## Facts

- Woodbrook Associates, an Indiana limited partnership, owned a single asset: a multi-family apartment complex in Indianapolis.
- The project was financed by a $5,559,700 first mortgage at 7.5%, insured by the U.S. Department of Housing and Urban Development (HUD); after default, the mortgage was assigned to HUD in 1988.
- HUD scheduled a September 1990 sale and stated it would not bid over $3.4 million; Woodbrook filed Chapter 11 shortly before the sale, staying foreclosure.
- During the case, Woodbrook stopped remitting net operating revenues and accumulated approximately $225,000 in operating surplus.
- Woodbrook proposed a plan valuing HUD’s secured claim at about $3.6 million and paying it over 30 years at 7.5%; HUD’s unsecured deficiency claim would receive 5% plus certain cash on hand (with $100,000 reserved).
- Other unsecured creditors, including management-related claims and trade creditors, were placed in separate classes and generally paid in full on an expedited schedule.
- The plan allowed partners to retain equity in exchange for new capital contributions; alternatively, equity would be canceled if retention was not permitted.
- HUD moved to dismiss, arguing the plan was unconfirmable (improper classification, unfair discrimination, absolute priority problems) and the case was being used to delay foreclosure; the bankruptcy court dismissed under 11 U.S.C. § 1112(b), and the district court affirmed.

## Issues

1. Whether dismissal under 11 U.S.C. § 1112(b) was proper because no confirmable Chapter 11 plan was realistically achievable and continuation would cause unreasonable delay and prejudice to creditors.
2. Whether the proposed plan was unconfirmable due to improper classification of similar unsecured claims and resulting unfair discrimination against HUD’s unsecured deficiency claim.
3. Whether the plan violated the absolute priority rule by permitting equity retention while HUD’s unsecured class was not paid in full, absent a qualifying new-value contribution.

## Decision

- The Seventh Circuit affirmed the dismissal of the Chapter 11 case.
- The court held the bankruptcy court acted within its discretion under § 1112(b) because Woodbrook lacked a realistic prospect of proposing a confirmable plan and the case functioned primarily as a foreclosure delay.
- The court agreed the plan’s separate classification and superior treatment of other unsecured creditors, compared to HUD’s deficiency claim, reflected improper vote engineering and unfair discrimination.
- The court concluded the plan failed cramdown requirements because it permitted equity retention while a dissenting unsecured class was not paid in full and the asserted new capital contributions did not cure the absolute priority problem.
- The court held dismissal, rather than repeated denial of confirmation with further opportunities to amend, was appropriate where structural defects and economic realities made confirmation futile.

## Legal Principles

- A bankruptcy court may dismiss a Chapter 11 case for “cause” under 11 U.S.C. § 1112(b) when there is no reasonable likelihood of rehabilitation and continuation would unreasonably delay or prejudice creditors.
- Although 11 U.S.C. § 1122 permits flexibility in classification, substantially similar unsecured claims may not be separately classified solely to obtain an accepting impaired class; classification must be justified by legitimate differences, not vote manipulation.
- A plan that pays select unsecured creditors in full while materially impairing a major unsecured deficiency claim can constitute unfair discrimination and support a finding of nonconfirmability.
- Under 11 U.S.C. § 1129(b), the absolute priority rule bars equity holders from retaining interests over the objection of an impaired unsecured class that is not paid in full, unless a valid exception applies; proposed “new value” contributions must satisfy strict requirements.
- In single-asset real estate cases filed on the eve of foreclosure, prolonged proceedings without a viable confirmable plan may support dismissal to prevent use of Chapter 11 as a delay device.

## Conclusion

The Seventh Circuit upheld dismissal of Woodbrook’s Chapter 11 case because the debtor’s proposed plan was structurally unconfirmable—using improper classification and discriminatory treatment of HUD’s deficiency claim and failing the absolute priority rule—and continued proceedings would only delay foreclosure and prejudice creditors without a feasible path to reorganization.


Matter of Woodbrook Assocs., 19 F.3d 312 (7th Cir. 1994)