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Seeking Relief from the Automatic Stay in a Chapter 11 Bankruptcy Case

 
12-17-2012  |  By: Scott Layfield, Attorney At Law  |  (0) Post comment  |  Read comments
 
11 U.S.C. ' 362 - When Seeking Relief from the Automatic Stay in a Chapter 11 Bankruptcy Case, a Secured Creditor should be Required to Provide Evidence of a Decline in the Value of the Property at Issue.
 
Over the past couple years numerous Chapter 11 bankruptcy cases have been filed across the country with the primary goal of restructuring loans secured by real estate. Often the terms of these restructurings are more favorable to lenders than foreclosure. In fact, the Bankruptcy Code requires a Chapter 11 Plan to  pay objecting creditors at least as much as they would receive in a Chapter 7 liquidation. 
 
Despite this reality, secured creditors, in response to a bankruptcy filing affecting their collateral, frequently make the knee-jerk reaction of filing a motion for relief from stay (often referred to as a MFR). These mechanical MFRs invariably seek relief for “cause” under Bankruptcy Code Section 362(d)(1) asserting that lender’s interest in the subject property is not adequately protected because the fair market value of the Property is declining and payments are not being made to lender sufficient to protect lender’s interest against that decline.  The problem for lenders, however, is that they very rarely attach any evidence of such decline in value. 
 
By choosing not to provide evidence of decline in value, lenders are presumably relying on Bankruptcy Code Section 362(g) which provides that the party seeking relief from stay “has the burden of proof on the issue of the debtor’s equity in property; and ... the party opposing such relief has the burden of proof on all other issues.” However, as explained by the Bankruptcy Court in the Southern District of New York in In re Elmira Litho, Inc., 174 B.R. 892, 902 (Bankr. S.D.N.Y. 1994), each provision in 362(g) discusses the burden of ultimersuasion, not the burden of going forward with evidence.  Under 362(g) lender must ultimately persuade the Court regarding debtor’s equity and debtor must ultimately persuade the court on all other issues.  But 362(g) does not change lender’s duty to go forward with evidence on the issue of the decline in value.
 
The burden of going forward with evidence requires establishing a prima facie case. Typically, as part of the prima facie case, a movant must demonstrate a factual and legal right to the relief that it seeks. So if lender seeks relief from the automatic stay for cause on grounds that the property is declining as a result of the stay, then to establish a prima facie case, lender must firs prove that the property as issue is declining in value.  If the motion does not so demonstrate, the motion for relief should be denied without requiring the party that bears the ultimate burden of persuasion, the debtor, to offer any evidence. 
 
 
Debtor’s attorneys should watch out for these types of MFRs and strongly oppose them on the above grounds. While lender may ultimately be able to provide such evidence, a successful opposition should benefit debtor by delaying or possibly avoiding, adequate protection payments to lender.
 

Recent Victory for Commercial Landlord in Tenant’s Bankruptcy

 
12-17-2012  |  By: Jerome S. Cohen, Attorney At Law  |  (331) Post comment  |  Read comments
 
Commercial landlord’s tenant files bankruptcy. Landlord has two goals. First is possession of the premises. Second is money. The first goal may be pressing if landlord has a replacement tenant desiring occupancy.
 
Each goal breaks down into three parts. Possession is most secure if Landlord obtains three things in bankruptcy: 
 
1. Relief from the automatic stay,
2. Surrender of the premises, 
3. Rejection of the lease. 
 
Collecting money also means three things to the landlord in bankruptcy: 
 
1. collecting money that was owed before the bankruptcy (“pre-petition arrearage”),
2. collecting post-petition lease obligations (“administrative rent”)
3. “lease rejection damages”.
 
In early fall, 2012, a landlord swiftly obtained all of the above. Landlord is a major Los Angeles commercial developer and operator of retail centers and other investment real estate. A Landlord subsidiary got notice that a pizza shop tenant had filed bankruptcy. Landlord turned to the law office of Jerome S. Cohen, on the basis of past work by Cohen (getting Landlord quick repossession of premises of an anchor tenant in another center).
 
Landlord had a replacement tenant ready to start its pizza business at once. First, Cohen filed papers for relief from the “automatic stay” to permit progress in Landlord’s pending eviction case. Then Cohen made direct contact with the Chapter 7 trustee. Cohen told the trustee that the facts made it probable that the Court would grant stay relief. Landlord would then proceed with eviction, but eviction might take months, and New Tenant wanted occupancy at once. The trustee agreed to consent to stay relief, to surrender his interest in the premises, and to reject the lease. Landlord had achieved all its goals in the bankruptcy. Cohen filed the agreement with the Court. But this gave Landlord only the interest of the debtor in bankruptcy, a co-tenant. The other co-tenant was not in bankruptcy, and not bound by the stipulation (which bound only the co-tenant in bankruptcy).
 
The non-bankrupt co-tenant was in a position to frustrate Landlord’s repossession of the premises. Cohen contacted the non-bankrupt co-tenant and negotiated his surrender of the premises also. Landlord was then able at once to accommodate the new tenant.  Here, recovering money was secondary. The case was a Chapter 7 liquidation.  The operators had failed and had little money. Landlord was satisfied to keep open a chance to collect money. Landlord could narrow the eviction case to money recovery alone (since Landlord had retaken possession). In Chapter 11, Cohen said, if the bankruptcy debtor’s prospects were good, and the debtor wanted to keep the premises, Landlord’s objective may have been primarily money. Cohen has successfully represented Landlords in Chapter 11.