Bankruptcy and the Automatic Stay: What Does It Mean and How Does A Lender Get Around It?

Bankruptcy and the Automatic Stay: What Does It Mean and How Does A Lender Get Around It? 

This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).
Although I can NOT quantify this statement, we're seeing more and more commercial real estate go into bankruptcy.  Of course, these typically do NOT involve CMBS loans; probably because those loans typically have a "non-recourse carveout" that brings personal liability to the individual sponsor, key principal or owner of the borrower, if the borrower files for bankruptcy.  So, unless that person's financial condition is independently insolvent, the individual owners "behind" commercial property (that is financed with a CMBS loan) generally strive to avoid bankruptcy. 
But then, during the '04 to '07 "hot" production years, there seemed to have been a tendency to even NOT require an individual to be personally liable for this topic.  Instead, the non-recourse carveout party was an entity (such as the operating company).  So, these types of CMBS loans will be like bank loans to entities, or any loan that doesn't have an individual with liability upon a bankruptcy filing: bankruptcy is a viable option.   (I know, I know:  . . . then there is the General Growth Properties bankruptcy filing - but that case is a topic beyond the scope of this posting.)
In any event, we're seeing an up-tick in bankruptcy filings involving commercial real estate owners. So, our FAQ series will focus on some common bankruptcy questions.
FAQ #42 -  What happens if the borrower files bankruptcy?

• Upon a borrower's filing of bankruptcy, an automatic “stay” immediately takes effect. The automatic stay prohibits all actions that may be taken against a borrower or its assets. This effect increases the costs and fees and dramatically delays a lender from foreclosing on the loan's collateral.
• Here is a glossary of helpful terms used in bankruptcy.

FAQ #43 - How can Lender (servicer) proceed in spite of the “automatic stay”?

• The lender as a secured creditor, may file a request with the court for relief from the prohibition of the automatic “stay”.
• In a Chapter 7 case (look at the glossary [above] for a definition), a secured creditor will likely want to file a lift stay motion as early case as possible in order to obtain stay relief as quickly as possible.  A stay relief motion may require at least twelve to thirty days' notice.  Therefore, if a secured creditor wants to obtain stay relief to pursue repossession or foreclosure, it is important that it file a motion for stay relief as early as possible to avoid any further delay.
• Occasionally, a secured creditor is able to negotiate with the Chapter 7 Trustee to reach an agreement whereby the Trustee will administer the secured creditors' collateral in exchange for a portion of the proceeds of such collateral to be distributed to unsecured creditors