Village Homes: Chapter 11 Plan Negotiations Stalemate
Village Homes’ exclusivity period for filing the Chapter 11 plan was due to expire on March 6, 2009. The exclusivity period is one where the bankrupt company has the exclusive right to file the plan (as opposed to a situation where creditors can come up with competing plans). The bankrupt builder filed a motion to extend the exclusivity period on March 3, 2009. The case is teetering on the edge with the multiple disputes and lift-stay motions by bank creditors still unresolved.
As court filings state, there is an “existing stalemate”, though parties appear to have continued negotiations. Village Homes and its lenders recently stipulated that they have “engaged in meaningful settlement negotiations” and that they “need a small amount of additional time to achieve a resolution”.
For homeowners and buyers watching this case, what are the issues on the negotiating table?
- Dispute over whether the $2 million in cash held by Village Homes belongs to the banks and (as their security interests) or whether it is part of the bankrupt builder’s own cash flow and home buyers’ deposits.
- Dispute over whether Village Homes can close on home sales. We mentioned the dispute over short sales in Banks’ Behavior in Builder’s Bankruptcy: Litigation Over Reorganization
- Resolving lenders potential deficiency claims. This may be bad news for unsecured creditors as Village Homes stated in a motion that these deficiency claims are “likely to be so large”.
A deficiency claim occurs when the secured lender cannot be repaid in full from its secured assets. The remaining amount may be pursued as an unsecured claim. Where the deficiency claim is very large, it adds to the pool of unsecured debt outstanding. Simply put, the recovery on a dollar for each unsecured creditor will then be largely reduced.
Nonetheless, it seems like there may be a twist in Village Homes’ case. The bankrupt builder has asserted preference claims against the lenders. This is a bargaining chip which may “persuade” secured lenders to willingly not pursue deficiency claims.
More news will be posted as negotiations unfold…
