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In re B.R. Brookfield Commons No. 1 LLC

United States Court of Appeals, Seventh Circuit

November 4, 2013

In re B.R. BROOKFIELD COMMONS NO. 1 LLC, et al., Debtors-Appellants.

Argued Sept. 13, 2013.

Page 597

Jeffrey Dan, Crane, Heyman, Simon, Welch & Clar, Chicago, IL, David B. Goroff, Foley & Lardner, LLP, Chicago, IL, Ann Marie Uetz, Foley & Lardner LLP, Detroit, MI, for Debtors-Appellants.

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 agreement [1] 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.

Page 598

Brookfield's election required the bankruptcy court to establish a judicial value for the Brookfield Property by means of independent appraisals. Though a judicial valuation for the Brookfield Property has not yet been established, both Brookfield and ValStone expect that the value will be less than the amount of the first mortgage. So, absent a significant and unexpected increase in value, the Integrity Claim, which is second in priority, will be totally unsecured by any equity in the Brookfield Property.

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 11 U.S.C. § 1111(b) allows ValStone to pursue a deficiency claim against Brookfield. ValStone, on the other hand, argues that 11 U.S.C. § 1111(b)(1)(A) treats its nonrecourse Integrity Claim as if it had recourse, and its unsecured deficiency claim should be allowed.

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 ...


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