Creditor\'s Rights and Bankruptcy Issues in Real Estate Law


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Discusses how creditors should deal with a recently filed case, the automatic stay, leasing, use and sale of assets, and nonbankruptcy remedies available to creditors, including receiverships, foreclosures, creditors\' bill, charging order, and assignments for the benefit of creditors

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  • Creditor\'s Rights and Bankruptcy Issues in Real Estate Law

    1. 1. CREDIT AND BANKRUPTCY ISSUES IN REAL ESTATE LAW Presented by Teri G. Rasmussen Plunkett Cooney
    2. 2. Who is PLUNKETT COONEY ? <ul><li>Established 1913 </li></ul><ul><li>325 Employees </li></ul><ul><li>150 Attorneys </li></ul><ul><li>Nine Michigan Offices plus offices in Columbus , Ohio and Indianapolis </li></ul><ul><ul><li>In Columbus, focus is on Real Estate, Title Insurance, Creditors’ Rights, General Business, and Bankruptcy/Workout Creditor Representation </li></ul></ul><ul><li>Full-service business and litigation firm </li></ul>
    3. 3. Teri G. Rasmussen <ul><li>Creditors’ Rights and Debt Collection </li></ul><ul><ul><li>Business Bankruptcy & Insolvency </li></ul></ul><ul><ul><li>UCC and Secured Transactions </li></ul></ul><ul><ul><li>Commercial Finance </li></ul></ul><ul><ul><li>Commercial Litigation </li></ul></ul><ul><li>General Corporate and Business Law </li></ul><ul><ul><li>Contracts and Loan/Lease Documentation </li></ul></ul><ul><ul><li>Real Estate </li></ul></ul><ul><ul><li>Business Acquisitions and Sales </li></ul></ul><ul><ul><li>Business Formation and Financing </li></ul></ul><ul><ul><li>Joint Ventures and Strategic Alliances </li></ul></ul><ul><ul><li>Corporate Governance and Shareholder Disputes </li></ul></ul><ul><ul><li>Business Planning </li></ul></ul>
    4. 4. Visit my legal blog: OHIO PRACTICAL BUSINESS LAW http://
    5. 7. Presentation Objectives <ul><li>Clarify what a bankruptcy filing really means </li></ul><ul><li>Provide insights into creditor strategies </li></ul><ul><li>Give overview of major bankruptcy concepts </li></ul><ul><ul><li>Automatic Stay and Exceptions </li></ul></ul><ul><ul><li>Proofs of Claim </li></ul></ul><ul><ul><li>Use, Sale, and Lease of Real Property </li></ul></ul><ul><li>Non-Bankruptcy Rights and Remedies of Creditors </li></ul><ul><ul><li>Receivership </li></ul></ul><ul><ul><li>Foreclosure </li></ul></ul><ul><ul><li>Creditors’ Bill </li></ul></ul><ul><ul><li>Charging Order </li></ul></ul><ul><ul><li>ABC aka Assignment for Benefit of Creditors </li></ul></ul>
    6. 8. Purpose of Bankruptcy <ul><li>To allow &quot;honest&quot; but insolvent debtors to obtain a &quot;fresh start&quot; </li></ul><ul><ul><li>Providing some &quot; breathing room &quot; to allow restructuring of debt through additional repayment time and discounting of the amount to be repaid; and </li></ul></ul><ul><ul><li>Allowing individual debtors to receive a &quot; discharge &quot; from all or some of the debtor's debts when the debtor is an individual. </li></ul></ul><ul><li>To ensure payment of creditors in an orderly fashion to extent debtor has assets </li></ul>
    7. 9. Dealing with a Bankruptcy Filing <ul><li>Understand structure of Bankruptcy Code. The Bankruptcy Code is found in Title 11 of the federal U.S. Code and consists of eight numbered chapters. </li></ul><ul><ul><li>Chapters 1, 3, and 5 contain general rules applicable to all bankruptcy cases. </li></ul></ul><ul><ul><li>Chapters 7, 9 (municipal), 11, 12 (farmer), 13, and 15 have provisions which apply only to cases filed under those chapters. </li></ul></ul>
    8. 10. Types of Bankruptcy <ul><li>Chapter 7 Liquidation </li></ul><ul><li>Chapter 13 Wage Earner Plan </li></ul><ul><li>Chapter 11 Reorganization </li></ul><ul><li>Chapter 15 Cross-Border Insolvency </li></ul><ul><li>State Law Alternatives </li></ul><ul><ul><li>Receiverships </li></ul></ul><ul><ul><li>Assignment for Benefit of Creditors </li></ul></ul>
    9. 13. Immediate Effect of Bankruptcy Filing <ul><li>Creation of Bankruptcy Estate – Created immediately upon filing of petition or in an involuntary case when the “order for relief” is entered. </li></ul><ul><ul><li>>>>>>> Imposition of Automatic Stay </li></ul></ul><ul><li>Appointment of Trustee : All of the debtor’s assets are no longer controlled by the debtor for his benefit. In a Chapter 7 or Chapter 13 case, the debtor’s assets are immediately transferred to the control of a trustee to manage and dispose of for the benefit of the debtor’s creditors. </li></ul>
    10. 14. <ul><li>Debtor in Possession : Typically the debtor’s management stays in control of the debtor (called the “debtor in possession” or “DIP”) </li></ul><ul><ul><li>Role of the DIP : DIP must manage the debtor’s assets for the benefit, of the creditors. </li></ul></ul>Chapter 11 Reorganization - DIP
    11. 15. Chapter 11 Reorganization <ul><li>Chapter 11 is an alternative … </li></ul><ul><ul><li>to Chapter 13 when the debtor exceeds the debt limitation for that sort of bankruptcy </li></ul></ul><ul><ul><li>to liquidation under Chapter 7 when permitting the debtor to continue to operate the business for the benefit of the creditors is better than simply liquidating the debtor’s assets </li></ul></ul><ul><ul><li>Can also be utilized for liquidation when a debtor wishes to retain control over the assets. </li></ul></ul>
    12. 16. Chapter 11 Reorganization <ul><li>Creditors’ Committee : The court will appoint a “creditors’ committee” from the unsecured creditors to represent the creditors, but is not required to do so if the total debts are less than $2 million . </li></ul><ul><li>Type of Debtors : Chapter 11 is available to any type of individual or business entity debtor . </li></ul><ul><li>Voluntary or Involuntary : Chapter 11 may be voluntary or involuntary. </li></ul>
    13. 17. <ul><li>Length: From the date the petition is filed until the plan is confirmed can take years </li></ul><ul><ul><li>Implementation of the plan following confirmation is likely to take several more years. </li></ul></ul><ul><li>Frequency : There is no statutory limit on how frequently a debtor may seek protection under Chapter 11. </li></ul>Chapter 11 Reorganization
    14. 18. RESPONDING TO A BANKRUPTCY FILING Initial Moves and Analysis
    15. 19. CRUCIAL Initial Information to Obtain <ul><li>What is name of party filing bankruptcy? </li></ul><ul><li>Where was petition filed? </li></ul><ul><li>When did filing happen? </li></ul><ul><li>How did creditor client find out? </li></ul><ul><li>What is Case No. ? </li></ul>
    16. 20. Initial Questions <ul><li>WHY is Creditor Faced with Bankruptcy Filing? </li></ul><ul><ul><li>Foreclosure sale/ repossession of collateral </li></ul></ul><ul><ul><li>Client Collection Action </li></ul></ul><ul><ul><li>Other Creditors </li></ul></ul><ul><ul><li>Voluntary Decision of Debtor </li></ul></ul>
    17. 21. Other Initial Questions - About the Client <ul><li>What kind of creditor is client?/ Who is the most important creditor? How connected to debtor? </li></ul><ul><ul><li>Secured >>> what type of collateral </li></ul></ul><ul><ul><li>Unsecured </li></ul></ul><ul><ul><ul><li>Trade creditor or supplier </li></ul></ul></ul><ul><ul><ul><li>Equipment lessor </li></ul></ul></ul><ul><ul><ul><li>Real Property Lessor </li></ul></ul></ul><ul><ul><ul><li>Taxing Authority </li></ul></ul></ul><ul><ul><li>Economic Effect of Filing on creditor </li></ul></ul><ul><ul><li>Creditor’s Objectives </li></ul></ul>
    18. 22. More Initial Questions <ul><li>Who/ What is Debtor? What about codebtors? </li></ul><ul><ul><li>Individual or Business </li></ul></ul><ul><ul><li>Industry Sector </li></ul></ul><ul><ul><li>Service, Manufacturing, Retail </li></ul></ul><ul><li>TYPE of debt, i.e. business or personal </li></ul>
    19. 23. Dealing with a Bankruptcy Filing – Developing a Strategy <ul><li>Catalog options and special considerations </li></ul><ul><ul><li>Type of security held/Importance to Debtor </li></ul></ul><ul><ul><li>Significance/Substantiality of Claim Relative to claims held by others </li></ul></ul><ul><ul><li>Effect of Exemptions </li></ul></ul><ul><ul><li>Likely Participation of Other Players </li></ul></ul><ul><ul><ul><li>Debtor </li></ul></ul></ul><ul><ul><ul><li>Trustee </li></ul></ul></ul><ul><ul><ul><li>Other Creditors </li></ul></ul></ul>
    20. 24. Dealing with a Bankruptcy Filing – Developing a Strategy <ul><li>Availability of Specialty Sections </li></ul><ul><ul><li>Lessor Claims </li></ul></ul><ul><ul><li>Administrative Claims </li></ul></ul><ul><li>Receiver Turnover Provisions of Section 543 >>> has Receiver been in place more than 120 days? </li></ul><ul><li>Review Documentation </li></ul>
    21. 25. Dealing with a Bankruptcy Filing – Developing a Strategy <ul><li>Determination of Secured Status </li></ul><ul><ul><li>Range of Value of Collateral </li></ul></ul><ul><ul><ul><li>Appraisals </li></ul></ul></ul><ul><ul><ul><li>Effect of Other Liens </li></ul></ul></ul><ul><ul><li>Compare to Amount of Debt </li></ul></ul><ul><li>Assess Vulnerabilities </li></ul>
    22. 26. Bankruptcy Preferences <ul><li>A payment or grant of collateral/conveyance of assets that allows the recipient to receive more than their fair share of the now bankrupt customer's available cash and assets </li></ul><ul><ul><li>Based upon extent secured </li></ul></ul><ul><li>Must be repaid because it frustrates the underlying policy of federal bankruptcy law that similar creditors should be treated in a similar fashion . </li></ul><ul><li>Policy is intended to discourage a mad grab by creditors that might accelerate a financially ailing company's slide into bankruptcy . </li></ul>
    23. 27. Statutory Definition of Preference – Section 547 <ul><li>On an antecedent (i.e., past due) debt owed to a creditor </li></ul><ul><li>Made while the now bankrupt customer was &quot;insolvent&quot; </li></ul><ul><li>Within 90 days (or a year, if the creditor is an &quot;insider&quot; such as a shareholder, officer, or director of the bankrupt debtor, or another affiliated company) before the date the bankruptcy proceeding was filed Continued </li></ul>
    24. 28. Statutory Definition of Preference – Section 547 <ul><li>That allowed the creditor to receive more on its claim than it would have had the payment not been made and the claim paid through the bankruptcy proceeding </li></ul>
    25. 29. Performing a “Preference Analysis” <ul><li>Gather a full payment history for the period of at least the year before the payments in question were made. </li></ul><ul><li>All invoices showing both sales made and payments received during this period </li></ul><ul><li>Copies of any correspondence, including e-mail, contracts, checks, or other evidence of payments Continued </li></ul>
    26. 30. Performing a “Preference Analysis” <ul><li>Determine the number of days which generally elapsed between presentation of the invoices and receipt of payment and detect any patterns, that can also be useful. </li></ul>
    27. 31. Preference Exceptions <ul><li>Contemporaneous Exchange - §547(c)(1) </li></ul><ul><li>Ordinary Course of Business - §547(c)(2) </li></ul><ul><ul><li>Made in the &quot; ordinary course of business or financial affairs &quot; of the creditor and bankrupt customer in payment of a debt &quot;incurred in the ordinary course of business or financial affairs&quot; of the parties. </li></ul></ul><ul><ul><li>Payment made &quot;according to ordinary business terms&quot; is also excepted. Continued </li></ul></ul>
    28. 32. Preference Exceptions <ul><li>Subsequent New Value - §547(c)(4) </li></ul><ul><ul><li>Extent to which creditor conveyed more value to debtor than it received </li></ul></ul><ul><li>Payments to Fully Secured Creditors </li></ul>
    29. 33. Dealing with a Bankruptcy Filing – Reviewing the Initial Pleadings <ul><li>Review bankruptcy initial filings </li></ul><ul><ul><li>Analyze “first day” pleadings – more than 20 “first day” motions in Chrysler case </li></ul></ul><ul><ul><li>Learn and understand about indebtedness to other creditors. </li></ul></ul><ul><ul><li>Make sure you or your client are properly listed. </li></ul></ul><ul><ul><li>Determine likely level of repayment if possible. </li></ul></ul>
    30. 34. “ First Day” Motions and Orders <ul><li>Retention /compensation of Debtor’s Counsel and other professionals </li></ul><ul><li>Interim Cash Collateral Arrangements </li></ul><ul><li>Payment of Prepetition Wages </li></ul><ul><li>Continuation of Utility Services </li></ul><ul><li>Post-petition Financing </li></ul><ul><li>Payment of Essential Pre-petition Debt/Critical Vendors </li></ul><ul><li>Continued use of Cash management systems </li></ul><ul><li>Case Management procedures </li></ul><ul><li>Extension of time to file schedules/Statement of financial affairs </li></ul><ul><li>363 Sale Motion/Prepackaged Plan of Reorganization </li></ul>
    31. 35. Statement of Financial Affairs / Schedule of Assets & Liabilities <ul><li>Both MUST be filed within 15 days after the petition is filed unless an extension is granted by the bankruptcy court. </li></ul><ul><li>The Statement of Financial Affairs is a series of questions focused on the debtor’s pre-filing behavior with respect to its assets, income, and liabilities. Continued </li></ul>
    32. 36. Statement of Financial Affairs / Schedule of Assets and Liabilities <ul><li>The Schedule of Assets and Liabilities is a balance sheet type document prepared on a “liquidation value” basis which </li></ul><ul><ul><li>Lists the debtor’s assets and </li></ul></ul><ul><ul><li>Itemizes the amount of each and every debt owed, together with the name and address of the creditor and </li></ul></ul><ul><ul><li>Itemizes the estimated value of any collateral securing the obligation. </li></ul></ul>
    33. 37. Schedule of Assets and Liabilities <ul><li>Schedule A Real Property </li></ul><ul><li>Schedule B Personal Property </li></ul><ul><li>Schedule C Property Claimed as Exempt </li></ul><ul><li>Schedule D Creditors Holding Secured Claims (includes both fully secured and only partially secured creditors) </li></ul><ul><li>Schedule E Creditors Holding Unsecured Priority Claims </li></ul><ul><li>Continued </li></ul>
    34. 38. Statement of Financial Affairs / Schedule of Assets and Liabilities <ul><li>Schedule F Creditors Holding Unsecured Nonpriority Claims </li></ul><ul><li>Schedule G Executory Contracts and Unexpired Leases </li></ul><ul><li>Schedule H Codebtors </li></ul><ul><li>Schedule I Current Income of Individual Debtor(s) </li></ul><ul><li>Schedule J Current Expenditures of Individual Debtor(s) </li></ul>
    35. 42. <ul><li>File appropriate proof of claim to evidence indebtedness owed to you or your client and reference any collateral securing repayment. </li></ul><ul><li>Either creditor or creditor’s attorney may file proof of claim with bankruptcy court. </li></ul><ul><li>Attach documents supporting claim, e.g. mortgage, note, etc. </li></ul><ul><li>DO NOT DISCLOSE personal identification information about debtor such as Social Security Number – redact if necessary </li></ul>Dealing with a Bankruptcy Filing – Proof of Claim
    36. 43. <ul><li>Most Chapter 7 cases: no-asset notice </li></ul><ul><ul><li>If assets  re-notice </li></ul></ul><ul><ul><li>90 days to file from notice </li></ul></ul><ul><ul><li>Otherwise, 90 days from first 341 meeting </li></ul></ul><ul><li>Chapter 11: not required to file if on schedules, but best to file POC anyway </li></ul><ul><li>Chapter 13: must file even if on schedules </li></ul>Proof of Claim: Just in Case
    37. 45. Types of Claims <ul><li>Secured claim – if value of collateral is less than the amount of the debt, the difference is an unsecured claim. </li></ul><ul><li>Unsecured Priority Claim – (i.e., taxes, certain pre-petition wages) </li></ul><ul><li>Unsecured Non-priority Claim – (i.e., trade creditors, credit card debt) Continued </li></ul>
    38. 46. Types of Claims <ul><li>Executory Contract – (i.e., lease of equipment or business premises; other unexpired contract </li></ul><ul><li>Administrative Claims – for services provided after the filing of the bankruptcy </li></ul><ul><ul><li>CANNOT use proof of claim form. </li></ul></ul><ul><ul><li>Instead must apply to bankruptcy court for payment pursuant to §503 of the Bankruptcy Code </li></ul></ul>
    39. 47. Priority of Claims <ul><li>Exempt Assets belong to the debtor (only applies to individuals), then </li></ul><ul><li>Secured Creditors are paid in full; then </li></ul><ul><li>Priority and Preferred Unsecured Creditors </li></ul>
    40. 48. Priority of Claims <ul><li>3. Priority and Preferred Unsecured Creditors </li></ul><ul><ul><li>a. Administrative costs (including Debtors’ attorney fees) </li></ul></ul><ul><ul><li>Debts incurred after filing; then </li></ul></ul><ul><ul><li>Wages/employee benefits up to $11,000 (amount is indexed) </li></ul></ul><ul><ul><ul><li>(1) Wages must be earned within 90 days prior to filing the petition, then </li></ul></ul></ul><ul><ul><ul><li>(2) Employee benefits must be earned within 180 days of filing the petition, then </li></ul></ul></ul>
    41. 49. Priority of Claims <ul><li>3. Priority and Preferred Unsecured Creditors </li></ul><ul><ul><li>d. Customer deposits up to $2,500 (amount is indexed) per customer; then </li></ul></ul><ul><ul><li>e. Alimony and child support; then </li></ul></ul><ul><ul><li>Taxes, then </li></ul></ul><ul><li>4. ALL OTHER UNSECURED CREDITORS </li></ul>
    42. 50. <ul><li>Meeting is led by the U.S. Trustee </li></ul><ul><li>Provides an opportunity for creditors to ask general questions about what precipitated the bankruptcy filing and what sort of treatment they might be able to expect for their claim. </li></ul><ul><li>Non-attorneys such as paralegals may attend and participate in the questioning so long as they are there on behalf of a particular creditor or other party in interest. </li></ul>Dealing with a Bankruptcy Filing – First Meeting of Creditors
    44. 52. All a Creditor Can Do is SMILE!! The Automatic Stay <ul><li>IMMEDIATELY , upon filing of a bankruptcy petition the “automatic stay ” stops all collection actions by all creditors, including secured creditors, or other actions interfering with “property of the estate” . </li></ul><ul><li>Purpose is to give deserving debtor a “breathing spell” in which to formulate plan of repayment </li></ul>
    45. 53. Automatic Stay Prohibitions – Section 362(a) <ul><li>Commencement, continuation, etc. of judicial, administrative, or other proceeding or effort to recover claim AGAINST Debtor </li></ul><ul><li>Enforcement of judgment against Debtor or property of estate </li></ul><ul><li>Obtaining possession of Debtor’s property </li></ul><ul><li>Creation, perfection and enforcement of lien of property of estate </li></ul><ul><li>Act to collect, assess, or recover claim arising before bankruptcy </li></ul><ul><li>Setoff of pre-petition debt owed by Debtor </li></ul><ul><li>Certain proceedings before U.S. Tax Court </li></ul>
    46. 54. Automatic Stay <ul><li>Duration – Stay remains in effect until </li></ul><ul><ul><li>Property is abandoned by bankruptcy estate </li></ul></ul><ul><ul><li>Case is dismissed or closed </li></ul></ul><ul><ul><li>In a Chapter 7 case, a DISCHARGE is granted or denied (occurs before case is finished) </li></ul></ul><ul><ul><li>Relief from stay is obtained from Bankruptcy Court </li></ul></ul><ul><li>Violation can result in fines, sanction and even imprisonment in extreme cases; inadvertent violation dealt with less harshly </li></ul>
    47. 55. EXCEPTIONS to Automatic Stay <ul><li>Stay does NOT prohibit continued collection action against guarantors or other co-debtors (Exception: Chapter 13 cases involving individuals – Section 1301) </li></ul><ul><li>Twenty-Eight statutory exceptions currently </li></ul><ul><li>Exceptions include criminal prosecutions or other actions furthering governmental police or regulatory powers, domestic relations matters such as alimony or child support, commodity brokers and swap agreements </li></ul>
    48. 56. EXCEPTIONS to Automatic Stay: Repeat Filings by Individual Debtors <ul><li>Very intricate provisions resulting from 2005 passage of BAPCA </li></ul><ul><li>Within one year before filing of current case: </li></ul><ul><ul><li>ONE case dismissed >>> stay limited to 30 days unless Debtor gets extension </li></ul></ul><ul><ul><li>TWO cases dismissed >>> NO automatic stay unless Court imposes one after determining case filed in good faith </li></ul></ul>
    49. 57. Determining If Bankruptcy Petition Filed in Good Faith
    50. 58. Other Automatic Stay Exceptions Applicable to Individual Debtors <ul><li>Actions to enforce lien OK against Debtor who has filed current case ignoring previous Order prohibiting filing of bankruptcy in that Chapter </li></ul><ul><li>OK to pursue Debtors whose previous case was dismissed either </li></ul><ul><ul><li>Willful failure of Debtor to abide by Court’s orders or appear in proper prosecution of case </li></ul></ul><ul><ul><li>Previous case voluntarily dismissed by Debtor after stay relief motion filed </li></ul></ul>
    51. 59. Other Real Estate Related Exceptions – IN REM Relief of 362(d)(4)(A) to Case Filed Within 2 Years Later <ul><li>Case “part of a scheme to delay, hinder, AND defraud creditors” </li></ul><ul><li>AND </li></ul><ul><li>Case involved transfer of all or part ownership of real property securing credit’s claim without consent of creditor </li></ul><ul><li>>>> Very narrowly construed </li></ul>
    52. 60. “ In Rem” Exceptions to Automatic Stay <ul><li>Applies to ALL Debtors when creditor is secured by real property AND </li></ul><ul><li>Court finds filing of the case was </li></ul><ul><ul><li>“ part of a scheme to delay, hinder, and defraud creditors” </li></ul></ul><ul><ul><li>and involved multiple filings affecting such real property. section 362(d)(4)(B) – stay relief to be granted >>> OR </li></ul></ul><ul><li>in rem relief from stay was previously granted pursuant to §362(d)(4) at any time in the last 2 years §362(B)(20)) – stay NOT applicable provided creditor has filed a certified copy of the stay relief Order with the applicable Ohio County Recorder’s office. </li></ul>
    53. 61. Pending FED Exception to Automatic Stay <ul><li>Pending FED/eviction proceedings in residential leases can continue after 30 days </li></ul><ul><ul><li>If “judgment for possession” obtained before bankruptcy filing AND </li></ul></ul><ul><ul><li>Debtor fails to deposit one month’s rent and file certification contemporaneously with petition that nonbankruptcy law allows cure </li></ul></ul><ul><li>Cure of nonmonetary defaults not permitted </li></ul><ul><li>If applicable nonbankruptcy law doesn’t allow cure of monetary default, Debtor out of luck </li></ul>
    54. 62. Exceptions to Automatic Stay for Leases <ul><li>EXPIRED nonresidential lease – Section 362(b)(10) </li></ul><ul><li>Eviction of RESIDENTIAL tenant using illegal drugs or endangering property within 30 days before bankruptcy filed. 11 U.S.C. 362(b)(23) </li></ul><ul><ul><li>Landlord must file certification </li></ul></ul><ul><ul><li>Stay expires 15 days later unless Objection filed by Debtor (362(m)) </li></ul></ul>
    55. 63. Other Real Estate Related Exceptions – <ul><li>Tax assessments and collection of same. §362(b)(9). </li></ul><ul><li>Creation or perfection of real property tax liens for amounts coming due after the filing of the petition. §362(b)(18). </li></ul><ul><li>Foreclosure of a HUD mortgage involving property with five living units or more (§362(b)(8)). </li></ul>
    56. 64. Basics of Lifting Automatic Stay <ul><li>Creditors can petition bankruptcy court for “relief from stay” to continue collection action when: </li></ul><ul><ul><ul><li>Lack of adequate protection </li></ul></ul></ul><ul><ul><ul><li>Debtor has no equity in the collateral, and it is not necessary for an “effective reorganization.” OR </li></ul></ul></ul><ul><ul><ul><li>For “cause” </li></ul></ul></ul><ul><ul><ul><li>- 11 U.S.C. §362(d) </li></ul></ul></ul>
    57. 65. Adequate Protection <ul><li>Used to protect secured creditors by the diminution in the value of their collateral </li></ul><ul><li>Intended to preserve status quo </li></ul><ul><li>Debtor may be required to make cash payments or provide additional collateral to secured creditor </li></ul><ul><li>Ground for stay relief if property is deteriorating in value or “equity cushion” is dissipating </li></ul>
    58. 66. Relief from Stay – No Equity AND Not Necessary for EFFECTIVE Reorganization <ul><li>Perhaps most frequently used, especially in Chapter 7 cases </li></ul><ul><li>NO EQUITY = Amount owed creditor is more than value of property </li></ul><ul><li>Demonstrating effective reorganization is not a reasonable possibility in a reasonable amount of time is sufficient </li></ul>
    59. 67. Relief from Stay – “For Cause” <ul><li>Available when another court or tribunal is better suited to determine issues, especially with respect to contingent claims </li></ul><ul><li>Catch-all category to provide flexibility to bankruptcy case to exercise its powers as court of equity </li></ul><ul><li>Lack of good faith or improper pre-petition action or conduct of Debtor may constitute “cause” </li></ul>
    60. 68. What is Lack of Good Faith? <ul><li>Debtor has one asset </li></ul><ul><li>Pre-petition conduct of debtor has been improper </li></ul><ul><li>Debtor has only a few unsecured creditors </li></ul><ul><li>Debtor’s property has been posted for foreclosure and debtor has been unsuccessful in defending against foreclosure in state court </li></ul><ul><li>Debtor and creditor have proceeded to a standstill in state court and debtor has lost </li></ul><ul><li>Filing of the petition effectively allows the debtor to evade court order </li></ul><ul><li>Debtor has no ongoing business or employees </li></ul><ul><li>Lack of possibility of reorganization </li></ul>
    61. 69. Relief from Stay – “Single Asset Real Estate” >>> 362(d)(3) <ul><li>Debtor MUST either </li></ul><ul><li>File plan of reorganization that “has a reasonable possibility of being confirmed within a reasonable time” OR </li></ul><ul><li>Start making monthly payments (can be from rents or income generated by property) equal to accrued interest at nondefault rate on an amount equal to the VALUE of creditor’s interest in the property </li></ul><ul><li>>>>> within later of (A) 90 days after bankruptcy filed; (B) longer period determined by Court; or (C) 30 days after case determined to be a “single asset real estate” case </li></ul>
    62. 70. What is “Single Asset Real Estate”? <ul><li>Non residential OR residential real property with more than 4 residential units </li></ul><ul><li>Generates substantially all of the gross income of a debtor who is not a family farmer </li></ul><ul><li>No other substantial business is being conducted by a debtor other than the business of operating the subject real property and activities incidental </li></ul>
    63. 71. Other Grounds for Relief from Stay <ul><li>Serial filings – 362(d)(4) </li></ul><ul><li>Ex Parte Relief- Bankruptcy Rule 4001 >>> Injunctive Relief Standard </li></ul><ul><ul><li>Demonstrate “specific facts shown by affidavit or by a verified motion that immediate and irreparable injury, loss, or damage will result” before the debtor can be heard in opposition. </li></ul></ul><ul><ul><li>The creditor’s attorney certifies to the court all efforts to notify the debtor and its counsel and why notice should not be required. </li></ul></ul>
    64. 72. Relief From Stay Procedures <ul><li>Motion for Relief from Stay + Notice </li></ul><ul><li>If no response, Order entered without a hearing </li></ul><ul><ul><li>20-day response period in S.D. Oh </li></ul></ul><ul><ul><li>10-day response period in N.D. Oh. </li></ul></ul><ul><li>Local Rules frequently require completion of a prescribed worksheet showing certain information and also sometimes require use of a particular format for the Motion </li></ul><ul><ul><li>Lots of variations from judge to judge, even in same district or division </li></ul></ul><ul><ul><li>ND OH recently posted proposed changes to forms for comment </li></ul></ul><ul><li>ECF Filing necessary requiring Bankruptcy Court ECF ID and password </li></ul>
    66. 74. Ordinary Course Use of Property <ul><li>In Chapter 11 and Chapter 13 cases, a debtor may continue to use its real and personal property – including property in which a creditor has a mortgage on or security interest in – in the “ordinary course of business” >>> no authorization of Bankruptcy Court required </li></ul><ul><ul><li>What is “ordinary course” depends on what is customary in the debtor’s industry and the nature of the debtor’s business in particular </li></ul></ul><ul><ul><li>If creditor is concerned about effect of use on value of collateral, it should seek “adequate protection” </li></ul></ul><ul><ul><li>Use not in the “ordinary course” requires Bankruptcy Court authorization </li></ul></ul>
    67. 75. Cash Collateral <ul><li>When debtor has granted a lender a mortgage in real property or a security interest in substantially all assets </li></ul><ul><li>>>>>>>Debtor is not permitted to use cash generated from receivables generation, rent payments, disposition of assets, etc. </li></ul><ul><li>without consent of the lender and/or approval of bankruptcy court. </li></ul><ul><li>11 U.S.C. §363(c)(2) </li></ul><ul><li>>>>> Considerable variation in Local Bankruptcy Rules </li></ul>
    68. 76. 363 Sale of Assets <ul><li>Real or personal property – or interests therein - may be sold free and clear of any liens or encumbrances </li></ul><ul><ul><li>Liens transferred to proceeds </li></ul></ul><ul><ul><li>Requires authorization of Bankruptcy Court </li></ul></ul><ul><ul><li>Discrete property/interests OR, especially recently, substantially all assets of Debtor (e.g. GM and Chrysler) </li></ul></ul><ul><ul><ul><li>Plan of Reorganization or 363 Motion? </li></ul></ul></ul><ul><ul><ul><ul><li>>>>> sub rosa plan </li></ul></ul></ul></ul><ul><ul><li>Section 363(m) makes appeal very difficult </li></ul></ul><ul><li>Many specific Local Bankruptcy Rules and judge specific procedures </li></ul>
    69. 77. 363 Sale Terminology <ul><li>Stalking horse </li></ul><ul><li>Topping fee or break-up fee </li></ul><ul><li>Bidding procedures </li></ul><ul><li>Credit bid </li></ul><ul><li>Expedited hearing </li></ul>
    70. 78. Substantive Requirements for Approval of 363 Sale – Demonstration of “Sound Business Purpose” for Sale <ul><li>Terms of the sale constitute the highest and best offer for the assets to be sold; </li></ul><ul><li>Negotiations concerning the terms and conditions of the proposed sale were conducted at arm’s length ; </li></ul><ul><li>Sale is in the best interests of the bankruptcy estate and its creditors; and </li></ul><ul><li>Proposed purchaser has acted in good faith   and the sale itself is being made in good faith  </li></ul><ul><li>Stephens Indus., Inc. v. Mallory Company, Inc. , 789 F.2d 386 (6th Cir. 1986) </li></ul>
    71. 79. Other Substantive Requirements for Approval of 363 Sale <ul><li>Applicable nonbankruptcy law permits such a sale (e.g. foreclosure) -§363(f)(1); OR </li></ul><ul><li>Debtor consents - §363(f)(2);OR </li></ul><ul><li>“ [S]uch interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on the property ” - §363(f)(3); OR </li></ul><ul><li>The Debtor’s interest is in “bona fide dispute” - §363(f)(4); OR </li></ul><ul><li>The Debtor “could be compelled, in a legal or equitable proceeding, to accept a monetary satisfaction of such interest” - §363(f)(5) </li></ul>
    72. 80. “ aggregate value of all liens” <ul><li>Actual economic value of liens </li></ul><ul><li>OR </li></ul><ul><li>Actual aggregate outstanding amount owed which is secured by liens </li></ul><ul><li>Clear Channel Outdoor, Inc. v, Knupfer </li></ul><ul><ul><li>363(f)(3) and (f) (5) </li></ul></ul><ul><ul><li>363(m) </li></ul></ul>
    74. 82. Executory Contracts and Unexpired Leases <ul><li>Trustee or DIP may choose to accept or reject executory contracts (i.e., lease agreements, unexpired contracts, union agreements) </li></ul><ul><li>In case of nonresidential real property leases, rental payments must be kept current until a decision as to what to do is made </li></ul><ul><li>Be wary of effect of potential effect of 363 sales on leases </li></ul>
    75. 83. Landlord’s Perspective on Tenant Bankruptcy <ul><li>Options depend upon </li></ul><ul><ul><li>Residential or nonresidential </li></ul></ul><ul><ul><li>Tenant’s desire/intentions </li></ul></ul><ul><li>Ipso facto provisions making bankruptcy a default not enforceable </li></ul><ul><li>Goals </li></ul><ul><ul><li>Obtain control of space </li></ul></ul><ul><ul><li>Determine amount and type of claim – whether to pursue or seek termination by Debtor </li></ul></ul><ul><ul><li>Stay on top of the case and in front of the Debtor </li></ul></ul>
    76. 84. Application of Automatic Stay <ul><li>If nonresidential lease ALREADY expired according to its terms before bankruptcy, OK to start or continue eviction </li></ul><ul><ul><li>Eviction ONLY – cannot pursue money judgment </li></ul></ul><ul><li>If residential lease and have obtained “judgment for possession”, landlord can continue FED/eviction </li></ul>
    77. 85. Stay’s Effect on Landlord/Tenant Relationship You CANNOT <ul><li>Evict tenant </li></ul><ul><li>Lockout tenant </li></ul><ul><li>Seize tenant’s property </li></ul><ul><li>Shut off utilities </li></ul><ul><li>Show property to prospective tenant </li></ul><ul><li>Apply security deposit </li></ul><ul><li>Hinder operation of debtor’s business </li></ul><ul><li>Change locks </li></ul><ul><li>Give eviction notice </li></ul><ul><li>Terminate lease </li></ul><ul><li>Declare a default </li></ul><ul><li>Threaten tenant </li></ul><ul><li>Move property of a tenant that has vacated </li></ul>
    78. 86. Stay’s Effect on Landlord/Tenant Relationship <ul><li>You Can: </li></ul><ul><li>Collect rent and other charges which have accrued since bankruptcy filing </li></ul><ul><li>Draw down letter of credit </li></ul><ul><li>Take action to continue a security interest in property </li></ul><ul><li>Take action to remove tenant whose lease has expired by its own terms prior to or during the bankruptcy case (this should be done carefully) </li></ul>
    79. 87. Landlord’s Perspective on Tenant Bankruptcy: Expect to Receive Post-Filing Rent in Nonresidential Leases <ul><li>Tenant remains in possession </li></ul><ul><li>No decision made by Tenant to reject lease </li></ul><ul><li>Tenant to make rent payments in non- default amount without necessity of demand by Landlord </li></ul><ul><li>Administrative claim priority </li></ul><ul><ul><li>“Stub rent” >> proration or billing date theory </li></ul></ul>
    80. 88. Assumption or Rejection of Lease by Tenant <ul><li>Tenant’s option to assume or reject </li></ul><ul><li>Chapter 7: Lease automatically rejected 60 days after bankruptcy filing unless Court grants additional time to make determination </li></ul><ul><li>Other Chapters: Decision regarding assumption or rejection must be made in 120 days after bankruptcy filing; one 90 day extension permitted </li></ul>
    81. 89. Assumption of Lease <ul><li>All monetary defaults (other than penalty provisions relating to nonmonetary defaults - §365(b)(2)(C)) must be cured - §365(b)(1)(A). </li></ul><ul><li>“ Adequate assurance ” must be provided that any nonmonetary defaults will be promptly cured - §365(b)(1)(B). </li></ul><ul><li>“ Adequate assurance” must be provided that lease obligations will continue to be satisfied in the future - §365(b)(1)(C). </li></ul>
    82. 90. Assumption of Lease <ul><li>Tenant cannot cherry-pick >>> lease must be assumed as a whole </li></ul><ul><li>Test for whether Court will authorize assumption = business judgment </li></ul><ul><li>Priority claim if rejected after assumption </li></ul><ul><li>Can do lease by lease or as a group </li></ul><ul><li>Motion or Plan of Reorganization provision </li></ul>
    83. 91. Assumption of Shopping Center Leases by Debtor Tenant <ul><li>Must provide adequate assurance of source of rent and show that financial condition and operating performance of assignee shall be similar to financial condition of operating performance of debtor at time of lease </li></ul><ul><li>Percentage rent will not decline substantially </li></ul><ul><li>Assumption or assignment is subject to all provisions in the lease including radius, use, location and exclusivity and will not breach any other lease agreement </li></ul><ul><li>Not disrupt tenant mix </li></ul>
    84. 92. Rejection of Lease – Calculation of Rejection Damages <ul><li>Calculate whatever damages are for breach under the lease </li></ul><ul><li>Cap the damages at GREATER of </li></ul><ul><ul><li>Equivalent of one year’s rent reserved in lease </li></ul></ul><ul><ul><li>OR </li></ul></ul><ul><ul><li>Amount of rent reserved for 15% of the remaining time under the lease not to exceed three years </li></ul></ul><ul><ul><li>i.e., (10 years x 15% = rent for 1.5 years) </li></ul></ul><ul><li>(7 years x 15% = rent for 1.05 years) </li></ul><ul><li>All amounts are subject to mitigation if new tenant takes possession </li></ul><ul><li>May be able to recover tort like damages in addition </li></ul>
    85. 93. Lease Clauses and Precautions for the Bankruptcy Conscious Landlord <ul><li>Security Deposits </li></ul><ul><li>Lease Guaranties </li></ul><ul><li>Letters of Credit </li></ul>
    86. 94. Summary of Landlord Claims <ul><li>Secured – Extent defined by lease. </li></ul><ul><li>Unsecured – Most common >>> File Proof of Claim </li></ul><ul><li>Administrative – Post-petition expense. Highest priority </li></ul><ul><ul><li>Prior to rejection >>> “STUB RENT” Issue </li></ul></ul><ul><ul><li>After rejection </li></ul></ul><ul><li>Property Tax / Expenses – Pro-rated </li></ul><ul><li>Environmental – Did claim arise pre-petition or post-petition? </li></ul>
    87. 95. THE LANDLORD CLAIM CONTINUUM General Claim vs. Estate or Secured Claim Depending on Lease Language Filing of Bankruptcy Administrative claim per rent reserved in lease until rejection when claim is measured by benefit to the estate Assumption: Must cure all defaults and lease continues as before Rejection: -Constitutes breach of lease from date of filing. -General claim or secured claim depending on lease. -Claim capped at greater of: (1)one year's rent or (2)15% of rent for remaining term of lease (3 year cap)
    88. 96. Tenant’s Perspective on Landlord Bankruptcy <ul><li>If bankrupt Landlord decides to assume or assign lease…. </li></ul><ul><ul><li>Tenant must be compensated for pecuniary loss (e.g. CAM overcharge) </li></ul></ul><ul><ul><li>Must present evidence showing future performance of landlord covenants </li></ul></ul><ul><li>If bankrupt Landlord decides to reject lease… </li></ul><ul><ul><li>Tenant has option of EITHER </li></ul></ul><ul><ul><ul><li>treating lease as terminated and vacating premises without further obligation; OR </li></ul></ul></ul><ul><ul><ul><li>remaining in possession and setting off damages against subsequent rent obligations </li></ul></ul></ul>
    90. 98. Receiverships <ul><li>Upon the petition of a creditor, the court appoints a third party receiver to take control of the debtor’s assets. </li></ul><ul><li>Often used in conjunction with commercial real estate foreclosure. </li></ul><ul><li>May be gaining in popularity as alternative to bankruptcy </li></ul><ul><li>Governed by Ohio Rev. Code Chapter 2735 </li></ul><ul><li>Key to scope of Receiver’s powers is DUE PROCESS being provided to lienholders </li></ul><ul><li>Local Court Rules often important </li></ul>
    91. 99. Receiverships <ul><li>Receiver liquidates the debtor’s assets and distributes the proceeds pro-rata to the creditors in a fashion similar to a Chapter 7 Trustee. </li></ul><ul><li>Receiver also continues to operate the business as an ongoing business </li></ul><ul><li>Typically achieved with Complaint plus Motion </li></ul><ul><li>Ohio Rev. Code 1313.56 authorizes avoidance type actions by receiver </li></ul><ul><li>Unless otherwise provided by court order, there is no discharge upon completion. </li></ul><ul><li>Local Court Rules often important </li></ul>
    92. 100. Receiverships – Evaluating the Option <ul><li>Ability of State court to sell assets free and clear of encumbrances </li></ul><ul><ul><li>Recent decisions say Receiver can as long as due process followed. See Ohio Dept. of Trans. v. Eastlake Land Dev. Co ., 177 Ohio App.3d 379 (8 th App. Dist. 2008) </li></ul></ul><ul><li>Buyer’s willingness to proceed in non-bankruptcy context </li></ul><ul><li>Whether company also has assets outside Ohio </li></ul><ul><li>Working capital needs and willingness of secured lender to continue making advances </li></ul><ul><li>Competence of existing management </li></ul><ul><li>Whether possible avoidance and preference claims exist </li></ul>
    93. 101. Foreclosure <ul><li>No nonjudicial sale procedure in Ohio </li></ul><ul><li>Ohio Supreme Court requires redaction of personal identifiers on exhibits </li></ul><ul><li>Title report/commitment or preliminary judicial report required to be filed with Complaint. Ohio Rev. Code 2329.191 </li></ul><ul><li>Mortgages often authorize appointment of receiver </li></ul><ul><li>Minimum bid is TWO THIRDS of appraised value as determined by court appointed appraisers </li></ul><ul><li>No redemption after Confirmation of Sale Order entered </li></ul>
    94. 102. Foreclosure Defendants MUST Include <ul><li>Original mortgagor (i.e. party granting the mortgage) - note that this may or may not be the principal borrower and that if not, the principal borrower is not required to be named a defendant </li></ul><ul><li>Current owner of the property, if different from the original mortgagor </li></ul><ul><li>Junior or senior lienholders , including mortgage holders, judgment lien holders, County Treasurer , statutory lien holders such as mechanics' liens and others </li></ul><ul><li>Spouse of individual debtor (to eliminate dower rights) </li></ul><ul><li>Current tenants and other occupants, regardless whether there pursuant to written lease </li></ul><ul><li>Holders of other interests such as easements, if wish to eliminate them </li></ul>
    95. 103. Assignment for Benefit of Creditors aka ABC <ul><li>The debtor voluntarily assigns its assets to a third party custodian . </li></ul><ul><li>The custodian liquidates the debtor’s assets and distributes the proceeds pro rata to the creditors. </li></ul><ul><li>Similar to Chapter 7 bankruptcy, but no discharge for debtor </li></ul><ul><li>Governed by Ohio Rev. Code Chapter 1313 – very detailed provisions </li></ul><ul><li>Rarely used in Central Ohio, but utilized more often in Cincinnati area and possibly Cleveland </li></ul>
    96. 104. Assignment for Benefit of Creditors aka ABC <ul><li>Must be filed in PROBATE Court </li></ul><ul><li>Initiated by filing a Deed of Assignment and filing of bond by assignee within 10 days </li></ul><ul><li>Permissible to continue operating business for period of time </li></ul><ul><li>Sale of assets must be at purchase price of at least TWO THIRDS appraised value </li></ul><ul><li>Creditors have SIX months from time noticed to file claims </li></ul>
    97. 105. Creditors’ Bill <ul><li>Available to creditors who have obtained judgment against debtor </li></ul><ul><li>Tool to reach intangible assets of judgment debtor otherwise difficult to reach </li></ul><ul><li>Creditor must show debtor does not have assets reachable through other remedies </li></ul><ul><li>EXAMPLES: Patents, breach of contract claim </li></ul><ul><li>Utilized through filing of new Complaint </li></ul>
    98. 106. Charging Order <ul><li>Available to creditors who have obtained judgment against debtor </li></ul><ul><li>Means of reaching economic benefits associated with ownership interest of a Partner in partnership or a Member in a limited liability company </li></ul><ul><li>If purchased by third party when foreclosed, purchaser receives distributions indefinitely </li></ul><ul><li>Creditor files Motion in in case in which judgment obtained </li></ul><ul><li>Exclusive remedy regarding ownership interest </li></ul>
    99. 107. Other Creditor Tools and Remedies <ul><li>Deed-in-Lieu Transactions </li></ul><ul><li>Judgment Debtor Examinations </li></ul><ul><li>Cognovit Notes and Judgments </li></ul>
    100. 108. CURRENT TRENDS <ul><li>Increased Use of 363 Sales </li></ul><ul><li>Emphasis on Demonstrating Chain of Ownership of Loan Documents </li></ul><ul><li>Foreclosure Mediation Programs </li></ul><ul><li>Business Courts/Commercial Dockets </li></ul>
    101. 109. <ul><li>Attorney and Counselor at Law </li></ul><ul><li>Plunkett Cooney </li></ul><ul><li>300 E. Broad Street, Suite 590 </li></ul><ul><li>Columbus, OH 43215 </li></ul><ul><li>Direct: (614) 629-3014 </li></ul><ul><li>[email_address] </li></ul><ul><li> </li></ul>Teri G. Rasmussen, J.D.