Mortgage bankers moved closer to ridding deadbeat commercial real estate borrowers of an unintended shield when the Senate Judiciary Committee approved legislation that will curb the practice of filing Chapter 11 bankruptcy petitions by debtors who are only protecting a single asset.
The committee approved the bill [S. 540] by voice vote Sept. 15 and reported it out. The bill outlines modifications to Chapter 11 single-asset bankruptcy protection (see story, this page), one of which will allow lenders to begin foreclosure proceedings as early as 90 days after bankruptcy petitions reach the court. Mortgage banking lobbyists believe the bill may reach the Senate floor this session.
The legislation was pushed by mortgage bankers whose investors were socked with $79 billion in outstanding commercial single-asset holdings at the end of last year The Mortgage Bankers Association of America says that single-asset commercial debtors--borrowers whose sole asset is one piece of commercial real estate--frequently use Chapter 11 bankruptcy laws to stall foreclosure proceedings. This typically results in sharp losses to lenders and investors.
The MBA surveyed a random group of 24 investors, all life insurance companies, to gauge the frequency with which single-asset proceedings were completed, as well as the estimated losses resulting from those delays. It found that the single-asset loans placed in bankruptcy rose to $702 million in 1992 from $41 million In 1985 and that the stall tactics have cost the commercial real estate industry $2.5 billion cumulatively during that span.
Current law prevents commercial lenders from foreclosing on any property mortgaged by the debtor until the bankruptcy court enters an order lifting it.
Chapter 11 protection was created so a business could continue to operate during reorganization. The MBA contends that with single-asset borrowers, the only "business" is the actual ownership of the building or property and, therefore, nothing is left to reorganize.
In addition to allowing lenders to proceed with foreclosure action 9O days after an automatic stay has come into effect, the legislation would only allow the automatic stay to re main if the debtor files a reorganization plan. The bill would also immediately establish the lender's security interests in rents, expedite the assignment of rent payments to lenders and allow foreclosures to proceed up to the property's final sale.
The legislation "offers the kind of much-needed reform that will discourage illegitimate bankruptcy filings and delay tactics," said MBA President Herbert B. Tasker at the MBA Board of Governors meeting Sept. 10. Tasker added that small-business owners trying to operate in deteriorating shopping centers are suffering from loss of business, and that apartment building and other community project tenants are also hurt by the delays.
"When capital investments are not made to sustain the values of these properties, the community's tax base erodes, placing an additional burden on the rest of the taxpaying community," he said.
Responsible lenders that recover the security in properties will seek to restore the capital health of the properties by reinvesting in them, he added. Bogus threats of bankruptcy filings serve only to short-circuit the reinvestment process.