This article discusses and analyzes a California appellate court decision holding that the lender could not recover its attorneys’ fees incurred in litigation with the debtor. Even though the court had found that the borrower partnership and its general and managing partners were guilty of the tort of bad-faith waste for failure to pay real estate taxes while the nonrecourse mortgage was delinquent, the lender was not entitled to attorneys' fees under the contractual language in the loan documents. The article also contains a discussion and analysis of bankruptcy court rulings on the issue of whether, and under what circumstances, a lender may recover attorneys’ fees incurred pursuant to a contractual entitlement to such fees, when the debtor files a bankruptcy proceeding.
This article discusses a Massachusetts bankruptcy court decision, In re Haskell, which ruled that the landlord-debtor could not compel a sale "free and clear" of the tenant's leasehold interest in the property where the tenant's monetary damages would be impossible to calculate and "adequate protection" of the tenant's interest could only be satisfied by the tenant's retaining its possessory interest in the leased premises. The court also ruled that a highly hypothetical future event caused by a third party, such as a condemnation, would not constitute the type of legal or equitable proceeding that would require the tenant to accept a money satisfaction of its interest. Based on the facts of this case and its analysis of construction of the applicable statutes, the bankruptcy court distinguished the 2003 decision of the Seventh Circuit in Precision Industries v. Qualitech Steel. The article also analyzes the existing case law in this area and provided drafting "tips."
This article sets forth "bullet points" that describe the status and scope of bankruptcy filings (personal and business) in the year 2000. The article also contains predictions with respect to additional filings in the year 2001.
This article provides a comprehensive overview of real-estate bankruptcy reorganizations under Chapter 11 of the Bankruptcy Code. The article focuses on the remedies, options, and strategies of secured mortgage lenders, including cash-collateral issues, "cramdown," relief from the automatic st¡ay, valuation, voting and classification, confirmation, purchasing claims, prepackaged plans, and debtor-in-possession financing.
This article discusses a California Appellate Court decision, C.H.E.G., Inc. v. Millenium Bank, which held that a bank lender that purchased the secured property at a bankruptcy sale "free and clear" of all liens, interests, or encumbrances, and subsequently sold the property to the lessee of the bankrupt lessee that occupied the property, did not thereby assume an obligation to pay a commission to a third-party broker in accordance with a provision in the lease providing for such commission upon a sale to the lessee. The article also analyzes the statutory and case law with respect to the issue of what rights and obligations of the landlord survive when a third party purchases property through a bankruptcy proceeding "free and clear" of liens, and the issue of what obligations of a bankrupt lessor survive when the lessor files bankruptcy and the lessee elects not to reject the lease.
This article discusses a case of first impression by the Ninth Circuit Federal Court of Appeals, Precision Industries, Inc. v. Qualitech, which held that the sale of the lessor-debtor's property "free and clear" of all liens, claims, encumbrances pursuant to section 363(f) of the Bankruptcy Code terminated the lease in effect on the property notwithstanding the provisions of section 365(h) of the Bankruptcy Code, which permits a lessee to retain its possessory interest in the leased property if the lessor-debtor rejects the lease. The article also discusses the background of these statutory provisions.
This article discusses a New York bankruptcy court decision, which held that where a transfer transaction is necessary for the consummation of a confirmed Chapter 11 bankruptcy plan, the exemption from stamp or similar taxes contained in sec. 1146 (c) of the Bankruptcy Code applies, even as to third-party transactions involving non-estate property. The article also contains a discussion of related bankruptcy law in this area.
This article discusses a Kansas bankruptcy court decision, In re Gilbert, which upheld the right of the bankruptcy trustee, under Section 544(a) of the Bankruptcy Code, to avoid a mortgage lien on real property owned by the Chapter 7 debtors. The bank lender had mistakenly recorded a release of the mortgage. The court ruled that the knowledge of the mortgagors regarding the mistaken release could not be imputed to the trustee, and that the bank lender was not entitled to reinstatement of the mortgage under equitable principles.
This article describes the use of business trusts as special purpose (or "bankruptcy remote") entities to minimize bankruptcy risk in commercial real estate transactions. The article discusses the definition and creation of these (and similar) types of trusts, and analyzes case law that indicates that - under certain circumstances - such entities may even be "bankruptcy proof."
This article discusses the application of the 1994 U.S. Supreme Court's holding in BFP v. Resolution Trust Corp. (which held that a regularly conducted, non-collusive foreclosure sale under applicable state law constituted "reasonably equivalent value" for the purpose of determining fraudulent transfers under section 548 of the Bankruptcy Code) to other "forced sales," such as non-judicial (or "strict") foreclosures and tax sales, and whether it applies to "voluntary" transfers such as deeds in lieu of foreclosure. The article also discusses the conflicting case law in this area, as well as the applicability of state fraudulent conveyance and fraudulent transfer statutes.
This article discusses the decision of the Ninth Circuit Court of Appeals in Platinum Capital, Inc. v. Sylmar Plaza, which upheld the confirmation of the debtor's Chapter 11 bankruptcy reorganization plan even though the sole purpose of the plan was to avoid paying approximately $1 million of default interest due on a mortgage loan form the debtors to a successor of the original mortgagee. The article contains a thorough discussion and analysis of the applicable Bankruptcy Code provisions and related case law in this area.
A summary and analysis of a recent Vermont bankruptcy decision which held that an equitable subordination claim, filed by the debtor-mortgagor in connection with its Chapter 11 bankruptcy filing, "trumped" a pending state foreclosure action previously filed by the mortgagee and made the entire matter a "core" proceeding to be decided solely by the bankruptcy court.
This article discusses the bankruptcy court's holding in In re Trapp. The court found that even though no privity of contract existed between the mortgage lender and the bankrupt debtor (the original borrower had sold the property to the debtor subject to the mortgage, in violation of the due-on-sale clause in the mortgage), the property was still part of the bankruptcy estate and the debtor had the power to decelerate the loan payments and cure the default through a Chapter 13 plan.
This article discusses and analyzes a recent bankruptcy decision, In re Williams, which held that the "DePrizio doctrine" still applies, notwithstanding the amendments to Section 550 of the Bankruptcy Code contained in the Bankruptcy Reform Act of 1994. The bankruptcy trustee successfully argued that since the lender's lien had been successfully avoided under Section 547(b) of the Bankruptcy Code, and the property had not been transferred to a third party, the trustee did not need to resort to Section 550 to "recover" the property from a non-insider creditor.
This article discusses and analyzes a recent Illinois appellate court decision, which permitted a mortgage to be subrogated in priority to a previous mortgage that had been paid off from proceeds of the new mortgage. The article compares this decision with a recent Illinois bankruptcy decision that reached a contradictory result.
This article discusses some fairly recent bankruptcy cases that have permitted the creditor to enforce certain “carveouts” to nonrecourse provisions in mortgage loans, which permit the lender to obtain personal liability against the borrower if there is a bankruptcy proceeding filed by or against the borrower, and under what circumstances such provisions are enforceable.
This article summarizes recent case law regarding the issue of whether the rejection in bankruptcy of a lease or executory contract automatically terminates third party interests, such as a leasehold mortgage, or permits such nondebtor interests to continue.
This article discusses a Second Circuit Court of Appeals decision, New England Dairies, Inc. v. Diary Mart Convenience Stores, which held that the beneficiary of a letter of credit, issued as a pre-judgment remedy in an action commenced prior to the debtor's bankruptcy filing, was not a secured creditor under the Bankruptcy Code and was not entitled to receive adequate protection of its interest in the form of an order compelling the debtor to renew or replace the letter of credit before it expired. The article also contains suggested strategies to be implemented by creditors to avoid a similar result.
This article analyzes the Illinois bankruptcy court's holding in In re 203 North LaSalle Street Partnership, in connection with the issue of whether a subordination agreement entered into by a junior mortgagee is enforceable in the mortgagor's Chapter 11 bankruptcy proceeding. The court held that the subordination was effective as to the entire indebtedness, even though the first mortgage lender's loan was nonrecourse and it was undersecured by a large amount. However, the court refused to permit the senior lender to vote the claim of the junior lender, even though the subordination agreement so provided. The article also examines case law in this area from other jurisdictions.
This article discusses a 2005 Vermont bankruptcy decision, In In re Frye. In this case, the court ruled that although an automatic-relief-from-stay provision in a pre-petition forbearance agreement was not per se enforceable, the lender was entitled to enforce the agreement unless the debtor-borrower could demonstrate sufficient equity in property in excess of mortgage debt, that it was likely that it could successfully reorganize, or that sufficient prejudice to other creditors outweighed the lender's request for relief. The article also discusses other case law in this area, and the factors that courts consider when deciding whether to uphold the validity of such provisions.
This article discusses the concept of equitable subordination, which is set forth in Section 510(c) of the Bankruptcy Code. The article analyzes the case law that has developed in this area, which defines the scope and substance of this remedy.
This article discusses a Texas Bankruptcy case, In re Home and Hearth Piano Parkway, L.P., which held that when the bankruptcy court grants a mortgage lender relief from the automatic stay, the lender is entitled to credit bid the amount permitted under its mortgage and applicable state law, and not bound by any Bankruptcy Code limitations on the amount of the lender's claim; therefore there is no "surplus" due to the borrower-debtor if the amount the lender bids at the foreclosure sale exceeds the amount of its bankruptcy claim. The article also discusses the treatment of a lender's secured claim in bankruptcy proceedings, the importance of obtaining an interest in the rental income, and strategies involved in the borrower's and lender's valuation of the mortgaged property.
This article discusses the state and federal doctrines of fraudulent conveyance, and the federal doctrine of preferential transfer, as they relate to various forms of mortgage loan guaranties. The article then discusses strategies to minimize risk, and contains several form documents to help achieve this goal.
This article discusses a recent Illinois bankruptcy decision, In re Pena, which held that the debtor-tenant had the right to assume a holdover tenancy interest that existed on the date of his Chapter 13 bankruptcy petition but that the interest expired on the one-year anniversary of the lease's expiration date. The article analyzes the reasons for the court's holding, and suggests language to insert in commercial leases to address this issue.
This article discusses the holding of the U.S. Seventh Circuit Court of Appeals in In re Jones. The court in Jones permitted the bankruptcy trustee to recover, as a preferential transfer, the proceeds from the Ohio foreclosure sale of the debtors' primary residence. The article further describes other bankruptcy decisions that have held that a bankruptcy proceeding can "trump" a state foreclosure action, and the effect of such decisions on the finality of state foreclosure proceedings.
This article discusses the "clogging the equity" doctrine as it relates to land contract forfeiture proceedings. The article analyzes a recent unreported Michigan appellate decision that held that a land-contract forfeiture judgment impermissibly clogged the borrower's right of redemption. The article further examines the issue of whether, when a bankruptcy proceeding is filed by or against a land contract vendor or vendee after execution of the land contract, the land contract will be construed as an executory contract under the Bankruptcy Code that can be assumed, assigned or rejected by the trustee or debtor-in-possession.
This article discusses the issue of whether a termination of a lease in bankruptcy by the debtor-landlord causes the lease to be terminated (along with all the tenant's rights thereunder except for the right of possession) or whether there is merely a deemed beach of the lease, with third-party rights (such as subleases and options to purchase) remaining in effect. The article further discusses the conflicting bankruptcy cases on this issue, the effect of a debtor lessee's rejection of the lease on third-party rights, and whether an option right or right of first refusal is an executory contract requiring assumption by the debtor-optionee.
The author discusses the general aspects of Chapter 11 single asset entity bankruptcies, various strategies and options for secured creditors, and possible alternatives to cramdown plans.
This article discusses the treatment of limited liability companies under the Bankruptcy Code, including whether the entity will be treated as a partnership, corporation, or "hybrid." The article also discusses the effect of a bankruptcy filing of a member on the continuation of the LLC; lender concerns in structuring "bankruptcy remote" LLCs; authority to file a bankruptcy proceeding on behalf of an LLC; whether the lender should consider becoming a member of the borrower LLC; and suggested revisions to the Bankruptcy Code to deal specifically with LLCs.
This article analyzes and comments on selected provisions of the Bankruptcy Prevention and Consumer Protection Act of 2005 that significantly affect real estate transactions, including the following: single-asset real estate; preferential transfers and fraudulent conveyances; assumptions of leases and contracts; priority for administrative expenses; post-petition transfers; and exclusivity periods for filing Chapter 11 reorganization plans.
This article summarizes the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was enacted into law on April 20, 2005 and applies to all bankruptcy cases filed on or after October 17, 2005 (with limited exceptions as to certain provisions). Approximately half of the Act's provisions deal with business, not consumers, and at least 21 provisions relate in some manner to real estate. This article summarizes the revised provisions of the Bankruptcy Code that should have a major impact on bankruptcy estates involving real property.
This article discusses and analyzes the U.S. Supreme Court's recent ruling in the 203 N. LaSalle Street Partnership case. The Supreme Court held that the debtor, by retaining the exclusive opportunity to propose a "new value" single-asset real estate Chapter 11 bankruptcy plan, had violated the Bankruptcy Code's "absolute priority" rule. The high court remanded the case for further proceedings. This article also speculates on the impact of this case on future single-asset real estate bankruptcy bankruptcy filings.
This article discusses the recent decision of the U.S. Seventh Circuit Court of Appeals that affirmed the confirmation plan of a single-asset real estate entity over the mortgage lender's objection, and affirmed the continuing validity of the "new value exception" to the Bankruptcy Code's "absolute priority rule."
This article discusses a New York bankruptcy court decision holding that the sale of real estate assets from a bankruptcy estate prior to plan confirmation qualifies for the exemption from transfer taxes under sec. 1146(c) of the Bankruptcy Code, where the sale is integral to a Chapter 11 reorganization plan that is subsequently confirmed. The article also compares this decision with other case law in this area.
In a surprising decision by the Ninth Circuit BAP, In re PW, LLC, the court held that, notwithstanding the junior lienholder’s failure to obtain a stay pending appeal of the bankruptcy court’s order approving a sale of the estate property free and clear of the junior lien on the property, § 363(f) of the Bankruptcy Code did not permit the senior secured creditor to credit-bid its debt and purchase the estate property free and clear of the junior lien based on the “mootness” doctrine. This article analyzes the court’s holding in this case, and discusses the implications of this ruling.
This article analyzes the case law concerning the issue of whether a non-recourse mortgage loan can except, as a “carveout” to personal liability, a bankruptcy filing by or against the mortgagor. The answer appears to be “yes,” at least under those situations where the bankruptcy proceedings had been terminated prior to the legal action to enforce the carveout and the debtor had very few (if any) other creditors.
This article discusses and analyzes the issue of whether an option to purchase real estate contained in a lease or a mortgage is an executory contract, which can be either assumed or rejected by the borrower if it subsequently files for bankruptcy. The article also discusses title-insurance-coverage issues in connection with executory contracts.
This two-part article discusses and analyzes a recent decision by the Seventh Circuit Court of Appeals, Precision Industries, Inc. v. Qualitech Steel SBQ, LLC (7th Cir. 2003). In a case of first impression, the court determined that sec. 363(f) of the Bankruptcy Code (which permits a sale "free and clear" of any "interest") trumps sec. 365(h) of the Code (which protects the rights of a lessee when a debtor-lessor rejects the lease). The article discusses the ramifications of this case for long-term leases and leasehold mortgages. The article also offers strategies and drafting tips to minimize the risks identified by this decision.
This article summarizes and analyzes the holding of the Ninth Circuit Court of Appeals in In re McConville. In this case, the lenders made a loan to the debtor and recorded a deed of trust post-petition without knowledge of the mortgagor/debtor's bankruptcy filing. The Ninth Circuit held that the creation of a mortgage lien does not transfer property for purposes of section 549 of the Bankruptcy Code; however, the court found that the debtor violated section 364(c) (2) by incurring secured debt without prior court authorization and, based on the equities of the case, determined that the lenders should get back the amount of money they loaned on the property and gave them a lien on the sale proceeds. The article also discusses current legislative attempts to amend the Bankruptcy Code to provide that mortgages are in fact "transfers" under the Bankruptcy Code, and do not violate the automatic stay provisions of the Bankruptcy Code, where notice of an undisclosed bankruptcy petition in another jurisdiction is not a matter of public record in that jurisdiction.
This article discusses and analyzes the issue of whether a prepayment premium provision in a commercial mortgage will be construed as "reasonable" under Section 506(b) of the Bankruptcy Code. The article also discusses recent case law in this area, and focuses on whether or not the courts will - or should - employ a liquidated-damages analysis in determining whether the charge is reasonable. The article also summarizes recent bankruptcy decisions regarding the issue of whether a prepayment charge constitutes unmatured interest under Section 502(b)(2) of the Bankruptcy Code.
This article discusses a federal court of appeals ruling which held that the failure of the debtor to pay taxes from pre-petition property income, while making cash distributions to the debtor's partners, constituted actionable waste and was a fraudulent transfer under state law, enabling the secured creditor to recover such amounts notwithstanding that the loan was non-recourse. The article also discusses other cases that have held that the failure to pay taxes constitutes waste.
An analysis of current conflict in case law concerning the "new value" exception to the absolute priority rule in connection with single-asset real estate bankruptcy cases. The article contains a discussion and review of recently proposed federal legislation designed to resolve the conflict in existing case law in this area.
This article discusses and analyzes a North Carolina bankruptcy court decision, In re E-Z Serve Convenience Stores, Inc., which held that, based on the facts and circumstances of the case, the landlord's right of first refusal to purchase the buildings and permanent improvements constructed on the leased land by the debtor-tenant was enforceable and would not be excised. The article includes a "drafting tip," and a discussion of the "chilling effect" of an option or right of first refusal on the ability of the bankruptcy trustee to attract other offers for the property.
This article discusses the requirements for the acceptance and approval of a Chapter 11 plan of reorganization, and analyzes the "cramdown" risks faced by the secured creditor in a single-asset real estate bankruptcy. It also examines the utilization by the secured mortgage lender of the strategy of purchasing the unsecured bankruptcy claims of third parties against the debtor, in order to avoid cramdown or block confirmation of the debtor's proposed plan.
This article summarizes current developments in Chapter 11 single-asset real estate bankruptcy cases.
This article discusses the benefits, and analyzes the structure of, a prepackaged bankruptcy (or out-of-court restructuring) plan negotiated by the lender with the borrower and key creditors before, and submitted to the bankruptcy court for approval simultaneously with, a voluntary Chapter 11 filing by the debtor.
This is an updated version of material written by Judith Greenstone Miller and John C. Murray, and published as U.S. Supreme Court Rules on "New Value," or Does It?, which first appeared in the Michigan Real Property Review 67 (Summer 1999), and thereafter published as The "New Value" Exception: Myth or Reality After Bank of America National Trust & Savings Association v. 203 N. LaSalle Street Partnership?, 104 Com. L.J. 147 (Summer 1999).
This article discusses a holding by the federal district court for the Southern District of California, which held that under a "stand alone" interest rate swaps, in which the parties hold no underlying debt and enter into the swaps to speculate on fluctuations in short-term interest rates, periodic payments and termination damages payable under the swap agreements do not constitute impermissible charges for "unmatured interest" under Sec.502(b)(2) of the Bankruptcy Code.
This article discusses the section 1146(c) Bankruptcy Code exemption and its impact on the taxes associated with property being transferred by a bankrupt debtor. Topics covered include the scope of the exemption, the issue of pre-confirmation v. post-confirmation transfers, constitutional challenges to the section 1146(c) exemption, and practical considerations (including escrow arrangements for disputed taxes). The article also includes exhibits setting forth sample provisions for insertion in bankruptcy plans and sale orders.
This article discusses and analyzes the U.S. Supreme Court's recent ruling in the 203 N. LaSalle Street Partnership case. The Supreme Court held that the debtor, by retaining the exclusive opportunity to propose a "new value" single-asset real estate Chapter 11 bankruptcy plan, had violated the Bankruptcy Code's "absolute priority" rule. The high court remanded the case for further proceedings. This article also speculates on the impact of this case on future single-asset real estate bankruptcy bankruptcy filings.
This article discusses the use of provisions in loan workout documents that waive the "automatic stay" of enforcement actions by the lender under Section 362(a) of the Bankruptcy Code in the event of a subsequent bankruptcy filing by the borrower, and whether such pre-petition waivers are valid and enforceable. The article also reviews the case law in this area, and provides drafting suggestions to improve the chances that such a provision will be held to be enforceable.
In the 1980s, institutional lenders eagerly sought out mortgage loans on commercial real estate properties such as office buildings, apartment projects, shopping centers, and hotels-often making mortgage loans to single asset limited partnerships on a non-recourse basis. Unfortunately, in the 1990s, depreciating property values, a declining economy, and corporate downsizing have combined to render many of these transactions economically infeasible. These factors have also contributed to souring relations between lenders and borrowers, resulting in missed payments, inadequate maintenance and operation of the property, and retention of property income by borrowers for their own purposes. The loans then become non-performing assets on the lenders' books and are transferred to the lenders' workout groups.
