Real Estate Chapter 11 Bankruptcy Cases In Kansas And Missouri

Real Estate Reorganization Through Chapter 11

Within the Chapter 11 world, a common and powerful type of Chapter 11 reorganization case is the “real estate reorganization” Chapter 11 case. These types of cases are filed by real estate management companies, by individuals who own residential or commercial real estate, by holders of “single asset” real estate projects or properties, or by entities or persons who have ownership interests in real estate. A person or business does not even need to be insolvent in order to file a case.  We will discuss here some of the typical features of a real estate reorganization. It is important to note at the outset that every case is different and presents its own issues. Long experience with these types of cases have enabled us to formulate some general principles and outlines.

The major advantages of the real estate Chapter 11 case is that it gives the debtor (whether an individual or a business) the ability to change the terms of the original loans. As a debtor-in-possession, the debtor stays in charge of everything and continues to operate as the business owner. Interest rates, monthly payments, and terms of loans can be (and are) drastically altered to enable the debtor to get relief from onerous mortgage or lease terms. Properties can be sold, liens can be stripped off, and loans can even be “crammed down” to the value of a piece of real estate. Regarding “cramdown”, we can say that this is one of the most powerful features of Chapter 11 practice. It provides that a Chapter 11 plan can be confirmed by a court even when there is an objection or disagreement from one or more creditors.

If a property is “underwater”, a cramdown allows a debtor to modify drastically a mortgage loan under certain conditions. Under Section 506 of the Bankruptcy Code, a lien is secured only to the extent that there is value in the property. If the mortgage exceeds the value, the unsecured portion of the loan is “crammed down” to the value of the collateral. In order for this to happen, certain requirements must be met by the filed Chapter 11 plan and with the voting among the classes of creditors. The plan must also not be unfairly discriminatory against the dissenting class of creditors. Because these requirements are somewhat vague and open to much interpretation, it is important to have an experienced attorney handle a real estate Chapter 11 case.

In a typical real estate Chapter 11 case, the case will be filed at a time when the debtor is already behind or expected to be behind on one or more mortgage payments. When the petition is filed, the debtor normally seeks a court order to use the “cash collateral” of the business. Frequently, rent collected by a debtor will be subject to such a cash collateral order. Within 120 days, a debtor will generally decide whether to assume, assign, or reject any leases or executory contract he or she may have with other parties. It no intention is declared, the lease is assumed to be rejected. Courts can extend the period of time for assumption, assignment, or rejection for an additional period of 90 days, if needed.

A debtor may assign a lease, even if the lease had a term against this, if adequate assurances of future performance are made. There are some additional nuances if the real estate involved is a shopping center. There should be adequate assurances of sources of rent and financial condition of assignee; the percentage of rent due should not decline substantially; and assumption or assignment should not destroy the balanced tenant mix in the shopping center. There are also rent caps on claims against debtors, which limit a landlord’s possible claim for a rejection of a lease.

Within 120 days of the filing of a case, the debtor must file a disclosure statement and plan of reorganization. The disclosure statement contains information about the debtor’s assets, liabilities, and financial projections. It is designed to enable a creditor to know more about the debtor’s overall picture. A plan is also filed, and sent to the creditors along with a voting ballot. If there are enough votes in favor of the plan, and it meets the confirmation requirements of the Code, it will be confirmed. Even if it does not, the court may still confirm the plan over the objections of the creditors.

In a cramdown scenario, a real estate mortgage is restructured where the loan balance is reduced to the fair market value of the collateral, and the interest rate is changed. Cramdowns can occur in three ways: (1) the lien is retained and the creditor receives the amount of the claim, and have a value equal to the allowed secured claim; (2) the debtor sells the encumbered property free and clear of all liens, and the creditor receives in cash the allowed amount of the secured claim; or (3) the lender gets some equivalent of the preceding two claims. In cramdown scenarios, at least one class of impaired creditors must vote in favor of the plan.

In certain situations, it is to a debtor’s advantage to sell some real estate in the Chapter 11 process. This is called a “Section 363” sale. We have written about the details of such sales elsewhere in this blog.  The link at the end of this article is one such example.  Additionally, you can click here for more information. 

The Single Asset Real Estate (SARE) Chapter 11 Case

There is a special type of real estate Chapter 11 case that is meant for single properties or single real estate projects. A “single asset real estate” is defined in 11 U.S.C. §101(51B). It is a single property or project, other than residential real property with fewer than four residential units, which generates substantially all of the gross income of a debtor (who is not a family farmer). In some situations, a debtor will be behind on a real estate loan for business real estate (e.g., investment property, warehouse, developments, office building, etc.). The filing of a SARE case can be a powerful help, as it can strip away any liens that are greater than the property’s fair market value.

With SARE cases, the automatic stay has different parameters than in a regular Chapter 11 real estate case. In a SARE case, a debtor should file a plan of reorganization or begin payments either within 90 days after the filing of the case, or within 30 days from the time the bankruptcy court determines that the debtor is subject to SARE guidelines. If this does not happen, the automatic stay may expire. There are many situations where it is unclear whether a Chapter 11 case is a SARE case. In these situations, it may be of use for a debtor to file a motion seeking a determination on this issue.

Real estate cases are complicated and present special issues. If you are an owner or an investor in real estate, and are seeking relief from financial issues, it is critical to explore what a Chapter 11 real estate case has to offer. You may be surprised to discover just how powerful the Chapter 11 process is in helping you to operate your real estate business as a going concern, and resolve issues with other creditors as well.

Read More:  Buying And Selling Assets In A Chapter 11 Case

Kansas City Missouri Municipal Court: An Overview

The Kansas City Municipal Division is part of Judicial Circuit 16.  The courthouse is located at 1101 Locust, Kansas City MO  64106.  It hears misdemeanors, infractions, and even housing code violations cases that arise out of incidents alleged to have occurred in the metropolitan Kansas City Missouri area.  It has eleven courts that deal with such cases, and the courts are indicated by letter (Courtroom A through K).  Persons who have received a citation or a summons to the the KCMO Municipal Court should look at their documentation carefully to make sure that they know when and where their court date is.  If you do not have your paperwork, your attorney can find this information out for you.

It is important to have an attorney when dealing with issues in KCMO Municipal Court.  Too often, people make the mistake of not doing this, and then find out later that big problems have been created.  In addition, having and attorney can do the following for you:  (1) Work on withdrawing active warrants and getting you a court date; (2) Changing the time and date of your current court date.  For many people, having these things done is an important part of the preliminary matters surrounding a case.  Under the “add on” system, and depending on the nature of the case, your attorney can often resolve your issue without you having to be there in court.

The Municipal Court should not be confused with the Jackson County Circuit Court itself, which is located near the Municipal Court but hears different types of cases.

Read More:  Overland Park Municipal Court:  An Overview

Overland Park Municipal Court: An Overview

The Overland Park Municipal Court is located at the W. Jack Sanders Justice Center, 12400 Foster, Overland Park KS 66213.  The court handles misdemeanor and infraction cases that arise out of the City of Overland Park.  It should be distinguished from the Johnson County District Court system, which is located in Olathe, Kansas.  If you have been issued a summons or ticket, you should review it carefully to make sure that your case is actually being held in the Overland Park Justice Center.  There are a great number of municipal courts in the greater Kansas City area, and confusion frequently arises about the location of a case.

It is strongly advised that a person have the assistance of legal representation in Overland Park Municipal Court. Issues can arise that affect a person’s legal rights in significant ways, and to proceed without the assistance of counsel is asking for trouble.  It is important to point out that not all courts have the same “personality” or organizational culture.  People with no exposure or experience with Overland Park Municipal Court are often surprised at the formality and rigor with which it is conducted, when compared to smaller municipal courts in the area.  For this reason, a person should not be proceeding without representation.  If you get legal representation, Overland Park Municipal Court has a special “attorney docket” where your attorney can confer with the city prosecutor about your case.  An attorney experienced in municipal court practice can help you resolve your case in the best way possible for you.

Read More:  Drug Crimes In Kansas City

Confirmation Of A Chapter 13 Plan: The Effects

One of the major goals of the Chapter 13 debtor is the confirmation of the plan proposed to the Court and to the creditors.  The plan, until it is actually confirmed by Court order, has no formal legal effect.  The plan’s provisions must be found to comply with Bankruptcy Code §1322 and meet the other confirmation standards laid out in §1325.  The creditors and the Chapter 13 trustee will have had the opportunity to review the plan and file any objections they wish to file.  Once the plan is actually confirmed by a confirmation order, three effects come into play.

First, the provisions of the plan become binding on all the parties (debtor and creditors) pursuant to §1327(a). This is referred to as the “res judicata” effect of confirmation.  As one judicial ruling said, once a plan is confirmed, it becomes binding on the parties, “warts and all.”  This means that the confirmed plan has binding legal effect even if it happens to contain provisions that conflict with the Bankruptcy Code (there are some limitations on this rule; and a debtor cannot push it too far.  Some things cannot be achieved by plan confirmation and must be separately litigated).  The plan is still subject to postconfirmation modification in accordance with §1329.  Furthermore, the Court does have the power to revoke a fraudulent confirmation under §1330(a).

Second, under §1327(b), the confirmation of a plan vests the property of the estate in the debtor unless the plan or confirmation order says otherwise. The Chapter 13 Trustee is not a liquidating trustee, unlike a Chapter 7 trustee.  The extent to which the property of the estate vests in the debtor is an important issue when dealing with the issue of the postconfirmation application of the automatic stay under §362(a).  Issues can also arise regarding the status of the debtor’s postconfirmation earnings or property that the acquires after confirmation.

Third, under §1327(c), property that vests in the debtor is held free and clear of any claim or interest of any creditor provided for by the plan, unless the plan or confirmation order says differently. If the plan modifies a secured claim, it must provide for the creditor to retain its lien until the value of the secured portion of the claim has been paid and the debtor has received a discharge.

Once the confirmation order is entered, the Chapter 13 Trustee begins to disburse funds paid by the debtor under the plan to the creditors in accordance with the plan provisions.  There is usually a significant amount of money available to do this, since the debtor will have been making payments since the filing of the case, and these payments will have been held in trust by the trustee.  Once the debtor has finished making the payments provided for under the plan, the debtor will be discharged for personal liability on all the debts (with some limited exceptions).  If this payments are not completed under the plan, it may be converted to another chapter of the Bankruptcy Code (Chapter 7) or dismissed.  If a case is converted or dismissed, a secured creditor retains its lien to secure the unpaid amount of the secured debt, regardless of the valuation of the encumbered property under the plan.

The binding effect of the plan’s terms requires creditors to apply payments in accordance with the plan, and limits their rights with regard to prepetition defaults.  If the plan modifies a secured claim through a “cramdown” or otherwise, the plan’s provisions state the terms for the satisfaction of the claim and any lien that may secure the property.  The plan is also binding on the debtor as well.  Essentially, the court views a Chapter 13 plan as a new contract among the parties, and that this new contract replaces the old agreements.  The doctrine of “claim preclusion” or res judicata applies.  This doctrine of claim preclusion has even been interpreted by courts to prevent later adjudication of many different matters, including an objection to a proof of claim.

However, the creditor must have received notice of the plan and it must have had a chance to assert its due process rights.  Due process is satisfied as long as the creditor has received adequate notice.  It is in the best interests of debtors, of course, to draft plans carefully, so that the desired treatment of each claim or class of creditors is specifically detailed.  Creditors, for their part, should review the plan carefully and address any issues that they may see contained therein.  No matter how carefully the language is crafted, there will occasionally be disputes of interpretation and importance, and these disputes will continue to fuel much Chapter 13 litigation.

Read More:  Adding Unscheduled Assets To A Bankruptcy Case

Recoupment Of Benefit Overpayment Did Not Violate Bankruptcy Automatic Stay: A Recent Kansas Decision

Overland Park Bankruptcy Attorney

Johnson County Bankruptcy Law Firm

A recent ruling by a bankruptcy judge in Kansas City demonstrated the interplay of a contractually-derived “right of recoupment” in a bankruptcy setting. It is an issue we have written about in this blog before. On March 16, 2014, here on our blog, in an article on overpayments of Social Security Disability payments we discussed the circumstances under which such overpayments were dischargeable in bankruptcy. (You can click here to see it).  We stated the following:

Recoupment is a common law doctrine. It is basically an equitable exception to the automatic stay of bankruptcy. It is “the setting up of a demand arising from the same transaction as the plaintiff’s claim or cause of action, strictly for the purpose of abatement or reduction of such claim.” In Re Caldwell, 350 B.R. 182 (E.D. Penn. 2006); see also In Re Mewborn, 367 B.R. 529 (D. N.J. 2006). Recoupment “does not require a mutuality of obligation, but rather countervailing claims or demands arising out of the same transaction under which the initial claim was asserted.” In Re Hiler, 99 B.R. 238, 241 (Bankr. N.J. 1989). See also In Re Irby, 359 B.R. 859 (Bankr. N.D. Ohio 2007). The key phrase here “arising out of the same transaction.”  Both the Hiler and the Caldwell courts stressed that a debtor must accept the burdens of a contract if he wants to continue to receive benefits under it. If overpayments are made under a contract which provides for recoupment prior to the filing of a bankruptcy petition, the debtor should not be allowed to avoid the reimbursement of money by having them discharged in a bankruptcy while at the same time he continues to receive the benefits under the same contract. A debtor, basically, cannot assume part of an agreement and reject another. Recoupment allows for offsetting the amount a person owes from the ongoing benefit received.

Basically, the point we were trying to make is that there are situations in bankruptcy where contract-based overpayments can continue to be collected by a creditor. These situations do not often arise, but they do exist. Judge Somers, in the Kansas City Division of the US Bankruptcy Court for the District of Kansas, made this point emphatically in a ruling issued October 6, 2014. The case was In Re Amelia Rock.

In this case, the debtor had become disabled in 2010 and was receiving long-term disability payments under a plan sponsored by the Kansas Public Employees Retirement System (KPERS). It was a contractually-based plan, which gave the plan administrator the right to recoup overpayments. The plan administrator did just that in 2011, and set up a “recoupment” when it found out that the debtor had received a large payment from a collateral source (workers’ compensation). The plan administrator (called “UHCSB”) reduced the debtor’s future disability payments by $100 per month in order to recoup the alleged workers’ comp overpayment.

The debtor filed a Chapter 13 bankruptcy in 2013, and assumed that the automatic stay imposed after the filing of the case would require UHCSB to terminate its recoupment debit of the debtor’s disability payments. Such language was included in the plan, and the plan was confirmed. The creditor, UHCSB, received notice of the plan and apparently did not object to it. The creditor continued to withhold the money from the debtor. The debtor then filed a motion to compel turnover of the withheld money, for sanctions for violations of the automatic stay, and for costs and expenses. The creditor actually did agree to stop the withholding, refund the money taken, and waive the remaining balance owed. The only remaining issue was that of the debtor’s litigation expenses, and this required the court to determine if the creditor had violated the automatic stay.

The court ruled that precedent in the Tenth Circuit showed that the creditor was not required to get relief from the automatic stay before continuing to withhold the $100 from the debtor’s monthly benefit payment. “Recoupment originated as an equitable rule of joinder, allowing adjudication in one suit of two claims that the common law had required to be brought separately.” The relevant test is whether the debtor’s obligation to repay arises out of the “same transaction” as the right to receive the continuing disability payments. Essentially, equity is the controlling issue.

A debtor should not be able to continue to receive benefits, as well as an overpayment, since such an outcome would amount to cherry-picking favorable terms out of one contract, while avoiding others. The court relied heavily on In Re Beaumont, 586 F.3d 776 (10th Cir. 2009) in arriving at its decision. Thus, ruled the court, there was no violation of the automatic stay, and therefore the debtor was not entitled to its litigation costs.

It should be stressed here that the “recoupment” doctrine only applies in certain situations.  As we noted in our earlier article on Social Security Benefits overpayment, not every benefit is contractually-based.  So, presumably, the outcome here would have been different if the benefit had been one of a different type.  Each case is different, and each situation needs to be examined on its own merits.

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Leases In Chapter 7 Business Cases In Kansas And Missouri

Overland Park Business Bankruptcy Attorney

The legal issues surrounding leases in bankruptcy cases can depend on what type of bankruptcy is being talked about. Chapters 7, 13, and 11 each have separate rules and procedures with regard to leases. In a Chapter 7 case, the bankruptcy trustee has the option of assuming the debtor’s interest in the lease or curing any default under it. In practice, this only happens on rare occasions with commercial leases (not residential leases). Chapter 7 trustees almost never bother with residential leases, since they provide no value to the estate. In commercial lease situations where the rent provided under the lease is significantly below the market rate, or where the premises have some sort of value to the estate in a business liquidation, this type of thing is possible in theory.

In a Chapter 7 business liquidation, the trustee has the right to commandeer the premises and use them for storage or for a bankruptcy sale. Here again, this rarely happens. Even in a liquidation, it often happens that by the time the case is filed, there is little value to the estate that can be had by operating the business. In situations where Chapter 11 cases are converted to Chapter 7, or where the business has a large amount of liquidation value, this can change. When the bankruptcy petition is filed, the landlord is prevented by the automatic stay from attempting to enter the premises and repossess the inventory or equipment on the premises, even if the rent has not been paid and a state court has ordered the debtor to be evicted.

The Chapter 7 trustee can use the leased premises to store the property until it can be sold, if it has significant value for the estate. If the trustee does not assume the lease of the business, and uses the premises for storage, it may not be easy for the landlord to collect rent from the trustee. The trustee typically claims that the estate is only liable for a lower amount, or only for the period in which the trustee was actually in possession. And if there is not enough funds in the estate to pay for the expenses of administration, then the amount might not be paid. Landlords and their attorneys are often unfamiliar with the nuances of bankruptcy law and their rights under it.

They may be unpleasantly surprised to find out that their statutory landlord lien is invalid in bankruptcy. Rent arrearages that may exist at the time of the filing of the case might get treated as a general unsecured claim in the estate, which usually amounts to very little in recovery.  A landlord subject to the automatic stay by the filing of a bankruptcy case cannot simply ignore it. This is true regardless whether he has received notice from the court. One of the basic purposes behind the automatic stay with regard to leases in Chapter 7 is to permit the trustee time to assess the condition of the premises and any property in it. Generally the trustee has 120 days to assume or reject a lease of nonresidential real property. The court can extend this for another 90 days if needed.

In business liquidation cases where a lease is involved, it is not always a simple matter for a landlord to collect rent during the time the trustee is in possession of the premises. In situations of nonresidential real property, the trustee has an obligation to “timely perform all the obligations of the debtor” arising under the lease, until the lease is assumed or rejected. In Re Cukierman, 265 F.3d 846 (9th Cir 2001). If the lease has significant value, it is even possible that the trustee may assume and the possibly assign or sell it. Before it can be assumed, he would have to cure any default under it, and compensate the landlord for any damages suffered by the breach of the lease.

If the property continues to be used by the trustee after the filing of the bankruptcy, it is possible that the landlord can request compensation under Section 503(b) of the Bankruptcy Code (administrative expense). The landlord would be entitled to the “reasonable value” of the use of the premises. This is not necessarily the rent amount specified in the lease agreement; in fact, it may be significantly less than this. And even if the estate can afford to pay the landlord administrative rent, claims will be based on the actual value received by the estate, not on the value that was lost by the landlord. However, the landlord may be entitled to “adequate protection” payments during the pendency of the case. As can be seen from this discussion, a landlord’s attorney will need to be aggressive and persistent if he wishes to recover anything for his client from the Chapter 7 trustee once a business liquidation is filed.

Read More:  Assigning An Executory Contract In A Chapter 11 Business Bankruptcy

Bank And Banking Crimes In Kansas And Missouri

Johnson County Criminal Lawyers

Bank and banking crimes are dealt with under a variety of federal criminal statutes. We will discuss some of the major ones here.

Embezzlement and Misapplication (18 U.S.C. §§656 and 657). These two statutes are nearly the same, except that Sect. 656 deals with banks and Sect. 657 with credit unions and savings and loan associations. Under Sect. 657, an officer or employee of the institution may not “knowingly and willfully embezzle and misapply monies and funds” of the institution. There must also be an intent to injure and defraud the institution. Embezzlement and misapplication are separate offenses: the difference is that for embezzlement, the defendant must first have lawful possession of the funds alleged to have been appropriated for his own use. The statute is limited to acts done within a person’s official capacity, unless he or she used his position to harm the bank.

Generally, to act with intent to defraud usually means to cheat, deceive, or mislead, for the purpose of causing a financial loss to someone else. The defendant must have knowledge of what he or she is doing, rather than being merely careless or reckless. However, since direct proof of fraud is often not always available, an intent may be discerned from the facts and circumstances surrounding the loss of money. “Misapplication” is intended to cover situations where bank examiners are deceived. Another statute (18 U.S.C. §371 (bank conspiracy)) is often used with the offense of misapplication. Some examples of misapplication can be the following: bad loans, dummy loans, brokered loans, bond swapping, check kiting, collusion with loan officers in approving loans, manipulation of lending limits, and compensating balances. The defense of “good faith” is often used as a defense to embezzlement or misapplication, as it tends to defeat an accusation of an intent to defraud.

False Entries (18 U.S.C. §1105 and §1106). These sections prohibit bank insiders from making false entries in the records of a federally insured banking institution with the intent to injure or defraud the bank. The false entry should be over a material matter, not an inconsequential one. Here again there needs to be an intent to injure or defraud; that is, it is a specific intent crime. Defenses to this crime include accurate reporting, the fact that the false entry may have been immaterial or de minimis, or the fact that the reporting may have been ambiguous.

False Financial Statements (18 U.S.C. §1014). This section prohibits someone from making a false statement to a federal insured banking institution for the purpose of obtaining a loan or other extension of credit. It is generally intended to apply to situations where loan applications are falsified or materially false. Under this section, a person may not knowingly make a false statement or report, or overvalue any land, property, or security, for the purpose of influencing the decisions of a banking institution. The representations may not be implied representations; they must be true or false on their face. U.S. v. Kurlemann, 736 F.3d 438 (6th Cir. 2013). A defendant can generally prevail if he can show that what he or she said was the “literal truth.” U.S. v. Sarno, 73 F.3d 1470 (9th Cir. 1995). Normally, the government need not demonstrate that the insured institution actually relied on the fraud (note how this seems to be a lower standard than the civil standard of “reliance” for nondischargeability actions in bankruptcy court).

Fraud. (18 U.S.C. §1344). Bank fraud is knowingly executing or attempting to execute a scheme to defraud a financial institution. There is a split of authority in the federal circuits as to the details of the “knowledge” requirement. The Eleventh and Fifth Circuits require specific intent; the Second Circuit requires proof of intent to harm, but permits intent to be inferred; the Fourth and Seventh Circuits hold that a scheme or willful conduct is sufficient to show intent to defraud. The victim of the alleged fraud must be a federally insured institution. Good faith is also a defense. Section 1344 covers a wide variety of situations where fraud can be found: ATM (teller machine) misuse, false representations to banks, forgery, stolen checks, credit card fraud, mortgage fraud, and false statements to induce check cashing have all been found to fall under Section 1344.

Bribery (18 U.S.C. §215). A person may not give or promise anything of value to an officer of a financial institution with the intent to corruptly influence or reward that person. Similarly, under Section 215(a)(2), a banker cannot solicit or demand anything of value with the intent of being influenced in his capacity in the bank.

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Bankruptcy Appeals And The Appellate Process In Kansas And Missouri

Johnson County Kansas Bankruptcy Lawyers

Under Section 158 of the Bankruptcy Code, appeals of bankruptcy court orders can be heard when the order if final, or when the order is “interlocutory” (with the leave of the District Court). In deciding when an order is final, courts take a realistic and pragmatic approach. Under Section 158(a)(3), an appeal from an interlocutory order can be heard only with leave of the court. Under this section, the district court or the bankruptcy appellate panel (BAP) can hear an appeal from an interlocutory order (a circuit court of appeals’ jurisdiction is limited to final orders). Thus, under F.R. Bankr. P. 8001(b) and 8003(a), an appellant must file a notice of appeal under Rule 8002, and also file a motion for leave to appeal.

Bankruptcy appeals can technically be heard in three possible forums: the local district court, the BAP of the circuit, or to the circuit’s court of appeals in some situations. As a practical matter, most bankruptcy attorneys will find themselves raising issues of bankruptcy law before the BAP, which operates in both the Eight Circuit (Missouri) and the Tenth Circuit (Kansas). This is so because the issues raised in bankruptcy cases are often complex and specialized, and the BAP is specifically designed to be a forum for bankruptcy appellate law.  US District Court judges may not have had as much exposure to the issues presented.

The 2005 amendments to the Bankruptcy Code created a limited ability to appeal matters directly to the circuit courts. This would be in situations where there is no controlling authority on legal issues involved, or where the issue requires the resolution of conflicting decisions, or where an immediate appeal “may materially advance the progress of the case or proceeding.” 28 U.S.C. Section 158(d)(2).

The deadlines are given in F.R. Bankr. P. 8002. The deadline for filing the notice of appeal can be extended in situations of “excusable neglect”, but this should never be relied on. Pushing the envelope is never a good idea in dealing with deadline issues. In determining what is “excusable neglect”, a court will look at the danger of prejudice to a debtor, the length of the delay and any potential impact on judicial proceedings, the reason for the delay, and whether the movant is acting in good faith.

Perfecting an appeal requires that certain other steps be made. The issues to be presented on appeal must be stated, and the record must be identified that the appeals court is supposed to review. Under F.R. Bankr. P. 8006, the following things are part of the record of appeal:

  • Items designated by the parties
  • The notice of appeal
  • The order, judgment, or decree that is the subject of the appeal
  • Opinions, findings of fact, and conclusions of law by the court

The parties then wait for the appeal record to be docketed. The appeals brief is then filed. From past experience, we have found that calling the BAP court clerks with questions is a very pleasant experience. The lack of crowded dockets gives them the ability to become personally acquainted with many cases, and makes for productive communication.
In reviewing an order, judgment, or decree from the bankruptcy court, the appellate court reviews the legal issues de novo, the factual findings for “clear error”, and its exercise of discretion for “abuse.” In Re United Healthcare Systems Inc. 396 F.3d 247 (3rd Cir. 2005). If there are mixed questions of law and fact, the appellate court will defer to the bankruptcy court’s finding of facts unless those are “clearly erroneous.” Frivolous appeals are very rare, but may possibly be found when the “overwhelming weight of precedent is against [appellant’s] position, where appellant can set forth no facts to support its position, or where, in short, there is simply no legitimate basis for pursing an appeal. In Re Alta Gold Co., 236 Fed. Appx. 267 (9th Cir 2007).

Under F.R. Bankr. 8005, there is a mechanism for getting a stay of an order pending the outcome of an appeal. Appellants will want to do this to preserve their position. Requests for stays pending an appeal must ordinarily be made to the bankruptcy judge. The court then has the discretion to grant a stay pending the appeal. A party seeking a stay pending the appeal is asked to show:

  • It is likely to prevail on the merits of its appeal
  • It will suffer harm unless a stay is granted
  • A stay will not substantially harm other interested parties
  • A stay is not harmful to the public interest

All of these conditions need to be met. Once the appeal has been docketed and scheduled, the litigants appear before the BAP judges and make their arguments, relying on the points raised in briefs.

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Landlords, Tenants, And Leases In Chapter 13 Bankruptcy In Kansas City

Overland Park Bankruptcy Law Firm

When a debtor files a Chapter 13 bankruptcy, the automatic stay under Section 362 bars the lessor (landlord) from “any act to obtain possession of property of the estate or of property from the estate” except through the bankruptcy court. A debtor who remains in possession of leased property will be expected to continue to pay the rent for such property. But there can arise many legal issues regarding when the rent is payable, what priority it has in relation to other debts, the measure of the rent, and the collectability of any past rent due.

In Chapter 13, a debtor has the option to assume or reject a lease. In situations where the lease is for personal property or residential real property, the option may be exercised at any time before confirmation of the Chapter 13 plan. The plan itself may indicated whether a lease is to be accepted or rejected. The lessor of nonresidential real property is treated a bit differently. If the debtor does not assume the lessor’s lease within 120 days or obtain an extension from the court, the debtor is technically obligated to surrender the property to the lessor. This deadline can be extended for 90 days.

Under Section 365 of the Code, the debtor also has extraordinary rights to assume and assign a lease, whether or not it is in default. This can be done even if the lease has a “non-assign” clause in it already. The debtor can even assign the lease to someone else, even if this person is not to the lessor’s liking. Lessors (landlords) are entitled to rent payments during the Chapter 13 case, but not necessarily at the rate and at the exact terms specified in the original lease agreement. To assume a lease, the debtor will be required to cure any default in the lease, and provide adequate assurance of future performance.

If the debtor continues to use leased property after the filing of the bankruptcy case, the landlord may be entitled to compensation under Section 503(b) of the Code. This section requires that the court permit, as an “administrative expense”, the actual and necessary costs of preserving the estate. The measure of compensation will normally be the “reasonable value” of such use and enjoyment of the property, which may not necessarily be the rent mandated in the lease agreement.

In addition, a lessor whose property is actually used by the debtor is entitled to adequate protection payments under Section 363(e) of the Code, pending a decision by the debtor to assume or reject the lease. Some interesting issues can arise in situations where a debtor continues to remain in the premises after a lease has been overtly or constructively rejected. These situations often arise where a tenant takes longer than expected to remove his or her belongings from the premises, or otherwise is unable to leave in a timely fashion. If a debtor continues to occupy the premises of a residence after rejection of the lease, the debtor may be liable to the landlord as a “tenant at sufferance.” Essentially, the tenant is viewed as a holdover tenant. In these situations, an alert landlord may seek to have the tenant pay a reasonable monthly amount for the use of the property while the tenant was there.

Clear-thinking landlords often find out that, considering all the rights that Chapter 13 tenants enjoy, it makes more sense to work out some arrangement whereby the debtor-tenant can remain in possession of the premises. It often makes sense to have an arrangement whereby the debtor pays a reasonable rent while using the premises to store personal property of the estate and looking for a purchaser of the property who might be willing to rent the premises. If the lease has been rejected, the debtor will have to leave the premises, and motions for relief from the automatic stay may follow quickly to make sure that this in fact happens.

Under Section 362(b)(22), the automatic stay does not prevent the continuation of an eviction action in state court if the landlord had already obtained a judgment of possession against the debtor before the bankruptcy was filed. However, under Section 362(l), the debtor can postpone the termination of the automatic stay by depositing 30 days’ worth of rent with the clerk of the court, and then filing a certification that there are circumstances that would entitle the debtor to cure the entire default. And if the default is in fact cured within the first 30 days of the filing, then the automatic stay continues in effect. If you are having issues as a tenant or a landlord and a bankruptcy case is being contemplated, it is important to get guidance on this area of the law quickly, so that options and remedies can be evaluated.  The law in this area is complicated, and things can vary greatly whether the case is under Chapter 7, 13, or 11, and whether the lease is residential or commercial.

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Interest Rates In Chapter 11 And Chapter 13 Cramdowns

Johnson County Bankruptcy Law Firm

“Cramdown” is a term of art used to describe a situation in a Chapter 13 or Chapter 11 bankruptcy in which a secured creditor is being paid to the fair market value of the collateral secured by its claim, rather than the full loan balance. In a Chapter 11 plan, if the plan proposes to pay the secured claim in deferred cash payments, those payments would include post-confirmation interest at the “market rate.” The market rate is a rate that the bankruptcy court considers fair in light of current market factors. In Re Hardzog, 901 F.2d 858, 860 (10th Cir. 1990); Till vs. SCS Credit Corp., 541 U.S. 465, 476 n. 14 (2004).
In the case of In Re American Homepatient, Inc., 420 F.3d 559 (6th Cir. 2005), the court determined that the Chapter 11 cram down interest rate should be market rate where there exists an efficient market; if a market does not exist, then a court should employ the “formula approach” described by the Till case for Chapter 13 cases.

Under this “formula approach”, the interest rate is set as the national prime rate adjusted to reflect risk posed by the debtor. Of course, secured creditors in a Chapter 11 or Chapter 13 case are never really going to be satisfied with this “market rate.” Several methods have been advanced by courts in determining how this “market rate” should be determined. We will describe each of these approaches.

Formula Approach. Under the so-called formula approach, as stated above, the court begins with a base rate (such as prime rate) and then adds points for “risks” posed by the debtor. The formula approach was adopted by the Second Circuit in In re Valenti, 105 F.3d 55, 64 (2nd Cir. 1997) and by the Tenth Circuit in In re Hardzog, 901 F.2d 858, 860 (10th Cir. 1990).

Cost of Funds Approach. Under this method, the rate is determined based on what interest the creditor would have to pay to borrow the funds. This approach is apparently not favored and has not been formally adopted by any circuits.

Coerced Loan Approach. There are two variations of the “coerced loan approach.” One variation is that the cram down interest rate is set as the same as the creditor would receive if it could foreclose and reinvest the proceeds in loans of equivalent duration and risk. Koopmans v. Farm Credit Servs., 102 F.3d 874, 875 (7th Cir. 1996). Another permutation on this approach is to examine the rate that the debtor would pay outside of bankruptcy to obtain a loan on terms comparable to those proposed in the Chapter 11 plan.

Presumptive Contract Rate Approach. Under this approach, the court begins with the pre-bankruptcy contract rate. This rate then creates a rebuttable presumption that either the creditor or the debtor can counter by persuasive evidence that the current rate should be different. In re Smithwick, 121 F.3d 211, 214 (5th Cir. 1997).

What is the guiding principle behind all of these approaches? Bankruptcy courts generally take the position that in reviewing reorganization and cramdown issues, it is important to balance the interest of the creditor in obtaining protection and compensation, while at the same time, setting an interest rate that is consistent with the fresh start offered by bankruptcy. There should be some consistency in approaches. Bankruptcy courts have the power to modify interest rates. There should be objective economic analysis applied, that weighs the risks of default with the fresh-start objective of bankruptcy.

Starting with the national prime rate of interest makes good sense. The “prime” rate (in the view of the Till case, cited above) is the “national prime rate, reported daily in the press, which reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default.” Till, 124 S. Ct. at 1960. “A bankruptcy court is then required to adjust the prime rate to account for the greater nonpayment risk that bankrupt debtors typically pose.” Id.

But how should this “risk adjustment” be determined? There are several factors that need to be weighed. The interest rate should be high enough to allow the creditor some relief, but not so high as to torpedo the plan. As discussed in Till, the following factors are normally relevant:

  • Circumstances of the estate. This term is rather vague, but presumably means any factor or issue that will impact on the debtor’s ability to perform on the loan, or otherwise increase risk.
  • Nature of the security. This means specific things directly related to the security. Value, depreciation characteristics, and the debtor’s use of the collateral are some of these things.
  • Duration of the plan. Inflation and expected market volatility are typically factors here.
  • Feasibility of the plan. This would be the projected likelihood of success, that is, the debtor’s ability to perform the terms of the plan.

Regardless of the methods used, the setting of a cramdown interest rate is important in both Chapter 13 and Chapter 11 cases. In Chapter 13 cases, the issue may not come up with as much frequency as in Chapter 11 cases. This is because many jurisdictions already have procedures whereby “trustee’s discount rates” of interest may be used. However, even model Chapter 13 plan formats allow debtors to set their own rates. Chapter 11 cases typically allow more creativity (or freedom) in crafting interest rates that can assist in the success of a Chapter 11 plan.

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