Why make 1111(b) election

In a sale, the non recourse secured creditor gets only the net proceeds and faces the risk that the collateral will not be sold for a fair price or will be sold at a low point in its market value. The undersecured creditor recourse or nonrecourse is protected, however, by section k of the Bankruptcy Code, which requires that the secured creditor be given the opportunity to credit bid at the sale. Thus the creditor may help bid up the sale price or acquire the collateral if it prefers to hold the collateral itself.

There is a cost: making the election deprives the undersecured creditor of any benefit from a distribution to unsecured creditors of the class into which the debtor would put the claim in its plan. In exchange, the creditor that made the section b 2 election is thus assured that the plan will not be able to cash out its interest without paying the secured claim in full. But section b 2 cannot save all undersecured creditors from perdition. Secured lenders facing undervaluation of their collateral and receiving too little under a plan may initially resist salvation in the form of waiving what can be a substantial chunk of their total claim.

As a result, the lender may get relief from the automatic stay and foreclose upon the collateral. This is an updated version of an article originally published on April 14, CRR Bankr. But this bifurcation of the claim based on a current valuation of the real estate may result in substantial unfairness to the real estate lender if the property recovers some of its pre-COVID value, or even increases dramatically in value, over the period of repayment provided by the plan.

This unfairness caused by temporary declines in value is addressed by the Bankruptcy Code in Section , which suffers from confusing language but in plain English works as follows. This Section b election by the real estate lender is not cost-free to that lender. It also gives up the leverage regarding plan terms afforded to a large unsecured creditor.

In short, the post-COVID environment is ripe for Chapter 11 cases in which claims secured by real estate can be adjusted downward based on current valuations of many classes of commercial properties.

See more ». This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. This can be particularly valuable where the creditor believes there is a high likelihood of the debtor defaulting under the plan.

Third, it entitles the creditor to specific plan treatment. If the collateral is real property, many courts would likely conclude that such treatment is fair and equitable. Similarly, in cases where the creditor making the election is the largest creditor in the case and is projected to have a substantial deficiency claim, it may be preferable to forego the election in order to be in a position to carry the vote of the general unsecured class.

This may put the creditor in a position to block confirmation and leverage more favorable plan treatment from the debtor. Once the hearing has been concluded, it would be too late for a secured creditor class to demand different treatment unless the court has fixed a later time.

Generally it is important that the proponent of a plan ascertain the position of the secured creditor class before a plan is proposed. The proponent of the plan is thus enabled to seek approval of the disclosure statement and transmit the plan for voting in anticipation of confirmation.

Only if that plan is not confirmed may the class of secured creditors thereafter change its prior election.