Foreclosing on a LLC borrower who has filed for bankruptcy?

Question

The scenario is the following:

as a private lender, I have a 1st lien on a property (in washington dc) to a borrower who is an LLC - and unable to make payments.  I am going thru the non-judicial foreclosure process to recover the property. The LLC filed for bankruptcy and the owner is blocking recovery of the property. Is there any recourse to reduce the risk for this type of scenario in the future - i.e. thru other protections (e.g. personal guarantees, cross collateralization, etc.) Thank you in advance for your replies.

Joel Owens · Answer

Is it a BK attorney? General practitioner? Commercial attorney? Residential? Real estate litigation attorney?

How much of their practice is made up of the problem you are experiencing? I generally do not like GP attorneys because they are not specialists.

When a BK is filed there is an automatic stay that is created if property is included in the filing. During that time you may not contact the borrower or it is considered a collection activity and a violation of the stay order.

If the borrower initiates contact with you that is a different situation but even then banks most times will not want to discuss the property with the borrower while the protection is in order. Too  much potential liability on their part for something to go wrong even though the borrower initiated contact during the stay.

From the time of the filing there is the meeting of the creditors. During this time your attorney can object to the property being included in the plan.

If the objection is denied then you have to wait for the conformation hearing. If the bankruptcy trustee sees the repayment plan as sound for a re-organization then they will recommend to go forward with the conformation hearing.

You can still try to file during the plan for relief of stay.

If your attorney is not well versed in corporate bankruptcy you might want to at least consult with another specialist attorney on the side to work in tandem with yours for actions and ideas on how to best handle and present you with a best and worst case scenario for money and timeline to resolve so you can know what to expect.

No legal advice given.

Russell Brazil · Answer

One quick thing I would like to ask if if the property is a condo. If it is....you want to make sure the condo fees are paid by you the lender. Condo boards have the ability to wipe out a lenders first lien priority in DC. So just be aware of that.

Jerry W. · Answer

@Sanjay Patel you need an attorney who specializes in BK.  Part of this depends on whether they filed a liquidation bankruptcy or a reorganization bankruptcy.  Chapter 7 in liquidation, I think 11 or 13 is corporate reorganization.  First are you still receiving payments?  If not that is very important.  The document I normally see filed is a Petition For Relief From Stay.  It would in effect remove the property from the automatic stay.  If they are reorganizing you may have to wait to see the creditors payment plan.  You should be under secured creditors.  Normally a bankruptcy court cannot reduce your principal owed and sometimes not your interest owed if you are over secured.  They may claim you are under secured and try a cram down.  The best way to fight those I have done are argue their valuation and offer to buy the asset well above their appraisal price or get an appraisal of your own.  It is truly important to get an attorney who knows bankruptcy law.

I have filed and litigated one or 2 but it has been at least 12 years or more ago.  My practice has changed since then.  Whatever you do, do NOT miss a filing deadline.  That is why a good BK attorney is important.  I would also show up at the creditors meeting and ask the creditor under oath questions about their solvency and the treatment of your property.  Good Luck.

Sanjay Patel · Answer

thank you everyone! I have an attorney but he says there isnt much that can be done when bankruptcy is filed.

Matthew Kreitzer · Answer

Yes, there are a number of contractual protections and bankruptcy protections a businessman can incorporate into their contracts through consultation with an experienced bankruptcy attorney turned real estate attorney. I would turn to such a professional at this time to avoid such future risks.

Jeff B. · Answer

:grin:  it's known as a "Protection Order" - - protection for he bank :sigh:

Ned Carey · Answer

You can file to get the property released from the foreclosure because it is security for a loan. I don't know the process and I don't know if it depends on the type of bankruptcy. However when you look at bankruptcy cases you see bank apply for release from stay all the time.  Of course our foreclosure attorney should know how to do this.

Foreclosing on a LLC borrower who has filed for bankruptcy?

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