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Presenting a live 90‐minute webinar with interactive Q&A
Intersection of Bankruptcy d S F l Land State Foreclosure Laws
Protecting Foreclosure Remedies and Overcoming Bankruptcy Pitfalls When Dealing With Distressed Borrowers
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, FEBRUARY 8, 2011
Today’s faculty features:
John F. Isbell, Partner, Thompson Hine, Atlanta
Johnathan C. Bolton, Senior Attorney, Fulbright & Jaworski, Houston
Craig S. Unterberg, Partner, Haynes & Boone, New York
The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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STRATEGIES FOR NAVIGATING BANKRUPTCY TO MONETIZE OR GAIN POSSESSION OF YOUR COLLATERAL
STRATEGIES FOR NAVIGATING BANKRUPTCY TO MONETIZE OR GAIN POSSESSION OF YOUR COLLATERAL
By John F. Isbell1
ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.
[1] John F. Isbell is a partner in Thompson Hine’s Atlanta, Georgia office. John can be reached at 404-541-2913 or at [email protected].
The Secured Creditor’s Foreclosure / liquidation Options
As a secured creditor facing a borrower bankruptcy filing you have As a secured creditor facing a borrower bankruptcy filing, you have options:
You can try to get out of bankruptcy court and exercise state law remedies, or
You can try to use the bankruptcy process to liquidate your collateral and maximize returns inside of the bankruptcy case.
You do not have to make a choice immediately, you can often change your position, and sometimes, early “defeats” can be used to your benefit later in the bankruptcy caseto your benefit later in the bankruptcy case.
5ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.5
Use of Cash Collateral Section 363(c)(2) states that “The trustee may not use sell or lease cash Section 363(c)(2) states that The trustee may not use, sell, or lease cash
collateral under paragraph (1) of this subsection unless –(A) each entity that has an interest in such cash collateral consents; or(B) the court, after notice and a hearing, authorizes such use, sale, or lease in accordance with the provisions of this section ”accordance with the provisions of this section.
Section 363(e) prohibits the use of such cash collateral “as is necessary to provide adequate protection of such interest.” Adequate Protection is defined in Section 361 to include monetary payments Adequate Protection is defined in Section 361 to include monetary payments,
replacement liens, or “such other relief”, but it can’t be just an administrative priority claim.
Accordingly, a secured lender with a security interest in the debtor’s cash collateral can either consent to use of cash collateral (and try to negotiatecollateral can either consent to use of cash collateral (and try to negotiate some concessions for such consent), or it can try prohibit use of cash collateral and take away the debtor’s ability to fund its bankruptcy case (unless the debtor can adequately protect the secured creditor’s interest).
6ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.6
Why Consent to Use of Cash Collateral? It is often in the secured creditors’ interest to keep its collateral (the It is often in the secured creditors interest to keep its collateral (the
Debtor’s business) operating pending a foreclosure or sale.
Usually, debtors are willing to include in the order approving use of cash collateral certain safeguards or “adequate protection” in the form of replacement liens, administrative claims, access to information, inspection rights for other collateral, etc.
More controversial forms of “adequate protection,” such as cross-collateralization, release of claims, blessing of liens, stipulations to claim amount, etc. may be available in some instances. c a a ou t, etc ay be a a ab e so e sta ces
7ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.7
Why Consent to Use of Cash Collateral? (Cont’d)
Can avoid a Section 552(b) “equities of the case” finding that shuts off your Can avoid a Section 552(b) equities of the case finding that shuts off your lien in post-petition cash collateral.
See Bank of N.Y. Trust Co. NA v. Pac. Lumber Co. (In re Scopac), 624 F 3d 274 282 84 (5th Cir 2010) (awarded $29 7 million as a 507(b) superF.3d 274, 282-84 (5th Cir. 2010) (awarded $29.7 million as a 507(b) super-priority claim based upon failure of adequate protection related to debtor’s use of post-petition cash collateral)
The creditor negotiated for its continued lien in post petition cash collateral The creditor negotiated for its continued lien in post-petition cash collateral.
Court ruled that all cash collateral, not just the cash collateral existing as of the petition date, was subject to an award of adequate protection
At confirmation, the pre-petition cash collateral was paid, but the post-petition cash collateral was spent. The court on appeal found a failure of adequate protection and awarded a Section 507(b) super-priority claim.
8ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.8
Why Consent to Use of Cash Collateral? (Cont’d)
Practice Tips Practice Tips-
Require that the Debtor make an evidentiary record supporting your award of adequate protection – especially if they propose to adequately
t t ith “ it hi ” Thi k th d l lik l tprotect you with an “equity cushion”. This makes the order less likely to be reversed on appeal.
Require specific findings of fact in the order consistent with the evidence and supporting your award of adequate protection.
The goal is to bind the Debtor and the Court to the order so that if adequate protection later fails (i.e., you don’t get paid the full amount of your cash collateral), you have a Section 507(b) super-priority administrative claim.
9ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.9
Why Oppose Use of Cash Collateral? You want to shut down the bankruptcy case You want to shut down the bankruptcy case.
In some states, you can effectively cutoff the Debtor’s right to collect its cash collateral based upon your pre-petition activities.
Absolute Assignment of Rents
Revocation of Right to Collect Rents / Direction Letters
Appointment of Receiver
They can’t adequately protect your interest in cash collateral
Projections show they will lose money on a post-petition basis
The Debtor is not offering you sufficient adequate protection.
You object to some of the proposed uses (i.e., payment of attorneys’ fees)
10ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.
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Why Oppose Use of Cash Collateral? (Cont’d) Practice Tips: Dangers to opposing use of Cash Collateral Practice Tips: Dangers to opposing use of Cash Collateral
Your liens and claim amounts might be challenged.
In a contested fight on Cash Collateral, the court may limit the amount of “adequate protection” given to the secured lender.q p g
The Court can use Section 552(b)’s equities of the case exception to shut off liens in some or all post-petition cash collateral.
You could win and now the company (i.e., your collateral) has no cash to operate be careful what you ask foroperate – be careful what you ask for.
Practice Tip: A potential benefit to opposing use of cash collateral If you oppose use of cash collateral and lose, you will likely receive a fully
litigated finding that you are adequately protected by X Y and Zlitigated finding that you are adequately protected by X, Y, and Z.
If that adequate protection later fails, you have a much more compelling case for seeking a Section 503(b) super-priority administrative claim.
11ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.11
Relief From the Automatic Stay Section 362(d) allows a secured party to obtain relief from the automatic Section 362(d) allows a secured party to obtain relief from the automatic
stay For cause, including the lack of adequate protection
If (1) the debtor does not have equity in the property and (2) the property is not ( ) q y p p y ( ) p p ynecessary for an effective reorganization
In a single asset real estate case, the debtor fails, within 90 days after entry of the order for relief (or longer if granted for cause) or 30 days after the court determines that the case is a single asset real estate case, to either (1) file a l f i i h h bl ibili f b i fi d (2)plan of reorganization that has a reasonable possibility of being confirmed or (2)
commence making monthly non-default interest payment on the “value of the creditor’s interest in the real estate”, or
If the court finds that the filing of bankruptcy was part of a scheme to delay, hinder and defraud creditors that involved either (A) transfer of all or part of thehinder, and defraud creditors that involved either (A) transfer of all or part of the secured creditor’s collateral without their consent or court order, or (B) multiple bankruptcy filings affecting such real property.
12ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.12
Why Seek Relief From Stay? You want to exercise your state law remedies You want to exercise your state law remedies
foreclose on your collateral
seek the appointment of a receiver
Y bi th ti ith t f d t t ti You combine the motion with a request for adequate protection Seek monetary payments
Replacement liens
Blessing of liens, perfection, and claim amount
Access to property, information, etc.
Setup a Section 507(b) claim if adequate protection failsp ( ) q p
13ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.13
Why You Might Want to Settle Your Stay Relief Motion?
Your liens or claim amount might be challenged Your liens or claim amount might be challenged
You might win – now you have to do something outside of bankruptcy court.
The court may deny the motion and establish a value on your collateral that you don’t like
It might hurt sale prospects later in the case It might hurt sale prospects later in the case
Hurts chances of getting a 507(b) claim if the value is low and easy to “adequately protect”
NOTE: It is almost always a good idea to bring, at a minimum, a motion for adequate protection.
14ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.14
Cause for Granting Relief From Stay
The most common form of “cause” is lack of adequate protection The most common form of cause is lack of adequate protection. Generally, you should show that your collateral is depreciating in value during
the pendency of the bankruptcy case.
The second most common form of cause is bad faith. Laguna Assocs. Ltd. gP’shp. v. Aetna Cas. & Sur. Co. (In re Laguna Assocs. Ltd. P’shp.), 30 F.3d 734, 736-37 (6th Cir. 1994) (finding that bad faith existed and listing the following non-exclusive list of bad faith factors: (1) the debtor has one asset; (2) the pre-petition conduct of the debtor has been improper; (3) there are only a few unsecured creditors; (4) the debtor's property has beenthere are only a few unsecured creditors; (4) the debtor's property has been posted for foreclosure, and the debtor has been unsuccessful in defending against the foreclosure in state court; (5) the debtor and one creditor have proceeded to a standstill in state court litigation, and the debtor has lost or has been required to post a bond which it cannot afford; (6) the filing of thehas been required to post a bond which it cannot afford; (6) the filing of the petition effectively allows the debtor to evade court orders; (7) the debtor has no ongoing business or employees; and (8) the lack of possibility of reorganization.)
15ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.15
Lack of Adequate Protection / Seeking an Award of Adequate Protection
Section 361 defines “adequate protection” to include monetary Section 361 defines adequate protection to include monetary payments, replacement liens, or “such other relief”, but it can’t be just an administrative priority claim.
Such other relief may include the following:
An equity cushion in the property – some courts hold that 20% in excess of debt is required to be a sufficient equity cushionexcess of debt is required to be a sufficient equity cushion
Payments to taxing authorities
Maintaining insurance
Inspection rights (conducting phase II environmental reports, photographing and taking inventory of collateral, etc.)
16ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.16
Section 362(d)(2)- The Debtor has no Equity in the Property and the Property is not Necessary for an Effective Reorganization
Determining whether the debtor has equity in the property / Determining whether the debtor has equity in the property / collateral is a valuation issue
Timing of valuation
Some courts require the valuation to be made as of the Petition Date
Others determine value as of the date the motion was filed
Generally, the valuation is for relief from stay or adequate protection only y, y q p yand does not bind the court to a valuation at plan confirmation.
Generally, valuation of debtor’s equity includes subordinate secured debt and other lien holders.
Valuation methods are subject to debate (i.e., fair market value, orderly liquidation value, forced liquidation value, comparison method, discounted cash flow method, etc.)
17ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.17
The Debtor has no Equity in the Property and the Property is not Necessary for an Effective Reorganization (Cont’d)
Determining whether the property / collateral is necessary for an Determining whether the property / collateral is necessary for an “effective” reorganization
This means that there must be a reasonable possibility of a successful reorganization within a reasonable time and that the collateral is necessary for that reorganization.
If there is no reasonable likelihood of reorganization, then the collateral is not necessary for an effective reorganization
Creditor dissent may show that a plan will not be approved.
Or that continued business model is not feasible Or that continued business model is not feasible.
18ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.18
Post Relief- From Stay Rule 4001(a)(3) Stay of Order for 14 days unless the court orders Rule 4001(a)(3)- Stay of Order for 14 days, unless the court orders
otherwise.
Always ask the court to “order otherwise” and grant immediate relief.
Some stay relief is minimal (i.e., you can advertise for foreclosure, but you have to get additional relief from stay to actually foreclose)
Some is more permanent (you obtain relief from stay to exercise state law remedies against your collateral)
The debtor still owns the property and may fight you in your attempt The debtor still owns the property and may fight you in your attempt to exercise your state law remedies
19ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.19
Bankruptcy Asset Sales Sometimes liquidating collateral in bankruptcy is better than your Sometimes, liquidating collateral in bankruptcy is better than your
state law remedies. Example: Golf Course located in two states
One state was a non judicial foreclosure state and the other was a judicial One state was a non-judicial foreclosure state and the other was a judicial foreclosure state.
Without the bankruptcy sale process, the creditor would have been forced to seek the appointment of a receiver and endure a year or more in the foreclosure processforeclosure process
We represented the secured creditor in submitting a stalking horse credit bid during the 363 sale process.
We ultimately took title much more quickly and with less expense than had y q y pwe gone through the receiver / foreclosure process
20ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.20
Bankruptcy Asset Sales (Cont’d)
Sometimes since you are already in the bankruptcy process you Sometimes, since you are already in the bankruptcy process, you might as well use it to liquidate your collateral.
Bankruptcy sales often attract more buyers looking for “bargains”
Sometimes, the prices go up significantly from pre-bankruptcy offers (i.e., Texas Rangers sale)
Sale might relieve you from state law post foreclosure battles regarding Sale might relieve you from state law post-foreclosure battles regarding the value of the collateral for purposes of pursuing deficiencies
A “free and clear” sale order is often more attractive to buyers d ith li bilit i d th titl iconcerned with successor liability issues and other title issues.
21ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.21
Bankruptcy Asset Sales (Cont’d)
Sometimes your collateral is being liquidated whether you are in Sometimes, your collateral is being liquidated whether you are in favor of it or not (and perhaps on unfavorable terms).
Recent limits to credit-bidding rights – Philadelphia Newspapers
Section 506(c) surcharge claims
Pressure from courts to force carve-outs for professionals and administrative claimsadministrative claims
22ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.22
Liquidation – Chapter 7 Abandonment of Property- Trustee may abandon property to Debtor Abandonment of Property- Trustee may abandon property to Debtor,
thereby removing the protections of the automatic stay
Relief From Stay- you can still move for relief from stay, for adequate protection, or to compel abandonment of propertyp , p p p y
Section 363 sales – the trustee can still sell property, but is less likely to sell unless there appears to be equity in the property or the secured creditor will leave a “tip” or carve-out for costs and unsecured creditors
23ATLANTA | CINCINNATI | CLEVELAND | COLUMBUS | DAYTON | NEW YORK | WASHINGTON, D.C.23
Intersection of Bankruptcy and State Foreclosure Laws:Intersection of Bankruptcy and State Foreclosure Laws:Protecting Foreclosure Remedies and Overcoming Bankruptcy PitfallsProtecting Foreclosure Remedies and Overcoming Bankruptcy Pitfalls
When Dealing with Distressed BorrowersWhen Dealing with Distressed Borrowers
Fraudulent Transfers, Preferences, and Lender LiabilityFraudulent Transfers, Preferences, and Lender Liability
Craig S. UnterbergCraig S. Unterberg212.659.4987212.659.4987
[email protected]@haynesboone.comg g@ yg g@ y
February 8, 2011February 8, 2011
This material does not constitute a legal opinion or advice related to any of the subjects or topics mentioned herein. It isThis material does not constitute a legal opinion or advice related to any of the subjects or topics mentioned herein. It isonly an informative overview of the subject matteronly an informative overview of the subject matter
©2011 Haynes and Boone, LLP
only an informative overview of the subject matter.only an informative overview of the subject matter.
Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsOverviewOverview
Discussion ParametersDiscussion ParametersThis discussion is limited to the effect of a bankruptcy petition filing on preThis discussion is limited to the effect of a bankruptcy petition filing on pre--petition petition transfers, where the Bankruptcy Code in effect reaches back to invalidate actions taken transfers, where the Bankruptcy Code in effect reaches back to invalidate actions taken prior to the bankruptcy filingprior to the bankruptcy filingprior to the bankruptcy filing.prior to the bankruptcy filing.
Topics CoveredTopics CoveredFraudulent TransfersFraudulent TransfersPreferencesPreferencesLender LiabilityLender Liability
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsFraudulent TransfersFraudulent Transfers
Fraudulent TransfersFraudulent TransfersFraudulent transfers (or fraudulent conveyances) are subject to Fraudulent transfers (or fraudulent conveyances) are subject to avoidanceavoidance by the by the bankruptcy trustee (or debtorbankruptcy trustee (or debtor--inin--possession acting with powers of the bankruptcy trustee).possession acting with powers of the bankruptcy trustee).
Fraudulent transfer actions arise under both Fraudulent transfer actions arise under both state lawstate law and the and the Bankruptcy CodeBankruptcy Code, and the , and the Bankruptcy Code enables avoidance of transfers under both sources of law.Bankruptcy Code enables avoidance of transfers under both sources of law.
A fraudulent “A fraudulent “transfertransfer” encompasses every mode of parting with property or interest in ” encompasses every mode of parting with property or interest in property, including:property, including:-- Payment (or repayment) of money.Payment (or repayment) of money.
G ti it i t t i tG ti it i t t i t-- Granting a security interest in property.Granting a security interest in property.-- Perfecting an unperfected security interest already granted.Perfecting an unperfected security interest already granted.-- Guaranteeing and obligation.Guaranteeing and obligation.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsFraudulent Transfers (continued)Fraudulent Transfers (continued)
Sources of Fraudulent Transfer Law:Sources of Fraudulent Transfer Law:-- Uniform Fraudulent Conveyance Act (“UFCA”).Uniform Fraudulent Conveyance Act (“UFCA”).
-- Small minority of states, including New York.Small minority of states, including New York.-- Uniform Fraudulent Transfer Act (“UFTA”).Uniform Fraudulent Transfer Act (“UFTA”).
-- Large majority of states, including California, Delaware, Florida and Large majority of states, including California, Delaware, Florida and Texas.Texas.
-- Bankruptcy CodeBankruptcy Code §§ 548 (and Bankruptcy Code548 (and Bankruptcy Code §§ 544 which incorporates state544 which incorporates stateBankruptcy Code Bankruptcy Code §§ 548 (and Bankruptcy Code 548 (and Bankruptcy Code §§ 544 which incorporates state 544 which incorporates state law fraudulent transfer actions).law fraudulent transfer actions).
Key Differences:Key Differences:Under UFCA the term “fair consideration” rather is used than “reasonably equivalent Under UFCA the term “fair consideration” rather is used than “reasonably equivalent value” found in UFTA and Bankruptcy Code value” found in UFTA and Bankruptcy Code §§ 548 and has a “good faith” requirement.548 and has a “good faith” requirement.
Under UFCA or UFTA of most states, the lookUnder UFCA or UFTA of most states, the look--back period is typically 4 to 6 years, whileback period is typically 4 to 6 years, while
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Under UFCA or UFTA of most states, the lookUnder UFCA or UFTA of most states, the look back period is typically 4 to 6 years, while back period is typically 4 to 6 years, while the lookthe look--back period under Bankruptcy Code back period under Bankruptcy Code §§ 548 is only 2 years.548 is only 2 years.
Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsFraudulent Transfers (continued)Fraudulent Transfers (continued)
Elements of an Actual (Intentional) Fraudulent TransferElements of an Actual (Intentional) Fraudulent Transfer-- Transfer made with actual intent to hinder, delay or defraud any creditor.Transfer made with actual intent to hinder, delay or defraud any creditor.
-- Intent shown through “Intent shown through “badges of fraudbadges of fraud” (usually more than one).” (usually more than one).Di t i di t t f t i idDi t i di t t f t i id-- Direct or indirect transfer to an insider.Direct or indirect transfer to an insider.
-- Debtor retained possession or control postDebtor retained possession or control post--transfer.transfer.-- Secrecy, haste or unusualness of transfer.Secrecy, haste or unusualness of transfer.-- Suit threatened against debtor prior to transfer.Suit threatened against debtor prior to transfer.Suit threatened against debtor prior to transfer.Suit threatened against debtor prior to transfer.-- Transfer of substantially all debtor’s property.Transfer of substantially all debtor’s property.-- Debtor removed or concealed property.Debtor removed or concealed property.-- Consideration not reasonably equivalent to transferred Consideration not reasonably equivalent to transferred
property.property.-- Debtor was, or became shortly after transfer, insolvent.Debtor was, or became shortly after transfer, insolvent.-- Transfer occurred shortly after debtor incurred substantial Transfer occurred shortly after debtor incurred substantial
debt.debt.
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debt.debt.
Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsFraudulent Transfer (continued)Fraudulent Transfer (continued)
Elements of a Constructive Fraudulent TransferElements of a Constructive Fraudulent Transfer-- Transfer in exchange for less than “reasonably equivalent value” (under UFTA Transfer in exchange for less than “reasonably equivalent value” (under UFTA
and Bankruptcy Code and Bankruptcy Code §§ 548) (without “fair consideration” which term includes 548) (without “fair consideration” which term includes “good faith” (under UFCA))“good faith” (under UFCA))good faith (under UFCA)).good faith (under UFCA)).
-- One of the following:One of the following:-- Transferor was insolvent at time of (or as a result of (under Transferor was insolvent at time of (or as a result of (under
Bankruptcy Code Bankruptcy Code §§ 548)) the transfer.548)) the transfer.-- Transferor intended to or believed it would incur debts beyond its Transferor intended to or believed it would incur debts beyond its
ability to pay as they matured.ability to pay as they matured.-- Transfer left transferor with unreasonably small capital (unreasonably Transfer left transferor with unreasonably small capital (unreasonably
insufficient capital (under Bankruptcy Codeinsufficient capital (under Bankruptcy Code §§ 548)).548)).insufficient capital (under Bankruptcy Code insufficient capital (under Bankruptcy Code §§ 548)).548)).
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsReasonably Equivalent Value (continued)Reasonably Equivalent Value (continued)
Reasonably Equivalent ValueReasonably Equivalent ValueOther than in the case of a mortgage foreclosure (and possibly nonOther than in the case of a mortgage foreclosure (and possibly non--mortgage foreclosures), mortgage foreclosures), determination of “reasonably equivalent value” is based on a “determination of “reasonably equivalent value” is based on a “totality of the totality of the circumstancescircumstances” (though fair market value still appears the benchmark for determining” (though fair market value still appears the benchmark for determiningcircumstancescircumstances (though fair market value still appears the benchmark for determining (though fair market value still appears the benchmark for determining “reasonably equivalent value”). There is no bright“reasonably equivalent value”). There is no bright--line rule and determination is line rule and determination is ““fundamentally one of common sense, measured against market realityfundamentally one of common sense, measured against market reality.”.”
Real Estate Mortgage Foreclosure PresumptionReal Estate Mortgage Foreclosure PresumptionIn the case of a mortgage foreclosure, a “reasonably equivalent value” is “the price in fact In the case of a mortgage foreclosure, a “reasonably equivalent value” is “the price in fact received at the foreclosure sale, so long as all the requirements of the relevant state’s received at the foreclosure sale, so long as all the requirements of the relevant state’s foreclosure law have been complied with.”foreclosure law have been complied with.”pp
It is not certain that this presumptive “reasonably equivalent value” based on proper state It is not certain that this presumptive “reasonably equivalent value” based on proper state foreclosure proceedings applies to foreclosures other than mortgage foreclosures.foreclosure proceedings applies to foreclosures other than mortgage foreclosures.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsTransfers on Account of Antecedent DebtTransfers on Account of Antecedent Debt
Transfers on Account of Antecedent DebtTransfers on Account of Antecedent DebtAs regards whether payments made by a debtor to a creditor on account of antecedent debt As regards whether payments made by a debtor to a creditor on account of antecedent debt can be fraudulent transfers, courts are not in universal alignment:can be fraudulent transfers, courts are not in universal alignment:
S t ( d i t l t i N Y k) h ld th t t f tS t ( d i t l t i N Y k) h ld th t t f t-- Some courts (predominately courts in New York) hold that transfers on account Some courts (predominately courts in New York) hold that transfers on account of antecedent debt cannot be fraudulent transfers (the “of antecedent debt cannot be fraudulent transfers (the “Per SePer Se” test).” test).
-- Most courts hold that whether transfers on account of antecedent debt are Most courts hold that whether transfers on account of antecedent debt are fraudulent transfers is a question of fact and circumstance (the “fraudulent transfers is a question of fact and circumstance (the “FactsFacts--andand--CircumstancesCircumstances” test).” test).
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsTransfers on Account of Antecedent Debt (continued)Transfers on Account of Antecedent Debt (continued)
The “Per Se” TestThe “Per Se” TestA payment made or collateral granted on account of antecedent debt is per se not a A payment made or collateral granted on account of antecedent debt is per se not a fraudulent transfer (though it may be a preference).fraudulent transfer (though it may be a preference).
S li it ti b i tS li it ti b i t-- Some limitations by various courts:Some limitations by various courts:-- Requirement of contemporaneous forbearance by lenders.Requirement of contemporaneous forbearance by lenders.-- Requirement that antecedent debt consist of money actually Requirement that antecedent debt consist of money actually
borrowed and received (as opposed to a guaranty).borrowed and received (as opposed to a guaranty).( pp g y)( pp g y)-- Requirement that transfers be made in good faith or not to Requirement that transfers be made in good faith or not to
insiders.insiders.-- Courts applying test:Courts applying test:
S D N YS D N Y-- S.D.N.Y.S.D.N.Y.-- D. Del. (some D. Del. courts used “factsD. Del. (some D. Del. courts used “facts--andand--circumstances” test)circumstances” test)
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsTransfers on Account of Antecedent Debt (continued)Transfers on Account of Antecedent Debt (continued)
The “FactsThe “Facts--andand--Circumstances” TestCircumstances” TestThe court looks at totality of the circumstances and determines whether a transaction The court looks at totality of the circumstances and determines whether a transaction conferred realizable commercial value on debtor that was reasonably equivalent to the conferred realizable commercial value on debtor that was reasonably equivalent to the realizable commercial value of the property transferred to creditorrealizable commercial value of the property transferred to creditorrealizable commercial value of the property transferred to creditor.realizable commercial value of the property transferred to creditor.-- Consider certain factors:Consider certain factors:
-- Good faith of parties.Good faith of parties.-- Difference between amount paid and fair market value.Difference between amount paid and fair market value.pp-- Whether arm’s length transaction.Whether arm’s length transaction.-- Value received by debtor in addition to loan.Value received by debtor in addition to loan.-- Disparity between amount of debt and value of collateral.Disparity between amount of debt and value of collateral.
-- Courts applying test:Courts applying test:-- Most courts outside S.D.N.Y.Most courts outside S.D.N.Y.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsAdditional Credit Protection as Fraudulent TransferAdditional Credit Protection as Fraudulent Transfer
Additional Credit Protection as Fraudulent TransferAdditional Credit Protection as Fraudulent TransferWhen entering into a forbearance or waiver agreement in exchange for additional credit When entering into a forbearance or waiver agreement in exchange for additional credit protections from the borrower, avoidance is possible to the extent the borrower is deemed protections from the borrower, avoidance is possible to the extent the borrower is deemed not to have received “reasonably equivalent value” for any protections receivednot to have received “reasonably equivalent value” for any protections receivednot to have received reasonably equivalent value for any protections received.not to have received reasonably equivalent value for any protections received.
Important ConsiderationsImportant Considerations-- Consider jurisdiction (especially when securing antecedent debt).Consider jurisdiction (especially when securing antecedent debt).j ( p y g )j ( p y g )-- Consider value of property or security interest received compared to value of Consider value of property or security interest received compared to value of
benefit conferred on borrower.benefit conferred on borrower.-- Consider granting forbearance (even if limited) in connection with Consider granting forbearance (even if limited) in connection with
additional credit protectionsadditional credit protectionsadditional credit protections.additional credit protections.-- Consider lookConsider look--back periods and likelihood of borrower’s insolvency.back periods and likelihood of borrower’s insolvency.
-- Consider “bad boy” guarantees to decrease risks of borrower filing for Consider “bad boy” guarantees to decrease risks of borrower filing for bankruptcy protection.bankruptcy protection.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsPreferencesPreferences
PreferencesPreferencesPreferences, like fraudulent transfers, are subject to avoidance by the bankruptcy trustee (or Preferences, like fraudulent transfers, are subject to avoidance by the bankruptcy trustee (or debtordebtor--inin--possession).possession).
Preference actions, unlike fraudulent transfer actions, arise solely under the Bankruptcy Preference actions, unlike fraudulent transfer actions, arise solely under the Bankruptcy Code.Code.
Elements of a Preferential TransferElements of a Preferential Transfer-- Transfer of interest of debtor in property.Transfer of interest of debtor in property.-- To or for benefit of creditor.To or for benefit of creditor.-- For or on account of antecedent debt.For or on account of antecedent debt.-- Made while debtor insolvent.Made while debtor insolvent.-- Made on or within 90 days before filing (or within 1 year if creditor is insider).Made on or within 90 days before filing (or within 1 year if creditor is insider).
Enables creditor to receive more than would in liquidation under Chapter 7 ofEnables creditor to receive more than would in liquidation under Chapter 7 of
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-- Enables creditor to receive more than would in liquidation under Chapter 7 of Enables creditor to receive more than would in liquidation under Chapter 7 of Bankruptcy Code had transfer not been made.Bankruptcy Code had transfer not been made.
Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsForeclosure Sale as PreferenceForeclosure Sale as Preference
Foreclosure Sale as PreferenceForeclosure Sale as PreferenceIn the context of a foreclosure sale, where a lender credit bids at a foreclosure sale and In the context of a foreclosure sale, where a lender credit bids at a foreclosure sale and subsequently sells the collateral for an amount exceeding its claim, a preferential transfer subsequently sells the collateral for an amount exceeding its claim, a preferential transfer may exist to the extent the subsequent sale exceeds the lender’s claimmay exist to the extent the subsequent sale exceeds the lender’s claimmay exist to the extent the subsequent sale exceeds the lender s claim.may exist to the extent the subsequent sale exceeds the lender s claim.
Courts are not in agreement on this issue, and while some have held actions arising from Courts are not in agreement on this issue, and while some have held actions arising from such excess receipts should be brought as preferences, other have held such actions should such excess receipts should be brought as preferences, other have held such actions should be brought as fraudulent transfers.be brought as fraudulent transfers.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsAdditional Credit Protection as PreferenceAdditional Credit Protection as Preference
Additional Credit Protection as PreferenceAdditional Credit Protection as PreferenceIn the context of a forbearance or waiver, where a lender agrees to a forbearance or waiver In the context of a forbearance or waiver, where a lender agrees to a forbearance or waiver in exchange for increased or additional credit protections (i.e., changes to credit facility, in exchange for increased or additional credit protections (i.e., changes to credit facility, additional interest or fees additional collateral or credit support restrictions on borrower’sadditional interest or fees additional collateral or credit support restrictions on borrower’sadditional interest or fees, additional collateral or credit support, restrictions on borrower s additional interest or fees, additional collateral or credit support, restrictions on borrower s activities, increased reporting requirements, releases of claims against lender, remedying activities, increased reporting requirements, releases of claims against lender, remedying perfection deficiencies), such protections may be deemed preferential transfers.perfection deficiencies), such protections may be deemed preferential transfers.
Defenses to Preference ActionsDefenses to Preference Actions-- Contemporaneous new value.Contemporaneous new value.-- Ordinary course.Ordinary course.
Purchase moneyPurchase money-- Purchase money.Purchase money.-- Subsequent new value.Subsequent new value.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsDefenses Against a Preference ActionDefenses Against a Preference Action
Contemporaneous New ValueContemporaneous New ValueRequirements:Requirements:-- Transfer intended by debtor and creditor to be a contemporaneous exchange for Transfer intended by debtor and creditor to be a contemporaneous exchange for
l d i f t b t ti ll t hl d i f t b t ti ll t hnew value, and in fact a substantially contemporaneous exchange.new value, and in fact a substantially contemporaneous exchange.
New valueNew value means money, money’s worth in goods, services, or new credit, or release of means money, money’s worth in goods, services, or new credit, or release of lien that is not void or voidable.lien that is not void or voidable.
ExamplesExamples-- Borrower pays inventory supplier for new shipment of inventory.Borrower pays inventory supplier for new shipment of inventory.-- Lender increases credit facility limit in exchange for increase in interest rate or Lender increases credit facility limit in exchange for increase in interest rate or
credit support.credit support.-- Lender waives default in exchange for increase in interest rate or credit support.Lender waives default in exchange for increase in interest rate or credit support.-- Lender forbears in exchange for increase in interest rate or credit support.Lender forbears in exchange for increase in interest rate or credit support.
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Lender forbears in exchange for increase in interest rate or credit support.Lender forbears in exchange for increase in interest rate or credit support.-- A forbearance of time not universally accepted as “new value.”A forbearance of time not universally accepted as “new value.”
Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsDefenses Against a Preference Action (continued)Defenses Against a Preference Action (continued)
Ordinary CourseOrdinary CourseRequirements:Requirements:-- Debt must be incurred in ordinary course of Debt must be incurred in ordinary course of debtor’s businessdebtor’s business (inquires into past (inquires into past
b i ti iti f thi ti l d bt )b i ti iti f thi ti l d bt )business activities of this particular debtor).business activities of this particular debtor).-- Payment must be made in ordinary course of Payment must be made in ordinary course of business or financial dealings business or financial dealings
between debtor and creditorbetween debtor and creditor (inquires into past relationship of this debtor and (inquires into past relationship of this debtor and this creditor).this creditor).
-- Payment must be made on ordinary business Payment must be made on ordinary business termsterms (inquires into business (inquires into business community at large).community at large).
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsDefenses Against a Preference Action (continued)Defenses Against a Preference Action (continued)
Purchase MoneyPurchase MoneyRequirements:Requirements:-- Transfer of security interest in property must be in exchange for new value Transfer of security interest in property must be in exchange for new value
t t it t d ibi t ll t lt t it t d ibi t ll t lpursuant to a security agreement describing property as collateral.pursuant to a security agreement describing property as collateral.-- The new value must be intended to be used to acquire such property.The new value must be intended to be used to acquire such property.-- The new value must be in fact used to acquire such property.The new value must be in fact used to acquire such property.-- The security interest must be perfected within 30 days of debtor possessing theThe security interest must be perfected within 30 days of debtor possessing theThe security interest must be perfected within 30 days of debtor possessing the The security interest must be perfected within 30 days of debtor possessing the
property.property.
This is essentially a form of a contemporaneous exchange for new value.This is essentially a form of a contemporaneous exchange for new value.
ExampleExample-- Borrower grants a security interest to lender on equipment in exchange for lender Borrower grants a security interest to lender on equipment in exchange for lender
providing credit for, and borrower using credit for, purchase of such equipmentproviding credit for, and borrower using credit for, purchase of such equipment.
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providing credit for, and borrower using credit for, purchase of such equipmentproviding credit for, and borrower using credit for, purchase of such equipment.
Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsDefenses Against a Preference Action (continued)Defenses Against a Preference Action (continued)
Subsequent New ValueSubsequent New ValueRequirements:Requirements:-- Transfer to or for benefit of creditor, to the extent that, after a transfer to or for Transfer to or for benefit of creditor, to the extent that, after a transfer to or for
th b fit f dit h dit l t f b fit f d btth b fit f dit h dit l t f b fit f d btthe benefit of a creditor, such creditor gave new value to or for benefit of debtor.the benefit of a creditor, such creditor gave new value to or for benefit of debtor.-- New value must not be otherwise secured by nonNew value must not be otherwise secured by non--avoidable security interest.avoidable security interest.-- Debtor must not have made otherwise nonDebtor must not have made otherwise non--avoidable transfer to or for benefit of avoidable transfer to or for benefit of
creditor on account of new value.creditor on account of new value.
ExampleExample-- Borrower pays inventory supplier on past debt in exchange for inventory Borrower pays inventory supplier on past debt in exchange for inventory
li ’ d li f hi t ditli ’ d li f hi t ditsupplier’s delivery of new shipment on credit.supplier’s delivery of new shipment on credit.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsLender LiabilityLender Liability
Lender LiabilityLender LiabilityIn the context of foreclosure remedies, absent fraud or bad faith, fraudulent transfer actions In the context of foreclosure remedies, absent fraud or bad faith, fraudulent transfer actions and preference actions are the primary concerns for lenders.and preference actions are the primary concerns for lenders.
However, a lender can incur liability for its conduct in pursuing nonHowever, a lender can incur liability for its conduct in pursuing non--foreclosure remedies foreclosure remedies against a distressed borrower as well.against a distressed borrower as well.
Some ExamplesSome Examples-- Breach of contract.Breach of contract.-- Duress.Duress.-- Interference.Interference.-- Alter ego / control.Alter ego / control.-- Breach of fiduciary duty.Breach of fiduciary duty.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsMinimizing Lender LiabilityMinimizing Lender Liability
Minimizing Lender LiabilityMinimizing Lender LiabilitySome considerations for limiting lender liability:Some considerations for limiting lender liability:-- Limit actions to rights found within loan documentation.Limit actions to rights found within loan documentation.
-- Adhere to agreements made therein.Adhere to agreements made therein.-- Expressly state no oral agreements.Expressly state no oral agreements.
-- Limit exercises of rights under loan documentation to protection of lender’s right Limit exercises of rights under loan documentation to protection of lender’s right to repayment and preservation of security interest in collateral.to repayment and preservation of security interest in collateral.to repayment and preservation of security interest in collateral.to repayment and preservation of security interest in collateral.
-- Avoid improper influence over borrower not directly related to protection of Avoid improper influence over borrower not directly related to protection of lender’s right to repayment and preservation of security interest in collateral.lender’s right to repayment and preservation of security interest in collateral.
-- Avoid claiming to have rights not possessed (or not contained within loan Avoid claiming to have rights not possessed (or not contained within loan d t ti )d t ti )documentation).documentation).
-- Avoid warning borrower of an intent to exercise rights if no such intent exists.Avoid warning borrower of an intent to exercise rights if no such intent exists.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsMinimizing Lender Liability (continued)Minimizing Lender Liability (continued)
Minimizing Lender LiabilityMinimizing Lender LiabilitySome further considerations for limiting lender liability:Some further considerations for limiting lender liability:-- Refrain from acting as or controlling borrower.Refrain from acting as or controlling borrower.
-- Limit involvement in borrower’s dayLimit involvement in borrower’s day--toto--day business operations.day business operations.-- Avoid appointing members to borrower’s board.Avoid appointing members to borrower’s board.-- Avoid requiring borrower to employ specific persons (i.e., Avoid requiring borrower to employ specific persons (i.e.,
accountants, etc.).accountants, etc.).accountants, etc.).accountants, etc.).-- Expressly negate any joint venture relationship in loan documentation.Expressly negate any joint venture relationship in loan documentation.-- Expressly negate any fiduciary duty in loan documentation.Expressly negate any fiduciary duty in loan documentation.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsConsequencesConsequences
A creditor faces a number of consequences in Bankruptcy court to having a transfer A creditor faces a number of consequences in Bankruptcy court to having a transfer deemed fraudulent transfer or preference and where its actions are deemed to give rise to deemed fraudulent transfer or preference and where its actions are deemed to give rise to lender liability.lender liability.
Possible Consequences:Possible Consequences:-- Avoidance of the transfer.Avoidance of the transfer.-- Judgment in the amount of the transfer.Judgment in the amount of the transfer.gg-- Damages.Damages.-- Equitable subordination of claim.Equitable subordination of claim.-- ReRe--characterize debt as equity.characterize debt as equity.
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Intersection of Bankruptcy and State Foreclosure LawsIntersection of Bankruptcy and State Foreclosure LawsFurther InformationFurther Information
Craig S. UnterbergCraig S. Unterberg | 212.659.4987 | [email protected]| 212.659.4987 | [email protected]
Alexander T. Alexander T. GrishmanGrishman | 212.659.8965 | [email protected]| 212.659.8965 | [email protected]
John EJohn E DonaleskiDonaleski | 212 659 4973 | john donaleski@haynesboone com| 212 659 4973 | john donaleski@haynesboone comJohn E. John E. DonaleskiDonaleski | 212.659.4973 | [email protected]| 212.659.4973 | [email protected]
Haynes and Boone, LLPHaynes and Boone, LLP30 Rockefeller Plaza30 Rockefeller Plaza
26th Floor26th Floor
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New York, New York 10112New York, New York 10112
Strafford CLE Presentation:Intersection of Bankruptcy and State Foreclosure Laws
F b 8 2011
Th I t f B k t
February 8, 2011
The Impact of Bankruptcy on Distressed Real Estate
Johnathan C. BoltonFULBRIGHT & JAWORSKI LLP
Houston, Texas(713) 651-5113
Houston New York Washington DC Austin Dallas Los Angeles Minneapolis San Antonio Hong Kong London Munich
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The Impact of Bankruptcyon Distressed Real Estateon Distressed Real Estate
I. Asset salesA L d i t th d f th “ t d d t d” i dA. Lenders coming to the end of the “extend and pretend” periodB. Section 363 sales are a great way to sell assets subject to
multiple/competing liens and interestsC. Some circuits hold that sales of substantially all assets are sub y
rosa plans that short-circuit the protections of 1129 (In re BraniffAirways, Inc., 700 F.2d 935 (5th Cir. 1983)).
D. During exclusivity period, it is difficult to prevent the debtor from proposing a plan or a 363 sale of the assetsproposing a plan or a 363 sale of the assets1. Seek to lift stay?2. Seek to dismiss case as a “bad faith” filing? 3. Seek to terminate exclusivity?4. File a competing plan of reorganization?
E. recent decisions have been harsh to credit bidding rights F. may make sense for Lender to work with the
Debtor to accomplish a saleDebtor to accomplish a sale.
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The Impact of Bankruptcyon Distressed Real Estateon Distressed Real Estate
II. Dirt for debtA C f ll t l i f ll ti f ti f th d bt OKA. Conveyance of collateral in full satisfaction of the debt - OKB. Conveyance of less than all collateral back to the lender in full
satisfaction of the debt (In re Atlanta Southern Bus. Park Ltd., 173 B.R. 444, 449 (Bankr. N.D. Ga. 1994).
C. Conveyance of different collateral in satisfaction of the debt? (Brite v. Sun Country Development, Inc. (In re Sun Country Development, Inc.), 764 F.2d 406, 408 (5th Cir. 1985)).
D A question of “indubitable equivalence” (In re Murel Holding CorpD. A question of indubitable equivalence (In re Murel Holding Corp., 75 F.2d 941 (2d 1935), Sandy Ridge Development Corp. v. Louisiana National Bank, 881 F.2d 1346 (5th Cir. 1989)).
E. Some circuits will not confirm dirt-for-debt plans (In re Arnold & Baker Farms 85 F 3d 1415 (9th Cir 1996))Baker Farms, 85 F.3d 1415 (9th Cir. 1996)).
F. Recent case: In re LBJ Lakefront, Inc., No. 10-10023-CAG (W.D. Texas 2010) (denying plan to convey less than all of the lender’s collateral).
.
.
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The Impact of Bankruptcyon Distressed Real Estateon Distressed Real Estate
III. Deeds-in-lieu of foreclosure
A. Helps Lenders avoid or reduce the delay, expense and possible uncertainty of going through the foreclosure process.
B. Borrowers may be able to eliminate personal liability and guarantee issuesB. Borrowers may be able to eliminate personal liability and guarantee issues with respect to the debt by negotiation for deed-in-lieu.
C. Could later be attacked as a fraudulent conveyanceD. No cutting off of junior liens as in foreclosure saleE. Tax consequences for both partiesF. Deed-in-lieu given at inception of the loan is almost universally held to
be void and unenforceable. G. Deed-in-lieu given after default, but intended to be held as security forG. Deed in lieu given after default, but intended to be held as security for
future performance, is subject to attack as a “disguised mortgage” or may be subject to rejection in bankruptcy.
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The Impact of Bankruptcyon Distressed Real Estateon Distressed Real Estate
IV.Single-asset real estateA. Bankruptcy Code 101(51B) 3 requirements to be a SARE debtor:p y ( ) q
(1) the debtor must have real property that is a single property or project (other than four residential units);
(2) the real property must generate substantially all of the debtor's gross income; andgross income; and
(3) there must be no other substantial business conducted on the real property other than operation of the property itself and
activities incidental thereto. B. Ad Hoc Group of Timber Noteholders v. The Pacific Lumber Co. (In re Scotia
Pacific Co., LLC), 2007 WL 3349093 (5th Cir. 2007) (revenues received by the owner must be passive in nature, such as receipt of rent, marketing activity, or mowing the grass).
C. Key – Section 362(d)(3) requires that, within 90 days after filing bankruptcy, debtor must file a plan that has a reasonable possibility of being confirmed within a reasonable time or commence regular payments to the secured creditor at the non-default interest rate.
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The Impact of Bankruptcyon Distressed Real Estateon Distressed Real Estate
V. Springing “Bad-boy” guaranteesA. One of the reasons why not a lot of chapter 11 cases being filedB. Difficult to foreclose when there are multiple lendersC. Raises issues concerning fiduciary dutiesD Some judges becoming harsh to “bad boy” guarantees andD. Some judges becoming harsh to bad boy guarantees and
have dismissed the claims.E. Problems arise when a mezzanine lender forecloses on the pledge of
interests in the mortgage borrower. After foreclosure, the mezzanine l d t l th t b t th t Th “b d b ”lender controls the mortgage borrower, not the guarantor. The “bad boy” guarantor may be forced to repay the mezzanine lender on its loan; in effect, the mezzanine loan becomes a recourse obligation..
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