Surinder Pal Sroa and Linda Marie Sroa

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
SURINDER and LINDA SROA, 	No. 11-10078
Debtor(s).
______________________________________/
Memorandum re Plan Confirmation
_________________
Debtors Surinder and Linda Sroa filed their Chapter 11 petition on January 11, 2011. Their
plan of reorganization is now before the court. Creditor Marin Mortgage Bankers Corp. objects to its
treatment under the plan and seeks to be treated as fully secured notwithstanding the value of its
collateral. The Sroas argue that Marin Mortgage is not entitled to elect such treatment.
Marin Mortgage is owed about $1 million. It has deeds of trust to two San Rafael properties
owed by the Sroas, 70 4th Street and 1310 Lincoln. The value of the latter does not exceed the senior
lien. The dispute here is over 704 4th Street, which the Sroas argue is also over-encumbered, leaving
Marin Mortgage wholly unsecured pursuant to § 506(a) of the Bankruptcy Code. Marin Mortgage
argues that while it is undersecured, it is not unsecured.
Section 1111(b) of the Bankruptcy Code offers a secured creditor a way out of being crammed
down under § 506(a). If the creditor elects, it has no unsecured claim but its secured claim remains a
lien on the property no matter what the property is worth. However, the right to make the election is
denied to a creditor by § 1111(b)(1)(B)(i) if its interest in the property is of “inconsequential value.”
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Entered on Docket
November 17, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 11-10078 Doc# 128 Filed: 11/16/11 Entered: 11/17/11 08:14:43 Page 1 of
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Generally, this means that a creditor cannot make the election if the total of liens senior to the
creditor’s lien is greater than the value of the property. In re O’Leary, 183 B.R. 338, 341
(Bkrtcy.D.Mass.1995), and cases therein cited; In re Cimino Brokerage Co., 2010 WL 5053963
(Bkrtcy.N.D.Cal. 2010).
Fixing a value for the property is problematical. According to Marin Mortgage’s expert
appraiser, 704 4 th Street is worth $950,000.00, or at least $910,000.00. An older appraisal by one of
the Sroas’ experts valued the property at $830,000.00, though she now fixes the value at $750,000.00.
The Sroas scheduled the property ten months ago in their bankruptcy papers as having a value of
$791,000.00. They have offered the testimony of yet another expert that the present value is
$650,000.00.
Weighing the testimony is not an easy matter. However, taking all the factors into account
including the facts that the debtors intend to keep operating a restaurant on the property through a
related entity and that Marin Mortgage would receive essentially nothing under the Sroas’ plan if it is
treated as an unsecured creditor, the court finds that the property is worth about $800,000.00. 	Since
the total of the senior liens on the property is about $765,000.00, Marin Mortgage has an interest in the
property which the court characterizes as thin but not inconsequential. 1
The purpose of the § 1111(b) election is to allow an undersecured creditor the opportunity to
capture future appreciation in the value of its collateral. 	In re Tuma, 916 F.2d 488, 491 (9th Cir. 1990).
Given the fluctuating values for commercial property in San Rafael and the draconian treatment Marin
Mortgage would receive as an unsecured creditor, its election makes perfect sense and is fully
consistent with the intent of the statute.
For the foregoing reasons, the court will confirm the plan only if Marin Mortgage is treated as
fully secured in accordance with its election. Counsel for Sroas shall submit a form of order
1Hypothetical costs of sale are not considered when making this determination. In re
Freudenheim, 189 B.R. 279, 280 (Bkrtcy.W.D.N.Y.1995).
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Case: 11-10078 Doc# 128 Filed: 11/16/11 Entered: 11/17/11 08:14:43 Page 2 of
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confirming the plan which so provides and which counsel for Marin Mortgage has approved as to
form, unless the Sroas elect to withdraw their plan from consideration.
Dated: November 16, 2011
SAlan Jaroslovsky
U.S. Bankruptcy Judge
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Case: 11-10078 Doc# 128 Filed: 11/16/11 Entered: 11/17/11 08:14:43 Page 3 of
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