Opinion ID: 206337
Heading Depth: 3
Heading Rank: 3

Heading: Mortgage Claim

Text: The last issue is whether the Mortgage became recourse in Ward I under section 1111(b) of the Bankruptcy Code. [7] Generally, this statute provides that if a debtor elects to continue using encumbered property in its reorganization, the bankruptcy court will grant the nonrecourse creditor, whose claim is secured by an interest in that property, an allowed claim under section 502 as if its security interest had recourse. The key language in this statute concerns the allowance of claims under section 502: Section 502 determines if a creditor can assert a claim against the debtor and in what amount; creditors receive a distribution from the bankruptcy estate based on their allowed claim. 11 U.S.C. § 507. Mechanically, section 1111(b) affects the distribution to creditors by granting nonrecourse creditors an allowed claim against the debtor that they would not normally receive under section 502(b)(1). In general, section 502(b)(1) allows a creditor's claim to the extent that it would be enforceable against the debtor and the debtor's property. A claim secured by a nonrecourse security interest is, by definition, enforceable only against the debtor's property. A claim secured by a recourse security interest is enforceable against both the collateral and, to the extent the claim exceeds the value of the collateral, against the debtor. If the recourse creditor's claim exceeds the value of the collateral that is, if the recourse creditor is undersecuredsection 506(a) bifurcates the claim into a secured claim for the value of the collateral and an unsecured claim for the deficiency. By treating nonrecourse creditors as if they had recourse, section 1111(b)(1)(A) gives undersecured nonrecourse creditors the unsecured deficiency claim they otherwise would not receive. 680 Fifth Ave. Assoc. v. Mut. Benefit Life Ins. Co. ( In re 680 Fifth Ave. Assoc. ), 29 F.3d 95, 97 (2d Cir.1994); Kenneth N. Klee, All You Ever Wanted to Know About Cram Down Under the New Bankruptcy Code, 53 Am. Bankr. L.J. 133, 161 (1979). This unsecured deficiency claim enables the undersecured nonrecourse creditor to vote on the debtor's plan of reorganization. Absent the unsecured deficiency claim, the undersecured nonrecourse creditor would not be able to vote so long as it received the collateral's appraised value. 11 U.S.C. § 1124(1) (a claim is unimpaired if the plan leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitled the holder of such claim or interest); 11 U.S.C. § 1126(f) (holders of unimpaired claims are conclusively presumed to have accepted the plan); see Michael J. Kaplan, Nonrecourse Undersecured Creditors Under New Chapter 11the Section 1111(b) Election: Already a Need for Change, 53 Am. Bankr. L.J. 269, 270-71 (1979). Without a vote, the nonrecourse undersecured creditor would not be able to challenge the appraisal process. Such a creditor would have lost its contractual state law right to bid on the collateral at a foreclosure sale or renegotiate the loan to allow the debtor to retain the collateral. Practically, section 1111(b) provides the undersecured nonrecourse creditor with the benefit it would otherwise obtain from its nonrecourse loan bargain. In re 680 Fifth Ave. Assoc., 29 F.3d at 97; see also Tampa Bay Assoc., Ltd. v. DRW Worthington, Ltd. ( In re Tampa Bay Assoc., Ltd. ), 864 F.2d 47, 50 (5th Cir.1989). If the debtor elects to sell the collateral in the Chapter 11 proceeding, the creditor can bid on it. If the debtor elects to continue using the collateral, section 1111(b) ensures that the creditor has the ability to vote on the debtor's plan. Section 1111(b)'s language and purpose indicate that the recourse transformation is for distribution purposes only. It does not change the nature or terms of a creditor's security interest. In re DRW Property Co., 57 B.R. 987, 992 (Bankr.N.D.Tex. 1986) (The transformation of non-recourse claims into recourse claims is for distribution purposes only in a Chapter 11 reorganization case where the debtor has been given the power to retain encumbered property (over the objection of the secured creditor) for use in its plan of reorganization.). Dika-Ward's argument overlooks the mechanics of the claims allowance process and, if accepted, would have the practical result of placing the nonrecourse creditor in a better position than it would have been outside of bankruptcy, a result not contemplated by Section 1111(b). In re DRW, 57 B.R. at 992 (`It was obviously not intended by according recourse . . . to nonrecourse claims [under section 1111(b) ] that the holders of these claims would be given any additional rights under state law.') (quoting 3 Norton Bankr. L. & Prac. § 57.02). Because we conclude that section 1111(b)'s transformation is for distribution purposes only, we conclude that, following Ward I, the Mortgage remained nonrecourse. Dika-Ward, as holder of that nonrecourse Mortgage, can look only to the property secured by the Mortgage.