IN RE GOPP, (Bankr.D.Wyo. 1994)

PETER McNIFF, United States Bankruptcy Judge.

THIS MATTER is before the court on an election under 11 U.S.C. § 1111(b) taken by the Stockgrowers State Bank and an objection to that election filed by the debtors, Donald R. Gopp and Vicky A. Gopp. At a hearing held April 12, 1994, the debtors personally appeared with their attorney, Stephen R. Winship. The bank was represented by Thomas C. Bancroft. Now, the court having heard the arguments of the parties, and having considered the testimony and materials on file, renders its decision.

FINDINGS OF FACT

Donald and Vicky Gopp (Gopps) are the debtors and the debtors in possession in this chapter 11 case. The business which they seek to reorganize is an electrical contracting business. However, the property which is the subject of this § 1111(b) dispute is their residence located in Worland, Wyoming.

Stockgrowers State Bank (SSB) is a secured creditor of the Gopps. The security for the debt consists of liens on two (2)

vehicles and a small amount of inventory, and a second mortgage on the Gopps' residence. The first mortgage is held by the Resolution Trust Corporation as Conservator for Standard Federal Savings Association. The parties represented that the RTC's secured claim is $65,011, although the proof of claim the RTC filed is slightly higher.

The Gopps and SSB agreed to obtain an appraisal of the residence for purposes of valuation under 11 U.S.C. § 506. The property was appraised at $76,500. That figure is the amount used by both parties at the hearing on this matter, although various adjustments were also argued.

The parties calculated the value of SSB's interest in the real estate as follows:

Value of real estate: $ 76,500

minus RTC lien: 65,011 ___________ value of bank's lien: $ 11,489

As of the petition filing date, SSB's claim is $81,830.78. The Gopps propose a surrender of the vehicles and inventory to SSB in partial satisfaction of the debt. Collectively, the value of that collateral is $2,675. After surrender of this miscellaneous collateral, SSB's claim will be $79,155 for purposes of the § 1111(b) election and any plan payments.

The Gopps' chapter 11 plan of reorganization treated SSB's claim as partially secured in the amount of $11,489, the present value to be paid, with interest over 20 years. The remaining unsecured deficiency claim was included in Class 6 with the other unsecured claims. After reviewing the plan, SSB filed an election under § 1111(b)(1)(A)(i). Whether SSB's interest in the real property is of inconsequential value is the issue before the court.

CONCLUSIONS OF LAW

Generally, a holder of an undersecured claim in a chapter 11 case has two (2) options with regard to treatment of its claim. The creditor's claim may be bifurcated under § 506 and treated as partially secured, with the deficiency portion separately classified. Or the creditor may elect, under certain circumstances, to have its entire claim treated as fully secured. 11 U.S.C. § 1111(b)(1)(A)(i) (b)(2). Section 1111(b)(2) provides that "notwithstanding section 506(a) of this title, such claim is a secured claim to the extent such claim is allowed." When the creditor elects nonrecourse status, the creditor waives its unsecured deficiency claim and its unsecured voting rights.

The right to election under § 1111(b) is limited by the Code in two (2) circumstances: when the creditor's interest in the property is of inconsequential value, or when the property is sold under § 363 or under the plan. 11 U.S.C. § 1111(b)(1)(B)(i) (ii). In this case, the Gopps contend that SSB's interest in their residence is of inconsequential value, precluding the election.

The Code does not define or provide specifics to aid in determining how little value is equivalent to inconsequential value. obviously, a lien of no value is of inconsequential value. See, e.g., In re 500 Fifth Ave. Assoc., 148 B.R. 1010, 1016 (Bankr.S.D.N.Y. 1993), aff'd, 1993 WL 316183 (S.D.N.Y. 1993).

In this case, SSB's interest in the residence clearly has some value. In fact, about 15% of the stipulated value is encumbered by SSB's lien.

However, Gopps urge the court to ignore the stipulated appraisal and, instead, to value the property using a liquidation or costs of disposition method. By deducting projected sale costs of 10%, the appraised value is reduced with a consequent reduction in the value of the lien to $3,839. This, Gopps allege, is a lien (or interest) of inconsequential value.

In support of their argument, Gopps direct the court's attention to the case of In re Wandler, 77 B.R. 728 (Bankr.D.N.D. 1987). In Wandler, the court compared the amount of the lien to the total amount of the claim and held that the resulting 4% ratio was of inconsequential value. Accordingly, the election was denied.

Using the Gopps' figures in this case, such a comparison gives a result of 3839/78155 or 4.8%.

For purposes of § 1111 (b), the Code does not require the court to value the property, but only to decide whether the amount of the lien is of inconsequential value. In re Tuma, 916 F.2d 488, 491 (9th Cir. 1990). This is significant because the Code permits the court to take all factors of the case into account, rather than applying an arbitrary test which may be too limiting. For example, the Wandler court compared the value of the lien to the total claim, but failed to consider the value of other collateral which also secured the total claim. Consequently, the ratio was not even accurate in that case.

Other factors appear to have influenced the Wandler court as well. The collateral involved there was depreciating personal property, and the amount of the creditor's claim was quite large. Hence the long term payout of the allowed claim was clearly more than could be amortized in a feasible plan.

But the defining test applied by that court was whether the total amount of the allowed claim exceeded the present value of the collateral. Because it did, that court would not allow a § 1111(b) election. However, such an analysis effectively reads the § 1111(b) election out of the Code and misconstrues the confirmation requirements. Consequently, this court does not find the reasoning in Wandler persuasive.

Even if the Wandler case were applicable, the facts in the Gopps' case are different. The collateral is appreciating real estate and the appraisal was made at a time when the market was close to its lowest point in recent years. The allowed claim is not so great that a long term payout is clearly impossible. Finally, the percentage of the lien value to the claim amount exceeds 4% under any suggested method.

While there may well be circumstances in which some minimal value is equivalent to inconsequential value, this is not such a case. The bank meets the criteria of the Code to make its own election. Therefore, the court holds that SSB's lien, under the facts of this case, is not of inconsequential value.

Gopps also raise other arguments to persuade the court that the election should be denied. For example, again relying on Wandler, Gopps contend that allowing the § 1111(b) election will unfairly discriminate against the unsecured creditors. The cramdown provisions of 11 U.S.C. § 1129(b)(1) provide that a reorganization plan shall be confirmed if it does not discriminate unfairly, and is fair and equitable "with respect to each class of claims . . . that is impaired under, and has not accepted, the plan." (Emphasis provided). To assume that the plan cannot discrimate between a secured class (SSB) and the unsecured class misreads the Code. Furthermore, whether the unsecured class will be impaired and will vote to reject the plan remains to be seen.

Finally, Gopps argue that allowing the election gives SSB a plan confirmation veto which is not intended by the Code. For this proposition, Gopps misapply the case of In re Triple R Holdings, L.P., 134 B.R. 382, 389 (Bankr.N.D.Cal. 1991), rev'd on other grounds, 145 B.R. 57 (N.D. Cal 1992). The bankruptcy court was concerned about an undersecured creditor's threat to split its claim under § 1111(a) in such a way that its vote could control the unsecured class and veto the plan. The creditor's recourse status and claim classification were the issues there.

The issue in Triple R. Holdings, whether to separately classify deficiency claims and other unsecured creditors, is frequently litigated lately. In re D W Realty Corp., 165 B.R. 127, 129 (S.D.N.Y. 1994). Those cases are inapposite and, on policy issues, are simply not applicable here.

These issues of plan discrimination, the alleged veto power of SSB, or whether the Gopps can propose a feasible or confirmable plan incorporating the SSB's § 1111(b) election are raised prematurely. The Gopps have not yet proposed a plan incorporating the § 1111(b) election. They have not negotiated with SSB or proposed a payment period. To the court's knowledge, a sale or surrender of the collateral has not been considered. In other words, until a plan of reorganization is before the court, the court cannot rule on whether such a plan is confirmable.

In sum, the court finds that the facts of this case do not support a finding of inconsequential value denying Stockgrowers State Bank its right to the election. Accordingly, it is ORDERED that the objection of the debtors to the § 1111(b) election is overruled.