“Strong Arm” Powers Round 2: This Time The Mortgage Survives

Posted on August 23, 2012 by BankruptcyRealEstateInsights

Hiraldo v. Banco Popular Depuerto Rico (In re Hiraldo), 471 B.R. 676 (D. P.R. 2012) –

Hiraldo illustrates the key role that state law can play in determining the outcome of a bankruptcy case.  Despite the fact that a mortgage presented for recording was still unrecorded six years later after the mortgagor filed bankruptcy, the debtor was not able to avoid the mortgage because it was eventually recorded post-petition, and under applicable state law recording related back to the time of presentment for purposes of determining priority.

As discussed in a prior blog on strong arm powers, a debtor can assert the rights of a hypothetical bona fide purchaser of real estate as of the commencement of the bankruptcy.  That normally means that the debtor can avoid a mortgage that is unrecorded at the commencement of the case since the hypothetical bona fide purchaser would typically take title free and clear of unrecorded interests under state law.  However, that was not the result in this case. Continue reading →

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Chapter 11 Secured Loans: “Lien Stripping” Lives

Posted on August 21, 2012 by BankruptcyRealEstateInsights

In re Heritage Highgate, Inc., 679 F.3d 132 (3rd Cir. 2012) –

In Heritage Highgate, the secured claims of a group of investors were valued at zero for purposes of treatment in a plan of reorganization, with the result that their mortgage loans were treated as unsecured claims.  This is despite the fact that an appraisal offered at the beginning of the case in connection with use of cash collateral supported a conclusion that the claims were fully secured.  How did this happen?

Section 506(a) of the Bankruptcy Code provides that a creditor with a secured claim will be treated as having a secured claim to the extent of the value of its interest in the collateral and an unsecured claim for the balance.  Value is determined based on the purpose for which it is used, taking into account the proposed use or disposition of the collateral. Continue reading →

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Accepting Payment Before A Construction Lien Is Filed: Catch-22?

Posted on August 16, 2012 by BankruptcyRealEstateInsights

Johnson Memorial Hospital, Inc. v. New England Radiator Works (In re Johnson Memorial Hospital, Inc.), 470 B.R. 119 (Bankr. D. Conn. 2012) –

Creditors of a distressed company often look for strategies to reduce bankruptcy preference exposure, and construction contractors are no exception.  Johnson Memorial Hospital dealt with a payment during the preference lookback period to a contractor that had not yet filed a construction lien, although it would have been entitled to do so if it had not been paid.  If the paid claim was analyzed as an unsecured claim, the payment would be recoverable as a preference, while if the claim was treated as secured by a construction lien, it would not. Continue reading →

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Bankruptcy “Strong Arm” Powers: Bye Bye Mortgage

Posted on August 14, 2012 by BankruptcyRealEstateInsights

Rhiel v. Central Mortgage Co. (In re Kebe), 469 B.R. 778 (Bankr. S.D. Ohio 2012) –

Kebe provides a classic example of the exercise of bankruptcy “strong arm” powers.  Based on a defective notarization, the lien of a mortgage was avoided, and the bankruptcy court left open the possibility that the value of the lien could be recovered from the mortgagee in the future.  Not a happy prospect.

Section 544 of the Bankruptcy Code gives the debtor or trustee the ability to assert the rights and powers of, and to avoid transfers that are voidable by, a bona fide purchaser of real estate as of commencement of the bankruptcy.  To the extent that a bona fide purchaser would have been able to void or take clear of an interest, the debtor or trustee will be able to do the same.  State real estate law commonly provides that a bona fide purchaser of real estate can take free of unrecorded interests.  In that case, if a mortgage is not recorded, the lien of the mortgage can be avoided in bankruptcy. Continue reading →

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RadLAX: Supreme Court Speaks On Credit Bidding

Posted on August 10, 2012 by BankruptcyRealEstateInsights

RadLAX Gateway Health Co. v. Amalgamated Bank, __ U.S. __, 132 S. Ct. 2065, 182 L. Ed. 2d 967 (2012) –

Undersecured lenders jealously guard their ability to credit bid in a sale of collateral (i.e. lender offsets the amount that it bids against the debt owed to the lender). This provides protection against a fire sale in which the collateral is sold to a third party for far less than the debt without requiring the lender to pay cash.  For bankruptcy sales, Section 363 of the Bankruptcy Code sets forth the rules for sale of property of the bankruptcy estate and specifically authorizes the holder of a secured claim to credit bid (unless the court orders otherwise).

So what’s the issue?  Debtors have argued that lenders are not necessarily entitled to credit bid if the sale is conducted as part of a plan of reorganization.  In RadLAX the Supreme Court rejected this position and ruled that a lender is entitled to credit bid as provided in Section 363(k) even if the sale is held pursuant to a plan. Continue reading →

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TOUSA: What’s All the Fuss?

Posted on August 10, 2012 by BankruptcyRealEstateInsights

Senior Transeastern Lenders v. Official Comm. of Unsecured Creditors (In re TOUSA, Inc.), 680 Fed 3rd 1298 (11th Cir. 2012) –

It would be difficult for even a casual observer to miss the uproar caused by the 11th Circuit’s decision in TOUSA upholding a bankruptcy court decision that (i) liens granted by subsidiaries of TOUSA, Inc. to secure loans to TOUSA were avoidable as fraudulent conveyances, and (ii) the value of the liens could be recovered from a third party that received payment funded by the financing secured by the liens.  What may be less clear to those watching from the sidelines is exactly what was going on and what this means for future transactions. Continue reading →

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