In re Buttermilk Towne Center, LLC, No. 10-8036, 2010 Bankr. LEXIS 4563 (B.A.P. 6th Cir. Dec. 23, 2010)

CASE SNAPSHOT

Reorganization or debtor-in-possession (“DIP”) financing has become an increasing source of litigation.

The United States Bankruptcy Court for the Western District of Kentucky recently found that a vendor’s filing of a prepetition notice of lis pendens served to place any hypothetical judicial lien creditor, execution creditor, or purchaser of real property on notice of its equitable lien against the property for the unpaid portion of the purchase price. This prepetition notice of lis pendens prevented the debtors-in-possession from avoiding the vendor’s lien in exercise of their strong-arm powers under 11 U.S.C. § 544.

In re Passarella, 2011 Bankr. LEXIS 53 (2011)

In re Innkeepers USA Trust, et al., -- B.R. --, 2011 WL 1206173 (Bankr. S.D.N.Y. 2011)

A New York bankruptcy judge has refused to permit a debtor to use rents generated by its real property because the rents absolutely assigned to the lender pre-petition were not property of the debtor's bankruptcy estate.2 Before the bankruptcy filing, the lender sent the borrower a default notice and terminated the borrower's license to collect rents. The lender also directed tenants to pay rents to it and not the borrower, commenced a foreclosure action, and sought appointment of a receiver.

Reversing the bankruptcy court, a Sixth Circuit Bankruptcy Appellate Panel held that a debtor in a single asset real estate case did not provide adequate protection to a creditor by providing replacement liens in the rents where there was no equity cushion.4 The notion that granting the lender a lien on future rents to replace the expenditure of prior months' rents was rejected. Accordingly, the appellate panel held that the debtor could not use rents collected post-petition to pay ordinary administrative expenses, such as fees of its professionals.

Representing a mortgagee holding liens on 37 unsold condominium units, Herrick, Feinstein successfully blocked a debtor's effort to confirm a chapter 11 plan of reorganization via cramdown. The plan envisioned sales of 27 unsold units over five years, deferred payments to the mortgagee at the rate of 4.75%, and scheduled principal pay downs from the sale of units.

Anyone in the commercial real estate business can tell you that the past couple of years have seen a significant uptick in the number of commercial foreclosures and owner bankruptcies. While it does appear that the market is improving, we’re certainly not out of the woods. We are likely to see headlines declaring the latest big bankruptcy or foreclosure for a few more quarters. Sometimes lost in the headlines is the impact such issues have on the tenants in these commercial properties.

In a recent decision, the Bankruptcy Court for the Southern District of New York concluded that an investor in a Real Estate Mortgage Investment Conduit ("REMIC") lacked standing to object to the sale of a chapter 11 debtor's real property, despite that the property served as collateral for loans held in trust by the REMIC for the benefit of its investors.