On August 24, 2012, the US Bankruptcy Court for the Northern District of Texas in In re Geijsel denied confirmation of a proposed bankruptcy plan because it did not satisfy the feasibility requirement of section 1129(a)(11) for confirmation or the fair and equitable standard for cramdown under section 1129(b) of the Bankruptcy Code.

Lone Star, FLCA and Lone Star, PCA (collectively, Lone Star) are the sole remaining creditors objecting to the second amended joint plan of reorganization filed and submitted for confirmation by the debtors, the Geijsels and The Luckie Dutchman, LLC. The debtors own and operate a dairy and have eight outstanding loans with Lone Star. The loans are cross-collateralized and are secured by virtually all of the real and personal property owned by the debtors.

The Court considered whether to approve confirmation of the debtors' plan over Lone Star's objections. The plan is funded by the continued operation of the dairy and income from the debtors' property. Since the debtors filed for bankruptcy, they have been making adequate protection payments to Lone Star. Lone Star argued, among other submissions, that the plan cannot be confirmed over their objections because it is not feasible and is not fair and equitable in its treatment of Lone Star.

The Court first analyzed whether the plan was feasible by looking at certain factors. In order to address the feasibility of the plan or its fairness, the Court set out to define Lone Star's claims and whether or not they were oversecured at the time of confirmation.

The plan consolidates Lone Star's claims into two claims and proposes a deferred payout plan involving monthly payments including interest and balloon payments for each. The debtors asserted that Lone Star was fully secured for its claims but not oversecured. They argued that the value of Lone Star's collateral did not exceed the claim amount and therefore does not trigger a right to charge postpetition interest and attorneys' fees under section 506(b) of the Bankruptcy Code.

The Official Unsecured Creditors Committee disagreed and contended that Lone Star was an oversecured creditor at the time of confirmation after credit is given for accumulated cash on hand and the $50,000 per month adequate protection payments.

The Court agreed with the analysis of the Committee because it was consistent with the approach in In re T-H New Orleans Ltd. Partnership, 116 F.3d 790 (5th Cir. 1997). It also considered two variables which complicate the analysis of whether Lone Star is oversecured:

The parties agreed that the cash generated during the pendency of this case was subject to Lone Star's lien. However, the Court questioned how to treat the adequate protection payments which proved to be unnecessary because the fluctuations in value of the hard collateral offset each other and the aggregate hard collateral value remained stable.

The Court determined that the income used to make the adequate protection payments was postpetition cash collateral. The Court then applied the "addition" view, adopted by a majority of courts, which provides that unnecessary adequate protection payments made from postpetition cash collateral should be applied against a creditor's principal debt and not against its secured claim. This view acknowledges that section 552(b) of the Bankruptcy Code allows a creditor, under narrow circumstances, to retain a security interest in cash or other collateral that a debtor acquires after the filing of the bankruptcy.

Therefore, Lone Star, who had an interest preserved by section 552(b), was entitled to more than a creditor who did not have this kind of interest. A creditor must meet the section 552(b) exception which allows postpetition proceeds of the collateral to be covered only if:

The debtors' plan is premised on having over $1 million in cash on hand at the time the plan is implemented, which creates a sufficient cushion to allow its use to make required payments under the plan without jeopardizing Lone Star's collateral position. However, the debtors actually had less cash and Lone Star's lien attached to the cash. While Lone Star consented to the debtors' use of cash collateral during the case, as an objecting creditor, it did not consent to the use of cash collateral under the plan.

The Court denied confirmation of the cramdown plan because it failed to accord Lone Star the "indubitable equivalent" of its cash collateral as required by the "fair and equitable" standard of section 1129(b) of the Bankruptcy Code. The debtors proposed to use cash generated during the case to pay off junior, unsecured and administrative claims without providing additional security to Lone Star. Instead, the debtors merely assured Lone Star that it would be paid in full under the plan and that they would continue to honor their security agreements with Lone Star regarding future cash. This treatment of Lone Star does not satisfy the fair and equitable standard, particularly because the debtors have no equity and no outside financing. With the cushion gone, the Court additionally decided the plan is no longer feasible under section 1129(a)(11) of the Bankruptcy Code because the debtors have no other source of capital to make the initial payments required by the plan.

In a case where a secured creditor is undersecured as of the petition date and its collateral does not diminish in value during the period between the filing of the case and confirmation, unnecessary adequate protection payments made by the debtor from postpetition cash collateral resulting from its lien on after-acquired property may cause the secured creditor to become oversecured, entitling the secured creditor to postpetition interest and attorneys' fees. This entitlement may absorb any cash cushion that the debtors gain during the course of the bankruptcy proceedings, and, in some cases, could prevent confirmation of the plan.