Bankruptcy

Where Are All The Real Estate Bankruptcies? Here Are Some Possible Answers.

By Scott Riddle

As many business bankruptcy lawyers understand, there has not been a groundswell of real estate and single asset bankruptcy cases, as predicted during the beginning of the current economic downturn.  The latest edition of the Georgia Bar Journal has an article entitled "What Happened to Real Estate Bankruptcies?" by Al Adams and Jason Kirkham, and the authors propose several reasons for the relatively few cases that are being filed.

The three primary factors stated by the authors: 

1. Springing, Exploding and Non-recourse Carve-out Guaranties.  Lenders often require that the mortgaged property be placed in a separate entity, and require personal guaranties that make individuals liable for the debt upon the happening of certain "bad acts," or when the entity files a bankruptcy petition.  Thus, there is incentive to avoid bankruptcy.
2. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).   The Code amendments removed the $4 million cap that applied to single asset real estate entities, as defined by Section 101(51B) of the Code.  Under the single asset rules, debtors must file a viable plan within 90 days after the order for relief, or make payments equal to the non-default contract rate, or the stay is lifted.  See 11 U.S.C. §362(d)(3).  Based upon the Code requirements for single asset cases, debtors may opt to not waste time on bankruptcy.
3.  The Virtual Elimination of the New Value Exception to the Absolute Priority Rule.  Where Courts have recognized the continuing viability of the new value exception to the absolute priority rule of 11 U.S.C. §1129(b)(2),  they often require a "market test," such as the opportunity for others to propose a plan or outbid insiders.   

I highly recommend this article, which includes a more thorough discussion of the issues and citations to relevant cases.

Scott Riddle's practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here. 

Full post as published by Georgia Bankruptcy Blog on December 19, 2010 (boomark / email).