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Copyright (c) 1996 Emory University School of Law
Emory Bankruptcy Developments Journal

ARTICLE: THE 1111(b)(2) ELECTION: A PRIMER

Winter, 1996

13 Bank. Dev. J. 99

Author

Steven R. Haydon *, Steven R. Owens **, Thomas J. Salerno ***, Craig D. Hansen ****

Excerpt



I. Introduction

When a secured creditor whose collateral has declined in value suffers the unpleasant circumstance of having its borrower file for a chapter 11 reorganization under the Bankruptcy Code, 1 that undersecured creditor 2 will be faced with the decision whether to make the "election" provided by 1111(b)(2) of the Code as part of the plan confirmation process. Depending upon the nature of the particular debt and security held by the creditor, and the debtor's overall debt structure, this election can have significant economic as well as legal consequences for both the creditor and debtor. Consequently, the decision to make the election is as much a business decision as a legal one for the creditor.

From a business standpoint, the decision whether to make the 1111(b)(2) election will greatly affect the ultimate economic return to the creditor. From a legal standpoint, the 1111(b)(2) election can be one of the most powerful weapons in a creditor's arsenal of bankruptcy strategies, with a substantial impact on a debtor's ability to reorganize. The effect of the election can be so profound because the decision whether to "elect" determines the particular treatment that must be accorded the undersecured creditor under the proposed plan of reorganization. Consequently, the 1111(b)(2) election has significant implications for a debtor's ability to confirm a proposed plan, including the ability to effect a "cramdown" 3 under the confirmation standards of 1129.

Unfortunately, but understandably, 1111(b) 4
 
 
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