In Re L & J Anaheim Associates, Debtor. L & J Anaheim Associates v. Kawasaki Leasing International, Inc.

We consider whether a creditor whose legal rights would be changed under a Chapter 11 plan is “impaired” under the plan as that term is defined by the Bankruptcy Code.

I

L & J Anaheim Associates (“L & J”), a limited partnership, owned a single piece of real property, a hotel. Kawasaki Leasing International, Inc. (“Kawasaki”) held a security interest in the hotel as collateral to secure a $13.2 million non-recourse note. Due to alleged mismanagement by the company hired to operate the hotel (“Trust-house”), L & J’s income declined to the point where it defaulted on its note to Kawasaki. Kawasaki moved to foreclose, and L & J filed for bankruptcy protection under Chapter 11.

When L & J failed to propose a plan of reorganization during the 120-day exclusivity period provided by section 1121(b), Kawasaki filed the plan that is the subject of this litigation (“the Plan”). The Plan proposed to auction off L & J’s assets — namely, the hotel itself and a lawsuit brought against Trust-house for its alleged mismanagement — and to use the proceeds to pay off all outstanding liens in order of their priority. The Plan also contemplated that Kawasaki would be appointed- as Estate…