B.R. Brookfield Commons No. 1 v. Valstone Asset Management, LLC

In the
United States Court of Appeals
For the Seventh Circuit
No. 13-2241
IN RE:
B.R. BROOKFIELD COMMONS
NO. 1 LLC, et al.,
Debtors-Appellants,
Appeal from the United States District Court for the
Eastern District of Wisconsin.
No. 2:13-cv-00310-JPS — J. P. Stadtmueller, Judge.
ARGUED SEPTEMBER 13, 2013 — DECIDED NOVEMBER 4, 2013
Before BAUER, FLAUM, and ROVNER, Circuit Judges.
BAUER, Circuit Judge. In this bankruptcy proceeding, the
creditor, ValStone Asset Management, LLC (“ValStone”),
succeeded to the rights of a second mortgage secured by a lien
on a shopping center owned by the debtor, B.R. Brookfield
Commons No. 1, LLC and B.R. Brookfield Commons No. 2,
LLC (“Brookfield”). Brookfield argues that because the second
mortgage is a nonrecourse loan, and there was no equity in the
shopping center at the time of the bankruptcy filing, the claim
on the bankrupt estate should be disallowed. Both the bank-
ruptcy court and the district court held that the claim was
valid. We agree with the lower courts and affirm.
2 No. 13-2241
I. BACKGROUND
Brookfield owns a commercial shopping center
(“Brookfield Property”) that serves as the collateral for two
mortgages. The first mortgage, in the amount of approximately
$8,900,000, is held by TS7-E Grantor Trust. ValStone serves as
attorney in fact for TS7-E Grantor Trust. Integrity Development
held the second mortgage in the amount of approximately
$2,539,375 (“Integrity Claim”), but has since transferred its
interest to ValStone. ValStone now holds an interest in both the
first and second mortgage claims.
The Integrity Claim is a nonrecourse loan agreement1 that
is secured by a lien on the Brookfield Property. Brookfield and
ValStone do not dispute that the lien is valid and enforceable.
Outside of bankruptcy proceedings, state law would allow
ValStone to foreclose on the Brookfield Property upon
Brookfield’s default on the loan. ValStone could bid on the
Brookfield Property at auction or receive proceeds from the
sale of the Brookfield Property at market value. However,
since the Integrity Claim is a nonrecourse loan, if the proceeds
from the sale were not enough to repay the first mortgage or
repay the Integrity Claim in full, ValStone would be barred
from pursuing a deficiency claim for the outstanding debt;
ValStone never initiated foreclosure proceedings under state
law.
1
A nonrecourse loan limits a Creditor to look only to the Debtor’s
collateral for repayment. Bank of Am. Nat’l Trust and Sav. Ass'n v. 203 N.
LaSalle St. P’ship, 526 U.S. 434, 438 (1999).
No. 13-2241 3
On June 10, 2011, Brookfield filed its Chapter 11 bankruptcy
petition. Unique to a Chapter 11 bankruptcy proceeding,
Brookfield is allowed to reorganize its debts and still retain
ownership in the Brookfield Property. It listed both the TS7-E
Grantor Trust first mortgage and the Integrity Claim as
secured claims on Schedule D of the bankruptcy petition.
Under its reorganization plan, Brookfield elected to retain
ownership of the Brookfield Property rather than selling it.
Brookfield’s election required the bankruptcy court to establish
a judicial value for the Brookfield Property by means of
independent appraisals. Though a judicial valuation for the
Brookfield Property has not yet been established, both
Brookfield and ValStone expect that the value will be less than
the amount of the first mortgage. So, absent a significant and
unexpected increase in value, the Integrity Claim, which is
second in priority, will be totally unsecured by any equity in
the Brookfield Property.
At issue before this Court is the validity of the Integrity
Claim. Brookfield objects to the validity of the Integrity Claim,
because it is not secured by any value in the Brookfield
Property. Brookfield argues that this totally unsecured,
nonrecourse loan should be disallowed because neither
state law nor 11 U.S.C. § 1111(b) allows ValStone to pursue a
deficiency claim against Brookfield. ValStone, on the other
hand, argues that 11 U.S.C. § 1111(b)(1)(A) treats its nonre-
course Integrity Claim as if it had recourse, and its unsecured
deficiency claim should be allowed.
The issue surrounding the validity of the Integrity Claim is
no stranger to review in this jurisdiction. Brookfield raised this
4 No. 13-2241
issue twice in the bankruptcy court, and sought review from
the district court as well. We now address the issue.
II. DISCUSSION
We review a district court’s decision to affirm the bank-
ruptcy court’s allowance of a claim de novo. In re Boone County
Utilities., LLC, 506 F.3d 541, 542 (7th Cir. 2007).
The only issue before this Court is whether the Integrity
Claim should be disallowed. The decision turns on the inter-
pretation of § 1111(b)(1)(A). This is an issue of first impression
in this Circuit; we have found no controlling law on this issue.
So, following the well-established principles of statutory
construction, we first look to the language of the statute.
Greenfield Mills, Inc. v. Macklin, 361 F.3d 934, 954 (7th Cir. 2004).
The text of § 1111(b)(1)(A) reads:
A claim secured by a lien on property of the estate
shall be allowed or disallowed under section 502 of
this title the same as if the holder of such claim had
recourse against the debtor on account of such
claim, whether or not such holder has such recourse.
In this case, the district court found that, “[t]he plain
meaning of § 1111(b)(1)(A) is clear and unambiguous … There
is one prerequisite: the claim is secured by a lien on the
property of the estate.” The district court’s plain reading is
consistent with the Second Circuit’s interpretation of
§ 1111(b)(1)(A).
In In re 680 Fifth Avenue Associates, the Second Circuit held
that the protections of § 1111(b) were not limited by a
lienholder’s contractual privity with the debtor. 29 F.3d 95 (2d
No. 13-2241 5
Cir. 1994). In 680 Fifth Avenue, the debtor purchased real estate
subject to an existing nonrecourse mortgage. Id. at 96. When
the debtor filed for Chapter 11 bankruptcy, the market value of
the real estate was insufficient to cover the full amount of the
indebtedness. Id. The court interpreted § 1111(b)(1)(A) to
address whether a nonrecourse lienholder, not in privity with
the debtor, could assert a deficiency claim against the debtor’s
estate. Id. at 96–97. The Second Circuit agreed with the bank-
ruptcy court’s reasoning that:
The plain meaning of § 1111(b) does not limit itself
to consensual or nonconsensual liens. Moreover,
§ 1111(b) is not limited to nonrecourse loans or to
claims where the lienholder is in privity with the
debtor. The only precondition to the statute’s applica-
tion is a claim secured by a lien on property of the
estate.
Id. (emphasis added). Similarly, we agree with the district
court’s finding in this case that the statute does not state that
the claim be secured by any value in the property of the estate,
and that the only prerequisite is that a claim be “secured by a
lien on property of the estate.” It is uncontested that the
Integrity Claim is secured by a valid lien against the Brookfield
Property. The language of § 1111(b)(1)(A) is plain, and the
Integrity Claim shall be treated as if it had recourse against
Brookfield.
If the language of the statute is plain, our only function is
to enforce the statute according to its terms. United States v. Ron
Pair Enterprises, Inc., 489 U.S. 235, 241 (1989). However, the
parties cite opposing cases that differ in their interpretation of
6 No. 13-2241
how to enforce § 1111(b)(1)(A). Brookfield primarily relies on In
re SM 104 Ltd., in which the bankruptcy court interpreted
§ 1111(b)(1)(A) to disallow a creditor’s nonrecourse lien claim
completely because it was totally unsecured by any value in
the collateral. 160 B.R. 202, 216 (Bankr. S.D. Fla. 1993). ValStone
cites to In re Atlanta West VI, in which the bankruptcy court
reached the conclusion that § 1111(b)(1)(A) requires a totally
unsecured, nonrecourse claim to “be classified and provided
for in [the] debtor’s plan.” 91 B.R. 620, 624 (Bankr. N.D. Ga.
1988).
This Court recently recognized “the danger of such differ-
ing interpretations, stating ‘[n]ot only is the rule against
multiple interpretations of the same statute well entrenched, it
is of special importance. Without it, even a statutory term used
but a single time in a single statute risks never settling on a
fixed meaning.’” In re Ryan, 725 F.3d 623, 628 (7th Cir. 2013)
(quoting In re Woolsey, 696 F.3d 1266, 1277–78 (10th Cir. 2012)).
Because we are concerned about the differing interpretations
of the statute, “we look to the legislative history of the statute
to guide our interpretation.” Kelly v. Wauconda Park Dist., 801
F.2d 269, 270 (7th Cir. 1986).
And, the Congressional Records of the U.S. House and U.S.
Senate describe § 1111(b)(1) as, “the general rule that a secured
claim is to be treated as a recourse claim in chapter 11 whether
or not the claim is nonrecourse by agreement or applicable law.
This preferred status for a nonrecourse loan terminates if the
property securing the loan is sold under section 363 or is to be
sold under the plan.” 124 Cong. Rec. 32406 (1978); see also 124
Cong. Rec. 34006 (1978).
No. 13-2241 7
So, the congressional record alone does not provide full
guidance on the function and enforcement of the statute at
issue. However, consideration of the case law that led Con-
gress to enact § 1111(b) is instructive. Congress enacted
§ 1111(b) in response to the harsh result in Pine Gate Associates,
when a debtor used the “cramdown” powers to avoid a
nonrecourse creditor’s undersecured deficiency claim. Great
Nat’l Life Ins. Co. v. Pine Gate Associates, Ltd., 2 B.C.D. 1478(Bankr. N.D. Ga. 1976). In Pine Gate, the lender financed an
apartment project on a nonrecourse basis, expecting either full
payment of the loan or the right to foreclose on the property as
the negotiated benefit of the bargain. Id. At a time when real
estate prices were depressed, the debtor filed bankruptcy
under Chapter XII of the former Bankruptcy Act. Id. Under the
former Code, the debtor retained ownership of the apartment
project and was able to “cash out a nonrecourse, undersecured
holder of a first priority security deed at the value of the
debtor’s property instead of the amount of the debt.” In re
Atlanta West VI, 91 B.R. at 623 (describing the facts in Pine
Gate). The debtor received the benefit of any future apprecia-
tion in the property, while the creditor received no payment on
its undersecured deficiency claim. Id. Thus, the former Code
left the creditor with neither full payment of the loan nor the
right to foreclose on the property, resulting in a windfall to the
debtor.
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 credi-
tor’s right to receive equitable treatment.” 7 Collier on Bank-
ruptcy ¶ 1111.03 (Alan N. Resnick & Henry J. Sommer eds.,
8 No. 13-2241
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 unantici-
pated 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 nonre-
course 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 consider-
ation of the legislative history of § 1111(b), it is apparent that
the district court’s interpretation of § 1111(b)(1)(A) is congru-
ent with Congress’ intent to strike a balance between debtor
protections and equitable treatment of creditors.
We agree with ValStone that the facts and analysis in
Atlanta West are analogous to this case. In Atlanta West, the
debtor proposed retaining a commercial office park under its
reorganization plan. 91 B.R. at 621. Three liens existed on the
commercial office park; the third lien was totally unsecured by
any equity in the property. Id. at 622. The Atlanta West court
analyzed the plain meaning, legislative intent, and case law
relevant to § 1111(b) to conclude that the “statute does not
require that the lien on the property be secured by actual
value” and the creditor “cannot be denied a claim as debtor
No. 13-2241 9
proposes.” Id. at 624. Here, Brookfield cannot dispute that
the Integrity Claim is secured by a lien on the Brookfield
Property, which is the only prerequisite for the application of
§ 1111(b)(1)(A). The value in the collateral is immaterial;
§ 1111(b)(1)(A) treats the Integrity Claim as a recourse loan for
purposes of Brookfield’s Chapter 11 reorganization and
ValStone’s Integrity Claim cannot be disallowed.
Brookfield’s contention that the analysis of the Integrity
Claim begins with the application of 11 U.S.C. § 506(a),
referenced in 11 U.S.C. § 1111(b)(2), is unpersuasive. That
position is inconsistent with the plain reading and the logical
flow of § 1111(b).
The facts and, more importantly, the analysis conducted in
Brookfield’s keystone case, SM 104, are distinguishable from
this case. In re SM 104 Ltd., 160 B.R. at 216. There are two
similar facts from SM 104 to this case. First, the collateral was
fully encumbered by the first mortgage claim, leaving no
equity for the second mortgage claim. Id. at 209. And, the
second mortgage was a nonrecourse loan. Id. However, that is
where the similarity between SM 104 and this case ends. The
SM 104 court summarily decided that:
Since Capital Bank’s mortgage is junior to
EquiVest’s mortgage, it necessarily follows that the
value of Capital Bank’s interest in the property of
the Debtor, and thus the amount of its secured claim
and lien, is zero. See 11 U.S.C. § 506(a). Accordingly,
Capital Bank does not hold a ‘claim secured by a lien
on property of the estate’ and does not have a
§ 1111(b) deficiency claim. See 11 U.S.C.
10 No. 13-2241
§ 1111(b)(1)(A). In addition, since the loan is nonre-
course, § 502(b)(1) prevents Capital Bank from
maintaining any unsecured deficiency claim. Since
Capital Bank has no right to payment from the
Debtor or the Debtor’s property, it is not a creditor
of the Debtor.
Id. at 216. In the course of its § 1111(b) analysis, the SM 104
court denied the junior mortgage’s entire claim, and along with
it, the creditor’s right to vote on the debtor’s plan. The SM 104
court did not consider bankruptcy treatises, legislative history,
persuasive cases, or controlling cases during its statutory
interpretation. This Court does not adopt the outlier opinion
proposed by Brookfield.
III. CONCLUSION
We hold that under § 1111(b)(1)(A), the existence of a valid
and enforceable lien is the only prerequisite for § 1111(b)(1)(A)
to apply. Regardless of whether the claim is secured by any
value in the collateral, § 1111(b)(1)(A) treats the nonrecourse
Integrity Claim as if it had recourse against Brookfield.
The decisions of the bankruptcy court and the district court
are hereby AFFIRMED.