In re B.R. BROOKFIELD COMMONS NO. 1 LLC, et al., Debtors-Appellants.
No. 13-2241.
United States Court of Appeals, Seventh Circuit.
Decided Nov. 4, 2013.
Argued Sept. 13, 2013.
735 F.3d 596
III. Conclusion
We AFFIRM the judgment of the district court.
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 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 bankruptcy court and the district court held that the claim was valid. We agree with the lower courts and affirm.
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.
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.
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
The issue surrounding the validity of the Integrity Claim is no stranger to review in this jurisdiction. Brookfield raised this 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 bankruptcy 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 interpretation of
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
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 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
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 application 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
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 how to enforce
This Court recently recognized “the danger of such differing 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
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 Congress 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 Bankr.Ct.Dec. 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
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.
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 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
The facts and, more importantly, the analysis conducted in Brookfield‘s keystone case, SM 104, are distinguishable from this case. In 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
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. See11 U.S.C. § 1111(b)(1)(A) . In addition, since the loan is nonrecourse,§ 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
The decisions of the bankruptcy court and the district court are hereby AFFIRMED.