Over the past year, in this column, we have examined several different issues related to troubled real estate loans, primarily in connection with borrower defaults and lender remedies. The credit crisis, however, has affected mortgagees as well as mortgagors. If, in the context of a participated, syndicated, tranched or senior/junior loan structure, one of the lenders were to file a petition for relief under the Bankruptcy Code,1 the automatic stay afforded such lender could have material consequences to the other lenders, especially in a circumstance where the loan or underlying collateral was itself troubled. As banks and other financial institutions fail, the issue of lender bankruptcy has become more prevalent in the finance industry.
One of the most fundamental protections afforded entities that file for bankruptcy is the imposition of the automatic stay, which prohibits creditors from commencing or continuing nearly all efforts to enforce debts or perfect security interests in property of the debtor.2 The automatic stay is designed to give a debtor “breathing room” in order to focus on either reorganizing its business or conducting an orderly liquidation of its assets in bankruptcy. In situations where the automatic stay applies, a creditor must move for relief from the automatic stay prior to engaging in activities designed to enforce its debt.
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