B.R. Brookfield Commons No. 1 v. Valstone Asset Management, LLC
735 F.3d 596
| 7th Cir. | 2013Background
- Brookfield owns a shopping center subject to two mortgages: a first mortgage (~$8.9M) held by TS7-E Grantor Trust and a second mortgage (~$2.54M) originally held by Integrity Development and assigned to ValStone. The second mortgage is nonrecourse and secured by a valid lien.
- Brookfield filed Chapter 11 and elected to retain the property; a judicial valuation is required and is expected to be below the first mortgage amount.
- Because the expected valuation is less than the first mortgage, the second mortgage will be totally unsecured (no equity to satisfy the second lien).
- Brookfield objected to allowance of the second (Integrity) claim, arguing a nonrecourse, totally unsecured junior lien should be disallowed (no deficiency claim).
- ValStone argued 11 U.S.C. § 1111(b)(1)(A) treats any claim secured by a lien on estate property as if it were recourse for allowance purposes, so the Integrity Claim must be allowed.
- The bankruptcy and district courts upheld ValStone’s claim; the Seventh Circuit affirmed.
Issues
| Issue | Plaintiff's Argument (Brookfield) | Defendant's Argument (ValStone) | Held |
|---|---|---|---|
| Whether a nonrecourse junior mortgage that is totally unsecured by collateral value is a "claim secured by a lien on property of the estate" under § 1111(b)(1)(A) | A totally unsecured nonrecourse junior lien is not a § 1111(b) claim and should be disallowed; § 506(a) zero valuation means no secured claim | § 1111(b)(1)(A)’s plain text requires only a lien on estate property; value in the collateral is immaterial and the claim is treated as if recourse | The existence of a valid lien alone satisfies § 1111(b)(1)(A); the nonrecourse Integrity Claim is treated as if it had recourse and may not be disallowed |
Key Cases Cited
- In re 680 Fifth Avenue Assocs., 29 F.3d 95 (2d Cir.) (§ 1111(b) applies where creditor holds a lien on estate property even if nonrecourse)
- In re Boone County Utils., LLC, 506 F.3d 541 (7th Cir.) (standard of review: de novo for district court’s affirmation of bankruptcy court’s allowance of a claim)
- United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989) (statutory language that is plain must be applied according to its terms)
- In re Ryan, 725 F.3d 623 (7th Cir.) (rejecting multiple interpretations; legislative history considered when statutory meaning unclear)
- In re Woolsey, 696 F.3d 1266 (10th Cir.) (discussion of statutory interpretation principles)
- Bank of Am. Nat’l Trust & Savings Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434 (1999) (definition and effect of nonrecourse loans)