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CRE Finance World, Summer 2013

Negotiating a Favorable Cash Collateral Order. Under the Bankruptcy Code, the debtor cannot use a secured party’s “cash collateral” (e.g., rents derived from improved real property subject to a mortgage or deed of trust with an assignment of rents clause) without the lender’s consent unless a court orders after notice and a hearing. This order is called the “cash collateral order.” For the debtor to use cash collateral, the debtor must assure the creditor that the collateral will not decline in value during the course of the bankruptcy, also known as giving the lender “adequate protection.” Because the debtor will normally want to use the lender’s cash collateral to operate its business as soon as possible, this statutory rule incentivizes the debtor to negotiate with the lender and creates an opportunity for the lender to obtain benefits and protections to which it is not otherwise entitled. CRE Finance World Summer 2013 76 Section 363 Sales. 11 U.S.C. § 363 of the Bankruptcy Code permits the debtor to sell assets “free and clear” of the lender’s lien if the lender consents to the sale. To approve a 363 sale, the bankruptcy court must determine whether the sale constitutes the highest and best offer, that terms and conditions of the sale were negotiated at arm’s length, that the sale is in the best interest of the bankruptcy estate and its creditors and that the purchaser and the sale itself is being conducted in good faith. If these factors are met, but the proceeds are not enough to pay the secured creditors in full, the sale cannot be approved over the objection of the creditor, unless there is nonbankruptcy law that is applicable and could force the creditor to accept the sale. Plan of Reorganization. For Chapter 11, a plan of reorganization typically must be confirmed by the bankruptcy court before the case can be brought to a successful close. Even if the plan is not accepted by all impaired classes of claims and interests, the court may confirm the plan as long as it is (among other things) “fair and equitable.” In the case of a class of secured claims, a plan that provides for deferred cash payments of a value at least equal to the value of the lender’s collateral (which may be less, perhaps far less, than the total amount of the lender’s claim) may be deemed “fair and equitable” for this purpose. This is sometimes referred to as a “cramdown” plan. Given the uncertainty here, both the debtor and the lender have an incentive to negotiate with one another to settle prior to the plan confirmation hearing the terms and conditions under which the lender will vote in favor of the debtor’s plan of reorganization. Lender’s Exit Strategy. A bankruptcy filing can significantly alter the rules affecting loan recovery efforts, so it is key for the lender to develop its “exit strategy” as soon as reasonably practicable. This strategy may include restructuring the terms of the loan pursuant to a plan, negotiating a sale of assets in a “free and clear” sale under Section 363 of the Bankruptcy Code or pursuant to a plan, with the net sale proceeds being used to pay down the loan, filing a motion with the bankruptcy court to lift the automatic stay permitting the lender to foreclose on its collateral or a combination of the above. In the past, all too many lenders assumed a bankruptcy filing severely limited their options, or at least suspended them for a potentially long time while the bankruptcy action was pending. The lender need not be a passive observer, however, since its cooperation or consent will still be required in the bankruptcy setting. As discussed above, the lender can use the bankruptcy code strategically to obtain favorable cash collateral orders in addition to being an integral part of the drafting of the plan of reorganization that is ultimately confirmed. In conclusion, with CRE debt maturities set to swell over the next five years, the use of receiver and bankruptcy will continue to play an important part in the mending of CRE markets. An informed lender or special servicer needs to be well versed in both receivership and bankruptcy basics — as well as all of the available workout tools — to effectively maximize the ultimate loan recovery. David Wallace is the general counsel, and Kelley McLaren is the managing director of receivership services at Trigild, a San Diego-based real estate services firm specializing in property management and receivership/ bankruptcy services. A Bankruptcy and Receivership Overview “The use of both receivers and bankruptcy will continue to play an important part in the mending of CRE markets.”


CRE Finance World, Summer 2013
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