Articles Posted in bankruptcy

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When a debtor files bankruptcy, an “automatic stay” arises by operation of law which prohibits all actions by creditors to collect, such as foreclosure, repossession, or lawsuit against property of the bankruptcy estate, the debtor, and the debtor’s property (11 U.S.C. (the Bankruptcy Code) §362). Real Estate attorneys frequently see a filing intended to thwart actions against the property, such as foreclosure. Operating like a “blanket injunction,” the stay continues until a court order lifting the stay has been entered or the stay has expired. Actions taken in violation of the stay are void.

Property ceases to be property of the estate if it is sold or abandoned. The trustee may abandon property if it is burdensome or of inconsequential value. (§554) Unless the judge orders otherwise, the property is abandoned back to the debtor. Often, the debtor is behind on their mortgage and the lender, wanting to foreclose, consults a real estate attorney. A recent decision in the 9th Circuit BAP points out just what that means- as property of the debtor, it is still protected by an automatic stay, and a foreclosure is void. The lender should have made sure that the abandonment order included lifting the stay so it could proceed with the sale, or otherwise sought relief from stay..

relief from stay sacramento.jpgIn re Gasprom, Inc. involved abandonment of a gas station in Oxnard, the principal asset of the debtor. The gas station was subject to a deed of trust securing a debt of over $1 million dollars. The trustee brought a motion to abandon the property. Gasprom objected (to prevent its creditors from exercising their state law rights and remedies, bu the court approved the abandonment. The Abandonment order was silent as to the automatic stay, and the secured creditor held a trustee’s sale later that day. Sixteen days later the case was closed. The trustee’s sale was in violation of the automatic stay -if they waited another 16 days, they would have been in the clear.

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California commercial tenants sometimes need to sublease their premises, or assign the lease. Without fail, they remain liable to the property owner for the lease, in the event that the subtenant does not perform. Breach of the lease does not automatically terminate it – the owner must exercise its right to terminate the lease. But what happens if the sublessor files for bankruptcy protection? In bankruptcy the bankrupt sublessor has 60 days to “assume” the lease. (Bankruptcy Code section 365(d)(4). In the 9th circuit Federal Court (covering California), if the lease is not assumed, the bankrupt owner’s right to possession under the lease ends. (In re Lovett 757 F.2d 1035) The master lease no longer exists, extinguishing all subordinate rights, such as a Sublease. Suddenly, the sub-tenant no longer has a lease, and is out in the cold. The California Court of appeal decision discussed below adopts this rule. Parties considering a sublease may want to consult with a Sacramento real estate attorney. A solution to the disappearing sublease may be, at the time of entering the sublease, for the subtenant to enter a non-disturbance agreement or option to enter a new lease with the property owner.

sacramento sublease attorney.jpgIn 366-386 Street LP v. Superior Court (Monro), Paem was the assignee of the lease for Rosebud’s English Pub on Geary in San Francisco. In the assignment transaction, Paem gave to the assignor a note and deed of trust, secured by the business. Paem filed Chapter 11. The bankruptcy court rejected the lease, and thus the debtor (and trustee) no longer had any right, title, or interest in the lease. This extinguished the assignor’s security interest in the lease.

The Assignor then filed a state court action, seeking relief from forfeiture of its security interest under Code of Civil Procedure section 1179. This section provides that The court may relieve a tenant against a forfeiture of a lease whether or not the tenancy has terminated, and restore him or her to his or her former estate or tenancy, in case of hardship, as provided in Section 1174.

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A lis pendens, or “notice of action,” is a document recorded to perfect a claim being alleged in a lawsuit regarding title to real property. Once recorded, the world has notice of the lawsuit, and no purchaser may buy the property free of the claim – if the plaintiff wins in the suit, the new owner of the property is subject to the decision of the court. It is not a lien on the property, but it effectively renders the title unmarketable. A question posed to Sacramento and El Dorado real estate attorneys is how the lis pendens plays out in a bankruptcy. In a bankruptcy the trustee may avoid certain transfers (get them reversed) if they were made within 90 days (and in some cases, one year) before the bankruptcy filing if they would benefit one or more creditors at the expense of other creditors. These transfers are called “preferences.” (11 USC § 547(b)). Is recording the lis pendens a preference?

The reasons behind this are to promote equal distribution of assets to creditors, and to prevent aggressive collection efforts that may be undone by the court. A Ninth Circuit Court of Appeals decision, which governs California Federal Courts (plus several other western states), has held that the recording of a lis pendens is a “transfer” for purposes of determining whether it is a preference. While this position is law in California, not all circuits agree.

el dorado real estate attorney.jpgIn re Lane, 980 F.2d 601, the Ninth Circuit decision, involved a creditor who had sued Lane, and apparently recorded a lis pendens on filing the suit, or sometime thereafter. The creditor obtained a judgment, and recorded abstracts of the judgment on June 24. Lane filed bankruptcy September 16. Thus, the abstracts were recorded in the 90 day preference period, but the lis pendens was recorded prior to the start of the 90 day period. In the bankruptcy there was a motion to determine whether the creditor was secured, as it had recorded the abstract within the preference period, and the debtor wanted it to be unsecured.

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The commercial landlord is increasingly faced with non-paying tenants who file bankruptcy. The following is a simple outline of the procedure for getting paid and getting possession of the property.

1. The Automatic Stay. If the lease term is still running when the tenant files bankruptcy, the lease is part of the estate and all landlord actions are stayed. That means the landlord can take no action without an order from the court. To obtain “relief from stay”, the landlord must show that it is not “adequately protected” or that the property is not necessary for an effective reorganization. Adequate protection can include cash payments for the use of the property, a lien on other property, or the equivalent.

2. The Trustee Decides. The bankruptcy trustee has 120 days to assume or reject the lease. If the trustee assumes the lease, the lease continues, and the trustee is then obligated under its terms. The trustee must “cure” defaults under the lease, or provide “adequate protection.” Adequate protection can mean a cash deposit, pre-paid rent, a lien on other property, or anything else the judge agrees protects the landlord.

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Long ago in law school a bankruptcy professor pointed out to us that, if you exaggerate your income on a credit card application, you might have a problem eliminating that card debt in bankruptcy. The bankruptcy code has a provision prohibiting discharge of debts to the extent they were obtained by use of statement in writing that is materially false, on which the creditor reasonably relied.

I’d be surprised if a credit card company could produce an original credit application from 10 years ago, but in other circumstances an exaggerated statement could seem to last forever, or so it may appear to the debtors in a recent decision. The 9th Circuit Court of Appeal, which governs Federal Courts in California, concluded in May 2009 that, even if the objecting creditor had not relied on the false statements, they could prevent the debt being wiped out in bankruptcy.

The case involved Blue Corporation, a commercial tenant. In signing a 1999 lease with the landlord, two corporate officers submitted personal financial statements and guaranteed the lease. The landlord sold its interest in the lease to Matsco in 2002. Blue Corp subsequently defaulted on the lease, and Matsco obtained a judgment for $193,ooo against the corporation & both officers. Matsco assigned the judgment to Stornawaye. In 2004 Stornawaye assigned the judgment to Blue Falls, and the two officers then filed for bankruptcy.

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