In October we reported on a case involving a distressed real estate bankruptcy. Although interest rates may have peaked, we continue to expect a large volume of distressed real estate debtors to utilize the bankruptcy system over the next couple of years. Today we are reporting on two additional recent decisions regarding distressed real estate bankruptcies, both of which involve rights of real estate lenders against proceeds of collateral other than the real estate itself. One involves the right of a lender to assert a deficiency claim against proceeds of the bankrupt debtor's insurance policy, and the other concerns whether a debtor can use the rents derived from the property that were pledged as additional collateral for the loan.

Lender Permitted to Assert Deficiency Claim Against Insurance Policy

In our first case, the U.S. Bankruptcy Court for the Eastern District of New York issued an opinion on Sept. 21 in In re Savva's Restaurant, Case No.: 22-70382-reg. According to the opinion, a mortgage lender sought to recover under the debtor's insurance policy following destruction of the property in a fire. The borrower filed a bankruptcy case and sold the property in a sale pursuant to a Chapter 11 plan. The lender entered into a stipulation consenting to the sale and agreeing its secured claim would be reduced by the amount of the net proceeds of the sale. The lender then asserted the deficiency amount against the insurance policy.