§ 1111(b) Election’s Two-Step For Confirmation (In re Topp’s Mechanical)

Election (photo by Marilyn Swanson)

By: Donald L Swanson

A new Bankruptcy Court opinion applies the § 1111(b) election and its two-step test in the context of a Subchapter V plan confirmation.

The opinion is In re Topp’s Mechanical, Inc., Case No. 21-40038, Nebraska Bankruptcy Court (issued November 23, 2021, Doc. 94). 

What follows is an attempt to summarize the In re Topp’s opinion.


Under-secured Creditor makes an 1111(b) election, and Debtor’s plan proposes a stream of payments in response to that election.  

Subchapter V Trustee objects to the plan:

  • under § 1191(b) because the unsecured class, (i) has not accepted the plan, and (ii) is impaired under the plan; and
  • under § 1191(c) because the plan is not fair and equitable for the non-accepting unsecured class.

Specifically, the Trustee argues that debtor’s disposable income—and, therefore, distributions to unsecured creditors—is artificially low because plan payments to Creditor are excessive.


Judge Saladino sustains the Trustee’s objection and denies confirmation like this:

  • Debtor’s plan proposes to pay Creditor far more than Creditor is entitled to receive as a result of its 1111(b) election;
  • So, there is less money available to pay to unsecured creditors; and
  • As a result, the plan discriminates unfairly and is not fair and equitable to the class of unsecured creditors.

Creditor’s Claim

 $3,763,611.81   Total amount of Creditor’s claim

($2,123,694.91)  Less total value of Creditor’s collateral

 $1,639,916.90    Balance of Creditor’s under-secured claim

Plan Provisions

Debtor’s plan proposes, because of Creditor’s § 1111(b)(2) election, to pay Creditor’s claim in three separate components, each of which balloons after five years:

  1. $1,224,821.76 amortized over 40 years at 5.25% interest;
  2. $   898,873.12 amortized over 10 years at 5.25% interest; and
  3. $1,639,916.93 amortized over 40 years at 0.00% interest.

That means Creditor will receive plan payments totaling $4,266,520.98—which amount is $502,909.17 more than Creditor’s $3,763,611.81 total claim.

Debtor’s plan also proposes that the non-consenting class of unsecured creditors will share three years of payments, that begin two years after the plan’s effective date, totaling $26,019.

Sec. 1111(b)(2):

  • allows a partially secured creditor to waive its unsecured deficiency claim and have its entire debt treated as a secured claim;
  • is designed to protect a creditor against the combination of, (i) a valuation of its collateral, at confirmation, when the market is temporarily depressed, and (ii) a subsequent sale of the collateral, when values rebound, for a windfall to the debtor;
  • allows the the creditor to guard against such an opportunistic sale by retaining a lien equal to the full amount of its claim, albeit without interest; and
  • prevents an electing creditor from participating in the unsecured creditor class but gives that creditor the benefit of any post-confirmation appreciation of its collateral.

Here’s how § 1111(b) functions:

  • once an 1111(b) election is made, the under-secured portion of the creditor’s claim is reduced to zero—but the creditors’ lien is retained for the full amount of its claim;
  • if the collateral is returned to the lender, the lender’s claim is satisfied in full; but
  • if debtor retains the collateral, debtor’s payments to the creditor must meet this two-step test: (i) have a present value equal to the value of the collateral, and (ii) equal the amount of creditor’s debt;

Subchapter V confirmation standards give under-secured creditors additional factors to consider before committing to a § 1111(b) election, making such decisions subjective and case-specific.


Trustee argues that, (i) Debtor’s plan would pay Creditor half a million dollars more than required, and (ii) such over-payment comes, unfairly, at the expense of unsecured creditors.

In response, Creditor argues it will not receive a windfall, since it is receiving only what Congress intended by enacting § 1111(b).

Issue, Ruling and Conclusion

Judge Saladino identifies the issue like this:

  • the interest component of Creditor’s claim is the determining factor in this case; and
  • the question is whether interest payments on the present value of the collateral (first part of the two-step test) count toward total payments owed to the electing creditor (second part of the two-step test).

He rules that interest payments on an allowed secured claim under a § 1111(b) election serve a dual purpose: (i) providing present value to creditor, and (ii) counting toward payment of creditor’s total allowed claim.   

And he concludes that:

  • under Debtor’s plan, Creditor will receive an “excess payment” (i.e., $502,909.17 more than what § 1111(b) requires); and
  • this is an unwarranted and unsupportable extension of the statutory requirements of § 1129(b)(2)(A), which calls for a single stream of payments that meets two tests.


Here’s a “thank you” to the parties and the Court for the In re Topp’s Mechanical case, plan, objection and opinion—all of which shed light, for the rest of us, on how § 1111(b) works.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

3 thoughts on “§ 1111(b) Election’s Two-Step For Confirmation (In re Topp’s Mechanical)

Add yours

  1. Don:

    Great article on 1111(b). One of the most confusing statutory provisions. Your writing skills make its application understandable. Thanks for your work efforts on Sub V Cases. Keep it up.

    Liked by 1 person

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