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CREDIT AND BANKRUPTCY ISSUES IN REAL ESTATE LAW Presented by Teri G. Rasmussen Plunkett Cooney

Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

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Discusses how creditors should deal with a recently filed case, the automatic stay, leasing, use and sale of assets, and nonbankruptcy remedies available to creditors, including receiverships, foreclosures, creditors\' bill, charging order, and assignments for the benefit of creditors

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Page 1: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

CREDIT AND BANKRUPTCY ISSUES IN REAL ESTATE LAW

Presented by

Teri G. RasmussenPlunkett Cooney

Page 2: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

WhoWho is PLUNKETT COONEY?

Established 1913

325 Employees 150 Attorneys

NineNine Michigan Offices plus offices in

Columbus, Ohio and IndianapolisIndianapolis In Columbus, focus is on Real Estate, Title Real Estate, Title

Insurance, Creditors’ Rights, General Business, Insurance, Creditors’ Rights, General Business, and Bankruptcy/Workout Creditor Representationand Bankruptcy/Workout Creditor Representation

Full-service business and litigation firm

Page 3: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Teri G. RasmussenTeri G. Rasmussen Creditors’ Rights and Debt Collection

– Business Bankruptcy & Insolvency– UCC and Secured Transactions– Commercial Finance– Commercial Litigation

General Corporate and Business Law– Contracts and Loan/Lease Documentation– Real Estate– Business Acquisitions and Sales – Business Formation and Financing– Joint Ventures and Strategic Alliances– Corporate Governance and Shareholder Disputes– Business Planning

Page 4: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Visit my legal blog:

OHIO PRACTICAL BUSINESS LAW

http://www.ohiopracticalbusinesslaw.com

Page 5: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law
Page 7: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Presentation Objectives Clarify what a bankruptcy filing really means Provide insights into creditor strategies Give overview of major bankruptcy concepts

Automatic Stay and Exceptions Proofs of Claim Use, Sale, and Lease of Real Property

Non-Bankruptcy Rights and Remedies of Creditors Receivership Foreclosure Creditors’ Bill Charging Order ABC aka Assignment for Benefit of Creditors

Page 8: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Purpose of Bankruptcy

To allow "honest" but insolvent debtors to obtain a "fresh start" – Providing some "breathing room" to allow

restructuring of debt through additional repayment time and discounting of the amount to be repaid; and

– Allowing individual debtors to receive a "discharge" from all or some of the debtor's debts when the debtor is an individual.

To ensure payment of creditors in an orderly fashion to extent debtor has assets

Page 9: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Dealing with a Bankruptcy FilingDealing with a Bankruptcy Filing

Understand structure of Bankruptcy Code. The Bankruptcy Code is found in Title 11 of the federal U.S. Code and consists of eight numbered chapters. – Chapters 1, 3, and 5 contain general rules

applicable to all bankruptcy cases. – Chapters 7, 9 (municipal), 11, 12 (farmer),

13, and 15 have provisions which apply only to cases filed under those chapters.

Page 10: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Types of Bankruptcy

Chapter 7 Liquidation Chapter 13 Wage Earner Plan Chapter 11 Reorganization Chapter 15 Cross-Border Insolvency State Law Alternatives

– Receiverships– Assignment for Benefit of Creditors

Page 11: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law
Page 12: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law
Page 13: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Immediate Effect of Bankruptcy Filing

Creation of Bankruptcy Estate – Created immediately upon filing of petition or in an involuntary case when the “order for relief” is entered.

– >>>>>> Imposition of Automatic StayAutomatic Stay

• Appointment of Trustee: All of the debtor’s assets are no longer controlled by the debtor for his benefit. In a Chapter 7 or Chapter 13 case, the debtor’s assets are immediately transferred to the control of a trustee to manage and dispose of for the benefit of the debtor’s creditors.

Page 14: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Debtor in Possession: Typically the debtor’s management stays in control of the debtor (called the “debtor in possession” or “DIP”)

– Role of the DIP: DIP must manage the debtor’s assets for the benefit, of the creditors.

Chapter 11 Reorganization - DIP

Page 15: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Chapter 11 Reorganization

Chapter 11 is an alternative …

– to Chapter 13 when the debtor exceeds the debt limitation for that sort of bankruptcy

– to liquidation under Chapter 7 when permitting the debtor to continue to operate the business for the benefit of the creditors is better than simply liquidating the debtor’s assets

– Can also be utilized for liquidation when a debtor wishes to retain control over the assets.

Page 16: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Chapter 11 Reorganization Creditors’ Committee: The court will appoint a

“creditors’ committee” from the unsecured creditors to represent the creditors, but is not required to do so if the total debts are less than $2 million.

Type of Debtors: Chapter 11 is available to any type of individual or business entity debtor.

Voluntary or Involuntary: Chapter 11 may be voluntary or involuntary.

Page 17: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Length: From the date the petition is filed until the plan is confirmed can take years

Implementation of the plan following confirmation is likely to take several more years.

Frequency: There is no statutory limit on how frequently a debtor may seek protection under Chapter 11.

Chapter 11 Reorganization

Page 18: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

RESPONDING TO A RESPONDING TO A BANKRUPTCY FILINGBANKRUPTCY FILING

Initial Moves and AnalysisInitial Moves and Analysis

Page 19: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

CRUCIAL CRUCIAL Initial Information to Obtain

What is name of party filing bankruptcy?

Where was petition filed?

When did filing happen?

How did creditor client find out?

What is Case No.?

Page 20: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Initial Questions

WHYWHY is Creditor Faced with Bankruptcy Filing? Foreclosure sale/ repossession of collateral Client Collection Action Other Creditors Voluntary Decision of Debtor

Page 21: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Other Initial Questions - About the Client

What kind of creditor is client?/ Who is the most important creditor? How connected to debtor? Secured >>> what type of collateral Unsecured

Trade creditor or supplier Equipment lessor Real Property Lessor Taxing Authority

Economic Effect of Filing on creditor Creditor’s Objectives

Page 22: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

More Initial Questions

Who/ What is Debtor? What about codebtors? Individual or Business Industry Sector Service, Manufacturing, Retail

TYPE of debt, i.e. business or personal

Page 23: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Dealing with a Bankruptcy Filing – Dealing with a Bankruptcy Filing – Developing a StrategyDeveloping a Strategy

Catalog options and special considerations Type of security held/Importance to Debtor Significance/Substantiality of Claim Relative

to claims held by others Effect of Exemptions Likely Participation of Other Players

Debtor Trustee Other Creditors

Page 24: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Dealing with a Bankruptcy Filing – Dealing with a Bankruptcy Filing – Developing a StrategyDeveloping a Strategy

Availability of Specialty Sections Lessor Claims Administrative Claims

Receiver Turnover Provisions of Section 543 >>> has Receiver been in place more than 120 days?

Review Documentation

Page 25: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Dealing with a Bankruptcy Filing – Dealing with a Bankruptcy Filing – Developing a StrategyDeveloping a Strategy

Determination of Secured Status Range of Value of Collateral

Appraisals Effect of Other Liens

Compare to Amount of Debt

Assess VulnerabilitiesAssess Vulnerabilities

Page 26: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Bankruptcy Preferences

A payment or grant of collateral/conveyance of assets that allows the recipient to receive more than their fair share of the now bankrupt customer's available cash and assets

Based upon extent secured

Must be repaid because it frustrates the underlying policy of federal bankruptcy law that similar creditors should be treated in a similar fashion.

Policy is intended to discourage a mad grab by creditors that might accelerate a financially ailing company's slide into bankruptcy.

Page 27: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Statutory Definition of Preference – Section 547

On an antecedent (i.e., past due) debt owed to a creditor

Made while the now bankrupt customer was "insolvent"

Within 90 days (or a year, if the creditor is an "insider" such as a shareholder, officer, or director of the bankrupt debtor, or another affiliated company) before the date the bankruptcy proceeding was filed

Continued

Page 28: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Statutory Definition of Preference – Section 547

That allowed the creditor to receive more on its claim than it would have had the payment not been made and the claim paid through the bankruptcy proceeding

Page 29: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Performing a “Preference Analysis”

Gather a full payment history for the period of at least the year before the payments in question were made.

All invoices showing both sales made and payments received during this period

Copies of any correspondence, including e-mail, contracts, checks, or other evidence of payments

Continued

Page 30: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Performing a “Preference Analysis”

Determine the number of days which generally elapsed between presentation of the invoices and receipt of payment and detect any patterns, that can also be useful.

Page 31: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Preference Exceptions Contemporaneous Exchange - §547(c)(1)

Ordinary Course of Business - §547(c)(2)

– Made in the "ordinary course of business or financial affairs" of the creditor and bankrupt customer in payment of a debt "incurred in the ordinary course of business or financial affairs" of the parties.

– Payment made "according to ordinary business terms" is also excepted.

Continued

Page 32: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Preference Exceptions

Subsequent New Value - §547(c)(4)

Extent to which creditor conveyed more value to debtor than it received

Payments to Fully Secured Creditors

Page 33: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Dealing with a Bankruptcy Filing – Reviewing the Initial Pleadings

Review bankruptcy initial filings Analyze “first day” pleadings – more than 20

“first day” motions in Chrysler case Learn and understand about indebtedness

to other creditors. Make sure you or your client are properly

listed. Determine likely level of repayment if possible.

Page 34: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

“First Day” Motions and Orders• Retention/compensation of Debtor’s Counsel and other

professionals• Interim Cash Collateral Arrangements• Payment of Prepetition Wages• Continuation of Utility Services• Post-petition Financing• Payment of Essential Pre-petition Debt/Critical Vendors• Continued use of Cash management systems • Case Management procedures• Extension of time to file schedules/Statement of financial

affairs• 363 Sale Motion/Prepackaged Plan of Reorganization

Page 35: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Statement of Financial Affairs / Schedule of Assets & Liabilities

Both MUST be filed within 15 days after the petition is filed unless an extension is granted by the bankruptcy court.

The Statement of Financial AffairsStatement of Financial Affairs is a series of questions focused on the debtor’s pre-filing behavior with respect to its assets, income, and liabilities.

Continued

Page 36: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Statement of Financial Affairs / Schedule of Assets and Liabilities

The Schedule of Assets and LiabilitiesSchedule of Assets and Liabilities is a balance sheet type document prepared on a “liquidation value” basis which

Lists the debtor’s assets and

Itemizes the amount of each and every debt owed, together with the name and address of the creditor and

Itemizes the estimated value of any collateral securing the obligation.

Page 37: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Schedule of Assets and LiabilitiesSchedule of Assets and Liabilities

Schedule ASchedule AReal PropertyReal Property Schedule BPersonal Property Schedule C Property Claimed as Exempt Schedule DSchedule D Creditors Holding Secured Creditors Holding Secured

ClaimsClaims (includes both fully secured and only partially secured creditors)

Schedule ECreditors Holding Unsecured Priority Claims

Continued

Page 38: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Statement of Financial Affairs / Schedule of Assets and Liabilities

Schedule FCreditors Holding Unsecured Nonpriority Claims

Schedule G Executory Contracts and Unexpired Leases

Schedule H Codebtors Schedule I Current Income of Individual

Debtor(s) Schedule J Current Expenditures of

Individual Debtor(s)

Page 39: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law
Page 40: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law
Page 41: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law
Page 42: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

File appropriate proof of claim to evidence indebtedness owed to you or your client and reference any collateral securing repayment.

Either creditor or creditor’s attorney may file proof of claim with bankruptcy court.

Attach documents supporting claim, e.g. mortgage, note, etc.

DO NOT DISCLOSE personal identification DO NOT DISCLOSE personal identification information about debtor such as Social information about debtor such as Social Security Number – redact if necessarySecurity Number – redact if necessary

Dealing with a Bankruptcy Filing – Dealing with a Bankruptcy Filing – Proof of ClaimProof of Claim

Page 43: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

• Most Chapter 7 cases: no-asset notice – If assets re-notice – 90 days to file from notice– Otherwise, 90 days from first 341 meeting

• Chapter 11: not required to file if on schedules, but best to file POC anyway

• Chapter 13: must file even if on schedules

Proof of Claim: Just in Case

Page 44: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law
Page 45: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Types of ClaimsTypes of Claims

Secured claim – if value of collateral is less than the amount of the debt, the difference is an unsecured claim.

Unsecured Priority Claim – (i.e., taxes, certain pre-petition wages)

Unsecured Non-priority Claim – (i.e., trade creditors, credit card debt)

Continued

Page 46: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Types of ClaimsTypes of Claims

Executory Contract – (i.e., lease of equipment or business premises; other unexpired contract

Administrative Claims – for services provided after the filing of the bankruptcy

CANNOT use proof of claim form.

Instead must apply to bankruptcy court for payment pursuant to §503 of the Bankruptcy Code

Page 47: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Priority of Claims

1. Exempt Assets belong to the debtor (only applies to individuals), then

2. Secured Creditors are paid in full; then

3. Priority and Preferred Unsecured Creditors

Page 48: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Priority of Claims

3. Priority and Preferred Unsecured Creditorsa. Administrative costs (including Debtors’ attorney

fees)

b. Debts incurred after filing; then

c. Wages/employee benefits up to $11,000 (amount is indexed)

(1) Wages must be earned within 90 days prior to filing the petition, then

(2) Employee benefits must be earned within 180 days of filing the petition, then

Page 49: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Priority of Claims

3. Priority and Preferred Unsecured Creditors

d. Customer deposits up to $2,500 (amount is indexed) per customer; then

e. Alimony and child support; then

f. Taxes, then

4. ALL OTHER UNSECURED CREDITORS

Page 50: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

• Meeting is led by the U.S. Trustee

• Provides an opportunity for creditors to ask general questions about what precipitated the bankruptcy filing and what sort of treatment they might be able to expect for their claim.

• Non-attorneys such as paralegals may attend and participate in the questioning so long as they are there on behalf of a particular creditor or other party in interest.

Dealing with a Bankruptcy Filing – Dealing with a Bankruptcy Filing – First Meeting of Creditors First Meeting of Creditors

Page 51: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

ALL ABOUT THE ALL ABOUT THE AUTOMATIC STAYAUTOMATIC STAY

11 USC 36211 USC 362

Page 52: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

All a Creditor Can Do is SMILE!!All a Creditor Can Do is SMILE!!The The Automatic Stay

IMMEDIATELYIMMEDIATELY, upon filing of a bankruptcy petition the “automatic stay” stops all collection actions by all creditors, including secured creditors, or other actions interfering with “property of the estate”.

Purpose is to give deserving debtor a “breathing spell” in which to formulate plan of repayment

Page 53: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Automatic Stay Prohibitions – Section 362(a)Automatic Stay Prohibitions – Section 362(a)

• Commencement, continuation, etc. of judicial, administrative, or other proceeding or effort to recover claim AGAINST Debtor

• Enforcement of judgment against Debtor or property of estate

• Obtaining possession of Debtor’s property• Creation, perfection and enforcement of lien of

property of estate• Act to collect, assess, or recover claim arising

before bankruptcy• Setoff of pre-petition debt owed by Debtor• Certain proceedings before U.S. Tax Court

Page 54: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Automatic Stay

• Duration – Stay remains in effect until– Property is abandoned by bankruptcy estate– Case is dismissed or closed– In a Chapter 7 case, a DISCHARGE is granted or

denied (occurs before case is finished) – Relief from stay is obtained from Bankruptcy Court

• Violation can result in fines, sanction and even imprisonment in extreme cases; inadvertent violation dealt with less harshly

Page 55: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

EXCEPTIONSEXCEPTIONS to Automatic Stay

• Stay does NOT prohibit continued collection action against guarantors or other co-debtors (Exception: Chapter 13 cases involving individuals – Section 1301)

• Twenty-EightTwenty-Eight statutory exceptions currently

• Exceptions include criminal prosecutions or other actions furthering governmental police or regulatory powers, domestic relations matters such as alimony or child support, commodity brokers and swap agreements

Page 56: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

EXCEPTIONSEXCEPTIONS to Automatic Stay: Repeat Filings by Individual Debtors

• Very intricate provisions resulting from 2005 passage of BAPCA

• Within one year before filing of current case:– ONE case dismissed >>> stay limited to 30

days unless Debtor gets extension– TWO cases dismissed >>> NO automatic stay

unless Court imposes one after determining case filed in good faith

Page 57: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Determining If Bankruptcy Petition Filed in Good Faith

The Debtor has the burden of proof of demonstrating that the current case is filed in good faith. Sections 362(c)(3)(C) and 362(c)(4)(D) state that there is a presumption – which can be rebutted only by clear and convincing evidence -- that the later case is not filed in good faith if any of the following are true:

If more than one bankruptcy case filed by the same debtor was pending within

the year prior to the filing of the current case;

If the previous case was dismissed after the Debtor failed to file the required pleadings without “substantial excuse”;

If the Debtor failed to provide the adequate protection ordered by the Court;

If the Debtor failed to perform the terms of a confirmed plan; or

If there has not been “a substantial change in the financial or personal affairs” of the Debtor since the last case was dismissed or any other reason to believe the current case will be concluded with a discharge or a fully performed confirmed plan as applicable.;

If a motion for relief from stay was pending or the stay had been terminated in the prior case.

Page 58: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Other Automatic Stay Exceptions Applicable to IndividualIndividual Debtors

• Actions to enforce lien OK against Debtor who has filed current case ignoring previous Order prohibiting filing of bankruptcy in that Chapter

• OK to pursue Debtors whose previous case was dismissed either– Willful failure of Debtor to abide by Court’s orders or

appear in proper prosecution of case– Previous case voluntarily dismissed by Debtor after

stay relief motion filed

Page 59: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Other Real Estate Related Exceptions – IN REMIN REM Relief of 362(d)(4)(A) to Case

Filed Within 2 Years Later

• Case “part of a scheme to delay, hinder, ANDAND defraud creditors”

AND

• Case involved transfer of all or part ownership of real property securing credit’s claim without consent of creditor

>>>>>> Very narrowly construed

Page 60: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

“In Rem” Exceptions to Automatic Stay

Applies to ALL Debtors when creditor is secured by real propertycreditor is secured by real property AND

• Court finds filing of the case was filing of the case was – ““part of a scheme to delay, hinder, and defraud part of a scheme to delay, hinder, and defraud

creditors”creditors”– and involved multiple filings affecting such real

property. section 362(d)(4)(B) – stay relief to be granted >>> OR

• in remin rem relief from stay was previously granted relief from stay was previously granted pursuant to §362(d)(4) at any time in the last 2 pursuant to §362(d)(4) at any time in the last 2 yearsyears §362(B)(20)) – stay NOT applicable provided creditor has filed a certified copy of the stay relief Order with the applicable Ohio County Recorder’s office.

Page 61: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Pending FED Exception to Automatic Stay

• Pending FED/eviction proceedings in residential leases can continue after 30 days– If “judgment for possession”“judgment for possession” obtained before

bankruptcy filing AND– Debtor fails to deposit one month’s rentone month’s rent and file

certification contemporaneously with petition that nonbankruptcy law allows curenonbankruptcy law allows cure

• Cure of nonmonetary defaults not permittedCure of nonmonetary defaults not permitted• If applicable nonbankruptcy law doesn’t allow If applicable nonbankruptcy law doesn’t allow

cure of monetary default, Debtor out of luckcure of monetary default, Debtor out of luck

Page 62: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Exceptions to Automatic Stay for Leases

• EXPIRED nonresidential lease – Section 362(b)(10)

• Eviction of RESIDENTIAL tenant using illegal drugs or endangering property within 30 days before bankruptcy filed. 11 U.S.C. 362(b)(23)

– Landlord must file certificationLandlord must file certification– Stay expires 15 days later unless Objection Stay expires 15 days later unless Objection

filed by Debtor (362(m)) filed by Debtor (362(m))

Page 63: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Other Real Estate Related Exceptions –

• Tax assessments and collection of same. §362(b)(9).

• Creation or perfection of real property tax liens for amounts coming due after the filing of the petition. §362(b)(18).

• Foreclosure of a HUD mortgage involving property with five living units or more (§362(b)(8)).

Page 64: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Basics of Lifting Automatic Stay

Creditors can petition bankruptcy court for “relief from stay” to continue collection action when:

– Lack of adequate protection

– Debtor has no equity in the collateral, andand it is not necessary for an “effective reorganization.” OR

– For “cause”

- 11 U.S.C. §362(d)

Page 65: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Adequate Protection

Used to protect secured creditors by the diminution in the value of their collateral

Intended to preserve status quo

• Debtor may be required to make cash payments or provide additional collateral to secured creditor

• Ground for stay relief if property is deteriorating in value or “equity cushion” is dissipating

Page 66: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Relief from Stay – No Equity AND Not

Necessary for EFFECTIVE Reorganization

• Perhaps most frequently used, especially in Chapter 7 cases

• NO EQUITY = Amount owed creditor is more than value of property

• Demonstrating effective effective reorganization is not a reasonable possibility in a reasonable amount of time is sufficient

Page 67: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Relief from Stay – “For Cause”

• Available when another court or tribunal is better suited to determine issues, especially with respect to contingent claims

• Catch-all category to provide flexibility to bankruptcy case to exercise its powers as court of equity

• Lack of good faith or improper pre-petition action or conduct of Debtor may constitute “cause”

Page 68: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

What is Lack of Good Faith?• Debtor has one asset• Pre-petition conduct of debtor has been improper• Debtor has only a few unsecured creditors• Debtor’s property has been posted for foreclosure and

debtor has been unsuccessful in defending against foreclosure in state court

• Debtor and creditor have proceeded to a standstill in state court and debtor has lost

• Filing of the petition effectively allows the debtor to evade court order

• Debtor has no ongoing business or employees• Lack of possibility of reorganization

Page 69: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Relief from Stay – “Single Asset Real Estate” >>> 362(d)(3)

Debtor MUST either• File plan of reorganization that “has a

reasonable possibility of being confirmed within a reasonable time” OROR

• Start making monthly payments (can be from rents or income generated by property) equal to accrued interest at nondefault rate on an amount equal to the VALUE of creditor’s interest in the property

>>>> within later of (A) 90 days after bankruptcy filed; (B) longer period determined by Court; or (C) 30 days after case determined to be a “single asset real estate” case

Page 70: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

What is “Single Asset Real Estate”?

• Non residential OR residential real property with more than 4 residential units

• Generates substantiallysubstantially all of the gross income of a debtor who is not a family farmer

• No other substantial businessNo other substantial business is being conducted by a debtor other than the business of operating the subject real property and activities incidental

Page 71: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Other Grounds for Relief from Stay

• Serial filings – 362(d)(4)• Ex Parte Relief- Bankruptcy Rule 4001

>>> Injunctive Relief Standard– Demonstrate “specific facts shown by affidavit

or by a verified motion that immediate and irreparable injury, loss, or damage will result” before the debtor can be heard in opposition.

– The creditor’s attorney certifies to the court all efforts to notify the debtor and its counsel and why notice should not be required.

Page 72: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Relief From Stay Procedures

• Motion for Relief from Stay + Notice• If no response, Order entered without a hearing

– 20-day response period in S.D. Oh– 10-day response period in N.D. Oh.

• Local Rules frequently require completion of a prescribed worksheet showing certain information and also sometimes require use of a particular format for the Motion– Lots of variations from judge to judge, even in same district or

division– ND OH recently posted proposed changes to forms for comment

• ECF Filing necessary requiring Bankruptcy Court ECF ID and password

Page 73: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

USE AND SALE OF REAL USE AND SALE OF REAL PROPERTY IN PROPERTY IN BANKRUPTCYBANKRUPTCY

11 USC 36311 USC 363

Page 74: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Ordinary Course Use of Property

• In Chapter 11 and Chapter 13 cases, a debtor may continue to use its real and personal property – including including property in which a creditor has a mortgage on or property in which a creditor has a mortgage on or security interest insecurity interest in – in the “ordinary course of business” >>> no authorization of Bankruptcy Court required

– What is “ordinary course” depends on what is customary in the debtor’s industry and the nature of the debtor’s business in particular

– If creditor is concerned about effect of use on value of collateral, it should seek “adequate protection”

– Use not in the “ordinary course” requires Bankruptcy Court authorization

Page 75: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Cash Collateral

When debtor has granted a lender a mortgage in real property or a security interest in substantially all assets

>>>>>>Debtor is not permitted to use cash not permitted to use cash generatedgenerated from receivables generation, rent

payments, disposition of assets, etc. without consent of the lender and/or approval

of bankruptcy court. 11 U.S.C. §363(c)(2)

>>>>>>>> Considerable variation in Local Bankruptcy Rules

Page 76: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

363 Sale of Assets363 Sale of Assets

• Real or personal property – or interests therein - may be sold free and clear of any liens or encumbrancessold free and clear of any liens or encumbrances Liens transferred to proceeds Requires authorization of Bankruptcy Court Discrete property/interests OR, especially recently,

substantially all assets of Debtor (e.g. GM and Chrysler) Plan of Reorganization or 363 Motion?

>>>> sub rosasub rosa plan Section 363(m) makes appeal very difficult

• Many specific Local Bankruptcy Rules and judge specific Many specific Local Bankruptcy Rules and judge specific proceduresprocedures

Page 77: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

363 Sale Terminology

• Stalking horse

• Topping fee or break-up fee

• Bidding procedures

• Credit bid

• Expedited hearing

Page 78: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Substantive Requirements for Approval of 363 Sale Substantive Requirements for Approval of 363 Sale – – Demonstration of “Sound Business Purpose” for SaleDemonstration of “Sound Business Purpose” for Sale

• Terms of the sale constitute the highest and best offer for the assets to be sold;

• Negotiations concerning the terms and conditions of the proposed sale were conducted at arm’s length;

• Sale is in the best interests of the bankruptcy estate and its creditors; and

• Proposed purchaser has acted in good faith and the sale itself is being made in good faith 

Stephens Indus., Inc. v. Mallory Company, Inc., 789 F.2d 386 (6th Cir. 1986)

Page 79: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Other Substantive Requirements for Approval of 363 Sale

• Applicable nonbankruptcy law permits such a sale (e.g. foreclosure) -§363(f)(1); OR

• Debtor consents - §363(f)(2);OR

• “[S]uch interest is a lien and the price at which such property is to be sold is greater than the aggregate value aggregate value of all liens on the propertyof all liens on the property” - §363(f)(3); OR

• The Debtor’s interest is in “bona fide dispute” - §363(f)(4); OR

• The Debtor “could be compelled, in a legal or equitable proceeding, to accept a monetary satisfaction of such interest” - §363(f)(5)

Page 80: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

““aggregate value of all liens”aggregate value of all liens”

• Actual economic value of liens

OR

• Actual aggregate outstanding amount owed which is secured by liens

• Clear Channel Outdoor, Inc. v, Knupfer – 363(f)(3) and (f) (5)– 363(m)

Page 81: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

LEASES OF REAL LEASES OF REAL PROPERTY IN PROPERTY IN BANKRUPTCYBANKRUPTCY

11 USC 36511 USC 365

Page 82: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Executory Contracts and Unexpired Leases

Trustee or DIP may choose to accept or reject executory contracts (i.e., lease agreements, unexpired contracts, union agreements)

In case of nonresidential real property leases, rental payments must be kept current until a decision as to what to do is made

Be wary of effect of potential effect of 363 sales on leases

Page 83: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Landlord’s Perspective on Tenant Bankruptcy

• Options depend upon– Residential or nonresidential– Tenant’s desire/intentions

• Ipso facto provisions making bankruptcy a default not enforceable

• GoalsObtain control of spaceDetermine amount and type of claim – whether to

pursue or seek termination by DebtorStay on top of the case and in front of the Debtor

Page 84: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Application of Automatic Stay

• If nonresidential lease ALREADY expired according to its termsaccording to its terms before bankruptcy, OK to start or continue eviction– Eviction ONLY – cannot pursue money

judgment

• If residential lease and have obtained “judgment for possession”, landlord can continue FED/eviction

Page 85: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Stay’s Effect on Landlord/Tenant RelationshipStay’s Effect on Landlord/Tenant Relationship

You CANNOTCANNOT• Evict tenant• Lockout tenant• Seize tenant’s

property• Shut off utilities• Show property to

prospective tenant• Apply security

deposit

• Hinder operation of debtor’s business

• Change locks• Give eviction notice• Terminate lease• Declare a default• Threaten tenant• Move property of a

tenant that has vacated

Page 86: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Stay’s Effect on Landlord/Tenant RelationshipStay’s Effect on Landlord/Tenant Relationship

You Can:You Can:• Collect rent and other charges which

have accrued since bankruptcy filing• Draw down letter of credit• Take action to continue a security

interest in property• Take action to remove tenant whose

lease has expired by its own terms prior to or during the bankruptcy case (this should be done carefully)

Page 87: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Landlord’s Perspective on Tenant Bankruptcy: Expect to Expect to Receive Post-Filing RentReceive Post-Filing Rent in Nonresidential Leases in Nonresidential Leases

• Tenant remains in possession

• No decision made by Tenant to reject lease

• Tenant to make rent payments in non- default amount without necessity of demand by Landlord

• Administrative claim priority– “Stub rent” >> proration or billing date theory

Page 88: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Assumption or Rejection of Lease by Tenant

• Tenant’s option to assume or reject

• Chapter 7: Lease automatically rejected 60 days after bankruptcy filing unless Court grants additional time to make determination

• Other Chapters: Decision regarding assumption or rejection must be made in 120 days after bankruptcy filing; one 90 day extension permitted

Page 89: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Assumption of Lease

• All monetary defaults (other than penalty provisions relating to nonmonetary defaults - §365(b)(2)(C)) must be cured - §365(b)(1)(A).

• “Adequate assuranceAdequate assurance” must be provided that any nonmonetary defaults will be promptly cured - §365(b)(1)(B).

• “Adequate assurance” must be provided that lease obligations will continue to be satisfied in the future - §365(b)(1)(C).

Page 90: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Assumption of Lease

• Tenant cannot cherry-pick >>> lease must be assumed as a whole

• Test for whether Court will authorize assumption = business judgment

• Priority claim if rejected after assumption

• Can do lease by lease or as a group

• Motion or Plan of Reorganization provision

Page 91: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Assumption of Shopping Center Leases by Debtor Tenant

• Must provide adequate assurance of source of rent and show that financial condition and operating performance of assignee shall be similar to financial condition of operating performance of debtor at time of lease

• Percentage rent will not decline substantially

• Assumption or assignment is subject to all provisions in the lease including radius, use, location and exclusivity and will not breach any other lease agreement

• Not disrupt tenant mix

Page 92: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Rejection of Lease – Calculation of Rejection Damages

• Calculate whatever damages are for breach under the lease

• Cap the damages at GREATER GREATER ofEquivalent of one year’s rent reserved in lease

ORAmount of rent reserved for 15% of the remaining

time under the lease not to exceed three yearsi.e., (10 years x 15% = rent for 1.5 years)

(7 years x 15% = rent for 1.05 years)

• All amounts are subject to mitigation if new tenant takes possession

• May be able to recover tort like damages in addition

Page 93: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Summary of Landlord Claims

• Secured – Extent defined by lease. • Unsecured – Most common >>> File Proof of

Claim• Administrative – Post-petition expense. Highest

priority– Prior to rejection >>> “STUB RENT” Issue– After rejection

• Property Tax / Expenses – Pro-rated• Environmental – Did claim arise pre-petition or

post-petition?

Page 94: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

THE LANDLORD CLAIM CONTINUUM

General Claim vs. Estateor

Secured Claim Dependingon Lease Language

Filingof

Bankruptcy

Administrative claim per rent reserved in lease until rejection

when claim is measured by benefit to

the estate

Assumption: Must cure all defaults and lease continues as before

Rejection: -Constitutes breach of lease from date of filing.-General claim or secured claim depending on lease.-Claim capped at greater of:(1)one year's rent or(2)15% of rent for remaining term of lease (3 year cap)

Page 95: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Tenant’s Perspective on Landlord Bankruptcy

• If bankrupt Landlord decides to assume or assign lease….– Tenant must be compensated for pecuniary loss (e.g.

CAM overcharge)– Must present evidence showing future performance of

landlord covenants• If bankrupt Landlord decides to reject lease…

– Tenant has option of EITHER • treating lease as terminated and vacating premises

without further obligation; OR • remaining in possession and setting off damages

against subsequent rent obligations

Page 96: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

NONBANKRUPTCY NONBANKRUPTCY CREDITOR RIGHTS AND CREDITOR RIGHTS AND

REMEDIESREMEDIESReceivershipsReceiverships

Page 97: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Receiverships

Upon the petition of a creditor, the court appoints a third party receiver to take control of the debtor’s assets.

Often used in conjunction with commercial real estate foreclosure.

May be gaining in popularity as alternative to gaining in popularity as alternative to bankruptcybankruptcy

Governed by Ohio Rev. Code Chapter 2735 Key to scope of Receiver’s powers is DUE

PROCESS being provided to lienholders Local Court Rules oftenoften important

Page 98: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Receiverships Receiver liquidates the debtor’s assets and

distributes the proceeds pro-rata to the creditors in a fashion similar to a Chapter 7 Trustee.

Receiver also continues to operate the business as an ongoing business

Typically achieved with Complaint plus Motion Ohio Rev. Code 1313.56 authorizes avoidance

type actions by receiver Unless otherwise provided by court order, there

is no discharge upon completion.

Local Court Rules oftenoften important

Page 99: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Receiverships – Evaluating the Option

Ability of State court to sell assets free and clear of encumbrances Recent decisions say Receiver can as long as due process

followed. See Ohio Dept. of Trans. v. Eastlake Land Dev. Co., 177 Ohio App.3d 379 (8th App. Dist. 2008)

Buyer’s willingness to proceed in non-bankruptcy context Whether company also has assets outside Ohio Working capital needs and willingness of secured lender

to continue making advances Competence of existing management Whether possible avoidance and preference claims exist

Page 100: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Foreclosure

• No nonjudicial sale procedure in Ohio• Ohio Supreme Court requires redaction of personal

identifiers on exhibits• Title report/commitment or preliminary judicial report

required to be filed with Complaint. Ohio Rev. Code 2329.191

• Mortgages often authorize appointment of receiver• Minimum bid is TWO THIRDS of appraised value as

determined by court appointed appraisers• No redemption after Confirmation of Sale Order entered

Page 101: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Foreclosure Defendants MUST Include

• Original mortgagor (i.e. party granting the mortgage) - note that this may or may not be the principal borrower and that if not, the principal borrower is not required to be named a defendant

• Current owner of the property, if different from the original mortgagor

• Junior or senior lienholders, including mortgage holders, judgment lien holders, County Treasurer, statutory lien holders such as mechanics' liens and others

• Spouse of individual debtor (to eliminate dower rights) • Current tenants and other occupants, regardless

whether there pursuant to written lease • Holders of other interests such as easements, if wish to

eliminate them

Page 102: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Assignment for Benefit of Creditors aka ABC

The debtor voluntarily assigns its assets to a third party custodian.

The custodian liquidates the debtor’s assets and distributes the proceeds pro rata to the creditors.

Similar to Chapter 7 bankruptcy, but no discharge for debtor

Governed by Ohio Rev. Code Chapter 1313 – very detailed provisions

Rarely used in Central Ohio, but utilized more often in Cincinnati area and possibly Cleveland

Page 103: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Assignment for Benefit of Creditors aka ABC

Must be filed in PROBATEPROBATE Court Initiated by filing a Deed of AssignmentDeed of Assignment and

filing of bond by assignee within 10 days Permissible to continue operating business for

period of time Sale of assets must be at purchase price of at

least TWO THIRDS appraised value Creditors have SIX months from time noticed

to file claims

Page 104: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Creditors’ Bill

• Available to creditors who have obtained judgment against debtor

• Tool to reach intangible assets of judgment debtor otherwise difficult to reach

• Creditor must show debtor does not have assets reachable through other remedies

• EXAMPLES: Patents, breach of contract claim

• Utilized through filing of new Complaint

Page 105: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Charging Order

• Available to creditors who have obtained judgment against debtor

• Means of reaching economic benefits associated with ownership interest of a Partner in partnership or a Member in a limited liability company

• If purchased by third party when foreclosed, purchaser receives distributions indefinitelyindefinitely

• Creditor files Motion in in case in which judgment obtained

• Exclusive remedy regarding ownership interest

Page 106: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Other Creditor Tools and Remedies

• Deed-in-Lieu Transactions

• Judgment Debtor Examinations

• Cognovit Notes and Judgments

Page 107: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

CURRENT TRENDSCURRENT TRENDS

• Increased Use of 363 Sales

• Emphasis on Demonstrating Chain of Ownership of Loan Documents

• Foreclosure Mediation Programs

• Business Courts/Commercial Dockets

Page 108: Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

Attorney and Counselor at Law

Plunkett CooneyPlunkett Cooney

300 E. Broad Street, Suite 590

Columbus, OH 43215

Direct: (614) 629-3014

[email protected]

http://ohiopracticalbusinesslaw.com

Teri G. Rasmussen, J.D.