Commercial Real Estate Lawyer Blog

The decision of whether and how to sell assets in a bankruptcy proceeding can trigger a number of disagreements, and the bidding process itself can attract some unusual bids. For example, in some cases, the Trustee may not feel that selling a particular asset is worth the time and trouble; however, a creditor may disagree. Another example occurs in a case in which the bankruptcy estate has potential claims for breach of contract or torts. In such a case, the breaching party or tortfeasor may be willing to offer the highest and best price to buy (and, thus, resolve) those claims against itself. In some cases, the most valuable bid may be a non-cash one. However, if the benefits of such a non-cash bid are public benefits, or do not otherwise ultimately produce cash with which to pay the creditors entitled to be paid, the Trustee may not be able to accept that bid. In some cases, it is difficult to evaluate the value of a bid in terms of the ability of the bidder to perform of of the Trustee's costs of keeping the bankruptcy proceeding open or of performing its own obligations under the terms of the bid. The purpose of this article is to high-light some of the case law dealing with such conflicts

Continue reading "Buying a Claim against Yourself from a Bankruptcy Estate; Evaluating Non-Cash Bids" »

Presented at the Annual Meeting of the American College of Real Estate Lawyers on October 31, 2009 in Washington, DC

8/15/09

The LandAmerica bankruptcies taught us that we cannot merely assume that third-party escrow arrangements are safe from unrelated third-party creditors. Now we know that the bankruptcy of the third-party intermediary, especially where the funds are not covered by deposit insurance and time deadlines are involved, can have profound implications far beyond the loss of the deposit itself. The following explores what happened in the LandAmerica case with respect ot Section 1031 escrow deposits and what drafting implications that has for future transactions.

Continue reading "And You Assumed That Escrow Moneys Were Bankruptcy-Proof . . ." »

The plan of reorganization is one of the most critical documents in a Chapter 11 bankruptcy proceeding. Even before declaring a default under a mortgage or deed of trust, a secured lender needs to plan ahead by considering, among other things (a) what remedies the lender has at each step of a bankruptcy proceeding; and (b) whether the borrower/debtor can, at each such step, propose a sufficient-enough plan of reorganization to prevent the lender from realizing upon those remedies. Such planning will also help the lender predict how long the bankruptcy proceeding is likely to take, what it is likely to cost, and what the lender's risks of adverse consequences, such as a cramdown, are. If nothing else, such planning will help the lender to determine what terms it should offer in workout negotiations.

As a Chapter 11 bankruptcy proceeding progresses, a secured lender will want to consider seeking in the following order in light to thedebtor's ability to then propose a sufficient-enough plan of reorganization: (a) a lift Stay, (b) a conversion or dismissal, and (c) counting the classifications and the votes to avoid a cramdown.

Continue reading "Steps a Secured Lender Should Consider in a Chapter 11 and the Role of a Proposed Plan of Reorganization at Each Step" »

One of the uses of bankruptcy, as a business planning tool, is to enable a debtor to attempt (a) to get out of, i.e. reject, pending leases and contracts [11 U.S.C. Sections 365(a)]; and (b) with respect to rejected real property leases, even to leave some extra money for the unsecured trade creditors, with whom the debtor may want to do business after the case is over, by capping the amount of the damages a landlord can claim by reason of such a rejection of a lease [11 U.S.C. 502(b)(6)]. As to post-petition or post-repossession or post-surrender rent under a real property lease in a tenant bankruptcy, 11 U.S.C. 502(b)(6) limits the landlord's claim (and it is only a claim) to "the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease". However, in the recent case of In re El Toro Materials Company, Inc., 2007 U.S. App. LEXIS 22991 (October 1, 2007), the Court carved out an exception to that lease rejection cap. In that case, the debtor/tenant had rejected the lease and left behind, on the leased premises, "one million tons of its wet clay 'goo,' mining equipment and other materials". The landlord claimed $23 million in damages for the costs of removing those items. The Court held that such removal costs are not subject to that lease rejection cap, i.e. that that cap applies only to rent and rent-like items, not to clean-up or repair costs. However, as with other non-priority rent, the landlord must stand in the same line, as all of the other unsecured creditors, with respect to its claims for such non-monetary defaults.