On December 23, 2010, the Bankruptcy Appellate Panel of the 6th Circuit, upheld the Eastern District of Kentucky’s Bankruptcy Court’s order that post petition rents, revenues or other funds derived from leased real property is property of the estate under 11 U.S.C. §541 and can be used as cash collateral under 11 U.S.C. §363. However, post petition rents can be used as cash collateral only if the debtor can provide adequate protection for the use of those rents through an existing equity cushion in the property.

The Bankruptcy Appellate Panel for the Sixth Circuit Court of Appeals1 recently issued an opinion of importance in bankruptcy cases involving commercial real estate as the debtor’s only asset, such as a shopping center or office building.

Introduction

In January of this year, George L Miller, the chapter 7 trustee (the "Trustee") in the WL Homes bankruptcy, began filing avoidance actions against various creditors. As alleged in the complaints, the Trustee seeks the recovery of what he deems are "preferential transfers" pursuant to 11 U.S.C. section 547(b) of the Bankruptcy Code. This post will look briefly at the WL Homes bankruptcy, as well as provide information on common issues that arise in preference litigation.

Background on the Bankruptcy Proceeding

In a welcome bit of good news for lenders, US District Court Judge Gold (Southern District of Florida) reversed the portion of the 2009 bankruptcy court decision in the TOUSA, Inc. bankruptcy cases that had ordered the disgorgement of $403 million plus interest based on the holding that the amounts were received by certain lenders to the TOUSA parent in connection with a pre-petition transaction that constituted a fraudulent transfer.

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.