Vanderbilt Law Review

First Page



For better or for worse, bankruptcy law generally recognizes secured creditors' state law rights in collateral. The decision to honor secured creditors' state law interests and the need to modify those interests in bankruptcy generate an essential tension of bankruptcy law. Much of the Bankruptcy Act's complexity and several of its most controversial provisions arise from congressional efforts to resolve this tension.

In trying to walk the fine line between taming and preserving secured creditors' rights, Congress created one of the most extraordinary provisions in the history of bankruptcy law. Section 1111(b) of the Bankruptcy Act of 19781 suspends two fundamental rules of debtor-creditor law. This provision allows an under secured claim to be treated as a fully secured claim and deems nonrecourse debt to be recourse debt.'

Congress enacted section 1111(b) in response to a bankruptcy court decision perceived as overly favorable to debtors and thus unfavorable to secured creditors. In that decision, In re Pine Gate Associates, the court allowed a reorganizing debtor to pay under-secured nonrecourse creditors the appraised value of collateral, to retain the collateral for use in reorganization, and to sever the secured parties' interests in the collateral. Under Pine Gate, therefore, the under secured creditors would not receive full payment and would have no continuing interest in the asset. In a nonbankruptcy setting, by contrast, the under secured creditors could be en-titled to the collateral itself unless they were paid in full.

Most commentators who understand the Bankruptcy Act's confirmation standards have not questioned the premises of section 1111(b) and treat the provision as a reasonable effort, if sometimes technically awkward or flawed,' to correct the Pine Gate problem. This Article explores that problem and section 1111(b)'s effect on it within the larger scheme of bankruptcy law.

Part II of this Article describes other bankruptcy rules that must be understood before analyzing section 1111(b)'s operation.Part III examines the Pine Gate decision and attempts to define the problem that it created and that led to Congress' enactment of section 1111(b). Analysis suggests that the Pine Gate problem does not differ from many other valuation problems that arise in bankruptcy. Accordingly, this problem is no more in need than they are of extraordinary remedial measures such as section 1111(b). Taking the analysis one step further, part IV discusses the Pine Gate problem's relation to the nature of security and the objectives of bankruptcy policy. Although section 1111(b) reflects a view of security in bankruptcy based on a secured creditor's in rem rights to collateral under state law, this approach is only one view of the nature of security in bankruptcy.