Tampa Bay Associates, Ltd., Matter of, 88-1517

• Decision Date: 26 January 1989
• Docket Number: No. 88-1517,88-1517
• Citation: 864 F.2d 47
• Parties: In the Matter of TAMPA BAY ASSOCIATES, LTD., Debtor. TAMPA BAY ASSOCIATES, LTD., Appellant, v. DRW WORTHINGTON, LTD., d/b/a Worthington Park I, Appellee. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 47

864 F.2d 47

19 Bankr.Ct.Dec. 97

In the Matter of TAMPA BAY ASSOCIATES, LTD., Debtor TAMPA BAY ASSOCIATES, LTD., Appellant, v. DRW WORTHINGTON, LTD., d/b/a Worthington Park I, Appellee.

No. 88-1517

Summary Calendar.

United States Court of Appeals Fifth Circuit.

Jan. 26, 1989.

Leland C. de la Garza, E. Eldridge Goins, Jr., Goins, Underkofler, Crawford & Langdon, Dallas, Tex., for appellant.

Kathryn C. Mallory, Mark X. Mullin, Haynes & Boone, Dallas, Tex., for appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before CLARK, Chief Judge, JOHNSON and JOLLY, Circuit Judges.

E. GRADY JOLLY, Circuit Judge:

In this case we are asked to consider whether the bankruptcy court and district court for the Northern District of Texas erred in disallowing Tampa Bay Associates, Ltd. ("Tampa Bay") an unsecured deficiency claim against DRW Worthington, Ltd. ("the Debtor") under Chapter 11 section 1111(b) of the Bankruptcy Code after Tampa Bay, an undersecured, nonrecourse creditor, foreclosed its security interest in the Debtor's collateral. Finding that the district court properly held that Tampa Bay was not entitled to a recourse unsecured claim against the Debtor, we affirm.

I

Between March 25, 1985 and May 31, 1985, ninety-five related general and limited partnerships filed voluntary petitions in bankruptcy court, seeking protection under Chapter 11 of the Bankruptcy Code. Donald Walker, a Dallas real estate developer and syndicator, was a general partner in each, and each partnership also had at least one corporate general partner, consisting of a corporation whose stock is wholly owned by Walker. Each partnership owned an apartment complex or an office building as its sole asset.

When bankruptcy proceedings began, the ninety-five Walker partnerships owned approximately eighty-three apartment complexes and office buildings in seven states, which secured in the aggregate approximately $255 million in indebtedness to about three hundred secured creditors.

Upon filing the bankruptcy petitions, the Walker partnerships stopped making monthly debt service payments to their secured lenders. The lenders immediately filed applications with the bankruptcy court to prevent the partnerships from using the lenders' "cash collateral" in the form of rental receipts to operate the properties, and requested that the court modify the automatic stay provisions of the Bankruptcy Code to allow the secured lenders to accelerate their indebtedness and foreclose their liens on the properties.

The court refused to lift the automatic stay in situations in which the debtors were able to make periodic cash payments as adequate protection, but forty-seven partnerships were unable to comply with the terms of the court's adequate protection orders and had their sole assets foreclosed upon or abandoned to their secured creditors. Many of the secured creditors who foreclosed were unable to receive full payment at their foreclosure sales, and asserted "deficiency claims" against their debtors for the shortfall. Many of the secured creditors who claimed a deficiency, however, had lent money to their debtors on a nonrecourse basis. Thus by the terms of their mortgage documents they had agreed to look solely to the real property mortgaged as collateral for repayment in the event of default, and waived the right to proceed against the makers of the notes under personal or corporate liability for any deficiency.

On March 29, 1985, the bankruptcy court entered an order procedurally consolidating the partnerships in accordance with Bankruptcy Rule 1015(b). On November 26, 1985, after the consolidation, the ninety-five partnerships filed a single Proposed Joint Disclosure Statement and Plan of Reorganization. One creditor, Treehouse Associates Limited Partners ("Treehouse") specifically objected to the disclosure statement on the grounds that it improperly denied unsecured deficiency claims to the undersecured nonrecourse creditors of the debtors because section 1111(b) of the Bankruptcy Code operated to transform those creditors' nonrecourse claims into recourse claims against the debtors, even where the lenders' collateral had been abandoned or foreclosed during the pendency of the Chapter 11 bankruptcy proceeding. A disclosure statement hearing was held on January 15, 1986, and on February 21, 1986 the bankruptcy court in Matter of DRW Property Co. 82, 57 B.R. 987 (N.D.Tex.1986) overruled Treehouse's objection. On March 4, 1986, the bankruptcy court confirmed the Debtor's Third Amended Joint Plan of Reorganization, which provided for the payment of all allowed unsecured claims.

Tampa Bay, the appellant in the case before us, had the misfortune to be an undersecured, nonrecourse creditor of one of the ninety-five Walker partnerships, DRW Worthington, Ltd., at the time it filed its petition in bankruptcy. The Debtor had had as its sole asset the Worthington Park I Apartments. On April 5, 1985, Tampa Bay filed a motion seeking relief from the automatic stay to permit it to foreclose its security interest in the apartment property. The stay was lifted and Tampa Bay subsequently foreclosed.

On April 7, 1986, Tampa Bay filed a proof of claim seeking to recover the principal of $3,825,000, plus interest, from the Debtor. On August 26, 1986 the Debtor filed its objection to Tampa Bay's claim on the basis that Tampa Bay's claim had been fully satisfied by the return of its collateral during the bankruptcy proceeding. On October 8, 1986, after foreclosure and sale, Tampa Bay filed an amended proof of claim, seeking payment of its deficiency of $1,169,204.15. The bankruptcy court disallowed Tampa Bay's deficiency claim in its entirety on January 27, 1988, on the grounds that a nonrecourse, undersecured creditor waives its right to recourse status under section 1111(b)(1)(A) by obtaining possession of its collateral pursuant to a motion for relief from stay or motion for abandonment. The court cited Matter of DRW. On appeal, the district court affirmed the bankruptcy court's ruling.

On appeal to this court, Tampa Bay argues that its foreclosure on the Worthington apartments during the pendency of bankruptcy proceedings does not operate to waive its right to a recourse unsecured claim under section 1111(b)(1)(A) of the Bankruptcy Code. According to Tampa Bay, because section 1111(b) provides only two express exceptions to the recourse status afforded to otherwise nonrecourse creditors, and a foreclosure sale is not a stated exception, Tampa Bay is allowed a recourse unsecured claim against the Debtor under section 1111(b).

II

Section 1111(b) reads in relevant part as follows:

(1)(A) A claim secured by a lien on a property of the estate shall be allowed or disallowed under section 502 of this title [11 U.S.C. Sec. 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, unless:

....

(ii) such holder does not have such recourse and such property is sold under section 363 of this title [11 U.S.C. Sec. 363] or is to be sold under the plan.

(Emphasis added.) ¹

Section 1111(b) establishes the general rule, with exceptions, that a claim in a Chapter 11 case secured by a lien on property of the bankrupt estate is to be allowed against the debtor, as if the claimant had recourse against the debtor, whether or not by contract or under applicable state law the creditor had that recourse. The section was enacted by Congress to cure the harsh result of Great National Life Ins. Co. v. Pine Gate Associates, Ltd., 2 B.C.D. 1478 (Bankr.N.D.Ga.1976). In Pine Gate, a limited partnership whose sole asset was an apartment project financed on a...