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Presenting a live 90‐minute webinar with interactive Q&A
Acquiring Real Estate From a q gBankrupt Seller: Legal IssuesEvaluating Acquisition Options and Navigating Complex Bankruptcy Court Procedures
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, JULY 9, 2013
Today’s faculty features:
Ken Miller, Shareholder, Gorman & Miller, Santa Monica, Calif.
Joseph Bolnick, Of Counsel, Gorman & Miller, Santa Monica, Calif.
David K. Gottlieb, National Partner, Crowe Horwath, Los AngelesDavid K. Gottlieb, National Partner, Crowe Horwath, Los Angeles
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ACQUIRING REAL ESTATE FROM A BANKRUPT SELLER: LEGAL ISSUESBANKRUPT SELLER: LEGAL ISSUES
WebinarJuly 9, 2013
Panelists:Panelists:
Ken MillerGorman & Miller
Joseph Bolnick Gorman & Miller
David GottliebCrowe Horwath LLPGorman & Miller
Gorman & [email protected]
Crowe Horwath LLP [email protected]
U S CBMS ISSUANCEU.S. CBMS ISSUANCE(in billions)
Source: CRE Finance Council
6
HYPO: Debtor – who has just filed bankruptcy owns commercial property encumbered by a- owns commercial property encumbered by a
senior mortgage loan with a balance of $40 million and a junior mortgage loan with amillion and a junior mortgage loan with a balance of $2.5 million. The Debtor, the Senior Lender and Junior Lender are all unrelated. Your client, an investor, wishes to acquire the Property and learns that the Senior Loan may b f lbe for sale.
7
Property owner files bankrutpcy
NOYES
Does Senior obtain relief from
the automatic Property is sold at foreclosure to
bankrutpcy.
NO
NOYES
stay?
Is Property included in a
Plan of Reorganization?
at foreclosure to the highest
bidder.
YESNO
NO
YES
Do outstanding mortgage
balances exceed the expected sale price?
Does Plan call for the sale of the Property?
YES p
Sale is exempt from transfer tax under the
Bankruptcy Code so long as the sale occurs after
confirmation and "pursuant to the Plan".
Property is NOT sold.
No lien stripping is required. Senior and Junior are paid in full with sale proceeds at
closing.Can the Trustee satisfy the
requirements for a
YES
NO
requirements for a "free and clear" sale
under Section 363(f)?
Trustee abandons the Property to the debtor
subject to the liens.
Property is sold "free and clear" of the liens. Proceeds are paid first to the lienholders in order of priority
with any balance to the estate.
8
Obtaining Relief from the StayGoverned by Section 362(d) of the Code Typically:Governed by Section 362(d) of the Code. Typically:Inadequate equity cushionSingle asset real estate where debtor fails to either (a) timely file a plan of reorganization having a reasonable possibility of being confirmed within areasonable possibility of being confirmed within a reasonable time or (b) timely commence monthly payments meeting certain specified criteriapayments meeting certain specified criteriaBankruptcy filing is a party of a scheme to defraud creditorscreditors
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Foreclosure and Title InsuranceForeclosure and Title Insurance•Surviving coverage under ALTA Lender’s Policy: “coverage … shall continue in force after acquisition of the Title by anshall continue in force…after acquisition of the Title by an Insured”. (Condition 2. ALTA 2006). Coverage is limited to the unpaid loan balance plus interest, foreclosure expenses and
t ti d Th li d t d f t i thprotective advances. The policy does not cover defects in the foreclosure process.
•Trustee’s Sale Guarantees Foreclosure Guarantees and•Trustee s Sale Guarantees, Foreclosure Guarantees and Litigation Guarantees generally provide the name and address of the current owner of record, other lienholders and parties
i d b l t b tifi d f t t ’ l d irequired by law to be notified of a trustee’s sale or named in a judicial foreclosure. They insure the lender and trustee, if applicable, against loss arising from any errors in such pp , g g yinformation.
10
Section 363 Sales – Statutory Requirementsy qSection 363(b)(1) of the Bankruptcy Code provides that “The trustee, after notice and a hearing, may use, sell or lease…property of the estate.”
Under Section 2002(a)(2) of the Federal Rules of Bankruptcy P d th U it d St t T t d ll dit dProcedure, the United States Trustee and all creditors and indenture trustees must receive at least 21 days’ notice of a 363 Sale unless the court orders otherwise. The notice must “include the time and place of any public sale, the terms and conditions of any private sale and the time fixed for filing objections ”objections.
Lienholders may credit bid “unless the court for good cause orders otherwise”. (§363(k)) Credit bidding juniors must ( ( )) g jinclude sufficient cash to payoff the senior liens.
11
Asset Purchase Agreement with Stalking HorseBreak-up fee?Procedures for overbidsProcedures for overbidsAllocation of closing costsPurchase Price and required depositWhether mortgages will be assumed, stripped or paid off. Closing conditions: bankruptcy court approval, title insurance, etc.“Free look” due diligence periodg pRepresentations and warranties?
12
Bankruptcy Court ApprovalTime Line:Time Line:Stalking Horse and Trustee sign Asset Purchase AgreementAgreementHearing on Motion for approval of the Bidding P d d b k fProcedures and any break-up feeBidders perform due diligence and submit marked up A t P h A tAsset Purchase AgreementsAuction Hearing on Motion for approval of the Sale, which may include a Free and Clear OrderClosing of the sale to the winning bidder
13
Lien Stripping – Section 363(f)“The trustee may sell property … free and clear of
any interest in such property of an entity other than the estate only ifthe estate, only if -
(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;of such property free and clear of such interest;
(2) such entity consents;(3) such interest is a lien and the price at which
such property is to be sold is greater than the aggregate value of all liens on such property;
(4) h i t t i i b fid di t(4) such interest is in bona fide dispute; or (5) such entity could be compelled, in a legal
or equitable proceeding to accept a moneyor equitable proceeding, to accept a money satisfaction of such interest.”
14
Section 363(m) – Protection of Good Faith Purchaser
According to the Senate Report on Section 363, this subsection “protects good faith purchasers of property sold under this section from a reversal on appeal of the sale authorization, unless the authorization for the sale
d th l it lf t d di l Thand the sale itself were stayed pending appeal. The purchaser's knowledge of the appeal is irrelevant to the issue of good faith ”issue of good faith.A notice of appeal must be filed within 10 days of the date of the entry of the judgment order or decreedate of the entry of the judgment, order or decree appealed from. (Federal Rules of Bankruptcy Procedure, 8001-8002), )
15
Clear Channel CaseFacts: Senior Lender had a $41 million mortgagethat was in default. Borrower filed bankruptcy on thep yeve of the Senior’s foreclosure Sale. Junior Lenderhad a $2.5 million mortgage. Senior entered intoAsset Purchase Agreement as stalking horse buyerand agreed to pay Trustee an $800,000 “Carve-OutPayment” When there were no overbids the SeniorPayment . When there were no overbids, the Seniorcredit bid its $41 mortgage. The court approved thesale “free and clear” of the Junior mortgage. Thesale free and clear of the Junior mortgage. The“sold-out” Junior received no proceeds; the Trusteereceived the Carve-Out Payment which it used topay its fees and those of its professionals.
16
The AppealThe Junior appealed without seeking a stay. On appeal, the 9th Circuit
BAP held:
1 It affirmed the order allowing the Carve-Out Payment to be made to the1. It affirmed the order allowing the Carve-Out Payment to be made to the Trustee reasoning that the Carve-Out Payment was “physically and logically isolated” from the Senior’s obligation to pay the purchase price of the Property. (Section 506(c) permits payment of reasonable costs of p y ( ( ) p p ydisposing of the property. What about the trustee’s fee? Compare SPM Manufacturing Corp v. Stern, 984 F. 2d 1305 (1st Cir. 1992) with In re Goffena, 175 BR 386 (D. Mon. 1994))
2. Section 363(m) does not apply to the lien stripping order so that reversal of the lien stripping order binds the Buyer even in the absence of a stay.a stay.
3. Section 363(f)(3) allows lien stripping only when the unpaid balance of the liens is less than the sale price.
4. Remanded to “allow the parties to attempt to identity a qualifying proceeding” satisfying Section 363(f)(5). (391 B.R. 25 (2008))
17
Judicial Reaction to Clear Channel WIDESPREAD CRITICISM WIDESPREAD CRITICISM
a. Re 363(m) ruling
b Re 363(f)(3) rulingb. Re 363(f)(3) ruling
c. Re 363(f)(5) ruling
COURTS HAVE GENERALLY DECLINED TO FOLLOW COURTS HAVE GENERALLY DECLINED TO FOLLOW 363(m)HOLDING
a 6th Circuit In re Nashville Senior Livinga. 6th Circuit – In re Nashville Senior Living
b. 8th Circuit – U.S. v. Asset Based Res. Grp.
9th Ci it I Th I l tic. 9th Circuit – In re Thorpe Insulation
d. EXCEPTION – In re Lehigh Coal
Senior Lender’s foreclosure remains viable as a qualifying proceeding under Section 363(f)(5) to strip junior liens.
18
Closing Considerations in 363 Sale – Part 1Closing Considerations in 363 Sale – Part 1•Prepayment penalties. An over-secured lender is entitled to “reasonable fees costs or charges provided for under” its loanreasonable fees, costs, or charges provided for under its loan documents. (Section 506(b)) Most cases engage in a state law liquidated damages analysis: is the prepayment penalty a
bl i ti f L d ’ l ? Yi ldreasonable approximation of Lender’s losses? Yield Maintenance Penalties (YMP) are generally approved in the Second Circuit (See, e.g., In re Financial Center Associates, ( g140 BR 829 (Bankr. E.D.N.Y. 1992); but may be invalidated in other circuits, particularly where projected interest shortfalls are not discounted to present value (See e g In re Kroh Bros 88not discounted to present value. (See e.g., In re Kroh Bros., 88 BR 997 (Bankr. W.D. Mo. 1988) and In re Skyler Ridge, 80 BR 500 (Bankr. C.D. Cal. 1987) rejecting YMPs which did not di t t t l )discount to present value).
19
Closing Considerations in 363 Sale – Part 2Title Insurance without title affidavits. (Applies also to sales under a plan.) California style closing to eliminate necessity of a GAP Indemnity if necessaryGAP Indemnity, if necessary.
Transfer tax. Federal exemption does not apply, but state exemption might apply (E g in N J no transfer tax on anyexemption might apply. (E.g., in N.J., no transfer tax on any deed from a “trustee in bankruptcy or liquidation” (N.J. Stat. §46:15 -10(g))
Due Diligence Review. The stalking horse bidder will typically be able to perform a thorough due diligence review; bidders will have a more limited opportunity to perform due diligence due tohave a more limited opportunity to perform due diligence due to time constraints and the risk that they fail to win the auction.
Closing. If any liens are being stripped, then in jurisdictions notg y g pp , jexplicitly rejecting Clear Channel, closing should occur after thetime to appeal has expired without the filing of an appeal. 20
Sale of Real Property Pursuant to a Pl f R i tiPlan of Reorganization
Plan may provide for sale to be “either subject to or free of any lien”. (Section 1123(a)(5)(D))
Sale is exempt from transfer tax so long as the sale occurs ft Pl fi ti d “ t t th Pl ” (Fl idafter Plan confirmation and “pursuant to the Plan”. (Florida
Dep’t of Rev. v. Piccadilly Cafeterias, Inc., 554 U.S. 33 (2008))
Cramdown plan may not provide for sale of property “free andCramdown plan may not provide for sale of property free and clear”of liens without allowing lienholders to credit bid. See RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct 2065 182 L Ed 2d 967 (2012)Ct. 2065, 182 L.Ed.2d 967 (2012).
Typically, the sale is conducted without court supervision.
Prospective buyers typically are able to perform a relatively thorough due diligence review.
21
