A Bankruptcy Primer For Real Estate Investors, Landlords & Lenders (6/16/2014) Presented by Dave Knapper

Transcription

1 A Bankruptcy Primer For Real Estate Investors, Landlords & Lenders (6/16/2014) Presented by Dave Knapper Law Offices of David L. Knapper 1599 East Orangewood Avenue Suite 125 Phoenix, Arizona Tel No.: (602) The following constitutes a general overview of what I suggest Arizona real estate investors, landlords and lenders should know about bankruptcies, together with a few unrelated tips. For when a borrower, occupant or tenant of a real property files bankruptcy, it becomes a whole new ballgame because bankruptcies trigger the application of a whole new set of laws. Those investors, landlords and lenders not familiar with the bankruptcy system typically suffer shock and disappointment once embroiled in a bankruptcy. Knowledge is power. By acquainting themselves, on the front-end, with how bankruptcies will impact them, real estate investors, landlords and lenders will have a better handle on what to expect, what risks they are assuming, and what they can and can t do for their own protection. The following is not an exhaustive list, but it s a start: 1. Because of the 11 U.S.C. 362(a) bankruptcy automatic stay, please terminate whatever you re doing and/or are contemplating doing against a debtor in bankruptcy (including terminating all your communications with the debtor) or you ll end-up paying dearly because violating this automatic stay subjects the violator to mandatory courtimposed sanctions, which can include, among other things, emotional distress damages and certain attorneys fees; 2. In Arizona, we only have 8 bankruptcy judges, when times are tough, handling 30,000 plus new bankruptcies filed each year: (1) Judge Nielsen (Phoenix): (2) Judge Curley (Phoenix); (3) Judge Hollowell (Tucson, Yuma & Phoenix); (4) Judge Collins (Phoenix & Prescott); (5) Judge Whinery (Tucson, Yuma & Phoenix); (6) Judge Ballinger (Phoenix & Bullhead City); (7) Judge Wanslee (Phoenix) and (8) Judge Martin (Phoenix). Each has different temperaments, procedures and inclinations. All of them take the bankruptcy automatic stay very seriously; 3. The automatic stay applies even when you think it shouldn t; 4. For your own protection, get yourself a lift stay order; i.e., bankruptcy clearance, from the assigned bankruptcy judge before undertaking any actions against a debtor, any property the debtor owns or even any property the debtor possesses (even if you assert the debtor is illegally trespassing upon your property); 1

2 5. 1 st bankruptcy: Debtors have the upper-hand securing a lift stay order may take months or years (and typically, the time required is dependent upon which Chapter of the Bankruptcy Code the debtor has filed under with Chapters 7 normally being wrapped-up quickly, Chapters 13 taking longer and Chapters 11 having the potential of taking the longest); 6. 2 nd bankruptcy, if filed within 1-year of a previous filing that was prematurely dismissed: Automatic stay only lasts for 30 days from date of filing bankruptcy, unless debtor proves by clear and convincing (note: not a simple preponderance of the evidence, but not as onerous as a beyond a reasonable doubt evidentiary standard) that 2 nd bankruptcy filed in good faith, plus there s adequate protection. See 11 U.S.C. 362(c)(3); 7. 3 rd bankruptcy, if prior 2 filed and prematurely dismissed within the past year of the third: No automatic stay, not even for the first 30 days, however, a debtor can still petition the bankruptcy court to invoke the automatic stay, thereby requiring an evidentiary hearing. See 11 U.S.C. 362(c)(4); 8. Chapter 7 (liquidation) involves a debtor and a Chapter 7 trustee; exempt assets are retained by the debtor while non-exempt assets are liquidated by the trustee; 9. Chapter 11 (business reorganization) typically only involves a debtor-inpossession without a trustee; plan may last 30 years or more; 10. Chapter 13 (consumer reorganization) involves a debtor and a Chapter 13 trustee; pursuant to 11 U.S.C. 109(e), debtor must have less than $750,000 of secured debts and less than $250,00 of unsecured debts; minimum plan duration of 3 years and maximum of 5 years; 11. Pursuant to 11 U.S.C. 365(d)(1), a Chapter 7 debtor of residential real property only has 60 days following the initiation of a bankruptcy to secure a lease assumption order or the lease is terminated (although such a termination does not terminate the 11 U.S.C. 362(a) bankruptcy automatic stay); 12. Pursuant to 11 U.S.C. 365(d)(2), a debtor (in both Chapters 11 and 13) of residential property has until a plan of reorganization is approved to secure a lease assumption order (although a landlord may request this period be shortened); 13. Pursuant to 11 U.S.C. 365(d)(5), a debtor or trustee (whether in Chapters 7, 11 or 13) of non-residential real property must bring itself current on all rent accruing postbankruptcy by the 60th day following the inception of the bankruptcy; 14. Pursuant to 11 U.S.C. 365(d)(4)(A)(i), a debtor or trustee (whether in Chapters 7, 11 or 13) of non-residential real property only has 120 days following the initiation of a bankruptcy to secure a lease assumption order or the lease is terminated (although, again, such a termination does not terminate the 11 U.S.C. 362(a) bankruptcy automatic 2

3 stay) however pursuant to 11 U.S.C. 365(d)(4)(B)(i), a debtor has the right to request an additional 90 days beyond the aforementioned 120; 15. Lien-stripping; it s going to happen whenever a junior mortgage holder is completely unsecured because the amount owing on 1 or more senior liens exceeds the involved property s fair market value; 16. Bankruptcy cram-downs in Chapters 11 and 13: A lender s worst nightmare. Cram-downs include possibly lowering the principal balance of a mortgage (if the mortgage is only partially secured), lowering the non-default interest rate, altogether eliminating default rate interest and late charges (see Great Western Bank & Trust v. Entz-White Lumber and Supply, Inc. (In re Entz-White Lumber and Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), and extending the maturity date of the mortgage; 17. Thankfully, pursuant to 11 U.S.C. 1322(b)(2), a mortgage secured by a debtor s primary residence (whether it s over-secured or only partially secured) may not be cramdowned; 18. Thus, lenders who: (i) finance anything other than individuals primary residences, and (ii) advance loans to entities, face significantly more exposure when their borrowers file bankruptcies; 19. Bottom line: I d rather be a landlord than holding a mortgage because leases can t get crammed-down; 20. If a mortgage encumbering a Chapter 13 debtor s primary residence matured prebankruptcy or is going to mature while a Chapter 13 bankruptcy remains pending, then 11 U.S.C. 1325(a)(5)(B)(i)(I)(aa), 1325(a)(5)(B)(i)(II), 1325(a)(5)(B)(ii) and 1325(a)(5)(B)(iii)(I) apply, which basically, allow a debtor the opportunity to pay-off the mortgage over the course of a plan lasting not less than 3 years, but no more than 5, however, this revised mortgage must paid-off in equal amortized monthly installments; 21. An 11 U.S.C. 101(51B) SARE, as in, a Single Asset Real Estate entity (typically, a limited liability company). Generally speaking, if a Chapter 11 debtor is a SARE, 11 U.S.C. 362(d)(3) will require the debtor within 90 days following the initiation of a bankruptcy (unless the debtor secures an extension), to either: (i) file a plan of reorganization that has a reasonably possibility of being confirmed, or (ii) begin making monthly interest payments to the lender. If the debtor does not comply with these requirements, the bankruptcy court must grant the lender relief from the automatic stay, i.e., allow the lender to proceed with its foreclosure action U.S.C. 362(b)(22) allows a landlord of a residential property to continue eviction proceedings where he has obtained a judgment pre-petition. But then, 362(1) takes that right away for at least thirty (30) days if a debtor simply completes an attached certification as part of his bankruptcy petition and serves (mails) such to the landlord. Whereupon, in accordance with 362(1)(3)(A), landlords are to file objections to these 3

4 certifications, and the bankruptcy court is then to hold a hearing on the merits of the dispute within ten (10) days thereafter; U.S.C. 362(b)(23) allows landlords of residential properties to accelerate matters where: (a) endangerment of the rented property or (b) illegal use of controlled substances at the property are involved. And, if either (a) or (b) occurred within 30-days of the initiation of the bankruptcy, it does not matter that an eviction was not commenced pre-petition. In all events, landlords must first file with the bankruptcy court and serve on debtors a 362(b)(23) certificate setting out the facts giving rise to (a) or (b), plus then pursuant to 362(m)(1), wait until the 15 th calendar thereafter before carrying-out eviction measures. However, per 362(m)(2)(A) and (B), if a debtor objects to a certificate, then that halts everything, whereupon a hearing on the merits of the dispute is to be conducted within ten (10) days following a tenant filing such an objection. 24. Bottom line: Comfort orders, adjudicating the 11 U.S.C. 362(a) bankruptcy automatic stay does not impede an anticipated course of action, are, in my opinion, always the best way to go; 25. And, in conjunction therewith, get an in rem Order if you can; 26. Local Arizona Bankruptcy Rule (b) encourages pre-litigation notice of default and demand for cure letters be employed when a debtor s personal residence is involved by providing bankruptcy judges authority to force landlords, who do not kickout such letters, to eat their attorney s fees if and when the judges deem it appropriate; 27. The 14 day delay created by Bankruptcy Rule 4001(a)(3) - can you get is waived? 28. Can and should you secure an emergency or accelerated hearing on the merits of your lift stay motion?; 29. Don t forget, 11 U.S.C. 362(d) authorizes a bankruptcy judge to not only lift the 11 U.S.C. 362(a) bankruptcy automatic stay, but also when the facts are right, to retroactively annul a stay; 30. generally speaking, per A.R.S (A), a trustee s sale is completed upon the full bid price being paid; 31. A.R.S (B) requires a trustee to deliver to the purchaser at a trustee s sale a trustee s deed upon sale within 7 business days after full payment; 32. A.R.S (A) advises that a trustee s deed upon sale should be recorded within 15 business days following a trustee s sale boy can this prove important; 33. A.R.S (B) and A.R.S (C) protects successful third-party bidders; 4

5 34. But still, don t pay too little (less than 20% - although maybe far more is required to play it safe) for a foreclosed property! In re Krohn v. Sweetheart Properties, Ltd., 203 Ariz. 205, 52 P.3d 774 (2002). 5