When Congress recently amended the Federal Bankruptcy Laws, one important change made it more difficult for debtors in single asset real estate cases to maintain the automatic stay without filing a plan of reorganization or making interest payments to secured creditors. Section 362(d)(3) requires that the automatic stay be terminated if the debtor does not file a plan of reorganization or commence interest payments within 90 days of the petition date.
Single asset real estate cases were formerly defined as those cases where the debtor had no more than 4 million dollars in non-contingent liquidated secured debts. Under the amendments to the Bankruptcy Code all cases involving real property constituting a single property or project, other than residential real property with fewer than 4 residential units, are included in the definition of single asset real estate, regardless of the amount of debt. The Code requires that the stay lift within 90 days of the petition date unless one of the two requirements is met. However, in exceptional cases, the Court may continue the stay for "cause". One bankruptcy court has recently considered what might constitute "cause" for purposes of extending the stay under 11 U.S.C. § 362(d)(3).
In In re Heather Apartments, Ltd. Partnership1, the debtor owned a single 436-unit apartment complex located just outside of Oklahoma City. The debtor’s secured debt approached 7 million dollars and the project was financially troubled, suffered from under capitalization, had significant deferred maintenance, and insufficient cash flow. The debtor admitted that the occupancy rate of the complex was significantly lower than it desired. Prior to the expiration of 90 days after the petition date, the debtor filed a motion to extend the automatic stay. The debtor did not file a plan of reorganization and did not commence making interest payments. Rather, the debtor argued that the sale of the debtor’s property was likely and that this constituted "cause" to maintain the automatic stay.
After reviewing the legislative intent concerning the amendments to Section 362(d)(3), the Court noted that Congress was concerned about the relative unfairness and lengthy delay in Chapter 11 cases involving single asset real estate projects. The goal of Section 362(d)(3) was to expedite the proposal of meritorious plans of reorganization in single asset real estate cases, and that where the case does not appear to result in a confirmable plan of reorganization initially, the debtor must compensate its mortgagee for the time value of the mortgagee’s debt by paying interest at the original contract rate.
In In re Heather, the Court found that "cause" must include a concrete substitute for the creditor’s statutorily fixed expectation of payment if the debtor is to be excused from having the stay lifted. While the Court was careful to say that the prospective asset sale could in some circumstances qualify as a concrete substitute, it would only do so where a purchase agreement had been executed, a binding lending commitment in favor of the prospective purchaser had been issued, and the parties had demonstrated substantial progress toward satisfying the details of a closing. Only then could the Court feel assured that the protected mortgagee would receive a substantial equivalent of the expected interest or plan filing required under Section 362(d)(3).
Although the Court in In re Heather Apartments Limited was careful not to exclude potential sales from the definition of "cause" under Section 362(d)(3), it is clear that Bankruptcy Courts are likely to interpret this section in favor of secured creditors. Only where the debtor is paying interest or has shown some concrete means to satisfy the mortgagee’s debt will the stay be extended beyond the 90 day period called for under Section 362(d)(3).
Footnotes
1 In re Heather Apartments Limited Partnership, 2007 WL 926299 (Bankr. D. Minn, March 28, 2007)
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