CRE Lenders Might Not Like How Bankruptcy Courts Treat Them During the Coronavirus

Published: 2024-01-18, Updated from "CRE Lenders Might Not Like How Bankruptcy Courts Treat Them During the Coronavirus" (April 21, 2020)

With the unprecedented economic fallout of the COVID-19 pandemic still lingering, commercial real estate (CRE) lenders face a new reality: a surge in Chapter 11 bankruptcies among property owners. But understanding how bankruptcy courts will treat them in this unique landscape is crucial.

Beyond Business as Usual: Recognizing the Exceptional Circumstances

The drafters of the bankruptcy code couldn't have envisioned the current economic maelstrom. Unlike typical market downturns, the pandemic's impact is widespread and indiscriminate, leaving even well-managed properties struggling. Bankruptcy judges are aware of this context and are likely to handle cases accordingly.

Challenges for Lenders: Foreclosure vs. Equitable Solutions

Lenders often seek relief from the automatic stay, allowing them to foreclose on defaulted properties. However, judges are scrutinizing such requests more closely. Factors like:

• Negative equity cushion: If the property's value is already below the loan amount, demanding "adequate protection payments" might hinder the debtor's reorganization efforts.

• Fair market valuation: Determining the property's true value in a volatile market is tricky. Should it be based on the current depressed state or a future projection of recovery? Judges will likely consider a nuanced approach.

• Alternative solutions: Bankruptcy proceedings are meant to preserve value. Judges may favor solutions like restructuring or mediation over immediate foreclosure, especially if they benefit all stakeholders.

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Lessons from Past Crises: Judges as Social Workers, Financiers, and Lawyers

Similar to situations like 9/11 and the 2008 financial crisis, bankruptcy judges will exercise their equitable powers to find fair solutions within the legal framework. They understand the limitations of the code and can navigate legal precedents while considering current realities.

Recent Examples: Judges Showing Flexibility and Wisdom

Early pandemic cases have already showcased this flexible approach. Some judges temporarily suspended Chapter 11 proceedings when circumstances were beyond the debtor's control, recognizing the pandemic's exceptional circumstances. Others denied lender relief requests when it disproportionately benefited one party over others.

These instances demonstrate a judiciary that prioritizes fairness and seeks solutions that work for all involved. This message, if received by lenders, could encourage them to seek collaborative solutions instead of aggressive foreclosure tactics.

Conclusion: A Calibrated Approach for Lenders in Troubled Times

The pandemic has fundamentally altered the landscape for CRE bankruptcies. Lenders who recognize this and adjust their approach accordingly will be better positioned to navigate these unprecedented waters. Understanding the evolving role of bankruptcy judges, their focus on equity and alternative solutions, and their willingness to adapt to extraordinary circumstances is key to finding workable solutions that benefit all parties involved.

About the Author:

Kenneth A. Rosen, Chair of the Bankruptcy, Financial Reorganization & Creditors’ Rights Department at Lowenstein Sandler LLP, brings extensive experience in Chapter 11 reorganizations, out-of-court workouts, and financial restructurings across diverse industries. The views expressed are his own and may not reflect the firm's position.