.S.C. § 1124(2); the district court reversed, reasoning that Prudential held court-recognized foreclosure interests beyond § 1124(2).
- MHA appealed.

## Issues

1. Whether a Chapter 11 plan that cures defaults, compensates the secured creditor’s default-related costs, and reinstates the original maturity and terms of an accelerated loan renders the creditor’s claim “unimpaired” under 11 U.S.C. § 1124(2).
2. Whether a prepetition federal order authorizing foreclosure prevents cure-and-reinstatement under § 1124(2), on the theory that it creates judicially recognized rights not subject to modification through a plan.

## Decision

- The Seventh Circuit reversed the district court and remanded with instructions to reinstate the bankruptcy court’s confirmation order.
- The court held that § 1124(2) permits cure and reinstatement of an accelerated secured obligation and that, if the statute’s conditions are met, the claim is not impaired.
- The existence of a prepetition foreclosure order did not bar § 1124(2) treatment where the foreclosure had not progressed to an irreversible stage (such as a completed sale) before the bankruptcy filing.
- Because the plan restored the original bargain and compensated Prudential for default-related costs, it did not alter Prudential’s legal, equitable, or contractual rights within the meaning of § 1124(2).

## Legal Principles

- Under 11 U.S.C. § 1124(2), a claim is not impaired if the plan cures default, reinstates maturity as it existed before default, compensates the holder for damages from reasonable reliance on acceleration/default, and otherwise leaves rights unaltered.
- A Chapter 11 plan may “de-accelerate” an obligation by curing arrearages and reinstating the original maturity and terms, even if the creditor accelerated the loan prepetition.
- Prepetition foreclosure proceedings and orders recognizing default generally enforce contract rights; absent a completed foreclosure sale or comparable final change in property rights, those rights remain subject to § 1124(2) cure-and-reinstatement.
- A secured creditor is not impaired merely because bankruptcy prevents it from completing foreclosure when the plan cures defaults, pays default-related fees and costs, and restores the original loan terms.

## Conclusion

The Seventh Circuit held that a Chapter 11 plan that cures a mortgage default, compensates the lender for default-related costs, and reinstates the original loan terms can leave the lender unimpaired under § 1124(2) notwithstanding a prepetition order authorizing foreclosure, so long as foreclosure has not reached a completed, irreversible stage.


In re Madison Hotel Assocs., 749 F.2d 410 (7th Cir. 1984)