24: Relief from stay
© Charles Tabb 2010
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 $
Grounds 362(d)(2)
• 1st – Dr has no equity in the property
AND
• 2nd – property is not necessary to an effective
reorganization
Two parts to 2nd ground
• Under 362(d)(2)(B), courts have interpreted the
“not necessary to an effective reorg” ground as
having 2 distinct elements:
• 1st, that DIP in fact NEEDS this collateral if it is
to be able to reorganize – the “necessary” part
• 2nd, regardless of need, that a reorg is
FEASIBLE – the “effective” part
Burdens of proof
• SP has B/P on no equity
• DIP / Tee has B /P on necessity for effective
reorganization
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
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
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)
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
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
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??
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?
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
362(d)(2)(B): Necessity
• 1st 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?
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
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
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
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
Timing matters
• Reality also is that early on in case (and especially during 1st 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??”
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
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!!
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”
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=18
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
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”
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
(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
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
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
“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.”
Key elements of definition
• 1st: real estate that is “single property or
project”
• 2nd: “generates substantially all of the gross
income of a debtor”
• 3rd: “on which no substantial business is
being conducted by a debtor other than the
business of operating the real property and
activities incidental thereto”
2 exclusions
• 1st, Residential real estate with less than 4 units
▫ E.g., a triplex
• Family farmer
Pre-2005
• Also had a $4mm debt ceiling
• Repealed 2005, so no debt limit
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
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
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