Originally published in Oklahoma Banker - July 2011.

Commercial lenders know the story. They made loans prior to 2008 when asset values were high. The economy soured. Asset values declined. A tepid recovery has, at best, led to stagnation of those values. Now, balloon notes are maturing and refinancing is difficult. Borrowers are stressed. As a result of all this, commercial lenders are often undersecured when a loan default occurs with the collateral worth far less than the amount owed. For example, in the recent mortgage foreclosure of Crossroads Mall in Oklahoma City, the lender was owed more than $60 million. During the foreclosure proceedings the mall appraised at slightly less than $17 million. Only the lender bid at the sheriff’s sale, credit bidding its judgment and taking title to the property for just over $11 million.

When a default is imminent or has already occurred, the lender may find itself on the receiving end of a Chapter 11 bankruptcy petition if the parties are unable to structure a workout. As a result of the Bankruptcy Code’s so-called “automatic stay,” absent permission by the bankruptcy court, the lender cannot pursue foreclosure proceedings, liquidate the collateral, and move on. Rather, the lender must attempt to enforce its rights during the often lengthy pendency of the bankruptcy case. However, the filing of a bankruptcy petition is not always a bad thing.

Article authored by McAfee & Taft Attorney: John D. Stiner.