Bankruptcy — nonrecourse loans

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United States Court of Appeals For the Seventh Circuit

Civil

Bankruptcy — nonrecourse loans

Even though there is no equity in property at the time of a bankruptcy filing, a second mortgage is nevertheless valid.

“Collier on Bankruptcy suggests that the purpose behind the addition of § 1111(b) to the bankruptcy code was to ‘strike a balance between the debtor’s need for protection and a creditor’s right to receive equitable treatment.’ 7 Collier on Bankruptcy ¶ 1111.03 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2013). The judicial valuation specific to a Chapter 11 reorganization deprives a lienholder of the right to bid on the collateral and the opportunity to ‘benefit from any unanticipated post-valuation appreciation.’ In re 680 Fifth Avenue Associates, 29 F.3d at 97. Congress promulgated § 1111(b)(1)(A) to allow a creditor’s loan to surpass the limitations of nonrecourse agreements and state law, and instead receive treatment as a recourse claim because the judicial valuation specific to Chapter 11 ‘was not part of a nonrecourse creditor’s bargain.’ 7 Colliers on Bankruptcy ¶ 1111.03[1][a] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2013). Application of § 1111(b) prevents a windfall to the debtor, and ‘puts the Chapter 11 debtor who wishes to retain collateral property in the same position as a person who purchased property “subject to” a mortgage lien would face in the nonbankruptcy context.’ In re 680 Fifth Avenue Associates, 29 F.3d at 97. After full consideration of the legislative history of § 1111(b), it is apparent that the district court’s interpretation of § 1111(b)(1)(A) is congruent with Congress’ intent to strike a balance between debtor protections and equitable treatment of creditors.”

Affirmed.

13-2241 In re: R.R. Brookfield Commons No. 1, LLC

Appeal from the United States District Court for the Eastern District of Wisconsin, Stadtmueller, J., Bauer, J.