90-Second Lesson: Can a Borrower File for Bankruptcy to Stop Foreclosure?

QUESTION:

An exasperated loan officer emailed us asking whether a borrower, in this case, a commercial real estate lessor, could file for chapter 11 reorganization bankruptcy and evade a state court order appointing a receiver in a foreclosure proceeding against the borrower’s building.

ANSWER:

A qualified yes.

If a debtor admitted that they filed the case solely to delay a secured creditor’s foreclosure, then, upon your motion, the court may well dismiss the case leaving the lender free to continue the foreclosure proceedings.

Such admissions are rare, and without one, a court is unlikely to dismiss a chapter 11 case filed by the debtor. Courts are usually willing to give a debtor some time in which to pull together a reorganization plan, provided that the debtor also provides adequate protection to the lender.

Consider exploring three possible ways in which to get a chapter 11 plan dismissed.

• The first is if the debtor fails to pay real estate taxes accrued and falls due during the case.
• The second 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 the collateral is unnecessary for the debtor’s effective reorganization.
• The third opportunity arises if the debtor is determined to be a single asset real estate (SARE), defined as its sole business operating the building as a lessor. The debtor is required to present a confirmable plan within 90 days from when the case begins 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.

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[Editors’ Note: This is part of our irregular series in which we answer readers’ questions. If you have a question, submit it to [email protected], 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.

To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. The Nuts & Bolts of a Chapter 11 Plan
2. Bankruptcy Intersections
3. Things to Consider Before You File

This is an updated version of an article originally published on April 29, 2019. It has been updated by Cathy Cagle]

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