Real Estate Bankruptcy

Real Estate Bankruptcy

 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.

About The Author

Writer of this article is working as a webmaster of 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"

webmaster@ukadvice.com