Zachary Rozycki
St. John's University School of Law
American Bankruptcy Institute Law Review Staff
Under section 362 of title 11 of the United States Code (the “Bankruptcy Code”), the filing of a bankruptcy petition results in an automatic stay that generally enjoins any creditor from taking any action against a debtor or its property.[1] The automatic stay is not permanent and may be terminated upon a showing of “cause.”[2] The automatic stay may also be terminated as to property if the debtor has no equity in the property and the property is “not necessary to an effective reorganization.”[3] Additionally, under section 362(d)(3), the automatic stay shall be lifted to permit a creditor to exercise its remedies as to single asset real estate, unless the debtor “has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time,” or has commenced monthly payments, within certain time constraints.[4] Under section 101(51B) of the Bankruptcy Code, a single asset real estate is generally defined to include a business that generates a substantial amount of its gross income from real estate.[5] In In re East/Alexander Holdings, LLC, a bankruptcy court in the Western District of New York granted a secured creditor’s motion to terminate the automatic stay because the debtor could not satisfy its burden of proving that its property was necessary to an effective reorganization.[6] East/Alexander Holdings, LLC (“East/Alexander”) is a single asset real estate business that owns three commercial buildings in Rochester, New York (the “Property”)[7] that are subject to a mortgage held by the creditor, M360.[8] In February 2021, M360 initiated a state foreclosure action following East/Alexander’s default on the mortgage.[9] Following the appointment of a receiver by the state court, East/Alexander filed a voluntary petition for relief under Chapter 11 resulting in a stay of M360’s foreclosure action.[10]
M360 filed a motion to lift the stay arguing, among other things, that East/Alexander had no equity in the Property, and that it could not prove the Property was necessary to an effective reorganization.[11] The court noted that M360 has the burden of proving that East/Alexander had no equity in the Property.[12] Here, the court found that M360 satisfied its burden and proved that East/Alexander did not have equity in property because the total amount due under the parties’ agreement was $16,897,551.61, which far exceeded the values for the Property that each party provided.[13]Thus, the first element of section 362(d)(2) was satisfied.[14] Under the Bankruptcy Code, East/Alexander had the burden of proving the second element of section 362(d)(2), which is that the Property was necessary to an effective reorganization.[15] Here, the court found that East/Alexander could not satisfy its burden and that the Property was not necessary to an effective reorganization.[16] Citing to United Savings Ass’n. V. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365 (1988) the court noted that “there must be a ‘reasonable possibility of a successful reorganization within a reasonable time’” for a debtor to satisfy its burden under §362(d)(2).[17] In this instance, given M360’s statement in opposition to a Chapter 11 plan and the size of M360’s likely unsecured claim that would control the vote on a Chapter 11 plan, the court concluded that East/Alexander had “no prospect for a successful reorganization within a reasonable time.”[18] Accordingly, the court lifted the automatic stay under section 362(d)(2) without addressing section 362(d)(1).[19] The court further noted that “[t]he existence of §362(d)(3) does not preclude the Court from exercising its authority to fashion appropriate relief in single asset real estate cases when sought under §362(d)(1) or (d)(2).”[20]
A court may lift an automatic stay with respect to single asset real estate under section 362(d)(1), (d)(2), or (d)(3), as long as there is a sufficient showing under any of the three subsections.[21] In the context of a single asset real estate, courts are not limited to lifting an automatic stay under section 362(d)(3), which by its terms is available only in a single asset real estate case.[22]
[1] In re East/Alexander Holdings, LLC, No. 22-20151-PRW, 2022 WL 1529730, at *1 (Bankr. W.D.N.Y. May 12, 2022).
[2] See id. at *2 (citing 11 U.S.C. §362(d)(1))
[3] See id. (citing 11 U.S.C. §362(d)(2))
[4] Id. at *3.
[5] Id. at *1.
[6] Id. at *6.
[7] Id. at *1.
[8] Id. at *2.
[9] Id.
[10] Id.
[11] Id. at *2–3.
[12] Id. at *2.
[13] M360 appraised the Property at $8,550,000, while East/Alexander reported that the Property was worth $9,800,000. Id. at *3.
[14] Id.
[15] Id.
[16] Id. at *5.
[17] Id. (citing United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365 (1988)).
[18] Id.
[19] Id. at *6.
[20] Id. at *4.
[21] Id.
[22] Id.