1. 24: Relief from stay © Charles Tabb 2010

2. 362(d)(2) Assuming SP adequately protected, 362(d)(1) ▫If not A/P, stay relief no matter what Estate STILL has to demonstrate a bankruptcy reason why it needs the collateral – why interfere with SP’s non-bk rights ▫Sorry Scalia Bankruptcy reason? Either: ▫Need to use collateral in business (most common) ▫Or, can sell and make some $

3. Grounds 362(d)(2) 1 st – Dr has no equity in the property AND 2 nd – property is not necessary to an effective reorganization

4. Two parts to 2 nd ground Under 362(d)(2)(B), courts have interpreted the “not necessary to an effective reorg” ground as having 2 distinct elements: 1 st, that DIP in fact NEEDS this collateral if it is to be able to reorganize – the “necessary” part 2 nd, regardless of need, that a reorg is FEASIBLE – the “effective” part

5. Burdens of proof SP has B/P on no equity DIP / Tee has B /P on necessity for effective reorganization

6. How grounds show bankruptcy need The “no equity” ground: ▫If Dr does have equity, then the estate rep could SELL the collateral and capture that equity for the benefit of unsecured crs, and still pay off SP in full The “not necessary for effective reorg” ground: ▫If Dr has chance to reorganize under ch 11, and it needs this collateral to do so, keeping the property (and paying SP A/P) furthers reorganization goal

7. SP has to win both to get relief For the SP to get stay relief under 362(d)(2), it has to prevail on BOTH the “no equity” and the “necessary for effective reorg” grounds b/c either one could benefit the estate And remember that SP ALWAYS must be A/P under 362(d)(1), so in theory at least won’t be harmed

8. Lack of equity Compute from viewpoint of estate, not from that of moving Cr Total up ALL liens and compare property value Reason is that are trying to determine if estate would get any $ if it sold the collateral and paid off all the liens (not just the lien of movant Cr)

9. How value collateral? In ch 11 business reorg case, value under 506(a)(1) and Rash “proposed disposition or use” is that Dr is keeping collateral, but the PURPOSE of the valuation is to determine whether estate would capture any $ over and above liens if SOLD the property ▫So arguably should use liquidation value

10. Valuation, cont. If a chapter 13 case, if is personal property collateral, will be stuck with valuation under 506(a)(2) (which requires some version of REPLACEMENT value) – ▫even though the purpose of the valuation is what would estate get if sells collateral, which means should use liquidation value

11. Valuation, cont. If chapter 7 case, the ONLY issue under 362(d)(2) will be equity (under (d)(2)(A)), b/c by definition the “necessary to an effective reorg” ground under (d)(2)(B) could never apply Again, if individual Dr, and personal property, stuck with 506(a)(2) replacement value ▫Which is absurd – certain will SELL property Which actually HURTS SP here, b/c it makes it harder for it to get stay relief ▫HELPS SP in the A/P calculus (b/c start with higher value) – but why would Tee want to keep the collateral??

12. Problem 7.3 Facts: ▫Property value = $120K ▫Liens:  Creditor One = $90K  Creditor Two = $40K ▫Creditor One moves for stay relief ▫Is 362(d)(2)(A) satisfied?

13. Answer 7.3 YES – hold Dr has “no equity” Total of the two liens (90 + 40) > Value (120), thus if estate were to sell the Property, it wouldn’t get anything – would all go to the lienholders ▫Even though CR One has equity (120 vs 90) ▫And even though One would be A/P under 362(d)(1) by that cushion

14. 362(d)(2)(B): Necessity 1 st prong of 362(d)(2)(B) is that the property at issue must be “NECESSARY” to an effective reorganization i.e., the issue is, IF the DR is going to be able to have a realistic chance to reorganize, do they need this particular item of property?

15. Necessity, cont. Almost ALWAYS find necessity Courts defer to DIP’s business judgment ▫Dr must think IS necessary, or would not resist SP’s stay relief motion In theory though is possible not necessary ▫Fungible item (e.g., oil derricks early 1980s) ▫Investment property

16. 362(d)(2)(B): Feasibility In almost all the cases, the fight under (d)(2) is whether the DR has a “ reasonable possibility of a successful reorganization within a reasonable time ” (per the dictum in Timbers) That is, the issue is whether a reorg is FEASIBLE ▫Stay relief motion is often an early test

17. Even appropriate to ask? Judge Mabey in Koopmans argued (quite convincingly) that Congress did not intend to use 362(d)(2)(B) as a mechanism to test feasibility of the case That should only be done under 1112(b) on a motion to dismiss or convert to 7 ▫Procedurally, note that a 1112 motion has to be served on all crs, while stay relief is just btwn DIP & SP – yet could have externality of killing off case

18. Timbers dictum settled For good or ill, though, the Timbers dictum re “reasonable possibility” etc effectively settled the Q – reality is that bk courts do ask the feasibility question at a stay relief hearing

19. Timing matters Reality also is that early on in case (and especially during 1 st 4 months when DIP has the exclusive right to file a plan), the bar for DIP to show feasibility is really, really low – just have to make up something remotely plausible – give them chance BUT after that the court will become a LOT more stringent – ▫Which is why strategically from SP’s perspective it makes a lot of sense to bring a stay relief motion right away – even though you know you’ll lose – b/c you put the DIP before the judge and make them say something ▫And then 6 months later bring a renewed motion and ask, “so how’s that plan going??”

20. One way to win for sure There is one way a SP can for sure prevail under 362(d)(2)(B), even early in the case – show that the plan the DIP is putting forward is legally UNCONFIRMABLE w/o SP’s consent ▫i.e, under the plan confirmation rules (1129(a) & (b), if what the DR is telling the CT that it’s plan will be could be vetoed by the SP – then SP can win now ▫No reason to postpone the inevitable

21. Nature of proof Some concrete evidence of actual and realistic reorganization prospects ▫More than vague hopes & dreams Make a legitimate business case, with documentation, financials, market analyses, etc. ▫Akin to sort of evidence business would have to present to bank if were trying to get a business loan ▫“Due diligence” Doesn’t have to be overwhelmingly conclusive – but it has to at least pass the laugh test!!

22. Pegasus Facts: ▫Pegasus owned investment real estate – 6 parcels ▫Hochman was Pres and sole SH ▫Davenport Property – 6-acre beachfront parcel ▫Defaulted, foreclosure sale set, DR filed 11 to stay ▫Grammas owned beach club contiguous – purchased the SP’s rights vs DR ▫Grammas moved for relief from stay 362(d)(2)  Agreed no equity  not contest “necessity” (could have? – just investment)  So sole issue is whether Dr’s plan had “any reasonable prospect of success”

23. The site http://maps.google.com/maps?f=q&source=s_q &hl=en&geocode=&q=560+davenport,+new+ro chelle,+ny&sll=37.0625,- 95.677068&sspn=49.71116,79.013672&ie=UTF8 &hq=&hnear=560+Davenport+Ave,+New+Roch elle,+Westchester,+New+York+10805&ll=40.89 3862,- 73.775868&spn=0.00292,0.004823&t=h&z=18http://maps.google.com/maps?f=q&source=s_q &hl=en&geocode=&q=560+davenport,+new+ro chelle,+ny&sll=37.0625,- 95.677068&sspn=49.71116,79.013672&ie=UTF8 &hq=&hnear=560+Davenport+Ave,+New+Roch elle,+Westchester,+New+York+10805&ll=40.89 3862,- 73.775868&spn=0.00292,0.004823&t=h&z=18

24. Proposed plan Subdivide 6-acre property into btwn 8 and 18 lots Build 3,000 sq. ft. residential homes on each lot ▫Project building cost $75-80 sq ft –from magazine! Sell for $600K each ▫Whether 8 (on ¾ acre) or 18 (on 1/3 acre)! ▫No market evidence Site improvement cost $800K ▫Whether 8 or 18 lots; no breakdown in Make profit between $2.2 & $5.95 MM

25. Legal test? Hold? Test: “any reasonable prospect of success” “ the straight-face test” Hold: Not show feasibility ▫“unfounded assumptions and dubious calculations rendered it entirely unreliable” ▫“entirely conjectural” ▫“shots in the dark”

26. SARE – 362(d)(3) – why? Added 1994 Deal with “single asset real estate” case –e.g., DR (often ltd pship) has a single asset (e.g. apartment complex) & only dispute is with secured lender If SP undersecured, but value of realty stable, under Timbers SP got nothing during case – DR could wait the SP out – leverage to agree to unfavorable plan

27. (d)(3) makes DR “pay to delay” Assuming property = “SARE” Dr MUST do one of two things to keep stay: 1. File a feasible reorg plan within 90 days ( or time extended for cause ): “reasonable possibility of being confirmed within a reasonable time” Or 2. start making monthly interest payments to SP ▫Based on value of lien (e.g., collateral value) ▫Rate of interest = applicable nondefault K rate  Directly overrides the Timbers outcome

28. How matters – Larry Goodwin Golf If NOT = SARE, then DR only has to make monthly A/P payments to SP = $4,000 If Dr IS = SARE, then must make monthly interest payments to SP = $6,793 ▫So much higher b/c must make payments based on K rate on value of collateral

29. Fighting issue – SARE? In the cases, the fighting issue is almost always whether the Dr is, or is not = SARE If it is, the consequences are clear ▫And Dr almost always does not want to, or perhaps is not even able to, make the higher interest payments

30. “SARE” Definition 101(51B): ▫“means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.”

31. Key elements of definition 1 st : real estate that is “single property or project” 2 nd : “generates substantially all of the gross income of a debtor” 3 rd : “on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto”

32. 2 exclusions 1 st, Residential real estate with less than 4 units ▫E.g., a triplex Family farmer

33. Pre-2005 Also had a $4mm debt ceiling Repealed 2005, so no debt limit

34. Big issue: other “substantial business” If the Dr is making virtually all of their money from the operation of the real estate itself, then is paradigmatic SARE Classic example: ▫DR ltd pship owns an apartment complex, or an office building ▫Income flow = the rents generated by that property

35. Larry Goodwin Golf – the hard case Larry Goodwin Golf is typical case where is a tougher call for court to make Dr’s sole asset is “Uwharrie Golf Club” – golf course, pro shop, driving range, swimming pool, also adjacent land for sale

36. Held: Not SARE Court held that was NOT = SARE Said that running the golf course, pool etc was the operation of a substantial business other than just holding the real property to generate income Relied on hotel cases, marina case