But what if a debtor makes the interest-only payments for a few months until it can file a confirmable plan and then cease to make the interest payments? This article posits that a debtor must continue to make interest payments once it elects to extend the automatic stay by making the required interest payments if the debtor wants to keep the automatic stay in place. The filing of a bankruptcy petition automatically acts as an injunction against certain actions against the debtor or the estate’s legal or equitable interests in the debtor’s assets. For example, if a debtor files for bankruptcy to stop the foreclosure of real property, this injunction — known as the automatic stay — precludes the lender’s commencement or continuation of the foreclosure proceeding.1 Normally, the lender must obtain court approval to commence or continue the foreclosure proceeding by filing a motion for relief from the automatic stay.2 The court must grant relief from the automatic stay if the lender can establish two alternative circumstances. First, if the lender can establish that “cause, including the lack of adequate protection” in the collateral exists.3 Second, the lender can establish that the debtor (a) lacks equity in the collateral and (b) the collateral is not necessary for an effective reorganization.4 This article, however, deals solely with the provision that governs relief from the automatic stay in SARE cases, which is set forth in Section 362(d)(3). A SARE case is defined under the Bankruptcy Code to mean: “Real property constituting a single property or project, other than residential real property with fewer than four 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 thereto.”5 A debtor can designate a case as a SARE case on its bankruptcy petition, or a creditor can move the court to designate the case as a SARE case. The distinction is important, as SARE cases are on an expedited timeframe. Secured creditors in cases designated as SAREs are afforded special protections under the Bankruptcy Code. Under Section 362(d)(3)(B), secured creditors are afforded “an express entitlement to receive payments of contractual interest from the debtor” after the first 90 days.6 Section 362(d)(3) further requires the court to grant a secured creditor relief from the automatic stay if the debtor fails to, within 90 days of filing its petition, (1) file a plan of reorganization with a reasonable likelihood of being confirmed within a reasonable time, or (2) commence making monthly interest payments at the applicable contractual, non-default rate.7 Section 362(d)(3) ensures that debtors cannot abuse the automatic stay while also “giving the debtor the opportunity to create a workable plan of reorganization within 90 days.”8 Congress’ adoption of Section 362(d)(3) limits “bankruptcy judges’ discretion to prolong a SARE case unless monthly payments have commenced” or the debtor has filed a plan.9 Ultimately, Section 362(d)(3) provides relief in those cases where a SARE debtor, with little hope of successfully reorganizing, delays the bankruptcy process “while secured creditors are left helplessly on the sidelines.”10 A debtor does not satisfy the requirements of Section 362(d)(3) by commencing monthly payments, halting such payments, and then filing a bankruptcy plan more than 90 days after the petition date. A bankruptcy court faced this same issue in In re 652 West 160th LLC.11 In that case, the debtor failed to file a bankruptcy plan within 90 days of the petition date. The debtor made one monthly payment that it alleged complied with the requirements in Section 362(d)(3)(B), but the bankruptcy court noted that “assuming arguendo that a timely payment was proffered, one interest payment made two months into the bankruptcy does not meet the statutory requirement of ‘monthly payments.’”12 The court concluded that the debtor in that case had already failed to file a reasonably confirmable plan within 90 days of the petition date, and its only option to satisfy Section 362(d)(3) was to make the interest-only payments. After failing to do so, the court determined the stay must be lifted. This is the correct result. It provides the debtor 90 days to file a confirmable plan or commence and continue to make interest-only payments while ensuring lenders are not “left helplessly on the sidelines.” Lindsay Doman and McKay Holley are attorneys at Spencer Fane and work within the firm’s Banking & Financial Services and Bankruptcy, Restructuring, & Creditors’ Rights practice groups. They can be reached at ldoman@spencerfane.com and mholley@spencerfane.com, respectively. 1. See generally, 11 U.S.C. § 362(a). 2. 11 U.S.C. § 362(d). 3. 11 U.S.C. § 362(d)(1). 4. 11 U.S.C. § 362(d)(2). 5. 11 U.S.C. § 101(51B). 6. In re Heather Apartments Ltd. P’ship, 366 B.R. 45, 49 (Bankr. D. Minn. 2007). 7. See e.g., Meruelo Maddux Properties-760 S. Hill Street, LLC v. Bank of America (In re Meruelo Maddox Properties, Inc.), 667 F.3d 1072, 1076 (9th Cir. 2012); In re BGM Pasadena, LLC, No. 16-03178-cas, 2016 WL 3212243 *6 (C.D. Cal. 2016) (discussing the standard for relief under § 362(d)(3)). 8. Id. (quotations omitted). 9. GPIF Aspen Club LLC v. The Aspen Club & Spa LLC (In re Aspen Club & Spa LLC), No. co-19-043, 2020 WL 4251761 at *5 (B.A.P. 10th Cir. July 24, 2020). 10. Leeward Subdivision Partners, LLC v. GDR Lending, LLC (In re Leeward Subdivision Partners, LLC), BAP No. ww-10-1060, 2010 WL 6259983 *4 (B.A.P. 9th Cir. June 11, 2010). 11. 330 B.R. 455 (Bankr. S.D.N.Y. 2005). 12. Id. at 462. The Show-Me Banker Magazine | 19
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