Pub. 3 2013 Issue 4

7 FALL 2013 Sound too good to be true? Like most legal analyses, there are strategic downsides to think through. First, a creditor who makes the § 1111(b) election no longer has an unsecured claim and is not part of the unsecured class. Often this unsecured claim is so large that the undersecured creditor has the power to block confirmation of a Chapter 11 plan by voting to reject the plan with the unsecured class. By giving up its unsecured claim, a creditor might lose its ability to block the plan (and thus lose significant leverage). Further, whether making the election will increase an undersecured creditor’s recovery depends on the value of the collateral and the treatment of unsecured creditors under the Chapter 11 plan. A Chapter 11 plan must provide that unse- cured creditors receive as much as they would in a Chapter 7 liquidation – which is often a very small percentage of their claims. Generally, if the distribution to unsecured creditors is nominal, it is wise to make the election. Additionally, if the creditor believes the value of its collateral will increase going forward (e.g., real property that will go up as the mar- ket improves), it might make more sense to take the election. Consider the following example. A secured creditor has a $5 million claim against collateral worth only $3 million. Without the election, the debtor must pay the creditor $3 million with reasonable interest over a reasonable amount of time. The remaining $2 million is paid pro rata with the other unsecured creditors. If the unsecured creditors receive 70 cents on the dollar, a creditor will be more inclined to not take the election, com- pared to a plan under which the unsecured creditors receive ten cents on the dollar. If the creditor takes the election, then the payments under the Chapter 11 plan must equal $5 million, but can be strung out over a far longer period of time. The creditor retains its $5 million lien until paid in full, but does not get to vote with the unsecured class. In short, when you are tasked with enforcing an under- secured bankruptcy claim, or even have a non-performing, undersecured loan in which you believe a bankruptcy is forthcoming, considering the virtues of the § 1111(b) elec- tion should be part of your strategic and decision making processes. w For more information contact Christian C. M. Beams at (602) 440-4818; cbeams@rcalaw.com . Chris is a share- holder in the bankruptcy, lending and commercial liti- gation practice groups at Ryley Carlock & Applewhite. Alissa A. Brice is an associate in the bankruptcy and lending practice group. Her phone number is 602- 440-4863 and email is abrice@rcalaw.com. De Rito Partners, Inc - Arizona’s largest full-service retail brokerage operation with 33 seasoned brokers specializing in property leasing, sales, and tenant representation. De Rito Partners Development, Inc - Specializing in the development and redevelopment of select retail and mixed-use properties. Currently redeveloping 1.1 million sq ft at The Pavilions at Talking Stick (formerly Scottsdale Pavilions), the company creates retail environments for shoppers; merchants, communities and investors, and has developed 19 first-class retail and auto properties totaling more than 5 million square feet throughout the Greater Phoenix area. De Rito Opportunity Investors, LLC - Specializing in acquisitions of distressed properties and value-added properties. In the last 40 months, we have purchased 39 retail assets with plans to purchase 10 more this year in Arizona and Nevada. De Rito Property Management, LLC - Offering premier-quality property management services for internal retail properties of any size. Currently managing 35 properties totalling over 1.7 million square feet. VISIT US ON THEWEB De Rito Partners, Inc - Stan Sanchez De Rito Partners Development, Inc - Chuck Carlise De Rito Opportunity Investors, LLC - Iver Bowden De Rito Property Management, LLC - Doug Himmelberger The Pavilions At Talking Stick - Matt Morrell www.ThePavilionsAtTalkingStick.com www.DeRito.com 3200 E. Camelback Road, Suite 175 Phoenix, Arizona 85018 480-834-8500 Call Us At: