BR Brookfield Commons No 1 LLC et al v. Valstone Asset Management LLC in its capacity as Attorney in Fact for TS7-E Grantor Trust

Filing 8

ORDER signed by Judge J P Stadtmueller on 5/24/13: AFFIRMING the Bankruptcy Court's decision dismissing Appellants' objections to the Integrity claim; the Integrity claim shall be allowed against Appellants; and DISMISSING this appeal. (cc: all counsel)(nm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
B.R. BROOKFIELD COMMONS NO. 1, LLC,
and B.R. BROOKFIELD COMMONS NO. 2,
LLC,
Case No. 13-CV-310-JPS
Appellant,
v.
VALSTONE ASSET MANAGEMENT LLC,
in its capacity as Attorney-in-Fact for TS7-E
Grantor Trust,

ORDER

Appellee.

On March 18, 2013, the appellants, B.R. Brookfield Commons No. 1,
LLC, and B.R. Brookfield Commons No. 2, LLC (collectively, “B.R.”),
appealed a series of decisions of the United States Bankruptcy Court for the
Eastern District of Wisconsin dismissing B.R.’s objection to a claim of the
appellee, Valstone Asset Management, LLC (“Valstone”). On appeal, B.R.
asserts that the bankruptcy judges—this matter was initially decided by
Judge James Shapiro, and confirmed on a motion for reconsideration by
Judge Pamela Pepper—erred in overruling that objection by misinterpreting
the bankruptcy code. The Court disagrees, and affirms the decisions of the
bankruptcy judges.
1.

BACKGROUND
The facts before the bankruptcy court in the proceeding below are not

in dispute.

B.R. filed for Chapter 11 bankruptcy on June 10, 2011.1 It owns and
operates a shopping center in Brookfield, Wisconsin.
Valstone holds the first mortgage on that shopping center, and filed
a claim based thereon in the bankruptcy court for an amount exceeding
$9,300,000.00.
A third party, Integrity Development (“Integrity”), entered into a
second mortgage with B.R. for the principal sum of $2,500,000.00. That is,
B.R. borrowed $2,500,000.00 from Integrity and executed a promissory note
in favor of Integrity, agreeing to repay that principal. The shopping center
serves as collateral to secure that second mortgage. The parties’ promissory
agreement for this loan states that the debt is non-recourse; however, as
Valstone points out, there are a number of circumstances in which the debt
becomes a recourse debt.
After filing for bankruptcy, B.R. listed Integrity’s claim on Schedule
D. The shopping center’s appraised value at that time was less than the
entirety of Valstone’s $9,300,000.00 claim.2 As such, Integrity’s $2,500,000.00
claim is effectively unsecured, as it is not supported by any equity that is not

1

It should be noted that the current bankruptcy proceeding is not B.R.’s
first. Rather, after Judge Shapiro dismissed B.R.’s initial Chapter 11 petition as
having been brought in bad faith, B.R. re-filed for Chapter 11 bankruptcy one day
later. That matter was assigned to Judge Shapiro, who handled the proceedings
through the dismissal of B.R.’s objection to Valstone’s claim. Judge Pepper heard
a motion for reconsideration of that decision, having taken over the case after Judge
Shapiro’s retirement. After Judge Pepper denied the motion for reconsideration,
B.R. filed the immediate appeal.
2

There is some dispute as to the actual value of the shopping center, but that
dispute is immaterial for purposes of the appeal at hand.

Page 2 of 9

already securing Valstone’s claim. Nonetheless, Integrity assigned its claim
to Valstone, and Valstone continued to assert the claim against B.R.3
B.R., however, filed an objection to Integrity’s claim, arguing that it
should be disallowed as an unsecured claim, pursuant to 11 U.S.C.
§§ 502(b)(1) and 1111(b), on the basis of its being unsecured by equity in the
shopping center.
Judge Shapiro disagreed with B.R.’s contention and overruled its
objection. He then retired, resulting in B.R.’s bankruptcy case being
reassigned to Judge Pepper for further proceedings. Only after the matter
was reassigned did B.R. request reconsideration of Judge Shapiro’s decision.
On reconsideration, Judge Pepper confirmed Judge Shapiro’s previous
ruling, agreeing that B.R.’s objection to the Integrity claim should be
overruled and the Integrity claim allowed.
B.R. appealed these rulings, and the matter is now before the Court,
having been fully briefed by the parties and ripe for decision.
2.

Standard of Review
On appeal, a district court may affirm, modify, reverse, or remand a

bankruptcy court's judgment, order, or decree. Fed. R. Bankr.P. 8013. Factual
findings are reviewed under a clearly erroneous standard, and conclusions
of law are reviewed de novo. See, e.g., Fed. R. Bankr. P. 8013; In re Newman,
903 F.2d 1150, 1152 (7th Cir.1990).

3

For clarity, despite the $2,500,000.00 claim having been reassigned to
Valstone, the Court will continue to refer to it as the “Integrity claim.” As already
mentioned, Valstone asserted a separate and independent $9,300,000.00 claim
against B.R. Thus, to ensure that those two claims are not confused, the Court will
continue to refer to the smaller of the two claims, originally held by Integrity, as the
“Integrity claim.”

Page 3 of 9

3.

Analysis
Generally speaking, 11 U.S.C. § 502(b)(1) (“§ 502(b)(1)”) disallows

deficiency claims on non-recourse debts. The entirety of the Integrity claim
is a deficiency claim. Thus, the Integrity claim should be disallowed unless
the Court determines that it is either based upon a recourse debt or entitled
to some exception to § 502(b)(1)’s provisions.
Valstone spends a small portion of the brief arguing that the Integrity
claim is, in fact, based upon a recourse debt, and thus should entirely escape
disallowance. (Valstone Resp. at 3). Valstone bases that argument on the fact
that the Integrity loan contained a number of “carve-outs” or exceptional
cases in which the note was converted from non-recourse to recourse.
(Valstone Resp. at 3). Neither the bankruptcy judges nor the parties have
extensively addressed that issue, and the Court does not wish to address that
contention on the limited record before it.
Instead, the entirety of the briefing in this matter has focused upon an
exception to § 502(b)(1), which could apply to remove the Integrity claim
from the ambit of § 502(b)(1)’s disallowance: 11 U.S.C. § 1111(b)(1)(A)
(“§ 1111(b)(1)(A)”). That provision calls for claims “secured by a lien on
property of the estate [to] be allowed or disallowed under § 502…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.” 11 U.S.C.
§ 1111(b)(1)(A). The parties and bankruptcy judges below focused much
more of their effort on addressing whether that exception should apply to the
Integrity claim. Indeed, there is no question amongst the parties that the
application of this exception is dispositive. If the Court determines that the
exception applies, then the Integrity claim must be allowed; if, on the other

Page 4 of 9

hand, the Court determines that the Integrity claim does not fall under
§ 1111(b)(1)(A)’s terms, then the Court would be obliged to reverse the
bankruptcy judges’ decisions and disallow the claims.4
Thus, there is only one issue in this appeal: whether the Integrity
claim, being totally unsecured by equity in the shopping center, may be
treated as a recourse claim under § 1111(b)(1)(A), and accordingly allowed
under § 502(b)(1).
This Court is not the first to address this issue. The United States
Bankruptcy Court for the Northern District of Georgia previously considered
the question in 1988, and determined that totally-unsecured claims, such as
the Integrity claim at issue in this case, should be treated as recourse debts
under § 1111(b)(1)(A), and therefore allowed under § 502(b)(1). In re Atlanta
West VI, 91 B.R. 620, 623–24 (Bankr. N.D. Ga. 1988). The Bankruptcy Court for
the Southern District of Florida reached an opposite conclusion an 1993, but
did so in a much more cursory fashion than did the Atlanta West court. In re
SM104 Ltd., 160 B.R. 202, 216 (Bankr. S.D. Fl. 1993). The parties also cite to In
re Montgomery Ward, LLC, in which the Third Circuit held that § 1111(b)(1)(A)
does not convert a non-recourse mortgage to a recourse mortgage for nonbankruptcy purposes, but that case does not specifically address the
narrower issue of whether that exception should apply to unsecured
nonrecourse claims in the bankruptcy setting, which is the more precise

4

In reality, if the Court were to make such a determination, then the Court
would delve further into the issue of whether the Integrity loan is truly nonrecourse. However, the Court decides that § 1111(b)(1)(A) applies, and therefore
may avoid the much thornier issue of determining the recourse or non-recourse
status of the underlying Integrity loan.

Page 5 of 9

question that the Court is called upon to answer here. In re Montgomery Ward,
LLC, 634 F.3d 732 (3d Cir. 2011).
The Court will address those cases in greater detail, below, but notes
that it need not address them at all. This is an issue of statutory interpretation
and, therefore, the Court should look first to the plain meaning of the statute
in question. See, e.g., Emergency Servs. Billing Corp., Inc. v. Allstate Ins. Co., 668
F.3d 459, 465 (7th Cir. 2012) (Grzan v. Charter Hospital of Northwest Indiana, 104
F.3d 116, 122 (7th Cir.1997); Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117
S.Ct. 843, 136 L.Ed.2d 808 (1997)). Thus, to the extent that it determines the
meaning of § 1111(b)(1)(A) is clear, it need not look to the other authority
cited here, given that the authority is merely persuasive, as opposed to
mandatory.
The plain meaning of § 1111(b)(1)(A) is clear and unambiguous.
Section 1111(b)(1)(A) requires that claims secured by liens on property of the
bankrupt estate be treated as recourse claims “whether or not such holder
has such recourse.” In other words, regardless of whether the holder of a
claim has recourse under that claim, the § 502(b)(1) determination of
allowance or disallowance should be made as if the claim is a recourse claim,
so long as that claim is secured by a lien on estate property. The Court sees
no room for interpretation in that text. There is one prerequisite: the claim is
secured by a lien on property of the estate. If that prerequisite is satisfied,
then the claim is treated as a recourse claim for making the § 502(b)(1)
allowance or disallowance determination, regardless of whether the claimant
actually has recourse on that claim. On this point, the Court must note that
the language does not make any distinction between claims that are legally
undersecured and those that are legally unsecured, as the Integrity claim is
Page 6 of 9

in this case. Nor would such a distinction make any sense. It would be
entirely illogical to require that claimants have some recourse to claim an
interest; as Valstone points out, this would allow claims that are vastly
undersecured, even if they had only $1 of recourse remaining, but would
disallow those same claims if they were worth only $1 less, making them
entirely unsecured. That vast distinction would make a huge difference to
claimants, without any substantive reason to do so. But, even setting that
logical argument aside, the Court stands firm in its determination: the plain
meaning of § 1111(b)(1)(A) is clear and requires that any lien on property of
the bankrupt estate be treated as a recourse claim, regardless of whether the
claimant has recourse under it.
This reading of the language is confirmed by both Atlanta West and
Collier on Bankruptcy. The Atlanta West court held that the mere existence
of a lien on estate property triggers § 1111(b)(1)’s application, even if there
is no separate equity in the property to secure that lien. Atlanta West, 91 B.R.
at 624. In other words, “[t]he statute does not require that the lien on the
property be secured by value.” Id. Collier further confirms this, citing to
Atlanta West and several other bankruptcy cases for the proposition that “[i]t
is the existence of the lien that calls [§] 1111(b)(1) into play and not the
existence of value in the collateral.” 7 COLLIER

ON

BANKRUPTCY § 1111.03

(16th ed. 2012).
Under this interpretation, the Integrity claim should be treated as a
recourse claim, making it allowable under § 502(b)(1). Integrity obtained a
lien on the shopping center, which is property of the bankrupt estate. On that
basis alone, under the Court’s interpretation of the plain language of
§ 1111(b)(1)(A) and the rationale set forth in Atlanta West and Collier’s, the
Page 7 of 9

Integrity claim must be treated as a recourse claim, regardless of whether
Valstone has recourse under it.
Accordingly, the Court determines that both Judge Shapiro’s and
Judge Pepper’s respective opinions on the issue were correct and should be
affirmed. The Integrity claim is allowable against B.R., and it was appropriate
to dismiss B.R.’s objection to that claim.
The SM104 and Montgomery Ward cases do not change the Court’s
analysis or the outcome of this matter. The Court agrees with Judge Pepper
that the SM104 court’s § 1111(b)(1)(A) analysis is neither as extensive nor as
well-reasoned as the Atlanta West court’s analysis of the same. See, e.g., SM
104, 160 B.R. at 216. While the SM104 decision is extensive, the analysis of
§ 1111(b)(1)(A) is no more than a paragraph, and fails to address either the
statute’s plain language or the practical effect that its interpretation (barring
unsecured claims) would have upon claimants in other situations. Id.
Conversely, Atlanta West’s analysis on the issue is extremely well-reasoned.
It addresses the language of the statute, examines the intent of Congress in
enacting § 1111(b), and considers the practical effect of its interpretation.
Atlanta West, 91 B.R. at 623–24. As such, the Court believes that it should
afford the Atlanta West decision much greater persuasive weight than the SM
104 decision.
Additionally, the Montgomery Ward case is readily distinguishable, and
therefore should not be given any weight here. The Montgomery Ward court
discussed § 1111(b)(1)(A) in a much different context, analyzing whether the
statute actually changed a mortgage from a nonrecourse debt into a recourse
debt. Montgomery Ward, 634 F.3d at 740–41. The Montgomery Ward court
determined that § 1111(b)(1)(A) applied only within the bankruptcy process,
Page 8 of 9

allowing nonrecourse debts to be treated as recourse debts therein, but
having no effect on the debt itself. Id. (“Because we conclude that [§] 1111(b)’s
transformation is for distribution purposes only, we conclude that…the
mortgage remained nonrecourse.”) That holding does not apply here. Nor
does any portion of the Montgomery Ward decision even begin to broach the
question of whether an unsecured claim on property of a bankrupt estate
should be treated as a recourse claim under § 1111(b)(1)(A). The case is
entirely inapposite, and the Court affords it no weight.
4.

Conclusion
Having found that § 1111(b)(1)(A) operates to allow treatment of the

Integrity claim as a recourse debt, and that the two adverse cases cited by
B.R. should not change that analysis, the Court is obliged to affirm the
bankruptcy court’s decision below. It was appropriate to dismiss B.R.’s
objections to that claim.
Accordingly,
IT IS ORDERED that the bankruptcy court’s decision dismissing
B.R.’s objections to the Integrity claim be and the same is hereby AFFIRMED;
the Integrity claim shall be allowed against B.R.; and
IT IS FURTHER ORDERED that this appeal be and the same is
hereby DISMISSED.
The Clerk of the Court is directed to enter judgment accordingly.
Dated at Milwaukee, Wisconsin, this 24th day of May, 2013.
BY THE COURT:

J.P. Stadtmueller
U.S. District Judge
Page 9 of 9