I. INTRODUCTION

After eighteen years of nearly uninterrupted growth in commercial real estate markets, defaults by commercial real estate borrowers are rising dramatically. In some cases, loans have defaulted because (due to the general downturn in the economy) the property is no longer generating income sufficient to pay the property’s debt service and operating costs. In other cases, the property may currently be able to cover expenses, but the loan has matured with no new financing on the horizon. Regardless of the cause, lenders face a scenario that is becoming all too familiar: The borrower is a special purpose entity that owns a single real estate project. The project was financed by a mortgage loan, which may be either recourse or non-recourse to the borrower and which may (or, may not) be guaranteed (in whole or in part) by the borrower’s principals. With no cure, refinancing or workout in sight, the lender has accelerated its loan and begun the process of foreclosing on the project. But, the borrower, who remains convinced that an economic recovery is just around the corner, insists that if the lender will just renegotiate the loan terms, the project can survive the current crisis, enabling the (eventual) repayment of the debt and the salvaging of the borrower’s equity in the project. To increase the lender’s willingness to agree to terms, the borrower has filed a Chapter 111 bankruptcy petition, threatening a “cramdown” unless the lender agrees (among other concessions) to reinstate the loan and extend its maturity.

What are a lender’s options when a single asset borrower files a Chapter 11 petition? Outside of Chapter 11, the rules are fairly simple: either the mortgage lender gets its loan repaid or it gets its collateral. In Chapter 11 the rules are quite different. The mere filing of a Chapter 11 petition initiates an automatic stay enjoining virtually all acts against the debtor or its property, including foreclosure.2 Unlike a Chapter 7 liquidation, where a trustee is appointed immediately upon filing, the borrower in a Chapter 11 reorganization remains in control of its assets as a “debtor-in-possession.” Virtually all business entities, including corporations, limited liability companies, partnerships, and sole proprietorships, may seek Chapter 11 relief.3 Insolvency is not a requirement.4

Over twenty-five years ago, in the midst of another severe recession, a bankruptcy court aptly observed that in Chapter 11 “there are seldom any winners, just survivors.”5 This Article summarizes the key issues that arise in single asset Chapter 11 cases and discusses strategies and tactics mortgage lenders can employ to maximize their chances of survival. In particular, this Article examines two significant changes in the world of commercial real estate finance since the last real estate recession: (1) the impact of the Bankruptcy Abuse and Consumer Protection Act of 20056 (“BAPCPA”) on bankruptcies by single asset real estate entities and (2) the increasingly widespread use of so-called “springing,” “exploding” and “non-recourse carve out” guaranties in commercial real estate loans. As discussed below, while these two developments may discourage bankruptcies by single asset entities and limit single asset debtors’ options once a bankruptcy petition has been filed, lenders are likely to face new challenges by debtors who are able to seek bankruptcy protection.