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Bankruptcy Code Can Present Significant Risks to Lenders
We all know the old saying — possession is 90% of the law. Well, this article discusses the other 10% and review two situations where a lender received payments and later was forced to disgorge them. The cases involve two recent court adverse decisions for lenders in contexts often seen in the commercial real estate context. In In re The West Nottingham Academy in Cecil County, Case No. 23-13830-MMH, the U.S. Bankruptcy Court for the District of Maryland ordered a lender to refund adequate protection payments made by a debtor during a bankruptcy case because the value of the lender’s collateral ultimately proved sufficient to protect the lender. In In re The Mall at the Galaxy, Case No. 23-1906, the U.S. Court of Appeals for the Third Circuit affirmed decisions of the bankruptcy court avoiding loan payments made to the lender as constructively fraudulent transfers because the loan proceeds had been given to a third party and provided no value to the borrower-debtor. These opinions illustrate two of the ways the bankruptcy code can present significant risks to lenders even after the lender receives payments in accordance with loan agreements or even a court order.
Lender Ordered to Refund Adequate Protection Payments
According to the opinion, the lender in West Nottingham Academy was owed approximately $4,847,700 when the borrower filed for bankruptcy. The debt was secured by first priority lien in all of the debtor’s real and personal property, including cash. The value of the collateral was unknown at the time of filing of the case. The Bankruptcy Court entered several orders authorizing the debtor’s use of cash collateral including adequate protection payments to the lender. The parties ultimately agreed the value of the collateral was $10,300,000. After confirmation of the debtor’s bankruptcy plan, the reorganized debtor sought a refund of the adequate protection payments that had been made to the lender in order to make the payments required under the plan.
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