Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

The Bankruptcy StrategistKickerFeaturesTopicsLitigationSectionsNewsLJN Newsletters

In re Soho 25 Retail, LLC Benefits Mortgage Lenders in New York

By William M. Hawkins
August 29, 2011

Earlier this year, Judge Sean H. Lane of the Bankruptcy Court for the Southern District of New York held that the post-petition rental income of a debtor-in-possession's commercial real property in New York City was not property of the debtor's estate under section 541 of the Bankruptcy Code, even though the underlying condominium units were owned by the debtor and had become estate property. The bankruptcy court concluded that control of the rental income had transferred to the debtor's mortgagee, who had begun (but not completed) a foreclosure on the commercial property interests of the debtor, before the bankruptcy's filing. In the decision, In re Soho 25 Retail, LLC, No. Adv. 11-1286-SHL, Bkr. 10-15114-SHL, 2011 WL 1333084 (Bankr. S.D.N.Y. Mar. 31, 2011), the exclusion of the rental income stream from the bankruptcy estate thwarted the debtor-in-possession's attempt to reorganize over the mortgagee's objection and markedly improved the creditor's position. Ultimately, the lender won its stay relief motion and completed its foreclosure. The bankruptcy case was dismissed.

Judge Lane's decision merits the attention of mortgage lenders and potential bankruptcy debtors alike, because it could provide significant leverage for secured parties, particularly in single asset real estate cases involving New York property. The holding supports the relatively new theory that New York law permits a mortgagor to transfer its entire interest in rents to a mortgagee upon executing the mortgage, such that the transfer will remain effective in the mortgagor's eventual bankruptcy. The decision also holds that a mortgagee's diligence in enforcing against a debtor upon and after default can cut off the ability of a debtor to use the rental proceeds of the mortgaged property in a subsequent bankruptcy. However, while the bankruptcy court's ruling is certainly good news for mortgage lenders and provides some guidelines for future strategy by both mortgagees and borrowers in distressed situations, the decision also leaves areas of doubt as to how these parties might best guide their behavior to maximize their benefits in a post-Soho 25 world.

This premium content is locked for LJN Newsletters subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
The DOJ's Corporate Enforcement Policy: One Year Later Image

The DOJ's Criminal Division issued three declinations since the issuance of the revised CEP a year ago. Review of these cases gives insight into DOJ's implementation of the new policy in practice.

Use of Deferred Prosecution Agreements In White Collar Investigations Image

This article discusses the practical and policy reasons for the use of DPAs and NPAs in white-collar criminal investigations, and considers the NDAA's new reporting provision and its relationship with other efforts to enhance transparency in DOJ decision-making.

The DOJ's New Parameters for Evaluating Corporate Compliance Programs Image

The parameters set forth in the DOJ's memorandum have implications not only for the government's evaluation of compliance programs in the context of criminal charging decisions, but also for how defense counsel structure their conference-room advocacy seeking declinations or lesser sanctions in both criminal and civil investigations.

Compliance Officers: Recent Regulatory Guidance and Enforcement Actions and Mitigating the Risk of Personal Liability Image

This article explores legal developments over the past year that may impact compliance officer personal liability.

Bankruptcy Sales: Finding a Diamond In the Rough Image

There is no efficient market for the sale of bankruptcy assets. Inefficient markets yield a transactional drag, potentially dampening the ability of debtors and trustees to maximize value for creditors. This article identifies ways in which investors may more easily discover bankruptcy asset sales.