## Facts

- A real-estate developer reactivated Victory Construction Company, Inc. to acquire a single, heavily encumbered property with the expectation that the debt might be restructured, and with awareness that bankruptcy might be used if the project could not service the liens.
- Victory exercised an option to purchase the property by assuming liens totaling roughly $2.9 million, including a major secured claim held by John Hadley (about $1.35 million) and another secured loan held by California Federal Savings & Loan.
- When the debt structure proved unsustainable, Hadley noticed default and scheduled a foreclosure sale under his deed of trust.
- On the day before the scheduled foreclosure, Victory filed a Chapter 11 petition, triggering the automatic stay and stopping the sale.
- In stay litigation, the court conditioned continued protection from foreclosure on “adequate protection,” requiring Victory to pay Hadley interest at 18% during the stay period, which Victory accepted.
- Victory proposed a Chapter 11 plan to cure arrears and reinstate the secured loans to original maturities and contractual interest rates (approximately 8% for Hadley and 8.25% for Cal Fed), with additional guarantees from the developer and related parties.
- The plan depended on developing a luxury hotel on the property and then operating or selling it for sufficient returns to satisfy obligations.

## Issues

1. Whether the plan was proposed in good faith under 11 U.S.C. § 1129(a)(3) given the eve-of-foreclosure filing and the debtor’s single-asset, speculative project.
2. Whether the plan was feasible under 11 U.S.C. § 1129(a)(11), meaning confirmation was not likely to be followed by liquidation or further financial reorganization.
3. Whether reinstating secured debt at pre-default contract rates, in light of risk and market conditions, was “fair and equitable” to dissenting secured creditors under 11 U.S.C. § 1129(b).

## Decision

- Confirmation was denied.
- The court found the plan failed to satisfy § 1129’s confirmation requirements, including good faith and feasibility.
- The court also found the proposed secured-creditor treatment did not meet cramdown standards, given the plan’s risk profile and the proposed return to low contractual rates.

## Legal Principles

- A Chapter 11 plan must be proposed in good faith under § 1129(a)(3), meaning it must be consistent with bankruptcy’s reorganization objectives and not serve primarily to hinder secured-creditor remedies without a credible reorganization prospect.
- Feasibility under § 1129(a)(11) requires more than optimistic projections; the debtor must present reliable evidence supporting a reasonable likelihood of performance without liquidation or renewed reorganization.
- Under § 1129(b), a cramdown plan for secured claims must be fair and equitable, providing the secured creditor the present value of its allowed secured claim and compensation for the risk of the proposed payment stream, assessed in light of market conditions and plan risk.
- In single-asset real estate cases filed on the eve of foreclosure, courts may apply closer scrutiny to good faith, feasibility, and the sufficiency of risk compensation offered to secured creditors.

## Conclusion

The bankruptcy court denied confirmation because the proposed reorganization depended on a speculative development strategy, lacked adequate evidentiary support for feasibility, and offered dissenting secured creditors insufficient risk-adjusted value under cramdown standards, defeating both § 1129(a) and § 1129(b) requirements.


In re Victory Constr. Co., Inc., 42 B.R. 145 (Bankr. C.D. Cal. 1984)