Chapter 11 Claim: Nonrecourse + No Equity = Disallowed Claim… Or Maybe Not

In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596 (7th Cir. 2013) –

A chapter 11 debtor sought to disallow the claim of a second mortgagee that held a nonrecourse loan that was totally underwater (i.e., the property was worth less than the first mortgage). The bankruptcy and district courts held that the claim should be allowed, and the debtor appealed to the 7^th Circuit.

The debtor owned a shopping center that was subject to a first mortgage of ~$8.9 million and a second mortgage of ~$2.5 million. Although the property had not yet been valued, all parties expected that the value would be less than the amount of the first mortgage. Consequently, although the second mortgage constituted a valid lien on the property, it was not secured by any value.