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By Sajjad Ahmad
Although real estate bankruptcy cases no longer dominate the bankruptcy
courts` dockets as they did in the early nineties, but they continue to be
filed with great frequency in UK. At its essence, the real estate bankruptcy
is a two party dispute between mortgagee and mortgagor. Real estate
bankruptcy cases are typically filed after a foreclosure sale has been set.
Upon learning of the bankruptcy filing, a secured creditor has a number of
available options, all or some of which should be exercised, depending on the
facts of the case, to maximize loan recovery.
A lender can ask the court to dismiss the bankruptcy case as a "bad faith"
filing. A creditor asserting bad faith must prove the subjective bad faith of
the debtor and that any reorganization by the debtor is objectively futile.
For subjective bad faith, the court will examine whether the debtor invoked
the protections of the Bankruptcy Code without either the intention or
ability to reorganize its financial affairs. To determine objective futility,
the court will examine whether there is indeed a "going concern" to preserve
and whether there is any realistic chance for the debtor to reorganize. Most
courts require a very strong showing to dismiss a case for bad faith at the
outset of a case.
Under the Bankruptcy Code a motion for relief from stay will also be granted
where the secured creditor can prove that there is no equity in the real
property over and above the secured claims, and that the property is not
necessary to the debtor`s effective reorganization. This basis for relief is
typically alleged as an alternative to bad faith, in the same motion. Almost
all controversies surround the value of the real property, making the expert
report and testimony of a licensed real estate appraiser essential to the
successful prosecution of a motion for relief from the automatic stay on
these grounds. The same factors relied upon to support objective futility in
the bad faith filing analysis are used to establish that the property is not
necessary to an effective reorganization.
An alternate ground for relief from the automatic stay is lack of adequate
protection of the secured creditor`s interest in the property. For example,
if the real property is deteriorating in value and the lender is not
receiving post-petition payments, the lender`s security interest in the
property is not adequately protected. A creditor holding a properly perfected
assignment of rents has a lien on "cash collateral" under the Bankruptcy Code.
If the assignment of rents was properly perfected pre-petition, it usually
attaches to the post-petition rents generated by the debtor`s real property.
A debtor may not use cash collateral without either a court order or the
consent of the secured creditor. While it is common in nonsingle asset realty
cases for a debtor to negotiate a cash collateral agreement with the secured
creditor before filing for bankruptcy, in single asset real estate cases,
which are typically filed at the eleventh hour for the express purpose of
stopping a foreclosure, such negotiations are virtually nonexistent.
Unless, within the first day or two of the case, the debtor requests a cash
collateral agreement with the lender, or files a motion with the court to
authorize the debtor`s use of post-petition rents, a lender should
immediately advise the debtor in writing that it may not use cash collateral
absent an agreement. If an agreement is not reached, the debtor will usually
petition the court for authorization on an emergency basis. The lender can
also petition the court to deny authorization on the basis that the debtor
lacks the ability to adequately protect its interests in the rents. In the
final analysis, most secured creditors share the same objective when faced
with a real estate case: to extract their collateral, including rents, from
the bankruptcy as quickly and inexpensively as possible.
Writer of this article is working as a webmaster of www.ukadvice.com (http://
www.ukadvice.com). Also writes business related articles for different
article sites. For further details and free bankruptcy advice:
Naylor Parkes Associates Ltd.
Lawford House, Lawford Close
Birmingham
B7 4HJ
West Midlands
United Kingdom.
http://www.ukadvice.com (http://www.ukadvice.com)
webmaster@ukadvice.com (mailto:webmaster@ukadvice.com)
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