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By: Andrew J. Olejnik and Abraham M. Salander
In In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596 (7th Cir. 2013) (No. 13-2241), the Seventh Circuit allowed a secured creditor’s claim against the debtor under Section 1111(b)(1)(A) of the Bankruptcy Code, even though the creditor’s loan was non-recourse and out-of-the-money. The secured creditor held a second mortgage on a shopping center whose value was insufficient to pay the first mortgage in full. As part of its reorganization plan, the debtor elected to retain ownership of the shopping center. Evaluating what was a question of first impression in the Seventh Circuit, the court determined that, under the plain meaning of Section 1111(b)(1)(A), a claim secured by a valid lien must be allowed or disallowed under the Bankruptcy Code as if the claim holder had recourse against the debtor. The court explained that to disallow a non-recourse loan that appeared worthless based on a judicial valuation would unfairly eliminate the possibility of the creditor benefiting from an unanticipated post-valuation appreciation of the property and could potentially give the debtor a significant windfall. Notably, if the debtor had sold the property, rather than retaining it, the second mortgagee would not have had the same protection and instead would have been limited to recovering only from the proceeds of the sale of the collateral.