A Note to Our Readers Our goal in creating this newsletter is to provide information and assistance to lenders and servicers with respect to the issues they face in Chapter 11 single-asset real estate bankruptcy cases. Thompson & Knight LLP, established in 1887, is a full- service law firm with U.S. offices in Dallas, Houston, Austin, Fort Worth, New York, and Los Angeles. Our Bankruptcy, Real Estate, and Trial practice groups have substantial experience representing lenders and servicers in connection with bankruptcy proceedings, loan modifications, out-of-court workouts, judicial and non- judicial foreclosures, and receivership, guaranty, asset recovery, and other commercial real estate litigation. We hope that you find this newsletter helpful and informative, and we encourage your feedback. CALIFORNIA BANKRUPTCY COURT SANCTIONS LENDER $45 MILLION FOR WILLFULLY VIOLATING THE AUTOMATIC STAY By Bruce J. Zabarauskas and Katharine Battaia Clark IN THIS ISSUE California Bankruptcy Court Sanctions Lender $45M P.1 Seeking Relief From the Automatic Stay P.2 Recently Filed Single- Asset Real Estate Cases P.3 Real Estate Bankruptcy Quarterly Newsletter October 2017 lender acknowledged receipt of notice of the bankruptcy filing, the lender proceeded with a foreclosure sale of the property in violation of the automatic stay. Additionally, even though the lender had an established policy of immediately rescinding any foreclosure sale that had erroneously occurred after the imposition of the automatic stay, no immediate action was taken by the lender. According to the court, the lender took further affirmative steps following foreclosure, including serving a three-day notice to quit on the borrowers and commencing eviction proceedings, also in violation of the automatic stay. The court further found that the lender’s agents entered the borrowers’ gated community, sometimes under false pretenses, “staked out the premises, tailed the [borrowers], knocked on doors, knocked on windows and rang doorbells, all to the terror of the [borrowers’] family,” which resulted in the borrowers leaving their home with their family, notwithstanding their bankruptcy filing. The foreclosure sale was eventually rescinded and the keys to the property returned to the borrowers, who asserted that major appliances, window coverings, and carpeting had been removed during their absence, and that other personal property items were lost or damaged. The bankruptcy court found that the lender’s knowing and callous disregard for the automatic stay justified the award of compensatory and punitive damages. This case serves as a lesson to secured lenders. Lenders must have a plan in place (1) to put all Earlier this year, a California bankruptcy judge sanctioned a lender $45 million and awarded compensatory damages of more than $1 million to husband-and-wife borrowers after finding that the lender willfully violated the Bankruptcy Code’s automatic stay. 1 According to a brief filed by the lender in its motion for reconsideration of the damage award, it is believed to be, by far, the largest award ever granted by a court for a violation of the automatic stay, exceeding the next largest sanction award by approximately $36.8 million. According to the bankruptcy court’s decision, the borrowers were current on their mortgage payments, but were struggling financially. The court found that the borrowers had been told by an agent of the lender that it would not consider a loan modification unless the borrower defaulted under their loan. Accordingly, the court found that the borrowers purposely defaulted under their loan with the expectation that the lender would negotiate a loan modification with them in good faith. The court found that the lender did not negotiate in good faith, finding that the lender sat on numerous modification requests and eventually returned the requests to the borrowers, claiming the information the requests contained was stale by the time the lender reviewed them. The lender scheduled a foreclosure sale of the borrowers’ residence, and the borrowers filed a joint bankruptcy case. Notwithstanding that the Continued on page 2
Transcript
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SEEKING RELIEF FROM THE AUTOMATIC STAY IN SINGLBANKRUPTCY CASES
A Note to Our ReadersOur goal in creating this
newsletter is to provide
information and assistance
to lenders and servicers
with respect to the issues
they face in Chapter 11
single-asset real estate
bankruptcy cases.
Thompson & Knight LLP,
established in 1887, is a full-
service law firm with U.S.
offices in Dallas, Houston,
Austin, Fort Worth, New
York, and Los Angeles.
Our Bankruptcy, Real
Estate, and Trial practice
groups have substantial
experience representing
lenders and servicers in
connection with bankruptcy
proceedings, loan
modifications, out-of-court
workouts, judicial and non-
judicial foreclosures, and
receivership, guaranty,
asset recovery, and other
commercial real estate
litigation. We hope that you
find this newsletter helpful
and informative, and we
encourage your feedback.
CALIFORNIA BANKRUPTCY COURT SANCTIONS LENDER $45 MILLION FOR WILLFULLY VIOLATING THE AUTOMATIC STAY By Bruce J. Zabarauskas and Katharine Battaia Clark
IN THIS ISSUE California Bankruptcy Court
Sanctions Lender $45M P.1
Seeking Relief From the Automatic Stay P.2
Recently Filed Single-Asset Real Estate Cases P.3
Real Estate Bankruptcy Quarterly Newsletter
O c to b er 2 0 17
lender acknowledged receipt of notice of the bankruptcy filing, the lender proceeded with a foreclosure sale of the property in violation of the automatic stay. Additionally, even though the lender had an established policy of immediately rescinding any foreclosure sale that had erroneously occurred after the imposition of the automatic stay, no immediate action was taken by the lender. According to the court, the lender took further affirmative steps following foreclosure, including serving a three-day notice to quit on the borrowers and commencing eviction proceedings, also in violation of the automatic stay. The court further found that the lender’s agents entered the borrowers’ gated community, sometimes under false pretenses, “staked out the premises, tailed the [borrowers], knocked on doors, knocked on windows and rang doorbells, all to the terror of the [borrowers’] family,” which resulted in the borrowers leaving their home with their family, notwithstanding their bankruptcy filing. The foreclosure sale was eventually rescinded and the keys to the property returned to the borrowers, who asserted that major appliances, window coverings, and carpeting had been removed during their absence, and that other personal property items were lost or damaged. The bankruptcy court found that the lender’s knowing and callous disregard for the automatic stay justified the award of compensatory and punitive damages.
This case serves as a lesson to secured lenders. Lenders must have a plan in place (1) to put all
Earlier this year, a California bankruptcy judge sanctioned a lender $45 million and awarded compensatory damages of more than $1 million to husband-and-wife borrowers after finding that the lender willfully violated the Bankruptcy Code’s automatic stay.1 According to a brief filed by the lender in its motion for reconsideration of the damage award, it is believed to be, by far, the largest award ever granted by a court for a violation of the automatic stay, exceeding the next largest sanction award by approximately $36.8 million.
According to the bankruptcy court’s decision, the borrowers were current on their mortgage payments, but were struggling financially. The court found that the borrowers had been told by an agent of the lender that it would not consider a loan modification unless the borrower defaulted under their loan. Accordingly, the court found that the borrowers purposely defaulted under their loan with the expectation that the lender would negotiate a loan modification with them in good faith. The court found that the lender did not negotiate in good faith, finding that the lender sat on numerous modification requests and eventually returned the requests to the borrowers, claiming the information the requests contained was stale by the time the lender reviewed them.
The lender scheduled a foreclosure sale of the borrowers’ residence, and the borrowers filed a joint bankruptcy case. Notwithstanding that the
(Continued from page 2)
dominate voting in all creditor classes; and (ii) a plan ofreorganization is financially feasible.
Relief From the Automatic Stay for Cause
Bankruptcy Code § 362(d)(1) provides that the bankruptcy court shall grant relief from the automatic stay “for cause, including thelack of adequate protection of an interest in property.” A lender’s interest in its collateral is not adequately protected where theproperty has been decreasing in value subsequent to the date the borrower files for bankruptcy. A dramatic decrease in real propertyvalue is not typical over the short run, so lack of adequate protection, other than in rare instances of extensive propertydamage, is not a typical basis for stay relief in a real estate bankruptcy.
While the term “cause” is not defined in the Bankruptcy Code, the case law has established that the filing of a bankruptcy case in bad faith constitutes cause for relief from the automatic stay. Theborrower bears the burden of proving it filed its bankruptcy petition in good faith. Courts across the United States disagree as to howbad faith is determined. Some courts take an objective view (i.e., whether the bankruptcy is futile because the debtor will not be able to confirm a plan of reorganization). Other courts make a subjective determination, looking at facts such as whether theborrower filed bankruptcy simply to delay foreclosure with nointention of reorganizing. Still other courts require a finding of both subjective and objective bad faith.
Relief From Automatic Stay for Failure to Make Payments or File Confirmable Plan
The Bankruptcy Code recognizes that options are generally limitedfor a successful reorganization in a single-asset real estate bankruptcy. The Bankruptcy Code therefore imposes certain time restrictions on single-asset real estate borrowers. Essentially, the
borrowerplan of reorconfirmed wpayments to amount of tthe lender’s provides thatautomatic scommencmay seem mCode provito facially mwhen the borrdisadvantagthe 90-day
1 This is the first in a series of articles addressing issues secured lenders face in single-assexpand upon these concepts, including providing strategies on how lenders can efficiently rthis article, Bruce J. Zabarauskas and Katharine Battaia Clark, are members of Thompson &lenders and servicers in real estate bankruptcy cases. Mr. Zabarauskas is Thompson & Kniin California, New York, and Texas. Ms. Clark is a Partner in Thompson & Knight’s Dallas of
2 There is no reorganization in a Chapter 7 liquidation. Hence, in a Chapter 7 case, a secured l§ 362(d)(2) upon a showing that the borrower lacks equity in the secured lender’s collateral
3 Basically, a class of claims is considered “impaired” unless: (i) the claims in such class are beimaturity date, which had been accelerated prior to the borrower’s bankruptcy filing, is beithe Bankruptcy Code.
Continued on page 2
-4-
(Continued from page 1)
employees, servicers, and agents handling a loan on immediate notice of a borrower’s bankruptcy filing, and (2) to hold foreclosure sales in abeyance upon notice of a bankruptcy filing. Additionally, lenders should have an electronic search run to check for borrower bankruptcies within the hours prior to a scheduled foreclosure sale. In the event a sale inadvertently takes place notwithstanding a bankruptcy filing, the lender should ensure that its counsel acts expeditiously to effectuate a rescission. Finally, the bankruptcy court’s docket should also be electronically checked before commencing any eviction proceedings or executing on a writ of possession, evicting the owner, tenant and/or occupant of the premises.
1 In re Sundquist, 566 B.R. 563 (Bankr. E.D. Ca. 2017).
SEEKING RELIEF FROM THE AUTOMATIC STAY IN SINGLE-ASSET REAL ESTATE BANKRUPTCY CASES By Bruce J. Zabarauskas and Katharine Battaia Clark1
The automatic stay imposed by the Bankruptcy Code is the initial hurdle a secured lender confronts when a borrower files bankruptcy. The automatic stay prevents all collection activity, including commencing or continuing judicial and non-judicial foreclosure proceedings, against the borrower or the lender’s collateral. Unless the bankruptcy court grants relief to the lender, the stay remains in effect until the time the bankruptcy case is dismissed or closed or, with respect to specific property, when the property is no longer property of the bankruptcy estate (e.g., the property is sold).
How to Seek Relief From the Automatic Stay
A lender seeks relief from the automatic stay by filing a motion with the bankruptcy court. The bankruptcy court is required to hold a preliminary hearing on the motion within 30 days after its filing. Some courts will rule on the merits of the motion following the preliminary hearing, while other courts will simply utilize the preliminary hearing as a mechanism to determine what issues require an evidentiary hearing and to set a final, evidentiary hearing, which is supposed to be held within 30 days of the preliminary hearing.
The Bankruptcy Code contains three grounds for terminating or modifying the automatic stay during the course of a borrower’s bankruptcy case, which are: (1) for cause, (2) for lack of equity and necessity of property for an effective reorganization, and (3) a borrower’s failure to meet certain Bankruptcy Code requirements that apply in single-asset real estate cases. The requirements for each of these grounds is described below. Regardless of the ground for relief, lenders should note that often multiple grounds are available to the lender.
Lack of Equity in the Property and the Property Is Not Necessary for an Effective Reorganization
Bankruptcy Code § 362(d)(2) is the most common provision secured lenders rely upon when seeking relief from the automatic stay in single-asset real estate cases. Under § 362(d)(2), a secured lender is entitled to relief from the automatic stay where (i) the borrower lacks equity in the property at issue and (ii) the property is not necessary for an effective reorganization.2
A borrower lacks equity in property when the amount of all liens on the property exceeds the property’s fair market value. The lender bears the burden of proving that the borrower lacks equity in the collateral, which typically requires the expert testimony of an appraiser.
The borrower bears the burden of proving that the property is necessary for an “effective reorganization.” Naturally, real estate in a single-asset case is vital to any reorganization effort. However, the word “effective” is key. In order for property to be necessary for an effective reorganization, the borrower must establish a likelihood of obtaining bankruptcy court approval, also known as confirmation, of a plan of reorganization within a reasonable period of time.
Getting a plan confirmed is no small task. The Bankruptcy Code contains multiple requirements for confirmation. Those that most often arise in the context of relief from stay motions are whether: (i) there is at least one impaired3 class of creditor claims that is able to vote to accept the plan (not including insiders of the borrower), which votes are difficult for a borrower to obtain in single-asset real estate cases because the lender’s claims tend to Location Type of Property Secured Debt
Harker Heights, Texas Multi-Family Residential (143 Units) $5,527,000
Long Beach, California Multi-Family Residential $2,139,000
Temecula, California Shopping Center $5,177,000
Santa Clara, California Empty Warehouse $2,675,000
Santa Cruz, California Rooming/Retreat House Unknown
New York, New York Multi-Family Residential $5,912,000
New York, New York Multi-Family Residential $3,971,000
New York, New York Multi-Family Residential $6,450,000
Brooklyn, New York Mixed Use (4 Residential Units / 2 Retail Units) $1,315,000
Bethpage, New York Retail $3,958,000
Profiles
Bruce Zabarauskas is Thompson & Knight’s Los Angeles Office Leader. Bruce is a commercial litigator whose practice includes representation of institutional lenders, such as national banks, special servicers, and investment banks, in commercial real estate foreclosure matters and Chapter 11 bankruptcy proceedingsthroughout the United States.
Katie Clark represents clients before bankruptcy courts, federal and state trial courts, arbitration panels, and appellate courts. She focuses her practice on bankruptcy, creditors' rights, and litigation, including representation of banks, indenture trustees, acquirers of assets from bankruptcy estates, and creditors in Chapter 11, 7, and 13 bankruptcy cases in a broad range of contested matters and adversary proceedings.
Recently Filed Single-Asset Real Estate Cases (Texas, New York, and California)
(Continued from page 1)
employees, servicers, and agents handling a loan on immediate notice of a borrower’s bankruptcy filing, and (2) to hold foreclosure sales in abeyance upon notice of a bankruptcy filing. Additionally, lenders should have an electronic search run to check for borrower bankruptcies within the hours prior to ascheduled foreclosure sale. In the event a sale inadvertently takes placenotwithstanding a bankruptcy filing, the lender should ensure that its counsel acts expeditiously to effectuate a rescission. Finally, the bankruptcy court’s docket should also be electronically checked before commencing any evictionproceedings or executing on a writ of possession, evicting the owner, tenantand/or occupant of the premises.
1 In re Sundquist, 566 B.R. 563 (Bankr. E.D. Ca. 2017).
SEEKING RELIEF FROM THE AUTOMATIC STAY IN SINGLE-ASSET REAL ESTATE BANKRUPTCY CASES By Bruce J. Zabarauskas and Katharine Battaia Clark1
The automatic stay imposed by the Bankruptcy Code is the initial hurdle a secured lender confronts when a borrower filesbankruptcy. The automatic stay prevents all collection activity, including commencing or continuing judicial and non-judicial foreclosure proceedings, against the borrower or the lender’scollateral. Unless the bankruptcy court grants relief to the lender,the stay remains in effect until the time the bankruptcy case is dismissed or closed or, with respect to specific property, when theproperty is no longer property of the bankruptcy estate (e.g., the property is sold).
How to Seek Relief From the Automatic Stay
A lender seeks relief from the automatic stay by filing a motion withthe bankruptcy court. The bankruptcy court is required to hold apreliminary hearing on the motion within 30 days after its filing. Some courts will rule on the merits of the motion following the preliminary hearing, while other courts will simply utilize thepreliminary hearing as a mechanism to determine what issuesrequire an evidentiary hearing and to set a final, evidentiaryhearing, which is supposed to be held within 30 days of the preliminary hearing.
The Bankruptcy Code contains three grounds for terminating ormodifying the automatic stay during the course of a borrower’s bankruptcy case, which are: (1) for cause, (2) for lack of equity and necessity of property for an effective reorganization, and (3) aborrower’s failure to meet certain Bankruptcy Code requirementsthat apply in single-asset real estate cases. The requirements foreach of these grounds is described below. Regardless of the ground for relief, lenders should note that often multiple groundsare available to the lender.
Lack of Equity in the Property and the Property Is Not Necessary for an Effective Reorganization
Bankruptcy Code § 362(d)(2) is the most common provision secured lenders rely upon when seeking relief from the automatic stay in single-asset real estate cases. Under § 362(d)(2), a secured lender is entitled to relief from the automatic stay where (i) the borrower lacks equity in the property at issue and (ii) theproperty is not necessary for an effective reorganization.2
A borrower lacks equity in property when the amount of all liens on the property exceeds the property’s fair market value. The lenderbears the burden of proving that the borrower lacks equity in thecollateral, which typically requires the expert testimony of an appraiser.
The borrower bears the burden of proving that the property is necessary for an “effective reorganization.” Naturally, real estate in a single-asset case is vital to any reorganization effort. However,the word “effective” is key. In order for property to be necessary foran effective reorganization, the borrower must establish a likelihood of obtaining bankruptcy court approval, also known as confirmation, of a plan of reorganization within a reasonable periodof time.
Getting a plan confirmed is no small task. The Bankruptcy Code contains multiple requirements for confirmation. Those that mostoften arise in the context of relief from stay motions are whether: (i) there is at least one impaired3 class of creditor claims that is able to vote to accept the plan (not including insiders of the borrower), which votes are difficult for a borrower to obtain insingle-asset real estate cases because the lender’s claims tend to Location Type of Property Secured Debt
Harker Heights, Texas Multi-Family Residential (143 Units) $5,527,000
Long Beach, California Multi-Family Residential $2,139,000
Temecula, California Shopping Center $5,177,000
Santa Clara, California Empty Warehouse $2,675,000
Santa Cruz, California Rooming/Retreat House Unknown
New York, New York Multi-Family Residential $5,912,000
New York, New York Multi-Family Residential $3,971,000
New York, New York Multi-Family Residential $6,450,000
Brooklyn, New York Mixed Use (4 Residential Units / 2 Retail Units) $1,315,000
Bethpage, New York Retail $3,958,000
Profiles
Bruce Zabarauskas is Thompson & Knight’s Los Angeles Office Leader. Bruce is a commercial litigator whose practice includes representation of institutional lenders, such as national banks, special servicers, and investment banks, in commercial real estate foreclosure matters and Chapter 11 bankruptcy proceedings throughout the United States.
Katie Clark represents clients before bankruptcy courts, federal and state trial courts, arbitration panels, and appellate courts. She focuses her practice on bankruptcy, creditors' rights, and litigation, including representation of banks, indenture trustees, acquirers of assets from bankruptcy estates, and creditors in Chapter 11, 7, and 13 bankruptcy cases in a broad range of contested matters and adversary proceedings.
Recently Filed Single-Asset Real Estate Cases (Texas, New York, and California)
–––
SEEKING RELIEF FROM THE AUTOMATIC STAY IN SINGLE-ASSET REAL ESTATE BANKRUPTCY CASES
A Note to Our ReadersOur goal in creating this
newsletter is to provide
information and assistance
to lenders and servicers
with respect to the issues
they face in Chapter 11
single-asset real estate
bankruptcy cases.
Thompson & Knight LLP,
established in 1887, is a full-
service law firm with U.S.
offices in Dallas, Houston,
Austin, Fort Worth, New
York, and Los Angeles.
Our Bankruptcy, Real
Estate, and Trial practice
groups have substantial
experience representing
lenders and servicers in
connection with bankruptcy
proceedings, loan
modifications, out-of-court
workouts, judicial and non-
judicial foreclosures, and
receivership, guaranty,
asset recovery, and other
commercial real estate
litigation. We hope that you
find this newsletter helpful
and informative, and we
encourage your feedback.
CALIFORNIA BANKRUPTCY COURT SANCTIONS LENDER $45 MILLION FOR WILLFULLY VIOLATING THE AUTOMATIC STAY By Bruce J. Zabarauskas and Katharine Battaia Clark
IN THIS ISSUE California Bankruptcy Court
Sanctions Lender $45M P.1
Seeking Relief From the Automatic Stay P.2
Recently Filed Single-Asset Real Estate Cases P.3
Real Estate Bankruptcy Quarterly Newsletter
O c to b er 2 0 17
lender acknowledged receipt of notice of thebankruptcy filing, the lender proceeded with a foreclosure sale of the property in violation of theautomatic stay. Additionally, even though thelender had an established policy of immediately rescinding any foreclosure sale that had erroneously occurred after the imposition of theautomatic stay, no immediate action was taken by the lender. According to the court, the lendertook further affirmative steps following foreclosure, including serving a three-day notice to quit on the borrowers and commencingeviction proceedings, also in violation of theautomatic stay. The court further found that thelender’s agents entered the borrowers’ gatedcommunity, sometimes under false pretenses, “staked out the premises, tailed the [borrowers],knocked on doors, knocked on windows and rang doorbells, all to the terror of the [borrowers’] family,” which resulted in the borrowers leaving their home with their family, notwithstanding their bankruptcy filing. The foreclosure sale was eventually rescinded and the keys to theproperty returned to the borrowers, who asserted that major appliances, window coverings, and carpeting had been removed during their absence, and that other personal property items were lost or damaged. The bankruptcy court found that the lender’s knowing and callousdisregard for the automatic stay justified theaward of compensatory and punitive damages.
This case serves as a lesson to secured lenders. Lenders must have a plan in place (1) to put all
Earlier this year, a California bankruptcy judge sanctioned a lender $45 million and awarded compensatory damages of more than$1 million to husband-and-wife borrowers after finding that the lender willfully violated the Bankruptcy Code’s automatic stay.1 According toa brief filed by the lender in its motion for reconsideration of the damage award, it isbelieved to be, by far, the largest award evergranted by a court for a violation of the automatic stay, exceeding the next largest sanction award by approximately $36.8 million.
According to the bankruptcy court’s decision, the borrowers were current on their mortgagepayments, but were struggling financially. The court found that the borrowers had been told byan agent of the lender that it would not consider a loan modification unless the borrower defaulted under their loan. Accordingly, the courtfound that the borrowers purposely defaultedunder their loan with the expectation that thelender would negotiate a loan modification with them in good faith. The court found that thelender did not negotiate in good faith, finding thatthe lender sat on numerous modification requests and eventually returned the requests tothe borrowers, claiming the information the requests contained was stale by the time thelender reviewed them.
The lender scheduled a foreclosure sale of the borrowers’ residence, and the borrowers filed a joint bankruptcy case. Notwithstanding that the
(Continued from page 2)
dominate voting in all creditor classes; and (ii) a plan of reorganization is financially feasible.
Relief From the Automatic Stay for Cause
Bankruptcy Code § 362(d)(1) provides that the bankruptcy court shall grant relief from the automatic stay “for cause, including the lack of adequate protection of an interest in property.” A lender’s interest in its collateral is not adequately protected where the property has been decreasing in value subsequent to the date the borrower files for bankruptcy. A dramatic decrease in real property value is not typical over the short run, so lack of adequate protection, other than in rare instances of extensive property damage, is not a typical basis for stay relief in a real estate bankruptcy.
While the term “cause” is not defined in the Bankruptcy Code, the case law has established that the filing of a bankruptcy case in bad faith constitutes cause for relief from the automatic stay. The borrower bears the burden of proving it filed its bankruptcy petition in good faith. Courts across the United States disagree as to how bad faith is determined. Some courts take an objective view (i.e., whether the bankruptcy is futile because the debtor will not be able to confirm a plan of reorganization). Other courts make a subjective determination, looking at facts such as whether the borrower filed bankruptcy simply to delay foreclosure with no intention of reorganizing. Still other courts require a finding of both subjective and objective bad faith.
Relief From Automatic Stay for Failure to Make Payments or File Confirmable Plan
The Bankruptcy Code recognizes that options are generally limited for a successful reorganization in a single-asset real estate bankruptcy. The Bankruptcy Code therefore imposes certain time restrictions on single-asset real estate borrowers. Essentially, the
borrower has 90 days after it files for bankruptcy to either: (i) file a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or (ii) commence monthly payments to the secured lender from rents from the property in the amount of the non-default, contract rate of interest with respect to the lender’s interest in the property. Bankruptcy Code § 362(d)(3) provides that a secured lender will be granted relief from the automatic stay if its borrower does not file such a plan or commence monthly payments within the 90-day period. While this may seem more straightforward than the other two Bankruptcy Code provisions, in practice borrowers tend to file very basic plans to facially meet the requirement and/or commence payments. Even when the borrower does not attempt to meet the requirements, the disadvantage to secured lenders in relying only upon § 362(d)(3) is the 90-day waiting period.
Conclusion
No matter the ground or grounds the lender relies upon, seeking relief from the automatic stay during a bankruptcy case benefits a secured lender in two significant ways. First, the act of filing such a motion forces the borrower on the defensive, effectively requiring the borrower to explain to the court how it seeks to repay or reorganize its obligations to the secured lender and the borrower’s other creditors more quickly than without a motion on file. In a single-asset real estate bankruptcy, a lender’s early action and participation sends a strong message to the court and the borrower. Second, where stay relief is granted, it allows the secured lender to exercise state law remedies (such as foreclosure) with respect to its collateral, as anticipated by its loan documents. Lenders who find themselves embroiled in a single-asset bankruptcy should strongly consider bringing a lift stay motion where circumstances warrant.
1 This is the first in a series of articles addressing issues secured lenders face in single-asset real estate bankruptcy cases. In future articles, we will expand upon these concepts, including providing strategies on how lenders can efficiently recover their collateral in bankruptcy cases. The authors of this article, Bruce J. Zabarauskas and Katharine Battaia Clark, are members of Thompson & Knight LLP, with substantial experience representing lenders and servicers in real estate bankruptcy cases. Mr. Zabarauskas is Thompson & Knight’s Los Angeles Office Leader and is licensed to practice in California, New York, and Texas. Ms. Clark is a Partner in Thompson & Knight’s Dallas office and is licensed to practice in Texas.
2 There is no reorganization in a Chapter 7 liquidation. Hence, in a Chapter 7 case, a secured lender is entitled to relief from the automatic stay under § 362(d)(2) upon a showing that the borrower lacks equity in the secured lender’s collateral.
3 Basically, a class of claims is considered “impaired” unless: (i) the claims in such class are being paid in full on the plan’s effective date; or (ii) a loan’s maturity date, which had been accelerated prior to the borrower’s bankruptcy filing, is being reinstated by the borrower to the extent permissible under the Bankruptcy Code.
