Pub. 3 2013 Issue 4

6 www.azbankers.org 111 West Monroe, Suite 440 Phoenix, Arizona 85003 Phone: (602) 258-1200 • Fax: (602) 258-8980 AzBA BOARD OF DIRECTORS 2012-2013 Lynne Herndon, Chairman City President BBVA Compass Bank Mike Thorell, Chairman-Elect President Pinnacle Bank Benito Almanza, Vice-Chair Arizona President Bank of America James Lundy, Immediate Past Chairman CEO Alliance Bank of Arizona Toby Day Arizona President Arizona Business Bank Stephen Johnson President & CEO, Arizona BMO Harris Bank Chuck Luhtala President Canyon Community Bank Dave Ralston CEO Bank of Arizona Brian Riley President & CEO Mohave State Bank Joseph Stewart Chairman & CEO, Arizona JPMorgan Chase Bank, N.A. Gerrit Van Huisstede Regional President Wells Fargo Bank Candace Wiest President & CEO West Valley National Bank Jack Barry Chairman & CEO, Arizona Region Enterprise Bank & Trust AzBA Staff Paul Hickman President & CEO Jan Arredondo Director, Administration Theresa Kleinlein Director, Marketing and Member Services The § 1111(b) Election in Chapter 11 Reorganizations: An Option All Undersecured Lenders Should Consider By Christian C.M. Beams and Alissa A. Brice I f you’ve been a banker longer than five years, see if this sce- nario sounds familiar. Your borrower defaults on a loan, and the collateral you thought safely secured it at origination is worth far less than the loan amount today. The borrower – the confident one with the can’t-miss business plan back then – is broke, has consulted its friendly neighborhood bankruptcy attorney, and is now a Chapter 11 debtor. And as these proceedings wear on, you learn that your defaulting customer intends to seek confirmation of a “cram down” plan of reorganization that will pay your bank far less than what was bor- rowed. Your lawyer has explained to you that such “cram down” plans are routinely confirmed if certain requisites are met, and making things even less comfortable, tells you that the “cram down” prospects are good in this par- ticular scenario. It is time to consider the § 1111(b) election. Section 1111(b) is one of the least understood provisions of the Bankrupt- cy Code, but its potential impact on undersecured creditors is significant. Generally, an undersecured creditor’s claim is “bifurcated” – that is, its claim is considered “secured” up to the value of the collateral and “unsecured” as to the balance. But under § 1111(b)(2), an undersecured creditor may elect to have its entire claim treated as secured. In other words, the creditor under this provision can elect to receive payments over time equal to the full amount of its claim, and keep its original lien on the collateral until paid in full. COUNSELOR’S CORNER