Real Estate Bankruptcy

Even though real estate bankruptcy cases no longer govern the bankruptcy courts' dockets as they did in the early on nineties, but they carry on to be filed with great frequency in US. At its essence, the real estate bankruptcy is a two party have an argument between mortgagee and mortgagor. Real estate bankruptcy cases are in general filed after a foreclosure sale has been set. Upon learning of the bankruptcy filing, a protected creditor has a number of existing options, all or some of which must be exercised, depending on the facts of the case, to make the most of loan recovery.

A lender can request the court to dismiss the bankruptcy case as a "bad faith" filing. A creditor asserting bad faith must show the subjective bad faith of the debtor and that any reorganization by the debtor is objectively useless. For subjective bad faith, the court will inspect whether the debtor invoked the protections of the Bankruptcy Code not including either the intention or ability to reorganize its financial dealings. To determine objective futility, the court will inspect whether there is indeed a "going concern" to protect and whether there is any sensible chance for the debtor to reorganize. Most courts need a very strong presentation to dismiss a case for bad faith at the outset of a case.

Beneath the Bankruptcy Code a motion for relief from stay will also be approved where the protected creditor can show that there is no equity in the real property over and above the protected claims, and that the property is not essential to the debtor's effective reorganization. This basis for relief is typically alleged as an option to bad faith, in the same motion. More or less all controversies surround the value of the real property, making the expert report and proof of a licensed real estate appraiser essential to the victorious prosecution of a motion for relief from the automatic stay on these grounds. The same factors relied upon to support aim futility in the bad faith filing analysis are used to establish that the property is not essential to an effective reorganization.

An alternate ground for relief from the automatic stay is being short of adequate protection of the secured creditor's interest in the property. For instance, if the real property is deteriorating in value and the lender is not getting post-petition payments, the lender's security interest in the property is not satisfactorily protected.

A creditor holding an exact perfected assignment of rents has a lien on "cash collateral" under the Bankruptcy Code. If the task of rents was correctly perfected pre-petition, it normally attaches to the post-petition rents generated by the debtor's real property.

A debtor may not use cash collateral exclusive of either a court order or the approval of the secured creditor. While it is general in nonsingle asset realty cases for a debtor to negotiate a cash collateral agreement with the protected creditor before filing for bankruptcy, in single asset real estate cases, which are naturally filed at the eleventh hour for the express purpose of stopping a foreclosure, such negotiations are practically nonexistent.

Unless, within the first day or two of the case, the debtor wishes a cash collateral agreement with the lender, or files a motion with the court to approve the debtor's use of post-petition rents, a lender should instantly advise the debtor in writing that it may not use cash security absent an agreement. If an agreement is not reached, the debtor will usually petition the court for approval on an emergency basis. The lender can also petition the court to deny approval on the basis that the debtor lacks the ability to adequately guard its interests in the rents. In the final analysis, most protected creditors share the same point when faced with a real estate case: to extract their security, as well as rents, from the bankruptcy as quickly and inexpensively as possible.