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by Sajjad Ahmad
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Although real estate bankruptcy cases no longer dominate the bankruptcy courts' dockets as they did in the early nineties, but they continue to be filed with great frequency in UK. At its essence, the real estate bankruptcy is a two party dispute between mortgagee and mortgagor. Real estate bankruptcy cases are typically filed after a foreclosure sale has been set. Upon learning of the bankruptcy filing, a secured creditor has a number of available options, all or some of which should be exercised, depending on the facts of the case, to maximize loan recovery.
A lender can ask the court to dismiss the bankruptcy case as a "bad faith" filing. A creditor asserting bad faith must prove the subjective bad faith of the debtor and that any reorganization by the debtor is objectively futile. For subjective bad faith, the court will examine whether the debtor invoked the protections of the Bankruptcy Code without either the intention or ability to reorganize its financial affairs. To determine objective futility, the court will examine whether there is indeed a "going concern" to preserve and whether there is any realistic chance for the debtor to reorganize. Most courts require a very strong showing to dismiss a case for bad faith at the outset of a case.
Under the Bankruptcy Code a motion for relief from stay will also be granted where the secured creditor can prove that there is no equity in the real property over and above the secured claims, and that the property is not necessary to the debtor's effective reorganization. This basis for relief is typically alleged as an alternative to bad faith, in the same motion. Almost all controversies surround the value of the real property, making the expert report and testimony of a licensed real estate appraiser essential to the successful prosecution of a motion for relief from the automatic stay on these grounds. The same factors relied upon to support objective futility in the bad faith filing analysis are used to establish that the property is not necessary to an effective reorganization.
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