Bankr. L. Rep. P 75,987
In re 680 FIFTH AVENUE ASSOCIATES, and 54th and Fifth Land
Partners, Debtors.
680 FIFTH AVENUE ASSOCIATES, and 54th and Fifth Land
Partners, Plaintiffs-Appellants,
v.
The MUTUAL BENEFIT LIFE INSURANCE COMPANY IN REHABILITATION,
Defendant-Appellee.
No. 1337, Docket 93-5107.
United States Court of Appeals,
Second Circuit.
Argued March 10, 1994.
Decided July 12, 1994.
Sheldon I. Hirshon, New York City (Steven E. Obus, Meyer Muschel, Lauren J. Drooker, Proskauer, Rose, Goetz & Mendelsohn, of counsel), for plaintiffs-appellants.
Edwin David Robertson, New York City (Raymond E. Loughrey, Alan J. Shmaruk, Cadwalader, Wickersham & Taft, of counsel), for defendant-appellee.
Before: WALKER and JACOBS, Circuit Judges, and ZAMPANO, District Judge.*
WALKER, Circuit Judge:
Plaintiffs-appellants and debtors in bankruptcy 680 Fifth Avenue Associates and 54th and Fifth Land Partners (the "Debtors") brought this adversary proceeding seeking a declaration of the parties' rights concerning a lien on a parcel of property with a building held by the Debtors' estates. The lienholder is defendant-appellee Mutual Benefit Life Insurance Company ("MBLI"), a creditor in the Debtors' bankruptcy proceedings.
The facts of this case are set out in the bankruptcy court's opinion, familiarity with which is assumed. See In re 680 Fifth Ave. Assocs.,
The Debtors appeal from a judgment of the United States District Court for the Southern District of New York (Leonard B. Sand, Judge ),
DISCUSSION
The question of statutory interpretation presented on this appeal is whether 11 U.S.C. Sec. 1111(b) entitles a nonrecourse lienholder who is not in privity with a Chapter 11 debtor to assert a deficiency claim against the debtor's estate. In the Debtors' bankruptcy proceedings, which are being jointly administered, MBLI asserted a claim for the entire amount of the mortgage against the Debtors' estates. The parties stipulated in the bankruptcy court that the purchase money mortgage held by MBLI is in default, and that MBLI's lien is valid and enforceable. Relying on 11 U.S.C. Sec. 1111(b), MBLI contended that its claim based on the lien was not limited to the value of the property even though MBLI made the original loan on a nonrecourse basis, and even though it is not in privity with the Debtors. The Debtors sought a declaration that MBLI's secured claim was limited to the worth of the building and land as determined by a valuation in bankruptcy.
As stated by the bankruptcy court, "[i]n Chapter 11, Sec. 1111(b) determines the treatment of undersecured claims secured by liens on property of the estate."
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....
Section 1111(b) allows an undersecured creditor either to elect to have its entire claim treated as secured, or to have the claim bifurcated into secured and unsecured portions, notwithstanding the fact that under 11 U.S.C. Sec. 502(b)(1), the nonrecourse nature of the loan would otherwise bar a deficiency claim for the unsecured portion of the loan.
The impetus behind Congress's enactment of Sec. 1111(b) was to protect the rights of nonrecourse lienholders in Chapter 11 reorganizations. See
Section 1111(b) therefore implements a general rule that a claim secured by a lien on property of the estate is to be treated as giving the lienholder recourse against the debtor, whether or not recourse exists under applicable non-bankruptcy law. See In re PCH Assocs.,
In this case, the bankruptcy court concluded that MBLI was entitled to the election under Sec. 1111(b) even though it is not in privity with the Debtors. The court reasoned that Sec. 1111(b) applies to all lien claims against property of the estate, irrespective of whether there is contractual privity with respect to the debt giving rise to the lien:
The plain meaning of Sec. 1111(b) does not limit itself to consensual or nonconsensual liens. Moreover, Sec. 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. Clearly, MBLI has such a lien which entitles it to be treated "as if [it] had recourse against the debtor."
We agree that the absence of contractual privity between the lienholder and the debtor does not deprive the lienholder of the benefits and protections of Sec. 1111(b). Any other rule would allow the purchaser in privity with the lienholder to defeat the lienholder's ability to rely on Sec. 1111(b) simply by conveying the property, and thereby destroying contractual privity. Furthermore, regardless of whether there is privity between them, the Chapter 11 debtor would have the same ability to cash out the lienholder's interest in the collateral property without giving the lienholder the opportunity to bid at a public sale. Section 1111(b) plainly was meant to avoid this result.
The bankruptcy court correctly determined that MBLI's lien against property of the Debtors' estate is a "claim" against the Debtors within the meaning of the Bankruptcy Code. See 11 U.S.C. Sec. 102(2) (" 'claim against the debtor' includes claim against property of the debtor"); Johnson v. Home State Bank,
Affirmed.
Notes
Honorable Robert C. Zampano, United States District Judge for the District of Connecticut, sitting by designation. Judge Zampano retired shortly after oral argument. Accordingly, the appeal was decided by the remaining two panel members pursuant to section 0.14 of the Local Rules of the Second Circuit