Property Interests / Subordination: Plan Ahead, Or You May Be Stuck Behind

Posted on September 13, 2012 by BankruptcyRealEstateInsights

Scotiabank De Puerto Rico v. Brito (In re Plaza Resort at Palmas), 469 B.R. 398 (B.A.P. 1st Cir. 2012) –

In Plaza Resort at Palmas the timeshare owners asserted claims as secured creditors with liens on the resort that were senior to Scotiabank De Puerto Rico (holder of a first mortgage securing acquisition funding for the resort), while Scotiabank sought a declaratory ruling that their claims were general unsecured claims. The result turned on state law, which in turn was driven by the language used in the timeshare documents. Continue reading →

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Challenging a Bankruptcy Sale: You Snooze, You Lose

Posted on September 11, 2012 by BankruptcyRealEstateInsights

Reynolds v. Rushton, 473 B.R. 436 (D. Utah 2012) –

Reynolds involves a challenge to a Chapter 7 trustee’s Section 363 sale of an underground coal mine together with an adjoining scale house located on leased land.  The scale house contained two separate units: one served as a scale office and warehouse and the other as a residence.  An individual, Charles Reynolds, claimed that he had a right to use and occupy the residence.  According to Reynolds, he and his family (including 10 children) had inhabited the residence for over 25 years.  However, the bankruptcy court entered an order authorizing the sale free and clear of his claims, and Reynolds appealed to the district court.  While acknowledging the hardship to Reynolds, the district court upheld the bankruptcy court decision. One of the key factors was Reynolds’ failure to obtain a stay of the bankruptcy court sale order and the sale.

As background, prior to the sale the trustee had obtained a ruling that Reynolds was a tenant at will and that the debtor had the exclusive right to use and occupy the scale house.  Reynolds requested a stay of the tenancy order which was denied.

In the meantime the trustee reached an agreement to sell a majority of the debtor’s assets, including the mine and scale house.  The sale order specifically found that the purchaser was a “good faith purchaser” entitled to the protection of Section 363(m) of the Bankruptcy Code.  Under Section 363(m): Continue reading →

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Can Default Interest And Late Fees Be Excluded From Secured Claims? … Maybe, Maybe Not

Posted on September 6, 2012 by BankruptcyRealEstateInsights

In re 785 Partners LLC, 470 B.R. 126 (S.D.N.Y. Bankr. 2012) –

Although the general rule is that creditors are not entitled to post-petition interest and fees, that is not necessarily the case for an over-secured lender. In 785 Partners, the lender held a secured loan with a principal balance of approximately $81 million, which was secured by a building with a market value of $91.7 million and an escrow fund of approximately $18 million, making the loan over secured. A payoff letter showed a balance due of $100,845,002.80, including approximately $6.7 million in regular interest, $8 million in default interest, and $3.8 million as a “late payment premium.”  At over 10% of the amount due, the default interest and late fees spelled the difference for the debtor between potentially being required to use almost half of the escrow fund for the secured claim and being allowed to use the entire escrow fund for other purposes. Continue reading →

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Lease Assumption: What if the Store Has Gone “Dark”?

Posted on September 4, 2012 by BankruptcyRealEstateInsights

Androse Assoc. of Allaire, LLC v. Great Atlantic & Pacific Tea Co. (In re Great Atlantic & Pacific Tea Co.), 472 B.R. 666 (S.D.N.Y. 2012) –

In A&P, the landlord objected to a debtor’s motion to assume the lease for a store that went “dark” prior to bankruptcy.  The district court upheld a bankruptcy court decision granting the debtor’s motion, finding that the debtor’s decision to retain a closed store was supported by sound business judgment and that the requirements for assumption were met, including a cursory consideration of the heightened scrutiny given to shopping center leases.

Supermarkets General Corporation was the original tenant under a 1986 lease with a term of 25 years.  It was acquired by Pathmark Stores, Inc., which in turn was acquired by A&P in 2007.  The leased store was considered an anchor store in Allaire Village Plaza.  A&P operated another store directly across the street.

Sometime in 2009 the leased store “went dark” (i.e. ceased operations, although the lease remained in effect).  This was permitted under the lease, since the tenant was required to open the store for business as a supermarket at the beginning of the lease, but was not “obligated to conduct, or to remain open for the conduct of, any business.” Continue reading →

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Mortgage Loan Sales / Guarantees: Freedom of Contract And Double Counting

Posted on August 30, 2012 by BankruptcyRealEstateInsights

In re Kaid, 472 B.R. 1 (Bankr. E.D. Mich. 2012) –

Can a mortgagee retain the right to collect on a guarantee after a sale of the guaranteed note and mortgage?  In Kaid, the answer was yes; but to avoid double counting, the guarantor was entitled to a credit for any reductions in the amount due under the sold note, including the amount bid at a mortgage foreclosure sale.

Kalid Kaid guaranteed an $807,500 mortgage loan made by Flagstar Bank, FSB to Michigan & Lonyo Ultimate Service Center, Inc.  Flagstar sold the loan to AFT Investments, LLC as part of a group of loans, but expressly excluded the Kaid guarantee from the sale.  The agreement with AFT allocated a portion of the purchase price to the Michigan & Lonyo loan and set a “maximum foreclosure amount” for the mortgage. Continue reading →

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Usurious Loan Claim: What Is An Equitable Result?

Posted on August 28, 2012 by BankruptcyRealEstateInsights

In Re Loucheschi LLC, 471 B.R. 777 (Bankr. D. Mass 2012) –

When a lender makes a loan that does not comply with usury laws it runs a risk that not only will interest and charges be disallowed, but also the entire loan may be declared void.  In cases where declaring a usurious loan void is discretionary, one might expect a bankruptcy court to be inclined to do so since it could benefit the bankruptcy estate.

In Loucheschi the court was asked to estimate a construction lender’s claim for purposes of determining its rights in connection with confirmation of a proposed plan of reorganization.  LBM Financial LLC (LBM) made a $3.9 million construction loan in 2006 that had a contract rate of 16% per annum and a default rate of 20% per annum plus 1% per month plus a 10% late charge for each overdue payment.  Default charges at this rate were determined to be the equivalent of 41% per annum in another case, and as this court notes, are clearly in excess of 32% per annum.  LBM filed a proof of claim in the bankruptcy case for approximately $5.6 million. Continue reading →

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