Chapter 8 - § 8.9 PLAN TREATMENT OF LIENS

• Jurisdiction: Colorado

§ 8.9 PLAN TREATMENT OF LIENS

Assuming a Chapter 11 debtor manages to propose and confirm a plan of reorganization, generally, mechanics' lienholders will be paid in full (or at a minimum be allowed to assert their state law rights when the plan becomes effective) due to their secured status and, often, their priority secured status over a secured lender. However, as noted below, a plan may modify a lien over a lienholder's objection in certain circumstances. A lienholder may also consent to any treatment of a lien that provides for less than the lienholder's full rights under state law.⁴⁰ A mechanics' lienholder might agree to lesser treatment with the implicit understanding that it might receive future work from the debtor or an affiliate.

Plans of reorganization divide creditors into classes that are given the same treatment,⁴¹ and mechanics' lienholders are typically treated the same in each case and therefore are placed in the same class. A plan must provide for adequate means for the plan's implementation, including, e.g., treatment of mechanics' liens.⁴²

§ 8.9.1—Impairment/Nonimpairment

Unless a debtor is fortunate enough to provide for full payment of claims (or full assertion of state law rights), at least one class of claims will be impaired.⁴³ A class consisting of mechanics' lien claims is impaired unless:

with respect to each claim or interest of such class, the plan—

(1) leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder of such claim or interest.⁴⁴

If a class consisting of mechanics' lienholders is impaired, a plan might create a holdout issue with respect to a dissenting lienholder as each holder of a claim in that class might either accept the plan (via a vote) or "will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date."⁴⁵ (The requirements for plan confirmation are found in Bankruptcy Code § 1129(a).) In effect, therefore, unless each lienholder consents to impairment of its claim, a mechanics' lienholder must be paid in full when the plan becomes effective or be allowed to assert all its state law rights, with one important exception.

§ 8.9.2—Cramdown

"Cramdown" is the term used to refer to a plan confirmed over the rejecting vote of one or more...