The Section 1111(b) election is one of the most poorly understood provisions in the Bankruptcy Code. Bankruptcy Judge John E. Hoffman, Jr. of Columbus, Ohio, explained one of the circumstances when the right to make the election can be waived.
The debtor filed a chapter 11 petition to effect a going-concern sale of its coal mining operations. A secured creditor had a claim of $13.6 million secured by specified equipment. Judge Hoffman determined that the collateral was worth $12.7 million, leaving the creditor undersecured.
The undersecured creditor objected to the proposed bidding procedures. In particular, the creditor objected to requiring a buyer to bid on all of the assets to retain its rights to make the Section 1111(b) election. The creditor also objected to the preclusion of joint bids.
After negotiations, Judge Hoffman approved bidding procedures allowing the debtor to accept credit bids from joint bidders as long as they were bidding for all assets. The secured creditor agreed to the bidding procedures in writing, evidently believing at the time that it would locate someone with whom to submit a joint bid, including a credit bid based on its collateral.
As it turned out, the undersecured creditor did not find someone with whom to make a joint bid, and Judge Hoffman approved the sale to the stalking horse.
As Judge Hoffman explained, Section 1111(b) “affords an undersecured creditor the right to elect to have its entire claim treated as secured,” citing Section 1111(b)(2). However, he went on to say that the election “is unavailable if the property securing the claim ‘is sold under section 363 of [the Bankruptcy Code] or is to be sold under the plan,” citing Section 1111(b)(1)(B)(ii).
Facing the loss of the ability to make the election because its collateral was being sold, the creditor nonetheless filed a notice to take the election. The debtor objected.
Judge Hoffman sustained the objection in his August 8 opinion and struck the creditor’s election to have the claim treated as fully secured.
For starters, the secured creditor argued that the sale was in reality a disguised reorganization where the right to make the election would survive. Analyzing the record, Judge Hoffman ruled that the transaction was and always had been a sale, even though the stalking horse was a newly formed company consisting of the primary secured lender and the existing owners.
Next, the secured creditor relied on caselaw allowing a secured lender to retain the ability to make the election if it was precluded from credit bidding. Judge Hoffman did not reach the issue under Section 1111(b)(1)(B)(ii). He said the creditor had “clearly forfeited its right to credit bid on [its] Collateral without bidding on all of the assets . . . .”
If the secured creditor “wanted to preserve the right to credit bid on [its] Collateral without participating in [a bid] for substantially all the assets,” Judge Hoffman said, “it should not have signed on to the Agreed Bidding Procedures Order.”
Because the undersecured creditor had agreed in writing to the bidding procedures, Judge Hoffman said that the creditor “forfeited the argument that it is entitled to elect treatment under § 1111(b) because its credit bidding rights were not honored by the Debtors.”
The Section 1111(b) election is one of the most poorly understood provisions in the Bankruptcy Code. Bankruptcy Judge John E. Hoffman, Jr. of Columbus, Ohio, explained one of the circumstances when the right to make the election can be waived.
The debtor filed a chapter 11 petition to effect a going-concern sale of its coal mining operations. A secured creditor had a claim of $13.6 million secured by specified equipment. Judge Hoffman determined that the collateral was worth $12.7 million, leaving the creditor undersecured.
The undersecured creditor objected to the proposed bidding procedures. In particular, the creditor objected to requiring a buyer to bid on all of the assets to retain its rights to make the Section 1111(b) election. The creditor also objected to the preclusion of joint bids.
After negotiations, Judge Hoffman approved bidding procedures allowing the debtor to accept credit bids from joint bidders as long as they were bidding for all assets. The secured creditor agreed to the bidding procedures in writing, evidently believing at the time that it would locate someone with whom to submit a joint bid, including a credit bid based on its collateral.
As it turned out, the undersecured creditor did not find someone with whom to make a joint bid, and Judge Hoffman approved the sale to the stalking horse.