To promote equal treatment of creditors, the US Congress has armed debtors with the power to bring suit to recover a variety of pre-bankruptcy transfers. Prominent among these is a debtor’s ability under Section 548 of the Bankruptcy Code to recover constructively fraudulent transfers — i.e., transfers made without fair consideration when a debtor is insolvent.

After more than a decade of rising real estate values, the tide has turned against commercial and development real estate, prompting major builders and developers to commence Chapter 11 bankruptcy proceedings. As a result of the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005, many Chapter 11 cases that revolve around real estate will fall within the Bankruptcy Code’s definition of single asset real estate (SARE) cases and are thus subject to special provisions in the Bankruptcy Code.1 As a result, it is now time to think about SARE.

In an Opinion issued on December 2, 2009 in the Washington Mutual, Inc. ("WaMu") Chapter 11 case, the Delaware Bankruptcy Court held that Bankruptcy Rule 2019 clearly applies to "ad hoc committees," regardless of how they might try to disclaim collective action. As a result, the members of an informal group of WaMu bondholders must now provide detailed information concerning their holdings, including a history of when they bought and sold their bonds and the prices paid. Perhaps more importantly, the Opinion packs a second bombshell.

Last week, the Associated Press announced that the number of bankruptcy filings in federal courts this year have increased by more than one-third. Based on numbers from the Administrative Office of the U.S. Courts, the Associated Press reports that about 1.4 million bankruptcy cases were filed between October 1, 2008 and September 30, 2009. In comparison, 1 million cases were filed during this same period last year. While Chapters 7, 12 and 13 filings have all increased, of particular note, Chapter 11 filings increased by 68 percent.

Yesterday, Treasury released its most recent completed transactions report for the period ending December 10, 2009.

In a recent decision from the United States Bankruptcy Court for the District of Delaware, Judge Mary Walrath has required that members of an informal committee of noteholders comply with expansive disclosure requirements beyond the standard established for official committees. In a written opinion issued on December 2, 2009 in the case of In re Washington Mutual, Inc., Case No. 08-12229 (MFW), Judge Walrath granted a motion to require an informal group of noteholders to comply with Rule 2019 of the Federal Rules of Bankruptcy Procedure.

This article appeared in the Dec. 9, 2009, issue of Lodging Law newsletter.

The economic meltdown has left many hospitality development projects in a ditch, but as 2010 approaches, some hospitality real estate projects may be ripe for new life. Pursuing distressed assets may offer a tremendous upside to developers, but the unforeseen downsides can devastate the effort if they are ignored at the front end of the deal. Some of these unforeseen downsides include:

Many companies secured their financing several years ago when the credit market featured advantageous pricing and loose loan covenants. Because these favorable terms would be impossible for borrowers to obtain in today’s lending environment, many viable companies with highly leveraged capital structures are looking for strategies to remove debt and, at the same time, to preserve, or “reinstate,” the favorable financing deals they secured before the markets crashed.

Courts are now being asked to examine transactions which were completed during the recent exuberant period. Despite the fact that the transactions in question may have been market standard at the time, because those transactions are being scrutinized during an unprecedented economic crisis, it appears that a disproportionate amount of finger pointing – and economic loss – is being directed at secured creditors. The result is a seeming erosion of secured creditors’ rights for the benefit of unsecured creditors.

470-Unit Apartment Complex in Pittsburgh, Pennsylvania In re Ventana Hills Associates, Ltd. (Bankr. N.D. Ill.) Case no. 09-41755 In re Ventana Hills Phase II, L.P. (Bankr. N.D. Ill.) Case no. 09-41758