An exasperated loan officer emailed us, asking whether the borrower – a commercial real estate lessor – could really file a chapter 11 case just to evade a state court order to appoint a receiver in a foreclosure proceeding against the borrower’s building.
If a debtor were to admit that it filed the case solely to delay a secured creditor’s foreclosure, the court may well dismiss the case (upon your motion), leaving you the lender free to continue with the foreclosure proceedings. Such admissions are rare, however. Without one, a court is unlikely to dismiss a chapter 11 case the debtor filed to stop foreclosure proceedings if it also appears that the debtor is capable of filing a chapter 11 plan of reorganization. Courts are usually willing to give a debtor some time in which to pull together a plan of reorganization, provided that the debtor also provides adequate protection to the lender (how to get adequate protection is a topic for another time). That said, lenders should note that a debtor’s failure to pay real estate taxes that accrue during the case and fall due during the case provides a firm ground on which a court may dismiss a case.
Another way to get to the collateral is to get the automatic stay lifted. Bankruptcy Code section 362 operates automatically upon the beginning of a bankruptcy case to bar or “stay” further foreclosure proceedings (or other collection actions) by creditors. The lender can successfully move to “lift” the stay if it can show “cause” to do so or if the debtor both lacks equity in the collateral and that collateral is not necessary for an effective reorganization of the debtor. A lot to unpack in that last sentence. More on that some other time, too.
[Editor’s Note for more information on what happens when your borrower files bankruptcy, please see When Your Borrower Files for Bankruptcy (DIP Financing, Cash Collateral, and Adequate Protection).]
Note, though, that if the debtor is determined to be a “single asset real estate” (SARE) entity (e.g., its sole business is operating the building as a lessor), it is effectively required to present a confirmable plan within 90 days after the beginning of the case (or within 30 days after being determined to be a SARE, whichever is later), unless the debtor has been making interest payments to the lender that comply with Code guidelines. Failure to meet these requirements exposes the debtor to an almost certain lifting of the stay, whereupon the lender could continue foreclosing on the building.
[Editors’ Note: This is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to firstname.lastname@example.org and we will try to answer it. This 90 Second Lesson is based, in substantial part, in material reprinted from Commercial Bankruptcy Litigation 2d and Strategic Alternatives for and Against Distressed Businesses, with permission of Thomson Reuters. For more information about these publications, please visit www.legalsolutions.com.]
The editors and editorial board of DailyDAC include preeminent restructuring and insolvency professionals, journalists, and editors. They are devoted to providing reliable and plain English education and deal intelligence about assignments, corporate bankruptcy, receiverships, out-of-court workouts and similar topics.
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When Your Borrower Files for Bankruptcy (DIP Financing, Cash Collateral, and Adequate Protection)
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