real estate

Showing: 1 - 7 of 12 Articles
Business Bankruptcy Issues Recent Developments

Video Of Testimony Before ABI Commission To Study Reform Of Chapter 11

As mentioned in a recent blog post, the American Bankruptcy Institute has established a Commission to Study the Reform of Chapter 11. A video of testimony before the Commission’s June 4, 2013 field hearing in New York is available below.

  • At that hearing, I testified on the second panel, discussing intellectual property licenses, their treatment in bankruptcy cases, and potential reforms to address several key issues. My testimony begins at the 01:14:14 mark.
  • Lawrence Gottlieb, my colleague at Cooley LLP in our Corporate Restructuring and Bankruptcy group, testified as part of the first panel, focusing on real property lease issues, how they impact Chapter 11 cases (especially those involving retailers), and suggested reforms. His testimony begins at the 00:08:12 mark.

More information on the Commission and its work, together with access to the video and written testimony of all panelists at the Commission’s hearings, is available at the Commission’s website.

 

Business Bankruptcy Issues Recent Developments

ABI Commission To Study The Reform Of Chapter 11

The American Bankruptcy Institute has established a Commission to Study the Reform of Chapter 11.

  • This afternoon, June 4, 2013, I will be testifying before the Commission about intellectual property licenses, their treatment in bankruptcy cases, and potential reforms to address several key issues. 
  • Lawrence Gottlieb, my colleague at Cooley LLP in our Corporate Restructuring and Bankruptcy group, will also be testifying before the Commission today, focusing on real property lease issues, how they impact Chapter 11 cases (especially those involving retailers), and suggested reforms.

More information on the Commission and its work, together with access to the testimony of all panelists at the Commission’s hearings, is available at the Commission’s website.

A copy of my testimony is also available by following the link in this sentence.

Business Bankruptcy Issues

Who’s SARE Now? Bankruptcy’s Single Asset Real Estate Rules And Their Impact On Commercial Real Estate

Given the state of commercial real estate, the prospect for defaults by commercial borrowers has greatly increased. The last time there was a significant downturn in the commercial real estate sector in the early 1990s, owners of buildings and other real estate often turned to Chapter 11 bankruptcy as a method of buying time and, in some cases, lowering or at least restructuring the amount of secured debt against the real property through a plan of reorganization. This raises the question — will the same story play out again in this downturn?

Major Bankruptcy Law Changes In 2005. As many readers of this blog know, major amendments were made to the Bankruptcy Code in 2005 — formally known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) — including ones that affect real estate. One of the better-known changes was the addition of strict limitations on the time bankrupt tenants could have to assume or reject commercial real estate leases.

However, there was another amendment that may have a significant impact on some owners of real estate in Chapter 11, and could complicate the prospects for using bankruptcy to restructure debt on certain distressed projects. This change was the elimination of a valuation cap that had previously limited the number of real estate debtors subject to the Bankruptcy Code’s single asset real estate (“SARE”) rules, most notably provisions that impose special requirements on single asset real estate debtors to keep in place the benefits of bankruptcy’s automatic stay. 

The Bankruptcy Code’s SARE Definition. Prior to BAPCPA, there were relatively few SARE cases because the definition was limited to debtors with less than $4 million of secured debt against the real property. This meant that only smaller real estate cases were covered by the more restrictive SARE rules. BAPCPA, however, removed the $4 million secured debt ceiling. As a result, a real estate entity owing hundreds of millions of dollars in secured debt may be subject to the SARE rules. Consequently, the number of real estate cases potentially subject to the SARE provisions has increased dramatically.

The Bankruptcy Code’s current definition of SARE provides:

The term ‘single asset real estate’ means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.

11 U.S.C. §101 (51B).

Impact Of A SARE Designation. A SARE designation can have a big effect on the debtor. When a debtor states on its petition that it is a SARE, or a secured creditor files a motion and the Court rules that the debtor is in fact a SARE, the dynamics of the Chapter 11 case will change. As discussed below, a SARE debtor must either file a plan of reorganization with a reasonable chance of being confirmed within the later of (i) 90 days after the order for relief is entered in the case (in a voluntary bankruptcy case this is when the case is filed) or (ii) 30 days after the date the court determines that the debtor is subject to the provisions of SARE, or must start making monthly payments to the secured creditor at the loan’s non-default interest rate. If a SARE debtor fails to satisfy these requirements, the court is likely to grant a secured creditor relief from stay to commence or continue with a foreclosure of the real property.

Who’s A SARE? Not every owner of commercial real estate in bankruptcy will be a SARE debtor. To determine what types of commercial properties and developments qualify as a SARE case, courts focus on interpreting the meaning of “a single property or project.” In cases in which one debtor owns one piece of real property, this issue will likely be straightforward. In other cases, however, the question may be more difficult to determine. For example, a real estate business owning many interrelated projects through separate, multiple limited liability companies ("LLCs") or partnerships may be able to avoid a SARE ruling. On the other hand, an entity owning more than one property, if considered a single project, may be deemed to be a SARE. To read one court’s analysis of these issues in a series of related bankruptcy cases involving multiple entities and properties, click here, here, and here.

If a single property or project is involved, courts then analyze whether the single real estate asset is used in the operation of a business or whether it is simply held for income. A SARE case usually involves passive rent collection without other active business activities that generate revenue for the debtor. The SARE standard is factually driven and generally looks to “whether [the debtors] conduct substantial business other than operating the real property.” In the Matter of Scotia Pacific Company, LLC, 508 F.3d 214, 221 (5th Cir. 2007) (debtor’s substantial entrepreneurial business operations went beyond mere passive collection of money). As the Scotia Pacific court held:

In order to be single asset real estate, the revenues received by the owner must be passive in nature; the owner must not be conducting any active business, other than merely operating the real property and activities incidental thereto. Under the prior jurisprudence, those passive types of activities are the mere receipt of rent and truly incidental activities such as arranging for maintenance or perhaps some marketing activity, or … mowing the grass and waiting for the market to turn.

A business would not be a SARE if a reasonable and prudent business person would expect to generate substantial revenues from the operation activities–separate and apart from the sale or lease of the underlying real estate.

For example, a golf club where the owners are actively engaged in activities such as employing third party workers, selling club memberships and merchandise, and charging green fees, has been held not to be a SARE. Likewise, a debtor in the hotel or marina business also may not be held to be a SARE.

Limited Automatic Stay Benefits For SAREs. A SARE debtor cannot count on the automatic stay remaining in force for an extended period of time. Instead, to maintain the benefit of the automatic stay, Section 362(d)(3) of the Bankruptcy Code requires a SARE debtor, within 90 days after filing bankruptcy, to file a plan that has a reasonable possibility of being confirmed or commence regular payments to the secured creditor at the non-default interest rate.

  • A SARE debtor that is not in a position to file a plan will, in effect, have to pay for the continuation of the automatic stay. This can prove difficult for projects that are not producing significant cash flow.
  • If a plan is filed instead, the debtor does not have to establish that the proposed plan will in fact be confirmed but must show that the assumptions that underpin the plan are reasonable. What constitutes a reasonable time to confirm a plan will vary from case to case.
  • If the debtor fails to satisfy either of these requirements, the secured creditor will likely be able to obtain relief from the automatic stay to foreclose on the property.
  • These rules do not preclude a secured creditor from seeking relief from stay on other grounds, such as a lack of adequate protection or other cause.

Overall Impact On Commercial Real Estate. Owners of distressed commercial real estate projects that are SAREs may find Chapter 11 to be less useful than in past down cycles.

  • With careful planning, some SARE debtors will be able to restructure through bankruptcy. Yet as an interesting study shows, many SARE (and non-SARE) real estate cases in the past few years have ended with the secured creditor obtaining relief from the automatic stay to foreclose. Faced with this prospect, some owners have simply decided to turn over distressed real property to the lender, often through a deed in lieu of foreclosure before bankruptcy.
  • In today’s environment, some lenders are willing to work with real property owners to extend loans and avoid foreclosure or taking back the property. However, if the SARE rules would apply in a potential bankruptcy, this fact may give the secured lender more leverage in those negotiations. 

What’s likely to be the end result of the SARE rules and the 2005 removal of the valuation cap? As single asset real estate projects face default, although some will certainly be able to restructure their debts, many may end up in the hands of lenders as real estate owned ("REO") properties. With distressed borrowers working through hundreds of billions of dollars in commercial real estate loan problems across the country, the negative impact defaulting commercial real estate loans and resulting REO may have on banks and other lenders could end up being the bigger part of this SARE story. 

Business Bankruptcy Issues Recent Developments

Fall 2009 Edition Of Absolute Priority Now Available

The Fall 2009 edition of the Absolute Priority newsletter, published by the Cooley Godward Kronish LLP Bankruptcy & Restructuring group, of which I am a member, has just been released. The newsletter gives updates on current developments and trends in the bankruptcy and workout area. Follow the links in this sentence to access a copy of the newsletter or to register to receive future editions. You can also subscribe to the blog to learn when future editions of the Absolute Priority newsletter are published, as well as to get updates on other bankruptcy topics.

The latest edition of Absolute Priority covers a range of cutting edge topics, including:

  • Developments in the General Growth Chapter 11 cases;
  • Updates on the General Motors and Chrysler bankruptcies;
  • Efforts in Congress to repeal certain of BAPCPA’s business bankruptcy provisions; and
  • The "settlement payment" defense to fraudulent transfer claims against shareholders in leveraged buyouts.

This edition also reports on some of our recent representations, including debtors Pacific Ethanol Holding Co. and Crabtree & Evelyn, Ltd., and our work for official committees of unsecured creditors in Chapter 11 bankruptcy cases involving major retailers. Recent committee cases include Eddie Bauer, Ritz Camera, Filene’s Basement, BT Tires Group, Boscov’s, Gottschalk’s, KB Toys, BTWW Retail, and G.I. Joe’s, among others. Also discussed is our work for Levi Strauss & Co. in purchasing 73 outlet stores from the Anchor Blue Retail Group case and for Rackable Systems, Inc. (now known as Silicon Graphics International) in purchasing substantially all of the assets of Silicon Graphics, Inc. in its recent Chapter 11 case.

In addition, a note from my colleague, Jeffrey Cohen, the editor of Absolute Priority, discusses how Section 363 asset sales have become the chief means for companies to restructure in bankruptcy, and how the number of "going concern" sales has grown over the past few months compared to the period following the bankruptcy of Lehman Brothers in September 2008.

I hope you find this Fall’s edition of Absolute Priority to be of interest.

Business Bankruptcy Issues Recent Developments

Bankruptcy Rule Amendments: New Article Reviews The Important Changes

An article my partner Adam Rogoff, associate Seth Van Aalten, and I wrote was recently published in the January 2008 issue of Pratt’s Journal of Bankruptcy Law. The article discusses the significant amendments to the Federal Rules of Bankruptcy Procedure that took effect on December 1, 2007. Those amendments covered a range of procedures from omnibus claims objections to motions to assume executory contracts and real property leases to "first day" motions in Chapter 11 cases. 

If you don’t have a copy of the Journal, you can read the article, entitled "Important Changes To Bankruptcy Rules Take Effect," by clicking on its title in this sentence. For more details on the rule changes, use the links that follow for a copy of the full, "clean" set of rule amendments as well as the redline set showing changes made by the amendments to the existing rules, together with the Advisory Committee’s comments.

Business Bankruptcy Issues Recent Developments The Financially Troubled Company

Real Estate Workouts: Are Pre-Bankruptcy Waivers Of The Automatic Stay Enforceable?

This post examines a new decision from the Bankruptcy Court for the Southern District of Florida involving the enforceability of a pre-bankruptcy waiver of the automatic stay. Let’s first set the stage by taking a look at a not so uncommon fact pattern involving a real estate project in financial trouble.

The Real Estate Workout: Forbearance With A Price. The owner of a troubled real estate development is about to default on a loan secured by the real property. On the eve of foreclosure, the lender agrees to forbear from foreclosing for two months to give the developer time to refinance and save the project.  However, in exchange the lender insists that the developer agree that, in the event of bankruptcy, the lender would have relief from the automatic stay to foreclose. The developer agrees and the forbearance agreement is executed.

The Bankruptcy Aftermath. Unfortunately, the hoped-for financing falls through and the developer files a Chapter 11 bankruptcy for the project just before the rescheduled foreclosure sale. The lender quickly files a motion for relief from stay, asking the bankruptcy court to enforce the pre-bankruptcy relief from stay waiver included in the forbearance agreement. The motion is opposed by the developer, now a Chapter 11 debtor in possession, as well as the official committee of unsecured creditors and junior lienholders.

Is The Waiver Of The Automatic Stay Enforceable? This was the question answered by Bankruptcy Judge John K. Olson in an 18-page decision, issued on February 12, 2008, in the In re Bryan Road, LLC Chapter 11 bankruptcy case. The facts were essentially as described above, but a few additional details help put the issue in context.

  • The real estate project involved a 210 unit "dry stack" boat storage facility in Dania Beach, Florida.
  • The lender, which commenced a judicial foreclosure proceeding against the 191 units still owned by the debtor, had been awarded final judgment setting a foreclosure sale.
  • On the morning of the foreclosure sale, the debtor and the lender entered into a forbearance agreement that was approved by the court in the foreclosure proceeding. The forbearance agreement provided for a two-month continuance of the foreclosure sale in exchange for the debtor’s agreement that the lender would have relief from the automatic stay to foreclose in the event of a bankruptcy.
  • The day before the continued foreclosure sale was to take place, the debtor filed its bankruptcy petition.

The Bankruptcy Court’s Analysis. In his decision on the lender’s stay relief motion, Judge Olson first noted that prepetition waivers of the stay will be given "no particular effect as part of initial loan documents" but the "greatest effect if entered into during the course of prior (and subsequently aborted) chapter 11 proceedings." After concluding that a confirmed chapter 11 plan was not required, the Bankruptcy Court looked to four non-exclusive factors, drawn from In re Desai, 282 B.R. 527 (Bankr. S.D. Ga. 2002), in considering whether stay relief should be granted based on the prepetition waiver:

(1) the sophistication of the party making the waiver; (2) the consideration for the waiver, including the creditor’s risk and the length of time the waiver covers; (3) whether other parties are affected including unsecured creditors and junior lienholders; and (4) the feasibility of the debtor’s plan.

As to the first two factors, the Bankruptcy Court found that the debtor’s counsel was very sophisticated and, although the forbearance period was short, it was sufficient consideration. On the third and fourth factors, the Bankruptcy Court first noted the existence of junior lienholders and approximately $1 million of disputed unsecured claims. However, the Bankruptcy Court then engaged in a detailed analysis leading to the conclusion that the debtor’s plan simply was not feasible. As such, there likely was no value for unsecured creditors in the boat storage project beyond the secured debt and the junior lienholders could protect their own interests under state law. Putting these factors together, the Bankruptcy Court concluded that the forbearance agreement — including the waiver of the automatic stay — should be enforced and the stay was lifted.

A Few Key Take-Aways. With economic conditions continuing to strain a variety of real estate developments, workouts in the shadow of foreclosure may become more common. The In re Bryan Road, LLC decision highlights that in the right case a bankruptcy court may be willing to enforce prepetition stay relief agreements if a bankruptcy is later filed.

  • This is particularly true when the debtor is a single asset real estate entity, it signs an agreement on the eve of foreclosure, and it has few unsecured creditors. In fact, the more the bankruptcy appears to be just a two-party dispute between the debtor and lender, the more likely the prepetition automatic stay waiver will be enforced.
  • On the other hand, when a troubled real estate project has a real chance of reorganizing, and substantial unsecured creditor claims are involved, these agreements more likely will be rejected in favor of traditional relief from stay analysis under Section 362 of the Bankruptcy Code.

Conclusion. Prepetition stay relief agreements involve complex issues. As with most bankruptcy questions, real estate owners and lenders should get advice from bankruptcy counsel on their specific situation when considering whether to include such a waiver of the automatic stay in any forbearance agreement.

Business Bankruptcy Issues Recent Developments

Don’t Miss The Important Business Bankruptcy Rule Amendments That Just Took Effect

On December 1st of almost every year, amendments to the Federal Rules of Bankruptcy Procedure — the ones that govern how bankruptcy cases are managed — take effect to address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. Often the changes are relatively minor and of interest only to bankruptcy practitioners, but this year’s set has made some significant changes that will directly impact debtors, creditors and other stakeholders.

A Look At The Amendments. You may find it interesting to see the entire group of amendments together, so I have included two links. The first is to the full "clean" set of the amended rules. The second is to a redline showing the changes made by these amendments to the existing rules, together with the Advisory Committee’s comments.

The Omnibus Objection Problem. One of the most significant amendments will make changes to the popular practice of filing omnibus objections. In large cases the debtor or other estate representative has so many claims to address that they have combined objections to dozens — sometimes hundreds — of different claims in one single motion. The objection may have a name such as “Debtors’ Fourteenth Omnibus Objections To Claims (Substantive)” or some similarly titled document. Click here for one example. In a post last year called "Objections To Claims: Ignore Them At Your Peril," I discussed how it can be hard to tell which claims an omnibus objection is targeting.

  • The format has often meant that the only reference to an individual creditor is buried within the objection’s many pages of text and exhibits, typically in an attached list or chart.
  • If the creditor doesn’t respond to the objection timely, its claim will likely be disallowed and it will recover absolutely nothing from the bankruptcy estate.

The Amended Rule 3007: An "Anti-Gotcha" Solution. The new rules restrict the use of omnibus objections to certain limited circumstances and impose formatting standards. Otherwise, each claim will require its own separate claim objection unless the combined objection covers claims filed by the same person or entity. What grounds for objection can be made by an omnibus objection under the newly revised Rule 3007?

  • Duplicate claims;
  • Claims filed in the wrong case;
  • Original claims that were amended by later claims;
  • Claims that were not timely filed;
  • Claims that have already been paid or released;
  • Claims filed in a form that does not comply with applicable rules;
  • Claims that are really asserting an equity interest in the debtor; and
  • Priority claims that assert an amount in excess of the maximum amount in the Bankruptcy Code.

In short, if the claim is being challenged on substantive grounds, rather than more technical or procedural ones, then the objection will have to be filed one claimant at a time.

When an omnibus objection does make the permitted objections, it will now have to list claimants in alphabetical order, cross-reference claim numbers, give the ground for the objection and cross-reference that to the text of the objection, describe the objector and the reason for the objection in the document’s title, and combine no more than 100 claims in a single objection. This is all designed to make it easier for the creditor to figure out whether its claim is included and the basis for the objection.

Amended Rule 4001: The Clearer Disclosure Rules. Changes have been made to the rule that governs motions and stipulations for use of cash collateral and obtaining debtor in possession (DIP) financing. The amended rules now require that more details about the key provisions of cash collateral and DIP financing terms and conditions be stated in the motion, that proposed forms of order be filed with the motion, and that cross-references be made in the motion to where in the cash collateral or DIP financing agreements and proposed orders the key provisions are reflected. Since some financing agreements can run hundreds of pages long, with complex formulas and provisions, this rule change is designed to make it easier for the court and the parties to understand their material features without wading through the entire document.

New Rule 6003: Putting The Breaks On Some "First Day" Orders. Another major change is the addition of Rule 6003. This new rule provides that "except and to the extent that relief is necessary to avoid immediate and irreparable harm, the court shall not, within 20 days after the filing of the petition, grant relief" regarding three key areas:

  • The employment of professionals;
  • A motion to pay any prepetition claims (read: critical vendors) or to use, sell, lease (Section 363 sales), or incur an obligation for property of the estate, other than cash collateral or DIP financing motions; or
  • Assumption or assignment of any executory contract or unexpired lease (including commercial real estate leases).

As drafted, unless there is an emergency, and then only to the extent it’s really necessary, the bankruptcy court should defer these decisions until after the 20th day following the filing of the Chapter 11 bankruptcy petition (although technically these apply under the other chapters of bankruptcy). One reason for the rule is to give time for a creditors committee to be appointed and retain counsel before important decisions are made. That said, the exceptions for cash collateral and DIP financing, as well as for rejection of leases and other executory contracts, means a lot can still be done during the early part of a case. When Section 363 sale or critical vendor motions come up on an emergency basis, it’ll be interesting to see how often courts, in applying this new rule, find the existence of irreparable harm.

Amended Rule 6006: Assumption, Assignment, And Rejection Of Executory Contracts. Similar to Rule 3007, Rule 6006 has been changed to put limits on when omnibus motions can be used to deal with executory contracts and leases. Under new Rule 6006(e), absent special court authorization, omnibus motions may be used for multiple executory contracts or leases only when all of the executory contracts to be assumed or assigned are (1) between the same parties, or (2) being assigned to the same assignee. This latter provision likely covers most Section 363 asset sales, so non-debtor contracting parties should continue to carefully review those motions, as discussed in this earlier post. An omnibus motion may also be used when a debtor or trustee seeks to assume, but not assign to more than one assignee, real property leases. In addition, omnibus motions may be used to request rejection of multiple executory contracts or leases.

New Rule 6006(f) provides that, when allowed, these omnibus motions can list no more than 100 executory contracts or leases in any one motion (unlike the chart on this fairly typical pre-amendment motion), and multiple motions will need to be numbered consecutively. The new rule also requires that permitted omnibus motions provide a variety of new information, including:

  • An alphabetical listing by party name;
  • The terms of the assumption or assignment, including for curing defaults; and
  • The identity of the assignee and the adequate assurance of future performance to be provided.

A Few Other Changes. The other amendments this year (1) permit a court to consider a change of venue, (2) clarify when corporate ownership disclosure needs to be made, (3) address constitutional challenges to statutes, and (4) specify procedures for protecting social security numbers and other private information in court filings. Check the clean or redline sets linked above to read these additional rule amendments.

Conclusion. This year’s amendments to the Federal Rules of Bankruptcy Procedure have more than their share of real changes and they will have an impact on business bankruptcy cases. The omnibus motion changes should help creditors from missing when their claim is the target of an objection and contract parties from failing to see that their executory contract or lease is part of a motion to assume and assign. Although cash collateral and DIP financing motions are not affected, the new irreparable harm standard for certain relief in the first 20 days of a case may prove interesting when emergency Section 363 sales are attempted. Stay tuned.