◀ Back    Trigild eTips What to do if the Debtor Files Bankruptcy

Question: We filed a motion to appoint a receiver, but the debtor filed for bankruptcy at the last minute. Now what?

Answer: If the filing had occurred when the receiver was already in place, your options would have been better. Nonetheless, all hope is not lost! In the past, lenders would often simply sit out the bankruptcy, expecting to re-start the foreclosure at a later date – but fortunately there are other solutions.

For example, you can try to have your proposed receiver appointed as a trustee in the bankruptcy, although this is not easily accomplished, and requires a number of special circumstances. Another option is to remove the assets (your security) from the bankruptcy court. Your counsel will file a "relief from stay" motion*, asking the court to remove the assets from the bankruptcy process, allowing your foreclosure action to proceed. But keep in mind that the court will require a very persuasive argument as to why the debtor should lose possession and the bankruptcy estate should relinquish the asset.

* For more on "Relief from Stay" see our January 2007 eTips.

Question: What makes a persuasive argument?

Answer: A variety of arguments suffice, but most can be condensed into two basic types: 1) The asset will suffer unreasonable harm and therefore a reduction in value by being held up in the bankruptcy process; or 2) The asset is of no actual value to the bankruptcy estate.

Using a hotel as an example, the loss of value could be caused by poor maintenance of the property, failure to keep up marketing efforts to maximize income, the potential loss of a valuable franchise, damage to the hotel’s reputation, and similar points. Since the property is in financial distress, some of these problems probably already exist. A simple non- payment of bills will not suffice, since that circumstance is the nature of all bankruptcies.

If the property is operational — such as a hotel or a restaurant — you can also prove that the property is losing value by demonstrating that it is unkempt, has safety hazards that need immediate attention, is losing market share from poor management, or that there are potential environmental risks. The more detailed the information you prepare — as proof that the debtor’s involvement with the asset endangers its value — the more likely you are to remove the asset from bankruptcy action.

Another argument, if the facts can be clearly shown, is more straightforward. If the asset has no value to the bankruptcy estate, there is no reason to maintain it as part of that estate. The proof is simple: your secured debt is a certain amount, and the value of that asset, if sold today, is less than that amount.

Question: So how can I obtain the necessary proof / information?

Answer: In the case of a hotel, potential harm or waste can be shown by an affidavit from a realtor, a property/business operator, a franchisor, and/or a variety of experts in the specific industry. Lack of value in excess of debt can be shown by typical methods of appraisal and analysis, but any asset with a business enterprise value should also be appraised by an expert in that business.

Your proposed receiver should also be expert in the kind of property/business involved, and ideally can assist your counsel.

So remember, there are viable alternatives when a debtor files for bankruptcy at the last minute. But in order to utilize them, you need to do careful research, prepare detailed information and most importantly, rely on savvy experts who are knowledgeable about the property type and/or the specific industry!

Legal Definitions

Bankruptcy: A statutory procedure by which a debtor obtains financial relief and undergoes a judicially supervised reorganization or liquidation of the debtor’s assets for the benefit of creditors; a case under the Bankruptcy Code

Foreclosure: A legal proceeding to terminate a mortgagor’s interest in property, instituted by the lender (the mortgagee) either to gain title or to force a sale in order to satisfy the unpaid debt secured by the property

Motion: A written or oral application requesting a court to make a specified ruling or order

Motion to lift the stay: A party’s request that the bankruptcy court alter the automatic bankruptcy stay to allow the movant to act against the debtor or the debtor’s property, as when a creditor seeks permission to foreclose on a lien because its security interest is not adequately protected. — Also termed motion for relief from stay

Black’s Law Dictionary (8th ed. 2004)

Trigild News

On February 8, 2008, Trigild’s President was named Receiver for a 230 room hotel in Dayton, OH. With only 12 hours advance notice, the Trigild receiver and hotel management team were able to file the receiver’s oath & bond, and be onsite at the hotel assuming control of the asset and its operations. The hotel is situated on 10.5 acres.

On January 15, 2008, Trigild became receiver and management company for a non-operational 94 room hotel in Kissimmee, FL. Trigild secured the asset and will protect it while a resolution is determined.