The Legal Anomaly of Non-Recourse Financing

24 Pages Posted: 29 Feb 2024 Last revised: 12 Mar 2024

See all articles by Steven L. Schwarcz

Steven L. Schwarcz

Duke University School of Law

Christina Trepczynski

Duke University School of Law, Students

Date Written: January 26, 2024


Section 1111(b) is one of the Bankruptcy Code’s most complex and challenging provisions. The existing scholarship focuses on the so-called 1111(b)(2) election, in which an undersecured creditor, in order to protect against undervaluation of collateral, can sometimes opt to have its claim treated in Chapter 11 as a fully secured claim. This article, in contrast, focuses on what can happen if that election is not made. Absent that election, § 1111(b)(1) automatically converts debt claims that are non-recourse under state law into full recourse claims. The consequence of this lobbied conversion is that non-recourse claims are no longer limited to the value of the collateral, creating unbargained and unfair benefits for non-recourse lenders to the detriment of debtors and unsecured creditors. This problem is important: domestic finance companies engage in roughly half a billion dollars of non-recourse financing yearly, non-recourse loans make up a significant portion of commercial real estate financing, and virtually all securitization and other structured financing is made on a non-recourse basis. The article explains the questionable origin of the § 1111(b)(1) non-recourse-to-recourse debt conversion and analyzes how that section should be amended to fairly protect non-recourse lenders without harming third parties or impairing bankruptcy policies.

Suggested Citation

Schwarcz, Steven L. and Trepczynski, Christina, The Legal Anomaly of Non-Recourse Financing (January 26, 2024). Duke Law School Public Law & Legal Theory Series No. 2024-16, Available at SSRN: or

Steven L. Schwarcz (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7060 (Phone)
919-613-7231 (Fax)

Christina Trepczynski

Duke University School of Law, Students ( email )

Durham, NC
United States

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